Opinion | Economic Incentives Don’t Always Do What We Want Them To

If it is not financial incentives, what else might people care about? The answer is something we know in our guts: status, dignity, social connections. Chief executives and top athletes are driven by the desire to win and be the best. The poor will walk away from social benefits if they come with being treated like a criminal. And among the middle class, the fear of losing their sense of who they are and their status in the local community can be an extraordinarily paralyzing force.

The trouble is that so much of America’s social policy has been shaped by three principles that ignore these facts; to fix it we need to start from there.

First, most policymakers are convinced that not much needs to be done. In the fantasy world where most economic policy conversations about trade shocks and technological innovations take place, people quickly adjust to those changes — workers move smoothly from making clothes in North Carolina to folding clothes in New York or selling clothes online. But in the real world, it is unreasonable to expect markets to always deliver outcomes that are just, acceptable — or even efficient. Disruptions (because of trade, robots or anything else) provoke real suffering. A study in Pennsylvania found that when workers with long tenure got fired during mass layoffs, they were substantially more likely to die in the years immediately afterward.

Second, let’s drop the talk about “dependency” and “welfare cultures,” powerfully articulated by Ronald Reagan, and never really contested since then. (After all, it was under Bill Clinton that “welfare as we know it” was ended.) Government intervention is necessary to help people move when it makes sense, but also, sometimes, to stay in place without losing their livelihoods and their dignity. The success of the populist agenda came from casting the working class as the victims of a war waged against them and offering them the ersatz protection of various “walls.” To counter that, policymakers must acknowledge that those who struggle economically are, in a sense, society’s fallen heroes, and that we need to treat them as such.

A first idea here might be a G.I. Bill for the “veterans” of disruptions. Since 1974, the Trade Adjustment Assistance program has offered workers displaced by international trade extended unemployment benefits and up to $10,000 in education credit to help them retrain. The few people who had access to it were indeed more likely to end up in better jobs — in the 10 years after losing their jobs, workers who benefited from T.A.A. earned $50,000 more than those who did not. But as a federal program it remains minuscule — regions most affected by trade got a paltry extra 23 cents per head in T.A.A. money every year, compared with $549 in lost income.

T.A.A. could be made much more generous, both in its coverage and in the benefits it offers. Like the G.I. Bill, it could offer full tuition at public universities, up to a cap of several thousand dollars a month, and a housing stipend; in addition, there would be generous unemployment benefits, especially in the most severely affected counties. Perhaps more controversially, a second idea would be the equivalent of a Marshall Plan for the affected regions, with significant subsidies for firms to keep older workers employed.

Third, we should not be unduly scared of raising taxes to pay for these projects. There is no evidence that it would disrupt the economy. This is, of course, a touchy subject politically: The idea of raising taxes on anyone but the very rich is not popular. So we should start with raising the rates on top income and adding a wealth tax, as many have proposed. The key then would be to link the added revenue to efforts like the ones we describe above, which would serve to slowly restore the legitimacy of the government’s efforts to help those in need. This will take time, but we have to start somewhere — and soon.

Esther Duflo and Abhijit Banerjee, economists at M.I.T., were awarded the 2019 Nobel Prize in economics and are the authors of the forthcoming “Good Economics for Hard Times,” from which this essay is adapted.

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