MIT economists Abhijit Banerjee and Esther Duflo have been at the forefront of rethinking the way we tackle extreme poverty. Their approach of using randomized control trials, typically used by clinical researchers, can sound deceptively simple, and was groundbreaking enough to win them the 2019 Nobel Memorial Prize in Economic Sciences, which they shared with Harvard’s Michael Kremer.
Now they’re taking the approach that’s helped improve the lives of millions of people in poverty to the biggest political challenges in the world today. Their new book, “Good Economics for Hard Times,” explores issues like the United States-China trade war and immigration, drawing conclusions from a wealth of research.
It can seem like a strange project, given their expertise, but in a sense it’s a natural extension of their work. They revolutionized their field by taking an evidence-based, rather than ideology-based, approach to studying poverty, and believe that we’ve entered an era where evidence doesn’t seem to matter for any policy issue. And similarly, the driving force behind their book is addressing the needs of nations’ most marginalized people, including in the US, with sympathy for their frustration and hardship.
We sat down with Banerjee and Duflo, who are married, to discuss “Good Economics for Hard Times,” and it was obvious they naturally play off each other. They said their years of collaboration has resulted in a shorthand between them when they tackle new topics (“She understands my cryptic messages better than anyone,” Banerjee said).
We started off by asking them why they decided to take their work in development economics and extend their approach to a way of understanding the world, and what exactly “good economics” means.
The following transcript was edited for clarity.
The lens of ‘good economics’
Duflo: I think what highly persuaded us to write this book is that the policy conversation has been hijacked by a very polarized conversation, in particular on misleading facts and almost no arguments, et cetera. It became very clear for us. Really what brought it home is Brexit and, of course, the run up to Trump’s election. We decided to write this book even before the election of Donald Trump because we already saw the danger of having this type of conversation, letting nonsense dominate the political debate.
One thing that was very striking in the lead up to both events is that nobody seemed to pay attention to economists quoting the book. We quote in the book a [British] poll from YouGov, it was taken in 2017, which said that economists are the least trusted people except for politicians. We replicated the question in the US in 2018 and we found the same thing.
Feloni: And had your work in development economics created a process that you could apply to things that maybe were not typically in your wheelhouse? Was that able to translate?
Banerjee: Part of what we had tried to do with the previous book, “Poor Economics” [published in 2011], was to try to say, “Look, there’s actually a bunch of facts out there and we often breeze along very well without paying any attention to them.” It seemed like the entire conversation can be independent of that. But there’s actually a bunch of people now, turning to the new book, working on the kinds of issues that are at the forefront of the political debate in the US where there’s really good, high quality work.
Any reasonable reading of the evidence of the last 20, 25 years is economics has become more and more an evidence-driven field. I think that it’s very clear that at some level that the facts are just not in line with what people are claiming often.
Feloni: Go more to the evidence and less of the theory.
Duflo: Since we took in “Poor Economics” and in fact, marginally, in all of our work, we do know that our intuitions are usually wrong, particularly when they are coming from decades of being unquestioned in a way. So, they have to be confronted by facts. And often the fact will surprise. That’s the attitude that we are bringing now to issues like immigration and trade and polarization.
Feloni: When you were going through this and accumulating everything for each of these topics, was there something that actually surprised even you?
Duflo: There’s the fact that immigration of low skilled workers really seemed to have no impact on the wages of the low-skilled native people. That’s a fact that kind of flies in the face of a lot of people’s intuitions. It’s only because we’ve heard it over and over and over again from our colleagues that for us it was not news, but for a lot of people I think it will be.
One thing that did strike me as something that I had not fully realized the extent of, is how immobile people are geographically. And for the US, I don’t think before writing this book I knew that only 3-something percent of people move from one county to the next in a year [down from 7% in the 1950s]. I think this will be very surprising to most people. In fact, it’s so surprising that sometimes when we talk about it people don’t really want to hear it.
The reaction to inequality
Feloni: You explore the global rise of right-wing populism and nativism, but how do you view the opposite side, especially when there is a resurgent left in the United States and the UK? If we want to just look at the US, for example, I’ve had some conversations about how it’s a new Gilded Age for the US and that’s why you’re having a new progressive movement and nativist movement, and it almost seems like a repeat of history. Is that a little bit too narrow minded?
Banerjee: I hadn’t fully made that connection — it’s as a very nice connection to make. I do think that there is a sense in which, like in the Gilded Age, there was a moment where media was very important and there was a sense in which exposing the gap between the myth and reality was very important. America was, after all, always built on a pedestal. There was this vision of America as this unique nation, entirely governed by principles of liberty and equality, and the fact that this was at odds with what was happening on the ground was something that came out.
And I think that particular thing is coming back. You can give many, many arguments for what’s going on and you can defend the status quo in one way or the other, but in the end it doesn’t hang together. We just see the facts that are so glaring. The fact that the death rate among the white population is rising, these kinds of facts are so glaring. The Gilded Age has that same feel of being, “Cut the crap. We’re really in a place where we could not imagine we would ever end up.”
Duflo: What we are referring to as the “hard times.”
Feloni: Yeah, exactly. There you go.
Duflo: The hard times were [initially] referring to the UK, but there was some thing very much similar that was happening, apparently. There was a lot of disruption and a lot of wealth being built on the back of a lot of hardship for people. I think one thing that has happened slowly, slowly in the last several decades is that neither the right nor the traditional mainstream parties were interested in the economic fortune of the bottom 50% of the income distribution, if you want.
The right because they’ve never really been interested in them — that’s not what right-wing parties are for in general. The left because it became more the party of educated people who then started fighting for educated people’s value, including, you know, identity fights, inclusiveness, liberal things — all sorts of good stuff, but giving up on being class-based. And what is happening now is that both of the right and the left realize that it’s not tenable, and that you have to go back to offering something to the bottom 50%.
And the right has taken a leaf from the playbook of the identity-based fight of the left, of thinking, “We are going to give them back an identity. They don’t have money but we are going to give them back a status. They feel completely abandoned and we are going to say that they are a victim of a war.” And now what the left is grappling with are reasons whether or not they can go back to a more traditional economic populism. Which it’s like, rethink the left as a party economic distribution.
It should be more than Medicare for All
Banerjee: I mean, strikingly, you hear about the wealth tax, but you don’t hear very much about what they’re going to do with it. You hear Medicare for All, but that’s it.
Duflo: Medicare for All has hijacked the conversation.
Feloni: Do you see that as a negative thing?
Banerjee: Yes, absolutely.
Feloni: How come?
Duflo: There is so much more to talk about. There’s Medicare For All among [Sen. Elizabeth] Warren and [Sen. Bernie] Sanders and then UBI [universal basic income] for [presidential candidate Andrew] Yang. And there’s so much more than those two things that should be discussed when we talk about wealth distribution.
Banerjee: In particular, the point of a Medicare for All — I think in any civilized society, nobody should be without some amount of medical care.
But the impact isn’t biggest on people’s health. It’s more, they’re frightened and worried. So, it’s not a bad thing to do, but where the real sort of very clear crisis is there are pockets of people, where there’s been a decline over 30 years and there’s been no attempt to rescue them.
I’m surprised that there isn’t an attempt to say, “Look, we’re going to target the people who have really, really done badly and we’re going to find ways to get them out of where they are.” And I think there’s a sense in which the blandness of medical care for all is, politically, a mistake. You want to actually take a stand which says, especially for a certain set of people who are unwitting victims of all the economic changes we have imposed on them, let’s do something very real and specific. And I think the lack of specifics is bothersome.
Duflo: Justifying the whole increased 6% wealth tax to finance Medicare for All seems such a waste. There’s such a crisis in the legitimacy of government that we document in the book that if you are going to do wealth tax, you should do something with that money that is of first order in people’s life.
Feloni: What’s the main priority?
Duflo: What Abhijit was talking about, which is helping the people who have been frontally hit, displaced workers. And that can take different forms, like for the people who are 30-something and can move. What we discuss in the book is a GI Bill-like program, which is a really generous, extended to employment insurance and to a high quality university, such that it helps with that transition. Any other ways to help that transition, like housing, help with childcare, et cetera. And then, there is a whole set of things of creating good jobs which can be done out of a government budget, if the government budgets were higher. You can think of clean green jobs being part of them, but also preschools and elderly care.
And finally there are the people who are not going to be able to move, and we need to do something to try and catch them and help them before they lose dignity and self-respect, and maybe have subsidized funds to keep them in place. We are not even saying these are the the greatest ideas in the world, and someone needs to adopt them and run with them. We are just a bit surprised that that’s not the core of the conversation.
Feloni: Even when you’re saying green jobs, another thing that you explore is the conversation around climate change. That seems to be discussed often in extremes as well, where it seems as if there’s not going to be any real progress, and then the US has officially decided to come out of the Paris accord. Is there any chance that anything is actually going to be accomplished?
Banerjee: It’s a hard question. In some ways, right now, it’s really outside the US political conversation. It’s not there. So, what will bring it back? That’s why I think is very important that the first investment in the US is in restoring some faith in government. I think there’s a sense in which all of the people who really need the help think, “All of these things are frauds.” And I think that deep skepticism of the government is a core problem. Whenever any policy is proposed, they think it is some piece of an elite fraud, and I think that reaction has to become better.
I do think that the Democratic candidates are right in not getting into this, in the sense that I don’t think it’s a vote winner. They have to start by doing something immediate for the people who are suffering. Promise them something; deliver something. When people feel more confident, they’re more generous.
Feloni: Do you see this as all part of a reaction against the neoliberal world order? Do you think that this is kind of a blip or is this actually a global movement where we are rethinking capitalism in a real way?
Banerjee: I think we are rethinking it. Whether we can get anywhere with the rethinking, that’s a different question.
Feloni: Do you see signs that this is going to lead to an actual shift?
Duflo: Politically, there has already been a movement to elect strongmen and to give up on democracy. That has the possibility of really changing, dramatically, everything about how we live, including the economic system, and much deeper than that. But if somehow we manage to avoid that, it seems that the conversation on economics may be over-dramatized, in a sense that somehow if you’re in favor of higher taxes it’s suddenly that you want communism.
One thing we explain is that nothing bad would happen if taxes were quite a bit higher because people are just not very sensitive to tax rates when they decide how much to work. First off, the economy would still hum along, but then there would be government money to do things, including help people, victims of shocks, and creating jobs, education, and how to invest in energy transition.
And likewise for climate change, it is not a choice between apocalypse and going back to living in a cave. It turns out that the way that we decide to consume, we are not so attached to them that they couldn’t be changed at very quite low costs. We’re creature of habits and if you nudge people a little bit in different habits, then after a while they wouldn’t know the difference.
The hope is that if we lower down the emotional debate and become pragmatic about talking about problems and solving them together, it would be much easier and much less of a commotion as we make it out to be.