history – The Ruminathans

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.

In the early 2000s, I used to read the conservative political journal National Review. I wanted to follow what I believed was a good-faith presentation of the conservative perspective, an outlook I fundamentally respect intellectually. It’s also hard not to empathize with conservative political philosophy if you were partly raised by Gandalf.

Not all change is for the better. Not all progress – no matter how well-intentioned – improves the lives of the disadvantaged. Babies do get thrown out with the bathwater. I get it. And there are positions that I think are logically coherent even if I have reached different conclusions. I can understand how someone can support the death penalty while defending the life of the unborn.

I gave up on National Review because – between the defenses of lower taxes and the raids on progressive sacred cows – there was always something else, like an intermittent odor that vanishes every time you try to sniff it out, only to return just when you thought you were imagining it.

I once ordered an intriguing-sounding dish off a menu in Colombia. When it arrived it smelled elusively pungent, reminding me of something I couldn’t put my finger on. Then – bang – the word “cowshit” came to me, and I realized I had ordered tripe stew. In the same way, I finally recognized the odor haunting the pixels of the National Review when, as a young professional, I encountered the word “leadership.”

The German word for “leader” is “Führer.” Yes, as in “Der Führer.” And as someone with complex ties to Germany, the idea of “leadership” sends shivers down my spine, to this day. “Führer” was not just a title in Nazi Germany; the “leadership principle” (Führerprinzip) was its ideological foundation. The will of the supreme leader has overriding force over people and laws.

The belief that we need a strong leader to keep the trains running on time is the basic ingredient for the catastrophes of not just the 20^th century, but of most of the centuries of the written word. Hearing the word “leadership” – or worse, “strong leadership” – used positively, not just at National Review, but all over the US political and corporate discourse, rang alarm-bells. “Any society that idealizes ‘leadership’ is headed towards authoritarianism” was my exact thought at the time, twenty years ago.

Of course it occurred to me that my reaction was overblown. And so said anyone else I mentioned it to at the time, too.

But the word “leadership” connected a word to the ephemeral stench I sensed at National Review and other “conservative” media. It gradually grew stronger and stronger. And when an odor grows stronger gradually, the risk is that you no longer notice it.

It took a particularly egregious fart of fascism for me to abandon the National Review entirely. In a 2007 article, contributor Mona Charen presented as fact a completely unsubstantiated claim that Prime Minister Benazir Bhutto had survived an assassination attempt via a bomb strapped to a baby (just weeks before her successful assassination by adults). In her article, Charen wanted to illustrate the utter depravity of “the terrorists,” implicitly letting the US off the hook for a “clumsy” war in Iraq and the use of torture in Guantanamo.

Disregarding facts in the service of demonizing an opponent and justifying heinous acts – that’s on page two of the authoritarian’s playbook. But it would be unfair to pin the “authoritarian” label on Charen. Instead, I see her article as an eruption of what lies beneath in us all, but in the last two or three decades has grown, surfaced, and found a home in the US political party nominally representing “conservativism.”

I can empathize with the tug towards authoritarianism. At its root lies the disillusionment that comes when – in the process of becoming adults – we first confront the fact that we don’t all agree on what’s true and good. It’s a nauseating experience. The realization that there may be no such thing as the absolute truth, and that even if there is, your own view will never encompass the whole of it, is like an abyss opening at your feet.

How you react to that abyss determines what basic political ideology you adopt. Some of us search for a strong hand that holds us back from falling, even if that hand extends from the sleeve of a brown shirt.

Some of us see the abyss as a void that we can fill through our collective efforts. By communicating – talking, writing, arguing – we can like the five blind men touching the elephant, make overall progress on a working theory of reality. The project is never complete. And that means that everybody, regardless of the gifts they have or haven’t been born with, or whether they have been born at all yet, can contribute pieces to the puzzle.

2007, the year of Charen’s article, also witnessed the birth of a blog by a writer recently interviewed in the New York Times, Curtis Yarvin. Yarvin is explicitly in the camp of those who reach for the authoritarian’s hand at the edge of the abyss. He argues that a strong executive, a “monarch,” can more efficiently lead the way to the “common good.”

If the “common good” were obvious, then maybe an efficiency argument would have some foundation. But the common good is elusive. It’s one of those things – maybe the most important thing – we’re collectively striving to discover and negotiate about.

Deliberative democracy is the set of rules and institutions we have adopted to ensure that as many people as possible can participate in our conversations about what is good and true. The voting part of democracy is simply a mechanism to halt the discussion periodically so that we can choose a course of action – a policy – that constitutes a test of our hypotheses about the good and true. Other decision-making mechanisms besides voting are conceivable. We can even include coin-flipping when we reach an impasse. Just as important as the decision-making mechanisms are the rules we adopt to structure the deliberation that informs the decision.

Deliberation is what helps us discover which decisions are important and which aren’t, what the options are, and most importantly, what criteria – what values – should inform whether we prefer one course of action over another.

The Supreme Leader achieves efficiency not by cutting through deliberation and red tape to achieve a known goal. The Supreme Leader’s “efficiency” comes from ending the search for the good and true, offering a plastic substitute in its place.

Say what you will, Yarvin should be commended for surfacing what many nominally “conservatives” like Charen have been keeping submerged, consciously or unconsciously, for the last two decades. And by all accounts, Yarvin’s views are resonating among those with the money and access required to change the rules and institutions through which we order our affairs.

The true political frontier doesn’t divide conservatives from progressives. The true dividing line is between those who embrace the collective and unending quest for the good and the true and those who want to end it by the most expedient means: submitting to the will of a supreme leader.

We have been born into the interesting times in which that line is being drawn more clearly once again.

Tag: history

Is the grass greener on the other side of the pond?