Nobel Prize 2

Good Economics: Action Plan to Solve Global Development Challenges#

Author Introduction#

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Among the winners of the 2019 Nobel Prize in Economics is a couple. They are Abhijit Banerjee (India) and Esther Duflo (France) from the Massachusetts Institute of Technology. "Good Economics" is their new book published at the end of 2019, with the Chinese version released in April 2020. This is not an academic work but a book aimed at the general public, intended to explain how "good economics" views and thinks about the major issues facing today's world.

Mind Map 2#

"Good Economics"

Immigration Issues This article is a reflection and notes on "Good Economics." This book is a new work by the 2019 Nobel Prize winners, as the couple has been dedicated to poverty alleviation work, studying the living habits of the world's poorest populations.

This article is a reflection and notes on "Good Economics," a new work by the 2019 Nobel Prize winners, as the couple has been dedicated to poverty alleviation work, studying the living habits of the world's poorest populations. Why did they write a book called "Good Economics"? In fact, it can be summarized in one sentence: the authors say, "Economics is too important to be left to economists alone."

So what is good economics, and what is bad economics? It is easier to find answers to these questions in this book by looking from the end to the beginning.

The authors say that good economics helps us overcome ignorance and ideology, ensuring that the correct distribution of mosquito nets in Africa reduces deaths and creates opportunities. Good economics conducts more field research, speaks more with numbers, and tries various methods to provide many tools and assistance to decision-makers and implementers. This is good economics; it is used to solve problems.

So what is bad economics? Bad economics promotes state incompetence, corruption, and blames the poor for laziness, leading to widening wealth gaps, increasing social anger, and confrontation, ultimately resulting in a deadlock in society. When you listen to the speeches and research of bad economists, you feel helpless, hopeless, and unsure of what to do. But in reality, economics is a science of action; it teaches us how to solve problems.

Therefore, this book lists many economic means to solve practical life problems. Let's look at them one by one.

The first topic is the immigration issue, which we all care about.#

Now the whole world, especially Western societies, is facing the so-called wave of immigration. The panic about the wave of immigration mainly comes from several points:

First, the large number of immigrants.
Second, the high crime rate brought by immigrants, leading to a decline in local employment. Therefore, in Europe and the United States, many people are constantly protesting against the wave of immigration. However, the authors say, how much of this is rational, and how much is based on real data—take a simple example: in Italy, immigrants actually account for 10% of the population, but when you conduct a poll and ask people how much they think immigrants account for, the average is 26%. You tell them that there aren't that many immigrants, but people feel that there are that many. Because you can't control people's feelings.

In fact, there is currently no wave of immigration in Europe: "In 2017, the proportion of international migrants in the world population was roughly the same as in 1960 or 1990, at 3%. The EU receives an average of 1.5 to 2.5 million non-EU immigrants from other parts of the world each year. Less than 2.5 million is less than 0.5% of the EU population, and most of these people obtain immigration status through legal means such as employment and family reunification. From 2015 to 2016, a large influx of refugees occurred in the EU, which was rare. By 2018, the number of people seeking asylum in the EU had dropped to 638,000, with only 38% of applications approved, equivalent to one refugee for every 2,500 EU residents; this situation is hard to call a refugee wave." This is the fact and data, but people's feelings are completely different.

Moreover, you should know that wage differences have almost nothing to do with immigration. If we think about it, we might feel, how can it be unrelated?! When immigrants come, there are more people, and they ask for less money, so wages must be lower. This is the simplest demand and supply curve in economics; everyone only thinks of this one curve. But in fact, the arrival of immigrants will shift this curve upward. After the upward shift, the result is that wage differences are not particularly related to immigration.

So who are the immigrants who actually leave their hometowns? The authors raise a question: why do so many qualified immigrants not migrate? They are willing to stay in their hometowns, in Africa, the Middle East, and South Asia; they do not choose to migrate when they have the opportunity, and often migration occurs during times of war and famine.

So, there is a poem I want to read to everyone. This is a poem written by a Somali poet. Many Somalis have left their hometowns due to war and famine.

He says: "No one leaves home unless home is the mouth of a shark; you can only run to the border. When you see the whole city running, your neighbor runs faster than you, with the taste of blood in your throat, the boy who used to go to school with you, who kissed you behind the old tin factory, is now holding a gun taller than him; you can only leave home if it doesn't let you stay..."

It's not that a person will just feel that if a country is rich, they will definitely migrate there. In fact, those who are forced to leave their hometowns, when they come to these more developed areas, bring about an overall improvement in local employment levels.

So what do locals do? A large number of locals benefit from the arrival of immigrants.

The reason low-skilled immigrants do not harm local wages and employment is that, for example, if some African immigrants or Middle Eastern immigrants come here, they can only do the most basic and ordinary work due to language barriers. Therefore, locals who can at least speak the local language can become foremen. They can become higher-level workers, thus promoting production.

Secondly, the main reason is that immigrants also need to consume. Locals already have houses, have decorated them, and live in them; their monthly expenses are just food and clothing. However, when an immigrant comes, they need a house, need to rent a house, need to buy furniture, need to buy more things, so consumption will increase.

Thirdly, the arrival of immigrants slows down mechanization. If immigrants do not come, employers only need to buy a few more machines to replace these people. This is the most important source of unemployment. However, after immigrants arrive, wage income levels drop, and they demand very low wages, so employers slow down the process of mechanization and reorganize their lifestyles. Therefore, locals can do more productive work.

Fourthly, immigrants will also engage in many jobs that locals do not want to do, which is to say that originally these things are what everyone does not want to do. If you ask in Beijing, who runs breakfast stalls? There are basically no old Beijingers; running a breakfast stall is hard work, so people from outside are more willing to do these things.

In addition, immigrants are more entrepreneurial. We can see this situation everywhere: after local residents stay in one place for a long time, they become complacent. They have houses, they collect rent, and they can have very low living needs; earning a few thousand a month is enough. However, incoming immigrants are more entrepreneurial and innovative, and they can even create new job opportunities.

Here are some examples: "In 2017, 43% of the Fortune 500 companies in the United States were founded or co-founded by immigrants or their descendants. Moreover, among the top 25 companies, 52% were founded by immigrants, and among the top 35, 57%; 9 out of the 13 most valuable brands were founded by immigrants. Henry Ford was the son of Irish immigrants, Steve Jobs' biological father came from Syria, Sergey Brin was born in Russia, and Jeff Bezos' name comes from his Cuban immigrant stepfather." These famous entrepreneurs are all immigrants.

So, in the past, based on intuition and the most superficial understanding of economics, we believed that immigration would bring various problems, while field research in economics tells us that, in fact, it does not. Low-skilled immigrants do not harm local wages and employment.

However, you should note that skilled immigrants are more likely to lower local wages. The real immigrants who come over and cause local white-collar incomes to decline are those skilled immigrants. However, it should also be noted that skilled immigrants are beneficial for local assistance to the poor because they lower service costs.

The core reason why many people are unwilling to migrate: the first reason is the lack of interpersonal relationships. Moving to a place where one is unfamiliar—if you ask me to move to the United States now, I would be unwilling to go. No one knows you; what do you do there every day? Good mountains and rivers, but very lonely.

The second reason is the comfort of family. A golden nest or a silver nest is not as good as one's own doghouse; that is, I stay at home, no matter how poor or bitter I am, as long as I don't starve, at least it is comfortable. This is a unique thing brought by family.

The third reason is that you will have family ties in the local area.

The fourth reason is people's prejudice against the systemic risks of immigration. The authors studied Nepal and found that whenever a labor incident occurs abroad, the labor output that year will drop significantly.

In fact, there are not many incidents, but people generally do not look at statistics; they look at significance. For example, I heard that someone in someone's family had an accident abroad. Therefore, this systemic prejudice leads people to be unwilling to go. People's stubbornness exceeds economists' expectations. People's prejudice against immigration and concerns about this matter, no matter how many numbers you tell them, just like telling Italians that the immigrant population here is not 26%, it does not solve the problem. Because people are extremely stubborn.

In fact, the greater threat to the economy is the immobility of people. When a place's people are too stable, the economy does not generate human flow, which will suffer huge challenges.

You see, after I finish talking like this, everyone will feel that it turns out that we need to understand such a big problem through economic research. So if it involves immigration policy, how should we discuss and formulate it? This is the work that good economics needs to do.

"Good Economics"
2. Trade This article is a reflection and notes on "Good Economics," and the second topic that everyone is very concerned about is trade.

This article is a reflection and notes on Good Economics, and the second topic that everyone is very concerned about is trade. This chapter is called the pain of trade.

You know, regarding whether the tariffs imposed by the United States can enhance the welfare of Americans, there is a survey. When given to ordinary people, the results are varied; some support it, and some oppose it. However, when given to top economists in the United States, regardless of their school of thought, whether they are Democrats or Republicans, or their research background, as long as they are famous top economists in the United States, the voting result is 100% against this view. That is, 100% of economists believe that the tariffs imposed by the United States are not beneficial to the welfare of Americans.

Why should there be trade between people? This brings us to the earliest theory of David Ricardo, who said that trade allows two countries to focus on their respective strengths and then exchange, resulting in an increase in total income for all countries. This is called the theory of comparative advantage. So, long ago, when David Ricardo proposed the theory of comparative advantage, people believed that trade must be very good.

However, later "Samuelson warned that, at least in wealthy countries, trade may come at the expense of workers' interests." That is, trade must be beneficial to the country, but at the expense of workers' interests, meaning that the more developed trade is, the greater the income gap in a country, which means that white-collar incomes become higher while blue-collar incomes become lower. This is the warning Samuelson made back then.

Later, an economist named Topalova proposed a new concept while studying various trade phenomena, called sticky economy. She said that sticky economy can lead to sticky traps. After this theory was proposed, it was rejected by many economists. They believed that this did not conform to the assumptions of economics.

So what is a sticky economy? The assumption of economics is that people are rational, so when they find that trade has produced imbalances, people will move, production materials will flow, and money will flow. However, Topalova observed many places, including developed and undeveloped countries like India, China, and South Africa, and found that when the economy shows a gap, these people, production materials, and money do not flow.

For example, in India, many banks, when a certain industry in that area is impacted by trade and has lost vitality, they still prefer to lend money to those old factories rather than to those emerging industries. Logically, if people are rational, if society can quickly allocate production materials as economists expect, then they should quickly lend money to those more efficient emerging industries. But in reality, it is lagging behind, and this lag leads to the money being lent out and not being recovered, which is called a sticky trap.

When a region enters a sticky trap, like some small cities in the United States, due to the industry being replaced by imports, these people can actually stay in that place after losing their jobs, living on the minimum living guarantee and living a very poor life. You say you can go to a bigger city to work, you can learn a new skill, you can do something else. They don’t go; people’s transitions are not that fast. Therefore, poverty occurs, in large part, from this sticky trap.

So, when studying trade, the authors say: "Large economies like the United States and China produce most products domestically with technology and capital at very high efficiency. Moreover, they also have sufficiently large domestic markets to absorb a large number of factories producing products at appropriate scales. If they do not engage in international trade, their losses are relatively small." This means that when you assess a country's impact from trade, it is related to the country's economic size. Countries like the United States and China have domestic trade environments that can be self-sufficient, so they are relatively less affected. The ones that are truly most harmed are those small countries.

So is a trade war feasible? Economists have studied this and concluded: "So, is it useful to reintroduce protectionist tariffs?" The answer is no.

"Reintroducing tariffs now does not help most Americans. The reason is simple: so far, one of our main arguments is that we need to worry about the transition issue. Many people who have been laid off due to industry decline have never really recovered because sticky economy means they cannot enter new industries or relocate to new areas to regain their footing, so resources cannot flow to them."

The discovery of sticky economy has a very important impact on solving trade issues: in the past, we viewed trade issues as rational assumptions, as if it were simple like playing a game; when one indicator declines, another indicator rises. Sticky economy tells us that it is not that easy; in many places, when employment indicators decline, these people do not move, do not learn new skills, do not want to go to other places to do other industries, so these people may not benefit.

Then the authors say: "Now cutting off trade with China will obviously cause a new wave of unemployment. Many of the newly emerging losers will come from areas we have never heard of. The reason we have not heard of these areas so far is simply because they are doing well now."

Therefore, through these arguments, research, and numbers from economists, we are told that using trade wars to solve domestic contradictions in the United States is not a good method at all. This is the second important topic of this book.

Next, the author also uses preference theory to explain prejudice and discrimination, which we plan to discuss seriously in another book. The name of this book is "Prejudice," and another book is written by this author, called "The Nature of Poverty," both of which are related to this topic. We will not elaborate on this here.

"Good Economics" 3. Economic Growth This article is a reflection and notes on "Good Economics," and the third topic is whether we have reached the limit of economic growth.

This article is a reflection and notes on "Good Economics," and the third topic is whether we have reached the limit of economic growth.

In the past, you know, after World War II, there was a glorious 30 years. During this glorious 30 years, many capitalist countries around the world experienced rapid growth, but after 1973, it seemed to stagnate. Therefore, many economists wondered whether there really is a limit to growth and whether the economy will stop developing.

In fact, here, economists propose that we should redefine GDP. By introducing happiness and joy as benefits in the definition of GDP, you will find that our growth continues. If we only look at GDP as economic numbers, we may produce such a bottleneck, but if we reconsider the utility brought by happiness and joy, then this number will change.

Then, during the process of economic growth, someone proposed whether reducing taxes on the rich could stimulate economic development because the rich are the owners of production materials, and they are responsible for investment. If you tax them more, they will be unwilling to invest, leading to economic decline. Through statistical research, it has been found that reducing taxes on the rich does not produce effective economic stimulus, meaning that what we imagine with the most basic logic in our brains does not exist according to statistical verification in economics.

What might be effective methods? The first effective method to stimulate the economy is to export capital to countries with high productivity. The second is to strive to avoid malignant inflation. The third is to optimize resource allocation. These are possible ways to improve economic growth.

At the same time, it is important to note that there is currently a global consensus: do not sacrifice the interests of the poor for growth. This is the warning proposed by economists.

"Good Economics"

4. Rising Temperatures This article is a reflection and notes on "Good Economics,"
The fourth topic, which many people may not consider an economic topic, is the issue of global warming.#

This article is a reflection and notes on "Good Economics," and the fourth topic, which many people may not consider an economic topic, is the issue of global warming.

The rising temperature of the Earth is a huge alarm for all of us. Do you know how to measure your carbon emissions? There is a particularly interesting ratio that says, "If your income rises by 10%, your carbon emissions will increase by 9%." Therefore, the rich should bear a more important responsibility for carbon dioxide emissions.

"In the next 100 years, the Earth will warm. The cost of climate change caused by an increase in temperature of 1.5 degrees Celsius or 2 degrees Celsius, or even more, will be very different. According to the report in October 2018, if the Earth's temperature rises by 1.5 degrees Celsius, 70% of coral reefs will disappear; if it rises by 2 degrees Celsius, this proportion will become 99%, meaning that coral reefs will almost completely disappear, and the number of people directly affected by rising sea levels and desertification of arable land will also be very different."

"In order to keep the temperature increase within 2 degrees Celsius, carbon dioxide emissions need to be reduced by 25% by 2030," which means a reduction of 25% compared to 2010. "By 2070, emissions must reach 0," meaning carbon dioxide emissions must reach 0. My goodness. Then if you want to "keep the Earth's temperature increase within 1.5 degrees Celsius," then "by 2030, carbon dioxide emissions need to be reduced by 45%, and by 2050, they must be reduced to 0."

If we attribute emissions to the place of consumption, there is a fierce debate here—every time the United Nations holds a conference on carbon emissions, there is bound to be a quarrel. Westerners stand up and say, "India and China, you have a large population; how much carbon emissions have you consumed?" Then the Indians stand up and bang the table and say, "You have to average it per person; you have to see how many people you have."

If we attribute emissions to the place of consumption, even though China produced this clothing, who is wearing this clothing? Americans are wearing this clothing; this is called the place of consumption.

The data shows: North Americans consume an average of 22.5 tons of carbon dioxide equivalent per year, which is the largest consumption in North America. If you go to the United States, you will find that there are no small hatchbacks; you rarely see them. The United States is full of large pickups and SUVs, and there is also a very bad habit: office buildings never turn off the lights; the central business district is always bright, and the air conditioning is set very cold. Why? Many people like to wear sweaters to work in summer, thinking it is comfortable. They have to set the air conditioning so cold and wear sweaters to work, while men wear suits and ties; this is indeed a huge waste. But their carbon emissions are this high, 22.5 tons.

Western Europeans are at 13.1 tons; don’t forget that it is proportional to income, so Western Europeans have higher incomes, so they are at 13.1 tons. Chinese people average 6 tons, and South Asians only 2.2 tons, meaning they do not need to consume too much energy to survive. This is, in fact, the approximate distribution of carbon emissions.

However, the warming of the Earth will have a greater impact on poor countries. Poor people are more likely to die due to global warming. The simplest reason is that there is no air conditioning. Poor countries do not have a high penetration rate of air conditioning; rich people can live in air-conditioned rooms, but air conditioning again causes global warming. And this global warming is paid for by those who do not have air conditioning. This is the result of global warming.

Optimists believe that it is okay. We once talked about a book called "The Zero Marginal Cost Society." In that book, Rifkin said, "Don't worry; clean energy technology will emerge soon." However, pessimists believe that the research and development process of clean energy technology itself requires a lot of costs. This matter is not as simple as we imagine; what we should reduce is our addiction to energy consumption.

Including me, we should all reflect: what we should reduce is our addiction to energy consumption. For example, when you sit in the office, why do you have to make it so cold?! Being greedy for coolness is not good for the body. Air pollution and high temperatures can indeed cause a lot of deaths. Therefore, your addiction to energy consumption can lead to the deaths of others. Think about this, and you should live a relatively simple life.

For example, why do the "Yellow Vests" in France take to the streets? It is because of the issue of global warming. Everyone should not underestimate the relationship between nature, economy, and politics. The most important trigger for the Yellow Vests to take to the streets comes from France's gasoline tax, which is to reduce carbon emissions by collecting gasoline taxes. If you consume a lot of gasoline, you pay more money, which encourages you to drive less and take the subway or public transportation more.

What is the problem with this? The people who take to the streets are all poor people from the suburbs. Why? The poor in the suburbs say, "You play this environmental protection game because you live in the city, and you can easily take the subway. We don’t even have a subway; how can I take the subway? What if you don’t let me drive?!" Therefore, I must drive. Driving requires burning gasoline, and burning gasoline requires paying more taxes. So, it involves very complex political and economic issues.

So what kind of solutions do economists propose? There are some suggestions; the authors say: "We are very clear that preventing climate change and adapting to ongoing initiatives will be very costly. We must invest in infrastructure and provide meaningful redistribution to those whose lives are affected. In poor countries, money can be spent to help ordinary citizens achieve a higher quality of life in ways that pose less threat to the future. Given that the consumption of the poor is not much, helping the world's poor increase some consumption does not require spending a lot of money."

What they mean is that you should try to help the poor popularize air conditioning; you should let the poor live in a relatively safe environment. Because even if they install air conditioning, their carbon emissions are still very low.

Then the authors say: "At the same time, better air can be obtained, and emissions can be reduced. Given the wealth of the world's richest countries, they can easily afford this."

"The problem is to find a way to discuss that does not equate the poor of poor countries with the poor of rich countries. Combining taxes and regulations to curb emissions from wealthy countries and paying for the transition to environmental protection for poor countries is likely to reduce economic growth in wealthy countries..."

"In places like Delhi in India, Washington in the United States, and others, decision-makers refuse to formulate or enforce regulations on pollution in the name of growth. No one can benefit from the subsequent growth of GDP."

If we now see that the political leaders of various countries are unwilling to take action because the existing cake has already been divided among the rich, and everyone is stuck in such a deadlock, then the future we will face will definitely be a warming Earth that may exceed two degrees, or even three degrees, with increasingly extreme weather. Because global warming will lead to more and more extreme weather, many people will suffer from storms or the scorching sun.

Therefore, economists hope that through economic research and detailed calculations of carbon emissions, they can touch the hearts of political leaders in various countries and take action. This is the topic of global warming. You see, this is the real world that good economics needs to face.

"Good Economics" 4. Rising Temperatures This article is a reflection and notes on "Good Economics," and the fourth topic, which many people may not consider an economic topic, is the issue of global warming.