Health, wealth and the origins of inequality
By Sir Angus DEATON – 2015 Nobel Prize in Economics
In his keynote address, Professor Deaton focused on inequality in income and wealth, as well as in health, education and political participation, particularly in the United States. In conjunction, he explained the origins of and damage from populism and touched on immigration.
INEQUALITY IS NOT BAD BY DEFINITION
Stating that he no longer believes that equality of outcomes is “inherently desirable,” Mr. Deaton emphasized that we must be careful on how we reduce inequality. Redistribution from top to bottom affects incentives, and you risk “killing the goose that lays the golden eggs.” For example, a danger of high taxation is its effect on the kind of innovation that has made much of the world prosperous.
Historical episodes of progress – such as the industrial revolution – have always been uneven, especially at first, with some people benefiting while others are left behind. “The greatest inequalities in the world today date back to those revolutions, which brought huge benefits to mankind.” These global inequalities are one of the causes of the recent immigration flows to Europe, and the immigration from Latin America to the United States. “When a drought or a civil war forces people to leave their homes, they don’t head for the Democratic Republic of the Congo, for Bolivia or Nepal, but to Europe.”
“Many in the United States, more so than in Europe, see the outcomes of market capitalism to be automatically fair, while government action is seen as arbitrary and unfair.”
INEQUALITY IS NOT THE SAME AS UNFAIRNESS
What matters most are the consequences of inequality, Mr. Deaton emphasized. If the rich use their wealth to exclude others from healthcare, education or political participation, or if they refuse to pay taxes, then inequality is harmful for society and short-sighted for the rich. However, inequality is not the same as unfairness. Everybody hates unfairness, but some aspects of inequality are accepted. Getting rich through a beneficial innovation is not unfair; getting rich by bribing government officials is.
While Americans may see the outcomes of market capitalism as fair, they resent not only rent-seeking by banks or pharmaceutical companies, but also government or University-sponsored programmes that favour specific groups such as minorities or elites. This, explained Mr. Deaton, is why so many white working Americans dislike the Democratic Party, which they consider the party of special interests.
Thus, it is not inequality that is driving populism, but unfairness, or perceived unfairness. If people believe that they are doing badly because someone else is doing well, then inequality poses a danger to political and economic stability. This is currently the problem in the United States between working people and the educated, professional elite.
“Life expectancy at birth is a good indicator of how a society is doing, and falling life expectancy is a devastating condemnation of the United States today.”
“INEQUALITY AFFECTS HEALTH AND LEADS TO “DEATHS OF DESPAIR”
There is also a link between inequality and health, in the form of “deaths of despair,” discovered Mr. Deaton when he noticed that the death rate of white men had started to rise in America. Most of these are suicides or drug and alcohol related deaths.
Aside from heroin, drug deaths are mostly from prescription opioids and pain killers. In America, over 180,000 people died from overdoes from 1999-2015, and 59,000 in 2016 alone. These drugs are very profitable and 244 million prescriptions were written for them last year.
Suicide and alcohol deaths are not far behind overdoses. For less-educated, middle-aged whites the ratio is three drug-related deaths to two each for suicides and alcoholic-related deaths. Because of deaths of despair and a reversal in the rate of decline of heart disease, life expectancy for whites dropped from 2014 to 2015. Moreover, these deaths are occurring despite America’s healthcare system being far more expensive than that of any other country, stressed Mr. Deaton. They affect white women as well as men and are correlated with low levels of education.
“If you accept the argument about deaths of despair coming from long-term dysfunction in the labour market, this is what we need to understand, and it is also what we need to prevent in other countries.
THE REASONS FOR THE INCREASED MORTALITY ARE NOT JUST ECONOMIC
There seem to be few links of the increased mortality with the economy, unemployment, family, and incomes, found Mr. Deaton. There were few deaths of despair in 1998, but they have been rising rapidly since, both before and after the Great Recession. Although blacks and Hispanics shared the ups and downs of family incomes before and after the recession with whites, their mortality rates continued to decline. “In fact, suicides respond much more to prolonged economic conditions than to short-term fluctuations, and especially to social dysfunction, such as loss of meaning in the interconnected worlds of work and family life that comes with prolonged economic distress.“
Those in their early 50s who are now susceptible to deaths of despair were born in the early 1960s. About 60% of them had higher incomes at age 30 than did their parents at the same age. However, for people born 20 years before, the percentage was 90%. So the number of people better off than their parents has been falling rapidly. It is the 50-year olds that were first hit by the long-term decline in median earnings that started in the US in the early 1970s, and those without a college degree also missed out on the rising wage premium from going to college.
THE LABOUR MARKET IS ONE CAUSE
Workers who entered the labour market before the early 1970s, even without a college degree, could find good jobs in manufacturing with benefits and training. They could be expected to last for life and brought annual increases in earnings and a road to middle-class prosperity. Such jobs have become much rarer since then, lamented Mr. Deaton.
As wages have stagnated, labour force participation has fallen in the United States. The fall has been ongoing for many years for men, and since 2000 has also begun for women. These declines are largely confined to those without a BA degree.
“Workers in the United States used to belong to unions, which provided them a degree of influence in the workplace and a countervailing power in national politics. As unions declined, especially in the private sector, workers lost some of their capacity to influence their lives and to express their views in the public sphere.”
The loss of good jobs for people with only a high school diploma has also come with a decline in other socially-significant outcomes, added Mr. Deaton. Marriage rates have fallen, and couples cohabitating and having children out of wedlock has become socially acceptable. In this more precarious environment, women have become pickier about their partners, and will often move on when a better prospect comes along. Therefore, cohabitating relationships are relatively unstable, much more so than in Europe. Many fathers do not live with or even know their children, and many children have lived with several “fathers” by their early teens. Most white mothers in the United States now have at least one child out of wedlock.
“Heavy drinking, social isolation, drugs, suicide, and detachment from marriage and from the labour force are plausible outcomes of these cumulative processes, and can combine to deprive white working-class lives of their meaning. We think of opioids not as the fundamental cause of the epidemic of mid-life mortality and morbidity, but as an accelerant, a set of drugs that added fuel to the fire and made an already-bad situation worse.”
“It’s not just the benign neglect of the rest by the elite, but something more active and more maligned. I suppose it is what non-economists like to call neoliberalism.”
THE COSMOPOLITAN ELITES ARE ALSO TO BLAME
So, why did this happen, asked Mr. Deaton, and why in the United States and not in most other rich countries? One reason is that there has been a breakdown in the social contract at the core of liberal democracy. The cosmopolitan elites were doing so well that they concluded that social solidarity was not important for a well-functioning democracy. This applies to Europe and Britain, as well as to the United States, but to a lesser extent. It explains Brexit as well as the election of Donald Trump.
Populism is an understandable reaction against these cosmopolitan elites, underlines Mr. Deaton, citing a favourite quote by Donald Trump in the Wall Street Journal in April 2016. “The only antidote to decades of ruinous rule by a small handful of elites is a bold infusion of popular will on every major issue affecting the country–this country–the people are right, and the governing elites are wrong.”
Globalisation, technological change, and immigration are all cited as potential culprits, says Mr. Deaton. However, they are common to most countries. An important cause in the US is that median earnings have not changed for nearly a century. If deaths of despair come from long-term dysfunction in the labour market, “this is what we need to understand and prevent in other countries,” he cautioned. For Mr. Deaton, the “awful” labour market in the US has been driven by policy–in many cases, by deliberate anti-union or anti-labour policy. For example, Right to Work Laws have been passed in 28 of the 50 states, preventing unions from coming to agreements that make people join and pay dues.
Productivity growth has also been low, and median wages have not even kept up with that low rate, since the federal minimum wage has not been increased since 2009. Another contributor is health care and the fact that employers and ultimately their workers pay for increasingly expensive insurance.
In addition, there is increasing concentration in most economic sectors. The consolidation of hospitals is a good example. Prices have risen rapidly, while wages in hospitals have not. Increasing concentration also contributes to low productivity growth. More than 20% of workers in the United States are covered by non-compete contracts, which prevent them from working for a competitor, even after being dismissed. These even cover many low-skilled workers, including those who work in fast food, bemoaned Mr. Deaton.
Moreover, jobs are increasingly outsourced, not only abroad, but to contractors. Drivers, food servers, cleaners, and maintenance staff, who used to be part of a company, are now working for outside entities who depress wages and often do not pay benefits. The stock market also rewards redistribution from labour to capital, giving the professional elite an interest through their 401K and pension plans.
IMMIGRATION ADDS ANOTHER ELEMENT TO THE PROBLEM
Mr. Deaton cited immigration as the area where there is the sharpest divergence between what the elites believe and what the population believes. Some is self-interest, some is based on analysis, and some is simply unjustified fear. The elites like to have cheap gardeners, cheap field hands, and cheap household servants. They may share workers’ beliefs that immigrants reduce wages, but they like that outcome because they benefit. Meanwhile, academic studies are mostly positive about the effects of immigration. They note that migration is much more effective in raising living standards than other tools such as trade or foreign aid.
An important point is that immigrants tend to be heterogeneous, said Mr. Deaton. In the US, they have about the same educational level as the native population, but many have much more, and many have none. It is the less-educated immigrants that are the most problematical. Evidence suggests that they bring down the wages of native low-skilled workers, some of whom are earlier immigrants, although mostly in the short term. Large numbers of immigrants arriving very quickly are also a problem, especially if they have a different language and different customs. This can provoke misunderstanding and fear. Nonetheless, America, which is a nation of immigrants, and in which one in four is an immigrant or a child of an immigrant, is still the richest country in the world.
The good news, said Mr. Deaton to close, is that “the dysfunctional labour market in the US is not an irremediable consequence of unstoppable global forces, like technical change and globalisation– forces that ought to be making us all better off. Instead, broad progress is amenable to policies deliberately designed to work in favour of consumers and workers.”