"The value of equality: an economist's perspective"

Ian M McDonaldDepartment of EconomicsUniversity of Melbourne

Workshop on Justice, Equality, and the Social Determinants of Health

Tuesday 14 June1

Some economic perspectives of relevance for the socioeconomic determinants of health

• Income inequality• Injustice – discrimination• Individualism/Competitiveness• Social comparisons

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Income inequality is associated with bad socio-economic outcomes – Wilkinson and Pickett

“What matters is the level of inequality…not how you get it” WP p.237

Reducing inequality by taxes/transfers, Australia 2003-04, ABS 6537.0

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Reducing inequality – net transfers received, Australia 2003-04, ABS 6537.0

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Problems with redistribution

• Loss of efficiency– Effective marginal rates of tax can be very high– Churning – Welfare dependency

• However, income inequity is not important…

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Wellbeing not health

• Economist’s objective=

wellbeing, utility, welfare, happiness• Health is not the objective, only a means to better

happiness– Pain relief versus cure

• Economist’s views on the appropriate nature of wellbeing are divergent– Ordinal– Cardinal– Inter-personally comparable

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Happiness survey questions‘cardinal’ and ‘inter-personally comparable’

• Survey question on happiness (from General Social surveys)– ‘Taken all together, how would you say things are

these days – would you say you are very happy, pretty happy or not happy?’

• Survey question on life satisfaction (from Eurobarometer Surveys)– ‘On the whole, are you very satisfied, fairly

satisfied, not very satisfied, or not at all satisfied with the life you lead?’

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Happiness measures are robustie ‘scientific’

• Measures of happiness correlate with other variables such as frequency of smiling, probability of committing suicide, brain activity, ratings by friends and relations

The unimportance of income inequality for happiness in Australia

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Or is it?

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It is…and also poor health has a large impact on happiness

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Income inequality seems more important in the US

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Injustice - discrimination

• Discrimination against blacks in the US– In US studies, being black reduces happiness by a large

amount (about half as much as being unemployed)– This gap is decreasing over time– Black people have poorer health, shorter longevity

• Experimental evidence on the ‘unchosen’– Brandts, Riedl and van Winden

• VEOHRC– eg Fairness templates for work environments

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Competition can destroy ethical behaviour

• Ultimatum game experiment– Competition forces people to override their wish

to share with others (treat others fairly) and leads to extreme inequity

• Example: child labour– All employers may wish to refrain from employing

children, but if child labour is not illegal then they may all end up employing children in order to survive

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Individualism

• Eckersley “Is modern western culture a health hazard?”• Evidence

– Twenge=increased narcissism– WHO=increased depression– Halpern=tolerance for material self interested attitudes eg

lying, cheating, →associated with crime, increased the effect of income inequality

– Eckersley and Dear=youth suicide across countries correlated with individualism

– Whitely et al= youth suicide across countries correlated with fragmentation

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Individualism and suicideFreedom and control=% of people one thinks have completely free choice and control

over their lives (WVS) – Eckersley and Dear (2002)

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However, individualism (freedom) is positively associated with happiness

Individualism/competition and economic growth

• In principle, free markets increase incomes– eg tariff reductions

• In practice– Mixed evidence on individualism increasing

economic growth, Anbarci, Hill and Kirmanoglu (2011)

– Some support for inequality tending to reduce economic growth, Vu and Mukhopadhaya (2011)

– But the non-market approach of communism was an economic disaster

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Economic growth doesn’t make people happier in rich countries…

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…but it does for poor countries

Health, education and economic growth

• Economic growth has increased resources and productivity in health and education

• Longevity has increased by 38% (20 years) in the last 100 years

• Necessary condition is economic growth– In Australia and overseas

• The happiness scores may under measure this

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Social comparisons can cause stress “Keep up with the Joneses”

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The hedonic treadmill economic growth is no cure for stress

The hedonic treadmill

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Mechanisms in the treadmill

• Social comparisons become more important as we get further from subsistence, Hirsch

• Positional goods=we cannot all have a Sydney Harbour waterfront however high GDP per capita gets

• Advertising=make people feel worse off– Some parts of the private sector are bloated

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Social comparisons and the underclassmethodological individualism

• Oxoby: “Cognitive dissonance, status and growth of the underclass”– Young people who expect their mainstream prospects to

give them little happiness will ‘choose’ to join the underclass

– They tailor their tastes– Their happiness expectation determined by how badly

they would do and how badly that would make them feel – cognitive dissonance

– Remember choice is subject to constraint• Free to choose does not ensure well-being

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The underclass

• The underclass are: the economically/materially poor who have also abandoned mainstream social norms

• Characteristics of the underclass – poverty plus aberrant behaviour such as crime, welfare dependency, weak labour force attachment and low effort

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Dissonance and status seeking

• Cognitive dissonance = psychological discomfort from inconsistent beliefs– A divergence between the desired level of social

status and the actual level of social status produces cognitive dissonance

• People attempt to reduce dissonance by pursuing social status goals or by changing those goals – abandoning a social norm, eg choosing not to support one’s family (Montgomery)

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For those people with y y , the best choice is to set =1 because V1>V0, that is join the rat race

For those people with y y , the best choice is to set =0 because V1<V0, that is join the underclass

Policy implications of Oxoby’s model

• the underclass would be increased by– Regressive income tax– greater emphasis on social comparisons eg on

‘getting ahead’– Higher GDP per capita

• Social comparisons become more important as incomes rise further from subsistence (Hirsch)

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Oxoby’s model and some statistical trends

less poor in labour force, more crime, more female-headed families

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Present bias can cause ill-health

• Present bias=I must go on a diet and I will start tomorrow– Obesity– Smoking– Gambling

• PB maybe greater for people with low incomes– Dellavigna and Paserman

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The economic cost of obesity, ACCESS Economics, 2005

$millions percentages

health costs 873 4.2

productivity loss 1,693 8.1

dead weight loss

358 1.7

wellbeing loss 17,246 82.1

other 4.0

total 21,013 100

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My Interpretation

• The overwhelming majority of the economic costs are borne by the obese individuals themselves

• Why do they do it? Present bias?• Suggests a major problem of self-control

and/or understanding and of lack of care for children

The challenge of affluence - Avner Offer

• Economic growth creates present bias problems through new products and greater spending power– Smoking– Fast food– Availability of drugs

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Conclusion

• For health:– Income distribution is unimportant– Injustice is important– Ability to cope with

• Injustice• Competitiveness• Social comparisons• Present bias

is important– We need to improve people’s ability to create happiness

• Make happiness the explicit objective of health and education

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