Review: Good Economics for Hard Times

Review: Good Economics for Hard Times

Good Economics for Hard Times: Better Answers to Our Biggest Problems by Abhijit V. Banerjee

My rating: 4 of 5 stars

Economics is too important to be left to economists.


After listening to a series of lectures on introductory economics, I was struck by the degree to which the basic logic of supply and demand was used to make sweeping pronouncements about human behavior and economic policy. The lecturer, starting from the premise that supply and demand is inexorable, would rule out certain policies as working against the market, while promoting those he considered ‘market-friendly.’ But rarely did he stop to actually examine a case study to see how these theories played out, leaving me with the impression of a wholly a priori logic.

The central thrust of this book is that a priori logic cannot be trusted. The economy is complex and unpredictable, so the best way to understand it is through historical case studies and randomized control trials. The authors find that, when we examine the economy in such a way, many of our intuitions about how the it works or will respond to certain policies are wrong. Indeed, though this could hardly be called a revolutionary book—its tone is engaging but mostly academic—the two authors, Banerjee and Duflo, reach quite heterodox conclusions.

One basic economic argument used against permissive immigration policies is that the increased supply of cheap labor will inevitably drive down wages, thus hurting native workers. The logic is simple but it does not hold up under the evidence. In case study after case study, immigration is shown to be either economically neutral or beneficial to native workers. Indeed, ironically—and contrary to what Trump and his ilk may say—low-skill immigrants are better for native workers than highly skilled ones, because they often take jobs that native workers do not want—jobs requiring little communication and much labor. Native workers may even benefit by being promoted to managerial roles. A multilingual immigrant doctor actually competes more directly with native workers than a monolingual immigrant fruit picker.

Perhaps you can see that the above supply and demand argument against immigration is simplistic, since immigrants, apart from increasing the labor supply, also increase demand for goods. Indeed, most professional economists are decidedly in favor of migration. Workers have much to gain from moving to where their skills will be most highly rewarded; and businesses would gain from having good workers. But here the economists’ logic is shown to have its own flaw. Real workers are actually quite averse to migration. Banerjee and Duflo show that, even when a better job may just require move from the country to the city, most will simply not go. There is a large amount of inertia built into real people’s lives—the pull of family, friends, and familiarity—which works against even obviously beneficial moves.

This is not the only way that the real economy is (in economic parlance) ‘sticky.’ Though economists imagine a world of workers ready to move and re-train, of companies willing to fire and hire, banks that drop bad investments and jump on promising new ones, firms willing to relocate to new countries with cheaper labor, new businesses popping up and inefficient ones disappearing—in a word, a dynamic world governed by shifting supply and demand—the real world is consistently stickier than this logic suggests. This seems particularly true in the developing world—the authors’ main area of study—where they found that efficient and inefficient businesses coexisted, where bad-selling product lines were retained, where banks merely rubber stamped loan applications from existing clients, and where people do not migrate for work, or even take the work that is available locally.

Inhabitants of planet earth will likely not be surprised by all this. But the upshot, the authors argue, is that free trade does not deliver all that it promises. Now, the logic of free trade is simple and compelling, grounded in the law of Comparative Advantage put forward by David Ricardo. Simply put, this law states that we all will benefit from trade, since we can all specialize in what we are comparatively better at doing.

But the logic has not exactly played out as hoped. Though touted as a way of propelling developing nations out of poverty, in practice free trade policies have a mixed record. The authors use the example of India, which transitioned from a highly-regulated economy with high tariffs to a free market with low tariffs in the 1990s. The result of this transition was hardly the economic wonder that some economists could have predicted. In many places, wages actually went down rather than up, and in subsequent years much of the economic growth has simply gone to the country’s rich. This is not to say that the results of economic liberalization were all bad, only that it was hardly the panacea that free-market advocates promised.

The consequences for rich nations, like the United States, have also been mixed. While most economic transitions involve winners and losers, the shock of free trade has benefited those who were already ‘winning,’ and hurt those who were already ‘losing.’ In other words, while the big cities full of college-educated workers have grown richer, the arrival of cheap goods—mostly from China—has ravaged many blue-collar communities.

Admittedly, the theory of Comparative Advantage does predict that free trade will temporarily hurt some workers who are forced to compete with cheaper goods from abroad. But the belief in economic adaptability (not to mention the political will to help assuage the problem) was overly optimistic.

Even when jobs disappear, workers do not move. Many simply go on disability and leave the workforce entirely. In short, workers are sticky. Not only that, but the United States has been very bad at redistributing the gains of free trade in the form of worker retraining and extended unemployment. No wonder that many in the country are skeptical of the benefits. However, the authors are careful to note that the solution to this problem is not to impose new tariffs on China. This will only create further economic harm in other sectors (like agriculture) without remedying the harm already done. What is needed, the authors argue, are generous government programs to either re-train displaced workers, or to subsidize industries that are being driven out of business.

This leads us to the longest and most theoretical chapter in this book, that on growth. The argument is fairly dry but the conclusion the authors reach is striking: we do not know what makes economies grow. The greatest years of economic growth were between the end of WWII and the 1970s. This was also a time dominated by Keynesian economics, which led many to give Keynes the credit for this economic miracle. But the magic wore off with the coming of stagflation, which the Keynesian seemed powerless to stave off. This crisis brought the managed economy into discredit, and ushered in the neoliberal revolution, where deregulation, lower taxation, and free trade were seen as the best tools to rejuvenate the economy. Unfortunately, that did not work, either, and growth has never picked up to pre 1970s levels.

Instead, what has grown since the neoliberal turn has been inequality. Rather than stimulate the economy into mad activity, these policies have merely directed what modest economic growth there has been to the much-maligned top 1%. And their political influence has grown right along with their fortunes, which only reinforces the government’s tendency to embrace these sorts of ‘business-friendly’ policies.

As usual, the economic logic used to argue in favor of these policies—that lower taxes on the rich will spur greater activity—is supported by a priori logic rather than actual evidence. But the evidence does not bear it out. People work just as hard whether they are being taxed at 30% or 70%, or not at all, as demonstrated by a series of tax holidays in Switzerland. The notion that high salaries reflect employee value (which supply and demand would predict) is also not supported, as demonstrated by the remarkably high wages paid to those who manage stock portfolios, which consistently underperform against index funds—meaning that the wages are essentially a rent for holding onto money. (And since the high salaries in finance influence salary negotiations in other industries, this increases salaries across the board.)

A strange picture emerges from all this, a picture of an economic policy—at least in the United States—that is entirely divorced from reality. We wring our hands about immigration at a time when immigration is not going up, and even though immigrants pose no credible economic or cultural threat. We argue about tariffs but not about how to actually help those hurt by free trade policies. We cut taxes and deregulate businesses in the name of growth that never appears. Meanwhile, automation is likely to make many of these problems that much worse, and we persist in putting off any action related to the looming climate crisis.

The current pandemic—and concomitant economic crisis—has only put this magical thinking into high relief. Perhaps the best thing to call it is free-market fundamentalism: the belief that the economy, acting on its own, will sort out all of our problems—from poverty to pandemic—without any government aid. Strangely, it is a faith held most ardently by those who see the least evidence for it: people who have been hit by the economic dislocation of free trade. Indeed, at just the time when inequality is rising, we have embraced a kind of social Darwinism that treats the economic pecking order as a perfect reflection of personal merit. This mentality, resting upon the assumption of an imagined economic mobility (which is even lower in the US than in the European Union), justifies both extreme poverty and extreme wealth, since both are ‘deserved.’ To the extent that anyone is held responsible for the situations, it is either outsiders like immigrants or minorities, or the government—not the wealthy.

As Manny has suggested, the situation is rather reminiscent of the USSR in its final years. In both cases we have an economic philosophy based on a priori logic rather than evidence, and believed on the same grounds. As this philosophy fails to deliver, the country’s elites still do not publicly renounce it, but instead only increase their displays of fervor. Rather, entirely irrelevant factors—immigrants, minorities, nefarious citizens—are used to explain the lack of prosperity. Meanwhile, the rich line their already deep pockets while spouting the old egalitarian slogans. The result is a society gripped by nihilism, wherein the old ideals become barely-disguised lies by corrupt and incompetent leaders, and anger and hopelessness descend upon a country that senses it is going in the wrong direction but does not understand why.

This may seem rather hyperbolic. But when you consider how bad things have gotten in the United States in the short time since the publication of this book, when it was already quite bad, then perhaps you can see the justification.

If our economic logic is often misguided, and our policies either useless or worse, what do the authors suggest? Here is where I thought that the book was mostly lacking. Banerjee and Duflo are extremely heterodox when criticizing conventional economics, but are not nearly so bold in proposing solutions. Their general point, however, is that we ought to shift our focus away from trying to grow the economy—since we do not know how to do that anyway—and towards most justly distributing the resources we have now. High tax rates on the rich will help curb inequality without reducing effective incentives. Coordinated efforts between countries can help to reduce tax dodging, and enforcing anti-trust legislation will help curb corporate power.

The authors have a fairly nuanced view of basic income. They think that basic income schemes work well in developing countries, where the poorest are mostly working a variety of temporary or seasonal jobs. But they do not think UBI would work in developed countries, because people have come to rely on jobs not only for income but for structure and even meaning in their lives. In studies, people who stop working do not tend to increase time socializing, or volunteering, or on hobbies; instead, most people end up just watching a lot of television—which does not increase happiness or well-being. This is why the authors prefer significantly stronger unemployment support—helping workers to retrain and relocate.

This seemed somewhat timid to me. But perhaps it is misguided to seek bold, sweeping solutions from authors who insist on hewing to trial, experiment, and evidence. Hard-headed economists, the authors do not promise miracles. Yet if you are looking for a probing and insightful look at many of our current economic woes—now only exacerbated by the coronavirus recession—then this book is quite an excellent place to start. The most pressing point is that our economical problems have political solutions. As usual, the only thing we need is the political will to start acting.



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Letters from Spain #8: Climate Change and Immigration

Letters from Spain #8: Climate Change and Immigration

Here is the eighth episode of my podcast about life in Spain. In this one, I talk about the UN Climate Conference that’s being held here in Madrid, as well as the process of working legally in Spain as an American.

https://podcasts.apple.com/us/podcast/letters-from-spain-8-climate-change-and-immigration/id1469809686?i=1000458741282

For the transcript, see below.


Hello.

Today I want to talk about two things that cause a lot of anxiety, climate change and immigration. (Though, they tend to cause different sorts of people anxiety.)

Well, we have a short week here in Madrid—thanks to the Day of the Constitution, on December 6th—but still quite an eventful one. As far as the news is concerned, the biggest event is the COP25: the 25th United Nations Climate Conference. It is being held in Madrid, in a place called IFEMA, which consists of a bunch of big empty glass buildings for holding big events. For example, this is where I had to go to register for the Madrid half marathon. They also have a special travelling exhibition about the tomb of Tutankhamun there now.

Brazil was originally supposed to host the event, but the election of Jair Bolsonaro—a version of Donald Trump—mooted that plan. Chile then offered to host the event; but political unrest in that country forced them to pass the torch to Spain. The highest profile guest at this climate talk will, no doubt, be Greta Thunberg, the 16-year-old activist from Sweden. She hasn’t quite arrived in Madrid yet, since she had to come all the way from New York, and she chose to cross the Atlantic in a boat rather than a plane in order to reduce her carbon footprint. It took her 21 days to make the crossing (she was slowed down by adverse weather), and has just arrived hours ago in Lisbon. (I wrote this yesterday on December 3rd.) She was in New York to participate in the 2019 UN Climate Action Summit, which was in September. So it seems like she’s following me around.

The main goal of this Madrid conference is to hammer out Article 6 of the Paris Agreement. Basically, this is an attempt to create a kind of global emissions market, wherein low-emissions countries will be able to sell their excess allowable emissions to other countries. I think it is a good idea. But I have to admit that, as the years go by, I get more and more depressed when it comes to climate change. Yesterday at the conference, Spain’s president, Pedro Sánchez, said: “Today, fortunately, only a handful of fanatics deny the evidence.” Unfortunately, one of those fanatics is in the White House, which has caused the United States—the second-biggest producer of greenhouse gases—to pull out of the agreement entirely. Meanwhile, most other countries have not been able to reduce their emissions sufficiently to stay within the goal (which is a 1.5 degree Celsius rise in global temperatures). China, for example, which is the world’s biggest greenhouse gas contributor, is still increasing rather than decreasing its emissions.

I remember when global warming was considered to be something we had to solve for our grandchildren’s sake. But as the years have gone by, and governments have continued to sit on their hands, the problem has become increasingly acute—not a problem for future generations, but for us. Unfortunately, by their very nature, these huge international agreements take a lot of time. And even if the U.N. does pass sweeping resolutions, these laws must still be hammered out and enacted in all of these different member states. Democracy is an awfully slow form of government, while climate change keeps accelerating.

As far as Spain is concerned, I think the country is doing decently well. There is a robust public transport system. If you go up north, especially to Galicia, you can see dozens upon dozens of wind turbines, which supply a sizable proportion of the country’s power. And if you go south, it is not hard to find solar panels baking in the Meditteranean sun. Near Seville, from the highway, you can see the PS10 solar power plant—which uses hundreds of mirrors to focus light onto a central point elevated on a tower. It looks quite cool, and somehow reminds me of Sauron’s tower from Lord of the Rings. Last year, in 2018, renewable energy accounted for 40% of the energy produced in Spain. The comparable figure for the United States is 17%. To pick a more humble example, I was happy to find that the little vegetable bags in my supermarket are biodegradable.

In any case, while climate change is threatening and occupying the world, my little world has been occupied by issues of immigration—namely, my own immigration. For the fifth time, I had to go and renew my visa in order to stay in Spain. So I thought that I’d take a little opportunity to walk you through the process of legally working as a language assistant in Spain as an American.

You start off in America, obviously. Now first you need to secure a job as a language assistant. The most popular way to do that is through the Ministry of Education program, but there are several others in Spain. You apply online and, assuming that you’re accepted into the program, you will be emailed an official letter stating the details of your job. This letter can sometimes take a distressingly long time to arrive, and some years it takes longer than others; but once you have that letter you are ready to apply for your visa. To do this, you need to locate your nearest consulate. I am lucky to live near New York City, where there is one, but for many people the nearest Spanish consulate is hours away.

To apply for the visa, you need to gather several things. There are easy things like writing a check for the fee and filling out a form. And then you have the official letter with your job details. But then there are more difficult things. You need a doctor’s note saying that you’re in good health, and this means a visit to your doctor. You need proof of financial means, which you can do either with a bank statement or with a notarized statement from a parent. The most difficult thing is the background check. You need to get this from the FBI. And since the FBI itself takes a long time in doing background checks, probably you’re going to have to use a ‘channeler,’ which is a third-party company that speeds it up. To do this you’ll need to go get your fingerprints taken. Now, once you get your background check back (and let’s assume you have a clean record) you’re still not done. Now you need to get what’s called an apostille, which is a document certifying the background check for international use. To get this in a reasonable amount of time, you need to pay another channeling service.

Ok, so we gather all of these documents together. When I got my visa, all I had to do was to mail my documents in with my passport, and they would send my passport back with the relevant stamp in a few weeks. But that system worked a little too well for the Spanish government, so they decided to change it. Now you need to book an appointment and physically bring all your documents into the consulate office. This wouldn’t be so much of a problem if there were appointments, but when my brother had to do it, all of the appointments were booked solid for months. (Lucky for him, they gave him an “emergency” slot.)

Well let’s say you go through all of these hoops and they give you back your visa in your passport. Hurray! But wait, you’re not done. This visa only lasts about three months. It’s really just to get you into the country and settled. Once you get in, you have to apply for your real identity card. And this, of course, is another long process. You need to make an appointment at a special police station (in Madrid it is in a place called Aluche) and then get a bunch of documents in order: the form, photocopies of your passport, new passport photos, your official job letter, and proof that you paid the fee. (Paying the fee is usually the most annoying part, since you need to do it in a bank, and the banks are not cooperative.) You show up on the appointed day at the appointed hour, wait a long time in a line, and then give your bundle of papers to a person behind a desk, who then scans the fingerprints of your two index fingers.

Oh, I also need to mention a document called an empadronamiento (a little hard to say). This is basically a registry of where you live. To get this, you need to make an appointment, fill out a form, and then go to the office on the appointed day with your rental contract and a recently paid bill (and copies, of course). You need to do this before the fingerprint appointment, so be careful!

If this goes well, you still have a little task to do, since it takes them about a month to print your identity card. So you need to take a little receipt and come back in 40 days to pick up the card. Now, something interesting happens if you, say, want to go back to America for Christmas break, but you don’t have your identity card yet (and this is fairly common). In that case you need another special piece of paper called the Autorización de Regreso. This allows you to exit and enter Spain without needing a visa for a period of ninety days. To get this, you need to get a whole bunch of other papers together, etc., etc., etc.

What I just described to you is what may be called an ideal process. It can, of course, go wrong in all sorts of interesting ways. I already mentioned that the appointments at the Spanish consulate in New York City fill up so fast that it can be impossible to get anything within three months. My brother would have been in a bad situation if they had not made a so-called “emergency” appointment for him, and they only did this because he has a government job. A slight error can also totally upset the process. When you pay the fee, for example, the person at the bank gives you back two receipts of payment: one for the government, and one for you to keep. They look absolutely the same except for some fine print on the bottom. Once, without either of us noticing, the man at the bank only gave me one of these back. So when I went to my appointment, the bureaucrat wouldn’t accept my application because I only had the receipt for me and not for the government. Nevermind that either receipt equally proves that I paid the fee, the fine print on the bottom is different. So I had to make a new appointment, go back a month later, and do it all again.

My worst experience was with the regreso document. In the past, the regreso was given out to anyone who showed up with the proper forms. All you really needed to say is that you had a flight soon, and it wouldn’t matter if you had an appointment. I thought this was very nice, since there are many situations when you might need to leave the country on short notice. But this system was too convenient for the Spanish government, so they changed it last year, requiring that everyone have an appointment. Nevermind that the appointments are not available within a short timeframe and are sometimes not available at all.

Well, suffice to say that I wasn’t aware of this rule change. So one summer I went to get my regreso before going back to America, and found to my horror that they wouldn’t give me it. This, despite being there, sitting in the desk with all of the requisite papers. The woman refused to accept them and I was sent packing. I ended up buying an entirely new flight. And the irony was that I wasn’t even asked for my regreso document upon getting back to Spain—something that very often happens. Indeed, I have found that it’s much easier for me to get into Spain than into my own country, since the Spanish are in general a lot less paranoid when it comes to foreigners.

So that’s my immigration story. After all this, I get a little green card that is valid for about six months. As a language assistant, you get a student visa for some reason, which is why you need to renew it every year. I am sure it could be much worse. I bet it is worse in my own country. But I do wonder what, if anything, all of this bureaucracy is really accomplishing. For example, with every application I need to include scans of my passport, which has all of my basic information. Then I need to put my basic information on a form. And all my basic information on the bank fee. And my information is also in my job letter. So, considering all the applications for various things, the Spanish government has dozens and dozens of documents with my basic information, all stored away in God knows where.

To me, it seems that this huge process only guarantees that people fill out the right forms and pay the right fees. I have a very hard time believing it keeps anybody safe. Think about it. If I was really up to no good, I would just enter Spain on a tourist visa, overstay it (which a lot of people do), and live off the grid. And think about how much all of this unnecessary bureaucracy is contributing to global warming? So here’s my proposal: open the borders, eliminate all of these petty and useless processes, and then put everyone to work building solar panels or something. I am sure the world would be a better place.

Thank you.