Europe chose insurance. America chose growth.

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Europe chose insurance. America chose growth.<br>Europe and America chose different points on the efficiency-equity trade-off. That used to be a matter of preferences. It isn't anymore.

Hanno Lustig<br>Jul 06, 2026

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The World Cup has kicked off an interesting experiment: hundreds of thousands of European soccer fans, some of whom arrived expecting a dystopian country. If you consume mainstream European media coverage of the United States under Trump, you would be forgiven for packing body armor. Instead, the accounts filtering back across the Atlantic have a consistent tone: the people here are generous, friendly, welcoming. And the visitors notice something else, even the ones who have never heard of a purchasing power parity adjustment for GDP per capita comparisons across borders. They notice the wealth. The cars, the houses, the restaurants, the sheer scale of consumption. They notice the contrast between what is happening here and what is happening back home. You don’t need the IMF’s World Economic Outlook to see it, though the WEO will confirm it: even after adjusting for purchasing power, U.S. GDP per capita is now roughly 38% higher than the EU average.<br>I’ve watched friends visiting from Europe process this, and there is typically a predictable moment of relief. They might see a homeless guy on the street, and something in their posture relaxes. They feel validated. Ah, there it is. Maybe our model is better after all. Europeans visiting the U.S. are typically looking for that sort of validation.<br>For the longest time, I thought this was actually a useful framework for thinking about the transatlantic divide. Americans and Europeans simply chose different points on the trade-off between incentives and insurance. Europeans accept a smaller pie in exchange for slicing it more evenly. Europeans want their governments to insure them against pretty much anything that can happen to them — unemployment, illness, old age, bad luck in the labor market, bad luck at birth. Americans accept more inequality in exchange for high-powered incentives: the U.S. is the one place that rewards innovation and risk-taking, and the size of the pie shows it.1<br>If you subscribe to this view, then it's just a matter of preferences. There is nothing to argue about. Americans and Europeans simply have different tastes over how much efficiency they're willing to trade away for better insurance. They have chosen different points on the same frontier.<br>Europe has not seen a lot of innovation in tech and related industries in the past decades. That’s not a mystery. If you can choose where you set up shop, you wouldn’t launch a highly risky tech startup in a country where laying off workers is very costly. These costs are so high precisely because these countries seek to shield workers from the risk of layoffs. You also don’t pick a country where capital markets are not quite developed and most companies simply rely on banks for lending. Capital markets are not as developed in the EU partly because most European countries have historically relied on pay-as-you-go pension systems. EU governments wanted to shield pensioners from the return risk that is inevitable in a defined contribution system where all households invest on their own behalf.<br>For a while it looked like Europeans got to consume most of the innovation anyway without producing it. The blockbuster drugs were developed for the American market at American prices, then sold into European single-payer systems at marginal cost plus a haircut. The software, the search engines, the smartphones, the platforms — invented in California, consumed everywhere. That’s a genuinely attractive position. It meant European living standards could keep pace with American ones even as the biggest innovation engine sat on the other side of the Atlantic. The Europeans could have their cake and eat it too. That’s the view that was articulated by Paul Krugman most recently in a series of posts. According to him, it doesn’t really matter that all this new wealth is not created in Europe, but on the other side of the Atlantic.<br>This view was only tenable only under the condition that Europe faced a roughly constant cost of providing more insurance and weaker incentives. It’s increasingly clear that that’s not the right way of thinking about this.<br>Start with the raw divergence. Since 2000, on a per capita basis, real disposable income has grown almost twice as much in the US as in the EU. The gap in the level of GDP at constant prices has doubled, from roughly 15 percent to 30 percent — partly demographics.2 The Draghi report attributes the widening gap primarily to a productivity shortfall, not to Americans working more hours or Europeans taking longer vacations. Paul Krugman has argued that this measured divergence is largely an accounting artifact: because tech is competitive, American productivity gains...