Good Economics for Hard Times

Economists Abhijit V. Banerjee and Esther Duflo argue that rigorous, evidence-based economics can address the most divisive policy issues of the day, from immigration and trade to inequality and climate change, but only if economists abandon ideological certainties, acknowledge the limits of their knowledge, and place human dignity at the center of their analysis. First published in November 2019, with a paperback edition updated in 2021 to reflect the COVID-19 pandemic, the book draws on decades of research across developing and developed countries to challenge conventional wisdom on both the political left and right.

The authors begin by diagnosing a crisis of trust. Polls in the United States and the United Kingdom show that only about 25 percent of people trust economists on their own subject. A persistent gap separates expert consensus from public opinion on questions ranging from tariffs to immigration. The authors attribute this gap partly to "bad economics," in which corporate spokespersons present ideologically driven conclusions as settled science, and partly to academics' failure to explain their reasoning. They propose sharing not just conclusions but evidence, while embracing a notion of well-being that extends beyond income to include dignity, community, and purpose.

On immigration, the authors argue that fears of mass migration are largely unfounded. The share of international migrants has held at roughly three percent of the world population since 1960. Drawing on natural experiments, including a 1973 volcanic eruption in Iceland and the forced resettlement of Finns after World War II, they show that people compelled to move often end up better off, yet most people choose not to migrate even when large wage gains are available. They review David Card's study of the 1980 Mariel boatlift, in which 125,000 Cuban migrants arrived in Miami and increased the local labor force by seven percent with no detectable effect on native wages. Standard supply-and-demand logic fails, they explain, because immigrants create demand, slow mechanization, and enable native workers to upgrade to more complex tasks. Labor markets function nothing like commodity markets: Hiring involves trust, long-term relationships, and efficiency wages, meaning above-market pay that firms offer to retain and motivate workers, all of which insulate existing employees from competition.

The discussion of trade follows a similar pattern. The authors trace the theoretical case from David Ricardo's concept of comparative advantage, the principle that both trading partners benefit when each specializes in what it does relatively best, through the Stolper-Samuelson theorem, which predicts that trade should help workers in poor countries and hurt workers in rich ones. Yet in country after country, including Mexico, Colombia, Brazil, India, Argentina, and Chile, trade liberalization was followed by rising inequality, the opposite of what the theorem predicts. In the United States, the "China shock" research by David Autor, David Dorn, and Gordon Hanson showed that communities exposed to rising Chinese imports lost manufacturing jobs with no offsetting gains in other sectors, and workers did not relocate. Government assistance proved woefully inadequate, with the Trade Adjustment Assistance program providing only twenty-three extra cents per adult in additional transfers. The authors calculate that aggregate trade gains for the US amount to only about 2.5 percent of GDP and propose expanding retraining programs rather than imposing tariffs, which would create new losers without helping the original victims.

Turning to preferences and prejudice, the authors challenge the assumption that people's tastes are fixed. They present evidence that preferences are shaped by social context: stereotype threat experiments show that framing a test as measuring intellectual ability depresses Black students' performance, while framing an athletic task as measuring "sports intelligence" depresses white students' performance. Drawing on Roland Bénabou and Jean Tirole's work on motivated beliefs, they explain why people resist disconfirming information: Admitting error threatens self-image, leading people to rationalize prejudice as truth. Twenty-seven randomized controlled trials support the contact hypothesis, the idea that structured interaction between groups under appropriate conditions reduces prejudice, though competitive contact can increase hostility.

On economic growth, the authors argue that sustained fast growth in rich countries may not return. Growth in the West was exceptional during the roughly 150 years from 1820 to 1970, driven by rapid gains in total factor productivity, a measure of how efficiently an economy uses its inputs. Since 1973, productivity growth has slowed dramatically. The authors reject the claim that tax cuts for the wealthy promote growth, citing the absence of any correlation between changes in top tax rates and growth rates. For developing countries, they identify misallocation of resources, including poorly functioning banks and family firms that pass control to relatives rather than more talented outsiders, as a major drag on productivity. They conclude that rich countries should prioritize quality of life over GDP growth.

Climate change, the authors argue, is massively inequitable: The richest 10 percent of the world's population generates roughly 50 percent of carbon emissions, while the poorest 50 percent generates just over 10 percent, yet poor countries bear the greatest damage. An additional hot day raises mortality 25 times more in India than in the United States, largely because poor countries lack air conditioning. The air-conditioning dilemma compounds the problem: The technology that protects people from heat accelerates warming through hydrofluorocarbon emissions, the climate-warming gases released by cooling systems. The 2016 Kigali agreement, an international accord to phase out these refrigerants, allowed India to delay compliance until 2028. The authors advocate for high carbon taxes announced well in advance, structured with rebates to lower earners.

The authors trace the explosion of inequality in the US and UK to the Reagan-Thatcher era, when top tax rates were slashed and unions weakened. The share of national income going to the top one percent in the United States has nearly returned to its 1929 level, while average real wages for workers without a college degree have fallen since 1980. They identify finance as a key driver: Financial employees earned 50 to 60 percent more than comparable workers, while most actively managed funds underperformed passive index funds, suggesting much of this pay represented unearned rent. Rising "deaths of despair," including suicides and drug overdoses among less-educated white Americans, reflect declining job attachment and weakened social ties. The authors argue that high top marginal tax rates and a progressive wealth tax would reduce inequality without discouraging effort, and that automation risks worsening the problem.

On government legitimacy, the authors contend that the Reagan-era mantra that "government is the problem" has become self-fulfilling. US tax revenues as a share of GDP are among the lowest in the Organisation for Economic Co-operation and Development (OECD), a group of mostly high-income nations. The authors challenge the assumption that privatization is inherently more efficient and highlight Mexico's Progresa conditional cash transfer program, whose randomized evaluation demonstrated that giving cash to the poor did not produce the feared negative consequences.

In their final substantive chapter, the authors argue that effective social policy must go beyond cash transfers to preserve dignity. They evaluate universal basic income (UBI), acknowledging that unconditional cash does not discourage work, but contending that UBI alone cannot address the crisis in rich countries where people derive identity from their jobs. For developing countries, they recommend a universal ultra-basic income paired with targeted support for health and education. For rich countries, they propose subsidizing employment for older workers in declining industries and expanding investment in education, childcare, and elder care. They highlight dignity-centered programs, including ATD Fourth World, a French anti-poverty organization that provides permanent employment for people in extreme poverty, and BRAC, a Bangladeshi development organization whose "graduation approach" combines asset transfers with ongoing social and emotional support.

The authors conclude by observing that all economies are "sticky," that people and capital do not flow seamlessly to their best uses, and that this stickiness, combined with globalization and technological change, has left behind vast communities worldwide. They call for a recommitment to evidence-based policy that resists ideology, engages honestly with complexity, and places human dignity at the center of economic thinking.