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How these 2 Nobel winners are challenging popular economics

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  • Amna Nawaz:

    As Paul Solman reported recently, economists Esther Duflo and Abhijit Banerjee won this year's Nobel Prize for their hard-nosed work on poverty, conducting experiments in developing nations, like Banerjee's native India.

    They wanted to see what actually works and what doesn't to improve the lives of the poor.

    But the married couple has also cast their critical eyes on the developed world and economic orthodoxy in their new book, "Good Economics for Hard Times."

    Paul zeros in on the ideas of their book for our series Making Sense.

  • Esther Duflo:

    We felt that there was a lot that economics could teach us about the important issues that people are fighting about today.

  • Paul Solman:

    Important issues, say Esther Duflo and Abhijit Banerjee, like immigration, which, they say, so many economists simply get wrong.

  • Abhijit Banerjee:

    They say, oh, well, you know, it's supply and demand. If supply goes up, price will go down.

  • Paul Solman:

    That, if there are more people willing to work cheaply, then wages will go down.

  • Abhijit Banerjee:

    Exactly. There is no evidence for it. In fact, there are many, many such episodes that have been studied, and for low-income workers, there is no evidence that the influx of large numbers of outsiders does anything to their wages.

  • Paul Solman:

    Instead, he says, the influx of workers stimulates the economy.

  • Abhijit Banerjee:

    They're going to buy stuff. And they often buy stuff that other low-income workers sell.

  • Paul Solman:

    We actually saw this in immigrant-friendly Utica, New York several years ago.

    Bosnian refugee Sakib Duracak, who came in the 1990s.

  • Sakib Duracak:

    At the time when we came in Utica, it's a relatively very dead and poor city.

  • Paul Solman:

    But immigrants like Duracak revived the city by working and spending.

  • Ellen Kraly:

    To have an economy, you have to have workers, and you have to have consumers.

  • Paul Solman:

    Professor Ellen Kraly teaches demography at nearby Colgate University.

  • Ellen Kraly:

    The influx of refugees to Utica allowed us to retain some smaller industries that were looking for highly motivated labor.

  • Paul Solman:

    Moreover, say the newly-minted Nobels, the work the immigrants do doesn't compete with native workers, who, for the most part, won't take the same jobs.

    I was skeptical.

    But look at union construction workers. They used to make a lot more money, adjusted for inflation, than they do now, due to, it seems, the influx of immigrants.

  • Abhijit Banerjee:

    I think that — that's a very good example of something that hasn't been commented on, which is, high-skilled laborers do lose when there's an influx of other comparable people.

    And in some sense, the political conversation has it backwards. The high-skilled immigrants have actually an impact on the wages of comparable people. The low-skilled immigrants are the ones who don't.

  • Paul Solman:

    Another chapter of the new book is called "Pains From Trade," playing off a supposed economic truism, gains from trade.

  • Esther Duflo:

    Economists repeat until they are blue in the face that trade is good for you and that trade is good for the country. But it's based on one very strong assumption.

  • Paul Solman:

    The assumption? That people who lose jobs to foreign competition will simply up and move to get a new one.

  • Abhijit Banerjee:

    Except that, in the last 40 years, there's been enormous decline in mobility. Seven percent of the people used to move from county to county.

  • Paul Solman:

    In the U.S.

  • Abhijit Banerjee:

    In the U.S. 40 years ago. Now it's 4 percent. That's almost a halving of mobility. People have stopped moving.

  • Esther Duflo:

    It's the emotional investment in the community, your identity as someone who has been working in a factory for many, many years. Maybe you have become a manager of your line or something like that.

  • Paul Solman:

    Plus, in factories I have visited over the years, workers develop specific skills that are non-transferable.

    At a Milliken textile mill in Jonesville, South Carolina:

  • Raymond Hood:

    You go through about a 12-week training program, and then you need probably nine to 10 months of practical experience on the machine before you get really competent and actually know what you're doing with the machine to be able to make it perform correctly.

  • Paul Solman:

    Same story at a corn broom factory in Alabama, which we visited back in the early '90s on the eve of NAFTA, when debate over trade with Mexico was raging.

    Technically, this was unskilled labor, but it took me eight minutes to do what the average worker does in one.

    And I'm basically hitting myself on the index finger at this point. No, that was the thumb getting hit, getting hit.

    Back then, it took a year or so to master this skill, useless anywhere else. But when we returned 10 years later, the job was so mechanized, said the CEO…

  • Ed Peason:

    If you can screw in a lightbulb, you can make a broom.

  • Paul Solman:

    Real expertise rendered obsolete. Yes, we have trade adjustment assistance to supposedly teach new skills, but when you bother to crunch the numbers, they show that what laid-off workers lose in wages alone is far greater than what's spent to reimburse and retrain them.

    A third and last example of where popular economics has led us astray, say the economists, is taxes.

    Here's the architect of Republican tax cuts, Arthur Laffer, making the classic argument a few years ago.

  • Art Laffer:

    If you raise tax rates, you collect more money per dollar of income. But then you have the economic effect, which, if you raise tax rates, you reduce the incentives for people to do the activity, and you will get lower income.

  • Paul Solman:

    Arthur Laffer told me that he moved from California to Tennessee, for example, because there was a lower tax rate.

  • Abhijit Banerjee:

    It would be really sad if he didn't move. A nice thing about economics is, we deal with large data sets. There's no clear evidence that, if you raise taxes, the rich stop working.

  • Paul Solman:

    Nor is there any credible evidence, say the laureates, that benefits keep the poor from working.

    Is there not — the welfare queen or welfare king stereotype, it's just not true?

  • Esther Duflo:

    There's no evidence for it. Neither in the U.S., nor in poor countries do we see that, when people are given more generous help packages, they become lazy.

  • Paul Solman:

    Evidence, much of it upending the conventional wisdom in economics, which is what, applied to poverty alleviation, earned Esther Duflo and Abhijit Banerjee their Nobel Prize.

    This is Paul Solman in Boston.

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