Conversations With Coleman — "Economics 102 with Prof Abhijit Banerjee" [S2 Ep.31]

Date: October 1, 2021
Host: Coleman Hughes (B)
Guest: Prof. Abhijit Banerjee (A), Nobel Prize-winning economist, MIT professor, co-founder of Abdul Latif Jameel Poverty Action Lab

Episode Overview

In this episode, Coleman Hughes welcomes Professor Abhijit Banerjee for an in-depth discussion that re-examines foundational economic ideas using both empirical evidence and theoretical frameworks. The conversation spans Banerjee's research on global poverty alleviation, behavioral economics, the limitations of financial incentives as policy drivers, the nuanced effects of immigration, and the social implications of globalism on American communities.

Key Points and Discussion Highlights

1. Introduction to Prof. Banerjee & His Approach

[02:03 – 05:21]

• Banerjee introduces himself as an economist focused on leveraging economics "to make the world a better place."

• Discusses the difference between theoretical (narrative-building) and empirical (experimental) economics.

• Emphasizes optimism and the importance of field experimentation:

  "I've always been interested in how things could go right... When you try things out, rather than speculate about [them], a lot of those things do work." — Banerjee [03:08]

• Explains the origins and mission of the Abdul Latif Jameel Poverty Action Lab (J-PAL), which conducts randomized control trials (RCTs) to rigorously test anti-poverty policies in 80+ countries.

2. Theory vs. Empiricism & "Herd Behavior"

[05:21 – 12:50]

• Banerjee (a former theorist) argues theory and empiricism aren't in conflict: theory is about understanding possible narratives, empiricism is about putting them to the test.

• Uses his seminal "herd behavior" model to show how rational people can still collectively make sub-optimal choices:

  "It's telling you that… when you see people making errors, it's not necessarily because they're stupid… You can often get stuck. The nature of learning is such that people can get stuck." — Banerjee [07:29]

• Coleman offers a relatable analogy from real life (NYC bathroom lines), which Banerjee connects to similar behavioral observations (train lines at Princeton).

• Extension of the model to social phenomena:

  "You see quick shifts...suddenly everybody's growing pineapple or mulberries...sometimes surprisingly slow. That’s… stickiness in both directions." — Banerjee [11:45]

3. Cash Transfers & "Graduation" Out of Poverty

[12:50 – 19:42]

• Explains the innovation and scaling of the "graduation" program (originating at BRAC in Bangladesh):

  • Targets extremely poor women who lacked experience or resources to be helped by microfinance alone.
  • Provides them with assets, skills training, encouragement, and temporary cash transfers.

  "It's not just that you have to keep pushing these people. It’s just, you do one thing once and then it takes off." — Banerjee [17:31]

  • Results: Indian RCTs found recipients had 25% higher long-term income and consumption, with returns up to 1000%.
  • Anecdote: Banerjee shares the transformation of a woman escaping domestic violence, illustrating empowerment through the program.

• Discusses ethical considerations of control groups in experiments; emphasizes eventual scaling to reach more beneficiaries.

4. Empiricism and Policy — The Danger of "Good Intentions" Without Evidence

[22:04 – 23:20]

• Coleman references the failed “playpump” water project in Africa as an example of well-intentioned, unevaluated interventions causing harm.
• Both assert the necessity of combining rigor with empathy to avoid such pitfalls.

5. On Immigration and Wages

[25:00 – 27:47]

• Challenges the “Econ 101” narrative that immigration of low-skill workers depresses native wages:

  "The labor market… it's not that everybody is stuck in one place and there's a fixed number of jobs. When more people come in, [they] create demand as well." — Banerjee [26:13]

• Highlights that immigrants are also consumers and future entrepreneurs, and domestic workers often shift to better roles.

6. Rethinking Financial Incentives

[27:47 – 37:44]

• Banerjee argues against the over-reliance on financial incentives, especially as drivers of productivity for both poor and rich.

  • Evidence suggests giving poor people more money doesn't make them lazy; in fact, it can raise productivity and well-being:

    "People don’t just become lazy... they become more enthusiastic and more productive." — Banerjee [28:47]

  • References studies showing alleviating financial stress improves cognitive performance and work.

• Disputes claims about high marginal tax rates discouraging work, particularly among the wealthy:

  "These 90% tax rates [in the 1950s–60s] made them lazy? Probably discouraged paying very high salaries. And you do see, after Reagan, you start to see a very high, steep rise in the top income." — Banerjee [34:27]

• Both discuss that status, fulfillment, and community matter as much or more than raw financial incentives, especially for the highly paid.

7. Complexities of Mobility, Poverty, and Incentives in the U.S.

[39:11 – 45:24]

• Highlights the diversity of "poverty" experiences in America—ranging from students to those in persistent hardship.
• Banerjee: There may be small short-term effects of assistance on job-seeking, but the bigger story is benefits enabling people to find better fits for their skills and aspirations, not just their first option.

  "If you come from a more abundant background, you just, you have a sense that you're going to get more and more opportunities in life and that you don't have to cling to the first one." — Coleman [44:32]

8. Why Don’t More People Move for Better Economic Opportunity?

[45:24 – 49:11]

• Banerjee: U.S. mobility has declined due to both economic factors (high housing costs in thriving cities) and deeper social attachments (community, identity, dignity).

  "What gives you a sense of yourself is your connections to the community.... All of those things, you have to imagine not just a check, imagine a life." — Banerjee [47:15]

9. Limits of Incentive-Heavy Policy and Economic "Rationalism"

[49:11 – 51:59]

• Economists long simplified policy advice by focusing on monetary incentives, but this overlooks social realities and can cause harm, such as “deaths of despair” in communities hollowed out by economic change.

  "It’s a catastrophic kind of mirror on the way we’re running our societies." — Banerjee [50:54]

10. Globalism, Industry Shifts, and Small Town Decline

[51:59 – 57:11]

• Discusses the consequences of manufacturing decline and global trade. Banerjee favors policies that smooth transitions, support affected communities, and phase out unviable sectors gradually instead of abrupt closures.

  "Transitions are important. These are people who are often, I benefit from the fact that there’s more trade with China... The losers, we’re going to let them lose. I think we could have done a much better job." — Banerjee [53:00]

• Highlights the difference between U.S. and Europe: European policies have maintained vibrant, picturesque small towns through agricultural subsidies, which offer both social and economic benefits beyond pure efficiency.

Notable Quotes

• On optimism in economics:

  "I have always been, I guess, more a glass half full guy. And I look for the full glasses." — Banerjee [03:57]

• On herd behavior:

  "Even though everybody is smart and rational...that's a story, right? It's telling you that...it's not necessarily because they're stupid...it's just a way in which the world works and sometimes we end up doing the wrong thing for the right reasons." [07:29]

• On results of cash transfer experiments:

  "10 years later, these people who got the asset are 25% richer... In this particular, the Indian version, the rates of return could be upwards 1000%." [16:51]

• On immigrants' economic effects:

  "They tend to be the hungriest people...who set up the local bodega, hire three people to deliver to them, etc." [26:56]

• On the limits of financial incentives:

  "The idea that...you have to have a kind of a financial democracy sword hanging on your head to make you work hard, just doesn't even seem to be psychologically plausible." [29:55]

• On moving for jobs vs. staying in community:

  "You have to imagine not just a check, imagine a life." [47:15]

• On policy transitions for declining industries:

  "There is no particular compelling argument that the day it becomes unviable, you should shut down. I think that's where the ideology of economics steps in a little too far." [54:17]

Important Timestamps

• [02:24] — Banerjee's background, motivation, introduction to J-PAL
• [07:29] — Explanation and examples of herd behavior
• [13:34] — Graduation program: methodology and long-term results
• [25:42] — Why immigration doesn't necessarily lower native wages
• [28:28] — Critique of incentives-based policy thinking
• [39:11] — Discussing the diversity and complexity of poverty in the U.S.
• [45:56] — Why people don't move for better wages
• [53:00] — On help for declining industries, managing transitions
• [55:28] — Small towns in Europe vs. the U.S. and social impacts of policy

Conclusion & Recommendations

Banerjee closes by recommending the J-PAL website (www.povertyactionlab.org) and his co-authored books, Poor Economics and Good Economics for Hard Times, for listeners who want to dive deeper. The episode stands out for its optimism, empirical grounding, and holistic view of humans as more than just rational, incentive-seeking agents.

For more on Prof. Banerjee's work:
www.povertyactionlab.org
Poor Economics (2011)
Good Economics for Hard Times (2019)