The Economist recently posted its newest “bright young economists to watch” list. In addition to the tremendous visibility given by a top tier pub like The Economist, past list alumni have gone one to great things –

Raj Chetty

TWENTY years ago The Economist wrote about eight young economists who were making a big splash in their discipline and beyond. One of them, Paul Krugman, recently won the Nobel prize for his models of international trade and economic geography. Ten years later we tried to repeat the trick, identifying another eight young stars, many of whom were taking their discipline far off-piste. One has since achieved even greater fame than anticipated. Steven Levitt of the University of Chicago became a household name as co-author of “Freakonomics”, a bestselling book published in 2005.

This year, 2 economists of mutinous importance made the cut.

The first, Raj Chetty, was tagged by Sepia Mutiny over a year ago as a “name to watch” when he received similar recognition from The American magazine. The Economist notes his most recent work in teasing apart the relative contributions of “moral hazard” and “liquidity effect” w.r.t. unemployment insurance –

Raj Chetty, recently hired by Harvard from the University of California, Berkeley, is a promising young “public economist”: a student of tax and spend…he wanted to know whether policymakers should raise unemployment benefits…

He gleans all the information he needs by looking at the time it takes unemployed people to find a new job. Unsurprisingly, they take longer when their benefits are more generous. This is usually attributed to “moral hazard”-people take less care to escape a danger, such as joblessness, if they are insured against it. But Mr Chetty shows that skewed incentives account for only 40% of the delay.

The rest is due to what he calls a “liquidity effect”. The unemployed typically have few liquid assets to fall back on and little chance of a loan from the bank. This forces them to rush their job search. If they had savings to dip into or credit to tap, they might search with greater deliberation. This kind of dallying is, in a sense, optimal. The unemployed decide that an unhurried job search is worth the extra cost of depleted savings or heavier loan repayments.

This claim from Chetty’s work is interesting and one that some quick googling didn’t dig up anymore meat. Any mutineer’s got insight?

Higher benefits ease this liquidity problem. Raising benefits by $1 a week would do as much social good as raising American GDP by $290m, Mr Chetty calculates, although government loans to the unemployed might do better still.

Since we profiled Chetty, he’s racked up another important accolade – tieing Obama-advisor Larry Summer’s record for becoming the youngest tenured econ professor at Harvard at the tender age of 28 –

Eight years ago, Raj Chetty ’00 graduated from the College summa cum laude, having completed his undergraduate degree in three years and produced a prize-winning thesis on business investment.

Chetty has spent the past five years teaching at the University of California, Berkeley and was offered tenure at Harvard last year, at the age of 28, the same age as department superstar Lawrence H. Summers. Chetty, however, did not accept the University’s offer until last week.

A second honoree – Esther Duflo – makes her mark not for being Desi but for doing important work that can help the under developed world writ large. Duflo’s experimental approach is described below –

Esther Duflo

Ms Duflo has made her name carrying out randomised trials of development projects, such as fertiliser subsidies and school recruitment. In these trials, people are randomly assigned to a “treatment” group, which benefits from the project, and a “control” group, which does not.

These trials introduce many of the same controversies and arguments as the medical trials upon which they are modeled. Namely, they require making one group of individuals the control or placebo group & thus relegates their economic livelihood (temporarily at least) to the same fate as folks who receive sugar pills in medical trials. The upside of their “investigative” technique, however, is measured, real-world impact that separates the truth from dogma and yields surprising options for policy implementers –

With her colleague, Abhijit Banerjee, Ms [Esther ]Duflo and Mr Kremer have remade development economics, nudging it away from its concern with policies, towards a preoccupation with projects. They study economic development as seen from the field, clinic or school, rather than the finance ministry. They might be called the “peace corps” of economists, bringing the blessing of their investigative technique to the neglected villages of India or the denuded farms of western Kenya…

In one study, Ms Duflo and her colleagues showed that mothers in the Indian state of Rajasthan are three times as likely to have their children vaccinated if they are rewarded with a kilogram of daal (lentils) at the immunisation camp. The result is useful to aid workers, but puzzling to economists: why should such a modest incentive (worth less than 50 cents) make such a big difference? Immunisation can save a child’s life; a bag of lentils should not sway the mother’s decision either way.

My pet theory? The brain has dramatically different paths for serious, considered decisions (“this vaccination thing sounds like a good deal for our kids”) vs. impulse ones (“mmm… daal….”). Duflo’s research outcome reveals a sort of behavioral economics “nudge” at work. By tying a low cost, impulse reward to a significant considered decision, large & socially important outcomes can be achieved. Anyone who’s seen techies stay at the office an extra hour or 2 for free pizza dinner has witnessed the same thing.

Duflo’s research also taps into another one of my pet peeves about many threads in economic policy. One of my standard quips is that while too many Conservatives believe in Intelligent Design for the origins of Life, too many Liberals believe in Intelligent Design for the origins of Social Wealth. Most real socio-economic progress isn’t a top down phenomena but rather an emergent, grounds-up process that involves a lot of decentralized, small scale trial & error. In development, William Easterly calls this the difference between “planners” and “seekers” and it’s sorta the diff between traditional Foreign Aid grants vs. programs like Microloans. While the latter is sometimes tough to measure in aggregate, Duflo’s research makes us take them seriously –

Randomised trials “give you the chance to be surprised”, Ms Duflo says. Had they arrived at this result using some other method, she and her colleagues would have assumed they had made a mistake. But randomisation removes such doubts, showing that it was indeed the lentils that made the difference. The result cannot be dismissed; it must be explained.