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Did Economists Break the Economy? Review of Deaton’s Economics in America

After about a decade of teaching, it finally occurred to me that interviewing an accomplished economist (or economic critic) would be more entertaining—and hopefully more educational—than asking students to listen to me wax on about economic expert “war stories” for two hours. Also, by inviting a book author, I could compel students to digest the reading material before class, by submitting ten original questions with pinpoint cites to the reading in advance of the lecture. But which economist would I invite?

I’ve always been fascinated with books about the influence of economics on the law and how the economic mindset has largely screwed up our society; books like MacLean’s Democracy in Chains, Appelbaum’s The Economists’ Hour, or Popp Berman’s Thinking Like an Economist. (A sub-strand of this genre by Wu, Stoller, Philippon, Teachout, Dayen, and several others explores how Chicago School economists neutered antitrust enforcement, to the betterment of monopolists.) The latest installment in this school of thought is Economics in America: An Immigrant Economist Explores the Land of Inequality, by Angus Deaton.

I was confident that Professor Deaton, having won the Nobel Prize in 2015 and presumably having more important things to do than speak with undergraduates in an economics department with a heterodox reputation, would either ignore my invite or politely decline. To my delight, I was wrong, per usual. And the experience was magical. (Popp Berman spoke to my class as well this semester, and Deaton calls her book “persuasive.”)

Economics in America is not Deaton’s first popular (and non-technical) book. Along with Anne Case, he is the author of Deaths of Despair and the Future of Capitalism (Princeton Press 2021). For those who are too busy to read it, Case and Deaton penned a wonderful op-ed about these deaths in the New York Times. Deaton’s research focuses primarily on poverty, inequality, health, well-being, and economic development. In the technical realm, he is the author, along with John Muellbauer, of Economics and Consumer Behavior (Cambridge Press 1980), which was used in my first-year microeconomics course in graduate school.

Deaton’s three degrees in economics were earned at the University of Cambridge. He came to America with an offer to teach at Princeton.  When he arrived, Ronald Reagan was dismantling the welfare state and regulation, as government interference in markets—and Keynesian economics generally—was blamed for stagflation in the late 1970s. (Keynesianism seems to be have been reborn in the aftermath of the Covid shock, with both parties embracing public-sector stimulus to revive economic fortunes.) Deaton was surprised by Americans’ apathetic attitudes towards inequality and poverty generally, especially compared to the widespread support of the safety net that had been erected in his home of Britain to fight disease and homelessness.

Gatekeepers Gonna Gatekeep

Economics in America begins with the story of how Card and Krueger’s seminal work on the minimum wage, which produced a result counter to the economic orthodoxy that the minimum wage reduced employment and counter to the interests of the business community generally and the fast-food industry in particular. Their findings were roundly rejected by the economics establishment or “gatekeepers,” as I like to call them. He chronicles the attacks by Paul Craig Roberts, Thomas Sowell, the Wall Street Journal editorial page (surprise!), David Neumark (whose minimum wage research, as the book notes, is funded by business groups), Finis Welch, and June O’Neill.

For those who are new to the debate, Card and Krueger exploited a natural experiment in two neighboring states (New Jersey and Pennsylvania) to show that that increasing the minimum wage in New Jersey did not increase unemployment, as the simplistic economic models would have predicted. One explanation for their surprising result was that employers like Wendy’s, despite their small footprint in fast-food employment within a commuting zone, enjoy a modicum of wage-setting power over their employees, due to high switching costs caused in part by firm-specific training. These switching costs in turn allow these employers to absorb increases in labor costs from a minimum wage hike without cutting jobs. (The profession reacted similarly to the notion that profiteering and price gouging by large corporations was to blame for some material portion of inflation. I had to block so many IO economists on Twitter!) Deaton concludes the chapter by noting that conventional wisdom in economics is “weighted towards capital and against labor.” But he never goes so far as to say that economics has been corrupted by capital—that is, in their constant pursuit of funding, economists say whatever capitalists want to hear. (He is more diplomatic than me.)

There’s a great revelation early in the book that Barack Obama, during a debate with Hillary Clinton, denounced the insurance mandate—which would require everyone to have coverage and thereby address the adverse selection problem—as being unnecessary to an effective health care overhaul. Of course, the mandate was ultimately included in Obamacare. I feel like this episode reveals a lot about Obama’s commitment to progressive values. That plus surrounding himself with neoliberals like Jason Furman and Larry Summers, who have revealed themselves to (a) be hostile to government spending even in a recession (now twice) and (b) subscribe to the outmoded theory that inflation is driven by wage demands (aka greedy workers).

In a chapter devoted to poverty, Deaton elegantly describes the official poverty metric from the Census Bureau as a “statistical stupidity,” because it fails to account payments from government programs. Thus, the war on poverty can never be won.

Poverty-Inflicting Corporate Behaviors

It is curious why a Democratic candidate (or office holder) cannot explain this statistical flaw to voters. Deaton ends the chapter by noting that donating for poverty relief in the places in the United States where jobs are being lost would draw attention “to those corporate behaviors that were contributing to that domestic poverty” (emphasis added). The book does not spell out, at least here, which “corporate behaviors” he had in mind, and how they contribute to poverty. Later in the book, however, Deaton cites corporate acquisitions—in particular, rich companies buying up competitors before they are a threat—as a mechanism by which income inequality (aka extreme wealth) limits opportunities. Though he did not list them, other anticompetitive “corporate behaviors,” including no-poach provisions and non-competes, also might be contributing to domestic poverty, by restricting worker mobility and thereby reducing their best outside options. (During my interview, Deaton confirmed that these other corporate behaviors are contributing to poverty.)

In a chapter devoted to inequality, Deaton discusses the hostility among Chicago School economists to the concepts of fairness and inequality. It’s pretty obvious that their preferred economic policies will “score” poorly on those dimensions, but will “score” better on their preferred metrics such as efficiency or output. The strategy of moving the goalposts to accommodate one’s preferred policies seems so obvious in hindsight. It begs the question as to why these results-oriented approaches were not sniffed out by courts.

Economics in America explains how income equality is perpetuated by market forces. Deaton writes that “income inequality seems to get in the way of [economic] opportunity.” One mechanism by which this causal story could occur is if the rich hoard the best opportunities for themselves and their children. (This happens outside the pay-to-play scheme for wealthy parents to get their children into top universities orchestrated by Rick Singer, no relation.) Another mechanism by which inequality impairs opportunity is that as disproportionately poor workers get sick while their wealthier peers stay healthy, the wealth gaps will widen.

Antitrust as an Anti-Poverty Tool

The same chapter explains how growing concentration among companies could give employers greater buying power over workers, increasing income inequality. This means that, contra the opinions of Jason Furman—who recently pushed back on a brilliant op-ed by Tim Wu—more antitrust enforcement in labor markets could be used to reduce income inequality. (In disclosure, I serve as an expert for workers in several ongoing labor antitrust matters, including the recently settled UFC monopsony case.) It bears noting that the consumer welfare standard of antitrust, another Chicago School invention, was presumably designed to divert attention away from worker harms in labor markets and towards consumer harms in product markets.

Deaton also hints, contra neoliberal orthodoxy, that a reduction in immigration might reduce income inequality, acknowledging that many economists might disagree. He never spells out the mechanism here. But he suggests that neoliberal economists may have committed some errors in measuring the impact of immigration on wages. My surmise, sticking with the economics-is-corrupt theme, is that economists instinctively defend immigration because immigration benefits large employers—by providing a ready pool of workers willing to supply labor at wages below competitive levels—and because economists are generally auditioning for income from large employers. Indeed, Deaton later writes that “the public perception [is] that economists are apologists for capitalism or they are shills for greedy and immoral corporations.”

So Did Economists Break the Economy?

Deaton finishes the book by exploring whether economists are to blame for breaking the economy and “creating the forces that swamp us today.” He notes that Larry Summers used his influence as Treasury secretary from 1999 to 2001 to “weaken restrictions on the international flow of speculative funds, as well as on derivatives and other more exotic instruments on Wall Street.” In critiquing these and other neoliberal policies that gave birth to the Great Recession, Deaton writes: “This is a tale that cannot be told too often, of government-enabled rent seeking and destruction supported by the ideology of market fundamentalism.”

He laments the anti-Keynesianism that grips the Republican Party (save for the aforementioned deficit spending under Donald Trump during Covid). Economist Robert Barro of Harvard pioneered the libertarian theory that, in response to fiscal stimulus, consumers will pare back spending in fear of future higher taxes on themselves or their descendants, thereby neutralizing the impact of the stimulus. Per Deaton, such “insanity is an embarrassment, and the fact that Barro is taken seriously—and is a professor at Harvard, rather than a fringe blogger—is a sure indication that, indeed, macroeconomics has regressed, not progressed, since 1936.” 

In writing about the deaths of despair, Deaton and Case saw the loss of jobs, via globalization and technology upheaval, as the key causal factor; without a job, a desperate American is more willing to engage in harmful activities, including drug abuse and eating poorly. Conservative critiques flipped the story around, blaming the drugs as the cause of despair (rather than the symptom), and speculating that the government was subsidizing opioids through Medicaid. Never mind that only eight percent of opioid prescriptions between 2006 and 2015 were paid for by Medicaid. Deaton explains that the right-wing prescription, often repeated by economists, is “to tell people to be more virtuous,” but that “[e]conomics does not have to be like this.” He concludes that “Joe Biden does not listen to economists in the way that Obama or Clinton did, something that arguably makes him a better president” (emphasis added). This is a sad reflection on the dismal science.

Alas, Deaton offers a prescription for a course correction: “Economics should be about understanding the reason for and doing away with the sordidness and joylessness that come with poverty and deprivation.” The final chapter explains how the “discipline has become unmoored from its proper basis, which is the study of human welfare.” A new breed of progressive economists (count me in) “worry about inequality and are willing to use redistribution to correct the failures of the market, even at the expense of some loss of efficiency.” In addition to redistribution, Deaton writes that we should embrace predistribution policies, or “the mechanism that determine the distribution of income in the market itself, before taxes and transfers.” Among these policies, he endorses distinctly heterodox ideas such as promoting unions, immigration control, tariffs, job preservation, and industrial policy.

Deaton has charted the new course. Will any economists follow it?

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