@calltheball_ @lugaricano Here are migration rates for the working age population (via @claudeai ). That technology workers would be so different in levels is a bit suspicious.
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Ricardo Reis
3K posts
Ricardo Reis
@R2Rsquared
AW Phillips Professor of Economics @LSEecon. Colunista @expresso. Director @CFMUK
London, England Katılım Kasım 2012
263 Takip Edilen52.9K Takipçiler
@calltheball_ @lugaricano Thank you for this reference. I am a little suspicious of the numbers shown so I will dig into them. But note:
1. Firms are not workers.
2. US immigration policy changes negate preferences
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I am late to the debate on whether Europe's economy is behind the US. Many quotes on this tweet by @lugaricano propose looking at health, inequality, happiness surveys, beauty of landscapes, driving around, etc. But there is a *better* way. And economists have used it for decades...
Luis Garicano 🇪🇺🇺🇦@lugaricano
We stopped everything to write an answer (link below) to Paul Krugman's two posts of today (one informal, one with a simple model) arguing that Europe is broadly not falling behind the United States. The change measured by the Draghi report, he argues, is mostly due to growth in the technology industry, which has distorted GDP numbers without actually leading to higher standards of living. We should believe our eyes when we walk around France and walk around Mississippi. Krugman is wrong. The measures he uses understate European stagnation. This matters enormously. Divergence with the United States is the strongest evidence for reform in Europe. 1. The growth numbers Krugman compares the United States, France, and Germany at purchasing power parity in current prices. On that measure, France's and Germany's position relative to America has been roughly constant since 2000. But current price comparisons miss productivity gains in sectors where prices fall. If America produces twice as much software while the price of each unit halves, the value of American software output looks unchanged even though the volume has doubled. Most economists therefore use constant prices, which fix the base-year PPP level and apply each country's real output growth on top of it. American output growth has concentrated in tech, where prices have fallen tremendously as productivity rises. In terms of the volume of things produced, America has pulled away from Europe. 2. Is it all the tech industry? Krugman concedes this tech divergence but says it is not welfare-relevant. The American growth lead is an accounting artefact of measuring more iPhones at base-year prices, not a sign that Americans are actually richer, because Europeans buy the same iPhones at the same world prices. This is not the right way to think about the world today, as an earlier Paul Krugman would have argued. His model assumes tradable goods, interchangeable workers, marginal-cost pricing, and no profits. Each assumption fails. Most of what households buy is non-tradable: housing, healthcare, childcare, education. When American tech firms bid workers from haircutting to coding, American haircut wages rise. Germany has no growing tech sector to do the bidding, so German wages stay flat. Technology is not priced at marginal cost. Apple's margins are around 40 percent. Anthropic's inference margins are at 70 percent. The major platforms enjoy network effects, switching costs, and lock-in that hold prices well above what a competitive market would deliver. A large share of the productivity gains in technology stays as profit. A lot of the value of American technology dominance shows up in equity, not in wages. Apple, Microsoft, Nvidia, Alphabet, Meta, and Amazon together are worth $21 trillion, more than the entire combined stock market value of all European stock markets. Around 60 percent of US equity is held by American households. The median French or Spanish household holds almost no equity. The median employee at Meta, a company with almost 80,000 employees, earned $388,000 in 2025. This advantage is not going to go away. Krugman's own 1991 paper, cited in his Nobel prize, showed that comparative advantage in modern industries is produced by increasing returns to scale, specialized labor markets, supplier networks and the agglomeration of suppliers, workers, and ideas in particular places. Once an industry concentrates somewhere, the concentration is self-reinforcing. Europe is being pushed away from the next round of technology industries (AI!). 3. What about inequality? Another retort is that GDP per capita hides substantial inequality, and so even if America is rich on average, this is mostly due to the super wealthy. But despite the US's high pre-tax income inequality, it also achieves higher median incomes than Europe, in part because of such a high base, and in part because it actually redistributes more than many European countries. The cleanest comparison is median equivalised disposable household income: income after cash taxes and transfers, adjusted for household size and purchasing power. According to the OECD's 2021 numbers, the median American earns 30 percent more than the median Dutchman, about 31 percent more than the median German, and about 52 percent more than the median Frenchman. 4. What about hours worked? Krugman points out that while American GDP per person is higher, most of this is because Americans work more. For this divergence to be an hours worked story, Americans must work more relative to Europeans now than they did in 2000. The opposite has happened. Birinci, Karabarbounis, and See in a 2026 NBER paper show that about half of the American-European hours gap that existed in the 1990s has reversed by the end of the 2010s. Americans work fewer hours per person than they did in 2000, while most Europeans work more. 5. Is America not a bad place to live? Walk around Alabama and France: surely the former cannot be substantially richer than the latter? American cities often have poorer centres and richer suburbs or exurbs. European cities preserve richer and more attractive historic cores. A visit to a city as a tourist in America compared with a city in France will leave one having seen different spots on the income distribution. Americans in Europe go to the nicest and richest European cities. Rather than a walking around test, do a driving around test. Go to the periphery of any modern American city and see a level of new-built material wealth that is extremely uncommon in Europe, with thousands of enormous four- or five-bedroom homes. In the South, in places like Nashville and Austin, drive around the downtowns to see hundreds of luxury apartment buildings springing from the ground. This construction boom is replicated virtually nowhere in Europe today. The other question is generational. Housing often costs more in Europe than in the United States, despite the quality of the housing stock generally being much better. Europe has nice city cores but these are inaccessible to young Europeans. Consider the salaries available to entry-level workers. The starting pay for a London police officer is $57,000. In Washington, DC, $75,000. The entry-level Deloitte consultant job in Madrid pays around €28,000, roughly $33,000 per year. In Charlotte, the entry-level Deloitte job pays $63,000. There are many things to dislike about life in America. But relative to 25 years ago, the gap in material wealth has shifted dramatically in America's favor. siliconcontinent.com/p/european-sta…
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@R2Rsquared cool data, Ricardo. Explanation? A simple story is market access: you want to be near your customers, and the U.S. is a bigger and more integrated market than the EU.
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Ricardo Reis retweetledi
Which of the US or EU do economic agents choose to locate in?
Their choice reveals how they weigh all the factors that matter. The relevant agent for productivity and economic growth are firms. So, the migration rates of startups reveals the economy where you want to be to grow and succeed:
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Thursday (1:00 pm ET) there is a new episode of the @ClevelandFed’s Conversations on Central Banking, May 14. This time on "The Case for Central Bank Independence". Free and open to the public at this link: clefed.org/3QYkPio
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Congratulations to @ludwigstraub for a well deserved honor. Read the prize description to learn about the exciting work he and others have been doing. The present and future of macroeconomic research is bright!
AEA Information@AEAInformation
Congratulations to Ludwig Straub (@ludwigstraub) of @Harvard, winner of the 2026 John Bates Clark Medal! aeaweb.org/about-aea/hono…
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11/end) And for more academic in-depth discussions of this topic see:
x.com/R2Rsquared/sta…
Ricardo Reis@R2Rsquared
What happened since Wednesday in the US repo money markets? Why did banks have to borrow $15.1bn from the Fed's recent lending facility? Could we see this coming? What does it imply for QT? (good clues in this thread...) [1/5] ft.com/content/60663a… via @ft
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10) For the full discussion, the video is available here:
youtube.com/live/HrTIj5h1N…
YouTube
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9) My written comments are here. These will appear in the Brookings Papers on Economic Activity @BrookingsInst.
personal.lse.ac.uk/reisr/papers/2…
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8) "Stigma" is an expression used to explain why US banks leave money on the table and do not use some Fed standing facilities. To my ears, this is doublespeak for US supervisory failures and/or flaws in the design of those facilities. They can and should be corrected.
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** Reducing the Fed's balance sheet **
Ten days ago, I was part of a discussion at @BrookingsInst on how to shrink the Fed's balance sheet with Darrell Duffie and @WenxinDu. I tried to lay out the discussion in terms that, hopefully, clarify it to a broader set of economists. Here are the main points: 🧵
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7) The elastic supply of money can be achieved by a standing repurchase facility open to banks, along the lines of the ones existing at the Bank of England or the ECB.
(Andrew Bailey laid out the reasons for this strategy at his @FMG_LSE Goodhart 2024 lecture)
bankofengland.co.uk/speech/2024/ma…
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6) Keeping interest rates in money markets from becoming dangerously volatile while reducing the size of the balance sheet requires committing to an elastic supply of reserves.
(Isabel Schnabel has several speeches on this)
ecb.europa.eu/press/key/date…
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5) Policies to reduce the balance sheet of the Fed are synonymous with policies that reduce the demand for bank reserves. You cannot do one without the other
(Lori Logan and Sam Schulhofer-Wohl @DallasFed have been making this point for a while.)
federalreserve.gov/monetarypolicy…
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4) Less debatable, the Fed should aim to (i) stay close to the optimal supply of reserves (Friedman rule), and (ii) prevent a financial crisis in money markets as a result of spikes in demand for liquidity.
(See governor Stephen Miran's approach)
federalreserve.gov/econres/feds/a…
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3) But, today, the Fed wants to reduce the size of the balance sheet. There are pros and cons for this, but let us take the desire to shrink as given.
(The incoming chair Kevin Warsh gave some reasons for this goal).
hoover.org/sites/default/…
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2) A simple answer to this shift in demand is to increase the inelastic supply of reserves. This is what we have done for the past 17 years.
(I wrote about the implications it has for monetary policy ten years ago at Jackson Hole.)
personal.lse.ac.uk/reisr/papers/1…
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1) Bank's demand for reserves at the central bank have increased because each of the four economic determinants' of that demand have shifted since the great financial crisis.
(Darrel Duffie's paper makes this point)
brookings.edu/wp-content/upl…
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