If BJP had asked me for (UBI) numbers, I would have given it to them too: Abhijit Banerjee
Banerjee & Duflo, who won this year's Nobel prize in Economics, share their views on a wide array of subjects.
What is it that the Nobel prize will help you do more, and better in future?
AB: I think what it will hopefully do is open more doors. We have a lot of enthusiastic young professors as part of our network and they are excited to do more work and more challenging work. Hopefully it will open up the right doors, more people will be open to the idea of doing RCTs (randomized controlled trials). That's our core business.
Do you think the Indian government will take you more seriously now?
AB: To be honest, the central government has made the right noises but many state governments have as well. Most of our business is with state governments, and across parties. Whoever is a ruling party in a state is our partner. If it is Gujarat, it is BJP, if it is West Bengal, it is Trinamool. We don't really pick and choose states. We work wherever work is interesting and the social or economic challenge is important and worth taking on. Hopefully, all of these people will not decide to become our enemies as a result of this. We are reasonably well connected to many governments and they see that we come and do our work professionally with a fair amount of commitment and patience.
ED: The defining characteristic of JPal (Abdul Latif Jameel Poverty Action Lab which she co-founded along with Abhjit)) is that we have played the long game. Most of the work is done by a dedicated staff who, in turn, work with governments and departments. Sure, the prize is going to draw some attention to us personally, and this attention needs to be turned into great work.
In your new book, you start off by saying how economists are among the least trusted experts and this seems to be true globally. You also point out that alarmingly they continue not to be believed even when the facts are presented to people. Given that reality, how will the book really help?
AB: It is an excellent question. I think one thing that economists do is they act as oracles. In the book, we don't try to say here is the answer. We say this is the reason why the answer may be different from what you think. Let us try to improve all our intuitions by listening a bit more carefully to the unfolding of the logic. The book is not about answers but about arguments to get to the answers. If people pay attention to the arguments, they might be little less sceptical of the answer. We try very hard to be not oracular.
ED: We are trying to bring a lot of data to this debate. What we are saying is that our intuitions are often wrong, and questioning these intuitions by confronting them with what happens in reality is a good way of starting a conversation.
You've spent a lot of time studying poverty across the world. How would you evaluate India's anti-poverty programmes?
AB: We have so many less poor, and that's a positive. There is no magic wand to make all the poverty go away. Given that growth is skewed towards the rich, the impact on poverty has been substantial. Whether we like the real estate boom or not, it created jobs in cities and money flowed back to the villages. Another part of it is policies like NREGA. It's not that we did stupid things, and got lucky. I don't think what is being tried is totally off target under any of the governments. Of course, there are bad policies like growing rice in Punjab but the state is trying to resolve this issue. Sometimes, the implementation of some policies is ham-handed, and we don't know how much initiatives like Jan Dhan will actually enrich people. Is it a sensible idea for everyone to have a bank account? Probably. Is it the first priority I would give to something? Maybe not, but we're not talking about insane ideas. Our policies are not coming out of someone's left ear. It's broadly sensible stuff. Of course, you can disagree with the implementation or the measurement of certain things or the claims being made etc, but overall we are not in a bad place.
Has China been more pro-poor than India?
AB: I think China has done one critical thing which we have failed to do, and that is going for labour-intensive manufacturing. We did create jobs in real estate, services but not in manufacturing. And that's one sector that can absorb millions of people. We missed that bus, and Bangladesh picked it up.
Is caste an external constraint that prevents labour mobility in India?
AB: When you look at the data, it doesn't look like people are waiting for that Brahminical job to fall into their lap. Everybody is doing something. At 32, our unemployment rates are extremely low - just 2-3% as per the last round of NSSO data. Once they get to their early thirties, all men are working.
Even if they are pakoda sellers?
AB: It's not that pakoda making is a bad thing to do but just that there are too many pakoda sellers which drives down prices.
What's your position on effectiveness of short-term subsidies to induce behaviour change versus continuing with subsidies endlessly? If India were to opt for a Universal Basic Income scheme, should it replace subsidies?
AB: I don't think anyone has tested this, and there are good arguments to be made on both sides. UBI is predictable and a person can take risks because they know that they have something to fall back on. Right now, among economists there is a strong view in favour of UBI. We are doing a very large experiment in Kenya to find out whether income transfers work. We should wait for the evidence.
Apart from being Nobel laureates, you're now famous as the person who advised Rahul Gandhi on the NYAY scheme. In retrospect, do you think it was a tactical error to be associated with any one political party even as an advisor?
AB: I don't feel defensive about it. You can't control the spin people give to things but I also don't like living my life thinking of every possible spin that people can give to my actions. They asked me a perfectly legitimate question - how much money would it take to implement a guaranteed income. That is a question for someone like me with some competence in looking at data and making computations. If the BJP had asked me for the same numbers I would have given it to them. I absolutely don't believe in restricting good policy out of political prejudice. We were trying to play the role of an honest broker, and that's our calling card. We shouldn't let political biases come in the way of doing things.
ED: We are working with various state governments - Gujarat, Haryana, Punjab and Tamil Nadu - across the entire political spectrum. In our work, we are not fighting ideological battles. We describe our work as plumbing. When a government wants to help the poor, we can help with figuring out and testing solutions.
You've made an interesting point that even if CEOs are taxed more, reducing their income, it doesn't disincentivise them from working harder. Are you in favour of a salary cap for top CEOs?
AB: I think a salary cap would be a good idea but it's a difficult one to implement. What I am very much in favour of is higher taxes at high incomes. There should be a way to use the tax system to deal with inequality. That's absolutely the first choice but we need to close the legal loopholes. In the US, Warren Buffet keeps saying I pay low taxes because you have set up the tax system so that I can pay low taxes. He is the champion of saying that there is a war between the rich and poor and the rich are winning.
ED: If taxes are high, then no salary cap is needed. Shareholders will not pay high salaries to CEOs to see most of it taxed away. In the US, the explosion of top CEO salaries happened when the tax rates were slashed at the top. It is important to have a simpler, transparent and well-designed tax system.
How do you deal with a situation where high tax rates in one jurisdiction lead to people migrating to other jurisdictions precisely for that reason?
AB: It is very important that you shouldn't have a choice where you declare your income. You can't have all the production of India being attributed to the Maldives. You have to somehow think of ways to declare income where it is produced, some value added share or something. But you can't just say that we will assign it anywhere.
ED: In the US when you are a citizen, you are liable to US taxes no matter where you are. So there is precedent.
In India, the maximum tax rate for the rich is already about 43.5%. Do you think that is high enough or can it go higher?
AB: Well, it can surely go higher than that. Political pressures will be substantial, and the loopholes have to be plugged well. The US under Eisenhower had a marginal tax rate of 95%. Even the Republican governments - Nixon had 70% tax rates. We are not talking about some Communist doing it. It is the extreme right that had these policies. Somehow we have forgotten about all that and are conned into believing that there is no possibility of having tax rates over 40% without a massive disaster happening. I don't think there is any evidence of that.
ED: In the US, it's not true that the rich are paying more taxes than poor. The data in a new book by Emmanuel Saez and Gabriel Zucman shows that in 2018, for the first time in 100 years, billionaires paid a lower tax rate than ordinary workers. This is not how it was intended to be. Nobody thinks that it is the way it should be. It is an accumulation of bad decisions.
AB: In other words, Indian tax rates are high but what income is it incident on? You should do the calculation that Warren Buffet talks about in India.
What worries you more - the economic slowdown or the move towards majoritarianism?
AB: I think both feed into each other. I think the slowdown is real, and the government is gradually accepting it. Five per cent is now good and soon there will be even less. The core message earlier was that India is doing great. Now that we are obviously not doing so great, then the danger is that since the government can't sell the economic message, there are other messages to sell to win elections.
ED: It is not an India-specific problem. The slowdown is not just in India, it's also in China. There are also fears of recession in the US and Europe. If you can't boast about the economy, you find something else - and that problem is everywhere. The thing is to acknowledge it and not do silly things. China has revised its growth target to 7% (from double digit levels), the Premier has called it "The new Normal", and the press is dutifully echoing it. Governments can do two things in bad times to protect the poor - not slashing social programmes, and using the existing money even better.
AB: And the answer isn't immediately cutting corporate taxes. The corporate sector is always happy to offer itself as a miracle solution to problems. I think neither interest rate cuts neither tax rate cuts are going to have an impact on any growth outcome. Even in short-term macroeconomics, the best thing to do is to put money in the hands of the poor, the economy will revive and the corporate sector will start investing once they see that.
You credit your mothers (Nirmala Banerjee and Violaine Duflo) for leading you into development economics. Can you elaborate?
ED: Maybe I'll start because Abhijit's mother has already had her big moment in the news already. So everybody knows that Abhijit didn't call his mother, but now we can say that I tried to call my mother but failed because she was in Guatemala without network. Both of us are extremely fortunate to have mothers who are wonderful people. Interestingly, they have many similarities although Abhijit's mother is an economist and mine is a doctor. They are both deeply committed to understanding the problems of those who are left behind. Abhijit's mother may have been quite unusual in her time for spending time in the field when few city-based economists did so. My mother is unusual for spending a lot of time outside working for kids who are victims of war and right now for kids in Latin America. We will never quite measure up to that, but we are trying.
Esther, you've written about how your first introduction to Kolkata was through a comic book, and you landed in the city as a young student thinking people only got nine square foot per person to live in. So, how has your association with Kolkata and India changed you, both as a person and as an economist?
ED: Where do I begin? So my interest and my commitment to trying to understand poor lives with a view to helping is because of my mother but my ability to do anything about it started in Kolkata. On my first trip to Kolkata I spent a lot of time in Metiabruz in the (garment) district, and it made me realise that everything I ever thought about how the poor work and live is completely wrong. These people had a level of sophistication and smarts that was quite impressive. I still spend a lot of time there. We also spent a lot of time working with Seva Mandir and Pratham. These experiences made me realise that you have to think big, and it is possible to make a real difference in the lives of many, many people.
There is an interesting anecdote about Abhijit playing war games with flowers since his parents didn't believe in toys. You use that to illustrate that his pleasure wouldn't be captured by the definition of GDP. Do you feel we should rethink how we measure growth?
AB: We should definitely rethink it. I don't know of a good way of doing it, but clearly we need more quality of life issues. When you think of kids growing up in India now, one of the things that we absolutely directly deny them, unless you happen to be very rich and live in some gated colony, is access to nature.
They live in such dreadful places. I feel like it's cruelty in a sense to make people grow up in dusty real estate with nothing pretty or aesthetic around them. I was lucky to grow up in Kolkata when it was still relatively slow and there were lots of trees etc. That's part of me, it constitutes me as much as anything else. I think the quality of life issues in India right now are massive. We haven't even wrapped our heads around it because we are so obsessed with growth.
Is there any clear memory you have from the 10 days you spent in Tihar Jail for a student protest?
AB: We were this relatively socially committed group of students, but the big fight we took on once we got to the jail was whether we should get bhindi or not. In the extraordinarily hierarchical prison system in India, if you happened to have a BA degree you were entitled to bhindi and if not, you didn't get it. I am not joking. I said, come on, we can live for ten days without bhindi but the others just ignored me. So I do remember our passionate fight for the right to bhindi.
So did you eat the bhindi or not?
AB: Of course, as a byproduct I got bhindi, but I was against it. I was saying you can't possibly be all for social change but want to stick to our 90-year-old British-given right to bhindi.
So you had the best of both worlds - the moral high ground as well as bhindi.
AB: But I would have settled for the moral high ground.
Your brother told us next you can win Masterchef, you are that good a cook.
ED: He is that good a cook, actually better. What his friends are most impressed by is that every time they come to our house, they get a different five-course meal without repetition, which is a combination of two of Abhijit's skills. One is that he is a fantastic cook and the other one is that he has an amazing memory. So he will remember. The other thing, though I don't know whether that is a skill, is that he thinks of food all the time.
AB: You know, actually the key is that I think of food all the time.
ED: Kind of a sideshow…(laughs).
Coming back to economics. how do you react to the charge that the RCT approach ducks the whole issue of what causes poverty in the first place?
AB: I think that is wrong. I think it ducks the question of there being a single cause of poverty. What it says is that there is a bunch of different reasons why people are poor. But it's not at all taking the view that poverty is unsolvable, it's very much taking the view that rather than looking for one solution, if you look for many solutions, you'll solve many things and in fact that's how a huge amount of progress has happened. I think the nature of the thing is that a bunch of stuff got thrown up and some stuck with A and some stuck with B and some with C and everybody got better off. It's not that one day the god of anti-poverty came and pressed this one button and it all got fixed. That never happens.
It is said that if you want faster growth, you'll have to live with increase in inequality at least for some time. Given that inequality is rising almost everywhere including in India, do you think there is merit in that argument?
ED: I don't think it is true. When you look at the data worldwide, there is no correlation between growth and changes in inequality. There are growth episodes that go with increase in inequality, growth episodes that go with reduction in inequality, inequality reduction episodes that go without growth and anything in between. I think there is absolutely no economic law of any kind that says that there is a trade-off there.
Some headlines here read 'Abhijit and wife win Nobel'. Did that upset you?
ED: No, it does not upset me. The headline in the French press was "Esther Duflo and two economists, including husband, win Nobel Prize". In this particular instance it all has to do with national pride. Nothing to get upset about. And, in fact, the Indians have shown more class: PM Modi did graciously congratulate me and Michael Kremer in a tweet (after he sent one tweet for Abhijit). In his own tweet, President Macron just mentioned me and then said it was a testimony to the strength of economics in France. So...