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 challenges facing today's world.

Mind Map 2#

"Good Economics"

Immigration Issue 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, 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, 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 only to economists."

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, and ultimately causing a stalemate 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 that 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.#

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

The first is the large number of immigrants.
The second is the high crime rate brought by immigrants, leading to a decline in local employment. Therefore, in Europe and the United States, many people are continuously 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 there aren't that many immigrants, but people feel there are that many. You can't control people's feelings.

In fact, there is currently no immigration wave 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 entered 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.

Additionally, you should know that wage differences have almost nothing to do with immigration. If we think about it, we might feel, how can that be unrelated?! If more immigrants come, they will demand lower wages, so wages will definitely decrease. This is the simplest demand and supply curve in economics; people only think of this one curve. But in fact, the arrival of immigrants will shift this curve upwards. After the shift, the result is that there is not a particularly large relationship between wage differences and immigration.

So what kind of people are the immigrants who 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, the taste of blood in your throat, the boy who used to go to school with you, who once kissed you behind the old tin factory, is now holding a gun taller than he is, you can only leave home if it doesn't let you stay..."

It is not that a person simply thinks that if a country is rich, they will definitely migrate there. In fact, those who are forced to leave their hometowns, when they arrive in these more developed areas, bring about an overall increase in local employment levels.

So what do locals do? A large number of locals experience appreciation due to the arrival of immigrants.

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

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

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

Fourth, immigrants will also engage in many jobs that locals are unwilling to do, which are originally jobs that everyone does not want to do. You can ask in Beijing, who runs breakfast stalls? There are basically no old Beijingers; running breakfast 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: local residents, after staying for a long time, become complacent. They have houses, they collect rent, they can have very low living needs, and 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 were founded or co-founded by immigrants or their descendants. Additionally, among the top 25 companies, 52% were founded by immigrants, and among the top 35, 57%. Nine of the thirteen most valuable brands were founded by immigrants. Henry Ford was the son of Irish immigrants, Steve Jobs' biological father was 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 definitely bring various problems, but 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 income to decline are those skilled immigrants. But it should also be noted that skilled immigrants are beneficial for local assistance to the poor because they lower service costs.

The core reasons why many people are unwilling to migrate are: 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, staying at home, no matter how poor or bitter, as long as one does not starve to death, it is at least 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 laborer dies abroad, the labor export for that year will drop significantly.

In fact, there are not many such incidents, but people generally do not look at statistics; they look at significance. That is, 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 their worries about this matter cannot be resolved by telling them more numbers, just like telling Italians that the immigrant population here is not 26% 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 movement, which will suffer huge challenges.

You see, after I finish talking like this, everyone will feel that it is necessary to understand such a big issue of immigration 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." The second topic that everyone is very concerned about is trade.

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

You know, regarding whether the U.S. tariffs can improve the welfare of Americans, there is a survey. When given to ordinary people, the results are varied; some support it, some oppose it. However, when given to top economists in the U.S., regardless of their school of thought, whether they are Democrats or Republicans, or their research background, as long as they are well-known top economists in the U.S., the voting result is 100% against this view. That is, 100% of economists believe that U.S. tariffs do not benefit the welfare of Americans.

Why should there be trade between people? Here we need to mention 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 to say, trade is definitely beneficial to the country, but at the expense of workers' interests, meaning that the more developed trade becomes, the greater the income gap in a country, that is, white-collar income becomes higher, while blue-collar income becomes lower. This is the warning that Samuelson made back then.

Later, an economist named Topalova proposed a new concept called sticky economy while studying various trade phenomena. After this theory was proposed, it was rejected by many economists. They believed it 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 developing countries like India, China, and South Africa, and found that when the economy shows a gap, 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 new industries. Logically, if people are rational, if society can quickly allocate production materials as economists expect, they should quickly lend money to those more efficient new industries. But in reality, it is lagging behind, and this lag leads to the fact that once the money is released, it may not even be recovered, which is called a sticky trap.

When a region enters a sticky trap, like some small cities in the U.S., due to the industrial replacement by imports, these people can actually stay in that place after losing their jobs, living on the minimum living guarantee, 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 do not go; people's changes are not that fast. Therefore, poverty occurs largely due to this sticky trap.

So, when studying trade, the authors say: "Large economies like the U.S. and China produce most products at very high efficiency in certain places with technology and capital. In addition, 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 judge the impact of trade on a country, it is related to the economic scale of that country. Countries like the U.S. and China have domestic trade environments that can be self-sufficient, so their impacts are relatively small. The real damage is to those small countries.

So is a trade war feasible or not? Economists have conducted research and concluded: "So, is it useful to reintroduce protectionist tariffs?" The answer is no.

"Now reintroducing tariffs 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 economies mean they cannot enter new industries or relocate to new areas to get back on their feet, so resources cannot flow to them."

The discovery of sticky economies has a very important impact on solving trade issues: in the past, we viewed trade issues as rational assumptions, as if it were very simple like playing a game, where one indicator declines and another rises. Sticky economies tell us it is not that easy; in many places, when employment indicators decline, these people do not move, do not learn new skills, and 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 new emerging losers will come from areas we have never heard of. The reason we have not heard of these areas so far is simply that 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 U.S. 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. This part we plan to discuss in another book. The name of this book is "Prejudice," and another book is written by this author called "The Nature of Poverty," both related to this topic. We will not elaborate on it here.

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

This article is a reflection and notes on "Good Economics." 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 would 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, it is likely to create such a bottleneck, but if we reconsider the utility that happiness and joy bring us, then this number will change.

Then, during the process of economic growth, some people 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 was found that reducing taxes on the rich does not produce effective economic stimulus, meaning that what we can imagine with the most basic logic does not exist according to economic statistics.

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 avoid severe inflation. The third is to optimize resource allocation. These are the possibilities 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 put forward 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 see as an economic topic, is the issue of global warming.#

This article is a reflection and notes on "Good Economics." The fourth topic, which many people may not see as 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 significant responsibility for carbon emissions.

"In the next 100 years, the Earth will warm. The cost of climate change caused by a temperature increase of 1.5 degrees Celsius or 2 degrees Celsius, or even more, will be significantly different. According to the report from 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 significantly different."

"To keep the temperature rise within 2 degrees Celsius, carbon emissions need to be reduced by 25% by 2030," which means a reduction of 25% compared to 2010. "By 2070, emissions must reach 0," carbon emissions must reach 0, my goodness. Then if you hope to "keep the Earth's temperature rise within 1.5 degrees Celsius," then "by 2030, carbon emissions need to be reduced by 45%, and by 2050, it must drop 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 out; 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 that 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 U.S., you will find that there are no small hatchbacks; you rarely see them. The U.S. is full of large pickups and SUVs, and there is a bad habit of never turning off the lights in office buildings; 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, which is 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 the approximate distribution of carbon emissions.

However, the warming of the Earth will have a greater impact on poor countries. Poor people will die more due to global warming. The simplest reason is that there is no air conditioning. The penetration rate of air conditioning in poor countries is not high enough; 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, why do you have to make it so cold while sitting in the office?! 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 point, and you should live a relatively simple life.

For example, why did the "Yellow Vests" in France take to the streets? It is because of the issue of global warming. Do not underestimate the relationship between nature, economy, and politics. The most important trigger for the Yellow Vests to take to the streets was France's gasoline tax, which was intended to reduce carbon emissions. If you consume a lot of gasoline, you pay more money, which encourages you to drive less and take the subway more, and use public transport more.

What is the problem with this? The people who took to the streets were all poor people from the suburbs. Why? The poor in the suburbs said, "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?!" So, I have to drive. Driving requires burning gasoline, and burning gasoline requires paying more taxes. Therefore, 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 well aware that preventing climate change and adapting to ongoing initiatives will cost a lot. 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 pay for the transition to environmental protection in poor countries is likely to reduce economic growth in wealthy countries..."

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

If we now see that the existing cake has been divided among the rich, and everyone is caught in such a stalemate, unwilling to take such action, then the Earth we will face in the future will definitely be one where warming may exceed two degrees, or even three degrees, and extreme weather will become more and more common. Because global warming will lead to more and more extreme weather, many people will suffer from storms or the scorching sun.

Therefore, economists hope to touch the decision-makers of various countries through economic research and detailed calculations of carbon emissions, and then 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," the fourth topic, which many people may not see as an economic topic, is the issue of global warming.