Last week, I wrote Part I of my critique of a recent long article in the New York Times by new Nobel Prize in economics winners Esther Duflo and Abhijit Banerjee of MIT. The op/ed is titled “Economic Incentives Don’t Always Do What We Want Them To,” New York Times, October 26, 2019. This is Part II of the critique.
The authors write:
On the flip side, when jobs vanish and the local economy collapses, we cannot count on people’s desire to seek out a better life to smooth things out. The United States population is surprisingly immobile now. Seven percent of the population used to move to another county every year in the 1950s. Fewer than 4 percent did so in 2018. The decline started in 1990 and accelerated in the mid-2000s, precisely at the time when the industries in some regions were hit by competition from Chinese imports. When jobs disappeared in the counties that were producing toys, clothing or furniture, few people looked for jobs elsewhere. Nor did they demand help to move or to retrain — they stayed put and hoped things would improve. As a result, one million jobs were lost and wages and purchasing power fell in those communities, setting off a downward spiral of blight and hopelessness. Marriage rates and fertility fell, and more children were born into poverty.
That’s bad. And it is true that many of us economists thought that people would adjust more quickly. But there is a big difference between the 1950s and now. The difference is that the higher-paying jobs are disproportionately available in cities where housing prices, adjusted for inflation and relative to real income, are much higher than in the 1950s. And that is mainly due to government restrictions on building. Harvard economist Edward Glaeser and Wharton economist Joseph Gyourko have written on this extensively. Could that matter for mobility? I think so. And, if it does matter, that’s evidence for the importance of incentives, not, as Duflo and Banerjee assert, for their unimportance.
Duflo and Banerjee go on to write:
Despite this, the faith in incentives is widely shared.
There’s that word “faith” again.
They continue:
We [the authors plus Stefanie Stantcheva] asked half of them [half of 10,000 Americans surveyed] what they thought someone should do if he or she were unemployed and a job was available 200 miles away. Sixty-two percent said the person should move. Fifty percent also said that they expected at least some people to stop working if taxes went up, and 60 percent thought that Medicaid beneficiaries are discouraged from working by the lack of a work requirement. Forty-nine percent answered yes when asked whether “many people” would stop working if there were a universal basic income of $13,000 a year with no strings attached.
But here is the twist: When we asked the other half of our sample the very same questions in reference to themselves, we got very different responses. Only 52 percent said they would move for a job, and this fell to 32 percent of those who were actually unemployed. Seventy-two percent of them declared that an increase in taxes would “not at all” lead them to stop working. Thirteen percent of respondents said they would probably work less if they received Medicaid without a work requirement; 12 percent said they would stop working if there were a universal basic income. In other words, “Everyone else responds to incentives, but I don’t.”
They are suggesting a contradiction. But look more carefully at the questions and answers, one by one.
62 percent said the unemployed person should move, and 52 percent said they would move. Is 10 percentage points a huge difference? It’s substantial but not earth-shattering. They try to make it huge by telling us that only 32 percent of those actually unemployed said they would move. But then shouldn’t they compare that with the percent of unemployed people who thought the unemployed person should move? Why don’t they give that number?
Next, they found that “Fifty percent also said that they expected at least some people to stop working if taxes went up.” But “Seventy-two percent of them declared that an increase in taxes would ‘not at all’ lead them to stop working.” They seem to see a contradiction. There isn’t one. It’s quite conceivable that 50 percent would expect some people to stop working. 28 percent said an increase in taxes would cause themselves to stop working. Isn’t 28 percent some? And, by the way, this is awfully “all or nothing” thinking rather than the “on the margin” thinking that economists usually recommend. I think their data show up the problem of surveys as a measure of what people would actually do. I would be shocked if an increase in taxes caused as many as 28 percent of people to stop working. But I would be equally shocked if an increase in taxes didn’t cause some people to work less.
Next, they write, “60 percent thought that Medicaid beneficiaries are discouraged from working by the lack of a work requirement.” And then, “Thirteen percent of respondents said they would probably work less if they received Medicaid without a work requirement.” That is a big gap and at least the two questions are symmetric. But those in the first group aren’t typically Medicaid recipients. They are answering what they think Medicaid recipients would do and and many of them probably view Medicaid recipients as being not very motivated. Ask them what they would do if they were Medicaid recipients and they will input their own circumstances, and will probably have trouble thinking that they themselves would cut work. So again there’s no necessary contradiction.
Look at the final survey question. First, “Forty-nine percent answered yes when asked whether ‘many people’ would stop working if there were a universal basic income of $13,000 a year with no strings attached.” Then, “12 percent said they would stop working if there were a universal basic income.” This is a contradiction only if one thinks that 12 percent is not many. I think it is many.
This is turning out longer than expected. Later this week: Part III.
READER COMMENTS
Brandon Berg
Nov 11 2019 at 9:23pm
I had exactly the same objections, which I think I posted earlier as a comment on Scott Sumner’s post on the same editorial. This is shockingly bad. Is this a record for turnaround time in cashing out Nobel credibility?
Phil H
Nov 12 2019 at 1:49am
It’s a slightly odd argument to make. I actually think Henderson has caught some potentially bad readings of the survey data there, but… so what?
There are many, many examples of people extrapolating badly about the behaviour of others. If it happens in the case of surveys on economic incentives, that’s not surprising, nor is it very good evidence for what B&D were claiming. If in fact, those surveys were all answered in a tightly consistent way, it would be (a) very surprising and (b) not very good evidence for what Henderson is arguing.
I’m sure at least some readers here already know Scott Alexander, but in case anyone hasn’t read it, I think he does a much better takedown of the B&D op ed here: https://slatestarcodex.com/2019/10/28/financial-incentives-are-weaker-than-social-incentives-but-very-important-anyway/
MarkW
Nov 12 2019 at 11:05am
There are other big differences between now and the 1950s. The most important is dual-income couples. In the 50s, when one partner lost his job, that was typically the family’s only source of income. There was both an urgent need to replace it and nothing to prevent the family from packing up and leaving. But now, obviously, when one spouse loses a job, the other generally doesn’t, and the family has both a continuing source of income and a good reason to stay put. Another factor is that the basic needs of life are much less expensive. In the 50s, food and clothing were still major expenses. But in 2019 basic sustenance in a low cost-of-living area is really cheap (yes, including housing — which in many declining areas is far below replacement cost). Lastly, the safety net is more generous now and there is much less shame involved in receiving benefits.
Mark Z
Nov 12 2019 at 5:28pm
That’s an important point, and it reminds me of something Ed Glaeser said I think on econtalk I think a few years ago; that the median household income was 40-something thousand a year, which is significantly lower than average, but isn’t destitution. The vast majority of the unemployed essentially live off of a spouse or relative.
Popular as it is to compare things today unfavorably to the past, to me it seems the that it’s far easier to stay put and survive in relative poverty today than ever before. All that migration in the 50s (or even more the international migration of the 1860s-1920s) wasn’t the result of greater mobility, but necessity. The alternative to moving, even halfway across the world, for work was often starvation, and that’s just not the case anymore. The standard of living for unemployed people is much higher today than it used to be, hence the reduced incentive for the unemployed to move. Seems like a classic economic incentives story to me.
JFA
Nov 13 2019 at 2:12pm
I look at the research and I see the importance of financial incentives everywhere. Isn’t one of Gabriel Zucman’s papers or books all about how the rich go to great lengths to hide their money from tax authorities. Every paper I have seen on money in medicine suggests that physician behavior is significantly affected by payments: from prescriptions used to the number of C-sections provided. If financial incentives don’t matter, then demand and supply curves wouldn’t have predictable shapes.
David Seltzer
Nov 13 2019 at 6:01pm
I couldn’t agree more. The obverse supports your position. Namely, disincentives. Personal experience. Some years ago I was offered a seven figure package to manage an equity derivatives trading desk in NYC. City, state and federal taxes are 50% 0ff the top. I calculated my marginal tax rate at nearly 75% which included the present value of estimated estate tax. I declined the offer as the idea of working for twenty-five cents on the buck was a powerful disincentive.
Phil H
Nov 13 2019 at 8:38pm
It’s important to point out how little sense this makes. Financial incentives are about the amount of money you personally get. The amount of tax you pay is not actually a factor, except insofar as it affects the amount of money you personally get. The phrase “working for twenty-five cents on the buck” is meaningless. There is no “buck” there.
What you’re actually saying is one of two things:
a) I was offered a high-paying job in New York, but the taxes meant that my take-home pay would be less, so I declined it. If (a) is the case, this is a straightforward example of financial incentives influencing your choice.
b) I was offered a high-paying job in New York, and my take-home pay would have been higher, but I was so upset by the idea of the government getting more money that I decided I didn’t want the job. If (b) is the case, this is a straightforward example of financial incentives being powerless in the face of ideological commitments (bizarre ideological commitments, I might add).
David Seltzer
Nov 13 2019 at 9:14pm
No! It makes sense since as I was offered less of an incentive at twenty-five cents on the “buck” than the various tax authorities would have had at seventy-five cents. So in fact those tax rates were a financial disincentive in much the same way an offer of 25% of the value of your home would incentivize you to decline the offer as it would render a financial disadvantage.
Phil H
Nov 14 2019 at 1:23am
I’m not sure if I can put this any more clearly… There was no buck. If you were offered a total compensation package of, say, 1.2m, no one ever suggested that you would personally get to pocket that amount of money. That’s not how jobs work. If you turned down a high-paying job because you were disappointed at the gap between the sticker compensation and the take-home pay, then you made a mistake. The comparison you should have been making is: my take-home now, vs. my take-home in the potential new job (plus or minus the benefits or disadvantages of moving to New York).
That “1.2 million” was never available to you. If you were being strictly financially rational, in the homo economicus sense, that number would not be a factor in your decision. Only the benefits available to you are a factor.
JFA
Nov 14 2019 at 9:42am
Another example of the importance of financial incentives published in the NYT: https://theincidentaleconomist.com/wordpress/even-a-modest-co-payment-can-cause-people-to-skip-drug-doses/. TL;DR: even for life-saving drugs, higher (even if just slightly higher) co-pays lead to patients skipping medications.
At first, I was thinking the Duflo and Banerjee article was a heavy-handed way of saying social and other non-financial incentives are also important, but the more I consider the article, it seems downplaying financial incentives (especially in the context of medical decisions) is, at best, willfully obtuse and, at worst, potentially life-threatening.
Comments are closed.