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Sol Hando's avatar

I think a modern study would show something quite different when comparing the UK and US today, rather than in 2007.

I see that the study took historical comparisons and analyzed change over time, but the most recent data seems to be from 2007 (and if I understand right, is referring to 2006). In 2007, the UK actually had higher GDP-per-capita than the US (if not as high incomes), so any comparison between the two that ended on that high note would certainly favor European social safety nets and higher equality.

If the consequence of the European system is significantly less growth (or even stagnation) in the long run, then it's uncertain if it's actually welfare producing. The UK and US had comparable GDP-per-capita prior to the GFC (The UK's was temporarily higher even), whereas today it's ~60% that of the US. Cheap healthcare and a strong social safety net is great for quality of life, but if the increased taxes that funds that welfare, and the decreased competitiveness of a more worker-friendly policy causes significantly less economic growth, the welfare might not be sustainable in the long run.

If you compare someone who retired at 60, with someone who retired at 80, the 60 year old would certainly have higher (or at least comparable) welfare to the working man, despite 20 years of lost income. Our retired-at-60 guy comes out ahead in terms of welfare, since there isn't enough time left for the 80 year old to reap the rewards of his increased efforts. If Mr. 60 found out they just invented immortality he would suddenly be *way* behind Mr. 80 in expected welfare. Mr. 80 now has a multi-million dollar portfolio to live off of, while Mr. 60 is stuck consuming his smaller pension, having spent down his savings on consumption during retirement. Mr. 60 could go back to work, but due to 20 years of missed compounding, and the difficulty of reentering the workforce, it might take up to half a century to catch back up.

Nations are effectively immortal, so a nation that transitions to a "retired" model of increased leisure, but lower income sooner, might end up significantly behind a nation that never "retired" or did so to a lesser extent. During the romance years, where the US was still increasing productivity while sacrificing quality of life, and the UK was enjoying quality of life while sacrificing productivity, the data would reveal the UK to be comparable or even superior. After the golden years, things might look a lot different, with quality of life even declining in the UK.

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Radek's avatar

The Chinese families net worth is not several time that of US families. That's simply delusional

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Manuel Estavillo's avatar

Very interesting paper. I'm interested in seeing how they get the utility of consumption or the disutility of working though. Some of it is going to be a consequence of the assumptions regarding the particular small u(), but not all of it

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Radek's avatar

Yeah this is going to be sensitive to how concave u is in each argument and the degree of complimentarity between the various "goods". Without reading the paper I'm guessing they went with separable log u coz that's easiest to compute

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Karan Makkar's avatar

The exercise in the paper seems like a nice way to bound the welfare differences between countries with similar production possibility frontiers which make slightly different leisure/consumption/inequality/life expectancy choices.

That said, how seriously do you take the magnitudes on the consumption equivalent welfare comparisons of the US with Malawi/India/Brazil, etc (99%!!!!)? If a solid chunk of the welfare from consumption is eroded by social comparison, I'd expect the difference in CEW to overstate the kind of utility we care about. In plainer language, having Brazil level consumption in the US would feel a lot worse than having Brazil level of consumption in Brazil (even after PPP adjustments). I don't think this is just survey preferences/hedons vs revealed preferences point: I suspect the median American would take the Brazilian bundle in Brazil over the 90% consumption cut at home, if offered the choice.

This is not to say that growth isn't ~everything that matters. I happen to think the Lucas quip is right, especially since growth is also going to give you more years, better health and better insurance (and maybe what we should care about is Sen-style capabilities rather than hedons or life satisfaction). Nevertheless, some of those numbers seemed a little wild.

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Oliver Kim's avatar

Thanks, this is a very thoughtful comment. I would need to think more about the social comparability point, which I'm sympathetic to. It does seem to me relatively more important once basic needs are fulfilled (i.e., more Brazil and Mexico levels of income, less India or Malawi).

As for magnitudes, I'm not sure—but maybe 99% is actually in the ballpark? (Hopefully it comes through in the piece that I take this all modeling with a rather large grain of salt.) For Malawi I would start to worry more about the 35% of my lifespan lost than quibble over whether I get to keep 10% or 5% or 1% of my income. It's also really difficult to have intuitions about the thought experiment of losing 99% of your consumption in the US ceteris paribus, since in actuality the social safety net would pick you up.

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Godfree Roberts's avatar

The figures for China are 8 years out of date.

Today, Chinese families' net worth is several time more than US families, their Gini is lower, life expectancy higher and streets much, much safe.

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