• Quote: Inequalities in Income, Health, and Wellbeing

    From Angus Deaton’s superb new book, The Great Escape: Health, Wealth, and the Origins of Inequality:

    Economists — my own tribe — think that people are better off if they have more money — which is fine as far as it goes. So if a few people get a lot more money and most people get little or nothing, but do not lose out, economists will usually argue that the world is a better place. And indeed there is enormous appeal to the idea that, as long as no one gets hurt, better off is better; it is called the Pareto criterion. Yet this idea is completely undermined if wellbeing is defined too narrowly; people have to be better off, or no worse off, in wellbeing, not just in material living standards. If those who get rich get favorable political treatment, or undermine the public health or education systems, so that those who do less well lose out in politics, health, or education, then those who have done less well may have gained money but they are not better off. One cannot assess society, or justice, using living standards alone. Yet economists routinely and incorrectly apply the Pareto argument to income, ignoring other aspects of wellbeing.

    @Bill_Gardner

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    • Bill, I disagree (with Deaton, I guess). There is ample work showing a correlation between income and well being, and comments like this usually fall into the uninformed “economics only think about money” camp.

      No one seriously claims that well-being is all about income. The claim is that income is a strong proxy for the measure of well-being. I think the vast majority of economists would agree that income isn’t everything.

      • Hi Mike,
        Thanks for commenting. I think this is a deep issue and I’m not supposing that it is obvious that Deaton is right.

        I am sure that most people, let alone most economists, would agree if asked that wellbeing is more than income. But in practice, I find that almost everyone discusses inequalities on single dimensions. In a way this is not surprising — we do not have any agreed upon metric for multidimensional wellbeing.

        I am familiar with the Wolfers article. Notice that they are talking about a correlation between income and subjective wellbeing. Deaton is talking about income, public health and education, not income and subjective wellbeing.

        However, income and wellbeing component X are likely highly correlated if we look at a cross section of countries. I don’t think that necessarily that they are highly correlated if we look within a country across a historical series, which is what Deaton seems to be talking about here.

    • Don’t economists also have an incentive to ignore the documented importance to real-live humans of relative status and relative wealth? This is of course a dependent utility function, and if utility is not independent, then you can’t mathematically prove that free markets are welfare-maximizing. It’s a little harder to call your work “science” when you kick out that foundation.

      Even if we pretended utility was independent, isn’t it also the case that the proof would still work with some other well-behaved norm that gave less weight to concentrated wealth, say an L(0.5) norm (square of the sum of the square roots) or perhaps the exp of the sum of the logs?

      • dr2chase,
        Good point. You may be familiar with Robert Frank’s writing on this topic; if not I recommend them.

    • I think Mike misses the point. Deaton doesn’t argue that income is unrelated to well-being. Deaton raises the possibility that MY income could be negatively correlated with YOUR wellbeing if 1) I acquire a disproportionate share of wealth, and thus power, and 2) I then structure society to promote my welfare – which may involve dismantling social safety nets that I don’t need, but you might. In contrast, if you and I have the same wealth, you and I are more likely to share views about the need for a social safety net, and about creating mechanisms to pay for it.

      Dr2chase raises the more interesting issue: Can we measure parado-optimality if people really value STATUS?

      Microeconomists HATE to address this issue. “Why countenance the politics of envy?” But like it or not, humans are not atomistic profit-maximizers; they’re social animals. Various studies suggest that people do better in social groups that seem more equal (whether or not people actually have equal access to resources).

    • Folks praising Deaton’s arguments above are presumably unaware that he concludes the book with a chapter arguing that foreign aid has typically hurt – rather than helped – the recipients

      Infusions of fungible aid can increase aggregate measures of per-capita wealth, but they undermine all of the institutions and processes necessary for the inhabitants to create and preserve wealth so dramatically that the recipient countries wind up with far less wealth concentrated in far fewer hands than they would have otherwise. Read “The Road to Hell” by Michael Maren for a vivid account of how these processes unfold on the ground.

      • Sorry JayB, I don’t follow the reasoning in your first statement. Why do you assume that someone praising the quoted Deaton arguments are not aware of Deaton’s arguments on foreign aid?

        • The criticisms that Deaton levels at foreign aid – e.g transfers of wealth undermine the processes that actually create wealth and ultimately leave the recipients off worse than they would have been otherwise – can apply equally well to domestic wealth transfers that increase money-income but undermine the habits, behaviors, and norms that typically result in steady employment, a decent income, and a sense of status and well-being.

          Spend some time working directly with the white underclass (no high school diploma, on disability, morbidly obese and strung out on painkillers….hence the drug-seeking in the ER, at age 23) and you can see the effects first hand. Converting at least part of the population on disability to an EIC like regime that incentivizes *any* labor-force participation, or even volunteering – would be a massive improvement over the destructive and enfeebling set of incentives in force at the present.

      • JayB,
        As it happens, I was aware of those views, as they are controversial. I know almost nothing about foreign aid policy issues, and anyway I haven’t gotten to that part of the book.

        Deaton is a complex thinker and I don’t think that you can easily characterize him on a American rightleft political continuum. For example, he thinks some inequalities — like current income inequality — are dangerous to our political community. But he thinks that others — such as the advantage that the rich have gained by stopping smoking — are natural and largely unavoidable outgrowths of progress, so long as they are temporary.

        • Bill:

          -I suspect that Deaton shares many ideological precommittments with folks who would take exception to his conclusions regarding foreign aid. He’s hardly unique in this respect, as this is actually a conclusion that’s been percolating throughout the aid community (William Easterly, Andrew Mwenda (TED talk on aid below), as well as some heterodox economists (Peter Bauer, etc) for quite some time. My wife came to identical conclusions after having served in the Peace Corps in Africa for two years (She’s now opposed to sending anything fungible). My point in bringing up the argument against aid is that one can easily direct the same argument against domestic aid programs that embed incentives that embed destructive incentives.
          http://www.ted.com/talks/andrew_mwenda_takes_a_new_look_at_africa.html

          -As far as income inequality is concerned, there’s a significant amount of evidence that income inequality at the “household” level is a statistical artifact that has resulted from the collapse of the norms, values, and behaviors that used to be keep low-income households intact.

          Take a look at the chart below, and ponder the significance of the values in the “Mean number of earners per household” and “married couple families” line for the lowest and highest quintiles, then ask yourself which policy currently in force today, or plausibly introduced by actual politicians put in place by the electorate is likely to meaningfully change either.

          • JayB,
            Thanks again for your comments. The chart is important and I think that the dissolution of lower SES families is a huge problem. As I think you are suggesting, no ‘actual politician’ has a solution to it. The ‘pro-marriage’ policies of the Bush administration showed no positive effects whatsoever. Obama hasn’t even tried.

            However, we likely disagree on two points. Norms and incentives must have something to do with family instability, but what? For example, why are families in better shape in Blue States than Red States?

            Second, much of the inequality that Deaton is concerned about occurs within the 5th quintile. The 1% have pulled away from the 19% within the top quintile, the 0.1% have pulled away from the 0.9% within the top percentile, etc. The concern here is not ‘justice for the 0.9%’, but rather the concentration of economic and political power in an increasingly tiny oligarchy. That concentration at the top end can’t be an artifact of changing marriage patterns.

            • “Norms and incentives must have something to do with family instability, but what? For example, why are families in better shape in Blue States than Red States?”

              Hypothesis: The political climate does not make families unstable; family instability makes the political climate. People who feel besieged by social decay become nostalgic for some previous golden era, real or imagined, and grow intolerant of deviance. Fundamentalism does not grow out of the past; it is a reaction to the present and future. Thus, there is no contradiction in saying that a region is characterized by ridged moralizing as well as rampant anti-social behavior; the two phenomena feed each other.

    • I’m sure this is related to the work on relative poverty/inequality and outcomes including health, such as by Richard Wilkinson and Kate Pickette in The Spirit Level, which the right tried very hard to pull apart…

      http://en.wikipedia.org/wiki/The_Spirit_Level:_Why_More_Equal_Societies_Almost_Always_Do_Better

    • Inequality per se isn’t a problem if the worst-off group has a decent life and opportunities. When JK Rowling writes bestsellers and becomes a multi-millionaire, no one is harmed.

      Where’s the problem? It’s the power of the wealthy rigging the system. I’d argue that a fair amount of that is the slow undermining of the “habits, behaviors, and norms” that once made social responsibility an obligation of the better off. Mitt Romney’s IRA of $102M should be as blatant a symbol of social rot as the obese 23 year old seeking drugs in the ER.