Good Timing for Great Economists

The editors at Public Affairs got lucky when they put together a publishing timetable for Good Economics for Hard Times—Abhijit Banerjee and Esther Duflo’s book comes out just weeks after the pair shared a Nobel Prize with Michael Kremer.

It is a perfect book to benefit from a Nobel bump: wide ranging, aimed at generalists, interesting, and charming. It is filled with lively writing and strong anecdotes. I learned about some fascinating studies and came to appreciate old theories in a new light. And it generously cites many of the pair’s professional colleagues, including critics. Indeed, for those critics who are concerned about their focus on small questions, this book tackles some of the biggest—including climate, trade, migration, and inequality.

Banerjee and Duflo suggest that the world may be back to the Dickensian characteristics of the original Hard Times, “with the haves facing off against the increasingly alienated have nots.” The authors’ concern is with the rise of authoritarian populists in wealthy countries (and in particular those in the US), the role of economic factors in that rise, and the potential for economic policies to fix the problem.

Sometimes, they argue, the received wisdoms of popular economics provide poor guidance, which may help explain economists’ image problem. In 2018, Banerjee and Duflo polled a representative sample of Americans to ask who they trusted most when an expert talked about their field of expertise. Eighty-four percent trusted nurses. Twenty-five percent trusted economists, putting them just ahead of politicians. At points the authors appear to sympathize with that distrust, suggesting corporate economists are biased and even academic economists are too committed to beliefs around labor markets adjusting and free trade being good.

But for someone who agreed with nearly all of the policy recommendations, the most surprising part of Good Economics for Hard Times for me was that the book appeared to embrace and extend received economic wisdom on migration while forcefully rejecting it on trade.

On migration

Much of the first few chapters, written by a globetrotting couple after all, is a paean to the power of movement and a dissection of the problem that we see too little of it. Duflo and Banerjee explain that low-skilled migrants consistently (economically) benefit from moving and help increase the wages of those who already live where they move—while the spillover benefits of movement help foster other global connections.

But “the vast majority who don’t face extreme internal or external compulsions to move” stay put. Banerjee and Duflo note how much movement has slowed within the US and that that fewer than 350,000 Greeks are estimated to have emigrated between 2010 and 2015 at the height of the economic crisis, despite an unemployment rate of 27 percent at the time and the opportunity to work anywhere in Europe.

That is because moving is hard for migrants. “If they leave, they must often leave alone, abandoning everything familiar or dear to them for many years to come.” Those who relocate will often end up doing jobs they are over-qualified for, and living far from the best neighborhoods in housing considerably more expensive than that they left behind.

The economic rationale for more migration means that people should be given help to move: literally, in the form of better rapid transit and housing support that allows migrants to live somewhere affordable and not too far from work, but also job matching and help with childcare. (The book shies away from specific policy recommendations on international migration.)

On trade

But the problems of “stickiness” in the economy—including the fact that people don’t like moving—help to explain why greater trade flows have caused significant disruption, argues Good Economics for Hard Times. Theory would suggest workers would move rapidly away from industries that faced comparative disadvantage in new trading relationships. In fact, as demonstrated by the work of David Autor, amongst others, workers often stay where they are and see spiking unemployment. The book is blunt on the resulting impact: “More international trade… hurts the poor in rich countries.”

Banerjee and Duflo don’t support a trade war as a result. After all, adjusting to rising trade barriers will cause disruption and dislocation just as lowering trade barriers did. But I would still argue with their analysis of the impact of previous rounds of trade opening. Were trade really a major force for income inequality in high-income countries, you would expect the United States, the country in that group with the lowest value of imports as a percentage of GDP, to be the most equal. That is very much not the case, perhaps in part because greater trade in inputs allows American firms to produce goods at lower prices and create more jobs. Wider analyses suggest that the net effect of trade on the US is to create employment.

Proportionately, poor people spend a lot more on imports than do rich consumers (who spend far more on domestically produced services like cleaning and dog walking). Pablo D. Fajgelbaum and Amit K. Khandelwal suggest that if the US moved to end imports, the poorest 10 percent of American consumers would see their buying power decline by 82 percent. That compares to six percent for the top 10 percent, and reflects a history of cheap imports putting downward pressure on consumption inequality.

When it comes to policy, Good Economics suggest strengthening the safety net for people who lose jobs thanks to trade competition, “helping them move or change jobs, or finding a way to compensate them better”—including employment subsidies. They should get that support, but it isn’t clear why those who lose jobs to workers in China deserve greater support than those far greater numbers who lose jobs to workers—or robots, or changing consumer tastes—in America.

The people-centered approach advocated by the authors would surely suggest both sets of workers are equally guiltless and equally suffering and so should benefit equally from support. An upper-end estimate of 300,000 jobs a year lost to Chinese trade exposure over the period 1991-2011 should be compared with more than 60 times that many layoffs and discharges each year in the US as a whole. If the broader concern is that economic uncertainty is a driver behind divisive politics, it would be best to deal with all uncertainty, not just the small fraction that is related to globalization.

On politics

With regard to those broader drivers, while Good Economics is both humane and persuasive on policies, I’m not always so sure about its analysis of politics.

Trade and automation gets some blame for the rise of populism over the past few years in Good Economics, but at the same time, Banerjee and Duflo accept that the worry over migration “has more to do with identity than economic anxiety.” They tie things together by suggesting the perception of white communities’ “own worth is tied to a sense of superiority to blacks and migrants,” and recent convergence in social circumstances “exacerbates their sense of crisis.”

It is a widespread argument that (as Good Economics puts it) “prejudice is often a defensive reaction to the many things we feel are going wrong in the world,” including economic uncertainty. Benjamin Friedman made it at length in The Moral Consequences of Economic Growth, for example. It led him to advocate for a stronger focus on growth.

Good Economics heads in the other direction, partially on the basis of perceived tractability: because it is hard to measure and even harder to know what drives it or what policies will help, “it may be time to abandon our profession’s obsession with growth” in rich countries. Even in developing countries, they suggest, we really only know that hyperinflation, overvalued fix exchange rates, and communism are probably bad.

Instead, the authors argue we should focus on redistribution, where we have a much better grasp of how to fix the problem. I agree we don’t know nearly as much about how to raise growth as about how to reduce inequality, but given perfect equality in many poor countries would still leave everyone on an income far below the US poverty line, surely still at least for development economists the argument should be “try harder,” rather than “give up?”

Regardless, the evidence that prejudice has risen with economic uncertainty in the US is debatable. Over the longer term, prejudice has been declining even over a period where economic anxiety has reportedly been on the rise. The percentage of non-black people who say they would be opposed to a close relative marrying someone who is black has fallen from 63 percent in 1990 to 14 percent in 2016, for example—and that is reflected in a rising share of interracial marriage. And a period of declining inequality and rising incomes for the working class in the US during the 1950s and early 60s was also one where Jim Crow laws were still firmly in place, and the majority of the population thought women shouldn’t work if their husbands could support them (this to say nothing of the rights and treatment of LGBT people and other marginalized groups.)

In 2016, prejudice was made politically salient by a presidential candidate who spouted bigotry with little pushback from his party. But the evidence for a theory that runs from economic factors through increased prejudice to changed vote share between 2012 and 2016 doesn’t stand up. It is true that areas with a high concentration of people who denied racism existed in the US were more likely to switch to candidate Trump. It is not true that those areas were particularly economically hard hit between 2012 and 2016.

It isn’t clear how to respond in the political arena to a group largely made up of old white men who feel that they are being discriminated against when the evidence still suggests the opposite remains the case. And that is not to deny the fact that some millions in that demographic have lost jobs and health, and that they face increased depression and rising rates of suicide.  In terms of policymaking they deserve support, it is harder to say what to do in terms of politics.

Next steps

Over the longer term, Duflo and Banerjee note that the evidence suggests “mixing is one of the most powerful instruments we have for making society more tolerant.” We need more movement—including distributed public housing for both migrants and minorities, more programs like Moving to Opportunity, and expanded bussing. By creating personal connections, people start to treat each other as humans rather than statistics.

In the shorter term, perhaps there is scope for the media: taking stories like Jason de Parle’s A Good Provider is One Who Leaves (about a family of migrants from the Philippines) and telling them to a wide audience. And we need to reduce the salience of race and ethnicity in elections. But this takes leadership across major party candidates of the type displayed by John McCain, for example.

For all that may sound hopeless today, there are reasons to be optimistic. Recent nativist outbursts by political leadership in the United States may have appealed to a minority of voters that were critical in swinging an election, but they are increasingly repellent to the country as a whole. Sixty-two percent of Americans say immigrants strengthen the country because of their hard work and talents compared to 28 percent who say they are a burden. In 1993, those proportions were almost exactly reversed. Again, 52 percent of Americans think free trade agreements between the US and other countries are a good thing compared to 40 percent who disagree.

Politics has not been permanently poisoned by globalization, then. Nativist voters are not those who live in communities “flooded” by migrants or most affected by imports, and the generational trend is towards greater acceptance.

But the reality of growing inequality across people and (some) places in the United States remains. Abhijit Banerjee and Esther Duflo’s book is full of great evidence-based policy advice on how to reverse or at least ameliorate that trend: better and more public provision of services and a far more generous safety net combined with support to help people move to opportunity and create opportunity in places left behind. All of this, they argue, should be paid for with higher taxes, especially on the rich and on carbon. Given that strong agenda for a fairer, more sustainable America, I hope Duflo and Banerjee’s awesome citation counts are mirrored in awesome book sales for Good Economics for Hard Times.

Photo credit: Kris Krüg via Flickr Creative Commons, image available here.