Originally published by VOX
MIT’s Abhijit Banerjee and Esther Duflo picked a very good time to release their second book, Good Economics for Hard Times: It came out almost exactly one month after the two shared the Nobel Prize in economics (along with Harvard economist Michael Kremer).
Duflo and Banerjee, frequent co-authors who are also married, pioneered the use of randomized controlled trials in development economics, using field experiments to evaluate specific policies in areas like cash transfers, teacher absenteeism, drunk driving, and sanitation. Their first book, 2011’s Poor Economics, went in-depth on the method and how it can change foreign aid and public policy in developing countries.
Good Economics for Hard Times tackles issues in both poor and rich countries, setting its sights on big-ticket macro issues: the impact of immigration, automation, and trade on workers; the rise of nativism and xenophobia; and universal basic income. Throughout the book, Banerjee and Duflo try to synthesize evidence from recent, credible economic papers and give their take on what the data tells us.
I was especially interested in their thoughts on immigration and trade in particular. Both Duflo and Banerjee are immigrants themselves, and economic disputes over the costs and benefits of immigration and trade have become incredibly politically contentious in recent years. On immigration, the economists decisively say that, if anything, we probably have too little of it: People like to stay in the communities in which they were born, migration within countries is low, and the cost to native workers is low or nonexistent. On trade, they emphasize the need for more extensive programs supporting people who lose jobs in trade shocks, building on the work of colleagues like David Autor, also at MIT.
I Skyped with Banerjee and Duflo in November, a couple of weeks ahead of the Nobel Prize ceremony in Norway. What follows is a transcript of our conversation, lightly edited for clarity and length.
I was somewhat surprised by the title Good Economics for Hard Times. In narrow economic terms, both the US and many developing countries seem to be growing quickly. The US has near-record low unemployment. What “hard times” are you responding to?
That’s not the shared sense of the world. Part of that is just inequality. There are enormous gaps between the winners and the losers, and a lot of the growth isn’t deeply shared. The unemployment rates are low in the US; that’s less true in Europe, and even in the US, the wage growth isn’t spectacular. Given the perceived need for catch-up by the rest of the economy relative to the super-rich, I think we are still falling behind all the time. The rich are still the only people who are really grabbing most of the growth.
Growth is also falling fast in both India and China. How fast, we don’t completely know, but there is substantial disagreement about Indian growth rates, and probably Chinese growth rates as well.
Given how politically volatile it would be if the growth in these two countries really slowed down, I think we’re deep in the middle of maybe not a crisis, but a moment where there isn’t really an assurance of good outcomes.
“Hard times” was a Dickens reference, and in some ways there’s parallels [in the developing world]. On the one hand, there is a lot of transformation in the economy that does produce the potential for economic growth, though the actual economic growth has been much lower in each country than [was] promised by this potential. There is at least some sense that there could be a transformation to the economy, similar to what happened in the Industrial Revolution.
At the same time, like in the Industrial Revolution, it comes on the back of enormous disruption and suffering for big swaths of people. That’s the “hard times” reference. And we all know that politically, these are hard times. We don’t seem to have a good political conversation. Strongmen are getting elected; nationalism and xenophobia are everywhere. So that’s also part of the hard times.
You come down pretty solidly that the benefits of immigration outweigh the costs overall, even to native-born workers. There are some economists, like George Borjas, who would dispute that conclusion. What made you confident in that judgment?
I must say, it was a good moment to find the [National Academies of Sciences, Engineering, and Medicine] report (2017) summarizing the impact of immigration on the economy, which the paper concluded was overall positive with few losers, because I think what dominates on the gossip-y front is the Borjas and [economist David] Card debate on the Mariel boatlift. It can feel like ping-pong.
(The Mariel boatlift, in which thousands of Cuban immigrants arrived in Miami all at once in 1980, is a frequently studied “natural experiment” in economics. Card found it didn’t lower wages for other Miami residents; Borjas disagreed. But Borjas was nonetheless part of the team that produced the NAS report finding minimal impacts of immigration. —DM)
But there are actually many more studies [of the impact of immigration on wages] that replicate. Even if we forgot the Mariel boatlift, that wouldn’t really change the findings. And the fact that this was put in [a National Academies of Sciences report] that Borjas signed was a sign that we are not being radical here. We are reflecting the consensus.
We came at it also from some development work that had been done. The idea that people don’t actually migrate enough is a very old idea in development. So we come at it from a background where this idea that migration is an overwhelming threat to civilization is already questioned.
For the impact of migration on low-skilled wages — we realized that even if we just give evidence that exists already in the literature and summarize it the best we can, that goes against the grain, doesn’t it? It sounds so counterintuitive. So the objective is to explain those twin facts: the fact that people aren’t moving as much as you think they might, and the fact that they are not in competition with the native workers.
The good economics part is to not just state the fact but to explain why in this particular case the intuitive logic doesn’t work.
It’s interesting you mentioned those points about stickiness — that people have an attachment to home and just don’t want to move — because that’s something that I found is more perplexing to economists than to lay people. If you ask lay people, “Why are people not moving from their town in rural Michigan to Chicago?” they say, well, they grew up there, they want to stay there. Economists have a much stronger sense that people should be moving to more productive jobs.
You’re right, but on the other hand, when people think about a rural town in Mexico for some reason, they think they are gonna come here. So there is a bit of a disconnect. People think it makes total sense to stay in Michigan but not in Mexico.
On internal migration — about a year ago, a randomized controlled trial in Bangladesh found that a program offering subsidies to move from the countryside to the city during the lean season didn’t work. People didn’t move. They were sticky, perhaps for the reasons we’ve been discussing.
If we think there isn’t enough migration, do we really have the tools to increase it?
We don’t know a lot, but the real estate market really plays a major role in developing countries. There’s a big issue of land-use laws that makes no sense; the cities are often too low-rise and housing prices are extraordinarily high. There’s a critical problem of, “How do I move to a city given that I can’t afford any reasonable housing?”
Many of the workers who come to work in cities in South Asia, for example, actually have no housing. They come and they are building a house. They live in the construction site. They have tents. It’s a huge problem.
It’s also a problem in the US. The US has a complete divergence between places where real estate prices are low and perhaps falling and places where real estate prices are high and rising, like Boston. If your house is now underwater, how do you get out of small-town Michigan and move to Chicago where real estate prices are much higher? So that’s a general problem caused partly by the inequality in where the growth is taking place in the US. The growth is so localized that many people have no way of moving.
Then there’s the question of child care. A lot of people want to stay with their families because child care is extremely expensive and unless you have family, there’s no way to afford child care.
In the pair of studies on [the Bangladesh program] No Lean Season, in the first study we’re learning that if you get people to move, there’s a huge benefit for them. In the second study we’re learning that it’s not a nudge that is going to do it. What they were trying to do is use a tiny incentive — a bus ticket, or a loan for the price of a bus ticket. What it shows is that’s not sufficient. It’s not that people are irrational about not moving. They’re quite rational in not moving.
[With] real estate and child care, there are ways to help people. Social networks are a bit harder [to offer help on] because you’re not going to move the whole town to one place. On meaningful jobs, we’re recommending building on the experience of the Trade Adjustment Assistance program (a US program that helps people who’ve lost jobs due to foreign trade competition). That seemed to be a way to get people a real university education that helps them move to something meaningful in another sector.
The bottom line is that you have to change some real things. You can’t just give a slight nudge and hope it works out for the best.
The whole section on trade has a very different tone from the section on immigration. Why do we need to compensate the “losers” in one case but not the other? I’ve seen some economists critique that distinction in the book.
The only reason it might be jarring for people is that we come down with the economic consensus that migration is nothing to be scared about, and with the popular consensus that not that trade is bad, but that the cost of trade is something we need to take into account.
I have been a bit lost in seeing how these contradict. They follow from a very similar logic: People are sticky and they are not really competing in a unified labor market. These two facts will explain both why migration is much less costly than you think and why trade is much more costly.
More specifically, if you have a factory move to China, in many of these places [where a factory leaves], there’s nothing left. Everything was feeding off [the factory].
But migrants who come and settle [somewhere] are both supply and demand. They increase economic activity precisely because they come and spend the money. Other than because economists for some reason have strong views on trade, there’s no particular reason for [immigration and trade] to be equated. They’re different shocks.
And by the way, we’re not anti-trade. We’re saying if there is a shock — trade being a big example of one because it creates a clustered shock — it’s going to create individual suffering for individual people and community suffering for individual communities, as opposed to diffused costs and benefits that our trade models have in mind.
That applies to other forms of shocks as well. If someone loses their job due to automation, the same thing happens. It’s going to be hard for them to move to another job. If someone loses their job because regulation makes [mining] coal difficult, that same logic applies.
But in the case of trade, I think the economists’ model and to some extent the way it’s applied to policymaking compares the aggregate benefits to the aggregate cost, which makes no sense. The benefits are diffuse, everyone gets slightly cheaper goods. But the costs are very highly concentrated.
You write a bit about how this research applies to the rise of nativist movements. I’m curious how you went about that analysis. This is something that political scientists have been very interested in, and it’s incredibly heated in political science the degree to which you credit economic factors versus personal prejudices.
We very much credit political scientists for emphasizing that a naive economic interpretation is often the wrong one. It’s not the fact that [a person going through these economic shocks is] just resenting some income loss. It’s also the fact that [they] constructed [their] identity, in a world of inequality, by feeling superior to some other group.
It’s not straightforward economics that’s going to give us an understanding of what’s going on. It’s something that political scientists and sociologists have talked more deeply about in some cases, particularly in the context of the US and Europe. We are quite influenced by them.
The key is when you realize that preferences are not immutable and that people are not universalist or communitarian by essence, the dichotomy between “it’s all politics, stupid” and “it’s all economics, stupid” vanishes a little bit. The two intertwine much more closely.