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Tax cuts for the rich is necessary for growth is a mantra that needs to be questioned: Abhijit Banerjee

Banerjee speaks on tax cuts for the rich, AI and the future of jobs, bad politics, and many other things.

ET Bureau|
Updated: Oct 21, 2019, 01.43 PM IST
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Tax cuts for the rich is necessary for growth is a mantra that needs to be questioned: Abhijit Banerjee
Economic Nobel laureate Abhijit Banerjee spoke to ET during his trip to Delhi where he is for the launch of his and his co-Nobel-winning partner Esther Duflo’s latest book, Good Economics for Hard Times. In a kind of ‘randomised control interview with Bodhisatva Ganguli, TK Arun, Indrajit Hazra and Urmi Goswami, Banerjee spoke, lubricated by a cup of hot water, on the job of the economic media, tax cuts for the rich, AI and the future of jobs, bad politics, government’s role in the economy, disgruntled white America and the efficacy of government scehemes. Excerpts from the interview:

Your book essentially sums up the difficulty in developmental economics. Why is it so difficult for a dialogue to be created with the people as to what the economists say is to be done?
Well, you guys should do it -- take the [economic] evidence more seriously. The media basically happily parrots the ‘common sense’ of not throwing sops to the poor – I hate that word ‘sop’ – and that we need tax cuts for the rich for them to do anything. We seem to have taken this as a mantra for growth. The media doesn’t question. People in authority say these things – how something like the recent corporate tax cut is good for the economy as a whole – and the economic media, absolutely to the man, was endorsing this. There’s no basis whatsoever [for such a belief]. It’s less my responsibility than yours. You should ask the question, whether in an economy that seems to be in a real demand shortage, a tax cut generates investment, or whether people just sit on their cash…

But what about investments moving from China and going to economies like Vietnam and Bangladesh, where the corporate tax rates are very, very low, making them competitive and attractive as investment destinations?
The causality is very, very subjective. I think it’s better to compare this with the states of the US. Different states have different corporate tax rates. Have they grown faster? No. That’s a much more comparable experiment. They all have state taxes. They can all cut state taxes. You see no particular effect of particular state tax cuts for businesses or investment. I think there is no reason to put so much faith in one such position. Sure, Bangladesh has low taxes. Bangladesh also happens to not have size restrictions on textile firms like we did, neither did Vietnam. We were very late in removing size restrictions on textile firms, and by that time a lot of the consequences of the end of the multi-fibre agreement, the movement of trade away from China, all of that started happening. Bangladesh expanded very quickly. But we were in no position to do it. We were still dealing with the consequences of having tiny, tiny, tiny firms because of size restrictions. Our book reviews this evidence and finds there’s no reason to believe lowering corporate taxes alone to cause investment boosts. That’s not to say that it’s necessarily false. It just doesn’t seem so compelling. Given the amount of money that’s being given away right now, given the state of the fisc, it’s not clear to me that it wouldn’t have been better to give the same amount of money to poor people.

But growth has globally been an engine to alleviate poverty.
Think of how much of all growth went to the poor, the fraction of poor went from something like 45% to something like 17%, while a very small fraction of our total GDP growth went to them. The poor, the very very poor, relative to the rest of the economy, they have a very small proportion of the GDP to start with. If we increase that proportional GDP by 2%, you already get a lot of people crossing the poverty line. The lesson from India is very much that -- this is a time when inequality completely exploded. Still, quality went up.

How do you do that?
First, I think, there was a demand boom, especially coming from the middle-classes. Real estate was a very effective channel of transferring income to the poor, because there is more work in the real estate. And land was another place where a lot of land of the farmers became valuable. So, a lot of money got transferred through the real estate mechanism. A bunch of government transfer programmes worked as well. I think NREGA worked, probably Ujjwala worked. There’s a bunch which made substantial transfers. NREGA there’s lots of evidence that there was quite a large measurable difference to the earnings of people. NREGA was financed by the fact that the economy was growing and the government could afford to spend, whatever, 1% of GDP…

Less than that. Do you think Ujjwala also worked?
Hard to know, as the evidence on Ujjwala is less easy to interpret than, say, NREGA. The advantage of NREGA was that it was phased in, so you could compare it with places that got it early with places that got it late. Ujjwala was not phased in. So, it’s harder to know... but there’s some claims that it also worked. It’s a very clear transfer, a bunch of people got it.

The way poverty has come down in the world by sheer growth, rather than by any economic policy from government. China is an example.
I don’t think that’s true. Take China. The biggest [poverty] reduction in China happened in just one year when they basically – controlled agricultural prices and they let it go up. That had a huge effect on poverty, on measured poverty. There’s a nice paper by Martin Ravallion and Shaohua Chen showing poverty going down slowly and then jumping down when (agricultural) prices are raised. I agree, for a large part of it, governments have done very little. That doesn’t prove that they could not do anything. I think when they have done something, like raised the prices, those have large consequences. NREGA likewise did something with large consequences. In general, we’re scared of governments doing nothing, and therefore… But everybody’s feeding the ideology that governments can’t do anything and all you have to do is let the private sector do it. I don’t know whether the evidence is easy to interpret given that we have already killed that goose.

There’s the additional problem of urban centres that prevent the terms of trade from going to rural areas.
Yes, as is happening now, for the last many years, trade moving away from rural areas. One of the reasons for a demand shortage is the terms of trade have gone down some 20% in rural areas.

Your book is very Dickensian, in that you talk about new technology effecting labour in a profound way as it did in the Industrial Revolution. You are quite skeptical about reallocation of jobs in an AI world. We’ve seen this before such as in the 1980s during computerisation. What makes the prospect this time grimmer?
Computers, for a long time, were doing realy very little to displace more manual work. But the BPOs, I have friends in the BPO industry, and they are scared. Medical transition can be now be done by robots. And that’s the kind of thing that will suddenly hit low-skilled people. Computers if anything were hitting, if anything, high-skilled people, number crunchers etc. Secretaries in the US are being displaced.

Doesn’t the evidence suggest that the total output will expand in the medium term and eventually new economies will be created? Buggies being replaced by cars in the past, those examples?
Maybe, maybe. There’s a sense in which the question is more: what will replace what? The history of the last 40 years now has been basically the middle-class jobs, so I think that will continue. I’m not saying that there will be very little employment. People will have to do something. The question is whether they will have the same quality of jobs, whether inequality will add levels that we have never imagined, and most people will be very poor.

One of the things you talk about consistently is upping the tax of the rich. Now, how will one ‘nudge’ that as policy?
The first thing to do is to undermine this sense that the rich are crucial [to the economy]. By the way, I’m not arguing for the nationalizing of private industry. I’m just saying that there are economies in which 45% of GDP is in the government sector and economies where 20% are. It’s not clear to me that there is clear evidence that, say, Denmark is not growing because taxes are too high. Most of Europe has taxes in the 40s, tax-to-GDP ratio is most of western Europe is almost 40% or above – 44, 46, 47 but the US has 29 or something. You can never settle this argument except by something like, ‘Europe is different because they are European’.

There’s no doubt that capitalism as practiced in the US is considerably more ‘cruel’ than in Europe.
But there’s no particular difference in growth sets. Productivity growth in the US…

But Europe doesn’t have a Silicon Valley.
But Silicon Valley has contributed very little to productivity. In fact, one of the chapters in our book details the fact that the productivity growth in the US after 1980 is not unlike in 1990 or 1995, except five years in between, productivity growth has always been at the level it was from 1975 to 1995. Productivity doesn’t change, at all.

But we’ve failed to capture the value of being able to search on Google. It’s not something one has put a value to.
Maybe. But I think people have tried to do it. We also have a long discussion about that [in the book]. I would say after doing that, maybe you can capture another 10 to 20% more increase in the long view, but not much. Productivity levels are nowhere near the productivity growth rates of 1945 to 1950s.

But European policymakers would give an arm and a leg to have their own Silicon Valley, or to create their own Facebooks and Amazons.
Maybe, maybe. But it’s not clear to me that they’re right in that. I think they don’t realise that there’s a causal connection possibly between the ‘cruelty of US capitalism’ and Donald Trump. Then they think what they really want.

You talk in your book of what economists would say, of say, whether Germany did the right thing in accepting 1 million refugees. Most professional economists would say that the German economy benefited over the medium and long term, whereas the public might be more skeptical. Similarly, whether NAFTA was a good thing or a bad thing. Why do you think this divergence exists and what can be done about it?
Sometimes economists are right, and sometimes economists are wrong. About immigration, all the evidence suggests that the economists are right. On trade, it suggests that all economists are wrong. Economists also need to be right but I don’t want the public to necessarily always agree with them when they’re wrong. But mostly the issue is that economists also don’t – in some sense, they don’t speak up. We have a lengthy view in the book that (free) trade is actually hurting a lot of people. So, I’m not sure that economists as a community are willing to take the weight of their evidence seriously. They seem to want to hold on to their shibboleths rather than engage with evidence.

It’s the nature of the political discourse that prevents poverty alleviation. What are the other factors, like identity politics, that holds back poverty alleviation?
We devote a whole chapter in the book on this. Partly, identity politics is a result of economic failure. So, when white people in the US feeling that their life experiences are very much like the black underclass, which is what’s happened, they feel even more racist. Because they feel they have to hold on to their superiority somehow. So, their racism is exacerbated by their economic decline.

Like the demand by Jats for reservations here.
Exactly. They have exactly that sense of insecurity. So, I’m not sure that these are unrelated. As an economist, the fact that poverty hasn’t been tackled as much as it has is a result of bad economics, which we should be shouting from the rooftops, that easily we can do more for the poor. I don’t know how permanent the sense of lost capital is. These [white] were the same communities that were proudly Democrat. Other communities are actually doing better. If you look at mortality. Every other mortality rate except that of white Americans is falling. Life expectancy is falling sharply among white Americans. So, it is specifically a white phenomenon which wasn’t noticed 15 years ago. Maybe it was there then, but these ‘despair deaths’ are very much the story of the last ten years.

One of the problems in India is the unaccounted shadow economy, real estate being a prime conduit or destination for that. And that hamstrings the government’s revenue collecting capacity, which in turn hamstrings the government’s ability to do things. And then there is the leakage. Given that, how do you look at plugging these holes?
Measured taxes (collection) have been going up along with measured GDP. Much improvement has happened. The government has increasingly been able to triangulate data. So I think there are instruments that the government already have that can be used to plug holes. I don’t think it’s so dire as you described it. Most economies have a fair amount of tax evasion, depending on how their data systems are. But I think our data systems are improved and the government is triangulating. It is looking at where your house is and if you’re paying $2 tax for a $1 million house, then they are coming after you. There is a lot of information around and is easier and easier to get hold of. I had a student who was studying Indian wealth by using data from real estate websites. They will tell you how much you’re selling a house for in this neighbourhood. There are circle rates, and circle rates are being moved now and being updated all the time. So, the political will to go after who are not paying taxes is there. One thing this government has taken more seriously is going after the tax-cheaters, something that I absolutely agree on.

And on the leakage side?
But if you take NREGA, one thing you can do is see the NSS figures of how much people report they are getting and look at the NREGA expenditure and match them up. In 2007-08, 50% went to the people, now it’s about 80-90%. So, the leakage has been plugged quite effectively. Improvement is not out of our reach, This hasn’t happened in 50 years, but in five years.

In your book where you talk about rising inequality, you talk about the example of sports salary caps in the NBA etc. On a less serious note, will you be taking up the invitation of the Kolkata football club, Mohun Bagan, offering you a lifetime club membership after you’re Nobel win?
I would. But I’m not a Mohun Bagan supporter. [Laughs] But maybe I will take up the offer.

You spoke about NREGA. How has NREGA done under the current government in the last five years? This government also has many welfare schemes like toilets, affordable housing etc. How do you think they have fared?
I don’t know. I do think, overall, you can say the glass is half-empty, half-full.

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