On Monday, October 12, Princeton Professor Angus Deaton was awarded the Nobel Prize in Economics for his “analysis of consumption, poverty and welfare.” As the Royal Swedish Academy of Sciences stated in its announcement, “to design economic policy that promotes welfare and reduces poverty, we must first understand individual consumption choices. More than anyone else, Angus Deaton has enhanced this understanding.”
In our 2014 interview with Professor Deaton, he discussed welfare, poverty and economic development through a nuanced view of inequality. “Progress is an engine of inequality,” Deaton said, a process that “opens up gaps between people who lead the progress — and therefore benefit from it — and the rest.” With effective public policy, the benefits of that progress eventually spread more widely so that all are better off.
Deaton warned, however, that the darker side of inequality is growing. “What worries me most about income inequality,” he continued, “is that it can turn into political inequality. If the very wealthy use their wealth to influence the political process, then the rest of us suffer. That is the danger.” In other words, the rich getting richer does not, on its own, harm anyone. But if they use that wealth and power to limit others’ access to public services like education and healthcare, that causes problems.
As we head into a presidential race in which Americans seem to be fed up with the growing influence of wealthy donors, lobbyists and other constituents, Deaton’s words are especially timely. “Small groups like lobby groups can find it easier to advance their interests because it is relatively inexpensive for them to organize,” he said. “The costs of the benefits they receive are spread throughout the population.”
In more recent years, Professor Deaton has collaborated with fellow Nobel Prize winner and Princeton Professor Daniel Kahneman on expanding our understanding of economies by shifting attention beyond income and GDP to measures of life satisfaction and well-being.
In our interview with Professor Kahneman last year, he discussed the importance of understanding the different relationships between life satisfaction and income and emotional well-being and income. “As far as life satisfaction is concerned, relative income and social standing are very important,” Kahneman noted. “For emotional well-being, relative income is of much less importance… in other words, there are economic limits to the ‘money buys happiness’ notion.”
The results of Kahneman’s and Deaton’s work have important policy implications. As Kahneman explained, “research has shown that while having a lot of money doesn’t necessarily improve your emotional state, having little money certainly makes you suffer. Being poor, especially in the United States, is emotionally draining and exacerbates negative experiences resulting from problems such as health issues, loneliness, stress or joblessness.” According to Kahneman, public policy needs to focus less on improving life satisfaction and more on reducing misery.
The work of both of these outstanding thinkers raises important questions and complexities about public policy in the inequality debate. Economic development inherently increases social, political and income inequality. For institutional structures to be most effective, they must not only support the widespread sharing of the benefits of that development, but also address the emotional discomfort that arises from growing inequality.
Login in below to access content exclusive to clients of The GailFosler Group.
Not a client yet? For more information on the benefits of becoming a client, please contact us.