The Benefits of Migration

They are significant for both the sending and receiving countries, according to a new NBER paper (via Blattman, who has a link to an ungated version). From the abstract:

We find that immigration increases employment, with no evidence of crowding-out of natives, and that investment responds rapidly and vigorously. The inflow of immigrants does not seem to reduce capital intensity nor total factor productivity in the short-run or in the long run. These results imply that immigration increases the total GDP of the receiving country in the short-run one-for-one, without affecting average wages and average income per person.

How is this possible? Perhaps think of potential immigrants as unemployed-natives-in-waiting. Migration allows them to find and fill jobs that would not otherwise exist, thus boosting output without having adverse effects on native workers. In other words, think of migration functioning as in-sourced entrepreneurship. There is no output loss from the sending country because that labor was un- or under-employed anyway.

This effect is not limited to the U.S. or Europe -- the paper covers 14 receiving countries in the OECD, and 74 sending countries -- but perhaps it is limited to capital-rich, post-industrial countries that can benefit from an influx of unskilled laborers. Still, if the result holds up to future study, it may have powerful implications for policymakers in developed and developing countries.

Champions

50% of this blog's writing team were here last night.


Timelapse: Franklin Street after the victory from The Daily Tar Heel on Vimeo.

Round and Round We Go

Krugman praises DeLong for once more trashing the Chicago School's view of the (in)effectiveness of stimulus. One bit from Krugman:

Here’s what we agree on: if consumers have perfect foresight, live forever, have perfect access to capital markets, etc., then they will take into account the expected future burden of taxes to pay for government spending. If the government introduces a new program that will spend $100 billion a year forever, then taxes must ultimately go up by the present-value equivalent of $100 billion forever. Assume that consumers want to reduce consumption by the same amount every year to offset this tax burden; then consumer spending will fall by $100 billion per year to compensate, wiping out any expansionary effect of the government spending.

But suppose that the increase in government spending is temporary, not permanent — that it will increase spending by $100 billion per year for only 1 or 2 years, not forever. This clearly implies a lower future tax burden than $100 billion a year forever, and therefore implies a fall in consumer spending of less than $100 billion per year. So the spending program IS expansionary in this case, EVEN IF you have full Ricardian equivalence.

This is a non sequitur. To my knowledge, nobody is arguing that taxpayers should view temporary spending as permanent; they are saying that taxpayers will view present deficit spending as having future costs. The bill will come due, and whether it's a one-time $100bn expenditure or a perpetual $100bn expenditure is irrelevant.

Although in the present case, taxpayers don't know how much taxes will be increased, because the Obama budget projections are ludicrous. Taxpayers have every reason to be skeptical when faced with an uncertain future, so it's certainly possible that they might overestimate the future costs of present-day deficit spending. If that happens, then taxpayers might save even more than if there was no stimulus spending at all, and the multiplier will not just be less than 1, it could actually be negative.

The point of stimulus spending is to, er, stimulate. That depends on the multiplier being greater than 1. That depends on two things: taxpayers thinking that they will be better off by spending money than saving it, and having a functional banking system that can move the money from savers to borrowers. So even if Krugman and DeLong are right on the first point, and I don't think they've proven their case, the banking system is still in chaos. Given that, our expectations for the multiplier should be downgraded.

Should Regulation Be Countercyclical?

McMegan has a nice post on reserve requirements and accounting rules for banks:

The problem with things like reserve ratios is that while in theory they should be countercyclical, in practice they aren't. A nice fat stack of reserves should enable you to better weather downturns. But of course, as long as they're required reserves, you can't actually touch them. If the government required you to carry $300 in your wallet at all times, you wouldn't have plenty of spending money; you'd have no spending money, unless you carried a lot more than $300.

A perfect regulator in an ideal market would relax capital requirements in bad times, and raise them in good times. The actual regulators we have, however, are terrified of spooking the markets if they do so--and more importantly, terrified of the all-out political war that would follow. So we lower capital requirements in good times, when all that capital seems like an untouched gold mine, and leave them stat, or raise them, when everything's going to hell.

Exactly right. The whole point of having reserves is to provide flexibility when times are bad. But if reserve requirements are fixed even in tough times then you don't get the positive benefit of having them. You do, however, still pay the cost of meeting the requirement.

The idea that policymakers should pursure countercyclical fiscal and monetary policies is uncontroversial, but when the source of the crisis is in the financial sector, it might make sense to tweak regulatory policies as well. In addition to giving damaged firms more flexibility in bad times, such a pattern might tamp down some "irrational exuberance" in good times.

Of course, countercyclical policies are often politically problematic: in good times, people and firms don't want the reins pulled in, and in bad times the tendency is to over-regulate in the areas causing the crisis. It is also too much to expect regulators to always make proper decisions, if given latitude (the recent flailing by the Fed and Treasury is proof enough of this). So it might make sense to set hard-and-fast rules in order to maintain stability.

Still, our current regulatory structure makes little sense. Improvements might be difficult, but regulation should make the system more stable, not less.

N! C! U!

No presumption. I just gotta show some pride.

Let's send the seniors out in style.

An Open Letter to Economists

From Harvey Mansfield, political theorist, and it could be subtitled "How then should we live?" (the actual subtitle is "Is the overly predicted life worth living?"). Via Tyler Cowen, who linked to the article but did not venture a response. Here's Mansfield's conclusion:

Economics needs to stop trying to duck responsibility for what it recommends. It needs to examine the whole of life and to focus on the virtue or virtues of different ways of life. It should give over talk about "preferences," as if human desires were given facts unaffected by the science of economics. It should abandon the crude positivism that claims that one can study facts without giving advice, or that one can confidently predict without causing people to believe in one's predictions. It needs to replace its false modesty with true moderation.

I doubt Mansfield will receive many answers from economists. All through my economics education I was constantly told that the study of economics is about what is possible to do, not what should be done; that question was reserved for the theorists, philosophers, and clerics. Modern economics is too tied to positivism to take Mansfield's advice, even if it wanted to (and it almost certainly does not). The old political economists -- J. S. Mill, Smith, Ricardo, Marx -- were centrally preoccupied with just this sort of normative question, but modern economists are proud to leave them to others. There are still a few strands of political economy happy to engage the debate, but all too often conclusions are a pure function of priors, so the interaction leaves something to be desired.

I'm not as sure as Mansfield that this state of things is so terrible. After all, there's something to be said for gains from specialization, and different scholars have different comparative advantages. Expecting quantitative methodologists or formal theorists to spend much time parsing normative concerns is just as silly as expecting philosophers to learn advanced game theory. We can have both: positivists to tell us the range of possible outcomes, and normativists to help us decide which outcomes to pursue. All to say, I don't think Mansfield's intended audience is capable of responding the way he wishes they could, and that's probably okay.

Bono vs. Bill

Now this is interesting. A Clash of Development Titans: Bill Easterly has picked a fight with the Bono-fronted ONE campaign over their response to Dambisa Moyo's new book Dead Aid, which is highly critical of aid programs in Africa. Easterly and co-blogger Laura Freschi:

The vigorous and public debate that has greeted the release of Dead Aid is a good thing for transparency and effectiveness in aid, no matter what you think of Moyo’s book. ONE apparently doesn't agree. There are two things wrong with ONE’s campaign to discredit Moyo.

First of all, ONE misrepresents Moyo’s ideas to better tear them down. For example, ONE characterizes Moyo’s plan as a call to “shut off all aid in 5 years,” when Moyo is very clear about excluding humanitarian aid and NGO/ charitable aid from her discussion.

Second, rounding up some Africans who happen to disagree with Zambian-born Moyo doesn’t alter the quality of her proposals, which deserve to be debated on their own merits. (We’ve blogged about the intellectually dishonest technique of the “authenticity trump card” before.) When the ONE campaign says in its email “We are collecting quotes from Africans who might disagree with her…”, it seems to be saying we will not trust or allow Africans to have this debate on its merits on their own.

Ouch. In aid circles, the "authenticity trump card" is like the "race card" in American politics: you don't go there unless you're losing. But ONE isn't giving in, and Easterly was magnanimous enough to post a response on Aid Watch:

In terms of the emails you refer to, yes, we emailed people in Africa who we work with to see what they thought, as many are involved directly with aid-funded initiatives. Their experience is very relevant in thinking through the impact of Ms. Moyo’s claims. So it wasn’t an attempt to shut a conversation down, but an effort to open one up. And it’s succeeded! We’ve also been in a direct and ongoing conversation with Ms. Moyo, before and after the book’s release. Our concerns are no surprise to her. We agree with your concerns about aid transparency and, as you know, we recently helped launch “publish what you fund”, an aid transparency effort. We share the goal of “asking that aid benefit the poor” (as you write on your website) and we campaign to ensure that it does.

We don't get that many (public and interesting) feuds in the social sciences, especially not spats that include the world's biggest rock-star-cum-aid-proponent fending off charges from the world's biggest aid skeptic.

We can only hope this escalates.

Naming and Shaming

Direct from the G20 summit:

A commitment to "name and shame" countries that renege on free trade agreement.

If protectionism stems from domestic political pressure, will international "shame" only increase a politician's payoff to trade closure?  A leader (or legislature) gets a lot of political mileage out of protecting their constituency from the big, bad, greedy world.  But, that political capital skyrockets when that leader/legislature does so in the face of international pressure to do other wise.  

I predict lots of David vs. Goliath analogies in the months to come.  Just another reminder that audience costs cut both ways - they can constrain or embolden.

Who Adjusts? A Continuing Series

Nobody, says Martin Wolf, and that's too bad.

Brad DeLong, on the other hand, sees a severe tightening of the balance of payments gaps... but not necessarily in a good way.

Radio Free-Riding Europe

Was I unnecessarily strident in my tone towards Europe in my last post? Loyal IPE@UNC reader Sensemania certainly thinks so, and she/he may have a point: my tone was probably more abrasive than it needed to be. Substantively, however, I'm unconvinced by Sensemania's rebuttals. I'll respond to Sensemania's bullets in kind:

1. "Europe (as a whole)" does not have the "second most impressive military in the world" because "Europe (as a whole)" does not have a military. If Sensemania means that all of the individual countries of Europe combined have the second most impressive military in the world, then the statement may be true but it is also meaningless. In all of the notable Western military interventions in the past two decades (that I can think of), Europe has been divided, with some prominent states favoring intervention and others opposing. Still, even if you take all EU military expenditures together, the US still spends more than twice as much, despite the fact that the EU has recently surpassed the US in gross GDP (i.e in percentage terms, the gap is even greater). Indeed, only two European countries -- France and the UK -- spend more than Japan, who is constitutionally forbidden from maintaining a standing army. What's the point of nit-picking? Only to point out that the lavish social spending programs in Europe have been possible in large part because America has borne a disproportional share of the security burden. This was probably more true in the second half of the 20th-century than it is today, but even still the disparity is stark.

2. I'm not talking about footing the bill for American adventurism in Vietnam (although France did start that one) or Iraq; I'm talking about the fact that Europe has been able to avoid costly security dilemmas with itself and the former Soviet bloc for decades because America has been willing to foot a large part of the bill. I think this point is pretty much inarguable. This is not to say that Europe does nothing, or that European intelligence, technology, and territory have not benefited the US. Of course they have. But if the question is who has benefited more from the other, there's only one answer.

3. The context of my post was the G-20 meetings, and the meat of it was about economic, not military, free-riding. To be sure, the two are sometimes related (which is why I brought it up), but they are also distinct. In this case there are three main noises coming from Europe: Germany is saying "Go ahead and stimulate your economy so you can buy our exports, while we sit back, keep inflation low, keep debt low, and free-ride". France is saying "We must have coordination, but you guys screwed everything up and we did nothing wrong, so if you don't do exactly as we please then we're outta here. Oh yeah, and we're gonna free-ride on your stimulus also." The U.K. is saying "Okay, so our banking system is even more screwed than yours, and our real economy is tanking, but we can't get the money we want for stimulus, so please help us out". True, some EU states (esp. Germany) aren't interested in stimulus for historical/ideological reasons, but others (esp. UK & E. Europe) are very much interested but don't have the political clout to get the EU to play ball. So the EU is asking for the IMF to step in and bail out their own member countries, as well as others on the Continent, rather than engage in stimulus as the US is doing. Some kind of cooperation!

As to the question of who pays for the IMF, well that is answered easily enough: the U.S. pays the greatest share of any country, and it's not even close (yes, the aggregate share of the EU countries is greater, but the EU does not vote as a bloc in the IMF). As for temporary increases in funding, the new $100bn commitment from the EU is encouraging (I wasn't aware of it until Sensemania pointed it out), but all sorts of commitments are made at G-20 meetings that never materialize. And even if the EU matches the US contribution to the IMF kitty, they are still falling far behind in other types of action.

The long and short of it is that the US is trying to stimulate domestic consumption, much of which will be consumption of imports from Europe and Asia. This consumption boost may not actually increase much domestic employment if the benefits of the stimulus leak from the US to its trade partners. Instead, the net effect could be an expansion the trade deficit and US debt. Other countries (e.g. China, Brazil) pushed forward with their versions of fiscal stimulus, but Europe refuses (UK excepted). Instead, they are content to let the US foot the bill and rack up the debt. Meanwhile, demands from Europe include calls for a new reserve currency and a new financial regulatory structure, despite the fact that European banking regulations were often much laxer than those in the US and the fact that the dollar has held its value better than the Euro or pound sterling since the crisis began. Oh yeah, and then there's the creeping protectionism that has some talking about a "new Iron Curtain" splitting Europe back into West and East. So much for common markets.

Perhaps Europe's actions are rational, but they aren't cooperative. And as the US continues to see Europe reap greater rewards from defecting in this version of the Prisoner's Dilemma, they will become more and more likely to retaliate.

For more on free-riding, and the differences between how Europeans and Americans view the crisis, see this piece. One tidbit:

If the episode that haunts the U.S. is the Great Depression, in Europe, where the Germans have been dominant in shaping economic policy, the defining historical moment is the hyperinflation of Weimar Germany, when prices rose more than seventy-five billion per cent in just one year, 1923, and, in the words of Walter Benjamin, “trust, calm, and health” vanished. The legacy of that episode lives on not just in German policymakers’ inflation phobia but also in their sense that there is something fundamentally distasteful about debt. For Germany, fiscal rectitude even in the face of a crisis is not just economically sensible but morally correct.