Alberto Alesina on Inequality, Immigration, and Austerity

July 2018. GrowthPolicy’s Devjani Roy interviewed Alberto Alesina, the Nathaniel Ropes Professor of Political Economy at Harvard University, on inequality, immigration, and austerity. | Click here for more interviews like this one.

Links: Alberto Alesina’s faculty page at Harvard | Publications | NBER research page | Wikipedia

Growthpolicy.org. What should we do about economic inequality?

Alberto Alesina: We need to clarify “which” economic inequality. Income inequality and especially poverty have gone down in the world in the last few decades. This is because [previously] poor countries [such as] China, India, other East Asian countries, some Latin American countries, and now even many sub-Saharan African countries have been growing faster than rich countries. This is thanks to, amongst other things, globalization and trade. So for the world as a whole we should celebrate the reduction of poverty and income inequity. In the U.S., income and wealth inequality have gone up. I am more worried about poverty and social mobility than inequality. The key policies are those that provide equal opportunities as much as possible and avoid pockets of poverty with no escape even for those who try. Improving the quality of free public education, affordable health care for all, and publicly supported scholarship for colleges are key policies, together [with] urban policies which eliminates ghettos.

Growthpolicy.org. Your research paper on immigration has been getting considerable press coverage. Based upon empirical evidence from six developing countries, you demonstrate that “[natives] believe there are more immigrants than there actually are … and also believe that immigrants are poorer, more reliant on the host country’s welfare state, more unemployed, and less educated than they actually are.” Beyond questions of political debate, how do strongly biased and erroneous beliefs about immigration affect policy making and the distribution of economic resources?

Alberto Alesina: Obviously people’s beliefs affect policymakers’ decisions. So they matter a lot. With reference to this specific issue of this paper we suggest (but do not prove) that peoples’ beliefs can be manipulated by those who are not in favor of more open immigration policies. When stereotypes about immigrants become common, then the media accommodate these views of the public since the public is their target for revenues. Thus, it becomes a vicious circle. In our research we find that in the six countries we examine (U.S., U.K., France, Germany, Italy, and Sweden) people vastly overestimate the number of immigrants in their countries, and believe than they are poorer and more dependent on the receiving countries’ welfare state to survive than they actually are.

Reasonable people can honestly disagree on immigration policies, and the paper does not offer any policy prescription about that, but the important thing is that these policies need to be based on facts, not erroneous perceptions.

Growthpolicy.org. In 2007, you co-authored a research paper on gender-based taxation that argued, somewhat controversially at the time, that “taxing labor income of women less than that of men satisfies criteria of optimal taxation” and that, in the U.S. “the female tax rate should be no greater than about 80% of that of males and possibly much less.” In the decade since the paper was first published, and also given our current climate with its conversations on pay equity for women, have your views on this subject changed or evolved in any way?

Alberto Alesina: No, they have not changed. In many countries there are discussions about how to facilitate women’s work with public subsidies to childcare, subsidies to elderly care, tax benefits for companies which hire women, and a variety of other specific subsidies. Why not simply give more money to working women and let them decide how to spend [it], eliminating all those subsidies? Also the elasticity of the labor supply of the second earner in a family (typically the woman) is much higher  that than that of the primary earner. Thus an income tax reduction for women would lead to a relatively large increase in labor supply and therefore would not lead to large reductions in fiscal revenues. In addition, the government would save from the elimination of all those subsidies.

Growthpolicy.org. You have contributed extensively to the literature on fiscal austerity, making the case, as you do recently, that “deficit-reduction policies based upon spending cuts are much less costly in terms of short-run output losses than tax-based adjustments” and that “spending-based adjustments lead to more long-lasting debt stabilization.” The debate on fiscal austerity measures has been ongoing since Keynes’s ideas after the Great Depression. What, according to you, are some prevalent misconceptions and errors in the thinking of policy makers about austerity measures that you would like to see corrected?

Alberto Alesina: The biggest misconception of some policymakers and of some even prominent economists advising them is that that whatever Keynes said is “by definition” right since he said it. Keynes was a genius writing when the size of government was a fraction of what it is today and the welfare state [was] virtually nonexistent so unemployed people were starving, literally. Public debt was small in many countries and Keynes was writing about getting out of “the” major depression in the history of modern capitalism. Today’s world is very different. The size of government i[s] more than half of the economy in many European countries and only a bit smaller in the U.S. The welfare state is generous especially in Europe and public debt [is] out of control in some countries. My work on austerity shows that negative effects on output of the spending cuts needed to eliminate runaway deficits is much smaller than that of tax increases. In fact, the output effects of these spending cuts is, on average, close to zero and expansionary on impact in a minority of cases. A forthcoming book with Carlo Favero and Francesco Giavazzi with Princeton University Press will collect many years of research on these points.

Growthpolicy.org. And finally, a question on international trade. You are a noted expert on the political economies of both the U.S. and the European Union. Some believe that the world is currently closest to a full-scale trade war since Smoot-Hawley in 1930, but this time with far greater repercussions since it involves the world’s three largest economies: the U.S., the E.U., and China. What do you see as the long-term impact on economic growth, both domestic and global, of protectionist trade policies?

Alberto Alesina: The effect of full-scale protectionism on the world economy would be devastating, enormous, [and] possibly even bigger than what happened in the Thirties. I very much hope that we do not go there and President Trump will reconsider his stance on protectionism. There might be issue with questionable policies by China, b[ut] my sense is that U.S. protectionist tendencies are dictated by the desire to win key states in which we have declining industries. This is not a good motivation for choosing the right policies for the country as a whole and for the world.