Russ Roberts

Deaton on Health, Wealth, and Poverty

EconTalk Episode with Angus Deaton
Hosted by Russ Roberts
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Angus Deaton of Princeton University and author of the Great Escape talks with EconTalk host Russ Roberts about the book--the vast improvements in health and standard of living in recent times. Deaton surveys the improvements in life expectancy and income both in the developed and undeveloped world. Inequality of both health and wealth are discussed as well. The conversation closes with a discussion of foreign aid and what rich nations can do for the poor.

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0:33Intro. [Recording date: November 8, 2013.] Russ: Your book focuses on health and wellbeing as well as the challenges that come with trying to measure those concepts. Let's start with health. How is the world doing? Guest: The world is doing a lot better than it ever has in the past, at least on average. And that's terrific news. Not so good news is that a lot of people got left behind and haven't got there yet. Russ: You suggest that a girl today born, I think, you said in the United States, has a 50-50 chance of reaching 100 years old. Guest: Yeah. That's a guess but it's not an unreasonable guess. One of the things about projecting mortality like that is that it obviously depends if the girl is born today and she gets sick when she's 50, what sort of medical technology, what sort of things we know then which will help her get through that. And of course we don't know that because it's 50 years down the pike. But there's been a lot of progress over the last 50 years, and if that goes on, that's not an unreasonable supposition. Curtis Simon is talking about white middle class, well-heeled girl born in the United States today. Russ: And as a contrast, there are a lot of fascinating statistics and evidence in the book, but one example here is that in 1910, of all the girls born in the United States, 20% died before their 5th birthday. That's one out of five. And only 2 out of every 5000 lived to celebrate their 100th birthday. And that's a measure of how much things have improved since 1910. Guest: That's right. A lot of that in the early part of the 20th century was cleaning up the water supplies--sanitation projects--extending vaccinations; all these things that we sort of take for granted now were not around in 1910. One of the things I like to tell my students and people are very surprised by this is, there were these huge revolution at the beginning of the 20th century in how we thought about germs, for instance; hotels in the United States did not used to change sheets between guests, and we used to think that was pretty much unthinkable today. So we really understand and apply in our everyday lives the germ theory of disease, and that is responsible for a lot of what happened up until mid-century. After that, other drivers like people quitting smoking or much other prevention of cardiovascular disease have been pretty important. Russ: How much of the improvement do you think we can attribute to general material wellbeing, in particular nutrition, just having more to eat when we are hungry? Guest: Right. That's the $64,000 question they used to call it. People have been grappling with that for a long time. I think maybe a third might not be a bad guess. Though most of it would be loaded up early in the century when there was [?] malnutrition around. There's the suggestion that if you don't really get enough to eat when you are very little that may predispose you to all sorts of bad things in later life, and so these effects may still be going on now because after all, people in the 1970s were born 70 years ago, when things were really very different. We don't typically think that nutrition is a problem today. In fact it may be a problem the other way around, which is that people are over-nutritive rather than under-nutritive; and that's been a very controversial topic, too which is the extent to which obesity is going to bring down life expectancy in the future. Russ: It has not done so, so far. We've either overcome its-- Guest: Some of it is less than one might think, yeah. And it's hard to find it unless you look really, really carefully. Russ: Which is contrary to what you commonly hear. It's generally thought that obesity is bad for your health. It's bad for your heart, for who knows what else. But the evidence is a little bit ambiguous? Guest: Well, I think that is true, what you just said that obesity does come with a lot of health risks. What is somewhat surprising is there has been a big increase in obesity and yet mortality rates keep going down. That may be because they are being offset by other things, or it may be that the penalties of obesity are not as large as they once were. In particular, doctors are very much better at prescribing anti-hypertensives than used to be the case, and it may be that one of the routes that obesity killed people was through high blood pressure, and if you are taking daily meds that prevent that from happening, the penalty from obesity may be somewhat less than we used to think it was. Russ: Now, as you point out in the book, and as you just alluded to, a lot of the gains in longevity come from, in the first part of the century came from reducing infant mortality due to better water, better understanding of just the whole medical system, the body, etc., and childbirth. Now most of those gains have been exhausted in the developed world, not so in the rest of the world. So what is the prospect for future improvements? Where are they going to come from? Guest: You mean in the rich countries? Russ: Correct. Guest: Yeah. I think there are obviously going to have to happen among older people, just by the obverse of what you said. Now the young people don't die very much. So they are going to be among the older people. I think, if I had to bet, the war against cancer may actually be showing some results at last. So that's the great hope for the future, that cancer will yield in the next 50 years in the way that cardiovascular disease has yielded over the past 50 years. And I hope we'll still get improvements in cardiovascular disease, too. But the cancer thing comes with a darker side too, which is most of the treatments for cancer are extremely expensive, and we face all sorts of problems about funding that. Russ: Maybe we'll figure out some cheaper methods. Guest: Could be. Yeah. Russ: We could use some incentives to find some cheaper methods. I think it's something that's missing from our current health care system. Guest: Right. Could not agree more.
8:01Russ: Now, you allude to a remarkable chart, a diagram from Jim Oeppen and James Vaupel. They calculated the world's highest life expectancy for women in each year starting in 1840 and evidently that number has risen every year, at a constant rate. So, talk about whether that's a meaningful number. Talk about how that number is calculated and whether it's meaningful. Because a lot of people would argue that, well, we keep living longer but there's a limit. And this suggests maybe there is not. Guest: Maybe there's not. I think that's a position that Jim Vaupel in particular has argued over the years. Not everybody is into that. But he's been continually right in the past; and that chart often comes with various projections that people made in the past, saying, you know, 10 years from now we'll be here; but the line kept on going up. Now, of course, as they tell you on your stock returns--past returns are no guide to future progress. But, you know, there's lots of pressures. People want to live longer. We spend an awful lot of money, the NIH (National Institutes of Health), and presumably that comes because people want to live longer. And every time we conquer one disease there's pressure to get rid of the next one. Which is, a lot of pressure on cancer right now. So, if that goes on happening, maybe that chart will go on forever. I don't know. No one knows. Russ: The magnitude is that every 4 years, it gets extended by a year. Which is pretty impressive. Guest: Isn't it? I like to call it 'creeping up on immortality.' Russ: Yeah. Like Moore's Law, but better. Guest: Better. Russ: So, talk about how that number gets measured. Actually, why don't you back up for a minute and talk about where longevity numbers come from to start with. Because I think many people find it somewhat bewildering that you-- Guest: Where they come from. Russ: Yeah. Guest: Well, I'm not sure how much technical detail people want, but it's a much more complicated number than it first appears. So, the notion that people have is life expectancy is simply when you are born, how many years can you expect to live. And these numbers are published for the United States right now, and it's 78 or whatever it is. But people think that means that for a child born today, that's how long they can expect to live. But that's actually not what it is. And we've already talked about why it can't be that; and the reason of course is we don't know how long someone born today is going to live. Russ: Even on average. Of course we don't know. Guest: Even on average. We have to wait 100 years to find out. Maybe longer than 100 years. So, the way they calculate it is they say, Ok, how long would that child live if they faced today's mortality rates at each age? So, in a world in which health is getting better, it's a very conservative number. In a world in which health is getting worse, of course, as it did in Africa for much of after 1990, then it would be a very optimistic number. But if there is progress continuing, the life expectancy at birth, which is based on today's epidemiological and medical conditions, is likely to be an underestimate of how long someone can be expected to live. Like the girl who might be expected to live to 100 that we talked about earlier. Russ: And we've been talking about girls because women tend to live longer than men. Guest: They do indeed. They have half the mortality rate. Russ: Which raises an interesting question from an egalitarian whether we should be spending more on men's health care problems than women's, forgetting the political aspect, which of course is very important in determining what we spend money on. But it is interesting that women do live longer than men, at current knowledge. Guest: Yep. There's a pretty radical split as to whether people think that's unfair or not. And some people actually do argue that the fact that men live shorter lives than women suggests we are under spending on men's health. A lot of [?] would argue is that we've been over-spending on men's health for many, many years. And that diseases of men got a lot more attention than diseases of women. So, I don't know where I sit on that. It would be better if we really knew why these differences exist. People say, It's biology. But that's just a way of evading the question. Russ: A fancy way of saying, I don't know. Guest: One thing we do know, though, is that the gap between men and women is smaller now than it's been for a very, very long time. And that's because women took up smoking later, and they've been slower to quit. So the men's mortality rates from lung cancer have been falling for some time now. And for women, that's much later. And in some countries, especially in Europe, hasn't really [?] at all.
13:25Russ: Let's switch to the poorer countries. You ask what I think is a different $64,000 question, and it's a set of questions actually. I'm going to be combining different quotes, different parts of the book, but they capture the same set of issues and I want you to respond to them. You ask, "What is it that makes it so dangerous to be born in Ethiopia or Mali or Nepal, and so safe to be born in Iceland or Japan or Singapore? Why should children die in poor countries where they would not die if they had been born in rich countries? What is it that prevents the knowledge that is freely available and effective in the rich world from saving the lives of millions of people who die in the poor world?" So, it's a complicated set of questions. What do you think are some of the possible answers? Guest: Okay. Well, let me tell you the one that most people think it is. They think it's money. And they think that because these countries are poor--because Mali and Ethiopia are really poor and they are very, very poor--there really isn't money to buy the vaccines or to pay for the clinics or the nurses or the regular maternal and child health care that would be required to fix those problems. I actually don't think to me that's convincing. It's certainly true that the health care sectors in most of those countries are pretty lousy, and it's also true that if you have a much better health care sector in those countries it would cost more money. So in that sense, you need more money. The issue, though, is if you put more money into these systems as they exist right now, we don't make things better. And to me the answer to that is really, No. I think the crucial matter for health care in poor countries is really the lack of a state, of a government that's capable of organizing these things. If you like, it's state capacity that seems to be the crucial missing link, not just money. Now, that said, there's been a huge amount of progress. So, the infant mortality rate in India today is lower than the infant mortality in Edinburgh in Scotland in the year that I was born there. Even though India is much poorer than Edinburgh was in 1945. So there's been a lot of progress. But I think the reason you can't really get there is just because of the lack of state capacity of a competent state to regulate the private sector or to provide public-sector health care. Russ: Well, it partially comes back to what we were talking about before, right? This issue of nutrition and just general material wellbeing. What aspects of the state do you think are missing, or the regulatory framework that are, say, present in the United States? We're recording this on the day when the FDA (Food and Drug Administration) has just announced that it's going to be banning trans fats--a decision I'm highly skeptical of, but maybe it's a good idea. I don't think it's going to have a big impact on longevity. But maybe I'm wrong. In fact, it could go the other way. But give me the mechanism by which you think a more effective state would play a role in say prolonging the--reducing infant mortality and extending life in poor countries. Guest: Let me first say that if the FDA does ban transfats, they get banned, right? Russ: It's true. Guest: So, there wouldn't be any trans fats after a while. If the government of India banned trans fats it really wouldn't make any difference because there's no one there to actually make sure that it happens. So, that's the sort of thing I mean by state capacity. If you look at health care in India, most of it [?] the private sector rather than the public sector, so there is private sector health care. If you look at what those guys do, most of them have no medical qualifications whatsoever. A large fraction of them didn't actually graduate from high school. So, you couldn't really do that. Neither you nor I. I presume you are not a medical doctor. Russ: No, I'm the other kind. I'm the kind of doctor that doesn't help people, as some say. Guest: Me, too. But it would be as if I could put a shingle up outside my door saying, Cancer cured here. And then I could rub garlic into people or something. I wouldn't be able to do that for very long in Princeton, New Jersey, but if I did it in India, no one would ever really come after me because there isn't the state capacity there to really make it work. Also, if you look at the clinics, in India there is mass absenteeism. People don't show up for work half the time. And that's true in a lot of poor countries around the world. Once again, there just isn't the capacity, the regulatory mechanism to make that, to stop that happening. Health care is difficult everywhere. We know it's really hard in the United States, too, so one shouldn't underestimate the difficulty of running a good health care system. But it's really hard for governments in poor countries. Russ: Let me ask you, though, about that India example. You are not suggesting that there are a lot of wonderful doctors who are being missed out and avoided by customers who are fooled into thinking that the high school graduate is effective? I assume the real problem in India is that there aren't that many doctors available that people can afford. Guest: Well, there actually--I'm not sure that's a problem. But it certainly is true that the more expensive doctors tend to do better. So there is some work that shows that. But you know, doctors are not very expensive in India. It doesn't cost that much to go to the doctor. That said, there's of course no insurance at all. So, people have to pay out of pocket. The only pseudo-insurance they have is if they get really sick and they go to a hospital; that would be covered by the state.
19:29Russ: Now, a paper recently came out suggesting--this is getting into some of the issues we've been talking about--that the height differences between some populations are not due to nutrition, not due to better prenatal care or other infant medical care, but differences in height across populations are a germ-based problem, and that such a significant portion, for example, of India's population uses outdoor--there's no bathroom. Goes to the bathroom-- Guest: There's no bathroom at all. Russ: It's not outdoor plumbing. It's just they go to the bathroom outside, so that bacteria is in the air and that this is a major factor in the fact that Indians have much lower height on average than other populations you'd expect to match. And this would be a problem that could actually be fixed either by government sanitation or by increases in income that would allow indoor plumbing through private expenditures. Guest: Yep. I agree with that. Dean Spears, who had done that work as a student here and has now started his own research institute in India; and he's giving a tremendous amount of attention for that work, both from the government of India and from the Gates Foundation. So, it's a very good example of terrific economic work that's fed very quickly into policy interest in that, and as evidence, to me, is really quite convincing. I wouldn't say it was all those things; but the argument really is that this is an important part. And also, you have to be a little bit careful about using the word 'nutrition,' because it's too easy to equate nutrition with eating food. And this has to do with nutrition and malnutrition. But malnutrition--the way I think of malnutrition is that you are not as tall as you ought to be, or you are too skinny. And that could be because you got too little food. But it also could be that there are too much of a tax on your body through disease or work or something else. So, food intake is not the only part of what we like to call malnutrition, which is how much your body actually absorbs and is capable of growing and getting bigger. And that distinction is extremely important, because I think there's been much too much focus just on food and getting enough food to people; and not enough on sanitation, on disease, and indeed on work. A lot of kids and a lot of adults in India do backbreaking manual labor. And that eats up a tremendous number of calories. Russ: And the other thing I wanted to point out is that, obviously, we don't intrinsically care about the height of a particular nation. It's a marker or signal of other potential problems. Let's close our health discussion--I'd like to hear your observations on the complexity of health. We've obviously been talking about longevity because it's dramatic and it's usually a 1-0, whether somebody is alive or not. We can measure that pretty well. We can measure height pretty well. But really when we are talking about how healthy we've gotten, there's much more to it than just that we live longer. Guest: Oh, absolutely. It's just some of that is the measurement[?] problem, so health is so multidimensional. You could have things wrong with you that would be crippling for someone doing a different sort of job but not really get in your way at all. If I'm a university professor, for instance, the fact that I don't have a great throwing arm is not really a problem, whereas if I were a baseball player not having a throwing arm would be a really terrible disability. So, it's very, very hard to get a--so one of the reasons we like height is that it's fairly straightforward to measure. You can get it on an individual basis. And it's correlated with things we care about. Exactly as you said--it's a marker for other things that happen. One thing that it may be a marker for, which there has been a lot of work on, is that it may be a marker in populations at least for cognitive development. So that if kids don't get enough to eat or they are running around where people are openly defecating, this may have long term effects, not just on their height but on their brain function. And you really do worry about that. Though I think, you know, given how well India is doing in the world these days, the idea of India with 20 extra IQ points is a little terrifying. Russ: Aw, no; I think it would be all to the good. Both for them and for us. Guest: Yeah. Russ: It's only terrifying to people who think the world economy is a zero-sum game. Guest: Yeah.
24:32Russ: Let's move on to material prosperity. And let's talk about--of course, we have similar challenges, as you point out. And I want to mention, by the way, that the book, again, is called The Great Escape. It's by Angus Deaton, my guest today, and it's really a beautifully written book. I particularly like the fact that you give caveats and asides when appropriate. It's not a rant or a screed of any kind. It's a very educational book, and you learn a lot from reading it. So I really commend you on both the clarity of the style and the methodology of how you approach these very complex questions. Guest: Thank you very much. Russ: Let's move on to this issue of material prosperity. How has the American standard of living changed over the last 100 years and why is that even a meaningful concept? Because it's obviously very hard to measure. Guest: Right. And some people might argue that it's just too hard to measure. If you go back a couple hundred years, the goods that we were consuming were just so different that it's very hard to make real comparisons. How do you compare Toyota with a horse? And more recently, there are all the electronics that we all love so much, none of which was there. So at some level those problems are almost impossible to tackle and we just string together, you know, 3% growth a year, and then say, well over 300 years that's going to be really a lot. But it's clear, however you do this, that there's no question about the direction of change over the very, very long period. We are way better off than our grandparents were, and our grandparents were way better off than their grandparents were. So over the long run there's been just a tremendous amount of progress. Russ: But we do try to measure it. Guest: Yes. Russ: Give me a ballpark. Because the ballpark's I think the best you can do; but a ballpark, I think, is useful. Guest: I've tried to stay away from those multiples over long terms. But you know-- Russ: I thought I caught one. Guest: Did you? Russ: Yeah. I think you said 4-8 or 2-8 or something like that. Two to eight times in the last hundred years. Which I think is very much an underestimate. Guest: Yeah. It could be. One of the things I do worry about, and I don't have a solution to it, is--well let me back off there a little bit. One of the things that worries me about the last 50 years is this effect that the growth rate is steadily falling, decade by decade, even before the Great Recession and the consequences of that. And some people would claim that we're just missing more and more. Maybe you belong to that camp. I'm not sure. Russ: I don't. Guest: But there's a good case that we're not really adequately taking into account many of the new goods that come along and make our lives much better. Things like iPads. Everything beginning with 'i'. Russ: Google, which is free. Guest: Google, the Internet. Yeah. I mean, and unlimited high-quality entertainment is free on the Internet. And you know, the statisticians make some attempt to sort of capture that stuff. But a lot of it, I think, goes uncounted. One of my friends who is a motor-mechanic in his spare time was telling me the other day that one of the huge improvements in motorcars over the last 30 years is they don't rust out any more. And that, you know, if you go back to our fathers' motor cars, after about 10 years, the thing fell apart because it rusted out. And so it doesn't happen any more. It's not clear we are picking up all those things. It's pretty clear we are not picking up all those things. What's not clear is how much difference it would make it we could. And of course then you get into these deep philosophical debates of the sort-of antimaterialists, who say all this stuff isn't any good for us anyway. And those like me who are actually impressed by a lot of this stuff and thinks it does make our lives very much better. Russ: Yeah. I tend to be in that camp. I guess the other question, which I find the real challenge, is, well, okay, suppose we are growing more slowly. Suppose these factors are not very important. I think they are important. I think, especially those of us who are over the age of 50, which would be me, who remember what the 1970s were like and who are told that we haven't made much progress, say the average person hasn't made much progress since 1970 because median income corrected for inflation or median wages, which is a worse measure, even less accurate, but that has done x, y, or z and hasn't gone up very much, or even gone down--I'm very skeptical of that. Having said that, it's not obvious what the implication of any of this is. People who like bigger government will say, well, if we are not growing faster, the government needs to do more. People who like smaller government could easily argue, well the reason we are growing more slowly is that government has gotten bigger. And I don't think we have a very good handle on what the right policy response would be if indeed we are growing more slowly. Guest: I think that's exactly right. I don't think economists are very good at understanding economic growth, in spite of, you know, a century of hard work on the topic. So we know sort of general things, like, innovation and technical change are a really important part of economic growth. But beyond that, we don't seem to have got really very far. And the questions you are asking are quite a long way down the pike, in terms of, you know, do we understand well enough what we ought to do. And you gave a very good example of it's perfectly possible for, you know, not crazy people, people who are perfectly sensible people, to take completely radically different views of why growth is [?] done. And, you know, I don't think economics right now is really capable--I mean, we can rule out some of the sillier explanations, but I don't think we are very good at saying which of those two things is really right. Russ: Yeah. I also like Ed Leamer's perspective on this, where he argues--you look at the path of GDP in the United States over the last 50 years: that's a period of time when there have been high-tech straights, low-tech straights, aggressive monetary policy, not-so-aggressive monetary policy, 5 million other changes in labor force participation by women. So many things. And yet it just goes up every year by pretty much 2% per capita. Pretty steadily. Guest: So, it's falling a bit. Russ: A little bit. Guest: I mean, it's not absolutely steady. Yeah. Russ: That's true. Guest: Well, I do think that's important. Because in fact decline is real, even if you don't believe the numbers that say there's no progress at all in the middle. I think the fact that the cornucopia seems to be drying up a little bit does make politics a lot harder. Russ: I would agree. Guest: Because you are fighting over a pie that is not growing, or not growing as fast as it was.
32:02Russ: So let's talk about inequality, which, measured inequality appears to be rising both in the United States and other countries. Guest: Though not in Latin America, which is historically the home of-- Russ: So, talk about that. Talk about what we know about the trends as measured. And what might be the causes of those changes. Guest: Well, it's clear that it's--what's the word people like to use, 'multifactorial'? Meaning there's a lot of things going on in this. But there is, with the exception of Latin America, and it's not quite clear why that's the case, that there is this worldwide increase in inequality. That, it's very important to realize the United States is very exceptional on this, among rich countries as to the level of inequalities. So, the European countries which were one time fought off as rising inequality--Germany, France, or Japan, not Europe but in the OECD (Organization of Economic Development)--have stopped or not--I'm not sure they have stopped fighting or were ever fighting, but the inequality has begun to rise there too. And that especially seems to be the case at the very top. So, you know, it's obviously got something to do with widespread things. Globalization is obviously part of it. Technical change is clearly part of it. And high technical change seems like a good thing, for the reasons we've been talking about. And also, you would expect when there is major technical change in the economy that some people are going to get very rich as a result of it. And I think to some extent that's fine, at least provided the social rewards and the private rewards are reasonably well aligned with one another. So, one of the examples I give in the book is I don't think anyone regrets that Steve Jobs got rich by giving us all the stuff that came out of Apple. We might not feel the same way about the bankers and Wall Street, who invented unbelievably clever derivatives that made them rich at the expense of the rest of us. I also worry about the health care sector, where a lot of people have very strong incentives to create and sell for very high prices drugs and other devices that in some cases do a tremendous amount of good but in a lot of cases don't. So, these are cases where the social and private incentives are not very well aligned, and bad things begin to happen. So that's sort of what I worry about. Russ: Yeah, I totally agree with you on that. Long may LeBron James make lots of money well, he's healthy; and may the Wall Street bankers lose their implicit subsidy from bailouts and other things. Guest: Under exemption from their going to jail. Russ: Which seems to be a, well, a mistake. Now, let me raise an issue that we've talked about before on this program, that I think you mention in this book very briefly. But to me it's an important issue that's been neglected in the inequality data, which is demographics. Most of the demographic change, most of the inequality data that you see, is over households and over families. And when you do that, and you compare people over time, you are taking different snapshots at different points in time when there are dramatic different demographic changes--there have been in the United States certainly in the last 40 years. You are going to mismeasure. You are going to attribute some of the changes in family structure to the economic system. And I suspect that the changes in the world that are delayed or accelerated--the fact that all nations aren't changing at the same rate in this phenomenon--is because their divorce rate isn't quite, and their family creation rate is different from ours. Just for an example, the number of households in the United States with no earners or one earner has changed dramatically over the last 30 years. Guest: Right. Russ: That's going to dramatically affect--there could be economic reasons for that. Some of them have to do with the effectiveness of the economy. But some of them have to do with social changes that have nothing to do with the economy. Guest: Right. I agree with that. I talk about that a little. I think that demographic change is a very important part of the increase in family inequality. One of the things that people don't I think widely know is that if you were to go back into the 1950s or 1960s, the sort of 'Madmen' era, as it were, the high-earning men were married to highly educated women. But those highly educated women didn't work. So the higher earnings the man had, the less likely was his wife to work in the labor force. Although the last 60 years it's completely reversed, to the point where the high-earning men and women are now married to spouses who are also high-earning men and women. And that has the obvious effect of, in the 1950s that dampened down inequality because the rich people were paired off with people who weren't earning so much or weren't earning anything at all, and now you are pairing, you know, a couple of lawyers who are earning $300 grand each, and that's sort of powering up the top. And the other part which you mentioned is the big increase in, you know, people in one-person families, or one-adult families, who are down at the bottom there. So those changes are just tremendously important. And I think one of the things we've realized: it is very important we shouldn't think of an inequality in terms of a single number. You just have to parse it out in different parts of the income distribution. What's happening here, what's happening there, and so on. It's a very complex picture.
35:07Russ: The other example you give in the book, which is quite I think often missed is that wages, which are often measured pre-tax and pre-transfer--that is, before government's intervention--are going to be affected by, one, they are going to be affected by government programs of various kinds; but also rising health care costs are probably by being paid for probably by in the form of lower wages in work places where the employer is providing an insurance subsidy due to the tax code. And as result measured wages are falling, or would be larger if health care costs weren't rising so much. And so, that's why I always suggest that if we want to talk about inequality, and labor's share, for example, wages unfortunately are not the right thing to look at. It's compensation. Guest: Yes and no. Let me first agree with you and then disagree a little bit. The agreement is that--I think--this is a disaster because people don't understand this is happening. So people don't perceive the cost of health care and they don't understand that it's making their wages lower than they otherwise would. And so they think this health care is coming for free, and so that takes a lot of the pressure off to reform it and get rid of this absurd system we have. So that's the bit I 100% agree. It's clear that--the CBO (Congressional Budget Office) and other people have put together estimates of what the income distribution would look like if you impute those things back in again. So, people are getting a lot of health care through the government, through Medicare and Medicaid. And if you add those back in, valued at something or other, then there's been less increase in inequality, less decline in real wages, if you like the compensation basis where you add the benefits back in. The problem, though, you could imagine is if we get to a state where 50% of the economy is being sucked up by health care then you can't-- Russ: [?] good news. Guest: Right. And also you can't eat the health care for breakfast; you can't feed[?] your kids on it. And so it may be worth something but at some point it becomes not worth very much if it's bankrupting you at the same time. And you can't really do what a lot of economists do which is add the value of that back on and say, okay, you are all right because you are getting this huge amount of medical care. Okaaay, but I don't want that huge amount of medical care; I'd much rather have something else. So, that's sort of a problem, I think, in the way people do these calculations. Russ: There's another measurement issue, which is a subtle one, but I find it striking, which is if you are going to look at wages as a measure of material wellbeing and leave out that health care part, you are often going to be correcting for inflation, which you have to do if you make comparisons over time, using a measure that includes health care costs. So as you point out, you can't eat your health care. But if you want to find out what you are able to eat, you shouldn't be using a measure that uses a disproportionate share of something--health care--that's in the other part of compensation. Guest: Right.
41:32Russ: Now, I wanted to ask you about poverty. But we don't have time. We have so many other things that I wanted to talk about. But I want to recommend the discussion of poverty rates and the measurement of poverty in the book because it's very thoughtful and very interesting. But I want to move on. I want to go back a little bit in terms of the history of the debate over prosperity. You talk about the worries people used to have over population. What were those worries and why have they been somewhat muted? Guest: Well, I think they've been muted by the facts, which is a real disappointment[?] on people eventually, just it takes a while to pan out. If you go back to the 1960s and so on, there was an enormous population explosion which was clearly a one-time event because antibiotics, the germ-theory of disease, had come to what was then called the Third World. That meant a lot of children who otherwise would have died, survived. And so you got these enormous increases in population. We talked earlier about life expectancy going up one year every four. In those years, in some countries, life expectancy went up more than a decade per decade. It was growing faster than time was passing. So, you just got enormous increases in population and decreases in infant and child mortality rates. So these kids survive and there was just an enormous number of people there. Of course this was not permanent. I mean, it was a long-lived but not permanent situation, because eventually mothers and fathers realized they didn't have to have as many kids to have as many surviving kids, and so they cut back on their fertility. But of course it took a long time for that to work its way through the system. So, that rate of growth of population has greatly slowed. The standard worry I think was the very simplistic one, which is what I call the 'lump fallacy'--not just I who call it that--which is that there is a fixed lump of stuff and if you have more people sharing it there is going to be less stuff for each; and if you have more and more people, eventually there really isn't enough to go around and we all starve to death or some horrible consequence. Of course, as many economists, especially at the time, these people are born not just with mouths but with hands and brains. And in the famous debate, the economist Julian Simon argued that more people was actually good for us on a per capita basis because of all the ideas and all the help that came with them. So it's more like when a whole bunch of extra people come to dinner, you say, oh my God, what are they going to eat; but they brought a lot of food with them or they know how to grow things in the yard and in the end, everybody's better off. Russ: They brought a stove. It is what's happening, and yet I think there still is a great deal of anxiety--part of it for environmental reasons, which are not the same issues; they are potentially a different set of issues; maybe the same. Julian Simon I think would say it is the same. But India, China, are much more populous and magically have a higher standard of living. And I think most people find that bewildering because it does go against their arithmetic preconceptions of x divided by y; if y gets bigger, that should get smaller. But it doesn't. Because x isn't constant when y gets bigger. And that's a tribute I think to the economic way of thinking. My 15-year-old son asked me last night if I thought immigration was bad for America because it reduced the number of jobs, and I said: Do you think the fact that we have a lot more people than 50 years ago is bad for America? Because we have so many more people there must be fewer jobs for everyone. And of course that's not true. And it's just very hard for people to think in those terms. It just does not come naturally. Guest: I think that's right. I think there's also that these are people not like us, is sort of the underside of this debate, too. Russ: Let's talk about happiness for a minute. We had Justin Wolfers and Betsey Stevenson on talking about this issue in a previous episode. The question is does wealth, the standard of living, lead to more happiness? And Easterlin is on one side of this debate; Wolfers and Stevenson on another. Where do you stand on it and why? Guest: I don't think the debate is completely closed, but I think I am more convinced by the Wolfers and Stevenson work than I am by the Easterlin work. Easterlin relies fairly heavily on what happened in China. I don't think the Chinese data really support those inferences. So, we could get pretty technical on this. Russ: A little technical. Guest: I think this debate is still pretty much open. I think Betsey and Justin made a very, very good case, for the opposition, as it were. I think Easterlin has enormous appeal to many, especially the anti-materialists in the world, who worry about the environment, who think consuming more is not good for us. So that's not going to go away any time soon. And it is a little bit puzzling. I think this is still a frontier issue in research and I think we are going to learn a lot more. I think Gallup deserves a whole lot of credit for this, too, because they've been collecting these terrific data all over the world and they've been doing it since late 2005, so given another 10 years of that we'll know a lot of the answers to these questions. Russ: I don't know. I'm a little bit skeptical, and I would raise the issue I've raised before about growth: If we found out that--and I'm pretty confident by the way that the anti-materialists are right in the sense that whoever has the most toys when they die doesn't win. I think they are on to something there. I think we all have some awareness that money doesn't "make us happy." We also understand that happiness is a very rich concept, and you do some nice work in the book distinguishing between happiness, satisfaction, meaning, etc. But if we really discovered that all of this rat-race is a mistake, that you and I who have a ridiculously high standard of living by historical standards are no happier than someone living in the bush in Australia, then what? Guest: Well, we know that's not true. What you just said is not true. Because if you look at the Gallup data, people in Togo think their lives are terrible; and people in Denmark think their lives are terrific. And that part of it is certainly--that's only one concept of happiness, of course. We do know there is some sense in which people think their lives are much better when they are better off, at least across countries. What we don't really know is: What did the Danes think 100 years ago, or 50 years ago? Because the Togolese could just be unhappy because they have television and they see what a nice time the Danes are having; whereas 100 years ago our ancestors didn't know that they didn't have iPads because they didn't know what iPads were. Russ: Or flush toilets. Guest: So that sort of issue is not resolved. Russ: Yeah. Nobody in 1900 was miserable because they didn't have a flush toilet, although most of them didn't. Or maybe none of them did. Guest: I think some of them [?] Russ: It was right around then. Guest: Yeah.
49:34Russ: Let's close with the issue you close with in the book, which is foreign aid. So, one issue, as you point out, it's obvious that much of the reduction in inequality is due to two countries, India and China, growing very rapidly, and have brought millions and millions of people out of the worst situation into a better situation. There are still a billion or so people who live in appalling and very depressing situations. We'd like to help them; we have this idea that we would, anyway. And you come down very pessimistically at the end of the book at our ability to do so and our ability to use foreign aid to help those people. Why do you come to that conclusion and what do we know about what might possibly be better? Guest: Okay. Well, I'm not quite as pessimistic as you summarized it there, because I think there are a lot of things we can do. They just are not usually classified as foreign aid. So for instance we have cotton subsidies in the United States which are bankrupting farmers in Africa. And we sell arms to poor people around the world. I mean, what do we think we are doing if we are really trying to help them by selling them guns? Russ: I think the answer to that is pretty obvious. We're not trying to help them. But go ahead. Guest: We're not trying to help them. But I suspect the whole aid enterprise is a little bit like that--it's not being run for them. It's being run for us, in which case we should sort of stop pretending. But there are countries like Britain who don't--who make their aid very explicitly humanitarian. Anyway, I think we could also have a new part of the NIH which specializes in research into diseases that affect poor people around the world. So, these are things that we really could spend money and which would make the lives of poor people around the world much better. The sort of aid I'm against is the aid in poor country--meaning you give money, large, large sums of money, to the governments of poor countries. So you've got these African countries where for the last 30 years or so, all of the government revenue has come from donors outside the country. And to me it just seems transparently obvious that you can't have a proper country that way. People need some sort of contract between the government and those who are governed, in which one set of people pay taxes and the government gives people back something in exchange, including things like health care and education and all the other things that we've talked about. And if the government is getting all of its money from U.S. Aid or DFID (Department for International Development) or AusAid (Australian Agency for International Development) or wherever it comes from, then the government has no incentive to do any of those things at all. So effectively it's using its own population as hostages to extract money from rich countries. And it's not acting in the interest of its population at all. So that's what I really worry about. If I could do one thing, what I'd do is say: No country in the world should get more than 20% of government revenue from outside sources. I don't know how you'd enforce that. But that's the sort of thing I think would be really helpful. Russ: So, the people on the other side of this debate--Jeffrey Sachs comes to mind; maybe Paul Collier. They have a different viewpoint. What would they say in response to you? You are suggesting--as you said, it seems pretty obvious that if you give despots and tyrants lots of money, it's going to make them richer and sustain their power rather than help the people you are trying to help. What do they have in mind, do you know? Guest: I think they see the whole thing as sort of an engineering problem in which you need so many doses of vaccine to vaccinate the kids, without taking into account how that might actually work out in practice. There's a wonderful new book by Nina Munk called The Idealist, who shadowed Jeff Sachs for 5 or 6 years and lived in some of the Millennium Development villages. And that book is like reading Joseph Conrad--it's a descent into insanity. These things just went very, very badly wrong. And I just don't think that technical approach works. And I think we've known that for a really long time. I like to give the example of Robert S. McNamara--who led the whiz kids at the Ford Motor Co. and discovered you could do marvellous technical solutions to a lot of technical problems, like building motor cars, but it doesn't work so well in Vietnam. And it didn't work so well in the World Bank, either. Development is a political problem. It's not a financial or an engineering problem. And I think that's the big mistake that gets made there. Russ: And I think some people have responded--not Sachs, others would respond: that's just too defeatist; we can't fix their politics overnight. I would say we may not have any successful way of fixing it; but let's leave that alone. They'd say, Well, we can't fix that, so what are we going to do--nothing? You suggest some things we could do--the NIH working on Third World diseases. I don't think that's going to happen for a bunch of reasons. But people do want to feel like they are doing something. What might they do--other than lobbying their government for unrealistic policies that aren't going to happen anyway? Guest: I disagree with you that those policies aren't going to happen. If those good people who are doing those, screaming and yelling in Washington, and creating a lobby against those things or for those things, I think there's a reasonably good chance that they would happen. I think right now what they are doing, with the best of possible intentions, is actually hurting people in poor countries. It's a really bad thing to do. So that's what I try to persuade my students here to do. And I debate this here with Peter Singer, for example, who is very much on the other side. But I think these arguments, you read a lot of the aid agency literature, the people who are really close to the ground[?] in those countries, and this question of undermining governments is something they are very familiar with. And they may be a little more optimistic about how to handle it. I've been very surprised and very pleased at how people really close to the ground have been to the arguments in the book. Russ: You give a number, which I think I've heard before--it's a rough estimate but it's in the ballpark, which is: Over the last 50 years we've given about $5 trillion--excuse me--the developed world has transferred to the less developed world $5 trillion and the impact is approximately zero. As a rough guess. It's not accurate, but it's in the ballpark: It's about 0. The two nations that have had wild success are not part of the aid nexus generally. They get a trivial amount. Doesn't that carry some weight [?] Guest: It does with me. When I was in Britain talking about the book one of the things that came up over and over again and has been a big issue in Britain is: Why are we giving aid to a country that has a space program? Meaning India. Russ: Do we give much aid to India? Well, the amounts from a British point of view are not trivial. The amounts per capita by India are trivial. And in fact I think British aid to India is stopping--not because the Brits are stopping it but because the Indians don't care to take any more of it. So maybe the space program and the [?] need for aid are sort of coming together. But I do find quite convincing that argument. And you look at the other end--there are all these little island nations all around the world that get huge amounts of aid per capita, and there's not much happening there. Russ: I guess the response is: we have to do it better. Guest: Well, that's one response. And I'm semi-sympathetic to that. You haven't talked about what I think most people think would be the great aid success, which is that there are many people alive on antiretroviral therapy today who would otherwise be dead, because they are HIV-positive. And those lives have been saved, and much of that has come from PEPFAR (President's Emergency Plan for AIDS Relief), the global fund, and [?] And that's clear, where money going into the country has saved a lot of lives and that has to count for a lot. So my counterargument is not that that's not good; I don't have any argument that says it's not good. It's just that the undermining associated with that goes on. We are trying to design and run other countries' health care systems from outside the country, and in the end that's neither sustainable nor desirable. Russ: We seem to be struggling to run our own. It reminds me of when a reporter once asked me what we should be doing to help people in Africa get better education, and I suggested that since we didn't seem to be good at getting Americans better education, we should maybe just focus on that. Not so much because it isn't important to help Africans get better education. We just don't know enough to be helpful. Guest: Right. I think that's right.

COMMENTS (13 to date)
Eric Falkenstein writes:

First, I want to say I really like these podcasts, and find them interesting. I don't spend a lot of timing writing notes sending that message, and don't want you to think I'm justt a hater, I just hate uninformative flattery in comments. So, don't get me wrong, I'm a fan of Russ.

That said, per the Easterlin/Wolfers debate, it's interesting that he didn't get much into evidence, and instead just talked about how views fit into a meta-narrative.

He briefly mentions China as being a big part of Easterlin's data, but he should mention USA as well, so Wolfers' and their supporters concede the economically largest and most populated countries as exceptions to the rule. Those are big exceptions.

But emphasizing the importance of the meta-narrative and ignoring the issues of the debate implies they (the Wolfers side) are basically playing off the narrative 'because that's what are opponents are doing', which is what Freud called 'projection' and what Jonathan Haidt calls self-righteous confabulation.

Finally, they compare Togo to Denmark to make their case, which clearly isn't what the Easterlin side would say is relevant to their case (everyone agrees that such countries benefit from growth).

Sri Hari writes:

Russ,
Another great podcast !
There was lot of discussion on the functioning of health sector of India. It was being emphasised that the untrained health staff were dishing out bad service. I beg to differ.
I would like to bring to the notice of health statistics of south Indian State of Kerala. Its education, literacy and infant mortality numbers are as good as Europe or US. The reason is due to better education which led to better awareness of health issues and gender equality. This in turn led to better political awareness and understanding of rights. The government health infrastructure was better utilised and serviced due to all the above reasons. The health system did not rot like in other parts of India. So, perhaps education and awareness of rights are core to better health combined with appropriate government support.
On the issue of uneducated health staff was the author referring to Auyurvedic or Homeopathic doctors? Alternate medicine practitioners do provide a valuable non-critical care, we should not pooh-pooh it.

SaveyourSelf writes:

The guest this week, Angus Deaton, said "I think the crucial matter for health care in poor countries is really the lack of a state, of a government that's capable of organizing these things...I think the reason you can't really get there is just because of the lack of...a competent state to regulate the private sector or to provide public-sector health care.

Mr. Deaton's causal story is remarkably bad--astonishingly so from a man who seemed so well grounded during every other part of the interview. Government is security services and, by extension, last line judicial services. Healthcare has nothing to do with security or Justice.

I work in healthcare in the USA. Every day that goes by the American government infiltrates the healthcare system to a greater and greater degree. Mr. Deaton's causal-assumption suggests this would improve American healthcare. From my first hand perspective I can assure you that the system is not improved by this change. Just the opposite. It is made more rigid, inflexible, expensive, slow, burdensome, and irrational.

SaveyourSelf writes:

[Continuing from my previous post]

Consider the following chain of reasoning:

Poor countries are poor because they lack trade.
Healthcare is a trade.
Good governments create and maintain the environmental assumptions necessary for trade to flourish [well-informed; competitive; voluntary; Justice].
Poor countries--by definition--have ineffective government.
Poor countries--again by definition--lack the assumptions necessary for trade to flourish.
Therefore, poor countries have ineffective healthcare.

So Mr. Deaton's correlation is correct, poor countries do have lousy healthcare AND ineffective governments. He assumes that empowering a government to run the healthcare system will improve the healthcare system in the poor country. His aspirations are far too limited. The general truth of Economics is that a government that maintains the assumptions necessary for ALL TRADE to thrive will result in improved everything...including healthcare. But asking a government to be good at a specific thing--like healthcare--means that it is no longer--by definition--an effective government.

Michael writes:

SaveYourSelf wrote:

"I work in healthcare in the USA. Every day that goes by the American government infiltrates the healthcare system to a greater and greater degree. Mr. Deaton's causal-assumption suggests this would improve American healthcare. From my first hand perspective I can assure you that the system is not improved by this change. Just the opposite. It is made more rigid, inflexible, expensive, slow, burdensome, and irrational. "

I think one can agree with Deaton's point without necessarily disagreeing with yours. If our government is too involved in health care, that doesn't mean that no government involvement whatsoever is optimal.

SaveyourSelf writes:

Michael wrote, “If our government is too involved in health care, that doesn't mean that no government involvement whatsoever is optimal.”

In fact it does. Proposing government involvement in specific industries to any degree is identical to proposing a monopoly solution to a problem in a competitive industry. Although some Monopolies are worse than others—usually determined by the amount of competition remaining in the market—there is no monopoly that produces better outcomes than voluntary-competitive-informed-just markets. So if “optimal” is our determinant of success, then any government solution is an automatic fail. This, of course, is not an argument for absence of government but simply a statement of fact regarding the predictable and actual outcomes of monopoly solutions compared to market solutions.

John Berg writes:

[Comment removed for being irrelevant and ad hominem. --Econlib Ed.]

James Newlin writes:

[Comment removed for irrelevance. --Econlib Ed.]

bogwood writes:

Can I do ad hominem by proxy? (A reference to Julian Simon is like a red cape). Simon was innumerate. See Al Barlett's video for details but following some of Simon's assumptions we would have more people on earth than there are atoms in the universe.

Those recognizing limits to growth are "scientists" or "ecologists" not "anti-materialists."

Jason Haines writes:

As always, another interesting podcast.

You briefly touched on foreign aid. It certainly seems that aid to corrupt governments does not have a beneficial effect. Funding research into medical issues that affect the third world seems a good approach - The Gates Foundation seems to agree.

I'm interested in the effectiveness of 'bottom up' approaches of organisations like GiveDirectly that are doing unilateral cash transfer in Kenya and soon, Uganda. This would be a great podcast topic.

Cowboy Prof writes:

Generally a good podcast that made me think, and Deaton would be a good guest to have back on to follow up with things you didn't have time for.

However, I was a bit knocked off my heals when I heard Deaton say, "How do you compare Toyota with a horse?" (I actually was walking the dog at the time and had to pause in stunned silence since this is one of my pet peeves.)

Allow me to compare:

A horse has one horsepower.
A Toyota Tundra SR5 Standard has 310 horsepower, which is 310 times the horsepower as a horse.

A horse can typically carry a 250-lb rider for about 20 miles before needing significant rest.
A Tundra extended cab can carry 5 250-lb people for about 575 miles on one tank of gas, the distance between Duvall (WA) and Anaconda (MT).

A Tundra has hydraulic rack-and-pinion steering and power assisted disc brakes.
The horse will decide where it wants to go and when it wants to stop (although it will occasionally let you think that you are in charge).

A Tundra will last you 20+ years of 20K miles per year if well cared for.
A horse will also last for about 20 years if well cared for, although it won't be able to go as far in its early and later years. But you will have a friend for eternity.

John Thurow writes:

"But you know, doctors are not very expensive in India. It doesn't cost that much to go to the doctor. That said, there's of course no insurance at all. So, people have to pay out of pocket. "

Correlation and causation - no insurance, pay out of pocket = low cost...

JRo writes:

Thank you, gentlemen, for another insightful discussion.

Regarding political leaders holding their underdeveloped populations hostage in order to get money from rich countries, I just heard a BBC GlobalNews story about China planning to build railroads in East Africa. A Kenyan, I believe, was recorded declaring,

“Over fifty years, Kenya and the neighboring countries have never built one kilometer of rail since the colonial governments left this region.”

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