Jane works three jobs and generates an after-tax income of $78,000. This income suffices to make ends meet. Beyond food, utilities, and shelter, her ends that need meeting include:
- Treatment of various medical conditions created or exacerbated by her inability to find time or energy for rest, recreation, and exercise.
- Legal bills due to lawsuits with a former employer, a medical service provider, and a restaurant whose undercooked pork dish resulted in one of her chronic illnesses.
- Servicing a loan for an education at a private college that has no bearing on any of her three jobs, but whose credential she needed to differentiate herself in the job market.
Johann works a single job and generates an after-tax income of $50,000. This income suffices to make his ends meet:
- He has ample time for rest, recreation, and exercise, and so he has no chronic illnesses.
- The regulatory environment he inhabits has established clear rules for employers, healthcare providers, and restaurants so that individual cases do not need to be adjudicated in courts.
- The educational institutions in his country are standardized and do not compete with each other for the signaling value of their credential.
Who is “doing better” – Jane with her $78,000 income or Johann with his $50,000 income? And what will per capita GDP tell us about the relative economic success of a nation composed of Janes and a nation composed of Johanns?
I am an American living in Germany, and I read media from both sides of the pond. And on both sides, a narrative has taken hold that the US economy has been more “dynamic” or achieved better outcomes in the last two decades, based on the observation that GDP has grown more rapidly in the US. (The most recent example I could recall is by Yasha Mounk, but it’s just one of many of its ilk.)
Unambiguously, Germany has a lower GDP per capita than the US, and the gap has widened since 2000. The raw data from 2022 shows a huge gap: $49,700 versus $77,900, i.e., the US GDP per capita is nominally about 55% higher (Unless otherwise stated, the data come from the World Bank’s Data Catalog which can be downloaded as a spreadsheet). The trend has widened since then (Mounk uses an even wider gap to make his point; nonetheless I will use 2022 numbers because I found World Bank data for the main variables I wanted to investigate only up to 2022).
However, the raw numbers do not take into account different pricing levels. I’m not sure why Mounk does not acknowledge that, especially because the concept of “purchasing power parity”(PPP) is well-known and the data are readily accessible. When you use those figures, the gap shrinks to $5,200 or 10%.
The question is: Does that mean Janes are better off than Johanns? And should Germany (and other European nations) emulate US policy to “catch up?”
GDP tracks economic activity insofar as it can be observed through monetary transactions. Not all measured economic activity is a sign of human flourishing. And not all flourishing-enabling activities are measured. Hire a chauffeur and his income contributes to GDP. Marry him and it drops back out.
GDP is an imperfect measure, and all economists know this. The question is whether even developed economies like the US and Germany differ systematically in how poorly they capture actual value-adding economic activity.
In the discussion to follow, I will look at how the US records more economic activity in three crucial areas that collectively account for much (possibly all) of the PPP-adjusted GDP per capita gap, and I will argue that these are areas that can profoundly mislead about welfare and prosperity.
Healthcare
In the argument that actual American Jane’s are not really better off than actual German Johann’s, whatever per capita GDP might say, healthcare weighs the heaviest. Healthcare obviously contributes to human flourishing. But if Johann spends €0 on healthcare in a given year, there might be two reasons. One would be that healthcare was unaffordable for Johann. But the other would be that Johann just didn’t get sick. We can agree that a world in which Johann didn’t spend because he didn’t get sick is better than not spending because he couldn’t afford treatment. But it’s also better than a world in which he was sick and generated €1000 of economic activity in healthcare services and products.
In a meaningful sense, the “best” world would be one in which no healthcare spending took place because diseases and accidents didn’t happen.
So one thing to investigate would be whether the US experiences more illness than Germany, generating more healthcare-related economic activity than Germany does. If so, then that’s economic activity Germany can happily do without. What are the numbers?
In 2022, the US spent $12,434 per person on healthcare versus $8,453 spent per capita in German. Importantly, these figures are adjusted for purchasing power parity already (the gap is wider if the raw numbers are used). That means the average Jane spends $4,000 more on healthcare than the average Johann, and not just through higher prices. She truly consumes more healthcare services.
Now it would be one thing if Jane could point to better health outcomes: She can afford an additional $4,000 of healthcare spending compared to Johann, and has better health to show for it. But it is hardly news that US health outcomes, measured along metrics such as life expectancy and infant mortality, are inferior (easily confirmable in the World Bank data). So the US pays more for less. As unnewsworthy as that is, what hasn’t been highlighted as much is how much of the US’s outperformance is due to its sicker state. Out of the $5,200 per capita GDP gap, $4,000 of economic activity is due to being sicker!
The remaining gap, $1,200, is 2.5%.
Are there other economic activities Americans spend money on that might not really be signs of human flourishing?
Legal services
A world in which people never have a need to sue each other is better than one in which they can’t afford to get justice. But it’s also better than one in which they can afford to get justice and have to avail themselves of the courts.
The US and Germany have different legal traditions and approaches to regulation. Loosely speaking, Germany makes rules in advance: rules designed to prevent undesirable outcomes, e.g. pollution, medical malpractice, etc. There’s no shortage of discussion about how burdensome Germany’s regulation can be. But having rules devised in advance gives economic actors some planning certainty and levels playing fields for competitors.
The US leaves much up to the courts to sort out after something bad has happened. The “freedom” from regulation means that you have to be worried that someone will sue you for something later on, possibly spuriously. And the battle in the courts is an arms race, in which the side that can afford to “lawyer up” the most may well win the day, regardless of the merits.
How much measured economic activity originates in the legal profession in the US and in Germany, respectively? This is a bit harder to tease out because it’s not in the World Bank data. But the direction is clear. In 2023, American Janes spent a total of $363 billion on legal services. I failed to find exact numbers for 2023 in Germany, but in 2024 it appears to have been around $36 billion. So the US has to spend around ten times as much on legal services in an economy that is only six times the size.
The comparison of economic activity due to the legal profession is less clear cut than the healthcare situation, and it’s also a smaller factor. But I wanted to highlight it for three reasons:
- Americans are famously litigious, but I hadn’t seen the measurable economic impacts.
- One of the policy comparisons people like to make between the US and European nations like Germany is the supposedly lower level of regulation with supposedly beneficial impacts on economic activity; this is, however, never juxtaposed with the costs of the American approach of case law and the threat of expensive civil liability.
- If you run the legal expenditure numbers on a per capita basis, you get to a difference on the order of around $600, which would make up half that remaining gap of $1,200 in relative per capita GDP.
Legal expenses can have an arms race character: You spend not to get quality per se, but to get a quality edge compared to your rivals. Everyone (except the lawyers) would be better off in a legal dispute if they all simultaneously agreed to “disarm” and spend less. But as in a military arms race, it can be hard to reach such an agreement, especially not with a rival or foe.
A society that is spending on competitive arming for military and legal battles is not spending on things that improve the lives of its citizens. Are there other sectors with such an arms race character?
Education
Learning unambiguously delivers social and private benefits. But a lot of education spending is not about the capabilities you are building. It’s about the signaling value of your credential. Instate tuition at the University of Texas (UT) is currently around $12,000 annually. Annual tuition at Harvard is around $60,000. I could be persuaded that there are some differences in quality in the learning experiences between the two. But it’s hardly controversial that you’re paying five times as much to be able to drop the H-bomb in the dating and job search games.
According to OECD data, the US spends about $20,400 per student on education (all levels including tertiary and R&D, and including public and private spending). The comparable figure for Germany is $17,200. These are 2024 numbers, as they were the most readily available, so it wouldn’t be 100% clean to compare them to the 2022 numbers I used for the most important factor, healthcare. Still, this shows the directional difference. These are PPP-adjusted numbers, so the US is spending more on education even after accounting for price levels.
Crucially, if you look under the hood, the US spends slightly more on primary and slightly less on secondary education than Germany does, and in both cases, the vast majority of the spending is public. But in tertiary education, where a greater proportion goes to private institutions like Harvard (and where even “public” institutions like UT are partly funded by individual tuition), the difference is enormous: $22,000 for Germany vs. $36,200 in the US.
Whereas stats like life expectancy and infant mortality demonstrate pretty clearly that the US is driving some of its measured economic activity from unwanted illness, it’s harder to pinpoint whether the US might actually be getting a better or worse educational outcome for its higher spending on education. Meanwhile, Germany has some of its own arms race dynamics when it comes to academic credentialing, as demonstrated by its many political scandals of politicians resorting to plagiarism to attain PhDs.
But at least some of the US’s excess spending on education must be attributable to the signaling arms race.
I won’t elaborate on the financial services at length. But it’s worth observing that the higher spending on tertiary education is financed predominately through loans rather than through taxes. That means the raw spending on tertiary education understates the amount of actual spending by the amount of interest students pay on their debt. Those interest payments contribute positively to GDP and are one – of very many – reasons that FIRE (financial services, insurance, and real estate) make for a bigger proportion of GDP in the US than in Germany. (The US spends around $6.3 trillion on FIRE, and Germany spends around $550 billion. So more than ten times as much spending on FIRE in an economy only six times larger).
I question whether the interest paid on the excess cost of education caused by the credentialing arms race contributes to human flourishing.
What about housing?
Arguments like Mounk’s see the need to not just compare raw numbers – even when they fail like Mounk’s to take into account pricing levels – and to try to identify ways in which the higher incomes translate into observable human flourishing. Mounk’s main case relates to housing: Specifically the relative sizes of average US and German homes: 2200 versus 1200 square feet (here’s his source).
He correctly points out that more “space” may or may not be intrinsically good, but that it affords the option to have more things, including very attractive time-saving things like dishwashers and dryers.
Although this is true, he fails to take into account that bigger houses are not really caused by policy differences and economic dynamism. It’s substantially a matter of density and available land.
And while it’s nice to talk about the positive aspects of big houses, especially when things like dishwasher and drier purchases contribute to GDP, it’s also important to highlight the downsides.
Greater density means that I have option value when it comes to choosing transportation in Germany: I can get from A to B in daily life by car, by public transport, on foot, or by bike. All four are realistic, safe alternatives. When I lived in the US, many trips were not viable by anything but car. Biking and walking contribute much less to GDP than driving, but may have the same impact on my flourishing (or arguably, much more).
All this by way of saying that “Americans live in bigger houses” is weak evidence for their greater prosperity, and even weaker evidence for the superiority of American economic policy or business culture.
Conclusion
The subtext of these articles comparing per capita GDP is always “Europe has been doing something wrong in its economic policy,” and “the US model is worth emulating.” I can understand why the raw numbers suggest that. And there may be interesting questions to ask about why the US’s information technology sector is so strong compared to Europe’s.
But to jump from raw GDP numbers to the conclusion that European economies are underperforming where it counts –creating value for citizens – is unwarranted. If there’s more measurable economic activity going on in the US because Americans are sicker and competing in more arms race-type games then I don’t think Europeans should believe the grass is greener on the other side of the big pond.
Europe should look at itself and say “we could be doing better (and we’ll have to because of an aging society).” But it need not look to the US for a model to emulate.
The Ruminathans 
The comparison between “Jane” in the U.S. and “Johann” in Germany makes for an engaging narrative, but it risks oversimplifying complex economic realities. You can’t just compare random individuals and then draw conclusions about the relative performance of two economies. Anecdotes can illustrate a point, but they cannot replace systematic analysis based on comparable groups and measurable outcomes.
If we want to evaluate whether one economy is performing “better” for its citizens, we need to compare like with like. That means matching people with similar qualifications and roles—two secretaries, two medical doctors, two nurses, two truck drivers, two teachers, or two university professors—and then looking at their real incomes, working conditions, social protections, and career prospects. Only then can we start to make meaningful statements about relative well-being.
Likewise, when comparing education systems, it’s not enough to look at spending levels or general impressions. We must also consider outcomes: in schools, internationally comparable test scores such as PISA results; in universities, measures such as the number of patents, Nobel laureates, or research citations. Without these performance indicators, the debate risks focusing on cost structures rather than on the value delivered.
The same applies to innovation and productivity. A higher GDP figure might reflect more economic “activity,” but unless we look at comparable productivity per worker, quality of services, and innovation outputs, we don’t really know whether one country’s economy is genuinely delivering more prosperity.
In short, to judge whether “the grass is greener,” we must avoid selective or mismatched comparisons and instead use consistent benchmarks across equivalent roles, qualifications, and measurable outcomes.
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It sounds like we agree on the conclusion! Note that Jane and Johann are not anecdotes, they are statistically constructed fictions representing people with incomes corresponding to the 2022 GDP per capita of the US and Germany, respectively. Admittedly exaggerated for illustrative effect.
Note also that I did not compare educational outcomes because it’s far, far more difficult to establish common criteria to measure than in the healthcare case. Personally, as a product of both US and German educational systems, I prefer the US, at least at the tertiary level. But I’m not sure I prefer it enough to pay 50% more for it (acknowledging that in the US, I would pay for tertiary education directly via tuition, while in Germany, I would be paying for it indirectly, via higher taxes). But if you want to go there: Germany outperforms the US in the PISA ranking and in per capita Nobel Prizes.
Your suggestion about comparing profession for profession is an interesting one, and I wonder what policy conclusions could come from that. Suppose it turned out that German bus drivers did better than their American counterparts, but America was the “better” place to be a social media marketing manager. What’s the policy conclusion? Or would the differences discovered simply reflect different cultural values?
With respect to the health professions, though: Suppose US doctors and nurses earned more than German doctors and nurses (anecdotally, this is true). Does that mean that America is a more caring society, valuing those who provide health services more highly, and constituting a shining example for the rest of the world to emulate? Or does it reflect that American policy and culture boost demand for healthcare services (making people sicker) while constraining the supply of healthcare workers through an inefficient guild-type system?
The fundamental point remains: GDP, GDP per capita, and GDP growth are not great proxies for a country’s success at provisioning its citizens. The famous objection to GDP as a measure of welfare you hear about in any economics class is that a natural disaster that causes billions of damage does not count negatively towards GDP, but the subsequent economic activity around reconstruction does. It’s a known shortcoming of GDP. What is less discussed is that the demonstrably poorer health outcomes in the US constitute the equivalent of a (substantially unnatural, policy-induced) disaster whose negative impacts are not captured in the measurement of economic activity called GDP but where “fixing” the problem does generate a lot of measured economic activity.
The credentialing arms race – which is recognized as a problem in the US – is a smaller factor, but one that also gets overlooked in economic pundits’ international comparisons.
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I think we are indeed aligned on the fundamentals. Neither of us is suggesting that GDP numbers should be disregarded entirely as a basis for comparing countries, nor are we arguing that they should be taken as the sole or definitive measure of prosperity. Still, I believe they remain a useful—if imperfect—starting point, and it is important to extract the right lessons from their long-term trends.
For me, the more troubling aspect is not that Germany is currently about 30% behind the United States in GDP per capita terms (or, conversely, that the U.S. is 50% ahead). What concerns me more is the relative deterioration over just one generation. When I left college in the early 1990s, Germany and the United States were roughly at par. Many of the shortcomings on the U.S. side that you so clearly describe already existed then—and unfortunately have not been resolved since—yet the gap has opened up markedly.
If we in Europe want to avoid finding ourselves further behind in another generation’s time, we will need to make dramatic changes in the way we organize our societies—politically, economically, and socially. Without such adjustments, the gap will not only persist but widen.
It’s also worth underlining that all the positive attributes of living in Germany—our healthcare system, strong primary education, quality infrastructure, and more—ultimately depend on a well-performing economy. These cannot be sustained in a declining economy, whether in absolute terms or relative to our peers. Da beißt die Maus keinen Faden ab, as we say in German—there’s no getting around that.
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