Macro Roundup

“…But can pot make people violent?A study last year found that young people with such mood disorders as depression who were also addicted to pot were 3.2 times as likely to commit self-harm and die of homicide—often after initiating violence—than those who weren’t. A meta-analysis found the risk of perpetrating violence was more than twice as high for young adults who used marijuana. It’s possible that pot can trigger dangerous behavior in youths who may be predisposed to it for other reasons such as prenatal exposure to drugs….”

Allysia Finley, "Cannabis and the Violent Crime Surge,"Wall Street Journal, June 6, 2022, https://www.wsj.com/articles/cannabis-and-the-violent-crime-surge-marijuana-pot-use-thc-shootings-psychosis-mental-11654540197

Cannabis and the Violent Crime Surge

The stigma once attached to marijuana has vanished. Nineteen states have legalized cannabis for recreational use, and politicians of both parties increasingly treat it as harmless. Asked during the 2020 presidential campaign about her pot use in college, Kamala Harris giggled and said marijuana “gives a lot of people joy” and “we need more joy in the world.” But the public needs an honest discussion of its social and public-health risks, which include violence and mental illness.

Alex Berenson, author of “Tell Your Children: The Truth About Marijuana, Mental Illness and Violence,” pointed out that the New York Times had curiously removed from an article about the Uvalde school shooting a former co-worker’s recollection that he complained about his grandmother not letting him smoke weed. The Times didn’t append a correction to the story as it might be expected to do when fixing a factual inaccuracy.

Assuming the elided detail was accurate, it would fit a pattern. Mass shooters at Rep. Gibby Giffords’s constituent meeting in Tucson, Ariz. (2011), a movie theater in Aurora, Colo. (2012), the Pulse nightclub in Orlando, Fla. (2016), the First Baptist church in Sutherland Springs, Texas (2017), and Marjory Stoneman Douglas High School in Parkland, Fla. (2018), were reported to be marijuana users. It could be a coincidence, but increasing evidence suggests a connection.

Isn’t pot supposed to make you mellow? Maybe if you smoke only a joint on occasion. But youth nowadays are consuming marijuana more frequently and in higher doses than their elders did when they were young. This is leading to increased addiction and antisocial behavior.

THC, the chemical that causes a euphoric high, interacts with the brain’s neuron receptors involved with pleasure. Marijuana nowadays on average is about four times as potent as in 1995. But dabs—portions of concentrated cannabis—can include 20 times as much THC as joints did in the 1960s. It’s much easier for young people to get hooked. One in 6 people who start using pot while under 18 will develop an addiction, which doctors call “cannabis use disorder.” As they use the drug more frequently to satisfy cravings, they develop psychological and social problems.

That’s what happened to Colorado teenager Johnny Stack. His mother, Laura, wrote a harrowing book chronicling his descent into cannabis addiction. He started smoking weed at 14, after Colorado legalized it, and progressed to using more-potent products such as dabs. He gradually withdrew from social activities and developed psychosis. Substance-abuse treatment and a stay at a mental hospital failed to cure him because chronic marijuana use permanently rewired his brain. Delusional, he jumped off a six-story building and killed himself. Alas, he’s not an anomaly. “People who have taken large doses of the drug may experience an acute psychosis, which includes hallucinations, delusions, and a loss of the sense of personal identity,” the National Institutes of Health notes.

Roneet Lev, an addiction specialist who previously led the Emergency Department at Scripps Mercy Hospital in San Diego, said in a recent interview with the American Council on Science and Health that California cannabis emergency-room visits climbed 53% in the three years after the state legalized recreational marijuana in 2016. Daily marijuana emergency-room visits in San Diego nearly quadrupled between 2014 and 2019.

Cannabis-induced psychosis, she said, is fairly common. Some patients she treated experienced cannabinoid hyperemesis syndrome from long-term use, which causes “scromiting”—screaming and vomiting. There’s no antidote. Some patients spend weeks in the emergency room waiting for placement in mental-health clinics.

Countless studies have also linked chronic cannabis use to schizophrenia. A meta-analysis in January examining 591 studies concluded that early marijuana use among adolescents was associated with a significant increase in the risk of developing schizophrenia. Researchers have yet to prove a causal relationship, but the weight of evidence is hard to dismiss.

Some legalization proponents claim that other countries where marijuana is widely available have fewer mental-health problems than the U.S. But a study from Denmark last summer found that schizophrenia cases associated with pot addiction have increased three- to fourfold over the past 20 years as marijuana potency rose 200%.

Young people are especially vulnerable to cannabis’s effects because their brains are still developing. Scientists in a recent study reviewed scans of teenagers’ brains before and after they started using pot. They found that parts of the brain involved in decision making and morality judgments were altered in pot users compared to nonusers.

But can pot make people violent? A study last year found that young people with such mood disorders as depression who were also addicted to pot were 3.2 times as likely to commit self-harm and die of homicide—often after initiating violence—than those who weren’t. A meta-analysis found the risk of perpetrating violence was more than twice as high for young adults who used marijuana. It’s possible that pot can trigger dangerous behavior in youths who may be predisposed to it for other reasons such as prenatal exposure to drugs.

Also worrisome, legalization seems to be leading to more pregnant women using pot. About 20% of pregnant young women in California tested positive for marijuana in 2016. THC crosses the placenta and can impair neurological development. Prenatal exposure to marijuana has been linked to behavioral problems, mental illness and lower academic achievement in children and adolescents.

Maybe it’s time that lawmakers and voters rethink their pot-legalization experiment before more young lives are damaged.

Thomas Blanchet, Lucas Chancel, and Amory Gethin of the World Inequality Lab at the Paris School of Economics found that the United States “stands out as the country that redistributes the greatest fraction of national income to the bottom 50 percent.”...Government spending accounts for a smaller share of national income in the United States (35 percent) than in Europe (47 percent), but rates of public spending on education, health care, and benefits for the poor and disabled are similar. The greater cost of government in Europe results largely from its spending 11 percent more of national income on public pensions than the United States—which serves to crowd out private pensions that higher earners would have provided for themselves. To finance these state pensions, Europe imposes payroll and sales taxes at rates twice as high as in the United States. These additional taxes fall heavily on lower-income groups—making government bigger, while imposing higher costs on the poor.

Chris Pope, "America's Redistributive Welfare State,"City JournalWinter, 2022, https://www.city-journal.org/americas-redistributive-welfare-state

America’s Redistributive Welfare State

As part of a recent study on income disparities, Thomas Blanchet, Lucas Chancel, and Amory Gethin of the World Inequality Lab at the Paris School of Economics found that the United States “stands out as the country that redistributes the greatest fraction of national income to the bottom 50 percent.” This is not the American welfare state’s traditional reputation and seems to have come as a surprise to the left-leaning authors. How can it be so?

Government spending accounts for a smaller share of national income in the United States (35 percent) than in Europe (47 percent), but rates of public spending on education, health care, and benefits for the poor and disabled are similar. The greater cost of government in Europe results largely from its spending 11 percent more of national income on public pensions than the United States—which serves to crowd out private pensions that higher earners would have provided for themselves. To finance these state pensions, Europe imposes payroll and sales taxes at rates twice as high as in the United States. These additional taxes fall heavily on lower-income groups—making government bigger, while imposing higher costs on the poor.

Because raising taxes is unpopular, politicians normally prioritize spending. For this reason, the U.S. established Medicaid, Medicare, Social Security, and various welfare benefits as safety nets. The middle class is expected to provide for its own health insurance through employment and most of its retirement through homeownership, private pensions, 401(k)s, and other investments.

In the early twentieth century, Europe’s welfare state was built along similar lines, through a combination of employer-sponsored benefits, private insurance, and public assistance targeted at the needy. But World War II crashed the continent’s private pension and insurance systems, forced the rationing of basic goods and services, and led governments to establish universal entitlements to provide for all citizens, regardless of their circumstances.

When Britain extended eligibility for state pensions and health-care services to the middle class, it did not increase funding proportionately. As a result, cash-benefit levels declined and the quality of medical services deteriorated—leaving the poor, who were already previously covered, worse off. The working class, which had not paid income taxes prior to the war, found itself paying for much of the expansion. Other European nations, such as France and Belgium, which enacted equivalent reforms to universalize entitlements at the end of the war, saw a similar effect.

For a while, the cost of the shift was masked by the rebound of ruined economies in the immediate postwar era. But over time, the expense of providing generous retirement benefits and comprehensive health-care services to all ballooned—tilting the bulk of government spending toward middle-class entitlements and eclipsing other spending priorities. France spends a much larger share of GDP (13.6 percent) on public pensions than does the United States (7.1 percent), owing to a lower retirement age (62 vs. 66) and disproportionately generous benefits for wealthier seniors. Yet, as 69 percent of American seniors receive private retirement benefits, incomes from private pensions in the U.S. (5.3 percent of GDP) are much higher than in France (0.3 percent), and the median disposable income of over-65s in the United States ($38,920) is also much higher than in France ($23,490).

Blanchet, Chancel, and Gethin make much of the fact that income is more unequally distributed in the U.S. than in Europe. The United States does not have greater inequality because it has more poor people, however, but because its nonpoor earn much more. In 2017, after adjusting for differences in the cost of living, only 19 percent of Americans lived in households with disposable incomes less than $20,000, compared with 22 percent in Germany, 27 percent in the United Kingdom, and 53 percent in Italy. By contrast, while 32 percent of Americans enjoyed disposable incomes greater than $50,000, only 12 percent of Germans, 12 percent of Britons, and 4 percent of Italians did so. Americans live in houses that are, on average, twice as large as those of Europeans. Indeed, the average resident of France, Germany, or Britain has less living space than the poorest quintile of Americans. Rates of homelessness are also substantially lower in the U.S. than in France, Germany, or the U.K. Only 3 percent of the U.S. population was undernourished in 2016, the same as in the E.U.

The swelling of Europe’s welfare states mostly imposes additional costs on those with modest incomes, rather than the rich—of which it has many fewer than the United States. While the richest 1 percent pay about 33 percent of their income in taxes in the U.S. and 35 percent in Europe, residents with below-average incomes pay much less in tax in the U.S. (16 percent) than in Europe (28 percent).

The United States has the highest levels of disposable income among G7 countries for nine out of 10 income deciles. Such comparisons give the impression that the poorest decile is little better off in the United States than in Europe. But the U.S. relies heavily on in-kind benefits, which traditional income statistics don’t count, to assist its neediest citizens. In 2018, American families with children below the poverty line averaged posttax earnings of $18,148—in addition to which government programs provided an average of $20,757 in cash, food, and housing benefits, along with $4,967 in child care and services and $14,960 in health-care benefits.

Blanchet, Chancel, and Gethin note that government spending on health care in the United States and Europe accounts for a similar share of GDP. However, American entitlements to health care are largely reserved for the elderly, disabled, and poor through Medicare and Medicaid, which covers 34 percent of the population. Health care for middle-class families is typically paid for privately through employer-sponsored insurance. When government and private-sector spending are included, the U.S. spends a total of 17 percent of GDP on health care, compared with 10 percent in the E.U.

Government budgets under single-payer health-care systems must be stretched to cover all, which typically leaves them short of funds for the costliest services. Britain’s National Health Service refuses to cover medical interventions that cost more than $40,000 per year of life saved. As a result, the sickest patients are often denied access to newly developed drugs or are treated with outdated equipment when major surgery is required. Even when procedures are nominally covered, a shortage of funds means that patients are regularly unable to make timely appointments with specialists for cancer care or forced to wait months for essential surgery.

America’s health-care system is therefore remarkably progressive in its financing and at ensuring better access to care. The 82 million low-income Americans covered by Medicaid in 2019 paid no premiums, deductibles, or coinsurance for health-care services. Because insurance is generally comprehensive, the share of household consumption dedicated to out-of-pocket medical expenses is lower in the United States than in most other developed nations.

American health care can improve. Employer control of insurance makes plans unresponsive to individual needs, creates gaps in coverage when people move between jobs, and weakens the incentive for hospitals to control costs. These problems can and should be fixed. But throwing more money at health care, as with other social programs, tends to run into diminishing returns.

The welfare states facing the greatest struggles are those that rely on a single payer to finance all activities. The sovereign debt crises in Portugal, Ireland, Italy, Greece, and Spain were primarily due to the expansion of public pensions that largely replaced private retirement finance. Maintaining broad access to essential health-care services, as medical capacities develop and citizens live further into old age, is also likely to prove hardest for countries where the government is expected to provide these services to all.

Governments best help those in need when they limit benefits to them, rather than trying to provide for the entirety of society—an approach that requires everyone to pay higher taxes, including the poor.

Thomas Blanchet, Lucas Chancel and Amory Gethin, "Why Is Europe More Equal Than The United States,"Paris School Of Economics, November 9, 2021, https://wid.world/document/why-is-europe-more-equal-than-the-united-states-world-inequality-lab-wp-2020-19/

“…Why do our conclusions contradict the standard view on redistribution in Europe and the US? We find that this is the case for three main reasons. First, OECD estimates rely exclusively on surveys, while we systematically distribute the entire national income by combining surveys with tax data and national accounts. Second, standard estimates of redistribution only allocate direct taxes and transfers to individuals, thereby ignoring corporate taxes, indirect taxes, and in-kind transfers. Distributing these components of government revenue and expenditure reverts the rankings of Europe and the US in terms of redistribution. This is because indirect taxes are much higher in Europe than in the US and fall disproportionately on low-income earners. Third, our benchmark measure of redistribution compares pretax incomes to Post tax incomes, while the standard view tends to compare factor incomes (sometimes referred to as market incomes) to posttax incomes. Because many European countries have a greater share of pensioners than the United States, and because public pension systems are much more developed in Europe than in the US, including pensions in the analysis leads to increasing estimates of redistribution more in the former than in the latter. However, as we now show, our conclusions are strongly robust to using one or the other of these two income concepts….”

Predistribution vs. Redistribution: Revisiting the Europe-US inequality gap

“…Figure VIIa directly answers this question by representing the share of national income transferred by the tax-and-transfer system between pretax income groups in Eastern Europe, Western and Northern Europe, and the United States in 2017. The bottom 50% and the middle 40% are net beneficiaries of redistribution in all three regions, but the US tax-and-transfer system appears to be unequivocally more progressive. The bottom 50% in the US received a positive net transfer of 6% of national income in 2017, compared to about 4% inWestern and Northern Europe and less than 3% in Eastern Europe. Meanwhile, the top 10% saw their average income decrease by 8% of national income in the US after taxes and transfers, compared to about 4% in Western and Northern Europe and 3% in Eastern Europe. The middle 40% benefits slightly more from redistribution in the US (2%) than in Europe (less than 1%)….”

The Net Impact of Taxes and Transfers on Inequality

“…FigureVIbprovides a complementary picture of the magnitude and progressivity of government expenditure by plotting total transfers received by the bottom 50% in European countries and the United States, expressed as a share of national income. The US ranks third in terms of the smallest share of national income transferred to the bottom 50% (about 13%), due mainly to lower expenditure on pensions. In Europe, transfers received by the poorest half of the population are smallest in Serbia (11%), followed by Romania (12%), Estonia (14%), and Poland (14%). Meanwhile, Denmark, the Czech Republic, Sweden, the Netherlands, Belgium, and Finland stand out as the European countries allocating the greatest share of national income to the poorest half of the population (22-23%, corresponding to slightly less than half of all government revenue in these countries)….”

“…As for taxes, total government expenditure is significantly lower in the US (35% of national income) than in Europe (47%).36 The difference between the two regions is due to cash transfers, which represent 9% of national income in the US compared to 23% in Europe. Within cash transfers, pensions are the aggregate that differs the most between the two regions (16% of national income in Europe versus 5% in the US), followed by family and social assistance transfers (5% vs. 3%) and unemployment and disability benefits (1.6% vs. 1.4%). Meanwhile, in-kind transfers in health, education, and other collective government expenditure are very similar in Europe and the US (25-26%, of which about 7% goes to health). Total government expenditure is higher in Northern Europe (51% of national income) and Western Europe (48%) than in Eastern Europe (42%), due mainly to the larger size of social assistance transfers (5% inWestern and Northern Europe vs. 3.5% in Eastern Europe) and in-kind transfers (29% vs. 25% vs. 23%, respectively) in Western and Northern Europe. Figure VIa presents the distribution of transfers across posttax income groups in Europe and the US, expressed as a share of posttax national income. Unsurprisingly, transfers are progressive in both the US and Europe: they represent over 60% of the posttax incomes of bottom deciles, compared to less than 30% of those of the top 1%. Pensions represent a smaller share of posttax income in the US than in Europe for all posttax income groups, while the distribution of other cash transfers is relatively similar between the two regions. Health payments are the most progressive type of transfers. In Europe, this is directly due to the fact that we distribute health expenditure on a lump-sum basis, assuming as a first approximation that all individuals benefit from the same in-kind transfer (see methodology). Health expenditure is also highly progressive in the United States, where public health spending is significant and targeted towards the very poor (via Medicaid). Other in-kind transfers are neither progressive nor regressive, because we assume that they are distributed proportionally to posttax disposable income (we come back to this assumption in the next section)…”

The Structure and Distribution of Transfers

“…By doing so and by narrowing down the analysis to the employed and working-age (20-64) population, the analysis remains consistent and cross-country comparisons meaningful. The main conclusions are unchanged. Because social contributions fall on labor income and are generally set at fixed rates, they tend to be flat for most groups within the bottom 90% and regressive at the top. This turns the tax systems of Western and Northern European countries into approximately flat tax systems, while those of most Eastern European countries become strongly regressive at the top end of the distribution. Because social contributions are smaller in the United States than in Europe, the US tax system remains more progressive than that of all European countries (with the exception of the UK)….”

“…Figure Vb ranks European countries and the United States according to a simple measure of tax progressivity: the ratio of the total tax rate faced by the top 10% to that of the bottom 50%. The composition of bars correspond to the composition of taxes paid by the top 10%. The US stands out as the country with the highest level of tax progressivity: the top decile faces a tax rate that is more than 70% higher than that of the poorest half of the population. By this measure, the European country with the most progressive tax system is the United Kingdom, followed by Norway, the Czech Republic, and France. Many European countries have values close to 1 on this indicator, corresponding to relatively flat tax systems, in which top income groups face a tax rate approximately equal to that of the bottom 50%....”

“..Figure Va represents the level and composition of non-contributory taxes paid by pretax income group in Eastern Europe, Western and Northern Europe, and the United States in the past decade.34 Two results clearly stand out. First, while taxes paid are lower in the US than in Europe for most pretax income groups, the taxation profile is unambiguously more progressive in the United States. The top 1% face a tax rate higher than 30% in the US, which is relatively comparable to what we observe in Western and Northern Europe. Meanwhile, bottom income groups are taxed an average rate that is nearly twice as small in the US as in Europe. Second, the difference in tax progressivity between the two regions is mainly driven by indirect taxes, which represent a significantly larger share of national income in Europe than in the US. These taxes tend to be regressive, because they are paid proportionally to consumption…”

“…Before investigating the distributional impact of taxes, it is useful to briefly compare the size and composition of government revenue in Europe and the United States.33 In 2007-2017, taxes and social contributions amounted to 47% of national income in Europe, compared to 28% in the United States. The United States collected less tax revenue than any European country, from Romania (32%), the country with lowest tax revenue, to Denmark (57%), which displayed the highest tax to national income ratio. The gap between the two regions was driven by two components of revenue: social contributions, which represented 19% of national income in Europe versus 8% in the US, and indirect taxes (14% versus 7%). Meanwhile, both regions collected comparable amounts of revenue from income and wealth taxes (10-11%) and from corporate income taxes (3%). The macroeconomic tax rate was larger in Northern Europe (52%) than in Western Europe (48%) and Eastern Europe (41%), due mostly to the larger share of national income collected in income and corporate taxes. If one excludes contributory social contributions from the analysis (that is, contributions financing the pension and unemployment systems), then the gap between Europe and the US decreases but remains significant: 23% of national income was collected in non-contributory taxes in the US in 2007-2017, compared to 30% in Europe….”

The Structure and Distribution of Taxes

“…TableIVprovides a more detailed picture of the rise of pretax income inequality by showing the real average annual income growth of selected income groups in our four regions of interest over the 1980-2017 and 2007-2017 periods.30 National incomes grew at a modest yearly rate in the past four decades in Europe and the US: 1% in Western Europe, 1.2% in Eastern Europe, 1.4% in the US, and 1.8% in Northern Europe. In all regions, however, growth rates have been markedly higher the further one moves towards the top end of the distribution. The average pretax income of the top 1% thus rose at a rate of 1.9% in Western Europe, 3.2% in Northern Europe, 3.3% in the US, and 3.8% in Eastern Europe. Meanwhile, middle-income groups saw their average pretax incomes grow at a rate closer to the average of the full population in all regions. The bottom 20% benefited the least from real national income growth: their average income increased at a rate of 1.2% in Northern Europe and 0.7% in Western Europe, while it decreased at a rate of 1.3% in Eastern Europe and fell on average by 1.1% every year in the United States….”

“..The US ranks third of all the countries considered here, with an increase in the top 10% share of almost 14 percentage points. In Western Europe, Germany is the country where the top 10% share grew the most (+ 9 percentage points)…”

“…We now turn to documenting the evolution of pretax income inequality in Europe and the US. FigureIIashows the evolution of the top 10% pretax income share in the US, Eastern Europe, Western Europe, and Northern Europe from 1980 to 2017. The United States remained more unequal than most European countries throughout the entire period, but the gap between Europe and the US has widened significantly over time.27Indeed, the top 10% rose most rapidly and steadily in the US (from 34% to 48%), followed by Eastern Europe (from 24% to 36%), Western Europe (from 30% to 35%), and Northern Europe (from 26% to 31%). From 1980 to 2017, Eastern Europe shifted from being the least unequal to the most unequal European region. A significant part of this change occurred between 1989 and 1995, following thedisintegration of the Soviet Union and the transition of Eastern European countrie to market economies…”

The Distribution of Pretax Income Growth

“…How do pretax incomes vary in Europe and the United States today? Table III provides a first answer to this question by displaying the average incomes and income shares of key income groups in Western Europe, Northern Europe, Eastern Europe, and the US in 2017. The average national income per adult stood at e52,700 in the US at purchasing power parity, compared to e44,900 in Northern Europe, e35,300 in Western Europe, and e21,700 in Eastern Europe. In Europe, only Norway (e55,000) and Luxembourg (e102,000) have higher average national incomes than the US.23Things look very different at the bottom of the pretax income distribution. Thebottom 50% earned only about e12,300 in the US in 2017, compared to e21,600 inNorthern Europe and e14,600 in Western Europe. Of the twenty-seven countriesconsidered in this paper, the US thus ranks third in terms of average national incomeper adult but nineteenth when it comes to the average income of the poorest 50%.24On average, pretax income inequality at the bottom is lowest in Northern Europe(with a bottom 50% share of 24%), followed by Western Europe (21%) and EasternEurope (20%). With a bottom 50% pretax income share of only 11.7%, the US is byfar the most unequal of all countries, followed by a distant Serbia (16%) and veryfar from the values observed in the Czech Republic, Iceland, Norway, and Sweden(all above 25%).25These differences appeared even more pronounced at the verybottom of the distribution: the average income of the poorest 20% was e11,600 inNorthern Europe in 2017, more than three times larger than its counterpart in theUnited States (e3,800).The same differences are visible at the top end of the distribution: the top 1% captured 21% of total pretax income in the US in 2017, compared to 12% in Eastern Europe, 11% in Western Europe, and less than 9% in Northern Europe. In 2017, the top 0.001% average pretax income exceeded e92 million in the US, nearly ten times the value observed in Northern Europe. The European countries with lowest top 1% income shares are the Netherlands, Slovenia, Iceland, Belgium, and Finland (less than 9%), while those with highest top income concentration are Germany, the United Kingdom, Greece, and Poland (13-15%).26 In summary, while the US stands out as being richer than most European countries today, differences in average national incomes mask substantial heterogeneity. With inequality levels surpassing by far those observed in any European country, theUS displays bottom pretax average incomes that barely exceed those observed inpoorer Eastern European countries. In contrast, the lower inequality levels and higheraverage incomes observed in Northern Europe imply significantly better standardsof living for the majority of the population than in the United States….”

“..The efforts made by the Luxembourg Income Study (LIS) to harmonize existing surveys, for instance, have been extremely helpful to improve the comparability of pre-2000 inequality statistics in Europe. Yet, because of sampling issues and misreporting at the top of the income distribution, surveys can picture evolutions that are inconsistent with those suggested by tax data. In this paper, we combine for the first time all these sources in a meaningful way, using new techniques and a consistent methodology. We show that correcting for the weaknesses of existing estimates does lead to substantively different conclusions on the level and evolution of inequality in Europe, the distributive impact of taxes and transfers, and how inequality and redistribution compare across European countries….”

Core Evidence

“..the main reason for Europe’s relative resistance to the rise of inequality has little to do with the direct impact of taxes and transfers. While Western and Northern European countries redistribute a larger fraction of output than the US (about 47% of national income is taxed and redistributed in Europe versus 35% in the US), the distribution of taxes and transfers does not explain the large gap between Europe and US posttax inequality levels. Quite the contrary: after accounting for all taxes and transfers, the US appears to redistribute a greater fraction of its national income to the poorest 50% than any European country. This finding stands in sharp contrast with the widespread view that “redistribution”, not “predistribution”, explains why Europe is less unequal than the US (e.g.,OECD, 2008;2011). In other words, Europe has been much more successful than the US at ensuring that its low-income groups benefit from relatively good-paying jobs. We show that the differences between our conclusions and those of the OECD are driven by several factors, including the greater underrepresentation of top incomes in US surveys, the fact that we account for indirect taxes and in-kind transfers, which are moreprogressive in the US than in Europe overall, and the inclusion of pensions in the definition of pretax income….”

“…Between 1980 and 2017, the share of pretax income that accrued to the richest 1% Europeans rose from 8% to 11% before taxes and transfers and from 7% to 9% after taxes and transfers. In the US, the top 1% pretax income share rose from 11% to 21% over the same period, and the top 1% post tax income share from 9% to 16%....”

Steve Notes

The bottom 20% in the US earn effectively zero, suggesting they don’t have jobs vs Northern Europe,which earns 21.6 euros suggesting they have significant jobs. That seems like apples to oranges. The amount transferred to the bottom 20% in the US seems very small compared to the amount calculated in the table we made of the many experts estimating the amounts. 6k euros vs tens of thousands of dollars. Lastly, they mix retirees with the poor so straightforward comparisons are very complicated/impossible. Perhaps they break them out in the online data table.

And also

3.2 delta/36.6 (average national income per capita) = 8.7% vs the chart above, which says 4.4%. I did this for the other (three) countries and found the same result: the allocation in the table seemed to be twice the number in the chart. I only have the chart for the US and not the table. So I believe I have to double the number in the chart to produce an equivalent table. But that’s too bold a leap for me to use publicly. Perhaps I don’t understand the chart or my math is wrong. I interpret the chart to be: what percent of national income is being distributed to the bottom 50% on net (i.e. less taxes plus services). On net, the US distributes more to the poor than other countries and national income per capita is larger so dollar-wise (or euro-wise in this case) more gets distributed both percentage-wise and even more so dollar-wise. Several other things made my ears perks up: Not presenting a comparable US page is a red flag. They use Piketty and Saez data for the US. But those estimates were criticized by Auten and Splinter. Pages 67 and 68 in the appendix show the (supposedly real) growth in average income (both are inflated to 2017ppp adjusted euros). But what inflation index did they use for the US and Europe, and are those indexes similarly accurate? When you inflate/deflate over that long a time period, the indexes matter. I’m always leery of data that changes significantly in a couple years. The significant down tick in the US and uptick in Europe makes my ears perk up. Things seldom change quickly. And, as far as I know, the incomes of American lesser-skilled workers grew faster than the economy on average (so their share would be growing).

Taking France as an example. It says the difference between pre and post tax income for the bottom 50% is 4.4% of national income. 21.0 (post tax per capita income for the bottom 50%, measured in 2017 purchasing poser adjusted euros) - 17.8 (pretax income for the bottom 50%) = 3.2 delta between pre and post

They have a chart like this for each country which show the net effect (i.e., minus taxes plus services)

And also

Blanchet Comment, “The figure for net redistribution shows the aggregate amount of income that is redistributed (on net) to each group, while you are calculating the change in each group’s average income. That is where the factor 2 comes from. The bottom 50% receives 4.4% on national income on net, but since that is distributed across half of the population, the change in that group’s average is twice as large. We don't show the US in our appendix because for them we are not making our own estimates, but use the data from:https://gabriel-zucman.eu/usdina/We always use the GDP implicit price deflators as price indexes, which in principle are harmonized across countries to the same extent that GDP numbers are.”

This paper highlights that the way that housing inflation was measured in the CPI made previous inflationary cycles look more volatile and responsive to Fed policy. We draw two sets of conclusions. First, our observations imply that the current inflation regime is closer to that of the late 1970s than it may at first appear. In particular, the rate of CPI disinflation engineered in the Volcker-era is significantly less when measured using today’s treatment of housing. In order to return to 2 percent core CPI today, we need nearly the same 5 percentage points of disinflation that Volcker achieved. In its pre-1983 form, shelter inflation would decline mechanically as interest rate increases subsided, adding fuel to rapid disinflations. Not only is the current housing component of CPI unlikely to decline swiftly, but recent research indicates that housing inflation is likely to continue growing in the coming monthsWith private sector rent growth currently still at 16 percent, residential inflation is likely to move towards 7 percent by the end of 2022, contributing almost 3 percentage points to core CPI inflation. Compared to previous inflationary cycles, housing will thus serve as a significant hindrance to rapid disinflation whereas it used to move the official series substantially lower.Second, our estimates suggest that past inflation cycles were more volatile than today’s due to the greater weight of transitory goods components in past indices. With current procedures, the inflation taken out of the system in 1950s and 1970s looks significantly more modest. Overall, some optimistic interpretations which underplay the magnitude of the required disinflation to return to trend inflation today are called into question by the analysis in this paper. Our estimates suggest that the current inflation rate is closer to the peak of other cycles than the official CPI data suggest. Figure 3 shows that the peak of the Volcker-era inflation (March 1980), currently understood to have been at 14.8 percent, is only 11.4 percent when adjusted for the switch from homeownership costs to OER. The growth in core CPI at its peak in June 1980 falls from 13.6 percent to 9.1 percent when measured using the OER method as seen in Figure 4. The large differences between the official and adjusted series reflect both the substantial weight of OER in the index, especially in core CPI, and the lower peaks of estimated OER relative to homeownership costs. From a low of 14.5 percent weight in 1983, as Americans have shifted more of their consumption towards housing, OER has risen to represent 24.3 percent of overall CPI and 30.6 percent of core CPI in 2022. While past inflation peaks are lower using the consistent methodology, the average inflation rate pre-1983 would also have been lower. Our estimates show that the mean headline inflation rate between 1949 and 1983 is 0.4 percentage points lower when accounting for the shift to OEROne thing that is not called into question is the great work performed by the people of the Bureau of Labor Statistics; our corrections do not at all denigrate current processes, they are just a tool for better intertemporal contextualization. Most importantly, prior to 1983 measurement of shelter inflation was mechanically responsive to Federal Reserve interest rate policy via mortgage rates. This method made pre-1983 peak CPI inflation measures, especially during the Volcker-era, artificially high at the beginning of the tightening cycle, and declines look artificially fast. Using publicly available Bureau of Labor Statistics (BLS) data for the post-war period, we develop new estimates of CPI headline and core inflation that can be better compared across time. The full series is available on our website athttp://larrysummers.com/category/inflation/. Our analysis reveals that current inflation, especially core inflation, is considerably closer to previous peaks than in the official series. Official core CPI inflation peaked at 13.6 percent in June 1980, whereas we estimate that core inflation was 9.1 percent in that same month when adjusting for the treatment of shelter inflation. Our estimates also suggest that the local trough of core CPI inflation in 1983 was considerably higher than originally reported. Overall, these estimates imply that the rate of core CPI disinflation caused by Volcker-era policies is significantly lower when measured using the current treatment of housing: only 5 percentage points of decline instead of 11 percentage points in the official CPI statistics. To return to 2 percent core CPI today, we thus need disinflation of a similar magnitude as Chairman Volcker achieved. We show that due to the greater weight of transitory goods components —especially food and apparel— in the index of the 1940s and 1950s, past inflation spikes were higher and more short-lived than today’s. When using current weights, we estimate that the peak of core CPI inflation in June 1951 falls from 7.2 to 5 percent, and the peak of headline CPI inflation falls from 9.4 to just 3.3 percent. These two points serve as a caution against overly optimistic forecasts of an inexpensive disinflation in the current cycle —the disinflation that needs to be achieved now is large by historical standards.

Methodology

“…To better contextualize the current run-up in inflation, this paper constructs new historical series for CPI headline and core inflation that are more consistent with current practices and expenditure shares for the entirety of the post-war period. Using publicly available Bureau of Labor Statistics (BLS) data for the post-war period, we develop new estimates of CPI headline and core inflation that can be better compared across time. The full series is available on our website athttp://larrysummers.com/category/inflation/. Our analysis reveals that current inflation, especially core inflation, is considerably closer to previous peaks than in the official series. Official core CPI inflation peaked at 13.6 percent in June 1980, whereas we estimate that core inflation was 9.1 percent in that same month when adjusting for the treatment of shelter inflation….”

Implication

“…Our estimates also suggest that the local trough of core CPI inflation in 1983 was considerably higher than originally reported. Overall, these estimates imply that the rate of core CPI disinflation caused by Volcker-era policies is significantly lower when measured using the current treatment of housing: only 5 percentage points of decline instead of 11 percentage points in the official CPI statistics. To return to 2 percent core CPI today, we thus need disinflation of a similar magnitude as Chairman Volcker achieved….”

Other Comparisons

“…Similar issues affect conclusions drawn from comparisons of current inflation with other periods of elevated inflation. Recent work suggests that the years following World War II have strong similarities to the current inflation environment (e.g., Rouse et al., 2021; DeLong, 2022). We show that due to the greater weight of transitory goods components —especially food and apparel— in the index of the 1940s and 1950s, past inflation spikes were higher and more short-lived than today’s. When using current weights, we estimate that the peak of core CPI inflation in June 1951 falls from 7.2 to 5 percent, and the peak of headline CPI inflation falls from 9.4 to just 3.3 percent. These two points serve as a caution against overly optimistic forecasts of an inexpensive disinflation in the current cycle —the disinflation that needs to be achieved now is large by historical standards…”

The Evidence

“…Our estimates suggest that the current inflation rate is closer to the peak of other cycles than the official CPI data suggest. Figure 3 shows that the peak of the Volcker-era inflation (March 1980), currently understood to have been at 14.8 percent, is only 11.4 percent when adjusted for the switch from homeownership costs to OER. The growth in core CPI at its peak in June 1980 falls from 13.6 percent to 9.1 percent when measured using the OER method as seen in Figure 4. The large differences between the official and adjusted series reflect both the substantial weight of OER in the index, especially in core CPI, and the lower peaks of estimated OER relative to homeownership costs. From a low of 14.5 percent weight in 1983, as Americans have shifted more of their consumption towards housing, OER has risen to represent 24.3 percent of overall CPI and 30.6 percent of core CPI in 2022. While past inflation peaks are lower using the consistent methodology, the average inflation rate pre-1983 would also have been lower. Our estimates show that the mean headline inflation rate between 1949 and 1983 is 0.4 percentage points lower when accounting for the shift to OER. More broadly speaking, past inflationary cycles would have been less volatile using the consistent methodology that uses OER. The pace of reflation during the cycle upswings, and the pace of disinflation during the cycle downswings are lower under today’s methodology, as summarized in Table 1.These differences imply that the responsiveness of the CPI to monetary policy was considerably lower during the 1960s and 1970s than the official CPI statistics suggest. We stress that any consequences of the difference in measurement are larger for core CPI than for headline CPI, due to the considerably larger weight of OER in core CPI..”

Marijn Bolhuis, Judd Cramer and Lawrence Summers, "Comparing Past and Present Inflation," National Bureau Of Economic Research, June 2022, https://www.nber.org/papers/w30116

David Autor, "The Labor Market Impacts of Technological Change: From Unbridled Enthusiasm to Qualified Optimism to Vast Uncertainty,"National Bureau Of Economic Research, June 2022, https://www.nber.org/papers/w30074

Autor, “…I began by asking what the role of technology—digital or otherwise—is in determining wages and shaping wage inequality. I presented four answers corresponding to four strands of thinking on this topic: the education race, the task-polarization model, the automation-reinstatement race, and the era of AI uncertainty.. Fundamentally, technological change expands the frontier of human possibilities, but one should expect it to create many winners and many losers, and to pose vast societal challenges and opportunities along the way. What are the policy implications of these observations? The question is so broad that almost any answer is bound to appear vague and inadequate. One can reliably predict that technological innovations will foster new ways of accomplishing existing work, new business models, and entirely new industries, and these in turn will generate new jobs and spur some productivity gains. But absent complementary institutional investments, technological innovation alone will not generate broadly shared gains. sketch a long-form policy vision of what form these investments may take, focusing on three domains: education and training; labor market institutions; and innovation policy itself. I provide a capsule summary of those conclusions here, stopping short of policy recommendations. As a starting point, educating and training the workforce to meet the demands of the moment can improve access to good jobs for workers who would otherwise face barriers and boost the quality of existing jobs by creating opportunities for career ladders. While boosting the supply of skills is never controversial, pure supply-side policies are inadequate to meet the gravity of the labor market challenge. In 1979, 60% of U.S. males at the median of the wage distribution possessed high school or lower education, whereas 21% had some college, and 20% held a bachelor’s degree or above. By 2019, 31% of males at the median of the earnings distribution had some college, 36% had attained at least a four-year college degree — a 75% increase — and only one-third had high school or less education. Despite this dramatic skill upgrading, the real earnings of the median male rose by only 10% in these forty years. More broadly, over more than four decades, the link between rising productivity and commensurate improvements in job opportunities and earnings has decoupled for the majority of U.S. workers. The poor quality of jobs available to workers lacking four-year college degrees or specialized credentials provides one of the starkest examples of this failure. Low-wage U.S. workers earn substantially less than low-wage workers in almost all other wealthy industrialized countries. The divergence between the upward path of productivity growth and the near plateauing of median wage growth among U.S. workers was not an inevitable consequence of technology, globalization, or market forcesRather, a set of U.S.-specific institutional and policy choices failed to blunt—and in some cases magnified—the consequences of technological and globalization pressures on the U.S. labor market. To contend effectively with these challenges would require institutional and policy reforms that realign labor market opportunities with the rising productivity and societal wealth that the U.S. has reaped from decades of innovation and investments in human and physical capital. Thus, a second locus for investment would be to revitalize the governmental, nongovernmental, and private sector institutions that translate—or fail to translate—rising productivity into shared prosperity. Some such steps might include updating and more vigorously enforcing labor standards, recalibrating federal minimum wage policies, extending the scope and flexibility of the unemployment insurance system, and transforming the U.S. employer-based health insurance provision into a system with portable benefits. further call for reevaluating the U.S.’ uncritical embrace of pure shareholder capitalism. While shareholder capitalism can plausibly be credited with some of the productive dynamism of the U.S. economy, it has also arguably helped fuel the drive to curtail wages and benefits for low-wage workers and, more broadly A third potential domain for policy is to directly shape innovation itself to speed productivity growth and complement the skills of the labor force. It is well known that the U.S. has a strong national innovation system, fueled by federal R&D investments, to develop fundamental science and new technologies, that has led to scientific leadership and new industries Less recognized, however, is the crucial link between those new industries as complements to the inevitable loss of jobs that results from productivity-enhancing technologies. New industries grew out of a flourishing innovation ecosystem that created new companies and new applications, alongside older industries that increased mechanization and automation as they matured. Arguably, the U.S. has let those important R&D investments wither Through increased and targeted R&D investments supported by a reinvigorated federal R&D program, as well as a tax policy that keeps workers and social challenges at the forefront, the country’s innovation system could be put to work for a broader number of people and regions than it has in recent decades Although I would prefer to end this essay with optimistic assurances,I will instead end with one uncertainty, one certainty, and one admonition. The uncertainty is that we have less clarity about our technological future than we did two decades ago. AI has extended the frontier of technological possibility towards boundaries that are barely visible at present. The tasks that machines will be able to accomplish, the rate at which new innovations may emerge, and the speed with which socially impactful technological innovations may diffuse is unknown. But the range of possibilities has surely gotten broader, and our certainty about the boundaries has accordingly diminished. Conversely, the certainty is that these technological advances will expand the set of desirable possibilities that are within the reach of humanity. Artificial Intelligence has the potential to help humanity tackle some of its most pressing challenges: climate change, disease, poverty, malnutrition, and inadequate education. But whether societies will successfully realize this potential, or instead squander it or, worse, disastrously misuse it, is highly uncertain and, I would argue, fundamentally indeterminate. The admonition is this: given the potential applicability of AI to a vast set of purposes, we collectively (meaning individuals, organizations, and governments) should not simply be asking what AI will accomplish but what we want it to accomplish. How can we use AI most productively to complement workers, raise productivity, and more broadly, tackle humanity’s most pressing challenges? Simultaneously, how can we blunt or reshape the commercial incentives to use AI for socially counterproductive objectives such as displacing workers, preying upon people’s cognitive and emotional frailties, or consolidating the power of governments or corporations to exercise social control As we ponder our uncertain AI future, our goal should not merely be to predict that future but to create it….”

“…How do pretax incomes vary in Europe and the United States today? Table III provides a first answer to this question by displaying the average incomes and income shares of key income groups in Western Europe, Northern Europe, Eastern Europe, and the US in 2017. The average national income per adult stood at e52,700 in the US at purchasing power parity, compared to e44,900 in Northern Europe, e35,300 in Western Europe, and e21,700 in Eastern Europe. In Europe, only Norway (e55,000) and Luxembourg (e102,000) have higher average national incomes than the US.23Things look very different at the bottom of the pretax income distribution. Thebottom 50% earned only about e12,300 in the US in 2017, compared to e21,600 inNorthern Europe and e14,600 in Western Europe. Of the twenty-seven countriesconsidered in this paper, the US thus ranks third in terms of average national incomeper adult but nineteenth when it comes to the average income of the poorest 50%.24On average, pretax income inequality at the bottom is lowest in Northern Europe(with a bottom 50% share of 24%), followed by Western Europe (21%) and EasternEurope (20%). With a bottom 50% pretax income share of only 11.7%, the US is byfar the most unequal of all countries, followed by a distant Serbia (16%) and veryfar from the values observed in the Czech Republic, Iceland, Norway, and Sweden(all above 25%).25These differences appeared even more pronounced at the verybottom of the distribution: the average income of the poorest 20% was e11,600 inNorthern Europe in 2017, more than three times larger than its counterpart in theUnited States (e3,800).The same differences are visible at the top end of the distribution: the top 1% captured 21% of total pretax income in the US in 2017, compared to 12% in Eastern Europe, 11% in Western Europe, and less than 9% in Northern Europe. In 2017, the top 0.001% average pretax income exceeded e92 million in the US, nearly ten times the value observed in Northern Europe. The European countries with lowest top 1% income shares are the Netherlands, Slovenia, Iceland, Belgium, and Finland (less than 9%), while those with highest top income concentration are Germany, the United Kingdom, Greece, and Poland (13-15%).26In summary, while the US stands out as being richer than most European countriestoday, differences in average national incomes mask substantial heterogeneity. With inequality levels surpassing by far those observed in any European country, theUS displays bottom pretax average incomes that barely exceed those observed inpoorer Eastern European countries. In contrast, the lower inequality levels and higheraverage incomes observed in Northern Europe imply significantly better standardsof living for the majority of the population than in the United States….”

Here is Blanchet, “…theUS displays bottom pretax average incomes that barely exceed those observed inpoorer Eastern European countries…”

David Autor, David Mindell and Elizabeth Reynolds, “The Work Of the Future,” MIT, 2020, https://workofthefuture.mit.edu/wp-content/uploads/2021/01/2020-Final-Report4.pdf

Autor, “..By almost every measure of job quality — pay, working environment, prior notice of job termination, and access to paid vacation, sick time, and family leave — less-educated and low-paid U.S. workers fare worse than comparable workers in other wealthy industrialized nations. Figure 7 provides one such benchmark, comparing purchasing-power adjusted gross (pre-tax) hourly pay of low-skill workers in 22 OECD countries in 2015.32 Low-skill U.S. workers earn only 79% as much as low-skill U.K. workers, only 74% as much as low-skill Canadian workers, and only 57% as much as low-skill Germans. While no single metric makes for a complete comparison, numerous analyses support the qualitative picture painted by Figure 7…”

“…Yet, as shown in the table below, the financing turned out to be off by at least $282 billion. Instead of a reduction, the ACA has caused an estimated $158 billion increase in the deficit during its first ten years (or about 40 percent of the health care budget increase). Moreover, because many of the now missing taxes and savings were back-loaded in the ACA, the increase in the deficit from the ACA in its second decade is even larger. This clearly confirms that the ACA was never fully paid for….”

Mark Warshawsky, "The ACA Was Never Fully Paid For,"Real Clear Policy, May 27, 2022, https://www.realclearpolicy.com/articles/2022/05/27/the_aca_was_never_fully_paid_for_834472.html

The ACA Was Never Fully Paid For

The White House celebrations for the twelfth anniversary of the passage of the Affordable Care Act (ACA) remind us that twelve years is a sufficient passage of time to compare the initial claims of the ACA designers and promoters to the actual outcomes and consequences of this massive, partisan, legislation. In the following analysis, I focus on the ACA financing.

The Congressional Budget Office (CBO) estimated on March 20, 2010 that the ACA’s expansion of health insurance coverage would cost the federal government $938 billion from 2010 through 2019. This gross expenditure would consist mainly of subsidies for purchasing insurance on the exchanges, expanding Medicaid eligibility, and enhancing Medicaid cost-sharing with the states. The CBO further estimated that — taking into account the reductions in payments to providers and certain tax features — the ACA would increase the federal budgetary commitment to health care by $390 billion. The health care and revenue provisions actually were estimated to reduce the deficit by $124 billion from 2010 to 2019, and by up to one-half of a percentage point of GDP in the subsequent decade. The financing would come from many sources and new programs, including several new taxes, mainly payroll ones, and spending cuts to Medicare providers. While promoting the ACA in 2009 and 2010, President Obama announced that it would be fully paid for.

Yet, as shown in the table below, the financing turned out to be off by at least $282 billion. Instead of a reduction, the ACA has caused an estimated $158 billion increase in the deficit during its first ten years (or about 40 percent of the health care budget increase). Moreover, because many of the now missing taxes and savings were back-loaded in the ACA, the increase in the deficit from the ACA in its second decade is even larger. This clearly confirms that the ACA was never fully paid for.

Another miss was the so-called Cadillac tax, which was an excise tax on expensive employer health insurance. Aimed at employees, it was a back-door and inexact limitation on the deductibility of health insurance premiums from income. This was intended to reduce the pace of health care price increases by discouraging complete insurance coverage. The provision was unpopular especially with unions and government workers. It was twice postponed and finally eliminated in 2019, by a large majority in Congress.

Other taxes removed in 2019 on a bipartisan basis were the excise tax on medical devices and fees on health insurers. The penalty on individuals without insurance was reduced to zero by Congress in 2017. A similar penalty on large employers who do not offer their workers adequate health insurance is still in the law, but according to the Treasury Inspector General, using current assessment rates, less than five percent of the revenues projected by the Joint Committee on Taxation will be collected, so I count it as a complete loss. The ACA reduced Medicaid payments to hospitals with a disproportionate share (DSH) of Medicaid and uncovered patients. Because this reduction has been repeatedly postponed and suggested for elimination, I regard it too as a financing loss. Finally, the ACA created a new government agency, the Center for Medicare and Medicaid Innovation (CMMI), whose purpose was to develop successful projects able to reduce costs. In the CBO’s estimate, this would result in significant net budget savings over the long-run. The reality, however, has been quite disappointing and the CMMI is now emphasizing health equity in its agenda.

Some argue that I should also add the spending misses on the plus side for the ACA. These arose because enrollment in the exchanges was lower than expected, some states did not expand Medicaid, and overall health care prices and use have come in below projections owing to recent economic trends. But then I should also count the significant increases in the exchange subsidies, and Medicaid enrollment and spending arising from the passage of the American Rescue Plan in 2021. These countervailing considerations may cancel out, but are quite difficult to calculate. It thus makes more sense to focus on discrete items from the original CBO score.

Almost all Americans care about health care insurance. A more stable and complete financing for legislation expanding health care coverage would have surely occurred had it passed originally on a bipartisan basis.