Good Economics for Hard Times | Abhijit V. Banerjee

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


Are you losing faith in economists and their abilities to tackle the world’s most pressing problems? ‘Good Economics for Hard Times’ offers an insightful analysis of various pressing issues, from immigration and climate change to automation and economic inequality. Authors Abhijit V. Banerjee and Esther Duflo bring nuance and evidence-based discussions on the growing presence of robots, the impacts of globalization and ways to address wealth inequality. By providing intriguing evidence from real-case scenarios, this book summary will challenge common misconceptions and stir up a deeper understanding of the complex issues we face today.

Building Trust in Economists

Public perception ranks economists low on the trust scale, often associating them with biased agendas and extreme ideologies. To counter this mistrust and effectively communicate their valuable insights, economists must present clear thought processes, accurate data, demonstrate a willingness to revise their opinions, and openly admit their fallibility.

In a poll measuring trust in various professionals, nurses came out on top, politicians at the bottom, and surprisingly, economists landed just above politicians in terms of reliability. There could be several reasons for this public mistrust in economists. Often, economists featured in the media are employed by companies with vested interests in promoting a specific market agenda. Additionally, prominent economists with extreme ideologies, either on the right or left, tend to dominate public discourse and may not always provide balanced, trustworthy analysis.

What exacerbates this problem is the lack of clear communication of evidence and reasoning by even skilled economists. They can appear confusing or disordered, as their opinions may conflict with those of politicians. However, the mistrust of economists is concerning, as they can provide crucial insights to solve some of today’s most critical global issues.

To regain public trust and effectively discuss pressing matters, economists must change their approach. First, they should transparently share their thought processes along with conclusions, enabling public understanding and trust in their assessment. This includes disclosing the evidence and data they base their arguments on.

Secondly, economists need to acknowledge their fallibility. The current political and economic discourse has devolved into unproductive arguments, with each side stubbornly defending their own viewpoint. To break this cycle, economists must be open-minded, receptive to new evidence, and willing to revise their opinions and concede when they are mistaken. By adopting these practices, economists can work towards rebuilding public trust and ensure the valuable insights they provide are recognized and utilized.

Debunking Immigration Myths

Immigration is often portrayed as a threat to native jobs and resources; however, evidence suggests that the reality is much more nuanced. Studies show that individuals choose not to migrate based solely on the potential for financial gain, as they value social ties, familiarity, and emotional considerations over increased economic welfare. Countering politician’s fear-inducing rhetoric, it is important to recognize that immigration can be beneficial for unskilled workers when appropriate incentives are provided.

Immigration remains a hot-button topic for contemporary politicians like Donald Trump, with many framing it as an invasion from resource-hungry individuals threatening the local way of life. The economic model of supply and demand is often employed to explain how an influx of immigrants leads to an oversupply of cheap labor, causing lower wages and job losses for native workers. While seemingly convincing, the actual evidence tells a different story.

Contrary to popular belief, the promise of increased income alone is not enough to motivate people to leave their home countries. When the Greek economy collapsed in 2013, it was expected that millions of Greeks would migrate to wealthier European countries, which was legally possible due to Greece’s EU membership. However, only a mere 3% of the population ended up leaving.

Moreover, research indicates that people are generally hesitant to relocate even within their own country. A study in India revealed that rural inhabitants of Bihar and Uttar Pradesh could double their income by moving to cities, but out of 100 million impoverished individuals, only a tiny fraction did so.

It becomes clear that a variety of factors keep people rooted to their homes, including family connections, support networks, and fear of the unknown. Human experiences are nuanced, and economic theories undersell the importance of these emotional considerations. How can we accurately measure fear of change, the responsibility to care for elderly parents, or the desire for children to grow up with fresh country air?

Rather than dismissing immigration as a looming threat, a more productive approach would be to provide well-thought-out incentives for people to migrate. The potential benefits of immigration for unskilled local workers can be realized when appropriate policies and encouragement are implemented.

Immigrants Boosting Local Economy

With the influx of immigrants, one might assume that they are stealing jobs from locals and destroying the labor market. But in reality, immigrants not only bring a supply of labor, but also stimulate demand for services, ultimately creating a more prosperous economy for all. Moreover, locals hold an advantage in terms of social networks and job-specific skills, helping them maintain job security. Immigrants often settle for jobs overlooked by locals, making valuable contributions to the community and promoting economic growth.

Imagine your town has recently seen a surge in its immigrant population. Your initial reaction might be concern about potential competition for your job. However, you soon observe that your restaurant starts filling up with more customers than before. This influx of new residents not only creates a demand for services like yours, but also generates revenue for local businesses that employ low-skilled workers.

Many proactive immigrants even establish their own businesses, further contributing to job creation. In 2017, it was found that 43 percent of America’s top Fortune 500 companies were founded by immigrants or their descendants, such as Steve Jobs or Henry Ford. This information discredits the belief that immigrants are a threat to the labor market for low-skilled native workers.

One of the reasons immigrants don’t outcompete locals is because they often lack the social networks and local knowledge that native workers possess. Employers usually seek reliable, well-performing employees and tend to prioritize people they know or have a strong recommendation. Locals thus remain favorable job candidates, even if they are more expensive.

Additionally, locals possess skills that immigrants might not yet have, like language proficiency. In fact, a Danish study revealed that native workers in areas with higher immigrant populations were more likely to transition from manual labor to skilled jobs.

Ultimately, immigrants tend to fill positions that locals might not want, such as cleaning or childcare. The increased supply in these industries may cause a decrease in wages, but it can also benefit workers, as seen in the case of a low-income mother who gains affordable childcare, allowing her to work and earn a living. In conclusion, immigrants not only contribute to the local economy but promote its growth as well.

Trade Theories vs Reality

International trade agreements are often portrayed as beneficial for all countries involved, but they overlook the lack of flexibility present in both industries and workforces. When countries are expected to switch their focus to new products, the reality is that workers struggle to move and change industries, and companies face difficulties in discontinuing unprofitable product lines. New companies are often unable to secure credit from banks and struggle to build trust with foreign buyers. This results in a vicious cycle where companies in developing countries are unable to improve and grow, limiting their international trade potential.

Advocates of international trade agreements often argue that countries can maximize their profitability by focusing on their areas of expertise and exchanging goods and services accordingly. Countries like Egypt can capitalize on their low-cost workforce by exporting labor-intensive products, while China can harness its technological prowess to dominate the global market for computer parts.

However, the optimism of these trade theories overlooks fundamental roadblocks in real-world economic flexibility. Contrary to the malleable workforce portrayed in trade models, many workers face significant barriers in changing industries or relocating for better job opportunities. A new job often requires moving to a different area, which in turn can prove impractical or impossible for many.

Companies, too, exhibit surprising levels of rigidity. Petia Topalova, an MIT economist, discovered that Indian companies rarely discontinue unprofitable product lines due to difficulties in obtaining credit, reinventing their offerings, and securing refinancing. Aspiring start-ups seeking to create innovative products are often denied the necessary financial support from banks, while older, struggling companies continue to receive funding.

Even if a company does manage to develop a new product and secure its place in the local market, competing in the global arena is no easy feat. Establishing a reputable image takes time and effort, and foreign buyers remain cautious when it comes to trusting new sources. In developing countries, this leads to a vicious cycle where businesses struggle to improve their quality and production capabilities, ultimately limiting their prospects in international trade.

Trade Wars: Beyond Short-Sightedness

Remember Trump’s 2018 protectionist move of imposing heavy taxes on Chinese aluminum and steel imports to safeguard local jobs? While this tactic indeed seemed to secure steelworkers’ jobs by increasing demand for local steel, it was shortsighted. China’s retaliation was placing its own tariffs on US agricultural products, leading to significant consequences for the agricultural industry. As a result, farmworkers’ jobs were at risk when American agricultural exports became too costly for the Chinese market.

The phenomenon known as “the China shock” demonstrates the disastrous effects of competition from inexpensive Chinese imports. Take Bruceton, Tennessee: Home to a clothing factory employing 1,700 people, Bruceton faced a financial crisis after the factory’s closure, transforming from a bustling town to an eerie, desolate place. With the town’s decline, investments for new businesses or factories withered, leaving unemployed residents stuck with limited options.

So how can the US help those losing their jobs to global trade? The Trade Adjustment Assistance (TAA) program offers unemployment insurance extensions, training, and support for entering a new sector, as well as financial assistance for relocating. However, despite having all the right components, the TAA is massively underfunded.

The solution doesn’t lie in merely imposing tariffs—this approach is far too narrow. Instead, substantial investment is needed to help the newly unemployed adapt and regain their footing. By recognizing the complexity of global trade and its implications on workers, we can implement more effective strategies for providing the necessary protection and support.

Climate Change and Economic Vulnerability

The “yellow vest” protesters in Paris at the end of 2018 demonstrated that the fight against climate change is often perceived as a luxury the poor can’t afford, placing a burden on them and leaving the elite unscathed. It is crucial to remember, however, that the poor are already suffering the consequences of climate change, especially in developing countries near the equator. Economic growth has long been prioritized above all, leading to resistance against cutting energy consumption. Nevertheless, to combat climate change, energy usage must decrease. Wealthy countries have a responsibility to support developing nations in their environmental challenges, such as financing cleaner-energy solutions, exemplified by air conditioners in India. Saving our planet does not have to come at the expense of the economically vulnerable; we simply need to redefine our priorities and establish a more equitable distribution of wealth.

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