Paul Krugman's blog questions whether the boom in the U.S. financial industry actually increased the productivity of the economy, and speculates that the “the apparent US productivity miracle, a miracle not shared by Europe, was a statistical illusion created by our bloated finance industry,” as its recent collapse demonstrated.
Krugman cites a paper showing that standard of living, the best measure of economic productivity, has increased more in Europe than in the U.S. in the past thirty years.
The paper took into account a number of measurements that track tradeoffs a nation makes in allocating resources for short term consumption at the expense of long-term growth, such as living on debt and not saving. Another important factor taken into consideration was adjusting for decreases in the balance of trade. Larger trade deficits translate into increases in the standard of living – as the U.S. has seen though buying cheap goods from China – but are not sustainable in the long term because the imbalance must eventually decrease and thus erase the standard of living gains. The paper also uses net domestic product instead of gross domestic product so resources that go simply to replace deteriorating capital equipment and infrastructure do not count toward economic growth.
So much for the notion that the U.S. version of unrestrained free markets and absence of a social safety net is superior to the European brand of regulation and more socialist human services programs.
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