Duflo and Banerjee advocate bigger government
By Scott Sumner
Nobel Laureates Esther Duflo and Abhijit Banerjee have a new piece in the New York Times. A reasonable summary of their position might be that they would like American economic policy to more closely resemble the economic policies of the Eurozone. This would include much higher taxes and also much more generous social welfare programs. They also claim that higher taxes and higher spending on social welfare programs would not significantly reduce work effort. They suggest that incentive effects are greatly overrated.
Note that the Eurozone is dramatically poorer than the US, with a per capita GDP of about $40,000 in 2018, vs. $62,600 in the US. Eurozone workers have lower productivity and they work far fewer hours. Eurozone incomes are comparable to those earned by residents of Mississippi.
Clearly there is no necessary contradiction here. Eurozone workers may work far fewer hours for reasons unrelated to “incentives”. But each time I ask a progressive to tell me why the Eurozone is so much poorer than America, they are completely unable to come up with an explanation that is even remotely plausible. (Thus “culture” doesn’t explain why the hours worked gap only opened up during my lifetime.)
In contrast, I do have an explanation for the gap. I believe that incentive effects are greatly underrated and that Eurozone residents have much less incentive to work than Americans.
PS. Please confine comments to the subject of the post. I’m not taking any position on whether the European economic system is better or worse than the US system. Comments that make normative claims about either system will be ignored.