“Unintended Consequences represents the most cogent and persuasive analysis of the Financial Crisis to date.” - Andrei Shleifer, 1999 John Bates Clark Medal Winner
“Unintended Consequences should be read by anyone who takes for granted the superiority of progressive taxation and has not thought carefully about the trade-offs involved.” - The New Republic
“Unintended Consequences provides a provocative interpretation of the causes of the global financial crisis and the policies needed to return to rapid growth. Whether you agree or not, this analysis is well worth reading.” - Nouriel Roubini, New York University; Chairman, Roubini Global Economics
“A full-throated defense of economic dynamism.” - The Wall Street Journal
“…a fresh argument for the productive value of inequality.” - David Autor, Professor of Economics, Massachusetts Institute of Technology
“…challenges misconceptions that distort our economic debates.” - Arthur Brooks, President of the American Enterprise Institute
“…serious thinking for serious thinkers. …a thought-provoking blueprint for growing middle- and working-class incomes.” - Mitt Romney, former Governor of Massachusetts
“There are an amazing number of good ideas and interesting points made in Unintended Consequences. The thinking underlying it, and the obvious depth of understanding of the author, are very impressive.” - Steven Levitt, coauthor of Freakonomics; 2004 John Bates Clark Medal
“…a fresh argument for the productive value of inequality.” - David Autor, Professor of Economics, Massachusetts Institute of Technology
“…challenges misconceptions that distort our economic debates.” - Arthur Brooks, President of the American Enterprise Institute
“…a must-read for serious students of economic policy.” - Glenn Hubbard, Dean, Columbia Business School, and former Chairman of the Council of Economic Advisers
“…a very valuable contribution.” - Larry Summers, former Secretary of the Treasury and director of the National Economic Council, president emeritus, Harvard University
AI Summary.Prime-age (25–54) and older (55–64) employment rates in Europe exceed those in the U.S., disproving the claim that European welfare systems suppress work. Higher-welfare northern European countries tend to have higher employment rates than lower-welfare southern ones.
Chris GilesFinancial Times
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Despite Europe’s high social spending relative to the US, Chris Giles notes that prime-age adult (25–54) labor force participation in the Eurozone has overtaken that of the US, and there has been a dramatic convergence in the LFP of older workers.
Does European welfare actually discourage work?
Core argument: Prime-age adults (25–54) and older workers (55–64) both achieve higher employment rates in Europe than in the U.S., refuting the premise that generous welfare systems suppress labor force participation.
It does not matter whether you use EU or Eurozone data, prime-age adults (between 25 and 54) in Europe are more likely to be in work than those in the US. Older people (between 55 and 64) also have higher employment rates in Europe. Younger people (between 15 and 24) are more likely to have a job in the US, but that results from Europeans educating themselves for longer. The proportion of young people not in education, employment or training is higher in the US than in Europe. So welfare is not stopping work. More than that, the higher-welfare north of Europe tends to have higher employment rates than the south, although there is convergence within the Eurozone. Spain, in particular, has enjoyed rapid improvements.
Takeaways by Macro Roundup® AI
Prime-age adults (25–54) and older workers (55–64) both achieve higher employment rates in Europe than in the U.S., refuting the premise that generous welfare systems suppress labor force participation.
The U.S. records a higher share of young people (15–24) not in education, employment, or training than Europe, indicating that lower U.S. youth employment reflects weaker human capital investment, not stronger labor markets.
Within Europe, higher-welfare northern economies consistently outperform lower-welfare southern ones on employment rates, though intra-Eurozone convergence is underway, led by rapid gains in Spain.
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Why Do Americans No Longer Work So Much More Than Non-Americans?— The gap in hours worked between Americans and non-Americans has narrowed by half since the 1990s, driven by declining U.S. work hours as expanded government health benefits reduced the need to work, while rising wages and lower barriers to employment increased hours worked in other advanced economies.
AI Summary.US corporate investment in equipment and facilities is projected to grow 40% in real terms by the end of next year, versus 12% in the euro area, widening a productivity gap where output per hour worked rose $14 in the US compared with $2 in Europe since 2018.
Sam Fleming, Amy Borrett and Olaf StorbeckFinancial Times
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Oxford Economics projects US real business investment will rise 40% over 2021–2027, ~3x the euro area’s 12%. US investment growth since 2024 has been largely information processing and software, but high US growth in GDP/hour is not “merely digital.”
Is artificial intelligence investment widening the transatlantic productivity divide?
Core argument: U.S. corporate investment in equipment and facilities is projected to rise 40% in real terms between 2021 and end-2026, versus 12% in the euro area and near-zero growth in Germany, sharply widening the transatlantic capital-spending gap.
Corporate spending on new equipment and facilities in the US is projected to increase 40% in real terms between 2021 and the end of next year, according to forecasts from Oxford Economics. The US surge compared with a real-terms increase of just 12% in the euro area, while German business investment is expected to have all but stagnated over the same period. Europe also faces a large and growing productivity gap with the US. “The United States has recently pulled further ahead of Europe,” Bart van Ark, a professor at the University of Manchester, told policymakers at the ECB Forum in Sintra. GDP per hour worked increased $14 in the US between 2018 and 2025, compared with just $2 in Europe. “The gap is not only a digital sector story,” added van Ark, stressing that the US outperformance extended to other sectors, including wholesale and retail as well as professional services.
Takeaways by Macro Roundup® AI
U.S. corporate investment in equipment and facilities is projected to rise 40% in real terms between 2021 and end-2026, versus 12% in the euro area and near-zero growth in Germany, sharply widening the transatlantic capital-spending gap.
U.S. labor productivity rose $14 per hour worked between 2018 and 2025, versus $2 in Europe, with outperformance spanning wholesale, retail, and professional services—not solely the digital sector.
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The Two Europes— The European Union contains two divergent economies: a reforming frontier energized by security threats, and a stagnant interior where structural reform pressure remains absent.
AI Summary.Europe's welfare model has eroded its own economic frontier by prioritizing consumption over production, shrinking the tax base and leaving future generations with worse trade-offs between growth and social insurance.
Hanno LustigThe Two Cents
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Lustig argues that Krugman is wrong to dismiss concerns about slower European growth relative to the US based on welfare measures: “Europe’s social model is not financed out of consumer surplus; it is financed out of taxable income and taxable profits.”
Does prioritizing social insurance over production growth harm long-term economic competitiveness?
Core argument: Europe’s welfare-state model relies on growth assumptions that are no longer materializing, driving a structural fiscal deterioration for future generations.
Europe consumes ChatGPT; it does not collect the capital gains, the payroll taxes on million-dollar AI engineers, or the agglomeration effects. The worst possible combination for a welfare state: contented consumers committed to the status quo, eroding public finances. The tax base migrates to where the high-value production takes place, not where the products are ultimately consumed. All this insurance that European states are committed to providing was implicitly backed by the promise of future growth. And that growth is no longer expected to materialize, but the promises remain. The problem is not simply that Europeans chose a different point on the efficiency-equity frontier. Their choices have shifted the frontier itself inward over time, leaving future generations of Europeans with a trade-off that is much worse.
Takeaways by Macro Roundup® AI
Europe’s welfare-state model relies on growth assumptions that are no longer materializing, driving a structural fiscal deterioration for future generations.
Europe’s choice of redistribution over growth has shifted its efficiency-equity frontier inward, leaving worse trade-offs available to future policymakers.
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European vs. U.S. Economic Performance: An Update— The U.S. productivity advantage over western Europe is largely explained by industrial mix: the U.S. tech sector is 3.8 percentage points larger as a share of the economy, and tech productivity grows 6.8 percentage points faster than the rest, accounting for ~40% of the total gap.
European Stagnation Is Real— Six large American technology companies are worth more than all European stock markets combined, and the wealth they generate flows primarily to American households through equity ownership and high wages rather than to European workers or investors.
Addressing whether intra-country growth comparisons should use constant or current price PPPs, Klein notes that for Japan, both give the same conclusion. ICT‑related price and quality‑adjustment asymmetries—while present—have not yielded large PPP drift.
One obvious approach would be to start from a given base year and then run the data forwards and backwards using national measures of inflation. This generates “constant price purchasing power parities”. In any given year, the relative purchasing power between two societies is sensitive to the starting benchmark, but the direction of travel always looks the same. The other obvious approach would be to recalculate the price parities each year, if possible, and then use those to compare incomes each year. This creates “current price purchasing power parities.” The argument about whether Europe’s living standards have fallen relative to the U.S. is an argument about whether one method is better than the other. In theory these should produce more or less the same answers as long as inflation is measured consistently across countries and as long as the mix of items tracked does not change. Sometimes, that is exactly what happens. Both methods produce essentially the same results when comparing Japanese and U.S. incomes over time, for example.
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Europe Versus America: A Response to the Critics— European productivity growth has trailed U.S. productivity growth for three decades, accumulating a gap of roughly 18 log points by 2024. Measuring output using prices updated each year obscures this divergence rather than resolving it, and no proposed quality adjustment is large enough to explain away the gap.
The Mismeasurement of European Productivity— European productivity growth has trailed U.S. productivity growth for three decades, accumulating a gap of roughly 18 log points by 2024. No proposed measurement adjustment is large enough to explain away a divergence of that magnitude.
Foreign tourist arrivals in the US–especially from Europe–remain buoyant. Italy posted a new all-time high in April 2025; data provide evidence contrary to the narrative warning of a collapse in travel to the US.
[The charts show] monthly tourist arrivals into the US from January 2015 to April 2025, the latest month for which data are available. Source for these data is the National Travel and Tourism Office (NTTO). Travel is highly seasonal, so I seasonally adjust these data. This means you can compare arrivals during the peak summer vacation season with arrivals at other times of the year. Data are for Germany (top left), Italy (top right), Spain (bottom left) and the UK (bottom right). The scale of these charts is different, with tourism from the UK by far the most important across these four countries, followed by Germany and Italy. What’s notable is that there’s no collapse in foreign travel to the US. In fact, in one case - Italy - arrivals posted a new all-time high in April 2025.
Valentina Romei, William Crofton, and Colby SmithFinancial Times
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Draghi noted that excluding the tech sector, “EU productivity growth over the past 20 years would be broadly at par with the US.” The US dominates global R&D, and per data from Preqin accounts for 83% of VC funding in G7 economies over the past decade.
US labour productivity has grown by 30% since the 2008-09 financial crisis, more than three times the pace in the Eurozone and the UK. That productivity gap, visible for a decade, is reshaping the hierarchy of the global economy. Economic growth in the Eurozone has been a third of the US’s since the pandemic, and output is set to expand by just 0.8% this year, according to the IMF. Similarly, the economies of Japan and the UK have grown only by 3% over the past five years. In fact, in productivity growth, the US is rapidly outstripping almost all advanced economies. According to data by Preqin, the US accounts for 83% of the amount of VC funding in G7 economies over the past decade. The country also attracted 14.6% of the world’s overall greenfield foreign direct investment in the first 10 months of 2024, according to fDi Markets data — a record high. Germany, by contrast, registered its lowest share of global FDI in 18 years.
A Visualization of Europe’s Non-Bubbly Economy— There are only 13 EU-based firms less than 50 years old with a market cap of > $10B, with a combined market cap of $400B. The comparable US cohort is worth…
The Economics of Inequality in High-Wage Economies— Inequality is mostly the result of an increasing premium on returns from risk and high-skilled labor ushered in by technological disruption and the feedback…
In 2008, the EU economy was 10% larger than the US economy. Today, the US economy is 1/3 larger than the EU and the UK. The US is 50% larger than the EU net the UK. @gideonrachman
In 2008, the EU and the US economies were roughly the same size. But since the global financial crisis, their economic fortunes have dramatically diverged. As Jeremy Shapiro and Jana Puglierin of the European Council on Foreign Relations point out: “In 2008 the EU’s economy was somewhat larger than America’s: $16.2tn versus $14.7tn. By 2022, the US economy had grown to $25tn, whereas the EU and the UK together had only reached $19.8tn.”The dollar’s status as the world’s reserve currency gives the Americans the ability to finance their ambitions, without spooking the markets. As one European industrialist puts it: “They can just swipe the credit card.”
Growth in the US has outpaced growth in other advanced peer economies. In 1990, the US accounted for 40% of the nominal GDP of the G7, today it accounts for 58%. @TheEconomist
America’s $25.5trn in GDP last year represented 25% of the world’s total—almost the same share as it had in 1990. On that measure China’s share is now 18%. In 1990 America accounted for 40% of the nominal GDP of the G7, a group of the world’s seven biggest advanced economies, including Japan and Germany. Today it accounts for 58%. In PPP terms the increase was smaller, but still significant: from 43% of the G7‘s GDP in 1990 to 51% now. America’s outperformance has translated into wealth for its people. Income per person in America was 24% higher than in western Europe in 1990 in PPP terms; today it is about 30% higher. It was 17% higher than in Japan in 1990; today it is 54% higher. America’s labour-force participation rate has been falling this century, largely because of men dropping out of the workforce. But this American oddity is not large enough to make up for the country’s advantage in raw numbers. Even with lower participation, the past three decades have seen America’s labour force grow by 30%. In Europe the number is 13%, in Japan, just 7%. America’s working-age population—those between 25 and 64—rose from 127m in 1990 to 175m in 2022, an increase of 38%. Contrast that with western Europe, where the working-age population rose just 9% during that period, from 94m to 102m.
