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Conversations with Coleman
Economics 102 with Prof Abhijit Banerjee [S2 Ep.31]
00:58:43
My guest today is Professor Abhijit Banerjee. Professor Banerjee is a Nobel Prize-winning economist, an econ professor at MIT, and a co-founder of the Abdul Latif Jameel Poverty Action Lab. Banerjee and I discussed the difference between empirical work and theoretical work in economics. We talk about Banerjee's Nobel Prize-winning research on alleviating global poverty. We talk about whether immigrants drive down wages for native workers, the role of financial incentives and driving human behavior. We speak about welfare, the effect of globalism on American industries like manufacturing, and the social consequences of having whole industries die out, and much more. #ConversationswithColeman #CwC #ColemanHughes #AbhijitBanerjee #nobelprize #Economics101 #Economics102 #poverty #globalism
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Welcome to another episode of Conversations with Coleman. If you're hearing this, then you're on the public feed, which means you'll get episodes a week after they come out and you'll hear advertisements. You can gain access to the subscriber feed by going to ColemanHughes.org and becoming a supporter. This means you'll have access to episodes a week early, you'll never hear ads, and you'll get access to bonus Q and A episodes. You can also support me by liking and subscribing on YouTube and sharing the show with friends and family. As always, thank you so much for your support. Welcome to another episode of Conversations with Coleman. My guest today is Professor Abhijeet Banerjee. Professor Banerjee is a Nobel Prize winning economist, an Econ professor at mit, and a co founder of the Abdul Latif Jameel Poverty Action Lab. Banerjee and I discuss the difference between empirical work and theoretical work in economics. We talk about Banerjee's Nobel Prize winning research on alleviating global poverty. We talk about whether immigrants drive down wages for native workers. We talk about the role of financial incentives in driving human behavior. We talk about welfare. We talk about the effect of globalism on American industries like manufacturing and the social consequences of having whole industries die out and much more. So without further ado, Abhijeet Banerjee Professor Banerjee, thanks so much for coming on my show.
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A
Thank you for having me.
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B
So before we get into all of the topics of your expertise, can you give my listeners who, if they haven't heard of you from your Nobel Prize or your several books, for a wide audience, a sense of who you are and how you came to be interested in theoretical and experimental economics?
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A
I'm an economist. I'm a professor at MIT and I've been a professor here for 30 years. I guess my general interest is using economics to navigate the world to understand how to make the world a better place. And that means, unfortunately, a lot of economics makes that look like a stretch. It looks like statements about how things are perfect as they are and how in any case if you try to do something, something else will go wrong. I've sort of always been interested in how things could go right. And in fact what is nice about being an experimental economist, somebody who actually is involved in running large scale field experiments with policies, is that you actually see that in the world. Lots of things that you try do work, you do find that there's lots of good news to be had once we try. I Think there's a sense in which as a field we are a little bit given to the bad news. Things could go wrong, this could go wrong, that could go wrong. I have always been, I guess, more a glass half full guy. And I look for the full glasses. And to be honest, when you try things out, rather than speculate about it, a lot of those things do work. So I think a lot of the. My inspiration comes from looking for things that work, trying to identify, find rigorous evidence for them, and then to try to actually take it to policymakers, try to persuade them that they should also do it. So that's been my work. We 20, almost 20 years ago, we set up an organization called the Abdul Latif Jameel Poverty Action Lab. And what we do in the Poverty Action Lab, we have about a thousand odd professors associated with it. We do randomized control trials of policies that are of relevance to people's lives and usually having to do with poverty, where we're mostly interested in policies in some way or the other which help poor people. So that's, that's. And that there's now over a thousand randomized control trials which we have finished, and they are in 80 odd countries and including the US, including Europe, including many developing, most major developing countries. And our goal is to try to put the science of policymaking on a firmer ground, to rather move it away from guesswork and intuition. And my hunch is this, and I think people behave this way or that way to actually show when you try it, does it work or not. That's the ultimate test.
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B
So as you say, economics is often described as the dismal science, but your work points, at least it seems to point in a more optimistic direction, looking for policies that actually work to alleviate poverty in the developing world especially. But you also have a background as an economic theorist as well, and I'm an avid reader of Marginal Revolution, the blog by Tyler Cowen and Alex Tabarrok and Cowan described you as. Who's your classmate of yours, Right. Described you as a theorist who decided that the future was an empirical work. So how do you see the tension between theoretical work in economics and empirical work?
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A
Well, I think that. I wouldn't say there's a tension necessarily. I think what a lot of theoretical work does is it elucidates possibilities. It brings us, sort of helps us think through, you know, if I do this, what are the things that could happen and, or why is it that it looks right now it looks like poor people are unable to, you know, make it through School. So what. What would be a narrative that explains that? Other than, of course, the. The obvious one and the one. The more repugnant one, which is that somehow they lack the talent to do so. So I think so when your theorist is always looking for stories, we're storytellers. It's not that we have, you know, some of those stories look like math. So it's not that always that we tell stories with beautiful language. But I think we are in the end, the attempt, in theory is to tell stories, to build narratives about how, for example, through no fault of yours, you could get stuck somewhere, or through no fault of. Or, you know, maybe one error can lead to another error and accumulate. So these are how, you know, maybe one great idea can lead to another one. So I think it's more to tell stories. We build stories as theorists. We build stories. One of my early pieces of work, which kind of got me going in life, was showing that you could get situations where everybody is extremely rational, but they all end up doing the same thing. What we call herd behavior. People just do the same thing. It's the same wrong thing. Even though everybody is smart and rational and does as many calculations as they need to. And that's the kind of thing which is sort of. That's a story. Right. It's telling you that, you know, when you see people making errors, it's not necessarily because they're stupid or they're malified. You can often get stuck. The nature of learning is such that people can get stuck. So that's an example of a piece of theory that helps us go back to the world and say, oh, well, maybe. Maybe it's not because these people are stupid that they're doing what they're doing. They're doing it because maybe this is just a way in which the world works and sometimes we end up doing the wrong thing for the right reasons.
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B
Yeah. So that paper is called A Simple Model of Herd Behavior, Right?
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A
Correct. Correct.
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B
Yeah. So I read in preparation for this podcast some of the examples you had given demonstrating that. And it occurred to me that I think something happened recently that might exactly fit your model. And I'm curious if this is kind of the sort of thing that you're attempting to model in that paper. I was at a restaurant where there is a bathroom that can fit two people, two men. And there's always a line for the bathroom. It's a comedy club. But the line is a very hectic scenario, very cramped. And the line is only single file. You can only, you know, it's in the Village, it's in New York, everything is small. And there's been more than one time where I'm say third in line. And the assumption from everyone in the line is that the bathroom must currently be full with two men. Right. Or else the first person in line would go in and hasten. But there's been multiple times when actually there's only one person in the bathroom for whatever reason because it's chaotic. The first person got a false signal that the bathroom was full. And no one who is in line is going to challenge that because obviously they would go in if there were space. This actually kind of happens all the time. And it's frustrating to the point where I now no longer really trust that the bathroom isn't full. And I'll be like the seeming asshole that checks and is right like a third of the time, you know.
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A
Yeah, that's a great example. I think I started thinking about this when I used to work at Princeton. I would take the train back to, to Manhattan because my then wife was a student at Columbia. And people would just, you know, line up somewhere, assuming that's where the train would stop. The train from Princeton Junction would, you know, that's where the door would open. And half the time it was the wrong place. It's just somebody stood there. The next person decided they'll. That maybe the person knows something and stood there. And then five people line up behind them and the door opens somewhere entirely different. And it was that observation that partly inspired me, in fact.
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B
Yeah. So is there anywhere that in the culture, whether it's social media or economic behavior, where that kind of model is useful outside of these sort of little pet cases?
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A
Yes. For example, think about contraception choice mean, think of contraception choice in a, in more conservative society. And all, you know, you're so all of you wondering is it okay? Is, you know, and then one person does it or does. And you know, the. And you see that. You see very quick shifts as one of contraception spreads very fast. As you see a long time when nobody uses it. And then suddenly you'll see a big shift in that. And it's probably because a lot of these people are, you know, they could also be kind of what you might call peer effects. You might say, you know, X is doing it, I'll do it. But I think there's also just learning. It's just I'd rather not be the first person to cross that threshold. But if some, if I see someone else, I hear somebody else mention it, maybe I'm going to go home and try it out too, and so on. And I think you see it for many things. I think you see it cropping choices. You know, you see quick shifts. You know, suddenly everybody's growing pineapple or mulberries or, you know, you see these shifts in farming patterns, which are also sometimes surprisingly slow. That's the. Also the same story, really. You know, there's a great opportunity, but I don't do it because, well, I don't see anybody else doing it. And so nobody's doing it. Maybe they're all right, and there's a good reason why they're not doing it. So they don't do it. So it's stickiness in both directions. You can become sticky in the direction of no one moving or everybody moves to something else. I think we see lots of examples of those.
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B
So something that seems related to me is your work on cash transfers to the very poor combined with coaching. So this is something that to many people, at a first glance, it might sound maybe too easy or too naive to say that you can simply give money to the very poor. Combine it with coaching about how to create a small business or just even simpler teaching of skills, and this actually has a very high rate of success. So can you describe the experiments that you used to discover this?
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A
So there's now I think a bunch of experiments, at least, I think probably 10 or so experiments. We did seven at the same time in different countries, and I wasn't involved in all of them. I was involved in a couple of them, but we had a team of people who worked. It was in Bangladesh, in India, in Pakistan, in Peru, in Ghana, so in Ethiopia, so very different places. And it. And. And the intervention was originally invented by a large Bangladeshi NGO called brac. So it's. It came from Bangladesh. It was kind of a interesting example of a, you know, south to south transfer. And the intervention was motivated. BRAC started as a microcredit organization, or I didn't start as it, but it was a major microcredit organization. It was lending to people, but it realized they couldn't lend to some people. Some of those people just were too poor to lend to. And their idea, and they called it the graduation program for, with a reason. The idea was these are people that are so poor that they need to graduate into normal poverty. That was the vocabulary they used. So the idea was some people just need a push, an initial push, because they're really stuck. And when we started working on it, we realized there was a lot of These people were women, women who were now maybe in their 30s, who had two or three children often and young children and who were, or maybe in their 20s with young children and who had been never been prepared in life for actually doing working. They were often like, you know, abandoned wives. There were people whose husbands had died, whose husbands had, you know, become alcoholics or drug, drug addicts or, you know, some way or the other. They had been sort of in these traditional societies and brought up with the idea that they would get married, have children and there'll be someone else providing. And suddenly they discover that they have to earn a living. So for a lot of these people, even the obvious is not obvious. They really didn't. You can't just say, well, we'll give you a loan, start a business, because, you know, what's a business? How do I start a business? They live on basically arms from other people. They go begging around the neighborhood and get some whatever rice or corn or something and cook it in for the children from that life. You really. The transition, and this was Brax theory, was that I think these people really need a moment where they're told, okay, look, this is your chance to get out of this. You can do it, anybody can do it. Just have faith in yourself. And here's the assets you need. So the intervention was a combination of assets and as you say, a combination of some skilling, some encouragement, a little bit of cash at the beginning as well, not just an asset, a little bit of cash which was sort of helping them transition because, you know, if I give you a cow, a cow doesn't give milk the next day, it needs to be pregnant and all that. So, you know, I. You can't expect people to, you know, feed the cow, but, you know, and then how would they survive in the meanwhile? So it was maybe up to a year of cash payments. So all of that was a package. And that package actually turns out to have very large effects. In India, we track these people. It was done as a large scale randomized control trial. So 500 odd people were given this asset. 500 people who were identical and chosen, you know, the people who got it, which was a random from the group. So they're really identical, kept as a control group. And we can track them for 10 years. And 10 years later, these people who got the asset are 25% richer. The income is more than 25% higher, the consumption is 25% higher. They just seem to be in a different place. And so it's not just what's nice about this is it's not that you have to keep pushing these people. It's just you do one thing once and then it takes off. And I mean, in this particular, the Indian version of it, the rates of return could be upwards 1000% on the money because they seem to be making extra money every year, years and years and years. So when you add it all up, it looks fabulous. It's a great deal, in a sense, for society because these people would have had to be sustained in some way or the other, and this is a way to make them productive. So that's an experiment that I think it's important both, because I think it's an experiment that demonstrate that this particular intervention works. Going back to what I was saying before, there's reasons to be optimistic, but also I think it sort of sustains a broader optimism, which is that even these people who were really. Who look like they had no skills, no. Even had no exposure to the world even, they can make a living. And many of them make a very good living, actually. I met one woman, and I don't usually trade in anecdotes, but she really impressed me. She said she ran away from her husband who used to beat her with her children, and lived in the forest. She had to sleep in the tree because there were tigers around. And so she slept in the tree for, I think, five years or something. And then somehow she got into this program. Now she's built a house for her son. She lives with her son, but she feels uncomfortable. So she's planning to build a second house so that she can move and live alone. I thought that was. That's an inspiring story of this one.
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B
Yeah. So in these studies, does the control group get nothing whatsoever or do they get cash without the skills trainings? Or how does that work?
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A
It depends exactly on the study. So we have done not quite the cash without the skills training, but some people get the asset without the skills training or the cash with the asset. I mean, depends on the experiment. In some experiments, when you're running a race between two ways of teaching, you do this traditional teaching versus some innovative teaching. And sometimes the innovative teaching turns out to be worse than the traditional teaching. So it's not necessarily that you're getting a benefit, but it depends very much on what question you're trying to answer. If the question is, if I give this asset to somebody with some training, will that person do better than person who doesn't get it, then that person doesn't get it. I mean, I think that's a It raises an interesting question. I mean, when knowledge is to be generated, knowledge is kind of a public good. It's something that once we have it, it changes the world. So in the process, obviously if, if we had already given all the control group the same asset, we would have never had the insight that if you did this you would actually get the benefit. So now upwards, I think several hundred thousand people, families are getting this kind of program. That's partly because the evidence suggests that it's worth getting. So there is an interesting tension there which is that, you know, you, to generate the evidence, sometimes you have to exclude people. Now I don't feel terrible because usually these are people who are not going to get anything. It's not that I take it away from somebody, it's more we bring fresh money but not enough money to serve everybody. And then you randomize and give it to some people and not others. Now ideally you want to go back to them and cover everybody eventually. And a lot of most programs do that. When we did an evaluation of Microcredit, we waited 18 months and then the people who were in the control group also got micro. So that's more the norm.
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B
I would say yeah, this is great because I'm always looking for evidence backed ways to alleviate poverty in America and globally. And there are, I mean there have been too many schemes over the years that weren't evidence backed and were people had great intentions. I had Peter Singer on this podcast a while ago and it was through him that I think I learned about the disastrous water pump fiasco in Africa where they were giving these water pumps redesigned as playground carousels that were horribly inefficient and made a lot of westerners feel very good about themselves. But these poor.
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A
That's a particularly egregious example. Yeah, right.
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B
So we're always looking, I'm, I'm always looking for places where good intentions align with rigorous experimentation and evidence gathering. And I think probably a lot of listeners to my podcast understandably have the same cast of mind. And I'm curious, is there any way to become a coach? Like is there, is this program scaling up and if so, if anyone listening to this is interested in becoming a coach, is there a path to do that?
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A
A coach in this graduation program, the one we talked about?
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B
Yes.
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A
Yeah. So I think the answer is yes. I mean, I think for one, right now depends on. Of course the program work is happening in bunch of countries, but not the US So I guess you'll need a listener who's willing to travel. But I Think in general, a bunch of governments are now interested in scaling this program. And we have on the website of Poverty Action Lab we have some description of where the scaling is happening and when the scaling happens. Basically the government or the NGO that's scaling it hires people to be the coach. It's actually one job that's really, I think the people who are doing it were amazingly good at. I was always impressed. They always knew, you know, oh, last week you had a, you know, your back was hurting. Is it better now? They would take care of like 50 women and remember every one of their peculiarities and of their history. So I think it's a very satisfying job. And my guess is that there are opportunities that now exactly where and for whom that depends a bit on the person and the, you know, their language skills and all that. But yes, in general I think this is, I love the idea of encouraging people to do these kinds of things because I think they're really in the right context, they're great use of talent.
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B
So let's, let's shift gears here and talk about some bigger picture economic issues that you've commentated on. The first I want to talk about has to do with immigration and its role on wages. So there's this plausible sounding idea based on supply and demand, Econ 101, that if there's an influx of low wage workers into the U.S. for instance, that that's going to drive down wages for similar low skilled workers competing for those jobs in America. So why do you challenge that story?
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A
Well, I think that idea is, as you point out, it's Econ101. The 102 version of that is, you have to remember these guys are not only workers, they're also consumers. They're also sort of workers of a particular type. Often what happens when you bring in a bunch of workers who are low skill is that the domestic comparable workers now go up the ladder. They tend to become, because there is more labor to be used, there's a demand for foremen, for example, and so they often get more managerial jobs. So the labor market is, you know, it's not that everybody is stuck in one place and there's a fixed number of jobs. When more people come in, partly that creates, you know, these people go to restaurants, they go to shops, they go to, they need other sort of haircuts. So, you know, they create demand as well. So I think that the problem with Econ101 idea is it thinks that it takes as given that the demand is fixed and they're Just the supply changes the demand. Of course, people don't just work, they also consume. And it's precisely. My sense of the literature is that it's precisely the fact that they consume, that they diversify the labor force. That's what makes the Econ101 idea fail. They are also talent, new talent. They start their own businesses, they hire other people. There often immigrants tend to be new. Immigrants tend to be the hungriest people. They tend to be people who really will work 16 hours a day. But those people are often people who set up the local bodega, hire three people to deliver to them, etc. So there's a bunch of reasons why that idea doesn't work. As I said, these are all different reasons why the demand also changes, not just supply.
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B
So there's another sort of big picture issue you've commentated on, which is the overweighting of financial incentives. So I mean, this story has been for a long time, again, sort of an Econ 101 story that people respond to incentives. I mean, this is like a fundamental backbone of economics, is that people respond to financial incentives. And in some cases you're even modeling people as primarily responding to financial incentives or even only responding to financial incentives. You have a lot to say about this idea and why it's wrong.
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A
Well, I think it's just prima facie. I think the evidence doesn't measure up. I mean, you look at. I mean, this is used in two ways. One is to say we shouldn't overpay or make life too easy for poor people, quote, unquote, income effect. If you give people, if you make life too easy for them, they'll stop working. And there's actually tons of evidence on this question and almost all the evidence goes the other way, which is that you don't see kind of a negative income effect. People don't just become lazy. In fact, in some recent work we did in Ghana, we find, which is related to the graduation program, we find the opposite, that people who get money, they're sort of. They become more enthusiastic and more productive. They don't work more hours, they work the same number of hours, but those hours are more productive. And it's not so surprising when you're really depressed. Life is shit. It's not clear that you would feel particularly energetic mentally and committed to working hard. I don't find it surprising that when you give people a little cushion, there's also evidence that it relieves stress, that people are people. This nice experiment by Frank Schilbach, who's one of my colleagues at MIT and a bunch of other of my friends. And they show that basically if you give people money, just not even like give them money, just pay them today rather than in a few days. So just make sure that the money is in their hands, they actually become better at doing tasks. The stress goes away from them, so they tend to relax and they tend to be more productive. They do things better. Like, especially tasks that require a lot of attention, they do better. I don't find that implausible. I think the idea that, you know, the 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. I mean, I find it very stressful to be under pressure. I work best when I'm relaxed and happy. Maybe that's true of you as well. So I don't think it's. Then there's the other story, which is rich people are going to stop. If you don't let them make, you know, trillions of dollars, they'll stop working. There's just no evidence for it. When you look at the evidence that people use. For example, there was this famous Reagan tax cut, which is, which did increase tax collection for a while. People. People did. And that was interpreted as a, as a response to that. But in fact, what happened was people just took advantage of that to bring some money that they were hiding into the tax net, and that very quickly faded away. So it's not the case that we just don't see very much evidence of rich people responding to incentives. Massive. We see some evidence that when taxes are high, they try to hide money. So we do see evidence of they're trying to do something about taxes, but it's not usually that. In fact, we did an interesting study in the US where we asked people was more like a survey, but we asked people online. There were 10,000 people. We asked them, suppose you give people some free money, universal basic income, would people stop working? The typical answer was very revealing. People said, I won't, but other people will. So we asked them both. Some people we asked, would you stop working? And some people we asked, would other people stop working? And I think they said 25% said they will stop working. And 50%, but they said 50% of the others will stop work. So in other words, everybody thinks everybody else will become lazy if you, if you make them, you reward them too much, if you make them too comfortable. But in fact, you see the opposite. And again, you see that also for the rich, you ask them, will you stop working if taxes go up? The answer is typically not me, but everybody else will. And you see this. The evidence of the US the prima facie evidence, which is of course complicated to interpret, is that the fastest growing years in the US are the 50s and 60s. The marginal tax rates are up to 90% under Eisenhower, so Republican. And then tax rates come down and productivity growth in the US has never recovered to the levels it was.
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B
Am I wrong to think that those 90% tax rates weren't totally legit or weren't actually collected at that rate or evaded. Evaded so thoroughly that the effective tax rate was much lower?
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A
I actually, to be honest, I don't know the answer to. I don't think that's true that they were evaded. I mean, because a lot of the. In the US this is a period where a lot of the people who are getting those high salaries were actually working in the corporate sector, where salaries are pretty easy to observe. So it was. These were. So I don't think they were easy to evade. I think what's more true is that what it did was to make those salaries pointless. So a lot of these managers didn't get paid huge salaries. Instead, they got their ability to run the firm they wanted the way they wanted. It was more this question of instead of managerial capitalism. So managers were very powerful, shareholders were less powerful. This is the image of the 50s and 60s. And I think that's what was more the thing that happened was that people, instead of getting rewards in money, got rewards in influence, power, golf club memberships. So there were, of course there were costs. But my point was that this wasn't that they stopped working, it's just that they worked in maybe, maybe they worked even harder because they were the. This was the era of the giant conglomerates and very powerful managers before the time of kind of shareholder control. And so I think, I don't. This is all anecdotal, but I wouldn't say there's any reason to think they were. These 90% tax rates 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. That's sort of the pickety point, right?
- [35:29]
B
Yeah. So the critique of the incentives model, I buy it in a basic sense, and I buy it especially for the lack of power incentives have over the rich. If you're working at an investment bank and taxes go up, you're not going to. I mean, it'd be a strange Person that worked less hard as a result of that. Because so much of the reason you work hard, it's not the number you see in your bank account at the end of the year. I mean, in a big picture sense, that matters, but it's the micro interactions, the community you've built at work, the fact that you want to impress your boss, you want to beat your rival, show people you're competent, impress your parents, just be a person of. I come from a music background as well. Most of my friends are probably still from the music world. And nobody goes into that for money. I mean, some people do, but the vast majority of people, what's motivating you is an intrinsic love for the thing itself, but also a desire to maximize your status within some local or some bounded community.
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A
Right. So you're saying relative incomes matter, but if I make everybody's income go down by 50%, not much will change. It's just. It will still be good. People really have a desire to be the winner, but not necessarily. But the level of the win doesn't matter so much. People would like to be. I want to be paid more than everybody else. I want the biggest bonus. But if the biggest bonus goes down by 50%, will I stop working? Probably not. That's sort of what you're saying.
- [37:14]
B
Well, even I think I'm making a slightly different point. I'm sort of making the same point you're making, which is that status independent of income. It's a different set of motivations in our minds that is sometimes more powerful and sometimes goes contrary to what a financial incentive would be.
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A
Yeah, it's the quality of what you do. And you want to be the person who's doing the best job. I see. I agree.
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B
Who's respected by one's peers and so forth.
- [37:47]
A
I also think that if you take the people who are making the really top dollars, I don't even think they have the time to spend it. I literally don't think so. I mean, just spending money takes time. I mean, you know, we. We just moved back from France, so I've been. And we came back to find half our appliances were broken. And I spent so much time in this process of buying them, you know, setting them up, checking if they work. It's like, I mean, I don't have that much money. If I had much more money, what would I do with it? I'm so busy, I wouldn't be able to. I don't want to go on vacation all the time because then I wouldn't be able to do all the great work that I don't necessarily say I'm doing great work, but the people like me who would be ambitious about what they do, I mean those people, I don't think they have the time to go on six month vacations where they can spend a lot of money. They're usually working very hard. So I think that it's just think of Jeff Bezos. He couldn't possibly spend the money he makes. It's just not possible. I actually think that if one did a calculation of how long it would take to spend the money, he makes more money in a year than he could spend in 10 years, something like that. I just think it's not feasible to spend. That's why he's trying to go to the moon, because that's the only way to spend really big bucks.
- [39:11]
B
So I want to go back to the question of whether giving poor people money incentivizes them to work less. And I think one thing in this conversation that is confusing is that poverty, the term poverty describes so many different kinds of people in America. Poverty describes kids that grow up middle class but are currently in their twenties, at the beginning of their careers, not making very much money, but with an understanding that they're with no worry about their next meal, who are embedded in a network where they know the worst case scenario for them is not homelessness. But technically they're below the poverty line. And I know many people in that kind of a circumstance and I know people for whom the unemployment checks given during COVID actually did influence their decisions about how to spend their time. You know, I can quit my boring restaurant, restaurant job and you know, be a photographer full time even though I make less money. So it's not, it's not in that sense that they're working fewer hours, but that it does change their behavior. And then there's other people that I know that were going to look for a job rigorously if they had that fire lit under there behind, but because of the employment checks delayed it and delayed it. And these are normal people, not bums in any classic, in any typical sense of that word, but where the incentive does change their behavior. Are you denying that that happens or is your point more tailored towards the very poor or how do you see these distinctions?
- [40:55]
A
Well, I guess I'm saying that in fact there is a very famous experiment that in the US which is sort of an attempt, it was done in, was one of the first social science experiments ever done. It was a income transfer experiment where it was a complicated experiment If I tried to explain it, I would use up all my time. So I won't try to explain it. But it was exactly. Testing these kinds of ideas, they do find some response. It's not that the response is zero. It just seems to me that relative to the social gain in making people people also when they get more income, they're more, they're more relaxed, they're happier, they're, you know, your, your friends who are, who, who decided to be a photographer, his life is much better. So my point was not that there is a precise zero, though I think many studies find a precise zero. But I think in the US during COVID I think a lot of people did quit their boring jobs. And I think maybe that was not a bad thing. It's a rich country. You could afford people to quit some boring jobs and do something more interesting with their life. But I think that it's also the case that sometimes that has long term effects which are very different from the short term. So part of what there's evidence in the US that people who are poor or under a lot of debt choose the first job they can find. Educational debt, for example, those people who come from poorer families. If you give two people with the same education, the people with poor families tend to choose jobs that are kind of the high paying job that comes in. Now the guy who's from a richer family might actually explore a bit more. He might choose a job that suits him better. And in the long run those things pay off because it's what you're doing, what you love to do, what you're doing, what you're really good at doing. Not taking the first job that pays enough, pay your debt payment. So I do think that it's also a little bit complicated. What we are looking for is not necessarily the immediate response, but also potentially the more long term response. Is it the case that five years later the person who got the money, is he going to be less productive, more productive is more productive than maybe three month furlough which lets him look for a better job is worth it. I think that's part of the challenge in a country like the US where jobs are available basically for anybody who wants one during, especially in the recent period in the last couple of years. I think that the real issue is are people taking the right jobs? Partly. And that doesn't necessarily mean taking a job tomorrow. So I think you're right in saying people delayed it. I don't know whether that necessarily means they take the same job in three months or they Actually take a better job. They're more fitted to the talents.
- [44:03]
B
No, I think, I'd not consider that. I think that's totally, that's very intuitively true to me. I mean, I think of my mom who grew up very poor, took the first, you know, was the first in her family to go to college and took the first job she could find or the first job that was offered to her, which ended up being very, very dissonant with her values in the long run.
- [44:25]
A
Right.
- [44:25]
B
She took a marketing job, which, which she ended up hating at some point.
- [44:30]
A
But it's exactly right.
- [44:32]
B
When you're poor and someone offers you six figures, you don't, you, you, you take it immediately without question because you have a mindset of scarcity, of I never get opportunities, no one I know ever gets opportunities. Whereas 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.
- [44:57]
A
Exactly. No, that's exactly right. So I think there is evidence actually for that, for what happens to people who start with more debt. I think that's a pattern. People do find this education debt question, which sort of is going on in the U.S. i think that's part of the cost of education debt, is that the poor tend to take jobs that are less suited to their personalities and talent.
- [45:24]
B
So in the same vein of financial incentives not explaining everything, why don't more migrants who would make much more money in other countries move or even within America? Why don't people who could move to another state and make much more money or to a city tend not to and have actually become less mobile in the past 50 years?
- [45:57]
A
I think that part of it is that the US has, I mean, taking the US example, there's an economic force and a social force. The economic force is that US geographically has become more and more unequal. So there is New York City and San Francisco and Boston where real estate prices have gone through the ceiling. And then there's tons of places in the US where real estate is just collapsing because nobody wants to live there. I think that inequality has made us less mobile because the places where the jobs are are the most expensive places. Places. New York City for example. That's part of the problem. But I think this is old fashioned sociological reason, which is that, you know, you had meaning in your community, especially for the older people, people who had a decent job in a, I don't know, furniture factory and you were a foreman and the factory shuts down and all the jobs disappear. At that point, you know, that you could get a job maybe as a doorman or as a. I don't know, maybe as a janitor, but that's not the job you want. It's, it's. It's also the case that, you know, a lot of the. What gives you a sense of yourself is the. Your connections to the community. You're the soccer coach. You are the. You're you. You are the lay pastor. You are the. This. You are someone people look up. And I think that's the huge cost for people to move to a different place where they are not known where they really are. There's no one who's looking up to them. So I, I think. And then there's, of course, the more mundane things like friendships and just familiarity and, you know, your. The. The pickup ball game that you play on Friday evening and all those things. And all of those things, I mean, you. You have to imagine not just a check, imagine a life, you know, you're living. You move to New York City, you can't afford any decent real estate. You live two hours away from where you work. Your life is very different from how it was when you were living in a smaller town where you were making less money, but at least you had 10 minutes to work, and then you knew everybody there. You came home, was fun because, you know, the friends came over, you had a beer, it was Friday night. You know, it just seems to me that it's hard to imagine that the money would be the only dimension of that conversation. And it isn't. And it's not surprising. It's exactly what you'd expect. I mean. Right.
- [48:33]
B
So is it the case that there was a point where economists. I'm not an economist. I've taken Econ 101, I've read some books, I read some blogs. But is there a point where economists actually expected the full range of human behavior, or at least behavior in terms of moving, interstate mobility and these economic trends to be fully explained by financial incentives so that the insight that they're not was a challenge to the status quo?
- [49:12]
A
Well, I think it's the. I think people always knew in their hearts that this was not true. But I think it was a good device because it went with a lot of policy prescriptions. If you really believe that money is the only thing that really drives people, then it says something about, for example, labor markets. If you think that you should have. Listen, you'd rather pay people more than give them Any kind of dignity. So there was a agenda of policy that fitted very well with that, which is that if you think that people some kinds of protection, if people are very fully rational and they only care about money, then that simplifies your policy advice. Let's make sure that they get more money. And once you wade into a world where people have complicated preferences and some things other than money matter, then you start to have to then all kinds of interventions. For example, just in the context of what we were talking about, usually economists say, well, why would we support a dying community? And shouldn't they all move to places where they can earn more, they'll be more productive. But the fact that the community is dying is shattering their lives. And you can see that in the outcomes. The sort of the almost epidemic of opioids, suicide, alcohol deaths you have among, especially among the white people in their 40s and 50s. I mean, that's really a result, I think, of this was. I think Angus Deaton and Anne Case have called it deaths of despair. I think that's something. You can't say that. That's just an incidental fact. It's really a catastrophic kind of mirror on our way we're running our societies. So in some sense I think that it's exactly that question, which is if this is really about money, then these guys are making a mistake. They should just all believe. But I think what's happening is to them, a lot of them is going back to what we were just discussing. Their life is being taken away from them. They had a life which worked for them. They were 40 years old. They've been working for 20 years and that was taken away from them. I think that changes your perspective on policy. You might want to say that, look, at least in the short run, maybe it's supporting what's supporting these communities even if they're not economically viable. Because afterwards then if people are not going to leave and find the most productive job, then we are just killing them. And I think that's a real issue.
- [52:00]
B
So rewinding the clock 50 years, and I agree with all the points you're making about communities that have been left behind. What could we have done, policy wise, to preserve it? Because it seems to me it's not just a matter of increasing welfare so much as preserving somehow keeping the factories here, which would seem to be maybe an argument for tariffs of some kind. But realistically, what kind of policies might we have done differently?
- [52:36]
A
Well, I think probably some combination of. I don't know whether tariffs, but at least some form of support to declining industry. So maybe, I mean, I certainly wouldn't say that if you are economically unviable, you should immediately be shut down. I think that transitions are important. These are people who are often, I benefit from the fact that there's more trade with China. I buy a lot of gadgets, I don't pay the cost. The people who were making things like that in the US Pay the cost. I do think that the transition is worth managing much better. I think the thing we did really badly is sort of say that, well, this is the normal way of economics. Some they're losers and winners and losers. And the losers, we're going to let them lose. I think we could have done a much better job. We could have acknowledged that we kind of know who the losers are. We know that certain goods are going to disappear, certain others won't. Barbers will do okay, Furniture makers will do less. Well, I think we knew that we sort of, we let them kind of their lives fade out without really acknowledging that this was a predictable, you know, it was a predictable loss, that the trade gains from trade are diffuse. Many people benefit. The losers are actually very focused. They are in specific industries, in specific places where that industry is clustered. And so I think we could have taken those clusters and said, look, you got hit by forces that were beyond not of your making and so you deserve a good package. And maybe part of that package is keeping some jobs going as let the fade out happen slower. I think there is no particular compelling argument that the day it becomes unviable, you should shut down. I think that's where I think the ideology of economics steps in a little too far.
- [54:44]
B
So that would seem to be an argument in favor of maintaining or slowly phasing out subsidies for industries. Argue about whether it makes sense to subsidize US Agriculture. And some people feel that it's a kind of welfare, that a market distortion that is unfair. Others want to maintain it indefinitely. But it seems like the upshot of your view would be some kind of slow graduated decline. Obviously politically that gets messy because it might be hard to implement. But in theory, if you were a dictator, is that the kind of policy you might.
- [55:28]
A
Yeah, and in particular, I think with agriculture. I mean, if you look at Europe, I think one thing that's striking about Europe is how many of the small towns survive in the US you really have a blight on small towns. Most small towns are dying because agriculture and agriculture based industries are all kind of. And so there's also a kind of a social externality which is that we are, you go through small towns in Europe, they're pretty, they attract tourists. In the US you go to small towns and there not many very pretty small towns. I spent a lot of time in the US now so I know some of the areas well and say most of the towns are really quite scary. They're kind of in collective emotional collapse. You know, I think when we think about the shape of societies, I think we need to take into account that nice small towns is, is also a designatory of a, of a well functioning society. I guess what I'm saying is that it's also not just that you keep the factory going, you also find ways of making towns vibe and part of the agricultural subsidy in Europe. What it does is it makes lots of small towns and villages picturesque. Those picturesque villages that we go to visit exist partly because of those subsidies. That's what makes them economically viable. And that sort of then we go and appreciate that we come home and we find that most of our towns are blighted and that particular, it's not an accident. I think it's a reflection of certain policies.
- [57:11]
B
Well, on that note, I'm going to let you go. This has been a really great conversation. I enjoyed it a lot.
- [57:16]
A
Me too actually. Very fun, very nice to meet you.
- [57:20]
B
Yes. And can you just point my audience in the Internet direction that they should go in if they want to experience more of you?
- [57:29]
A
Well, they could. Either the Internet direction would be to go to the Poverty Action Lab, a website that is www.propertyactionlab.org or they could read our books. We have two books for wide audiences. One is called Poor Economics that was written 10 years, published 10 years ago and a book from actually relatively, it was kind of a odd timing. Just before the pandemic we had a book come out. It's called Good Economics for Hard Times. And I think that that's a book very much on the issues we talked about today. So I, I, I think that's probably the best articulation of what I have to assan, I have to say.
- [58:19]
B
All right, well, thank you so much for your time.
- [58:21]
A
Pleasure. Thank you.
- [58:26]
B
If you appreciate the work I do, the best ways to support me are to subscribe directly through my website, ColemanHughes.org and to subscribe to my YouTube channel. So you'll never miss my new content. As always, thanks for your support.