There are three somewhat peculiar things about the history of technological progress over the past half century, as estimated by the BLS (whose estimates aren’t very different from those of others.) Two of those three peculiarities are visible in the chart above.

First, a large part of modern technological progress took place during a relatively short period — roughly between 1995 and 2005. Yet this wasn’t a period of dramatic, glamorous innovations. Instead, it was the period in which businesses, which had been spending a lot on information technology since the 1980s, finally figured out what to do with it. The result was big productivity gains in prosaic tasks, like inventory management. (Think bar code technology.)

Second, when dramatic, glamorous innovations did arrive — especially the rise of smartphones and the mobile internet in general — they didn’t seem to generate a productivity boom. In fact, U.S. productivity growth since 2007 — the eve of the global financial crisis — has been disappointingly sluggish.

This might be due to a measurement problem. You could argue that conventional economic statistics fail to capture the value we get from technologies that fundamentally change the way we live, like streaming and social media. To take a trivial example, I know that many readers of this newsletter enjoy the musical codas that conclude weekday posts; YouTube, where I find these clips, was created in 2005.

But you could also argue that some of these technologies do not, in fact, do much to make our lives better. For example, digital technology may even enshittify our society and possibly our economy. I personally find that getting pleasure out of YouTube depends on taming the algorithm through rigid self-discipline: Never, ever click on anything involving either (a) politics or (b) cute animals.

A third peculiarity is that while technological progress (as measured by total factor productivity) has been sluggish overall, there has been much faster progress in “tech” — again, roughly speaking, the sectors that operate according to Moore’s Law. Here are estimates from the Bureau of Labor Statistics:

![A graph showing a number of blue squares

AI-generated content may be incorrect.](https://substackcdn.com/image/fetch/\(s_!mk89!,w_1456,c_limit,f_auto,q_auto:good,fl_progressive:steep/https%3A%2F%2Fsubstack-post-media.s3.amazonaws.com%2Fpublic%2Fimages%2F64990463-a0ad-404d-b920-ef76c9ce8462_1046x578.png) Source: [BLS](https://www.bls.gov/charts/total-factor-productivity/information-and-communication-technology-industries-total-factor-productivity-combined-inputs-and-output-trends.htm) Why does this matter? Last week I [noted](https://paulkrugman.substack.com/p/notes-on-europes-economy) that the Draghi report, while raising alarms about lagging European productivity, concludes that essentially all of that is due to the lagging European tech sector. In all other sectors, European productivity growth has been just as high as in the U.S. I suggested that much of this European tech lag may be due to the self-reinforcing advantages of large tech clusters. They are self-reinforcing because tech people are more productive when they are located close to other tech people. Hence tech industries will tend to agglomerate in a few locations – which are now mainly on the American West Coast and in China. But if the agglomerative nature of tech explains why the European productivity lags behind the U.S., does this have any implications for who *benefits* from technological progress? That is, will Europe necessarily benefit less from technological progress because it doesn’t contain a dominant tech sector? *Nations, regions, and the benefits of tech* The Draghi report’s discussion of Europe’s productivity and technology lag mostly relied on data from 2000 to 2019, a reasonable end date given that much of the statistical work was done before the world economy had fully recovered from Covid. For today’s post I’ll move the window a bit, looking at the period from 2007 — the eve of the financial crisis — to 2024. The U.S. versus Europe story remains the same despite the change in dates. Here’s the growth rate of labor productivity in the United States and the euro area: s_!nvHs!,w_1456,c_limit,f_auto,q_auto:good,fl_progressive:steep/https%3A%2F%2Fsubstack-post-media.s3.amazonaws.com%2Fpublic%2Fimages%2F777060cd-e8e7-4897-971c-d2ba7cf52e5d_856x514.png)

Source: Total Economy Database

Alert readers may notice that I said labor productivity, not total factor productivity (TFP). I’m doing that because it’s easier to compare with the U.S. regional data I’ll turn to in a minute. But there’s no reason to believe that the story would be any different if I used TFP.

As in Draghi’s data, America has had consistently higher productivity growth, by a bit less than 0.9 percentage points a year. I won’t try to do the detailed breakdown by industry contained in the Draghi report, but it seems clear that the US advantage continues to be driven by our advantage in tech.

The story I’ve been telling is that the U.S. dominates tech largely thanks to the self-reinforcing advantages of local clusters, with Silicon Valley at the top of the list and Seattle coming in second. Europe doesn’t have comparable clusters, so it’s shut out of much of the tech sector. And because productivity rises much more quickly in tech than in the rest of the economy (Moore’s Law again), America’s tech dominance translates into a higher average rate of productivity growth.

But as I noted at the beginning of this post, while Europe doesn’t have a Silicon Valley, neither do regions in the United States other than the West Coast. So this story implies that the western United States, home to the biggest tech clusters, should have substantially faster productivity growth than the rest of the country. And it does:

![A graph of growth in a company

AI-generated content may be incorrect.](https://substackcdn.com/image/fetch/\(s_!9Q_U!,w_1456,c_limit,f_auto,q_auto:good,fl_progressive:steep/https%3A%2F%2Fsubstack-post-media.s3.amazonaws.com%2Fpublic%2Fimages%2Fa723b47e-9b12-4f18-b500-eab027b549ea_928x514.png) Source: [BLS](https://www.bls.gov/productivity/highlights/state-labor-productivity.htm) Over the 2007 to 2024 period, productivity in the West grew about 2.2 percent annually, while it rose only about 1.4 percent on average in the rest of the country. That’s a difference of 0.8 percentage points — which is roughly the same as the productivity gap between the U.S. and Europe. The Draghi Report lists multiple reasons for Europe’s productivity lag, ranging from the lack of a truly unified internal market to the lack of venture capital funding for innovative companies. It makes many policy recommendations based on that diagnosis. I have no quarrel with either the diagnosis or the recommendations. But I think we should acknowledge that an important part of the reason European productivity growth is slower than American is the same as the reason productivity growth in most of America lags growth in the West. Namely, for historical reasons California has Silicon Valley and the rest of us do not. Which brings us to the next question: To what extent do either regions or nations that are home to a major tech cluster do better in terms of what matters — the lives of ordinary people — than regions that aren’t? In a competitive economy, we would expect the gains from productivity growth in any one industry to accrue mainly to that industry’s customers, who will benefit from lower prices and higher quality. Tech’s customers are located all around the world. So we should also expect most of the productivity benefits from these clusters’ existence to be spread around the world, not captured by the clusters themselves. The same should be true for industrial clusters in general, like the main industrial clusters [one finds in China](https://www.princeton.edu/~pkrugman/deardorff.pdf). You might say that from an economic point of view we don’t expect what happens in Silicon Valley to stay in Silicon Valley. OK, competition in tech is limited and some tech people are clearly collecting a lot of rents. More on that in this post’s final section. But we can still ask whether ordinary people’s incomes in the West increase faster compared to the incomes in other regions of the country due to tech’s high productivity growth**.** Why ask this question? Because in terms of dominance in tech, the West region is to the rest of America as America is to Europe: one place has it while the other doesn’t. And the data on interregional living standards are easier to interpret than international data. As far as I can tell from a preliminary look at the data, the answer is that the West has *not* seen faster growth in living standards than the rest of America. The chart below shows changes since 2007 in median real personal income — the income, adjusted for inflation, of the typical adult — for the four Census regions. There are significant differences in growth, and I’ll eventually try to figure out what’s driving those differences. But the West did *not* show exceptional growth in real incomes. Instead, it was right in the middle, achieving essentially the same rate of income growth as the Midwest despite much higher productivity growth. s_!m8X_!,w_1456,c_limit,f_auto,q_auto:good,fl_progressive:steep/https%3A%2F%2Fsubstack-post-media.s3.amazonaws.com%2Fpublic%2Fimages%2F8267a00f-a5ee-4863-ba9c-e5f6d3694455_800x450.png)

What this means is that tech-driven productivity growth in the West hasn’t translated into an increase in the living standards of the ordinary person living in the West compared to the rest of the United States. My slightly educated guess — I’ve just begun trying to dig into the data — is that the same is true for comparisons between the U.S. and Europe: America’s tech-driven advantage in productivity growth has had relatively little effect on raising our living standards relative to Europe. In other words, the US may be outperforming Europe by some measures, but living standards for most Americans aren’t rising faster than the living standards of most Europeans (and we die younger.)

Does this mean that the Draghi report is a false alarm? No. Because simply comparing productivity growth rates doesn’t get at the real reasons Europe should be concerned.

Is Europe losing? Is America winning?

I’ve just argued that America’s lead in tech probably isn’t raising the typical American’s standard of living compared with the typical European’s. Why, then, do many people think of this as a race that Europe is losing?

The main answer, I’d argue, is that tech is generating highly profitable corporations and extremely wealthy people. Both tech corporations and billionaire tech bros are overwhelmingly based in America.

The numbers are striking: 8 of the world’s 10 most valuable companies are based in the U.S., while Europe’s most valuable company, ASML, comes in at #27. Most of the world’s wealthiest individuals are also U.S.-based.

This certainly makes it look as if Europe is losing. But appearances may be deceiving.

Does America benefit from being the home base for rich corporations and individuals? You might assume that they pay a lot in taxes, helping to keep the government solvent. But in practice both corporations and the wealthy have become proficient in tax avoidance. And the power they exert in American politics makes it extremely difficult to crack down on their tax avoidance schemes.

Which is part of a broader point: The concentration of the tech industry in the United States means that this industry is uniquely powerful here — and this power is being used in ways that harm many ordinary Americans. I’ve written before about how Meta was able to block even basic limitations on social media that harms children, how crypto bros have in effect — in Donald Trump’s case, literally — been able to bribe politicians into supporting an industry that is still used primarily to facilitate crime and endangers financial stability. Millions of dollars of political donations by Elon Musk and Peter Thiel clearly influenced the outcomes of presidential and senatorial elections. And so on.

So Europe might count itself fortunate not to be host to tech, which does little to raise most people’s incomes and has helped corrupt U.S. politics.

What should worry Europeans, however, are security issues. Europe doesn’t want to be totally dependent on a potentially hostile nation for crucial technology.

Once upon a time it would have seemed ridiculous to call America a potentially hostile nation. But we’re now an illiberal democracy at risk of becoming an autocracy, so Europe should be concerned about our dominance in tech.

There’s much more to say about that grim development. But it’s not the point of this post, which is really about how to interpret international comparisons of productivity.

My old teacher Charlie Kindleberger used to tell his students that when assessing economies, policymakers and the public always want a single number — but often a single number doesn’t tell the real story, and the story is what matters. He was talking about the balance of payments, but the same is true for economic growth.

It’s tempting to reduce comparisons between the United States and Europe to a single number — the difference in productivity growth. But the real story largely involves the location of tech clusters, and is much less favorable to America and dire for Europe than many imagine.