Good Economics for Hard Times Read online

  There are of course those who do speak out, but they tend to be, with important exceptions, those with the strongest opinions and the least patience for engaging with the best work in modern economics. Some, too beholden to some orthodoxy to pay attention to any fact that does not square with it, repeat old ideas like a mantra, even though they have long been disproved. Others are there to pour scorn on mainstream economics, which it may sometimes deserve; but that often means they are unlikely to speak for today’s best economic research.

  Our sense is that the best economics is frequently the least strident. The world is a sufficiently complicated and uncertain place that the most valuable thing economists have to share is often not their conclusion, but the path they took to reach it—the facts they knew, the way they interpreted those facts, the deductive steps they took, the remaining sources of their uncertainty. This is related to the fact that economists are not scientists in the sense physicists are, and they often have very little absolute certainty to share. Anyone who has watched the comic TV series The Big Bang Theory knows that physicists look down on engineers. Physicists think deep thoughts, while engineers muck around with materials and try to give shape to those thoughts; or at least that’s how the series presents it. If there were ever a TV series that made fun of economists, we suspect we would be several rungs below engineers, or at least the kind of engineers who build rockets. Unlike engineers (or at least those on The Big Bang Theory), we cannot rely on some physicist to tell us exactly what it would take for a rocket to escape the earth’s gravitational pull. Economists are more like plumbers; we solve problems with a combination of intuition grounded in science, some guesswork aided by experience, and a bunch of pure trial and error.

  This means economists often get things wrong. We will no doubt do so many times in this book. Not just about the growth rate, which is mostly a hopeless exercise, but also about somewhat more limited questions, like how much carbon taxes will help with climate change, how CEOs’ pay might be affected if taxes were to be raised a lot, or what universal basic income would do to the structure of employment. But economists are not the only ones who make mistakes. Everyone gets things wrong. What is dangerous is not making mistakes, but to be so enamored of one’s point of view that one does not let facts get in the way. To make progress, we have to constantly go back to the facts, acknowledge our errors, and move on.

  Besides, there is plenty of good economics around. Good economics starts with troubling facts, makes some guesses based on what we already know about human behavior and theories elsewhere shown to work, uses data to test those guesses, refines (or radically alters) its line of attack based on the new set of facts, and eventually, with some luck, gets to a solution. In this, our work is also a lot like medical research. Siddhartha Mukherjee’s wonderful book on the fight against cancer, The Emperor of All Maladies, tells a story of combining inspired guesswork with careful testing, and many rounds of refinement, before a new drug gets to the market.13 A big part of the economist’s work is very much like that. As in medicine, we are never sure we have reached the truth, just that we have enough faith in an answer to act on it, knowing we may have to change our minds later. Also like in medicine, our work does not stop once the basic science is done and the core idea is established; the process of rolling out the idea in the real world then begins.

  At one level, one could think of this book as a report from the trenches where that research happens: what does the best economics of today tell us about the fundamental issues our societies are grappling with? We describe how today’s best economists think about the world; not just their conclusions but also how they got there, all the while trying to separate facts and pipe dreams, brave assumptions and solid results, what we hope for and what we know.

  It is important that in this project we be guided by an expansive notion of what human beings want and what constitutes the good life. Economists have a tendency to adopt a notion of well-being that is often too narrow, some version of income or material consumption. And yet all of us need much more than that to have a fulfilling life: the respect of the community, the comforts of family and friends, dignity, lightness, pleasure. The focus on income alone is not just a convenient shortcut. It is a distorting lens that often has led the smartest economists down the wrong path, policy makers to the wrong decisions, and all too many of us to the wrong obsessions. It is what persuades so many of us that the whole world is waiting at the door to take our well-paying jobs. It is what has led to a single-minded focus on restoring the Western nations to some glorious past of fast economic growth. It is what makes us simultaneously deeply suspicious of those who don’t have money and terrified to find ourselves in their shoes. It is also what makes the trade-off between the growth of the economy and the survival of the planet seem so stark.

  A better conversation must start by acknowledging the deep human desire for dignity and human contact, and to treat it not as a distraction, but as a better way to understand each other, and to set ourselves free from what appear to be intractable oppositions. Restoring human dignity to its central place, we argue in this book, sets off a profound rethinking of economic priorities and the ways in which societies care for their members, particularly when they are in need.

  That said, on any single issue we will cover in the book, or perhaps all of them, you may well come to a different conclusion than we do. We hope to persuade you not reflexively to agree with us, but to adopt a little bit of our methods and share some part of our hopes and fears, and perhaps by the end, we will really be talking to each other.

  CHAPTER 2

  FROM THE MOUTH OF THE SHARK

  MIGRATION IS BIG NEWS, big enough to drive the politics of much of Europe and the United States. Between President Donald Trump’s imaginary but enormously consequential hordes of murderous Mexican migrants and the anti-foreigner rhetoric of the Alternative for Germany, the French Rassemblement National, and the Brexit crew, not to mention the ruling parties in Italy, Hungary, and Slovakia, it may be the single most influential political issue in the world’s richest countries. Even politicians from the mainstream European parties are struggling to reconcile the liberal traditions they want to uphold with the threat they see across their shores. It is less visible in the developing world, but the fights over Zimbabwean refugees in South Africa, the Rohingya crisis in Bangladesh, and the citizenship bill in Assam, India, have been equally frightening for those who are its targets.

  Why the panic? The fraction of international migrants in the world population in 2017 was roughly what it was in 1960 or in 1990: 3 percent.1 The European Union (EU) on average gets between 1.5 million and 2.5 million non-EU migrants every year from the rest of the world. Two and a half million is less than one half of one percent of the EU population. Most of these are legal migrants, people with job offers, or those who arrive to join their families. There was an unusual influx of refugees in 2015 and 2016, but by 2018 the number of asylum seekers to the EU was back to 638,000, and only 38 percent of the requests were granted.2 This represents about one for every twenty-five hundred EU residents. That’s it. Hardly a deluge.

  Racist alarmism, driven by a fear of the intermingling of races and the myth of purity, doesn’t heed facts. A survey of 22,500 native respondents from six countries where immigration has been a defining political issue (France, Germany, Italy, Sweden, the United Kingdom, and the United States) revealed massive misperceptions about the number and composition of immigrants.3 For instance, in Italy, the actual share of immigrants in the population is 10 percent, but the average perception of that share is 26 percent.

  Respondents starkly overestimate the share of Muslim immigrants, as well as the share of immigrants coming from the Middle East and North Africa. They believe immigrants are less educated, poorer, more likely to be unemployed, and more likely to live on government handouts than they actually are.

  Politicians stoke these fears by abusing the facts. In the run-up to the 2017 French presidential electi
on, Marine Le Pen frequently claimed that 99 percent of immigrants were adult males (58 percent were), and that 95 percent of migrants who settled in France were “taken care of by the nation” because they wouldn’t work in France (in reality, 55 percent of migrants in France were in the labor force).4

  Two recent experiments show this is a winning electoral tactic, even in a world of systematic fact-checking. In one study in the United States, researchers worked with two sets of questions. One set aimed to solicit respondents’ opinions about migration, the other their factual knowledge of the numbers and characteristics of migrants.5 Those who answered the fact-based questions first, before being asked their opinion (and thus reminded of their own distorted perceptions about migrants) were significantly more likely to be against immigration. When they were told the true numbers, their sense of the facts changed, but not their bottom-line views on immigration. In France, a parallel experiment found something similar. People deliberately exposed to Marine Le Pen’s false claims were more likely to want to vote for her.6 Sadly, this persisted after her statements were fact-checked in front of them. Truth did not sway their opinions. Simply thinking about migration makes people more parochial. The facts aren’t allowed to get in the way.

  There is an important reason why facts are ignored, and it is based on a piece of economics seemingly so utterly self-evident that many find it impossible to think past it, even when the evidence says the opposite. The economic analysis of immigration often comes down to a seductive syllogism. The world is full of poor people who would obviously earn a lot more if they could find their way here (wherever that might be), where things are clearly much better; therefore, given half a chance, they will indeed leave wherever they are and come to our country, and this will drive down wages and make most of us already here worse off.

  What is remarkable about this argument is its faithfulness to the standard exposition of the law of supply and demand, as taught in high school economics. People want more money and therefore will all go wherever wages are highest (supply goes up). As the demand curve for labor slopes down, the rise in the labor supply will lower wages for everyone. The migrants may benefit, but the native workers will suffer. This is the sentiment President Trump tries to capture when he insists the country is “full.” The reasoning is so simple it can fit on the back of a very small napkin, as in figure 2.1.

  The logic is simple, seductive, and wrong. First, wage differences between countries (or locations, more generally) actually have relatively little to do with whether or not people migrate. While there are obviously many people desperate to get out from wherever they are, as we will see, the enduring puzzle is why so many others don’t move when they can.

  FIGURE 2.1 “Napkin economics.” Why immigrants must make the rest of us poorer.

  Second, there is no credible evidence that even relatively large inflows of low-skilled migrants hurt the local population, including members of the local population most like the migrants in terms of skills. Indeed, migration seems to make most people, migrants and locals, better off. This has a lot to do with the peculiar nature of the labor market. Very little about it fits the standard story of supply and demand.

  LEAVING HOME

  The British Somali poet, Warsan Shire, wrote:

  no one leaves home unless

  home is the mouth of a shark

  you only run for the border

  when you see the whole city running as well

  your neighbors running faster than you

  breath bloody in their throats

  the boy you went to school with

  who kissed you dizzy behind the old tin factory

  is holding a gun bigger than his body

  you only leave home

  when home won’t let you stay.7

  She was clearly onto something. The places people seem most desperate to leave—countries like Iraq, Syria, Guatemala, and even Yemen—are far from being the poorest in the world. Per capita income in Iraq, after adjusting for differences in cost of living (what economists call purchasing power parity, or PPP), is about twenty times that in Liberia, and at least ten times as high as in Mozambique or Sierra Leone. In 2016, despite a dramatic fall in income, Yemen was still three times richer than Liberia (there is no data for more recent years). Mexico, President Trump’s favorite target, is an upper-middle-income country with a much praised and widely imitated welfare system.

  Those trying to get out of such places probably don’t face the grinding extreme poverty the average Liberian or Mozambique resident faces. It is more that they find life intolerable because of the collapse of everyday normality: the unpredictability and violence brought upon them by the drug wars in Northern Mexico, the horrible military Junta in Guatemala, and the civil wars in the Middle East. A study from Nepal found that even bad years in agriculture didn’t drive many Nepalis out of the country.8 In fact, fewer people left in bad years because they could not afford the trip out. It is only when the violence from Nepal’s long-standing Maoist insurgency flared up that people started leaving. They were running from the mouth of the shark. And when that happens, it is almost impossible to stop them, because in their minds there is no home to return to.

  Of course, there is also the opposite: the ambitious migrant who needs to get out at all costs. This is Apu, the protagonist of Aparajito, the second of Satyajit Ray’s wonderful Apu trilogy, caught between his lonely mother in their village home and the many exciting possibilities offered by the city.9 This is the migrant from China who works two jobs and scrimps and saves so his children one day can go to Harvard. We all know such people exist.

  And then there are the people in the middle, the vast majority who don’t face extreme internal or external compulsions to move. They do not seem to go chasing after every extra dollar. Even where there are no border checks and no immigration agents to dodge, they stay where they are, in the countryside, for example, despite the large wage gaps that exist within the same country, between rural and urban areas.10 In Delhi, a survey of slum dwellers, many of them recent migrants from Bihar and Uttar Pradesh, the two enormous states to the east of Delhi, found that after paying for housing, the average family lived on slightly over $2 a day (at PPP).11 This is much more than the bottom 30 percent in those two states, who live on less than $1 a day at PPP. Yet the rest of the very poor people (of whom there are about a hundred million) have not opted to move to Delhi and more than double their earnings.

  It is not only in developing countries that people do not move to take advantage of better economic conditions. Fewer than 350,000 Greeks are estimated to have emigrated between 2010 and 2015, at the height of the economic crisis that shook their country.12 This represents at most 3 percent of Greece’s population, despite the fact that the unemployment rate was 27 percent in 2013 and 2014, and Greeks, as members of the EU, are able to work and move freely within Europe.

  THE MIGRATION LOTTERY

  But maybe there is no puzzle here; maybe we overestimate the benefits of migration. An important general problem in assessing the benefits of migration is that we usually only focus on the wages of those who chose to move, and not on the many reasons that made them do so, and the many things that made it possible for them to do so successfully. Those who migrate may have special skills or unusual stamina and would therefore earn more, even if they had stayed home. While migrants do many things that do not require particular skills, their jobs often involve hard, backbreaking work calling for great stamina and patience (think of construction or fruit picking, the jobs many migrants from Latin America do in the United States). Not everyone can do it day after day.

  Therefore, one cannot naively compare the earnings of migrants with the earnings of those who remain in their home location and conclude, as many cheerleaders for more migration have, that the benefits of more migration must be enormous. This is what economists call an identification problem. To be able to claim a difference in wages is caused by the difference in the location and nothing else,
we need to establish an exact connection between the cause and the effect.

  One easy way to do this is to study visa lotteries. Winners and losers in a lottery tend to be identical in every way except for this one piece of luck, and therefore the difference in earnings resulting from winning the visa lottery cannot be due to anything other than the change of location it facilitates. Comparing winners and losers of the New Zealand visa lottery, for applicants from the tiny South Pacific island of Tonga (most of them quite poor), a study found that within one year of moving, winners more than trebled their income.13 At the other end of the earnings spectrum, Indian software professionals who got to work in the United States because they won the visa lottery made six times more money than their peers who stayed in India.14

  LAVA BOMBS

  The problem with these numbers is also what makes them easy to interpret: they rely on comparisons among those who applied for visa lotteries. But those who don’t apply may be very different. They may have little to gain from migrating, say, because they do not have the right skills. There are, however, some very revealing studies of people forced to move by an act of pure chance.

  On January 23, 1973, there was a volcanic eruption in the Westman Islands, a prosperous fishing archipelago off the coast of Iceland. The Westman Islands’ fifty-two hundred inhabitants were evacuated within four hours and only one person died, but the eruption lasted for five months, and lava destroyed about one-third of the houses on the islands. The houses destroyed were those on the eastern part (directly in the flow of the lava), plus some houses elsewhere that were hit by random “lava bombs.” There is no way to build a house that resists lava, so destruction was entirely determined by location and bad luck. There seemed to be nothing out of the ordinary about the eastern neighborhood; destroyed houses had the same market value as nondestroyed houses, and their inhabitants were the same kinds of people. This is what social scientists call a natural experiment: nature has thrown the dice, and we can safely assume there was nothing different ex ante between those who had their houses destroyed and those who did not.