Good Economics for Hard Times: Better Answers to Our Biggest Problems


Good Economics for Hard Times
Publisher: Allen Lane
Published: 11/12/2019
The experience of the last decade has not been kind to the image of economists: asleep at the wheel (perhaps with the foot on the gas pedal) in the run-up to the great recession, squabbling about how to get out of it, tone-deaf in discussions of the plight of Greece or the Euro area; they seem to have lost the ability to provide reliable guidance on the great problems of the day.

Book Summary - Good Economics for Hard Times by Abhijit V. Banerjee and Esther Duflo

Key Insights

With all the big issues facing the world, you may feel like giving up. From climate change threatening our existence to immigration threatening our livelihoods, it may seem hopeless. Especially when you see politicians and leaders doing more fighting than finding solutions.

Occasionally, you see experts offering their insights. But it doesn’t feel like they’re any better than the politicians. They just pop up on television and make dramatic statements or get involved in the political mudslinging. So it feels hard to trust the experts as well.

Economists get lumped into this problematic system. You might see them as part of the political machine, hired by a politician or business to support their positions. Or economists are academics that are not speaking to average people looking for solutions to the issues that concern them.

Fortunately, there are logical, fact-based solutions that economics can offer. But it will take some adjustments to the way economists evaluate theories and communicate their solutions.

Key Points

Economists are not seen as trustworthy.

People see and interact with a variety of different professionals, but they don’t trust all of them. In one poll of public opinion of trustworthiness, nurses ranked the highest. Politicians were at the bottom, which is probably not a surprise. Near the bottom were also economists, barely above politicians.

Why don’t people feel like they can trust economists? Think of the economists you are most likely to hear from. These are the ones on the news. They are probably trashing a politician or espousing some theory about how everything is doom and gloom in the world.

Television economists usually don’t come with an unbiased agenda. They are generally hired by companies. Their goal is to provide messaging that supports that company’s interests. If you see that the economists are speaking on behalf of a corporation, it’s hard to trust them.

There are also academic economists, which are equally difficult to trust. Academics are often seen as having extreme views. Or they challenge mainstream positions. By upending what people already believe or have been told by politicians and leaders, economists have an uphill battle to gain public trust.

Transparency and admitting they can be wrong will help economists gain trust.

If economists want to gain trust, they have to share more than their conclusion. You need to see the process and information that went into getting to that conclusion. Walking through each step of the theory, including the evidence that supports it, makes economic analysis clearer.

Transparency is half of the trust equation. The other half is admitting that it’s possible to be wrong. Anyone can be wrong, including really smart economists. Being unwilling to admit fallibility seems like arrogance or delusion. Neither of these qualities makes for trustworthiness.

An economist looking to build trust should be open about their thought process, data, and conclusions. But they also have to admit that they could be wrong and are open to alternative positions.

Politicians oversimplify immigration to overstate how many people are trying to move.

Every politician talks about immigration as a broken system. People like Donald Trump make it sound like America is under attack by immigrants that are hurting the economy. Immigrants are apparently arriving in droves because America is a wealthy country.

Immigrants do not just move for money alone. Humans are motivated by more than just the possibility of higher wages. Immigrating means leaving homes, families, and communities. And people often aren’t willing to do it.

In Europe, where free movement of people is possible between most countries, very few Greeks relocated when their economy crashed. Even without leaving their country, people are resistant to moving. In India, poor people living in rural regions are unwilling to move to the city despite the significantly higher financial opportunities available to them there.

Fears that immigrants will just take jobs from locals is misplaced because immigration can actually help local economies.

Politicians also claim that an influx of immigrants would result in an excess supply of cheap labor and locals would lose their jobs. This is an oversimplified use of the economic concept of supply and demand. Immigration can actually benefit locals, especially those working in unskilled positions.

When immigrants come in, they may add to the labor supply. But they also add to the demand for goods and services. They are customers for local shops and restaurants. Some immigrants even open their own businesses that create jobs. In 2017, 43 percent of the Fortune 500 companies were founded by immigrants or the descendants of immigrants.

Even when competing for jobs with native job seekers, immigrants are at a disadvantage. Employers aren’t simply looking for the cheapest possible labor. Skills, language, other things like local knowledge can play an important role in who gets hired.

In fact, immigrants usually end up with the jobs that locals don’t want to do. They clean houses, care for children, and garden. An influx of cheap labor that can do these things can benefit locals, such as by making it easier to work because childcare is affordable.

Locals may also move into better jobs because they have skills immigrants don’t yet have. In Denmark, a study found that native workers moved into skilled jobs and left manual labor in areas with more immigrants.

Contrary to political arguments, economic evidence shows immigration can be beneficial. Immigrants can’t “steal” jobs because they can’t compete with native employees. The work they do supports others and they can also become valuable customers for local businesses.

People and companies are not flexible enough for international trade agreements to work the way politicians claim they do.

International trade agreements allow goods to move freely between countries. The theory is that a country will only export what they produce best but will stop manufacturing what they can import for cheaper.

This theory is problematic because switching industries and products is not that easily done. Even when products are no longer profitable, studies show that companies rarely discontinue them. Workers are also inflexible and don’t move to industries despite financial incentives to do so.

It is also hard for the global market to adapt to new entrants. Even where a new business may be competing in a local market and offer a superior product, the global market is slow to adopt.

Using tariffs against global trade is just as inefficient and it would be better to focus on easing worker transition to new industries.

Instead of the open flow of goods that comes with a global trade agreement, some politicians support tariffs that protect local manufacturers. Trump imposed a large tax on imported steel and aluminum from China. The goal was to protect local jobs from international competition.

China retaliated with tariffs on agricultural products from the United States. So, while steelworkers are protected, you’re just shifting the harm to the agricultural workers. With 16 percent of US exports of meat and crops going to China, this is a significant part of the agricultural industry. Starting a trade war to protect workers from one industry backfired.

The impact of Chinese imports on manufacturing is an effect known as “China shock.” Factories close and it creates devastating impacts on communities. When the factory that is the main source of employment for a town closes, a large portion of the community suddenly becomes jobless.

It is incredibly hard for towns hit by a large-scale unemployment crisis like a factory closure to bounce back. There aren’t new jobs available for the people laid off and it’s hard for people to leave the place they know for another area.

If protectionist tariffs just protect one industry at the expense of another and trade agreements shut down American manufacturing, what’s the solution? The Trade Adjustment Assistance (TAA) program accepts that job loss will occur and offers support to the affected individuals. This includes retraining for a new industry, extended unemployment, and financial help to move. The problem is the program is underfunded.

Allocating resources to help the recently unemployed is a better long-term solution for addressing industries that are disappearing. It also builds up the infrastructure for support in the future as global trade continues to evolve.

Economic inequality must be addressed alongside climate change.

One argument against dealing with climate change now is that the fight is not something that the poor can afford. The economy has to be protected now at the expense of the planet in the future. But the groups that are suffering from climate change are lower-income countries.

At a higher latitude, Scandinavia is generally cold. If temperatures rise on a consistent basis, it will not become unbearable. On the other hand, an already hot country like India would suffer. This is especially true because only 5 percent of Indian households have air conditioning.

Energy consumption must be reduced in order to slow the damage to the climate. If it hurts the economically vulnerable most to try to reduce emissions, they have to be given assistance to take action that combats climate change without increasing the economic vulnerability.

From a global perspective, wealthy countries should take on a greater role. They can pay for air conditioners for Indian households. These can be air conditioners that are cleaner and don’t produce HFC gases. Combined with a reduction of emissions in rich countries, the redistribution of wealth can fight climate change and reduce inequality simultaneously.

Technological advancements and automation threaten human jobs.

Robot uprisings are an apocalyptic scenario plucked from sci-fi movies, but these stories are not without a realistic root.

Artificial intelligence and technological advancements are automating tasks and even entire jobs. This is not just an abstract threat. In one commuting zone, a single industrial robot eliminated more than six jobs and created downward pressure on wages.

Thus far, the issue of AI has been largely a concern for manual jobs. But technology is evolving to handle complex roles as well. A robot could take care of some paralegal work, bookkeeping, and even sports journalism. So that means that only jobs at the highest skill levels like engineers and lowest skill levels like dog walkers will remain.

Companies see financial benefits with AI. Even if the robot is less efficient, it may still be a more cost-effective choice. Robots don’t require health benefits or maternity leave. You don’t have to worry about payroll taxes or labor conditions.

To protect human jobs, one option would be to offer a tax benefit or impose a penalty that makes it better to hire a human. But it is challenging to know exactly how to apply this. Technology is everywhere. Automation can be part of a machine that requires one human to operate but replaces the jobs of 10 humans.

Economic inequality has a long history in America.

It may be tempting to think of the large economic disparities as a recent issue, but it has a much longer history in America.

Back in 1928, the wealthiest one percent held about 28 percent of the wealth in the United States. This was trending downward and by 1979, the top one percent held about 10 percent of the wealth. Then, the trend reversed again starting in 1980.

Incomes for the richest people have drastically increased. In contrast, incomes for working-class people have remained stagnant. Real wages, which measure purchasing power have gone down by 10-20 percent for male workers since 1980.

Politics is what changed everything in 1980. Ronald Reagan in the US and Margaret Thatcher in the UK supported cutting taxes for the richest. The theory was that any savings they incurred would “trickle down” to people at lower incomes.

At the same time, Reagan and Thatcher also supported incredibly high salaries for some people. This was based on an argument that they had a special talent that should be rewarded and encouraged. CEOs continue to be given large bonuses without being expected to do more and the employees get paid the same.

With all of this in mind, it is no surprise that wealth inequality is now double what it was in 1980.

Tax more and use the money properly to help address inequality.

Countries that don’t have as significant of a wealth disparity are ones with higher taxes. The US, UK, and Canada have all provided tax breaks for high earners. These countries have more inequality. Denmark, Spain, and Germany have high taxes and less inequality.

Taxes offer resources for important government resources. The US only gets 27 percent of its GDP from taxes. In contrast, France and Denmark get 46 percent from taxes. These are countries that are actively working to address poverty and inequality.

What level of taxes would be needed? For the top one percent, a tax of 70 percent or higher makes salaries more equal. Companies stop paying those salaries because they don’t want all that money just going to the government.

Fixing inequality and all of its ramifications requires more than a higher income tax rate for the higher salaries. The government needs more resources, which it can get from additional taxing.

A wealth tax on assets for the richest people could generate significant revenue for the government. The tax would be small. Two percent for people that have at least $50 million in assets and three percent for those that have more than $1 billion in assets.

Average earners also have to contribute. It’s not just up to the wealthiest to fix income disparities. France and Denmark, who are both trying to fix inequality, get most of their taxes from average earners.

In the US, there is a resistance to paying more taxes. Some of it is due to a concern about how the government will use the money. It is fair for people to be concerned about where the money goes. Government work is essential, but governments must be accountable. Public programs help fill in where the market fails and these programs need tax revenue to operate.

The poor are not to blame for being poor.

If you don’t have a safety net, poverty can ensnare you very quickly. Imagine if the job that you do is suddenly automated. Your education and experience become worthless. Or what if the main employers near you shut and moved overseas? You are jobless with few options.

So, you’re suddenly poor. What do you do? You have to turn to public assistance programs. But many of these demonize the poor. You’re shamed and it can be hard to hold on to any remaining feeling of dignity.

Instead of providing cash assistance for any necessary expenses, politicians argue that the poor can’t be trusted to spend money on responsible things. Opponents of these programs also claim that basic income will disincentivize getting a job.

These concerns about programs that help individuals living in poverty are unfounded. Studies in 119 developing countries found that financial assistance does not result in more alcohol and tobacco spending. Nutrition and health increased, showing that spending was likely responsible.

Financial assistance that offers a basic income for individuals does nothing make people stop working. A study conducted in Ghana had individuals making bags for a decent wage. Some of the people making bags were also given goats, which they could use to make more money if they wanted to. The people that had the goats made more bags and their bags were better quality.

Despite the concern that poor people will not want to work or spend responsibly, public programs can help individuals get out of poverty. If they don’t have to think about the struggle of surviving every day, they can focus on trying a new venture, moving to somewhere with better opportunities, or working harder.

Political rifts can’t be healed without communication.

Before 2015, hate crimes in the United States had been on the decline or flat for many years. And then they rose by 17 percent in 2017.

Where does the hate come from? Prejudices and racism are a complex issue. Context and history shape these views. While the rhetoric of Donald Trump and media portrayals may be part of the cause, people weren’t just brainwashed.

Social groups and who you surround yourself with shape your beliefs. If you have an echo chamber, you’re only reinforcing what you think and never challenging it with outside opinions. Political lines can influence what opinions a person holds, even on issues of scientific fact.

Diverse social interactions are needed for people to better understand one another. That includes racial, socioeconomic, and political diversity. It is possible for even a deeply rooted prejudice to change. But without having meaningful interactions with people they were taught to hate, that change is nearly impossible.

Communication is essential to bridging political divides.

The Main Take-away

All of the big and overwhelming problems facing society are not unsolvable. Despite the doomsday messages shared by sensationalist news and politicians, it is possible to address poverty, inequality, climate change, immigration, and more.

You have to look to economics and data-driven solutions for policy ideas. It may seem hard to trust economists, but the ones that aren’t ideological extremists or paid for by corporations can offer meaningful solutions. Economists also can be more transparent and open about their fallibility to gain your trust in these ideas.

Many of the causes of problems are misrepresented by politicians. And the inaccurately use economics as support. The solutions require a nuanced approach. Economic growth must be balanced against inequality and climate change. Market shortcomings must be corrected with government interventions.

If you want to be able to evaluate real solutions, you have to be able to discuss them. This means not just holding on to your prejudices or only discussing ideas in an echo chamber. A diverse set of voices and opinions that can communicate openly will help fix rifts. And then you can fix the problems.

About the Authors

Abhijit V. Banerjee and Esther Duflo are a husband-and-wife economist team that won a Nobel Prize in 2019 for their experimental strategy to address global poverty. This is the second book authored by Banerjee and Duflo.

Banerjee is an Indian-American who finished his first two degrees in India before completing his Ph.D. from Harvard University. Duflo is a French-American who first attended two French institutions before finishing her Ph.D. at the Massachusetts Institute of Technology. Both are professors of economics at MIT.

Banerjee is the son of two economics professors, both of whom taught at institutions in Calcutta, India. In addition to his Nobel Prize, he has received many accolades. He is a fellow of the American Academy of Arts and Sciences.

Duflo is the daughter of a pediatrician and a mathematics professor. When she won the Nobel Prize in Economics, she was the second woman and the youngest person to have won the award.

LEAVE A REPLY

Leave a Reply

Your email address will not be published. Required fields are marked *