In an interview with ProMarket, Nobel Prize-winning economist Angus Deaton talks about the connection of rent-seeking and monopolization to rising inequality.
In December, the United Nations’ special rapporteur on extreme poverty and human rights, Philip Alston, embarked on a coast-to-coast tour of the United States. Alston’s fact-finding mission, conducted at the invitation of the federal government, resulted in a grim report that declared the US “the world champion of extreme inequality” and highlighted the vast inequities that plague American society: The US is one of the world’s wealthiest countries, yet 40 million of its inhabitants live in poverty, its infant mortality rates are the highest among developed nations, and Americans lead “shorter and sicker lives, compared to people living in any other rich democracy.” The US also has the lowest rate of social mobility of any rich country, rapidly turning the American Dream—its national ethos—to “an American illusion.”
Rising inequality has been the focus of countless articles, books and debates in recent years, as more and more empirical studies show that in the decades since 1980, income gains have gone overwhelmingly to the top 1 percent and 0.1 percent. Much of the debate, however, is concerned with the implications of inequality: Does rising inequality negatively affect economic growth? Does it undermine democracy? Did it contribute to the rise of populist politics in America and around the developed world?
Those, says Nobel Prize-winning economist Angus Deaton, are the wrong questions to ask if we wish to understand inequality. In fact, he suggested in a recent piece for Project Syndicate, it’s possible that the term “inequality” itself might be ill-fitting. A better term might be “unfairness”: Inequality, he argued, is the consequence of economic, political, and social processes—some good, some bad, and some very bad. The key to addressing its rapid increase is to address the processes that can be deemed “unfair.”
Examples are plenty. In his piece, Deaton focuses on several processes and policies that have allowed the rich to get richer while holding down middle- and working-class wages. Among them: rising health care costs, market consolidation, diminishing labor power, and corporations’ political power. These processes do not stem from “unstoppable processes” like technology or globalization, argues Deaton, but are the result of rent-seeking.
Deaton, the recipient of the 2015 Nobel Prize in Economics, is one of the world’s foremost experts on inequality. The groundbreaking research on US mortality rates he conducted together with Anne Case revealed an increase in midlife mortality rates among white non-Hispanic Americans, led by death related to drugs, alcohol and suicide—what they called “deaths of despair.”
To better understand the connection between inequality and rent-seeking in America, we spoke with Deaton, a Senior Scholar and the Dwight D. Eisenhower Professor of Economics and International Affairs Emeritus at the Woodrow Wilson School of Public and International Affairs and the Economics Department at Princeton University. In his interview with ProMarket, Deaton discussed the connection of rent-seeking and monopolization to rising inequality, and explained why he believes it’s easier for rent-seekers to influence policy in the US than in Europe.((This interview has been edited and condensed for clarity and length.))
Q: In a recent piece for Project Syndicate, you argued that contrary to popular opinion, inequality is not so much a cause of certain economic, political and social processes, but a consequence of them. Can you elaborate?
I just think that thinking of inequality as some outside cause of economic outcomes is not very sensible. The economy is a set of processes and policies, and the interaction between these processes and policies produces various outcomes. Inequality is one outcome among many.
A sensible way of thinking about it is to focus on some things that are going on, like for instance monopolies or monopsonies. If they’re unregulated, monopolies might be very effective at squeezing stuff out of consumers and workers to make profits for the monopolists. That’s a process of rent-seeking which would transfer resources upwards, from relatively-poor people to people who are much better-off, thus increasing inequality but also slowing economic growth and making the market less efficient. Under those circumstances you would get a correlation between inequality and slower growth, but it’s the monopolies that are causing both, not one causing the other.
Q: In recent years you have devoted more attention to rent-seeking. What is the relationship between inequality and rent-seeking in America?
Monopoly, I think, is a big part of the story. Both monopoly and monopsony contribute to lower real wages (including higher prices, fewer jobs, and slower productivity growth)—just a textbook case! But there are things like contracting out, which are making it much harder at the bottom, or local licensing requirements—mechanisms for making rich people richer at the expense of stopping poor people starting businesses and stifling entrepreneurship. There are also more traditional mechanisms other than rent-seeking, like the tax system. All these affect the distribution of income very directly.
One of the things that seem to be going on more than it used to be is rent-seeking that’s redistributing upwards. Rent-seeking doesn’t have to redistribute upwards—when there were powerful unions, I am sure there was a fair amount of redistributing downward. It used to be that there was a lot of rent-seeking that went to workers. For instance, a lot of rents used to go to the autoworkers in Detroit for instance, [as part of] the Treaty of Detroit—“there’s no real competition, so we make crappy cars, but we’ll share the rents with workers.”
Now they’re not sharing the rents with the workers anymore. I think one of the reasons people are worried about inequality is that rent-seeking has turned almost entirely in favor of the elite.
“Monopoly, I think, is a big part of the story. Both monopoly and monopsony contribute to lower real wages (including higher prices, fewer jobs, and slower productivity growth)—just a textbook case!”
Q: Would you describe rent-seeking as the main problem facing the American economy today?
I’d say the main problem is that the living standards of the working class are not rising anymore. That’s linked to the “deaths of despair” aspect, the work Anne Case and I have been doing on people dying in middle age, which we have tied to a very long-term wage stagnation that’s been going on for over half a century and destroyed working class life in America.
I think the deep question here is: Does American capitalism, or liberal democracy as it is today, continue to work for ordinary people? That seems to me the really big issue. Are we back to where we were in the 1930s and 1940s, when we thought maybe this wasn’t the case? After the Second World War it was clear that in American and British and European social democracies market capitalism worked well for nearly everyone. There was a huge increase in living standards, even for people who were not particularly well-educated.
The question now is whether that is stopping, and what are the forces that might make this thing not work anymore, of which rent-seeking would be one. To me, the most plausible stories are stories that involve rent-seeking. Mancur Olson said a long time ago that this is what would happen in mature capitalism, and you could make an argument that this has been happening all along but the Second World War sort of stopped it for a while.
I don’t like stories that say inequality is bad, inequality is the problem. I wrote a book called The Great Escape: Health, Wealth, and the Origins of Inequality, in which one of the things I pointed out is that periods of great progress are usually periods of rising inequality because none of these things are evenly doled out. Rising inequality can be a sign of real progress, but I don’t think that’s what’s happening now.
Q: Which sectors of the American economy, would you say, seem particularly rife with rent-seeking behavior?
The health care system in the US is certainly an important one. Its effects work partly through prices, but a lot of it also works through wages, because so much of health care is provided by employers and because people don’t see it—they think they’re getting free health care from their employers. It’s an exquisitely designed rent-seeking mechanism, where you can seek large rents without most people understanding what you’ve done. It also seems extremely well-engineered to lower take-home wages and make a bunch of people in the health care sector a lot better off.
I am less expert on other sectors, but much has been written on rent-seeking in the financial sector.
Q: Are you in favor of a single-payer health system in the US? Can a single-payer system reduce opportunities for rent-seeking?
Yes, and I believe so. That is why I favor it, in spite of the potential problems and costs.
“I think it’s easier for rent-seekers to affect policy here than in much of Europe. You cannot run for Congress unless you have a deep-pocketed backer, and that’s not true in Europe. It’s also very difficult to be a member of Congress if your views are not pro-corporate, whereas in Europe it’s much harder for corporations to affect policy—it would take much longer and you have to be much more subtle about it.”
Q: Is rent-seeking a problem unique to the US economy?
It’s interesting, you always have to use Europe as a counterfactual, because a lot of the forces that operate here operate there. I think they operate a lot of more fiercely here. I think it’s easier for rent-seekers to affect policy here than in much of Europe. You cannot run for Congress unless you have a deep-pocketed backer, and that’s not true in Europe. It’s also very difficult to be a member of Congress if your views are not pro-corporate, whereas in Europe it’s much harder for corporations to affect policy—it would take much longer and you have to be much more subtle about it.
It’s one of the protections you get from a civil service that is very highly professionalized and doesn’t turn over very much. They may be only loyal to their conception of what public service is, but they’re not easily influenced because they don’t turn over every time there’s an election. What happens in the EPA now could not happen in Britain, for example. But then there has also been a lot of wage stagnation in Britain as well.
Q: Particularly in The Great Escape, you’ve presented passionate defense of globalization. The last two years, of course, have seen a fierce backlash against globalization in the US and developed countries, with both politicians and scholars suggesting that globalization played a key part in the increase in inequality within developed nations, as well as other economic phenomena such as stagnating wages and rising market power. Do you believe that globalization has been unfairly maligned?
Yes. It has obviously played a role in all this, but globalization is our friend; it moves out the possibility frontier. So our job is not to kill the golden goose, but to design policy to share the eggs more reasonably.
Q: What are some possible remedies to American rent-seeking?
I think we have to do a lot of serious rethinking about antitrust.
Q: Does that mean tougher enforcement, or as some have suggested, a reframing of current antitrust policy away from solely focusing on consumer welfare to confronting the political power of corporations?
Both. But I am not very optimistic.
Because the forces against are very strong. I see the problem, I don’t see easy solutions. But resistance to rent-seeking is an issue that both the right and left can get behind. You’ve got libertarians on one hand and left-wingers on the other hand that would agree that rent-seeking is a really bad thing. They may not agree that free market capitalism is a good thing, but they can agree on disliking rent-seeking. Maybe there’s something of a consensus to be built there. As I said, I am not very optimistic. But I am very excited that a lot of people in economics are working on things like increasing margins, monopoly, and rent-seeking—that’s terrific. This is what needs to be done.
Disclaimer: The ProMarket blog is dedicated to discussing how competition tends to be subverted by special interests. The posts represent the opinions of their writers, not those of the University of Chicago, the Booth School of Business, or its faculty. For more information, please visit ProMarket Blog Policy.