Thursday , December 14 2017
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Silvia Merler

Silvia Merler

Silvia Merler, an Italian citizen, joined Bruegel as Affiliate Fellow at Bruegel in August 2013. Her main research interests include international macro and financial economics, central banking and EU institutions and policy making.



Articles by Silvia Merler

The DSGE Model Quarrel (Again)

3 days ago

Dynamic Stochastic General Equilibrium models have come under fire since the financial crisis. A recent paper by Christiano, Eichenbaum and Trabandt – who provide a defense for DSGE – has generated yet another wave of reactions in the economic blogosphere. We review the most recent contributions on this topic.
By:
Silvia Merler
Date: December 11, 2017
Topic: European Macroeconomics & Governance

A recent paper by Christiano, Eichenbaum and Trabandt (C.E.T.) on Dynamic Stochastic General Equilibrium Models (DSGEs) has generated quite a reaction in the blogosphere. In the paper, C.E.T. argue that pre-crisis DSGE models had shortcomings that were highlighted by the financial crisis and its aftermath. But over the past 10 years,

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The Bitcoin Bubble

10 days ago

The price of bitcoin has just passed $11,000. A year ago it was worth less than $800. Economists and commentators are thus increasingly concerned that this may be a bubble waiting to burst. We review recent opinions on the topic.

The price of Bitcoin has reached and passed $11,000, from $800 just one year ago (Figure 1). The Economist’s Buttonwood’s notebook thinks that while the stock market has been trading at high valuations for some time, there is nothing like the excitement about shares that there was during the dotcom bubble of 1999-2000. That excitement has shifted to the world of cryptocurrencies like Bitcoin and Ethereum. There are three strands to their appeal: the limited nature of supply; fears about the long-term value of fiat currencies in an era of quantitative easing;

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Has the Phillips curve disappeared?

23 days ago

The Phillips curve prescribes a negative trade-off between inflation and unemployment. Economists have been recently debating on whether the curve has disappeared in the US and Europe. We report some of the most recent views.

The Economist argues that the Phillips curve may be broken for good, showing a chart of average inflation and cyclical unemployment for advanced economies, which has flattened over time (Figure 1). The Economist also refers to a recent paper by three economists at the Philadelphia Fed, arguing that the Phillips curve is not very useful at forecasting inflation: their Phillips curve models’ forecasts tend to be unconditionally inferior to those from a univariate forecasting model. Phillips curve forecasts appear to be more accurate when the economy is weak and

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Powell’s Federal Reserve

November 13, 2017

With the appointment of Jerome Powell as the next Fed’s chairman, President Trump break a tradition of bipartisan re-nomination and chooses someone who is not an economy by formation. We review economist’s opinions on this choice and the challenges ahead.

Kenneth Rogoff argues that with the appointment of Jerome Powell as the next Fed Chair, Donald Trump has made perhaps the most important single decision of his presidency. It is a sane and sober choice that heralds short-term continuity in Fed interest-rate policy, and perhaps a simpler and cleaner approach to regulatory policy. Powell will face some extraordinary challenges at the outset of his five-year term. By some measures, stock markets look even frothier today than they did in the 1920s and with today’s extraordinarily low

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The Bank of England’s dovish hike

November 6, 2017

For the first time since 2007, the Bank of England raised interest rates, with a hike of 25 basis points. At the same time, it provided forward guidance that outlines a very gradual path for future increases. We review the economic blogosphere’s reaction to this decision.

By:
Silvia Merler
Date: November 6, 2017
Topic: European Macroeconomics & Governance

Chris Giles at the FT says that the Bank has questions to answer: about its reasoning; about the UK’s economic prospects; and about the way it communicates the future outlook for interest rates. For most of this year, City economists have converged on the view that in light of Brexit, the Monetary Policy Committee (MPC) would not touch interest rates until late 2018 or

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The capital tax cut debate

October 30, 2017

How much do workers gain from a capital gains tax cut? CEA chairman Hasset claims the tax cut will cause average household labour income to increase by between $4000 and $9000. Several commentators note this implies that more than 100% of the incidence of the tax is on labour. This question has triggered a heated discussion in the economic blogosphere, which we review here.

Former chair of the Council of Economic Advisers (CEA) Jason Furman writes on Twitter that “the economic debate about the %age of the corporate tax paid by labour ranges from 0% to 100%. The new CEA study puts it at 250%.” Larry Summers writes in the Washington Post that White House Chief Economist Hasset’s claim that cutting the corporate tax rate from 35 percent to 20 percent would raise wages by $4000 per

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Bailout, bail-in and incentives

October 23, 2017

Ever since the outbreak of the global financial crisis, more and more rules have been developed to reduce the public cost of banking crises and increase the private sector’s share of the cost. We review some of the recent academic literature on bailout, bail-in and incentives.

Some early literature correlated the likelihood of systemic crises to banks’ anticipation of bailouts. Leitner (2005) develops a model of financial networks in which linkages not only spread contagion but also induce private sector bailouts, where liquid banks bail out illiquid banks because of the threat of contagion. Linkages can thus be optimal ex ante because they allow banks to obtain some form of mutual insurance even if formal commitments are impossible. However, in some cases, the whole network may

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On the cost of gun ownership

October 11, 2017

On 1 October 2017, 59 people were killed and another 489 injured in what is currently the deadliest mass shooting in US modern history. The author reviews recent contributions on the economic cost of gun violence, as well as the impact of regulation.

The Washington Post makes the math of mass shootings.There is no universally accepted definition of a mass shooting, and different organizations use different criteria. The Post piece uses a narrow definition and looks only at deadliest mass shootings, beginning August 1, 1966. Based on this criteria, they identify 131 events in which four or more people were killed by a lone shooter (or two shooters in three cases). An average of eight people died during each event, taking the total death toll to 948. It’s worth checking out the Post’s

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The Economics of Healthcare

October 2, 2017

Healthcare reform has been a thorn in the side of the US administration for several months, prompting President Trump to declare that “Nobody knew that healthcare could be so complicated.” We review recent economists’ views on the issue.

Greg Mankiw  argues that healthcare is so complicated because the magic of the free market sometimes fails us when it comes to this sector, for several reasons. First, externalities abound. When a new treatment is discovered, for example, that information enters society’s pool of medical knowledge, but without research subsidies or an effective patent system, too few resources will be devoted to research. Second, when people get sick, they often do not know what they need and sometimes are not in a position to make good decisions. The inability of

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The Fed’s Unwinding

September 25, 2017

The Federal Open Market Committee (FOMC) held short-term interest rates steady on September 20th and announced that starting from October 2017 the Fed will gradually shrink its balance sheet, which grew considerably in response to the Great Recession. We review economists’ views on this move.

Joseph Gagnon at PIIE thinks that the unexpected development was a further reduction in the median view of FOMC participants about where the short-term interest rate will settle in the long run. The Fed apparently endorses the view that the slowdowns in the growth rates of productivity and the working-age population have persistently lowered both the economy’s potential growth rate and the rate of return on investment. Shrinking the balance sheet will tighten financial conditions because it will

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Global Imbalances

September 21, 2017

The recent IMF’s External Sector Report highlighted the persistence of imbalances and a switch of imbalances towards advanced economies. We review recent contributions on this topic.

The IMF’s 2017 External Sector Report shows that global current account imbalances were broadly unchanged in 2016. Overall excess current account imbalances (i.e., deficits or surpluses that deviate from desirable levels) represented about one-third of total global imbalances in 2016, increasingly concentrated in advanced economies. Persistent global excess imbalances suggest that automatic adjustment mechanisms are weak. While the rotation of excess imbalances toward advanced economies likely entails lower deficit-financing risks in the near term, the increased concentration of deficits in a few

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North Korea: sanctions and marketization from below

September 11, 2017

What’s at stake: despite Western sanctions, North Korea has been in the news all summer. The country was in the spotlight for the death of American student of Otto Warmbier in June, and for the frequent missiles tests in July and August. We review recent contributions on the impact of economic sanctions.

The Economist argues that Western sanctions have not had much effect on North Korean economy, which is probably growing at between 1% and 5% a year. The UN has attempted to block the country’s access to hard currency by capping the amount of coal it can export, and China, the buyer in 99% of North Korea’s reported coal sales, said that it would suspend all imports. Yet North Korean vessels have continued to dock at Chinese coal ports. Moreover, countries or individuals that help

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Hurricane Harvey’s economic impact

September 4, 2017

What’s at stake: tropical storm Harvey has caused unprecedented and catastrophic flooding in southeastern Texas. We review recent estimates of the economic impact of this natural disaster.

Are natural disasters becoming more expensive? Back in 2012, the IMF released a study finding that over the previous two years, 700 natural disasters were registered worldwide affecting more than 450 million people. Damages were estimated to have risen from $20 billion on average per year in the 1990s to about $100 billion per year during 2000–10. The Economist also has an interesting chart showing how the number of weather-related disasters is increasing but the death toll is decreasing (see below).
Figure 1

NASA’s Earth Observatory points out that natural disasters may be getting more

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Africa and Chinese rebalancing

August 28, 2017

What’s at stake: China and Africa have developed close economic ties over the past 20 years. The need to rebalance the China-Africa relationship was also a prominent topic in the context of the recent Kenyan elections. But if the drivers will shift relatively more towards domestic consumption, what will the impact be on Africa? We review recent contribution to this debate.

Chen and Nord in a recent IMF paper document that Africa’s commodities exports have fallen as a result of the decline in Chinese demand and the precipitous fall in world commodity prices, putting pressure on the scale and external accounts of many African countries. Beyond commodity prices, the rebalancing of China’s growth model from investment-led to consumption-led growth is expected to affect the country

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The issue of U.S. prescription drug prices

August 24, 2017

What’s at stake: Americans spend a lot on prescription drugs, more per capita than any other country by far. Individual cases of sharp price increases – like the case of the EpiPen – have recently driven attention to this issue. We report review contributions on this topic.

The Hutchins Center and Center on Health Policy at Brookings has a good explainer of the facts. In 2015, the U.S. spent $325 billion on retail prescription drugs, equivalent to 1.8% of GDP, or 10% of total national health expenditures. Spending has grown considerably since the 1980s (Figure 1) and the U.S. spends substantially more per capita than other countries. According to the OECD, the U.S. spent $1,112 on retail pharmaceuticals per person in 2014, while the next highest spender was Canada, at $772,

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The US Antitrust Counter-Revolution

July 31, 2017

Plenty of recent research has highlighted a rise in concentration in the US economy, across different sectors. Economists are now wondering to what extent this is attributable to a shift in the antitrust enforcement philosophy. We review contributions to this debate.

In a new paper in the Washington Center for Equitable Growth’s series on antitrust policy, John E. Kwoka of Northeastern University documents the rise in concentration and examines the evidence for one possible explanation: the change in merger enforcement policy at the Federal Trade Commission (FTC) and the Antitrust Division of the U.S. Department of Justice.
Examining FTC merger enforcement data from 1996 through 2011, Kwoka finds that merger enforcement narrowed its focus to mergers at the very highest levels of

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The international effects of ECB’s monetary policy

July 24, 2017

What’s at stake: the literature on monetary policy spillovers is abundant of studies investigating the impact of the US Federal Reserve’s monetary policy announcements and actions on emerging market economies. More recently, economists have been investigating the effect of the ECB’s credit easing as well.
By:
Silvia Merler
Date: July 24, 2017
Topic: European Macroeconomics & Governance

In a recent speech, ECB’s Executive Board Member Benoit Coeuré discussed the international effects of the ECB’s asset purchase programme. The data show a turnaround in capital flows in the Euro Area from net inflows to net outflows starting in mid-2014, after the ECB announced its credit easing package. Asset purchase programmes are shown

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The US retail crisis

July 17, 2017

What’s at stake: America is undergoing a retail sector crisis, partly related to the increase of competition from online commerce. We review recent contributions to this debate.

The New York Times has some interesting data visualisation about the growth of e-commerce jobs and the decline of retail sectors employment (Figure 1). Online shopping accounts for only 8.4 percent of all retail sales in the United States, but it has had an outsize effect on the retail workforce. The Financial Times has a graphical review of the recent stock market sell-off on retail department stores, spurred by mounting concerns about the effects of online competition.
Figure 1

A related question would be what the implications are, not only for retailers and retail-property companies, but also for the

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The forward guidance paradox

July 10, 2017

What’s at stake: the term “forward guidance” is used in economic jargon to describe central bank communications about the likely future path of policy rates. Standard monetary models imply that far future forward guidance has huge effects on current outcomes, and recent literature has been trying to reconcile this with reality.
By:
Silvia Merler
Date: July 10, 2017
Topic: European Macroeconomics & Governance

Negro, Giannoni and Patterson empirically document the impact of forward guidance announcements on a broad cross section of financial markets data and professional forecasts. They find that Federal Open Market Committee (FOMC) announcements containing forward guidance had heterogeneous effects depending on the

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A tangled tale of bank liquidation in Venice

June 26, 2017

What can we learn about the Italian banking sector from the decision to liquidate Veneto Banca and Banca Popolare di Vicenza? Silvia Merler sees a tendency for Italy to let politics outweigh economics.

The long and troubled journey of Veneto Banca and Banca Popolare di Vicenza (BPVI) has come to an end. The conclusion of the story highlights once again a pattern that has characterised the Italian approach to banking problems over the past years. The distinctive features of this approach are a desire to postpone solutions to long-lived problems (like MPS) and a tendency to subordinate economic to political logic. This raises questions at both the Italian and the EU level.
Veneto and BPVI were due to launch a capital raise in April 2016. If the operation had failed – as it was widely

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The US 100% renewables dispute

June 26, 2017

What’s at stake: Two years ago, a debate started on whether it would be feasible for the US to achieve 100% renewable energy power. The arguments on both sides have been fierce, and more has been written recently. We review the debate.

In 2015, Mark Jacobson and his colleagues at Stanford argued that it would be technically feasible for the United States to be entirely powered by clean energy sources, between 2050 and 2055. One factor currently inhibiting the large-scale conversion to 100% wind, water, and solar (WWS) power for all purposes (electricity, transportation, heating/cooling, and industry) is fear of grid instability and high cost due to the variability and uncertainty of wind and solar. Jackobson et al. conducted numerical simulations of time- and space-dependent

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The Fed’s problem with inflation

June 19, 2017

What’s at stake: the Federal Reserve raised the benchmark interest rate by one-quarter of a percentage point. The moved surprised no one, but it still prompted economists to asks themselves questions about the Fed’s relationship with inflation. We review the most recent contributions.

Joseph Gagnon at PIIE argues that the FOMC meeting offered three unexpected items. First, Chair Yellen pointed to “one-off” development in the prices of mobile phone service plans and pharmaceuticals in March, as the main reason the FOMC’s preferred measure of inflation has moved away from its 2 percent target to 1.5 percent as of April. Gagnon wonders whether the FOMC is revisiting the bad old days of the 1970s, when it tried to explain away inflation that was too high by pointing to a seemingly

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The Universal Basic Income discussion

June 12, 2017

What’s at stake: the concept of a Universal Basic Income (UBI), an unconditional transfer paid to each individual, was prominent earlier this year when Finland announced a pilot project. It’s now back in the discussion as the OECD published a report illustrating costs and distributional implications for selected countries. We review the most recent contributions on this topic.
By:
Silvia Merler
Date: June 12, 2017
Topic: European Macroeconomics & Governance

The OECD recently published a policy brief and a methodological note looking into the cost and benefits of adopting Basic Income (BI) as a policy option. The simplest way of introducing a BI would be to take existing cash benefits paid to those of working age and to

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The Mariel Boatlift Controversy

June 5, 2017

What’s at stake: how does immigration affect the wages of local workers? One way to answer this question is by exploiting a natural experiment. The Mariel boatlift of 1980 constituted an ideal experiment – bringing a sudden and large increase of low-skilled workers in just one city – but results are still hotly debated.

In 1980, 125,000 mostly low-skill immigrants arrived in Miami from Mariel Bay, Cuba (“Mariel Boatlift”) in the space of a few months. In 1990, David Card investigated the effects of the boatlift on the Miami labour market. The Mariel immigrants increased Miami labour force by 7%, and the labour supply to less-skilled occupations and industries by even more, because most of the immigrants were unskilled. Nevertheless, Card concluded that the Mariel influx had

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President Trump’s budget: the 3% growth quandary

May 29, 2017

What’s at stake: the Trump administration released its full budget proposal. Economists have been arguing about the feasibility of the underlying growth assumptions, and on whether there is a double-counting implied. We review the most recent contributions to this debate.

Bloomberg has a very telling graphical representation of what this budget would imply for the federal government (figure 1 below). CNN has updated numbers on what would be cut and by how much. While the overall proposed spending is about on par with last year, at $4.1 trillion for 2018, the budget envisions severe cuts to domestic programs focused on science and research, the arts and, most notably, social welfare programs. At the same time, defense spending would be increased by about 10% and more than half of

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The US and the productivity puzzle

May 8, 2017

What’s at stake: Productivity growth fell sharply following the global financial crisis and has remained sluggish since, inducing many to talk of a “productivity puzzle”. In the US, we may be seeing what look like early signs of a reversal. We review recent contributions on this theme.

A recent IMF note finds that the productivity slowdown reflects both crisis legacies and structural headwinds. In advanced economies, the global financial crisis has led to “productivity hysteresis” — persistent productivity losses from a seemingly temporary shock. Behind this are balance sheet vulnerabilities, protracted weak demand and elevated uncertainty, which jointly triggered an adverse feedback loop of weak investment, weak productivity and bleak income prospects. Structural headwinds, already blowing before the crisis, include a waning ICT boom and slowing technology diffusion, partly reflecting an aging workforce, slowing global trade and weaker human capital accumulation.

Because the pace of innovation in the hard-to-measure digital economy is very rapid, measurement error has been put forward as an explanation. Byrne et al. (2016) examine this issue in the US context and find little evidence that this slowdown arises from growing mismeasurement of the gains from innovation in information technology–related goods and services.

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The Trump tax cut

May 2, 2017

What’s at stake: on Wednesday, the Trump administration – now 100 days old – unveiled a draft tax plan including the intention to enact a radical cut to the corporate income tax, lowering it to 15 percent. While we are still missing details on how this and other measures would be implemented, we review some of the early reactions.

Tyler Cowen argues on Bloomberg View that the U.S. can afford Trump’s radical tax cut. While there are some potential problems with President Trump’s proposal, there is no fiscal reason such a tax plan ought be ruled out. It seems the administration is willing to consider a tax cut that increases the budget deficit. Cowen argues that most versions of the plan, if executed properly on the details, would most likely boost economic output and create new jobs, also in light of the fact that the rate of return on private investment is probably higher than the return on public investment.
This argument for a corporate tax cut – “let’s borrow more now while rates are relatively low” – is remarkably similar to the argument that Keynesians have been using for more government infrastructure spending for years.

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The decline of the labour share of income

April 24, 2017

What’s at stake: at odds with the conventional wisdom of constant factor shares, the portion of national income accruing to labour has been trending downward in the last three decades. This phenomenon has been linked to globalisation as well as to the change in the technological landscape – particularly “robotisation”. We review the recent literature on this issue.

Chapter 3 of the IMF’s 2017 WEO documents the downward trend in the labour share of income since the early 1990s, as well as its heterogeneous evolution across countries, industries, and workers of different skill groups. In advanced economies, labour income shares began trending down in the 1980s, reached their lowest level just prior to the global financial crisis of 2008, and have not recovered materially since. Labour income shares now are almost 4 percentage points lower than they were in 1970.

According to the IMF’s analysis, In advanced economies about half of the decline in labour shares can be traced to the impact of technology – a combination of rapid progress in information and telecommunication, and a high share of occupations that could be easily be automated. Global integration – as captured by trends in final goods trade, participation in global value chains, and foreign direct investment – also played a role, but its contribution is estimated at about half that of technology.

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Italian banks: not quiet on the eastern front

March 31, 2017

Italian banks are back in the spotlight. After MPS failed to raise enough capital from private investors earlier this year, Banco Popolare di Vicenza (BPVI) and Veneto Banca take centre stage. The story of these two banks epitomises the strategy of delayed reform that has been so characteristic of the Italian banking crisis.

Italian banks are back in the spotlight. After MPS failed to raise enough capital from private investors earlier this year, the centre stage has moved from Tuscany to the region of Veneto, in the Italian north-east. We have met the main characters previously: Banco Popolare di Vicenza (BPVI) and Veneto Banca were among the Italian banks that failed the ECB’s comprehensive assessment in 2014. They were also in the spotlight last year, when the bank-funded Atlante fund was created, mostly to become the underwriter of last resort in their (otherwise unlikely) capital raise.
If we look at the data, things are definitely not looking good. BPVI published its 2016 accounts this week, closing with a € 1.9 billion loss. Veneto Banca postponed the publication of its account, but it is expected to report a loss of about € 1 billion. Earlier this month, both banks asked access to precautionary recapitalisation, like the one currently discussed for Monte dei Paschi di Siena.
Gross NPLs for BPVI were € 9.8 billion in 2016, up 9.3% from last year. € 5.

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The American opioid epidemics

March 27, 2017

What’s at stake: The US Department of Health and Human Services (HHS) declares that the country is “in the midst of an unprecedented opioid epidemic”. Since 1999, the rate of overdose deaths involving opioids – including prescription pain relievers and heroin – nearly quadrupled. We review contributions looking at the economic drivers and implications of this phenomenon.

The opioid epidemics
According to the Centers for Disease Control and Prevention, 91 Americans die every day from an opioid overdose. From 2000 to 2015, more than half a million people died from drug overdoses. Overdoses from prescription opioids are a driving force: since 1999, the amount of prescription opioids sold in the U.S. nearly quadrupled, and deaths from prescription opioids – drugs like oxycodone, hydrocodone, and methadone – have more than quadrupled. Some of the largest concentrations of overdose deaths were in Appalachia and the Southwest (Figure 1), with West Virginia, New Mexico, New Hampshire, Kentucky and Ohio being top-5 States. CNN has a historical overview of how opioids turned from “wonder drug” to abuse epidemics.

This trend may be connected to another disquieting statistics. In 2015 Princeton’s Anne Case and Angus Deaton documented a 21st century rise in the proportion of white non-Hispanic Americans dying in middle age.

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