When I read that Angus Deaton, a
professor at Princeton University, had won this year's Nobel Prize in
Economics for his work studying poverty in developing countries, I
was intrigued. What did the world learn from his studies?
Basically, we've learned that the world
is a better place today than it used to be. Poverty is down, life
expectancies are up, disease is down and fewer families are watching
their children die soon after birth.
But how do we apply what Deaton has
discovered? Well, the devil is in the details, and Deaton apparently
has a great love of detail. Excruciating detail, explained in
mathematics.
I noodled around a bit, trying to find
some of that detail explained in plain English. Much of my
information (and subsequent speculation) comes from the Nobel
committee itself, which published two surveys of Deaton's work: one
for economists, and one for the rest of us. You can find the general
summary at:
http://www.nobelprize.org/nobel_prizes/economic-sciences/laureates/2015/popular-economicsciences2015.pdf
Poverty, says Deaton, is in how you
measure it. Put more accurately, the result of policies designed to
improve the lives of the poor cannot be predicted by the
macroeconomic theories that we've previously relied upon. Deaton
suggests that using the wrong tools to measure poverty has
over-stated the numbers of people living below the poverty line by as
much as half a billion people.
Instead of studying big-picture
measures like GDP to assess whether governments are doing the right
things by their people, Deaton employed large numbers of
house-to-house surveys and compared patterns of household consumption
over long periods of time.
He found the greatest devil that
tortures economics: that people are not always rational. He found
that it's better to measure and predict things by looking at the
behaviour of individuals upward, than to predict the behaviour of
whole populations from the top down.
His theories (and the basis of his
Nobel award) are contained in theory called The
Almost Ideal Demand System, which
I can assure you I have not studied.
Here's a Deatonian issue that might
apply in Alberta: would the poor be better off in Alberta, and
incomes less unequal if we had a provincial sales tax?
My personal bias leads me to say yes.
Taxes on consumption tend to equalize after-tax incomes because the
rich can consume so much more. They also tend to stabilize government
revenue, which leads to more predictable funding of services like
schools, etc., which benefits people on low incomes.
Ah, but then there's the devil of
irrational behaviour. Deaton's detailed questionnaires of families
helped him formulate mathematical equations that would tell a
government just how much a one-point adjustment in a sales tax (or
sales tax cash rebate) would affect purchases of food, clothing or
other goods by poor families, by changing that family's after-tax
income.
These equations predict who wins and
who loses — and by how much — with each change.
In fact he has separate equations for
each type of consumer commodity, which I am quite sure our federal
government did not apply when it decided to lower Canada's GST by two
points.
Previous economic theories suggest
people generally spend less and save more when they expect their
incomes to drop. But we've found in Canada that people are entering
lower-income retirement in record-setting levels of debt. Irrational,
but true.
What, if anything, should governments
do to encourage more saving? Call professor Deaton, I guess.
One surprising thing I learned is that
Deaton is no great fan of international economic aid from rich
countries to poor ones.
He says the practice undermines the
ability of countries to grow their economies, and that if we feel we
ought to do something to help the poor in those countries the
something we should do is to stop giving them aid.
As well, Deaton says the fact that
family incomes grow unequally in developing countries is not
necessarily a bad thing. Inequality, he says, is a consequence of
progress, proof that progress exists.
No doubt someone is hard at work
writing a movie script about all this, the way they did for John
Forbes Nash Jr. who developed Game Theory and inspired the movie A
Beautiful Mind.
I expect such a movie would have to
involve a conversation with the devil of details.
Follow Greg Neiman's blog at
Readersadvocate.blogspot.ca
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