Authors: Abhijeet Banerjee & Esther Duflo
Nations are doing very little to solve the most pressing challenges of our time; they continue to feed the anger and distrust that polarize us, which makes us even more incapable of talking, thinking altogether, doing something about them. It often feels like a vicious cycle.
What is dangerous is not making mistakes, but to be so enamoured 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.
Immigration
Leaving Home
— Warsan Shire
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 neighbours 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.
That it takes a disaster scenario or a war to motivate people to gravitate to a location with the highest wages shows economic incentives on their own are often not sufficient to get people to move
How low-skilled immigrants spur growth
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Low-skilled immigrants not only get employed in their new locations. But they also spend in their new locations. Like to get a haircut, and thus they create more jobs and businesses in the new locations.
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Alternate example Czech workers in Germany
who worked in Germany but travelled back and spent in Czech. The immigrants did not produce anticipated growth for Germany
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They slow down the process of mechanisation
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Mexican immigrants in California
1964 - Mexican immigrants are kicked out of California on grounds that they depress wages. But as soon as they leave. All the tasks they used to do in farms are mechanised. Like tractors. If unable to mecahnize the crops are dropped. No more asparagus, strawberries in California.
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Natives upgrade their skills or occupations
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Danish people benefitted
from immigrations by shift of their jobs from manual to non-manual. Switch to tasks that required communication (immigrants dont know the language)
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Willing to perform tasks that natives are reluctant to do
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Highly skilled women natives benefitted
are able to work more when there are more migrants around
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Labor is no ordinary commodity —Karl Marx
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Soviet joke — They pretend to pay us, we pretend to work
The wage the firm must pay to get workers to workers has to be high enough that being fired actually hurts. The wage difference between what firms pay their established workers and what they would need to pay for a newcomer may not be very large because they cannot risk the consequences of paying a newcomer too little.
Skilled migrants do takeaway jobs of native people - It helps low-skilled natives who benefit from cheaper services (like migrant cheap doctors) at the cost of worsening the labor market prospects of the domestic population.
Bad working conditions and environments for migrants.
- India imposes limits on how high buildings can be. This results in massive urban sprawl and long commutes and traffic in most Indian cities.
- Bad air conditions - Delhi
- Smaller close network - Leaving families behind. Especially in international moves.
- Yet the make the move considering the risks. These are migrants who can look beyond the bad times. Strong hearted.
Loss Aversion
- The outcome of letting things be, serves as a natural benchmark. Any loss relative to that particular benchmark is particularly painful
- Reason why we buy expensive warranties, insurance premiums etc. No calculated decisions - only overestimated risks
Fear of failure is a substantial disincentive for embarking on a risky adventure
Internal migration in the US
- Coasts are rich. Central states - not very economically good
- People used to move into rich states (coasts) until 1980s. Now low-skilled workers don’t. This is because gains in wages don’t match to increases in cost of living.
The Rise of the Rest Fund
Young educated workers will not come until amenities exist, but the amenities cannot thrive unless there are enough workers like them around.
Migration was encouraged or forced during modernization
India and China - Banning export of farm produce to keep prices where urban consumers wanted it to be. Making agriculture unprofitable, encouraging people to move away from farms.
Conclusion
- Encourage migration
- Information about benefits
- Making it easy for households to send money back and forth
- Insurance against failure
- Housing assistance
Trade
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Comparative advantage - Countries doing and exporting what they’re relatively best at doing - Free trade
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Absolute advantage - Produce everything and swamp all markets - China (possibly, but not completely)
China could win any single market and yet there is no way for it to win in every market
- Stolper-Samuelson Theorem - opening up free trade results in…
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GNP increase
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Inequality goes down in poor countries
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Inequality can go up in rich countries (can be mitigated if goverment redistributes gains)
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Free trade - China and India benefitted. Growth in India was at 4% before 1991 and a steady 8% after that. But post liberalisation India, China and Korea, all have seen rise in inequality.
Poverty dropped from 35 to 15 percent in India. But the rate of poverty reduction was less. Which meant liberalisation had slowed down poverty reduction. Which means it had increased poverty. This is contrary to Stolper-Samuelson theory.
Industrial cluster
- Tiruppur. Exporters in Mumbai direct an Italian importer to Tiruppur. And then Tiruppur grows posts 1980s. ==A concentration of firms in the same industry in one location, all benefitting from the reputation associated with the cluster.==
- Egyptian carpets
- Both cases there are intermediaries who acquire orders and pass on to the industry.
Amazon/Alibaba insert themselves in place of intermediaries and allow individual producers to build reputations on their sites. It is to build reputation that producers sell for cheap prices on Amazon.
China devalued their local currency until 2010 to boost export growth. But Chinese consumers had to take the loss of paying for overvalued imports. Had the exporters expanded more slowly, the domestic market might have grown faster and absorbed the surplus (80% of China’s GDP is in domestic)
Is international trade the way forward for an average poor country?
Job Loss in the US - China Shock
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Ghosted towns - the ones previously dependent on clustered industry
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No new factories set up - vicious cycle
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Welfare payments too less
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Disability insurances went up
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People chose to switch to disabilities. Reduced their prospects of rehiring.
Is US China Trade war bad for US?
Apparently no. Because, US being a developed country will not be affected MUCH by trade. Gains will go down. But not much. If imported items are high priced, US will just find substitutes internally, so that value of imports is not high. Back to jobs. And back to happy people.
But Trade war is only going to make things worse. (This author is starting to say confusing things :/ ). Shutting off trade with China will clearly create new set of displacements and mant of those new losers will be in counties we’ve not yet heard anything about, simply because they’re doing just fine.
US economy will be fine. Hundreds of thousands of people will not.
Preferences
The story of the Moroccan who chose to buy a TV when he had no money for him and his family to eat. Preferences.
Standard preferences
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The Manhattan subway queue anecdote - Simple model of herd behaviour. Why people chose to stand in a line when there are other empty spots closer to the doors in other lanes.
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Alternate view. People don’t get influenced by external factors. They stick to their deepest preferences. No matter what. That’s why we tend to make irrational choices. Sticking to our preferences.
In the absence of a strong reason to believe otherwise, I might infer from other people’s actions that a tattoo does look good, that drinking banana juice will make me slim, and that this harmless looking Mexican man is really a rapist at heart.
Common shared pasture with strict grazing rules in alps. For Swiss cheese producers. Doesn’t make sense in terms of economy without the context - Systems of mutual help may collapse if some community members have opportunities outside
State vs Community goals
35% to 29% wage gap drop between schedules castes and others. Wage gap between whites and blacks in US is higher. This is as a result affirmative action policies that Ambedkar put in place. He was an opponent for Gandhi’s community based goals. Ambedkar feared the intermingling wouldn’t happen faster, but the problems themselves paved way for faster adoption of solutions. Example - Midday meal scheme picked up fast, because poverty bought people together irrespective of class.
But problem of caste has not been solved. While traditional methods of discrimination have weakened, upper castes react with violence to the perceived threat of economic progress.
In politics there is increasing caste polarization in voting; an increasing faction of the votes of the upper class go to the Bharatiya Janata party - one party not committed to affirmative action. Other parties have emerged to cater to specifically to different caste groups. This polarization has consequences in Uttar Pradesh, India’s most populous state. The complexion of politics changed drastically between 1980 1996. Areas dominated by lower castes voted more and more for the two parties identified with low castes, where as the areas dominated by upper castes, continued to vote for the parties traditionally associated with them. During the same period, corruption exploded. An increasing number of politicians had a case opened against them, some even fighting and winning the election campaigns from jail. Abhijit and Rohini Pande found that there was a connection: Corruption increased the most in areas where either the upper caste or the lower caste were a large majority. In those areas, as a result of caste based voting the candidate of the dominant caste was all but assured to win, even when he was extremely corrupt and the opponent was not. Nothing like that happened in areas where the population was balanced.
The stereotype of a black man as a freeloader (begging for a small change) and Obama ad an inspirational leader (asking for a cultural change).
First people are against people coming in. Then as the migrants mingle in. They’re fine with that set of people and tend to find for new enemies. Why do we look ror a new enemy even as we become reconciled to the previous one?
Between 1950 and 2000, Hindu Muslim riots were much more likely to occur in a particular city in a particular year if the Muslim community happened to be relatively well off. And they were less likely to occur if the Hindu community happened to be doing well. Violence is often a convenient camouflage for theft.
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Statistical discrimination
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Ban the box policies - pre and post BTB
Self reinforcing discrimination
Minorities self impose threats. Out of fear. Insecurities. People perform differently when they are reminded of their group identity, which makes them doubt themselves even more.
Echo chambers
Like-minded friends who are oblivious to others opinions. Whip themselves into a frenzy by listening only to each other. Facebook and Twitter function as echo chambers. Fragmented public space.
Only 4.7 degrees of separation between any two people on Facebook.
Problems with Social Media
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Fake news spread. Makes it’s way to mainstream media. Makes the elderly vulnerable.
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Endless repetition. Almost like chanting political agendas.
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Experiments by political entrepreneurs. Crabbed twitter language. Testing against target groups what works or doesn’t work.
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Automatic customisation. Echo chambers.
When people chose their sources of information and update their opinions they tend to be more center. Whereas, those who are just exposed to any kind of information, don’t update their opinions and become further left or right. Observations from that korean experiment.
As we lose the ability to listen to each other, democracy becomes less meaningful and closer to a census of the various tribes, who each vote based on tribal loyalties than on a judicious balancing of priorities.
Contact Hypothesis
Under appropriate conditions, interpersonal contact is one of the most effective ways to reduce prejudice. (Delhi schools example). But contact alone may not work. It’s important to have shared goals.
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Singapore - strict quotas ensure some amount of mixing between ethnic groups
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Housing projects in Paris
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School Busing in US
Conclusion
Prejudice is often a defensive reaction to the many things we feel are going wrong in the world, our economic travails, and a sense that we are no longer respected or valued.
Four implications:
- Expression of contempt against racists reinforces those sentiments
- Prejudice is not an absolute preference. Racist voters do care about other things. Mayawati's victory in 2007 - She went for broad inclusivity and not narrow sectarianism. Also Medicaid was supported by republicans in red states.
- Voters know all politicians are more or less alike. This they vote for people that are more like their kind. Ethnic voting is often just an expression of indifference.
- Convince citizens that it is worthwhile to engage with other policy issues. Reestablish the credibility of the public conversation about policy.
Economic Growth
Robert Gordon’s book is particularly daring. He gleefully takes on the set of future innovations futurologists predict and one by one explains why in his opinion none of them would be as transformational as the elevator or airconditioning, and why none would take us back to an era of fast growth. Robots cannot fold laundry, three-dimensional printing won’t effect large scale manufacturing, artificial intelligence and machine learning are nothing new. They have been around since at least 2004 and have done nothing for growth and so on.
Capital-scarce economies grow faster because new investment is highly productive. Rich economies, which are, in general, capital abundant, tend to grow more slowly because new investment is not as productive. One implication of this is that any large imbalance between labour and capital should get corrected.
Since 1973, interest rates have been falling throughout the West, reflecting, it seems, an abundance of capital, exactly as in the Solow model. Abundance of Capital
Misallocation
The case of Kerala fisherman - who used cellphones to easily communicate and land in different beaches based on customer expectations and finish selling their fishes. Reduce waste. Landing in different beaches led to discovering new boat manufacturers and thus making stronger boats. Bad boat makers in other beaches went out of business. But overall misallocation was overcome. This is a case of communication barriers having led to misallocation.
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US firms - up or out firms
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Indian firms - extremely sticky - good firms do not grow and bad firms do not die
Clean energy - climate change - economic growth
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High taxation on bad energy. Will work like how taxation on cigarettes work.
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Much of the energy consumption that rich countries need to sacrifice are inessential. Not the same for poor countries.
AI Jobs and Economy
In history, mechanisation came, traditional manual workers lost jobs. But after a very longgggg era of technological progress. This long time in between was hard times for ppl. Today wages are high. If AI wave hits and job losses occur. Will a similar rebound happen like in the past?
Inequality - Even if people remain employed. They’ll only do tooo meager jobs. Like working as dog walkers for super-rich software engineers.
Excessive unnecessary automation
US tax code taxes labour at higher rate than capital. Payroll taxes on labor but not on robots. Robots don’t need subsidies, benefits etc as well.
R&D concentrations towards ML and AI to automate existing works instead of innovating new products (which in turn will create new jobs) is stopping some pathbreaking innovations.
Alternative - Robot tax
Tax on robots, large enough to prevent them from being deployed unless the productivity gains are sufficiently high.
South Korea announced the world’s first Robot tax.
Winners taking it all. One big product for one big space in market. A few firms tend to capture large parts of markets. A reason behind overall wage inequality rising. These winner firms take all the good capital and labor.
Finance jobs swallowed most of the pay rise in US and UK (which dominate the high end of finance - funds, investments, venture capital). Unlike other big market countries.
Warren Buffet pays less taxes. Wealthy people do not consume the vast majority of the income they derive from their wealth. Instead they take a small fraction of the wealth income in the form of a dividend, and they plow the rest back into their family trust or whatever structure that has allowed their wealth to accumulate. In current tax codes in most countries, they do not pay any taxes on the amount that goes back into the trust
Despair in US. Fed by the American dream, they blame other factors over their incapabilities. More despair. More mortality among uneducated, poor whites. When the rest of the world saw convergence between mortality levels of the college educated and the rest, the United States went the other way.
Taxes are NOT the way to bridge income inequality - Bad examples - India and China. Top 2-3% high income ppl pay taxes in India. Every year tax bracket increased. But kept at a steady 2-3% of top people. But the higher income people have only ended up earning more. No money goes to the betterment of poor.
Latin America has done good to bridge the gap. Driven by rising commodity prices, policy interventions - higher minimum wages and large scale redistribution.