In an interview with ProMarket, Nobel Prize-winning economist Angus Deaton outlined what he believes the incoming Biden administration should do: introduce price controls and a public option for health insurance, close tax havens, tackle labor market monopsonies, combat rent-seeking, and consider a value-added tax to fund large public programs.
The economic wrecking ball of Covid-19 has exposed—and in, many ways, deepened—the vast inequalities within the American economy. A study published in October showed that the number of poor people in the US has grown by eight million since May, and with millions more suffering from job losses and business closures, hunger is skyrocketing across the country. And as Senators continue to bicker over a Covid-19 relief bill, an eviction crisis is looming. America’s wealthiest citizens, meanwhile, face a vastly different reality, one in which the pandemic has only served to make them richer.
One area in which these divergent realities have become particularly pronounced is America’s already-dysfunctional health care system. With millions of people losing their health coverage along with their jobs, more and more Americans saddled with enormous health bills are now turning to soliciting donations through GoFundMe to cover their health care costs.
President-elect Joe Biden has vowed to address these challenges when he enters the White House on January 20, but whether he will be effective in doing so, and how he intends to do it, remains to be seen. In a recent interview with ProMarket, Nobel Prize-winning economist Angus Deaton outlined what he believes the Biden administration should do: introduce price controls and a public option for health insurance, get corporations to pay their taxes, tackle labor market monopsonies, combat rent-seeking, raise taxes on the wealthy, and consider a value-added tax to fund large public programs.
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, is the recipient of the 2015 Nobel Prize in Economics and the co-author (with Anne Case) of the recent book Deaths of Despair and the Future of Capitalism. He also leads the IFS Deaton Review, a 5-year review of rising inequalities in the UK launched by the Institute for Fiscal Studies in 2019.
[The following conversation has been edited for length and clarity.]
Q: What are the most pressing economic challenges that the Biden administration should deal with?
What we need is to get health care costs down. One of the things that Anne Case and I learned when we worked on our book Deaths of Despair is how much of the distress among Americans without a four-year college degree was connected to the labor market. Employer-provided health care insurance is incredibly corrosive, especially when it’s levied as a sort of poll tax where it costs the employer and the worker jointly close to the same amount whether a person is operating the elevator or the CEO. For low skilled workers, that burden is not viable. It has helped destroy the supply of high-quality jobs for less-educated Americans who are now shunted into jobs where they have no health insurance. I think we can stop that.
Health is somewhere where I think more competition is not going to work. I don’t think that competitive markets can deliver health care, for the reasons that Kenneth Arrow worked out a long time ago. The (old-style) Chicago argument that government is even worse than the market has a lot going for it, but in the case of health care, it’s just not true. There is no possibility of getting government out of health care. What we have right now is a godawful mess, with endless lobbying and rent-seeking, with things like concentration of hospitals, insurance monopolies, a lot of monopsony—everybody trying to get bigger and to get power against the others and against the public at large. There are five health care lobbyists in Washington for every member of Congress.
There’s something clearly wrong with our corporate system, in which pharmaceutical companies are allowed to kill people for money and be protected by politicians. It’s not so much a monopoly issue or competition issue, but under this rhetorical umbrella of bringing competition to the health care sector, you allow firms to do anything they want, and that doesn’t work at all.
The other thing that seems like common sense to me is to get corporations to actually pay taxes. That giant companies like Amazon pay almost no taxes is something that undermines trust in capitalism. Milton Friedman actually argued in favor of tax havens. He thought they were a good idea precisely because they limited the governments’ ability to collect taxes. One thing that the Trump administration has not done at all and could be done is build international cooperation to close tax havens. That’s something that very clearly is needed, and you can’t do it without international cooperation. The Biden administration would be in a good position to try to do that. The US leading the charge on that would be a real signal that this administration is doing something different, and European countries would respond very positively to that, too, because this is a big problem for them, except for places like Ireland that are living off of it.
The regulation of Big Tech needs to be seriously researched, thought about, and legislated. We’re preventing innovation by giving too much power to the incumbents. That said, I suspect that the biggest issues in Big Tech have to do with control of information and what that’s doing to our democracy.
The lobbying system makes things very hard. I have watched pharma companies use lobbying and campaign finance to stop regulation of the most awful abuses, like closing down parts of the Drug Enforcement Agency that tried to stop distributors from flooding towns with opioids—it’s rent-seeking and deeply harmful. I’m a great believer in the power of competition and capitalism, but friends who still teach tell me that their students despise capitalism, and a minority of them actually despise democracy.
So that’s my wish list. Milton Friedman once said that it’s our job as academics to prepare these politically impossible things for when they become inevitable, and I agree with that.
Q: You said that more competition wouldn’t work in health care. If more competition is not going to work, what can the Biden administration do to bring health costs down?
You might be able to slow some of the consolidation among hospitals, and they could perhaps bring more suits against monopolistic behavior by hospitals.
Price controls, not something that economists recommend in most circumstances, seem to be absolutely essential in health care. Otherwise, you get this moral hazard, mostly on the side of producers, who can set both quantity and price, which is what we’re seeing now: we have this unbelievably expensive health care system that is maintained in place by a lobbying system that makes it incredibly hard for administrations to do much about things like abusive pricing, mergers of hospitals, and monopsony. Those are sort of minor things around the edge, which is what you would do it were a normal industry.
I think there are some solutions out there: I think the public option would help, but I don’t think it’s going to happen because the insurance industry is so well-defended—by both Republicans and Democrats. And pharma is covering itself with vaccine glory in a way that will make us all grateful to them and less willing to take draconian steps against them.
There are lots of other ways that other countries do this, and all of them are better than what we got. You just have to choose and pick between those and find something that might be politically feasible.
Q: You mentioned the “incredibly corrosive effect” of the employer-based health care system. Covid-19 seems to have shown us how dangerous this system is when millions of people lost their jobs and their access to health coverage during a pandemic.
I was hoping that the Covid catastrophe would make this so intolerable that it would break through the protective ranks of the lobbyists in Washington. I’m not so sure anymore. People are not screaming about this. There was a big drop-off in health care usage in the first three months, but it’s pretty much gone back to where it was, so it’s not clear how many people are really being shut out of actual health care. That said, it may be that in the months ahead we’ll see hundreds of thousands of people being saddled with huge bills that they can’t pay.
Q: Other than health care, another focus of your work in recent years has been inequality. What can the next administration do to combat the rising inequality in America?
That’s the big question. Another question is whether it should. One of the things we’re trying to do in the IFS inequality review is to discuss why it is that people are upset or should be upset about inequality. Objective measures of financial inequality seem to be either stagnant or going down, and yet people are getting more and more upset it, which makes you think they’re upset about something else. I think the bailout of the financial sector during the Great Recession made a lot of people very angry. I think people are very angry about large corporations not paying taxes.
The University of Michigan philosopher Elizabeth Anderson writes about inequality in a very insightful way. She talks about relational equality, rather than distributional equality, which ties into ideas of fairness and of procedural equality. In both the UK, as exemplified by Brexit, and in the US, as exemplified by people who voted for Donald Trump, there seems to be a large section of the population that feels that it is not in relational equality with an elite that somehow gets to run the country and from which they’re excluded and which thinks of them as “deplorables.” It could also well be that enormous financial inequality tends to make relational inequality close to impossible.
Q: You mentioned monopsony. Is acting against labor market monopsonies a possible avenue through which the Biden administration could reduce inequality?
Yes. And it’s a good avenue. Monopsony is every bit as illegal as monopoly but is very rarely prosecuted, despite the fact that there’s consensus on both the right and left that this is a bad thing that, like monopoly, redistributes money upwards to a few people unfairly while charging the rest of us a lot. Both intellectually and legislatively, monopsony is an area that I think should become much more active.
Q: How about Biden’s proposal to raise taxes on those who make over $400,000 a year? Would raising taxes on the rich and on corporations be an effective way of reducing inequality?
We should reduce the ability of corporate lobbyists to reduce taxes, which has been part of the Republican and Democratic playbook for a long time. According to the Financial Times, Apple made $47 billion out of Trump’s tax cuts. I don’t think Apple needed that, and it’s very hard for me to believe that the economy benefited from giving Apple $47 billion out of the public purse. And even if you think the social utility of government expenditures is low, it’s got to be higher than giving Apple $47 billion.
That said, I’m not sure that confining these tax increases to the very top is a very fruitful way to go. We need broad tax increases to support broad public programs; a broad-based social contract. Europe has a value-added tax, for example, and the European welfare states are built around that, so you can see the benefits. If we’re going to solve some of these problems with health care, you’re going to need more money in the short run, and a value-added tax might be one way to do that. And funding health care through a value-added tax would remove the poll-tax element of funding health insurance through employment.
Q: Wouldn’t that be regressive, though?
Not if you take into account what you do with it. It’s not regressive in the sense that employer-based health insurance is regressive. The value-added tax is proportional to consumption, so people who spend more pay more. It’s true, it’s more regressive than a highly progressive income tax, but I’m not entirely sure we have that anyway, at least in the very top.
Q: So you are not in favor of raising taxes on the wealthy?
No, I am indeed in favor of raising taxes on the wealthy. I also support a VAT, provided that it is used to provide general public goods, which we’re going to need. But the key is not to tax away ill-gotten gains, but to stop the rent-seeking in the first place. We use cops to go after thieves, not the IRS!
Q: You mentioned declining trust in capitalism. What would you do to increase public trust in the market system, which a majority of Americans now see as rigged?
There’s a lot of things we can do. It’s going to be slow, because trust is not something you build up overnight. Seeing rich people and large corporations pay their taxes is something that’s going to increase trust. We need better regulation. And we have to avoid what happened in the financial crisis, which is we bail out a bunch of very rich people who never get punished for hurting the rest of us.
The lack of control of opioids is another thing that leads to a massive loss of trust. Anne and I are working on a new paper where we’re looking at life expectancy. The US as a whole reached its peak life expectancy at birth in 2014. If you look at who’s responsible for that, it’s people who do not have a bachelor’s degree, many of whom voted for Donald Trump. People with a four-year degree are continuing to see their lifespans increase, while people without a BA reached a peak in about 2012.
These educational differences are enormous, and people really resent them. The economy is increasingly not offering work with dignity and social esteem to those without a BA. These are things that used to go with good working-class jobs and that you don’t get if you’re working in an Amazon warehouse or a call center.
Q: One proposal that several prominent Democrats like Chuck Schumer and Elizabeth Warren have recently voiced support for is canceling student debt. Biden has been supportive of at least partial student debt forgiveness. Are you in favor of that?
I’ve been wrestling with it. It’s massively regressive: you’re taking money away from everybody, including people who don’t have a four-year degree, and you give it to people who do have a BA or have a chance at one. I would be happier if, before we think about that, we set the conditions so that education stops being so expensive and exploitative.
One thing that would help is if state governments were not being pressed by rising Medicaid costs, and could restore affordable education in state universities. I’m reluctant to have a system in which we let educators and state officials keep on raising prices, where students finish with a huge amount of debt, and we just forgive it on a regular basis. That’s a system that doesn’t make any sense, as well as being endlessly redistributive towards college graduates and university staff who are far from being the most deprived. If you are going to make something free, the demand will rise—which is what we want—but you had better get costs under control first. Otherwise, you will finish up hurting more than you help.