In 1998, he started writing short pieces on America’s economy, American economic policy, and economic thinking in general. Now he’s put many of those pieces together in Economics in America, which his subtitle brands “the land of inequality.” (The? As if there’s only one?) The title itself gives away much of his thinking. He believes that American economists have not sufficiently explored inequality and that U.S. economic policy pays too little attention to reducing this inequality.
Deaton writes well and is a great storyteller. Some of his stories of conflicts within the economics profession are fascinating. He also has some penetrating discussions of controversial issues. At times you might think you can put him in a well-defined left-of-center ideological box, but he occasionally surprises us, as with his discussion of the 1990s lawsuits against the tobacco industry. Still, he often does fit in the above-mentioned ideological box, and this comes out in his discussions on healthcare, pensions, taxation, fiscal policy during recessions, and many other issues. Also, the views he expresses about how much we can trust government, especially on pension policy, show real ambivalence. Unfortunately, he often criticizes people who disagree with him without explaining why they’re wrong; in one instance, he accuses a Harvard economist of “insanity.” And on one issue, the ideal progressivity of the income tax system, he omits a key finding in the early literature he discusses, a finding that dramatically contradicts his own view on progressivity.
Foreign aid controversies / One of the more interesting parts of Deaton’s book is his discussion of controversies among economists on foreign aid. The first is Joseph Stiglitz’s attack, in his 2002 book Globalization and Its Discontents, on Larry Summers and Stanley Fischer. Although Deaton doesn’t take sides, except to argue that Stiglitz’s attack on Fischer’s integrity was unjustified, he references a YouTube debate between Stiglitz and Harvard economist Kenneth Rogoff. That video is now in my queue.
The second controversy he discusses is the “war” (Deaton’s word) between Jeffrey Sachs and William Easterly. In his 2005 book The End of Poverty, Sachs called for large-scale government planning to end poverty in poor countries, prompting the more market-oriented Easterly to criticize Sachs for “unwarranted utopianism.” Sachs’s response, writes Deaton, was “vituperative, contemptuous, and ad hominem.” Deaton also references Nina Munk’s book The Idealist: Jeffrey Sachs and the Quest to End Poverty, in which she discusses how Sachs’s Millennium Villages Project “left a trail of destruction and unintended consequences.”
Healthcare / The US institution that Deaton seems to dislike the most is healthcare and especially health insurance. He, like many of us, hates the fact that we can’t know in advance the amount we would have to pay out of pocket for surgery. His view is informed by his personal experience with hip replacement. Concerning his first replacement, he writes, “I felt like punching the anesthesiologist instead of signing the ‘consent’ form.” He much preferred his experience with his second hip replacement, which was covered by Medicare. He also has nice things to say about Britain’s socialized system, which he grew up with, though he admits that the waits for care are long.
Deaton seems unclear about what he wants. On the one hand, he castigates “market fundamentalists” (a term he never defines) for wanting free markets in healthcare. On the other hand, he seems quite positive about a plan developed by the late health economist Victor Fuchs for giving people vouchers that could be spent on medical care. Food stamps are vouchers for food, and few people would claim we don’t have a relatively free market in food. Similarly, providing vouchers for medical care is consistent with a free market in healthcare, yet Deaton doesn’t seem to have thought about whether his interest in vouchers can be consistent with his opposition to free healthcare markets.
Something that I noticed again and again in the book is Deaton’s unwillingness to take seriously certain arguments against his own views. It shows up early in the book in his discussion of the 2010 Affordable Care Act (ACA), which he seems to favor mildly. He points out that the first major challenge to the ACA was over whether it is constitutional for the federal government “to require anyone to buy anything” and notes the late Supreme Court Justice Antonin Scalia’s question about whether the state could force people to buy broccoli. Deaton comments, “Perhaps he thought you didn’t need health insurance if you ate enough broccoli?” But Scalia was getting at a serious question: If the feds can make you buy X, can they also make you buy Y and, if not, what is the limiting principle? Deaton’s lame humor allows him to dodge the question.
One nice surprise in his chapter on healthcare is his treatment of the infamous 1998 settlement between 46 state governments and the major cigarette companies. Deaton points out that the $200 billion in revenues the cigarette companies agreed to hand the state governments are not coming out of the cigarette companies’ coffers but, instead, are being paid from higher cigarette company revenue generated by higher prices charged by a legal cartel that the governments created and blessed. Deaton doesn’t explicitly call it a cartel, but he does note that smokers are paying for the settlement in the form of higher prices.
Deaton takes on some prominent health economists—in particular, David Cutler and Joseph Newhouse of Harvard and Jonathan Gruber of MIT—who favor the cartel. Their argument is the paternalistic one that the benefit to smokers in saved lives outweighs the costs. Deaton writes:
The authors [Cutler, Newhouse, and Gruber] recognize and defend their rejection of the idea that people know what is best for them, and dismiss the idea that smokers are making rational choices for themselves. Even if it is true that people don’t always know what is best for them, there is a long step from that to ceding their personal autonomy to a bunch of Harvard and MIT economists.
That’s particularly well said. It got me wondering whether Deaton would be willing to reconsider his apparent view that a bunch of government officials should be able to make us purchase health insurance.
Taxation / In a chapter titled “Monetary Inequality,” Deaton talks about his concern, growing up in Britain, with large inequality in wealth and income. He highlights work by British economist and fellow Nobel winner James Mirrlees, who “solved (one version of) the problem of how much inequality we ought to have” (italics in original). Deaton notes that Mirrlees proposed an income tax system that made “the best possible trade-off” between equality and incentives. Unfortunately, Deaton fails to mention Mirrlees’s surprising finding that the top marginal tax rate should be only about 20 percent and that the tax rate should be about the same for everyone. In short, Mirrlees concluded that there should be approximately a flat tax rate. In his 1971 Review of Economic Studies article “An Exploration in the Theory of Optimum Income Taxation,” which contains that conclusion, Mirrlees wrote: “I must confess that I had expected the rigorous analysis of income taxation in the utilitarian manner to provide arguments for high tax rates. It has not done so.”
Deaton doesn’t tell the reader Mirrlees’s surprising conclusion. Could it be that Deaton favors a progressive income tax and doesn’t want to undercut his belief by quoting Mirrlees’s finding? I don’t know.
Deaton highlights a 1996 paper by Stanford’s John Shoven and Harvard’s David Wise, “The Taxation of Pensions: A Shelter Can Become a Trap,” that concludes that one provision in the 1986 Tax Reform Act, combined with federal and state income taxes and estate taxes, could cause someone on the verge of retirement to leave his heirs “less than ten cents on the dollar” saved in his retirement account. Furthermore, writes Deaton, if the person lived and died in New York, his heirs could get “only a quarter of one cent on the dollar.” One might think that Deaton would be aghast at this confiscatory taxation. But he expresses no such emotion. He points out that the Taxpayer Relief Act of 1997 repealed the relevant 1986 provision, along with liberalizing the taxation of capital gains from home sales. After noting that big issues like Medicare and Social Security were not dealt with in the ’97 legislation, he writes sarcastically, “But no matter, so long as the ‘underrich’ are taken care of.” Like Deaton, I think Congress and the president should take care of the looming crises in Medicare and Social Security, although our preferred solutions might differ. But why the apparent resentment of Congress for “taking care” of the “underrich” by refusing to confiscate almost all their retirement wealth?
Pensions and Social Security / One major change in private pensions and even some federal employee pensions over the last half-century is the movement away from defined benefit plans to defined contribution plans. In the former, the employer pays a pension based on the retired employee’s years of service and pay. In the latter, both the employer and employee contribute money to an investment fund that the employee owns and can take with him upon leaving an employer or upon retirement. Many employees, including me, have invested these funds heavily in the stock market and, if they’ve chosen funds indexed to the overall stock market, have done very well over the last few decades.
Deaton is wary of such investment plans because people can and do make mistakes. He admits that there is “no painless or risk-free solution to providing and funding pensions.” He recognizes that while people are myopic, politicians are very myopic: “political lives,” he writes, “are shorter than people’s lives.” You might then think that he wants politicians to stay out of people’s pensions. But he writes, “Pensions need to be collectively managed so that unscrupulous but relatively well-informed politicians and managers are not able to shift risk to poorly informed individuals whose material wellbeing in retirement is often barely adequate.”
By collective management, Deaton means government management. Who runs government? Politicians. So, politicians are myopic when it comes to investing pension funds in stocks. Check. But they’re not myopic when it comes to managing the current Social Security system, which will be unable to deliver promised benefit levels in a decade’s time? In wanting government management but not management by politicians, Deaton sounds almost like the ACA opponents who famously didn’t want the government messing with their Medicare.
Fiscal policy in recessions / One of the biggest controversies in macroeconomics in the late 1960s and early 1970s was about the relative potency of fiscal policy and monetary policy during recessions. The dominant view into the late 1960s was the Keynesian belief that fiscal policy is potent and monetary policy impotent. For that reason, Keynesians advocated increasing government spending during recessions. But Milton Friedman and a band of monetarists challenged that view and brought substantial evidence to bear on it. Friedman argued that monetary policy was much more potent. That did not lead him to advocate increasing the money supply during recessions. Instead, he advocated steady and moderate growth of the money supply to avoid bad recessions and high inflation.
Yet Deaton writes as if that debate never happened. He attributes the view that governments should avoid increasing spending during recessions not to economists, but to Republican politicians and regular voters. He notes that less than 10 percent of Americans reported being able to “see” any reduction in unemployment as a result of President Barack Obama’s 2009 increase in federal spending. One gets the idea that Deaton has not contended with the serious literature. Also, one argument against increasing the deficit to shorten recessions is the “Ricardian equivalence” argument pushed by current Harvard economist (then at the University of Chicago) Robert Barro. Barro argued that when deficits rise, people save more in expectation of having to pay higher future taxes. The evidence on this is messy but not one-sided. How does Deaton handle Barro’s argument? By calling the viewpoint “insanity.”
Elsewhere in the book, Deaton quotes George Stigler’s comment that a believer in the labor theory of value wouldn’t be able to get a good job in academia, not because he was radical but because a hiring committee would think that such a person couldn’t be both intelligent and honest. Deaton counters that there might be “something to be learned from studying the labor theory of value.” Note two things: First, Stigler was discussing someone who believed in the labor theory of value, not someone who studied it. Indeed, in his work in the 1950s on the history of economic thought, Stigler himself studied the labor theory of value. Second, contrast Deaton’s evenhandedness about the labor theory of value, which has been thoroughly refuted, with his charge of insanity to Ricardian equivalence, which hasn’t.
Conscription and immigration / My two biggest disappointments with Deaton’s book are his criticism of the idea of an all-volunteer military and his openness to further restrictions on immigration.
He rightly credits Friedman and Walter Oi for their roles in helping to end the draft, but objects to the fact that in 2015 some 8 percent of enlistees had a bachelor’s degree. Why, in Deaton’s view, does this matter? One reason he gives is that “those without a college degree are suffering.” What he seems not to realize is that by introducing a draft, he would cause them to suffer more. The last time there was a serious attempt to reintroduce the draft, in the 1979–1981 session of Congress, every draft bill introduced had in it a substantial reduction of first-term pay. Draftees who would have volunteered at market wages would thus have been made worse off. So, his solution to the suffering of military volunteers who lack a college degree is to take away or limit what they regard as their best opportunity, causing them to suffer more.
He also argues that economic inequality “can spill over into the military and compromise battlefield success.” Even if that’s true, he needs to compare it to the alternative. While teaching at the Naval Postgraduate School, I used to poll my military officers about whether they wanted to return to the draft. Practically all of them would say no, and they typically justified their view with a rhetorical question, “Why would I want to be in charge of people who don’t want to be there?”
On immigration, Deaton notes correctly that immigration of unskilled workers undercuts the wages of unskilled incumbent workers. But pro-immigration economists, of whom there are many, offer what are called “keyhole solutions”—policies that address specific problems like this without restricting immigration overall. One such solution would be a reduction in the bottom federal tax rate of 10 percent, thereby increasing unskilled workers’ net income. There are other solutions as well, though they are too complicated to cover here.
The underdog / Deaton writes of his concern for the underdog—those he considers to be treated unfairly. Some of his policy recommendations, however, would hurt the underdog. On the other hand, he does point out government policies a reversal of which would help the underdog. One is decisions by judges that allow private equity firms to buy failing firms and then “strip the contractual health benefits and pensions of the workers.” I don’t know much about this area of law and economics, but I share his feeling that this seems wrong.
Deaton also shows concern for the underdog in his discussion of the economist Alfred Marshall’s horrible treatment of his wife, Mary Paley Marshall, who was a first-rate economist in her own right. He quotes a statement from Austin Robinson that Robinson attributed to Keynes: “Why did Alfred make a slave of this woman, and not a colleague?” Why indeed? In tracking down the quote, I found that Friedman, like Deaton, was appalled by Marshall’s treatment of his wife.
Deaton’s concern for the underdog carries over to his concern for academic economists who, given the old-boys club in the top journals, have little chance of publishing there. It’s refreshing to see him pull back the curtain. In expressing his legitimate concern, though, he engages in a little elitism of his own. After listing the top five economics journals, Deaton writes, “Young scholars need to publish in one or more of them if they are to build successful careers.” I would bet that over 90 percent of economists (including me) have never published in any of those journals. Would Deaton really maintain that none of us has had a successful career?
Also, while Deaton expresses legitimate concern for the wellbeing of American men without a college degree, he fails to see that even they have gained economically over the last several decades. He claims that their real wages are lower than they were 50 years ago but doesn’t present evidence. Given his criticism of economists who want the consumer price index (CPI) to adjust better for new products and quality improvements, it’s clear that he must be using the CPI. He never discusses the inflation measure that the Federal Reserve favors: the personal consumption expenditure index (PCE). This shows a lower growth of prices from 1970 to 2023. If, say, Deaton’s measure shows a 2 percent decline of wages for male non-degree holders over those years, the PCE measure would show a 26 percent increase in real wages. And that ignores non-wage benefits, which have been an increasing percentage of overall compensation in the last 50 years.
Way with words / As you can see from the above, my assessment of Deaton’s thinking is more negative than positive. But I want to end on a positive note: he has a way with words. In comparing the small amount of government funding of economics provided by the National Science Foundation with the large amount of funding on health given by the Bethesda-based National Institutes of Health, Deaton writes, “Economics may be the six-hundred-pound gorilla in the social sciences, but it’s still a small creature in the Bethesda Zoo.” And in describing the splendors of the 2015 Nobel Prize event in Stockholm, he writes of his economist wife Anne Case, “Anne’s scarlet sheath could be seen from outer space.” I hope his wife found that as charming as I did.
