Nobel Laureate Abhijit Banerjee: Lessons for America on Fighting Poverty

To study poverty, Abhijit Banerjee has made the world his laboratory.

His tool: the randomized controlled trial, long a mainstay of medical research but one that had not been widely incorporated into economics. Using such trials, he has been able to examine the claim that poor people won’t keep working if offered aid (they will), that tiny “microloans” are a way to pull people out of poverty (they generally aren’t) and that people abuse welfare rolls (they don’t).

“Poverty is really not one problem,” Banerjee said in a National Press Foundation briefing. “It’s many problems. There are many, I think, false answers. So truth is often – unfortunately – uncomfortable.”

That work helped Banerjee, a professor at the Massachusetts Institute of Technology, win the Nobel Prize in economic sciences in 2019. Banerjee shared the prize with Esther Duflo, an MIT professor who is also his wife, and Michael Kremer of Harvard University. (Coverage of the Nobel announcement in The New York Times and the BBC.)

Banerjee and Duflo are authors of “Poor Economics” and “Good Economics for Hard Times,” both of which cleanly describe for a mass audience something typically reserved for econ textbooks. And they are co-founders of the Abdul Latif Jameel Poverty Action Lab, known as J-PAL, which coordinates the work of 194 affiliated professors worldwide to conduct randomized impact evaluations to answer critical questions in the fight against poverty.

In medicine, randomized controlled trials divide participants so those in Group A get an experimental treatment and those in Group B a sugar pill. If more people are cured in Group A, then there’s a good chance the new treatment was the cause.

It’s not so simple in economics research.

“Medical trials are highly controlled,” Banerjee said. “They often have 100 or 1,000 people. We often have millions of people, and there’s much less control as a result.”

But by zeroing in on a group of people in one community who are statistically identical to those in a neighboring community, researchers can begin to learn which aid or development programs work – which ones reduce poverty, for example, or increase business ownership or alleviate hunger. J-PAL has been involved in more than 1,000 randomized evaluations in 88 countries and has a searchable database with information on them.

Among the most politically pressing evaluations are those about whether aid is a disincentive to work – the “free money makes people lazy” argument.

Banerjee described aid programs in different countries – Honduras, Mexico, the Philippines, Morocco, Indonesia, Nicaragua – in which people got some welfare payment that was not conditioned on their working – the free money.

Then they examined how much people worked before and after the payments.

“What this shows is that there’s absolutely no evidence that people became lazier,” he said.

The same holds true in the very recent example of COVID-19 CARES Act stimulus payments and whether they should be cut off as quickly as possible, given fears they would make people lazy. Banerjee cited work by economists from Yale University that showed employment dropping after the pandemic hit and then Congress authorizing individual stimulus payments – and then people continuing to work.

“So before Congress authorizes this payment, the labor supply drops, then it doesn’t change,” he said. People get the money, nothing changes, completely flat. … So in other words, there is no evidence that people when they get the extra welfare payments stop working.”

Evidence for pervasive worries that people take advantage of welfare or other aid programs is also thin. One study examined whether people were enrolling in a food assistance program in Pennsylvania. What researchers found is that even with outreach efforts, people didn’t claim benefits they could have.

“Eighty-two percent of the people, after all these efforts, didn’t take the program, even though they were entitled,” he said. “… The idea that welfare abuse is rife is certainly exaggerated if not false.”

One program he said could be used more is trade adjustment assistance for workers who have been adversely affected by foreign trade.

“We know exactly if you put a tariff on this or you put an export ban on that who’s going to get hurt,” he said. “We know where the farmers are, where the industries are – the furniture makers are in North Carolina, the soybean farmers are in Indiana. We know exactly where they are.”

Asked for his advice for an incoming Biden or a second Trump administration, he said he would deploy that program more, helping those who are getting hurt through no fault of their own.

 

This program is funded by the David and Lucile Packard Foundation, W.K. Kellogg Foundation, and Heising-Simons Foundation. NPF is solely responsible for the content.

 

Abhijit Vinayak Banerjee
Ford Foundation international professor of economics, Massachusetts Institute of Technology
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