Angus Deaton: “A lot of the inequality in the U.S. comes from rent seeking. It comes from firms and industry seeking special protection or special favors from the government.”

Eliminating rent seeking and toughening enforcement of antitrust laws are “critical” to reducing rising inequality, said two Nobel Laureates, Angus Deaton and Joseph Stiglitz, during a panel of Nobel laureates last Friday. Two fellow laureates, Roger Myerson and Edmund Phelps, echoed their message and warned of a return to 1930s-style corporatism.

“To the very considerable extent that inequality is generated by rent seeking, we could sharply reduce inequality itself if rent seeking were to be somehow reduced,” said Angus Deaton, recipient of the 2015 Nobel Prize in Economics. Deaton described inequality in the U.S. as being primarily driven by industry rents, and rejected proposals to increase taxes on the rich as a way to reduce rent seeking.

“I don’t think that rent seeking, which is incredibly profitable, is very sensitive to taxes at all. I don’t think taxes are a good way of stopping rent seeking. People should deal with rent seeking by stopping rent seeking, not by taxing the rich,” he said.

The panel was part of the annual Allied Social Sciences Associations (ASSA) meeting in Chicago. Fellow Nobel Laureate Joseph Stiglitz, recipient of the 2001 prize, offered a more sympathetic view of higher taxes on the rich as a method to reduce inequality, but stressed the importance of rent-seeking to the rise in inequality in the US.

“In all areas of economics, the rules of the game are critical—that is emphasized by the fact that similar economics exhibit markedly different patterns of distribution, market income, and after tax and transfers income. This is especially so in an innovation economy, because innovation gives rise to rents—both from IPR and monopoly power. Who receives those rents is a matter of policy, and changes in the IPR regime have led to greater rents without having any effects on the pace of innovation,” said Stigltz.

Both Stiglitz and Deaton agreed that tougher antitrust enforcement is “incredibly important” in reducing inequality (an argument that was explored at length in ProMarket as well), rejecting claims that diminishing the role of government and regulation is the key.

The panel included five Nobel laureates: Deaton, Stiglitz, Myerson, Phelps, and Robert Shiller. All expressed deep concerns over the rise of inequality, both within the U.S. and around the world, as well as recent political turmoil associated with the resultant public outrage, such as the election of Donald Trump. The panel, moderated by Fordham professor Dominick Salvatore, was characterized by a general agreement that a decline in innovation and competition and an increase in rent seeking are contributing to the rise in inequality, as well as a general agreement over a number of policies to reduce it.

While the panel dealt with a wide array of topics related to inequality, such as globalization, the decline of innovation, and the dangers of a secular stagnation, much of the panel focused on the issue of rent seeking and its impact on the US economy.

While some forms of inequality could be linked to progress and innovation, said Deaton, inequality in the US does not stem from creative destruction. “A lot of the inequality in the US is not like this. It comes from rent seeking. It comes from firms and industry seeking special protection or special favors from the government,” he said.

Deaton highlighted a particularly salient example of rent seeking: the American health care system which, he said, “seems optimally designed for rent seeking and very poorly designed to improve people’s health.”

In his remarks, Deaton referred to a 2015 study that he and his wife, Princeton professor Anne Case, published in 2015. In the paper, Deaton and Case analyzed health and mortality records and showed a troubling rise in the death rates of middle-aged white Americans. This rise in mortality was unique to white non-Hispanic Americans, they concluded, and was driven primarily by an epidemic of suicides and diseases related to substance abuse among poorly-educated whites, particularly heroin and prescription opioids such as oxycodone.

“There are around 200 thousand people who have died from the opioid epidemic, were victims of iatrogenic medicine and disease caused by the medical profession, or from drugs that should not have been prescribed for chronic pain but were pushed by pharmaceutical companies, whose owners have become enormously rich from these opioids,” said Deaton, who later advocated for a single-payer health care system in the U.S., saying: “I am a great believer in the market, but I think we need a single-payer health care system. I just don’t see any other sensible way to address it in this country.”

A great deal of time was devoted to the plight of working-class whites who have been hurt by the automation and outsourcing of manufacturing jobs, particularly in regions like Appalachia, which contributed to the public anger that led to the election of Donald Trump. “Poor people in the U.S. may not be many times better off than people in Africa or in India,” said Deaton, who added: “Many areas of Appalachia and Mississippi Delta have lower life expectancy than Bangladesh.”

Phelps, who received the Nobel Prize in Economics in 2006, focused on the decline in living standards suffered by working class communities in the Rust Belt, most of them white men, titling his talk “The Left and the Right are Failing the West.”

Other than the loss of income, he said, “many men in the Rust Belt in Appalachia have lost meaningful work and are unable to find another. People want work that provides them with some agency—they want a chance to prosper, to have the satisfaction of succeeding in something. They would also appreciate the experience of developing in the course of a career, to have self expression through imagining and creating new things. The good jobs in manufacturing offered these men the prospect of some learning, some challenges, and some attendant promotions. The bottom-rung jobs in retailing services that these men are forced to take do not. In losing their good jobs, then, these men were losing the meaning of their very lives. The rise of suicide and drug related deaths among Americans might be evidence of just that sense of loss.”

The last four decades of slow growth in the U.S., said Phelps, fit Alvin Hansen’s definition of secular stagnation “to a tee.” Phelps traced the roots of this secular stagnation, characterized by slower growth and loss of innovation, to a “corporatist ideology that had come to permeate the government at all levels” starting with the 1960s, and has “replaced the individualist ideology supporting capitalism” ever since.

Stiglitz, in his remarks, likewise focused on the discontent with globalization felt across wide swaths of the American and European public. “One of the reasons that there is that discontent with globalization and with the political process is that it’s been associated with a large number of broken promises. The promise was that globalization, together with liberalization, lowering tax rates, and technology, would make everyone better off, presumably through some process of trickle-down economics, and now in many countries workers are told they have to accept cutbacks in wages and public services in order to compete in a globalized world. The disparity between the promises and what has happened has deepened distrust of the elites, including academics and democratic politics.”

Much the panel, particularly remarks by Shiller (recipient of the 2013 Nobel Prize) and Myerson (who received his Nobel in 2007), focused on the detrimental impact of rapid technological change. But while the consensus held that technological progress is inevitable and that manufacturing jobs lost to automation are not coming back, the panelists offered a number of policy suggestions to help deal with the implications of dislocation due to “efficiency-enhancing” technologies. 

Myerson, for instance, suggested governments “tax those who benefit most from the global economy, to fund a safety net for those who benefit least.” Social safety nets and a more equal distribution, he said, are essential for future development, as they had been since the beginning of the Industrial Revolution.

Stiglitz, on the other hand, opined that all remedies to inequality must take into account the political economy. “We need to pay attention not only to what is feasible, but also to what is likely to happen given how the political system works, and also be attentive how our policies interact with the political economy. In that sense, the political economy is endogenous,” he said.

A return to 1930s-style corporatism?

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The panel. Left to right: Edmund Phelps, Joseph Stiglitz, Dominick Salvatore, Robert Shiller, Roger Myerson, and Angus Deaton.

Economists and politicians have proposed a number of methods to tackle the problem of growing inequality in recent years, from taxing the rich through more progressive income and property taxes to a global tax on capital to raising the minimum wage.

When it comes to solutions for the rise in inequality, the panelists agreed on a number of policies, such as investment in basic research, while Deaton and Stiglitz called for stronger antitrust enforcement and rejected notions that diminishing the scope of government is the key.

“Libertarians argue that the solution is to eliminate government, or to reduce its scope. They like to quote Proudhon’s wonderful quotation that ‘government is theft.’ But there are governments elsewhere in the world where rent seeking is less of an issue,” said Deaton, who voiced support for campaign finance reform.

Campaign finance reform, he said, “would reduce the current selection of Representatives and Senators who are beholden to deep pockets. It’s hard to be elected to Congress or to stay elected without support from well funded interest, and that’s as true in recent years for the Democrats as for Republicans. Congressmen and Congresswomen are the farm team for K-Street.”

Many of these policies, however, are unlikely to be implemented in the next four years. A large portion of the panel was devoted to the most prominent result of public outrage caused by rising inequality, rent seeking, and discontent with globalization: Trump’s victory in the presidential election. The laureates severely criticized the forming policies of the Trump administration, and warned of what they described as a return to corporatism.

Phelps, for instance, criticized Trump’s assertion that job and income losses among the American working class were caused by trade and not by losses of innovation, and the President-elect’s “assumption that supply-side measures to boost after-tax corporate profits will bring generally heightened incomes and employment to America,” which he said runs the risk of explosion in public debt and a deep recession.

The most hazardous, said Phelps, “is the assumption that by bullying corporations, such as Ford, and stepping in to aid other corporations, such as Google, the Trump administration can achieve various objectives that will widely boost employment.”

Trump, said Phelps, is leading “an expansion of corporatist policy not previously seen since the corporatist German and Italian economies of the 1930s. If history is a guide, by expanding protection and interference in the business sector the Trump administration may very well block the innovation of outsiders and newcomers more than it would stimulate the innovation among the insiders.” American economists, he added: “must wake up to the dangers presented by a return to corporatism—the Trump government is threatening to drive a silver spike into the heart of the innovation process.”

ASSA meeting reflected growing interest in political economy

The Laureates panel was not the only event that emphasized the importance of rent seeking and issues related to political economy. The ASSA conference was rife with papers and panels dealing with issues related to rents and the subversion of competition by special interests:

  • In a panel titled “How Much Finance Does the Economy Need?” (moderated by Chicago Booth Clinical Professor Guy Rolnik, Stanford University’s Anat Admati, chief economist of the OECD Catherine Mann, Antoinette Schoar of MIT, and Ceyla Pazarbasioglu from the IMF discussed rents in finance.
  • In another panel, titled “Challenges to Democracy in Middle-Income Countries: A Comparative Perspective,” MIT’s Daro
    n Acemoglu, Rafael Di Tella and Andrei Shleifer of Harvard University, and Claudio Ferraz from the Pontifical Catholic University of Rio de Janeiro (PCU-Rio) compared democratic crises in Turkey, Argentina, Russia, and Brazil and discussed media capture.
  • In the session “Inequality: Rents, Value Extraction, and Power,” Dean Baker, co-director of the Center for Economic and Policy Research (CEPR), presented a paper in which he examines rents in the financial sector, among doctors and dentists erecting barriers to entry, and within patent and copyright monopolies. In the same panel, Kim Weeden from Cornell University presented a paper in which she also looks into rents generated through licensure, non-competitive compensation, and market concentration. William Lazonick from the University of Massachusetts Lowell also presented a paper, as did Nancy Folbre from the University of Massachusetts Amherst.
  • In a session on common ownership, Jose Azar of the IESE Business School presented a “model of firm behavior in the context of oligopoly,” in a paper on portfolio diversification and market power. Erik Gilje and Doron Levit of the University of Pennsylvania, along with Todd Gormley from Washington University-St. Louis, presented a paper documenting the rise of common ownership in the U.S. stock market over a period of 32 years. Albert Banal-Estanol from Universitat Pompeu Fabra, Xavier Vives from the IESE Business School, and Jo Seldeslachts from the University of Amsterdam presented a paper examining the impact of the financial crisis on competition and common ownership. Miguel Anton and Mireia Gine of IESE Business School, Florian Ederer of Yale University, and Martin Schmalz from the University of Michigan, presented a paper on common ownership and management incentives.
  • In a session titled “Political Economy,” Ferenc Szucs from the University of California, Berkeley and Adam Szeidl from the Central European University presented a paper on media capture in Hungary. Viktar Fedaseyeu from Bocconi University, Erik Gilje, and Philip Strahan from Boston College presented a paper on incumbent politicians and political change. Jon Fiva from the Norwegian Business School (BI) and Daniel Smith from Harvard presented a paper on political dynasties. Fiva, Smith, and Askill Halse from the University of Oslo also presented a voter mobilization in local elections. Christine Benesch, Katharina Hofer, and Monika Bütler from the University of St. Gallen presented a paper on transparency in parliamentary voting. George Deltas and Mattias Polborn from the University of Illinois at Urbana Champaign presented a paper on voting patterns during primary elections.
  • In a session titled “The Economics of Winner-Take-All Markets,”  Christian Peukert of the University of Zurich and Lisa Megargle of Hunter College and the CUNY Graduate Center presented a paper on YouTube and cultural convergence. Benjamin Anderson of Colgate University and Michael Sinkey from the University of West Georgia presented a paper that used NBA data to examine signaling in the labor market. And Wayne Grove of Le Moyne College, Michael Jetter from the University of Western Australia, and Kerry Papps from the University of Bath looked into professional tennis to see how early success in winner-take-all-markets might affects adult outcomes.
  • In the session titled “The Political Economy of Consolidating Democracies,”  Suresh Naidu and Lauren Young from Columbia University and James Robinson of the University of Chicago presented a paper on elite networks and the social origins of dictatorships, using evidence from Haiti. Horacio Larreguy of Harvard University, John Marshall of Columbia, and Lauren Trucco from New York University presented a paper on breaking clientelism, examining evidence from Mexico. Samuel Bazzi and Matthew Gudgeon from Boston University used evidence from Indonesia to examine the impact of redistricting. Monica Martinez-Bravo and Andreas Stegmann from the Center for Monetary and Financial Studies (CEMFI), along with Priya Mukherjee from the College of William & Mary, also used evidence from Indonesia to examine the non-democratic roots of elite capture. Francesco Amodio from McGill University and Giorgio Chiovelli from London Business School presented a paper on ethnic favoritism in democracy through the lens of the political economy of South Africa.
  • In a session on “Theoretical Political Economy,” Mats Ekman from the Hanken School of Economics presented a paper on political campaigning incentives. Hulya Eraslan of Rice University and Saltuk Ozerturk from the Southern Methodist University presented a paper on information access and media bias. Daniel Stone of Bowdoin College presented a paper on the dynamics of political polarization.
  • During a panel titled “The Vested Interests Versus Rational Public Policy: Economists as Public Intellectuals,” Stiglitz and Baker, along with James K. Galbraith of University of Texas at Austin, Stephanie Kelton from the University of Missouri-Kansas City, and Lawrence Mishel from the Economic Policy Institute discussed competition, trade, consumer protections, and how to reach effective public policy. “We need to rewrite the rules of the market economy,” said Stiglitz during the same panel.