Esther Duflo & Abhijit Banerjee: Good Economics for Hard Times
People want money yes, but they also want meaning in their life and one thing that a universal basic income doesn't do is provide people with anything close to meaning. We should restore not just people's earnings but way of living.
We had two closely related ambitions. The first one was to contribute to improving the lives of the poor, here and now. The second was to build a better understanding of how they live their lives, from the ground up, by building a fuller picture, one question at a time.
Esther Duflo and Abhijit Banerjee were winners of the 2019 Nobel Prize in Economics for their ground-breaking work on solving global poverty. Using their innovative research based on field experiments, they have created practical tools to improve education, health and economic wellbeing. In their new book, Good Economics for Hard Times, they look at today’s seemingly insoluble problems – inequality, technological disruption, slowing growth, and accelerating climate change – to find the fresh and original solutions we need.
In conversation with UNSW professor Rosalind Dixon, they will explore how cutting-edge economics can take on these challenges and bring the world back from the brink.
ABOUT THE WALLACE WURTH LECTURE
The Wallace Wurth Lecture was first held in 1964 to commemorate the memory of the late Wallace Charles Wurth, the first President of the Council of the New South Wales University of Technology, and the first Chancellor of the University. The first lecture was delivered by the then Prime Minister of Australia, the Right Honourable Sir Robert Menzies and recent speakers have included Gail Kelly, Stan Grant and Daniel Dennett.
Rosalind Dixon: Welcome to Good Economics for Hard Times. Tonight's event is the 2020 Wallace Wurth lecture. Election named after UNSW’s first Chancellor. This event is presented by the UNSW Centre for Ideas. My name is Rosalind Dixon, I'm co-director with Richard Holden of the New Economic Policy Initiative here at UNSW. Unfortunately, Richard is unwell and cannot chair this evening. But it's my absolute delight to step into his shoes. And to moderate this conversation with such amazing economists and distinguished guests, Esther Duflo and Abhijit Banerjee.
Before we begin our conversation about their exciting new book, Good Economics for Hard Times, I would like to acknowledge the Bidjigal people who are the traditional custodians of the land on which we meet and pay respect to Elders past, present and emerging, and to all our Aboriginal Torres Strait Islander colleagues joining this lecture virtually, and pay respect to the country on which they come to us from. Of course, when we pay respects of this kind, it is important to acknowledge that it is part of a broader picture of a struggle for Indigenous peoples in this country for justice. And that part of that journey was culminating in Uluru and the call that came out of that for a Voice to Parliament, and I lend my voice in support of their call.
So our two guests this evening, for most people need very little introduction, but for those of you who are not economics aficionados, Esther and Abhijit really want you to read their book and join them in conversation. So let me introduce them a little bit to you. Esther is the Abdul Latif Jameel professor of poverty alleviation and development economics in the Department of Economics at MIT, in Cambridge, Massachusetts – what the French like to call temple Americain de la connaissance – one of the most amazing global institutions and co founder there of the Abdul Latif Jameel Poverty Action Lab, I know people who've left their modest fortune to the lab, knowing the work that it does, and it has been an inspiration to development economists around the world. Esther has got so many grants and awards, it's hard to list them all. But two stand out prior to the Nobel, the John Bates Clark Medal in 2010, and her MacArthur Genius Grant. She's joined by Abhijit Banerjee, who's the Ford Foundation and International Professor of Economics at MIT, and also the co-founder of the Poverty Action Lab. Abhijit has again received numerous fellowships and distinguished awards, including the Guggenheim Fellowship, and an Alfred P Sloan fellowship. Together, they've written a very, very well read and received book on pro-poor economics. And their most recent book we're going to be talking about tonight is Good Economics for Hard Times. But of course, when you win when you win the Nobel Prize, that becomes the best line on your Vita. And it is worth just reading to you the citation of the committee that they noted their enormous contribution, and, in particular, their experimental approach to alleviating global poverty. What they study is very precise, and provides practical questions that relate to how people live in developing countries. They study how people work, how they eat, how they bring up their families, all with a goal of understanding how we can make their lives better. We've got lots of questions from the audience this evening. And all of them have talked about how much they have enjoyed engaging with the work.
So this new book, Good Economics for Hard Times, is better answers to our biggest problems. Now, the central claim of this book is that economics and economists have a lot of value to tell us. And that too often we overlook those insights, they say we can get better and more effective policy. If we understand economics the right way, as good economics. If we can understand the insights that good economics gives us, we can design better policies, we can expand possibilities for the poor, as well as for the middle class. Two lovely examples in their book. One is about if we can just understand the data we can more radically and quickly effectively eliminate malaria. It turns out the nets actually do work. And there's been a long standing dispute about that and Esther and Abhijit marshal the evidence to say we can get there more effectively and more quickly than we thought. But they tell us, it's actually harder sometimes than we think. There's a wonderful story in the book about weatherization programs in the US and the ability to combat climate change. Turns out, it's much harder than all the engineering estimates and all the optimistic policy assessments and data tells us we've got to work harder, and it's not so simple.
So if anyone can convince us that economics is worth listening to, it's these two Nobel Prize winners. But before we get into some of their specific insights and findings, I want to talk to them about how they became economists. What else might they have been doing with their time? What drew them to the work they're doing as development economists? I know, Esther, that in your Nobel lecture, you gave us a couple of clues. You mentioned other possibilities including a Soviet revolutionary or mathematician? Do you stand by that? Perhaps you can start and then we'll move to Abhijit to tell us about what drew him to the work that you do together.
Esther Duflo: Thank you very much for his very, very graceful introduction. I'm worried it's gonna be downhill from here. So please bear with us, we hope that you enjoy the conversation, I am very sure we will.
So in terms of how I came to economics, it was really by the, by the wayside in a way, from when I was a kid, I was really bothered at a very low fundamental level by the difference in the lives of poor children in poor countries, compared to my life as middle class children in a rich country. And I had a chance to be exposed to that, because my mother used to spend time in poor countries, as a paediatrician, working with children who were victims of war. Not as a full time job, but as something she did on the side. And she came back from this trip with photos and used to show us this, like, traditional slideshow with the little square slides that you might remember from that time. And she used to tell us look, this is how this is your contribution to improving the lives of those children who are so much less lucky than you, to let me, let me go. And I thought, okay, that's okay, that's a contribution, but it's really not that much, and how can I, you know, repay the huge debt I have to nature or to a destiny that I was born in these circumstances. But for the longest time, I really couldn't figure out how, and I was going about my usual business, you know, going to school and trying to do well, and so on and so forth. And I thought maybe I would do history. Although my father was a mathematician and my mother, a doctor, these were two, actually, trajectories that I preferred to avoid. And I studied history. And I maybe felt it was okay, but not quite sufficient. And as you say, I was a little bit tempted to accelerate, change. I happened to be in Russia, at the transition from the Soviet Union. And I participated very briefly to this popular uprising. But I also realised that being a revolutionary in another country was not really like a career path for me. And it's only later when I spent another year in Russia, a full year in Russia, that I discovered the influence that the economist can have, I must say, with a mixture of fascination and, and dread, because I felt that they were very influential, even when maybe they were very wrong, potentially. But then I thought, this is really the best job one can have. Because you can take the time to find the right answers to the question you're asking. But when you have the answer, it turns out politicians are willing to listen. So this is really what I should learn, and I should develop the best answers. And then I will be able to be an academic and take my sweet time finding my solutions, and yet be useful in the world. So from there, there was no looking back.
Rosalind Dixon: That's a great story. You would have been a good permanent revolutionary, but we're lucky that you turned to economics. Abhijit, what was your journey to this place?
Abhijit Banerjee: Sure. So as always, Esther had the foresight to… she knew where she wanted to get to, she didn't know how to get there. I didn't know what I wanted to get to. I was, kind of, one of these people who defaulted studying because I could and quite figure out what else I could do. And, you know, there were people around me, my parents were academics. In the economics, in fact, so, you know, and I, but I kind of fell into it, I don't think it was a long time in my life, I didn't really have a clear sense of what I wanted to do. I was a good student, so my professors will encourage me to take the next step, and the next one and for want of better I did that. So it was very much, like, you know, one day at a time, kind of, falling into it. And I must say that, you know, when I became an economist, as a PhD student, I think, finally, when I committed myself, I really enjoyed it. But even then, I wasn't entirely confident, I knew the kind of economics I wanted to do, I was kind of, I have actually with some success written about many, many fields in economics. And, and it was not, it's only as I, sort of, matured as an economics that I started to realise that my… what troubled me about the economics that I practised was that it's this junction from the reality that I grew up with in Kolkata, where I grew up at the age of a slum in a middle class family perfectly comfortable. But we were literally the last house before the slum began. So it was very much, I mean, I had a completely ringside view of what it meant to be very, very poor. And that was always somehow, in my mind, but not necessarily adequately connected to the other part of my brain, which was, you know, studying models of economics. And, you know, thinking of all the clever ideas I could push, and at some point, I sort of started to see a pathway for bringing those two parts of my brain together. And maybe that's sort of what made me a development economist.
Rosalind Dixon: There are so many wonderful stories throughout the book about your insights from India and the work you've done together and separately in India. And so you can see that view from your house in the slum, in a sense, carrying through into all of the work that you've done. So Esther, you say, you know, being able to show government what the answer is, is powerful. Can you tell us just very briefly, for those who don't understand the methods you've used, what is the identification revolution, and the kind of experiments that you've done to try and prove to government, this is where you should be spending your money, and these are the kinds of policies. What's the quickest and easiest way for people to understand the kind of work you do?
Esther Duflo: So what we, along with Michael Kremer, who shared the Nobel Prize with us, worked with and contributed to generalise, is the idea of using randomised control trials to measure the effectiveness of policy. So what's a randomised control trial? Well, it's the same thing as an experiment you would do to test the effectiveness of a drug. So imagine, for example, that to take a very recent example, a very current example in our lives. There are currently very large trials going on for new vaccines against the Coronavirus. And what they are doing is that they are taking 30,000 people, then they are randomising a number of them to get the new candidate vaccine, and then the other half gets a placebo. And then they are kind of tracing them to see whether the people who do get the vaccine, number one are less likely to become sick with COVID-19, number two, have any side effects that we should worry about. And it's only when those trials are finished that you can get approval for the vaccines because you know, you have something that is effective. And that is not, that doesn't have dangerous side effects.
So in medicine, this has been the standard of evidence for years and years and years. In social science, although there were initial forays in the 60s and 70s, in trying to apply the same method to measure the effectiveness of policy, it was much less used as a standard tool in policy of evaluation and in economics. And yet, you can imagine doing something very similar. So for example, just let's continue with the example of vaccines. Once we have a vaccine you're going to have to surmount a huge amount of mistrust for the vaccine, in particular, for example, among African Americans in the US. So an immediate question would be, what type of policies will be effective? What type of outfits will be effective to encourage African Americans to take the vaccine? And then one could say, well, when could have various ideas. So you could, for example, have an information campaign on television, you can have an information campaign on social networks, you could have, then you could think well, on the contrary, we are going to scare people. On the contrary, we are going to try and give them hope, any number of questions about how to do this effectively. And our main point is that, while you might have hunches and intuition about what might work, in practice, you have no idea how well something will work until you've tried it out. So the best way is to try it out in exactly the same way, as you would test a drug, which is, you know, you have your sample of people, you try two versions of the campaign to randomly selected people. And you see whether people react positively or negatively, and whether or not they get the vaccines. So although this was an example that has not happened yet, what really the Nobel Prize recognized is a huge movement of people which have applied this method in development economics. So in, for example, in the lab that we co-direct and co-founded. There are about 400, 500 people now, is there a cost associated with the lab, and together, they've completed, or have ongoing more than 1000 such projects. Evaluating the impact of things from computers in classrooms, to campaigns to encourage people to get immunised, to campaigns to give information about policy, about politicians, to voters, and so on, and so forth.
Rosalind Dixon: So one of the things that's really fascinating is we live at a time where interest in evidence, as you noted in the book, has been more limited. There's a kind of gap between the compelling evidence that researchers at the lab and others have produced and the ability to persuade governments. Can you tell us about your greatest successes and frustrations in translating your findings in a research setting into persuading governments and foundations to back the findings in their decisions about money and policy? Maybe you first Abhijit.
Abhijit Banerjee: I guess, I don't think that characterization is necessarily fair. I think, if I think about it, you know, relative to 20 years ago, things are just much better. I think one shouldn't take Mr. Trump as an example of anything. I mean, other than how to not behave. But I think, I do think that overall, there is a general recognition that, you know, general principles and intuition are not good enough. I think that I think there's more recognition of that now than there was when we started doing this work, it was, like pulling teeth, we will say we know the answer. And now I think people, there's more humility to go around. I think it's not, it's not perfect, and you have, we have issues on which people just, you can't knock them off, whatever you say. I mean, President Macron was, you know, recently on TV, saying that, you know, he doesn't want to be too generous with the social support during the pandemic, because he was, he's, he's worried that this will make everybody lazy, that's an idea that's been kind of had an amazing shelf life, it's sort of a Victorian idea, and it keeps going and going and going. And you sort of, it's hard to get people to… it’s a pre-Victorian idea, sort of, from the poor laws debate in the UK in the early 19th century. And it just goes on and on and on, and all the evidence that we have from this pandemic, it shows the opposite, that when people got free money to stay home, they said, oh, no, I have a job, I'd rather keep the job and get less money. There is just been no evidence that people you know, poor people, just you know, as soon as they get some money, they just, you know, sort of give up and you know, couch surf. So I just think this kind of thing, some of these ideas are incredibly powerful, and one of the things, one of the projects we take on in the book is to, kind of, try to explain to people why their intuitions are not necessarily correct. I think that's part of the point that we take on in this book is to say that, you know, you might think that this is what economics should say, and on some level, maybe even your 10th grade economics said that, but it's false. There is lots of evidence, we will have tested this. We tested the idea, what happens when people get a cash transfer, a kind of unconditional cash transfer, which doesn't require them to stop working or anything, do they become lazy as soon as the cash drops on their laps? And we find absolutely no evidence, evidence for all over the world, and no evidence that this happens. I think, in general, there are places where I think the evidence is less powerful than it should be. But on the other hand, just to give one positive example, in Indonesia, we worked with the government closely for many years now. We, I mean, we, I mean, J-PAL in particular, Ben Olken and Rema Hanna, who are our colleagues, have worked very closely. I've worked with them and with the Indonesian government, as well. And one of the things that we worked on was these cards that were basically, you know, the problem that they were trying to solve was, how do you get people to get the rice subsidies that they're supposed to get. And basically, at the point where this conversation started, they were getting about a third of the subsidy they're supposed to get, the rest was getting syphoned one way or the other, syphoned off. And then what we proposed is we send them a card with their name on it, so that you are entitled to get this rice, say how much rice, and say how much there is need to pay for it on the card. And then also publicly announce that this is happening, when you do all of these things, so publicly announce the list of people who are supposed to get, when you do all of these things… we did a large randomised control trial covering many, many, many 1000s upon 1000s of people. And we show that base… that improves that, sort of, instead of losing a third of the sub… getting a third of the subsidy, you get more than two thirds. So you really get… and when we told that to the government, they basically printed those cards and mailed them to everybody. So that touches the lives of, you know, 100 million people.
That's, that's sort of… it's not that we always succeed. But I think there's an increasing number of cases where we succeed, the case of the malaria nets is another one, the one you mentioned earlier, Ros. And when we succeed, the number of people who are affected is enormous. And when we look at malaria deaths in the last 10 years, have halved in Sub-Saharan Africa. And that's enormous success by any sort of measure of success, I think, we are talking about the, you know, millions of children who are living till five because of these nets. So I feel that it's, I think it's, in many ways we are living and we live in a really awful time. There's lots of awful stuff happening, lots of governments which are run by awful people. Nonetheless, I think we are, there is also remarkable progress. And it's one of the points we make in the book, that we shouldn't, there's no cause to give up hope.
Rosalind Dixon: And I love the fact that both of those examples are relatively low tech, cheap solutions. It's just about showing that they work and getting them to be rolled out and invested in. I want to pick up on something Abhijit said about, sort of, leakage or corruption in Indonesia. But before I do, Esther, are there any other, kind of, standouts for you, of both success or frustration in translating the findings into the real world.
Esther Duflo: No, I think the examples Abhijit gave were great. So I don't have anything to add to that. I just want to reinforce what he said about the role of evidence in policy making. So I think it shouldn't conflate what we see from the public about some amount of resistance to accept facts, you know, the effectiveness of fact checking the highs of Qanon in the US and so on and so forth, which I think is real, and it's something to be worried about. But we shouldn't necessarily conflate that with how policymakers behave. Because, notwithstanding the large Trump exception, I think what we've seen in the world over the last, maybe 20 years is actually big progress in the willingness to take evidence as an example. I'll cite you one example from Brazil, where researchers provided mayors in Brazil at a conference that they had, like a big conference of mayors, they provided them with the opportunity to get evidence from randomised controlled trials, to choose what could be effective in terms of better early childhood development programs, as well as better programs to get people to pay their taxes. And, they noticed two things, which are both important. The first one is mayor's actually willing to spend some of their own money to receive this information. So they find it useful and important. And secondly, they actually act on it, the people who are presented the information about what works from an area of randomised control trials are more likely to put it into practice once they come back to their cities. I've got… this is the snapshot today, but my strong sense is that this would not have been true 20 years ago. So it's not you know, it fits and starts, but on balance, I would say especially in developing countries, there has been a growing pragmatism in many governments, and a growing willingness to try and do what works and to try to find out from other people’s experience what works as well as to evaluate their own work.
Rosalind Dixon: That's cause for great optimism. So Abhijit, you said about, you know, part of people's rice rations getting syphoned off, and obviously, affects people's livelihood in a very profound and immediate sense. Australians are really, you know, preoccupied at the moment with various minor corruption allegations and scandals. And in a perennial way, it raises the issue of is all corruption bad? Is some amount tolerable? Is it a cost worth bearing? There's a proposal at the moment for a federal commission to investigate corruption, there are ongoing debates in New South Wales. You know, as economists, the sort of interesting thing that you say in the book is maybe some amount of corruption is worth tolerating for some other set of goals. Tell us about why that is, and how much is too much.
Abhijit Banerjee: How much is too much, I'm going to avoid, maybe it would take more than the hour. But the logic of what I think we try to say in the book is very simple. The reason why governments step in is precisely that, because markets don't work. That's why governments step in, that's why governments try to, for example, regulate emissions, or effluence in a factory. That's something that a market will never solve, you know, if you… now, the precise fact that the market doesn't work to achieve these goals, has the consequence that there is a divergence between private incentives and public incentives. And that divergence creates an opportunity for corruption. So, you know, I would… I, as the pollution inspector, really don't so much care about whether your factory is polluting or not. And you as… maybe I care a little bit, you as the owner, maybe you care a little bit, but the fine is large. It should be large, because in fact, the losses are not just to you know, the owner and the and the inspector the losses to the whole community whose water supply is poisoned, so the fine should be large, but the two of us, we you know, we'd rather share some of that money and avoid paying the fine. And that's that's what happens whenever you try to act against the market, that's not a reason to say, we will never act against the market, that would be completely perverse, if one went in that direction, because we lose everything in a sense that has you know, made our lives in fact, possible, in a sense. You know, if we really let loose on all the pollutants that that now we have come up with we probably couldn't drink our water and you know, and couldn't breathe the air. So I do feel that we need to recognise that we need to intervene to stop the market from acting. When we do that, the reason why the market, sort of, all the incentives the markets create, don't go away by magic, we have to constantly fight them. You know, the pollution inspector is thinking, maybe, maybe he's not, maybe he's perfectly honest, many of them are, maybe even a majority are. But you know, some of them are thinking, look, you know, why do I care? I could, I could make, you know, double my salary, this guy would save, you know, $500,000, the factory owner, and we thought we’re better off and who cares about the rest? And that particular situation arises when, you know, so when it arises in the private sector, you see exactly the same behaviour.
This is the expanding scandal in the US of admissions to the elite universities is nothing but an illustration of that. Yes, it's exactly this fact that, you know, the universities don't try, rightly, to not sell their seats at market prices, they want to give it to the best people, and who are the best people? How do we decide? So the market doesn't decide that, they have some process for deciding that. But of course, once you replace the market by some process, so you don't sell it to the highest bidder. Now, somebody can come and say, look, you know, my daughter, she actually, you know, she's actually not particularly good at tennis, but I can buy a video of her playing tennis at a price, and if I show it to you and give you some extra money, would you admit her and give her a scholarship? That's sort of what was happening in this, in this admission scandal, and this is all the private sector. This was, you know, Yale and Stanford and other very elite legitimate universities and their admissions people were, I know, getting persuaded by no doubt gifts of the right kind – don't know what they necessarily were – to take on, take on people who should not have got in. And that's private sector corruption. It happens for exactly the same reason that we get public sector corruption. It’s the attempt to deny the market, is legitimate need, and desirable, but when you do it, you will get the market try to creep back in, and when it does, that's what we call corruption.
So in some sense, I think one, just to go back to what you started by saying, I think it's easy to throw the baby out with the bathwater. And I think that's a lot of what we've been doing for the last 30 years. This obsession with fighting corruption in many places has led to processes that are incredibly Baroque and wasteful. I think we, if we were willing to tolerate the fact that you know, this is, we're fighting the market, we will pay a price for that in terms of corruption. Sometimes, we will actually get better outcomes by not fighting it too much. So it's not that I know anything about the scandal in Australia right now, and maybe it is, sometimes it's worth fighting, fighting as hard as you can. Sometimes it's not worth fighting.
Rosalind Dixon: Well, I want to pick up on this point about this fictional daughter, getting a fake video of her tennis skills and talk about DVD players. In the book…
Abhijit Banerjee: I changed the details slightly.
Rosalind Dixon: Well, the fake video is, there's a great story in this book about Esther and Abhijit’s objects, somewhat unhappy attempts to get a DVD player. And the multiple attempts it took through e-commerce. But this is part of a broader critique Esther, of the kind of free trade e-commerce globalisation, growth fetish of modern, classical and neoclassical, some might say, neoliberal economics. If the person who supervised your economics, PhD, was reading this book and you didn't have a Nobel Prize in a Clark Medal, they might be horrified. Tell us how you and Abhijit are arguing based on your findings against the kind of orthodoxy around trade and growth, and why would people who, you know, trained you be horrified, and why are you right?
Esther Duflo: I, so, I think it's worth saying that our chapter on trade is based almost exclusively, not, on our own research. Unless you count our attempt to get the DVD player as, as research.
Rosalind Dixon: Small ‘n’, very small ‘n’.
Esther Duflo: Some parts of it are, in fact, the one that's related to the DVD player is based on our own research. But the main argument, really, is something that is found in the studies of others. And in fact, the studies of many others. So, actually, although our supervisor, if they were trade economists might be horrified, I think that might be more horrified by our making this public, then by what we actually saying, because everything we are saying on the trade chapter in the book is published, peer reviewed, generally accepted, although it took some time to get accepted. But economists in general and trade economists in particular do not like to air their dirty laundry in public. So it is not what we are doing here, is that we take the dirty laundry and we air it. So what is the argument?
Rosalind Dixon: So just, to note, the dirty laundry is that trade doesn't help us as much as many people think. And then at most, it creates 3% extra GDP, which is very modest, you suggest, in the book in terms of the gains promised.
Esther Duflo: So there are various aspects to the dirty laundry, that's one of them, which is for a country like the US, which is a large economy very diversified, trade is not such a very big, very important part of, of the economic activity, because a lot of what is consumed and produced is simply produced and consumed internally. So that's why the gains from trade for a country like the US are smaller than what we have kind of assumed intuitively, that's one part of it. The second part of it, which is perhaps even more important, is that trade creates very many losers. Now in neoclassical economics, you know, starting, at least with Samuelson, there was the idea that there would be losers of trade. But the hope was that these losses were going to be relatively small, because, okay, fine, you lose your job working in a factory making furniture in North Carolina, you have always the opportunity to move to New York, and become a security guard in a shop that sells furniture. China is now producing furniture very cheaply, so that destroys the furniture makers job. But that makes a lot of furniture available to be sold. And that creates jobs in the selling of furniture. So the idea that the very, you know, the forces that make the economics tick, at least in our models, is the idea that people leave the regions and the sectors which are not doing well, and then instead, join the region or a sector which are booming. So that trade has this process of creative destruction that in the end, it's only at the margin that people get it a little bit hard. Now, unfortunately, this is not the way it happens in reality, because in reality, people are much, much less mobile, both geographically and across sectors, then we would imagine a hope or dream. In practice, people mostly stay home, in fact, mobility within the US has been halved between the end of the 1940s and today. So if people don't move geographically, then when the industry of furniture making in North Carolina gets decimated, then people do not find opportunities elsewhere. They just get decimated in place. And this is why trade has been extraordinarily costly for individual people. And these pains from trade is not something we discovered, it's something that was found to exist actually, even in countries that have probably benefited from trade overall, like in India, and again in the US, and then in Brazil, and in many countries, it's been reproduced in the same way that the places that directly compete with imports get clobbered, hammered. And unfortunately, because this is not a part of the story that anybody had very clearly in the top of their mind. No attempt was made to compensate these people adequately. They get very little in terms of help, to the extent they get help, it's in forms that are humiliating, like for example, they have to go on disability to survive. And that has contributed to a decline in people's standard of living, but also in people's sense of their own dignity, boarded up streets and a declining rate of marriages and people's sense of status, which is at the heart of the despair that you see in many hinterlands in America today. This is something that, you know, we haven't discovered, is something that people have said and proven. But generally, economists prefer not to discuss that too much. Because we have this very strong portrait, it's intuition that gets a little bit shaken by this type of findings.
Rosalind Dixon: Well, as you say, this is evidence that has been published, and some of it based on exactly your RCT type methods. One of the studies you cite in the book is about the value of place based policies and governments investing in areas. In the US the classic was the Tennessee Valley Authority, obviously, but there are examples around the world. And that's a debate Australia needs to have. And we can learn a lot from the book about how we can help people affected by free trade, even if we don't abandon it, there's a lot there to learn about how to make sure that as you say, those concentrated areas that are so hard hit get proper assistance. Now, Abhijit, the other part of this, sort of, you know, rebelling against – this is the Soviet revolutionaries in you – against the orthodoxy is the anti-growth part of the book. Obviously, growth has become a very central part of our, kind of, orthodox economic commitments. You're not anti-growth, but you just say perhaps we shouldn't be quite so worried about it, as most economists are, you say, maybe we should focus more on life expectancy or mortality or education. Would it be useful to have an index like the human development index to measure those things? And why are you not so interested in focusing on growth?
Abhijit Banerjee: So, there are plenty of indices, I hate to be the sponsor of one yet one more. I think with, you know, the human development index is actually a reasonable balancing of GDP level, not growth, but I think in some sense, the growth in that discourse, the point of growth is precisely to have a higher level. So, a culmination of GDP level and, you know, other more, I think, direct welfare indicators, like for example, infant mortality, whatever, women's rights, etc. So I think it is a decent index. And there are actually many others. There's a whole literature on multi dimensional poverty as well. I feel like it's not the lack of indices that are holding us back at this point, I think that what is holding us back is this promise, which is to answer the other part of your question that, if only you guys could just let us policymakers do what we need to do, we will deliver you with a lot more growth. I think that claim is false. We may, in some countries grow and others don't. And growth has been absolutely beneficial for many people in the world, including people in countries where, you know, the growth has benefited the rich more than the poor. Still, the poor have benefited. I don't want to get into the debate. So much about whether or not you know, growth in India, it has been worth it. I think the answer is overall, yes. The question that I think is, we don't know the answer to and that sort of, is the basis of our, kind of, more sceptical view is that I think, in India and elsewhere, other than the very broad principles of don't, let's not have the government control, every choice people make, give people some amount of economic freedom. You know, really basic stuff, don't do North Korea over again, I don't think we've learned very much. I don't think we know how to control the growth rate, much more now than we knew 30 years ago, despite the fact that lots has been written, lots of ink has been spent. I doubt that we understand very much. And I think that is fundamentally linked to the fact that growth is incredibly complicated. So I think the position we take in the book is not, neither that growth is not desirable, nor that… sometimes it's not, I think in rich countries, I would say that countries which could do much better for the world by controlling the quality of their consumption, consuming, you know, less, sort of, cheap, wasteful things than they're doing now. But I think in many poor countries, growth is necessary, that the point I think we make emphatically in the book is that let's not use the promise that if only we would, you know, allow us to do this or that or the other will give you growth, let's not let that promise dominate the the policy conversation. Because it's false, we don't actually know how to deliver, both countries have done that, and in many cases, or as many cases as, as the opposite, have not delivered growth. And if you think of the, for example, most of the OECD, we've been fighting the fact that growth has not been in our control, that growth slowed down after 1973. Now we’ve been fighting that for 40 years, or more, and with no visible success. The core element of growth, which is growth in productivity, has slowed down and has remained slow. Despite all the claims of you know how, by, you know, venture capitalists are revolutionising the world and all that, we're still kind of where we were 20 years ago, we're still at that same level of productivity growth. So I think there's just a lot of talk and a lot of policy influence from this obsession with growth. And that's sort of what we're fighting, not growth itself.
Rosalind Dixon: So you're de-fetishizing it rather than being anti-it. And of course, one of the hard things is, you know, your methodological commitment is to understanding these things in a really careful, empirical way. And, you know, whole economies don't lend themselves well to that kind of experiment. So we don't have the benefit of your kind of work, although, of course, we do have the benefit of quite a lot of RCTs in relation to tax and labour supply. And there's evidence that you present in the book that's very interesting that says, you know, as you said earlier, about, sort of, free money Abhijit, people think that tax has a big impact on the, sort of, micro-economic fundamentals and growth and it seems less so from the data you present, although, interestingly, it has a big impact on how much money and time people spend on evasion of tax rather than in labour supply. So I want to turn, Esther, to another theme that goes back to your question essentially about disappointment. So trade and people's sense of disappointment in the liberal democratic project. So turning to Trump and Orban and, you know, Boris Johnson and Brexit. And both the sort of immigration piece of that, and the inequality, economic and peace and see what your book can tell us about what's gone wrong, if you like, in the Washington consensus, and the promise that when you were on that wall in 1989, and the, sort of, change was happening, you know, things haven't gone quite how we hoped.
So one of the striking findings in the book that you report is that people fear very much that immigration tends to drive wages down for domestic workers. But you find that there's very little evidence of that in large numbers of very, very careful empirical studies, and that, if anything, migration is neutral to positive for most workers in a domestic economy. So if that's right, what do you put down? You know, how do you explain this very strong anti-immigrant sentiment that is circulating in Hungary, in the British context of Brexit in, you know, parts of the US, part of Trump's support base. Indeed, you know, there have been moments of that in the US that, you know, are stronger than Australia, but Australia has its fair share of it. I was on television earlier this evening, just after Senator Pauline Hanson who runs a very clearly anti-immigration far right party. So what do you put this down to, when all the evidence suggests that we have nothing to fear?
Esther Duflo: So I think there has been a web of reasons that have converged to immigrants being the… and immigration being the, kind of, catch all enemy for many people. The first one is that if you look at the US, for example, there is certainly a breaking down of the American Dream over the last several years, in particular, whereas several decades ago, if you take a child born in the bottom 20% of the of the income distribution from parents, in the bottom 20% of the distribution, they were very much more likely than in Europe to potentially end up at the top. But today, this is not true. Today in the US, it's the opposite. There is less social mobility in the US than there is in Europe, and is much less than there used to be. But people have not actually gotten that memo. If you ask them, Americans and Europeans, their perceptions about social mobility, researchers found that Europeans are more or less realistic, whereas Americans are very optimistic. So they still think that they live in a country where capitalism is basically giving everyone a fair shake. And then they compare that to the reality that they live, where they clearly see that they haven't had a fair shake. And if the system is not to blame, then who is to blame? So either they are to blame themselves. And I think some people do blame themselves. And that leads to this epidemic of depth of despair that you're seeing in the US where the the rate of opioid overdose and alcohol poisoning and suicide has skyrocketed among a white, middle aged Americans. Oh, you blame, you know, someone else, some enemy, and who is a better enemy than the immigrants, it's a very clear enemy. This is of course, something that has been stroked by a populist leader such as Trump. And it has the advantage of, you know, sounding quite intuitive. If you have more people trying to come into the country, then it must be that it puts a downward pressure on our wages, it has to be. You know, if more people try to share the same cheese, that [means] less cheese for anybody, for every single person. And so this kind of a sequence of reasoning that, first of all, everybody wants to come to America, because America is so much better than the shithole country that they come from. Second of all, once they've come to America, there are going to be too many of us for the same amount of work, so that's why the wages are stagnating for this many years. And that's why I'm not able to guarantee to my children that they’ll live, they live better than me. And there you go, you have you're blaming your immigrants, this is something that has actually always happened that immigrants are very easy scapegoats. But I think it's more likely to happen in the current environment where people have been, in reality, let down by the American dream. But I've not fully ascribed to miss functioning in the system and in policy and therefore are looking for another type of enemy.
Rosalind Dixon: So, you know, one potential problem is too much optimism, optimism bias, and that leads to the dissonance you suggest but as you also note, another problem is a failure to ascribe stagnation in work and wages to the right course, to put it down to immigration when it's due to tectonic forces like automation, the decline in union power, globalisation. Does the data that you and others have assembled say anything about where people should be putting the blame? If we've seen 40 years of no real growth in wages for American workers, who should they be blaming?
Esther Duflo: Oh I think there is no, there is absolutely no economic, how would I say, sort of, malediction, that it has to be like that there is some strong economic forces that lead to this point. I think it's very much a sequence of policy choices, starting with the Reagan Thatcher era. In pursuit of goals, Abhijit pointed out, of, you know, de-unionisation, reducing taxes on the top income, making it much less much less progressive, fighting with any form of public policy. And unfortunately, with taxes, particularly in the US, or with any kind of government policy, it has… it's very difficult, it's very easy to ratchet it down and it's very difficult to ratchet it back up. So we kind of still live off the kind of dismantling of the state as you know, a form of solidarity for everyone that has started in the Reagan era. That has changed the norms about what is acceptable in terms of remuneration,for top income, what is acceptable, about how you share the benefits of forms between worker and shareholder, and so on so forth, which ultimately is the reason why wages have been stagnating in the US when they have not been as much in Europe and when where inequality has not at all followed the same trajectory.
Rosalind Dixon: And in Australia, one of the reasons inequality has not followed the same trajectory is the role of taxes and transfers. That we have seen some uptick in inequality, pre taxes and transfers, as documented by colleagues here at the SPRC and ACOSS and others. But post taxes and transfers it's much more stable and less stark. So that brings us to really, what can policy do? I want to read a lovely quote from the book and then ask you, Abhijit, about the interesting data in the book about a UBI versus the kind of workfare program that some Indian departments, kind of, run and administer for 100 days of decent paid work for every Indian. So Esther and Ahbijit write, “What is common among a drought affected farmer in India, a youth in Chicago Southside, which I will say I know only too well, and a 50, something white man who was just laid off, what is common while they have problems, they are not the problem. They are entitled to be seen for who they are and not to be defined by the difficulties besieging them. Time and again, we have seen in our travels in developing countries that hope is the fuel that makes people go. Defining people by their problems is turning circumstances into essence, it denies hope. A natural response is then to wrap oneself into this identity with treacherous consequences for society at large.” I love that quote. And I love how the poetry in it runs through the whole book. But for the non poetic part, the policy part, Abhijit, what should we be doing to make policy better, and show greater respect to those people suffering, in all of those towns and cities around the world where people are feeling let down and left behind? Should we be pursuing a UBI? Or a workfare jobs guarantee program? Or all of the above?
Abhijit Banerjee: I know we… specifically that question a little bit in the book. In fact, I mean, to the extent we say anything, we say that UBI would probably be a good solution for a similar problem in a country where targeting is hard. But in a country like the US where there is actually a lot of predictability of who is going to [be] the victim. You know, we could have told when, you know, US opened up to trade with China, which places will get hurt. And we could have proactively identified those people in those areas, and helped them. So I think we have so much information that, sort of, taking the stand that, you know, everybody gets the same amount makes less sense, I think [in] a country like the US.
Now, that's related… the other point I think we're making, and I think the one that's related to the part you read out, which is that I think people actually want, I mean, they want money, but they want also meaning in their lives. And I think the loss of meaning has been critical. And one thing that UBI by ideology, in a sense, doesn't do is provide people with an attempt to provide people with anything close to meaning and in some sense. So I think the point we're trying to make, maybe in that section of the book, is that our ambition should be to restore not just people's earnings, but also a way of living. And I think especially mechanisation, and in particular AI, really kills a lot of jobs, and that challenge of providing people with meaningful jobs will get much worse. So I think we should start from now to thinking about how we could reconstruct meaning in people's lives. And that doesn't necessarily mean workfare. It doesn't mean that you know, the government. I mean, the government can hire people, but I think it's also the case that it might well be [that] we need to create, you know, opportunities for self employment but which are, which are designed in ways that are more fulfilling. And I think if we took that on, if there was funding for it, if we took that as an agenda, I do believe we can do much better than we're doing. That goes with the, I think, a more general shift that we need, which is a shift in the rhetoric. I think the first thing we need to stop doing is blaming the poor for being poor. I think if we and the unemployed for being unemployed, I think that's where we start. A shift in the rhetoric so that people feel that, you know, they're not losing the respect of the community the moment they have a bad shot. Yeah, I think that that has to be the starting point.
Rosalind Dixon: Well, as you say it's about economics, but also about dignity. And I should have known better than to ask an empiricist for a generalised answer to the, how do we move forward? As you remind us, it's about looking at the context and the data about what works in that context. So that brings us more or less to the end of our time. A number of our audience wanted to know about how experimental methods can be used in the next frontier. But Esther told us very early on that COVID is just another example of where we can be using RCTs not just to figure out, are vaccines safe? Do they work? But how can we make people feel safe and feel trusted, as we roll them out? You know, if we're fortunate in the coming months, and years. So, COVID is at least one of those topics. And no doubt there are hundreds more. So Esther as our closing thought, one of our audience wants to know, what's the next book? They've enjoyed these two so much, can you make a prediction of what the topic of the next one will be?
Esther Duflo: I can tell you what I'm working on, and let Abhijit say what he's working on. I'm actually working on a project, on a book for children. An illustrated book for children to try and… because I think it's very important for people both in rich countries and in poor countries to be, you know, to be familiar very early about how people live their lives, and what are the solutions and the problems in a way that is pragmatic and fun?
Rosalind Dixon: Well, I love that project. I always say to my children, if you don't understand supply and demand, you can't survive at home or in life. So what a great project. Abhijit, are you doing the illustrations? Are you working on something else?
Abhijit Banerjee: I'm working on something else. I’m working on many things, but I'll say one thing. I'm working on – I don't know how to call it – maybe an installation is the right way to call it? I'm working with a graphic novelist and a graphic artist to set up a, kind of… we conceived of it as being, kind of, part theatre part, you know, part live, by video. But I think in this COVID world, probably turning to a video, which is going to take on a set of topics mostly around the environment, probably mostly focused on water, and try to create a set of kind of more funny, entertaining, light, but maybe, therefore, also, maybe more popular texts that that can be in the popular domain, in the public domain. And we're sort of working towards finishing the first of those.
Rosalind Dixon: Well, fantastic. We have a wonderful Water Institute. Here we have a parking spot that's reserved right out front for Nobel Prize winners and a bookshop that would be eager to sell your children's books. So when the pandemic is done, please come to Sydney in person and join us. But what a delight to have had you today, via Teams. Thank you so much Esther and Abhijit for your insights and for your time. I encourage everyone listening this evening to buy and read the book. If you were in doubt before reading it, after you will be convinced that economists have a lot to teach us as long as we get the economics right, and think about economics in the right way, informed by RCTs and take the good economics not just the bad. Thank you for joining us. To hear about upcoming events and podcasts we invite you to subscribe to the Centre for Ideas newsletter and visit us at centreforideas.com at UNSW. Goodnight, and thank you for joining us.
Esther Duflo is the Abdul Latif Jameel Professor of Poverty Alleviation and Development Economics in the Department of Economics at the Massachusetts Institute of Technology and a co-founder and co-director of the Abdul Latif Jameel Poverty Action Lab (J-PAL). In her research, she seeks to understand the economic lives of the poor, with the aim to help design and evaluate social policies. She has worked on health, education, financial inclusion, environment and governance. Duflo has received numerous academic honours and prizes including 2019 Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel (with co-Laureates Abhijit Banerjee and Michael Kremer), the Princess of Asturias Award for Social Sciences (2015), the A.SK Social Science Award (2015), Infosys Prize (2014), the David N. Kershaw Award (2011), a John Bates Clark Medal (2010), and a MacArthur “Genius Grant” Fellowship (2009). With Abhijit Banerjee, she wrote Poor Economics: A Radical Rethinking of the Way to Fight Global Poverty, which won the Financial Times and Goldman Sachs Business Book of the Year Award in 2011 and has been translated into more than 17 languages, and the recently released Good Economics for Hard Times.
Abhijit Vinayak Banerjee is the Ford Foundation International Professor of Economics at the Massachusetts Institute of Technology. In 2003 he co-founded the Abdul Latif Jameel Poverty Action Lab (J-PAL) with Esther Duflo and Sendhil Mullainathan, and he remains one of the Lab’s Directors. Banerjee is a past president of the Bureau for Research and Economic Analysis of Development, a Research Associate of the NBER, a CEPR research fellow, International Research Fellow of the Kiel Institute, a fellow of the American Academy of Arts and Sciences and the Econometric Society. He has been a Guggenheim Fellow, an Alfred P. Sloan Fellow and a winner of the Infosys Prize. Abhijit is the author of a large number of articles and four books, including Poor Economics: A Radical Rethinking of the Way to Fight Global Poverty, which won the Goldman Sachs Business Book of the Year, and Good Economics for Hard Times, both co-authored with Esther Duflo. He is the editor of three more books and has directed two documentary films. Banerjee has served on the U.N. Secretary-General’s High-level Panel of Eminent Persons on the Post-2015 Development Agenda.
Rosalind Dixon is a Professor of Law and Director of the Gilbert + Tobin Centre of Public Law at UNSW Sydney. She is a graduate of UNSW and Harvard, and has taught at law schools around the world – including Harvard, Columbia, University of Chicago and National University Singapore, and is the author of a new book, with Richard Holden, From Free to Fair Markets: Liberalism after COVID out later this year. She is passionate about law and politics, and currently Director of the Pathways to Politics for Women Program at NSW.