Good Economics for Hard Times
By Abhijit V. Banerjee and Esther Duflo
Hachette Book Group, New York, 2019
Abhijit Banerjee and Esther Duflo won the 2019 Nobel Prize in Economics for their research into alleviating global poverty. In Good Economics for Hard Times they take a look at some of today’s most hotly debated issues including immigration, global trade, climate change, and social programs.
The book was published last year but got a big boost recently when Bill Gates added it to his 2020 summer reading list.
Good Economics for Hard Times is really a collection of essays. Each chapter stands on its own and you can read them in any order. Here are some of the highlights I found most interesting.
Banerjee and Duflo make short work of debunking the pernicious myth that low-skill immigrant labor depresses the wages of native workers.
“… there is no credible evidence that even relatively large flows of low-skilled migrants hurt the local population … Indeed migration seems to make most people, migrants and locals, better off.” [p. 13]
The real problem, they claim is that there is too little migration. People don’t migrate enough between countries and even within them. It’s scary; migrants often face high costs and uncertain job prospects at their destination. They leave behind support networks of family, friends and culture. As a result, most people only migrate under dire circumstances. The authors quote the British-Somali poet Warsan Shire,
“no one leaves home unless
home is the mouth of a shark
you only leave home
when home won’t let you stay”
Those who do migrate tend to be risk-takers and entrepreneurs.
“It takes an ability to dream … or a substantial dose of overconfidence, to overcome this tendency to persist with the status quo. This is perhaps why migrants, at least those not pushed out by desperation, tend to be not the richest or the most educated, but those who have some special drive, which is why we find so many successful entrepreneurs among them.” [p. 42]
But mobility helps to even out standards of living across regions and countries so there are good economic reasons to encourage it through immigration and social support policies. The authors are not blind to current political realities and they realize it’s extremely unlikely any governments will follow their advice on this.
The theory of comparative advantage is one of the most sacrosanct in economics, yet it is surprisingly difficult to prove empirically. Economist have long recognized that trade creates winners and losers. The gains from trade are supposed to be sufficient to compensate the losers, but this requires government to tax and redistribute, provide retraining or facilitate movement to new regions and new industries. In many countries around the world, especially in the US, this has not been done effectively. As a result, many people have become hostile to international trade and globalization. We are now entering a period of deglobalization.
Banerjee and Duflo point out that economies tend to be sticky. Capital and labor do not move as quickly or as efficiently from one location to another or from one industry to another. So the losers from trade often do not get re-employed. Instead they stay in their communities which become increasingly depressed.
The authors are not anti-trade, but they do caution that the benefits of trade may take a long time to emerge, and that the costs may be more significant than free trade advocates admit. They recommend enhanced adjustment programs that support mobility and encourage hiring or subsidizing the wages of displaced workers, especially older workers who may have more difficulty transitioning to new jobs or new towns.
The 30 years following World War II were a period of historically unprecedented high growth. It came to a shattering end with the OPEC oil embargo of 1973. Ever since, economists and politicians right up to Donald Trump have been trying to figure out how to get back to the glory days of high growth.
Surprisingly, it turns out that economists don’t understand growth very well. Economists disagree on the underlying causes of economic growth and on the policies governments should implement to stimulate growth. They don’t agree on whether it is even possible to return to high growth rates, or whether developed countries inevitably evolve into a more-or-less permanent low growth state.
“We don’t understand very well what can deliver permanently faster growth. It just happens (or not).” [p. 179]
In any case, the authors argue, it may be futile to focus on elusive high GDP growth. Instead perhaps we should focus on the overall well-being of the population, including health, education, a functioning court system and banking system, better infrastructure (roads, sewage) and livable cities. Not only is that better for everyone, but if and when growth does catch on, countries or regions with these advantages will do better.
Banerjee and Duflo are unequivocal about one thing, however.
“In a policy world that has mostly abandoned reason, if we do not intervene we risk becoming irrelevant, so let’s be clear. Tax cuts for the wealthy do not produce economic growth.” [p. 177]
In the final chapter of the book, Banerjee and Duflo look at social programs, how they’re structured and how they’re perceived.
Essentially social programs can be arranged on a spectrum. At one end are direct all-cash transfers such as Universal Basic Income or traditional welfare. In the middle we see contingent cash transfers where recipients must satisfy certain requirements, such as work or education, to continue receiving benefits. Finally, there is non-cash aid such as food stamps or job training programs.
The problem with all of these programs today is that recipients are stigmatized. Even though there is no evidence of significant abuse of social programs, “those people” are seen as lazy, incompetent or undeserving.
“The deep disregard for the human dignity of the poor is endemic in the social protection system.” [p. 318]
Combined with a deep suspicion of any government program, the result is that even people who are eligible for programs often do not enroll.
“A social protection system that treats anyone with this kind of callousness becomes punitive, and people will go to great lengths to avoid having anything to do with it. Make no mistake. This does not just affect some small sliver of the extreme poor that’s very different from the rest of us. When part of the social system conveys punishment and humiliation, it is the entire society that recoils from it. The last thing a worker wants when he has just lost his job is to be treated like “those people.” [p. 319]
In the most compassionate writing of the book, the authors argue that we don’t have to run our social programs or treat our fellow human beings this way. To deliver long term benefits, to treat people with dignity, social programs much change from being patronizing to respectful.
“What is common among a drought-affected farmer in India, a youth in Chicago’s South Side, and a fifty-something white man who was just laid off? While they may have problems, they are not the problem. They are entitled to be seen for who they are and to not be defined by the difficulties besieging them. Time and again, we have seen in our travels in developing countries that hope is the fuel that makes people go. Defining people by their problems is turning circumstance into existence. It denies hope. A natural response is then to wrap oneself into this identity, with treacherous consequences for society at large.” [p. 322]
The book was written before the outbreak of COVID-19 but those words seem prescient when millions of people have been thrown out of work through no fault of their own.
Banerjee and Duflo write from an economic perspective, but with humility and even occasional flashes of humor that I wouldn’t normally expect from a pair of economists.
They recognize that markets don’t always deliver the results that economic theory would predict. One of the main reasons – this is a recurring theme of the book – is that economies are sticky. People don’t move as quickly or as easily between jobs or regions as economists might like. Even capital doesn’t always get redeployed from declining industries or locations to rising ones. It turns out that people don’t always act for strictly economic reasons and Banerjee and Duflo are wise enough and compassionate enough to recognize that economics and politics must adapt to this reality if they are to truly serve their communities.
The book draws upon the authors’ own research and the work of dozens of other economists and theorists. It’s laced with examples from India, Bangladesh, China, Peru and many other places around the world. This was one of the most enjoyable aspects of the book for me. It was really refreshing to read a book that wasn’t exclusively focused on the so-called developed (and mostly white) world.
I was disappointed by the relatively light emphasis given to the environment. There is a chapter on climate change – the authors favor a carbon tax like most economists – but it’s the shortest chapter in the book. And the lengthy chapter on growth doesn’t really address the question of sustainability or whether we need to move to a no-growth or even a degrowth economy. (For more on that, please read my review of Kate Raworth’s Doughnut Economics.)
Nonetheless Good Economics for Hard Times tackles controversial questions head on, and often reaches unconventional conclusions.
These two brilliant economists explain hot-button issues
Bill Gates’ review of Good Economics for Hard Times.