Why did it go so wrong in the US? Is the decline the economists’ fault?

An important book by Nobel Prize winner Angus Deaton more than suggests that the decay in the United States is due to a rightward turn among professional economists.

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You should listen when an old dog does. Angus Deaton barks in unison. He has written the important book “Economics in America” ​​(Princeton University Press, 2023). It is for all of us who both love and hate America and economists. Why did things go so wrong in the land of inequality? Is the decline the economists’ fault?

The answers Deaton gives are characterized by his background. He came to Princeton University in the United States as a young immigrant from Scotland. The book reproduces the immigrant’s wonder at developments in subjects, politics and American capitalism. With an emphasis on the role of economists, he addresses the major problems in the American economy. And also the socio-political despair linked to racial discrimination and what he calls deaths from despair.

The last expression (“death of despair”) originates from his and Anne Case’s study from 2015. This shows how people’s life expectancy in the USA has increased from 50 to almost 80 years during a hundred-year period.

Since the 1990s, however, mortality rates have risen sharply among middle-aged, non-Hispanic whites in the United States, especially those without a college education. According to Case and Deaton, the reason is that working-class people aged 45 to 54 drink themselves to death and overdose on opioids and other drugs – and ultimately their own lives.

In the book, Deaton takes up some of this again, which also presenter and author Thomas Seltzer has covered so well both for NRK and in book form. Deaton points to how lack of jobs, family decay and other social stressors precipitated fatal despair in a manner reminiscent of the fate of black Americans in inner-city areas in the 1970s and 1980s.

Minimum wage and employment

The first chapter of “Economics in America” ​​goes straight into the eternal debate about the minimum wage and employment. This has ridden American economic thinking for half a century.

The empirical work of the economists David Card and Alan Krueger from the early 1990s showed that an increase in the minimum wage in fast food restaurants in New Jersey did not lead to reduced employment, but increased employment – ​​compared to the neighboring state of Pennsylvania without a minimum wage increase.

The explanation is that increased minimum wages reduced companies’ power in the labor market. They could no longer increase profits by holding down the demand for labor in order to achieve an artificially low wage – a mechanism well known all the way back to the contributions of the economist Joan Robinson in the 1930s.

Card and Krueger were colleagues of Deaton at Princeton. Their publications created a furore. There was no limit to the vile insinuations of conservative commentators and economists. How could the best scientific journals publish such a piece of crap? The authors did not even understand “the fundamental laws of the market”, it said, and they came to conclusions that “contrary to the very theory of gravity”.

The hate reactions the two economists received were ideologically motivated, according to Deaton. If they were both right, it must also be right “to redistribute income from the rich to the poor, from capital to labour, and from those with great power to those with much less”. In the eyes of these critics, Card and Kruerger’s work was therefore not only wrong and bad science, but simply a betrayal.

Critical perspective

Deaton here takes up again a criticism which, in his words, states that the economics subject’s “conventional insight and textbook material is more in favor of capital and against labour, that it takes efficiency much more seriously than equality, that power differences are ignored, and that the economics subject’s acceptance of the conditions must bear some of the responsibility for the workers’ reduced standard of living’.

In a nuanced way, this critical perspective repeats itself in all the chapters of the book. Among other things, it argues why the American healthcare system does not work, and why inequality in income, wealth and power is increasing so strongly. Deaton also rails against the role of private financial institutions in American pension plans. He has long been among the best researchers and sharpest critics of poverty and the lack of health services at home and abroad (especially in India).

Deaton shows how the American economy is moving more and more away from decentralized competition to a monopoly-like concentration of power around large groups such as Google and Facebook. It is a form of capitalism which, according to Deaton, can hardly be compatible with a liberal democracy.

He is particularly critical of how many economists discussed the financial crisis in 2008 and what they learned. The modern anti-Keynesian macroeconomics gets the slippery layer. The direction represents, according to Deaton, a step back. He is particularly critical of the most influential economists in the field – such as Harvard economist Robert Barro and the late Nobel laureate Ed Prescott. It’s crazy, says Deaton, to think that stimulus government emergency packages don’t work because people reduce demand by saving more since the emergency measures lead to increased taxes in the future.

Of course, Deaton does not think that everything that is wrong in the United States is the fault of the economists. He still places much of the responsibility here, and especially on the right-wing economic thinking that can never see the market errors. He also blames the left for never seeing the state’s serious faults. Modern economics, he claims, has broken away from its old foundation, the study of social welfare and the causes of poverty and social problems.

Mastering his theme

I have pointed out on several occasions that the right-wing both in the USA and in Europe have an excessive faith in their own economic insight, and that the left has bad taste when it comes to economic theory and method. Deaton speaks to both sides without belonging to either. He is what we used to call a good, old bourgeois economist – neoclassical from head to toe, but still with a sense of sociology and philosophy.

Deaton is critical of what he believes is a right-wing turn in his own profession, and of developments in American capitalism. He warns against professionals who embellish their insights to suit their political beliefs.

Currently, most popular science economics books are written by journalists. Many of the books are absolutely excellent. But Deaton’s book is still particularly good to read because the author does not have to make an effort to master his subject. He knows it from lifelong research.

Much is controversial, although not everything he says is equally original. It is important who says it, and how he does it – modestly, elegantly and believably.

Behind Angus Deaton’s formal facade – with the well-known transverse bow – beats a warm heart and a cool head – something that should inspire us all.