Tuesday, January 14, 2020

Good Economics for Hard Times III

The chapter on climate change, "In Hot Water," focuses primarily on policies to reduce greenhouse gas emissions and does not address the long-term economic effects. Carbon taxes and exchanges are recommended. Wealthy countries, which are the primary creators of global warming, ought to assist poor nations, which, though not major polluters, continue to use processes that produce carbon dioxide emissions. One of the recurrent themes of the book is that humans tend to engage in "sticky" behavior, which in economics means that they don't like to move or change their habits. In India and other countries, people still cook with wood, which creates both carbon dioxide emissions and poor health. They also burn fields after harvesting, which causes pollution and is not a sound agricultural method. In cases like this, the authors recommend assistance from wealthy countries. Since poor countries are going to take the brunt of climate change, the countries that created it have some responsibility along with the financial resources to help.

The next chapter, "Player Piano," discusses automation, also limiting itself to the near-term effects. Robotics has already taken a toll on employment in manufacturing. The authors believe that this trend will continue and intensify, affecting many other industries and reducing relative wages for all but the tech-savvy. The chapter then abruptly shifts to tax policy, which is continued in the next chapter, "LEGIT.GOV." Banerjee and Duflo spend quite a few pages explaining why the policies of Ronald Reagan and Margaret Thatcher were ill-conceived and have caused negative consequences right up to the present. One idea, that lower taxation on the rich results in economic growth, has been disproven. Another idea, that welfare makes people lazy and unproductive, is also inaccurate. Reagan and Thatcher apparently were sincere, and at the time there was no research to contradict them. The authors, rather courageously I think, go on to attack the American Dream ideology, in which the country is seen as an open field in which anyone can get ahead with hard work, and in which those who fail simply haven't put in enough effort. What they emphasize is that the Reagan-Thatcher policies are responsible for increased inequality in the U.S. and U.K., in which the rich are under-taxed. The top income tax rates in both countries have dropped considerably, allowing a few people to become extremely wealthy – much wealthier than the wealthy of the early twentieth century. Furthermore, the centers of finance in New York and London have permitted some to become super-rich without any visible talents. Excessive wealth accumulation by a small minority, which is enabled by low top income tax rates and the absence of a wealth tax, results in insufficient funds for necessary social programs. Those whose wages have stagnated or evaporated due to automation and international competition eventually require guidance and sometimes need financial support from the social service arms of government.

Ever since the Reagan-Thatcher era, government has been portrayed as an obstacle to progress. Although governments are often inefficient and corrupt, the same is true of private businesses. However, the authors argue that government involvement is essential when inequality rises to a high level and the government becomes the only source able to help those in need. Many of the social issues that exist in the U.S. and U.K. today are relatively nonexistent in countries such as Denmark, which has higher taxation on the wealthy and more funds available for social programs. In this respect, the authors criticize Emmanuel Macron for eliminating the wealth tax in France and placing a surcharge on fuel. These actions had an instant polarizing effect that resulted in riots. Catering to the rich comes at the cost of social stability.

Banerjee and Duflo also devote quite a few pages to the political polarization in the U.S. Much of it, they say, can be attributed to the low self-esteem and anger of those who are suffering economically now. In the U.S., the Protestant work ethic, as invoked by Reagan, tells them that they are failures if they can't succeed financially. A portion of these people gives up, takes drugs and dies. Another portion gets angry and becomes a pawn for corrupt politicians like Donald Trump. As policy wonks, the authors are well-versed in which policies would defuse this situation if they had political support and the proper funding. It goes without saying that Trump doesn't understand or care about the issues and that his incompetent administration is incapable of addressing the underlying causes. But the blame doesn't lie completely on the Republicans, since the Democrats have also supported welfare "reform" and privatization. Rhetorically, Hillary Clinton contributed to her own political demise by referring to Trump supporters as "deplorables." This angered enough people that it may have cost her the election. Hillary Clinton and Barack Obama show all of the symptoms of "elites," and while I share some of their sentiments, displaying them in public can become a prelude to political death. As I've said, this is an anti-intellectual country, and some of the most popular memes in circulation, including the American Dream and American exceptionalism, border on pure fantasy.

The next-to-last chapter, "Cash and Care," discusses practical ways to assist the needy in both wealthy and poor countries. In each case, a form of Universal Basic Income is agreeable to the authors, though they think that it works better in poor countries. There is a lot of detail to wade through here, and I think this chapter would appeal more to someone in the field of Poverty Alleviation and Development Economics, like Duflo.

On the whole I found the book enlightening, because this kind of information rarely comes up in the news. It is encouraging to know that some real expertise exists in the subjects covered. Reading it is an easy way to rise above the nonsense that one faces on a daily basis. These important issues become drowned in misinformation, lies and bad jokes when encountered at the level of American politics. My only complaint about the book is that it doesn't extend its analysis out very far into the future, at which point both climate change and technological change will render the policy atmosphere quite different from the one we're in now.

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