In a recent piece, Virgilio Urbina Lazardi argues that European countries have lower inequality than the United States because they distribute market income much more equally, not because of their welfare states.
A paper published a few years ago in the American Economic Journal has raised eyebrows within and outside of the profession. Combining national accounts data with household surveys, its authors found that the United States redistributed a greater share of its gross domestic product through taxes and transfers to its poor than any of its wealthy, mostly Western European, peers.
As it turns out, the “inequality gap” between the United States and Europe is not explicable by the comparative generosity of the latter’s welfare states, which are in fact funded by more regressive systems of indirect taxation. Rather, the key to Europe’s relatively higher levels of equality is a more egalitarian distribution of pretax market incomes.
This is not true. Lazardi is simply the latest victim of the most deceptive paper ever written on this topic.
When trying to figure out what is most responsible for low inequality in developed countries, the welfare state always beats market-income compression for one simple reason: half of the population does not work. The nonworking half of the population drives up market inequality because they add a ton of zeroes to the bottom of the market income distribution. Providing welfare benefits to this nonworking half replaces those zeroes with positive numbers in direct proportion to how generous the welfare state is. The effect of moving these zeroes to nonzeroes completely overwhelms any other inequality-reduction mechanism.
To reach a contrary conclusion, one has to either remove nonworking people from the analysis or count certain welfare incomes as market incomes. The paper Lazardi is referencing — Blanchet et al. (2022) — uses both tricks.
Blanchet uses a pretax-income concept that…
Auteur: Matt Bruenig
