Angus Deaton: Inequality and Good Intentions

Copyright, The New York Times Company

The recent book by today's Nobel Prize winner -- congratulations to him!! -- says good intentions are a barrier to equality and to progress among the world’s poor.

For most of human history, family incomes were barely enough to survive and life was short. But in “The Great Escape: Health, Wealth and the Origins of Inequality,” Professor Angus Deaton of Princeton writes that while economic progress allowed much of the world to escape poverty, “escapes leave people behind, and luck favors some and not others; it makes opportunities, but not everyone is equally equipped or determined to seize them.”

Professor Deaton also deals with the events after the great escape: that is, how the progress of some families and nations affects the prospects for progress of those initially left behind.

Imitation is one force and works in the direction of progress for all. The poor can look to the progress of others to embark on their own escape. Professor Deaton shows how the imitation of new methods has occurred, for example, with medical technologies that have allowed the residents of a number of poor nations to live longer than Americans did just a hundred years ago, and sometimes longer than Americans live today.

But new methods can harm those with vested interests in the old ones, and the vested interests can use their political power to block competition and progress. Professor Deaton explains how “the emperors of China, worried about threats to their power from merchants, banned oceangoing voyages in 1430,” adding, “Similarly, Francis I, emperor of Austria, banned railways because of their potential to bring about revolution and threaten his power.”

Progress begets inequality, and the resulting inequality can either encourage more progress or impede it, or both. Professor Deaton suggests that inequality in the modern United States has had both of these effects.

He points to a third influence of progress and inequality on outcomes for those left behind: good intentions. As part of the world becomes rich and no longer worries about day-to-day survival, it can look outward. Many residents of developed countries have a “need to help” those less fortunate.

But the attempts to help often – perhaps even usually – go awry.

As medical progress began to diffuse around the world, people stopped dying so young, and that made for an increase in population, especially in less-developed countries. Developed countries thought they would help poor nations by encouraging population control, based on the dubious proposition that more people means more poverty.

“What the world’s poor – the people who were actually having all these babies – thought about all this was not given much consideration,” Professor Deaton says, citing China’s continuing one-child policy as an example. He adds: “The misdiagnosis of the population explosion by the vast majority of social scientists and policy makers, and the grave harm that the resultant mistaken policy did to many millions, were among the most serious intellectual and ethical failures of a century in which there were many.”

Other types of foreign aid to developing nations have also been a disaster, he says, with “pictures of starving children being used to raise funds that were used in part to prolong war, or to N.G.O.-funded camps being used as bases to train militias bent on genocide.”

Professor Deaton’s book is primarily international in focus, and he insists that help for the American poor is different and more effective than aiding the world’s poor. Nevertheless, American readers may be left wondering how much aid to American poor, is, as Professor Deaton says, “more about satisfying our own need to help, and less about improving the lot of the poor.”

Amazon began shipping my new book today!

It is full of examples. The effects of Obamacare on the workweek are shown with diagrams rather than equations, which now part of an optional appendix.

Spending on health care has grown faster than the economy itself, even while the share of the population without health insurance was increasing. The Affordable Care Act (a.k.a., Obamacare) intends to reverse these trends, but in doing so has economic side effects. Businesses are complaining about the ACA's new tax and regulatory burdens, whereas supporters say that it is a long-overdue "shot in the arm" that will promote entrepreneurship and a "more rapid economic recovery."

Positive and negative tax effects of the ACA are carefully documented. The book offers a comprehensive market analysis of the law that arrives at conclusions as to effects on work hours, productivity, and national income. It shows what the ACA means for economic performance in the years ahead, and explains why forecasters have yet to acknowledge many of the economic forces that have been put in motion.

The book contains numerous facts and economic insights that have been unnoticed by both supporters and opponents. Anyone interested in economic performance over the next several years has to understand the contents of the Affordable Care Act from a labor market perspective and this book is so far the only comprehensive and user-friendly introduction to the topic.

Employment per capita drops 3 out of the last 4 months

through September. Below uses the same methodology I displayed in the past in order to include self-employed workers too. The self-employed component is volatile ... it would be nice to have some kind of error bands on this series ... but that is still work in progress.

In-kind Taxation in the News

Russia is now drafting soldiers.  Below is a new economic discussion of in-kind taxes, of which the military draft is a good example.

In-Kind Taxes, Behavior, and Comparative Advantage

In-kind taxes – obligations of citizens owed in goods or services, rather than money – are some of the most important taxes in human history, and even in recent times are used in significant ways.  For example, according to The Military Balance, 59 percent of countries in the world in 1995 obtained military manpower by conscription: forcing citizens into military service.  More than six dozen countries, including the United States, have constitutional provisions for taking private land using the power of eminent domain. Eminent domain is also used to redistribute intellectual property, and may be employed more frequently in the future as that type of property becomes more valuable.  In-kind “public service” labor payments to local governments can be a major part of the tax burden faced by the poor in developing countries.  Another example: two dozen countries compel their citizens to participate in civic elections. 

Although public finance deals extensively with the question of cash versus in-kind transfers, in-kind taxes are almost completely neglected.  For example, neither of the public finance textbooks by Stiglitz and Rosen mentions in-kind taxes in general, or labor conscription in particular.  The purpose of this paper is to examine the efficiency properties of in-kind taxation (hereafter, IKT), with special emphasis on avoidance behaviors.

Behaviors for avoiding the Vietnam War draft are still famous today.  They include entry into protected occupations, obtaining political favors, moving to Canada, or embellishing medical conditions.  Quantitative work on avoidance behaviors has shown that the Vietnam War draft induced a significant increase in college enrollments (Baskir and Strauss 1978).  Desertion by conscripts can be rampant, and draftees are less likely than volunteers to reenlist when their required tour is finished.   Leon Friedman (1969, pp. 1545-6) describes evasion of the Union Army’s draft, “enrolling officers … were frequently lied to, avoided, and even physically attacked… new towns sprang up just across the northern borders in Canada … some men maimed themselves in order to fail the physical requirements for the army.”  Landowners are known to modify their property in order to avoid being targeted for condemnation or other limits on land rights.  Stroup (1997, p. 57) describes how landowners have reacted to the Endangered Species Act by “managing their land … in a way that almost assures that it will not be suitable for listed species.” 

Avoidance activities like these serve to restrict the quality and quantity of supply of resources to be taken, yet the small literature on the economics of eminent domain and military conscription typically takes the supply as given, emphasizing instead the purported tendency of in-kind taxation to distort comparative advantage (i.e., that the public project fails to be supplied by those most suited to do it) while it economizes on treasury revenue.   This paper treats IKT as a price-regulation phenomenon – the public recruiter is a buyer who has coercive power over its suppliers – and explicitly models the social costs, and private benefits, of suppliers’ avoidance behaviors.

In-kind taxation has been implemented in a variety of ways. Supplier compensation is one variable. Another is the granting of an option (if any) for suppliers to substitute a monetary tax payment for their obligation to supply under the IKT.  The price-control framework readily addresses various implementation options, offers new conclusions, and changes some old ones.  Under some conditions, “fairer” IKTs – those that do not accept monetary payments and thereby widely distribute the IKT obligation – are more efficient than less fair IKTs.  These results may help explain where and when various implementation options are exercised.

The IKT implementation options present a tradeoff between avoidance costs and opportunity costs.  IKT’s are capable of realizing many of the gains from comparative advantage, even while controlling prices.  This implication appears to match the reality in which the resources obtained through IKT are far from random.  Even among men born 1950-53 whose military draft eligibility was chosen by a random draft lottery, military enlistment was by no means random.  Angrist (1990, p. 315) refers to “the fact that armed forces selection criteria were not random ...” and reports that more than three-quarters of draft-eligible men in these cohorts did not serve in the military.   At the same time, roughly ten percent of those not draft eligible did serve. Although IKTs distort comparative advantage to some degree,  the price control framework suggests that comparative advantage distortions might enhance efficiency because they can alleviate incentives to avoid the tax.

Previous work on conscription has debated the nature of the relationship between monetary taxes and in-kind taxes.  Lee and McKenzie (1992), Ross (1994), and Warner and Asch (1996) claim that economizing on treasury revenue, as in-kind taxation is supposed to do, is socially valuable because of the deadweight costs of collecting monetary taxes.  However, these papers do not model the social costs of effort to avoid IKTs; real-world IKTs interact with income taxes, and the former may generate more deadweight costs because they are more concentrated.  Birchenall and Koch (2014) use a mechanism-design framework to look at the two types of taxes simultaneously, and conclude that IKTs may reduce overall efficiency by raising the marginal deadweight cost of income taxes.  This paper does not contribute to the money-versus-IKT debate, and just assumes that in-kind taxation reacts not only to the efficiency considerations noted above, but also to social or political preferences to regulate prices paid to suppliers.  

Section II begins with this paper’s conceptual point of departure: a model of avoidance behavior as a Tullock-style rent-seeking contest.  A simple, but critical, result is that the social  costs of avoidance are convex in the amount of avoidance.  Section III lays out the other dimensions of IKT policies, relates them to empirical observations of military recruitment schemes, and interprets them in an equilibrium context.  Section IV overturns some of the conclusions from the literature.  Section V looks at policy options for the mix of social costs, and suggests that comparative advantage distortions may not be the primary social cost of IKTs.  Section V concludes with some ideas of why the incidence and design of IKT tax policies vary over time, by country, and across policy domains.