Alex Tabarrok

President Obama telling what I thought was a joke at the White House Correspondents Dinner:

They say Donald lacks the foreign policy experience to be president. But in fairness, he has spent years meeting with leaders from around the world: Miss Sweden, Miss Argentina, Miss Azerbaijan.

Apparently Donald was listening because yesterday in an interview with Bret Baier he made exactly the same point but this time as argument:

Bret Baier: About Russia, you were asked yesterday if you’ve ever spoken to Vladmir Putin. And you said, “I don’t want to say”:

Donald Trump: Yeah, I have no comment on that. No comment…I was in Russia….I know Russia well. I had a major event in Russia two or three years ago. Miss Universe contest which was a big, big, incredible event. Incredible success. I got to meet a lot of people….

Guru, a 2007 movie from India starring Abhishek Bachchan and Aishwarya Rai and directed by Mani Ratnam, is one of the most pro-free market movies ever made and perhaps the best.

Guru follows Gurukant “Guru” Desai from his small village in India to Turkey where in a series of evocative scenes he shows a natural affinity for the rhythms of markets. Determined to work for himself, Guru returns to India and tries to enter the cotton market but he needs a license and the license system is monopolized by a rich clique with close ties to the government. Guru has no entry into this clique, which Guruposterdiffers in class and caste from his village roots, but his cause is taken up by a liberal newspaper editor, Manik Dasgupta, a veteran of the independence movement, who shames the government into opening up the license system. Guru and Manik become close and Guru becomes godfather to Manik’s daughter who has epilepsy.

The movie’s portrayal of entrepreneurship and the problems that Guru must surmount–financial, familial, and political–is unusually smart and sympathetic.

As Guru rises to the top the movie becomes more complex. Guru bribes politicians and skirts rules and regulations. His previous benefactor, the newspaper editor, turns against him. Derek Elley at Variety says Guru “forgets his ethics on the way to the top.” That’s a common but incorrect reading. What is going on is more subtle. Ratnam is telling us that Guru’s virtues are incompatible with a corrupt system and a choice must be made. Consider that on his way to the top, Guru has promised to always honor, love and respect his elder patron and even as they are at odds, he never wavers in this promise. Nor does he waver in his love for Manik’s epileptic daughter, even as she marries the reporter who has led the charges against Guru. Rather than having been corrupted, Guru demonstrates an iron-willed commitment to virtue. Riches and success did not corrupt Guru’s personal virtue nor has his public virtue been corrupted. In contrast to the earlier corruption of the ruling clique we never see Guru preventing others from competing with him. He bribes only in order to build.

The movie is powerful not because it opposes virtue and corruption but because it opposes two ideas of virtue. Is it virtuous to follow the law when the law itself is corrupt? Other artists have explored this question when the lawbreaker opposes social injustice, ala Gandhi and Martin Luther King, but what about when the lawbreaker opposes economic injustice? The question the movie asks is a classic question from Ayn Rand, how can an honest (business)-man live in a corrupt world? The theme becomes clear in the climax, a trial in which Guru, ala Howard Roark, puts society on trial.

The director, Mani Ratnam, has great ambitions. In telling the story of India’s liberation, not from colonialism but from socialism, he aims to elevate a new type of hero for post-socialist India, a business guru. In the trial, Ratnam is also arguing that a house divided against itself, a house half slave and half free, cannot long remain standing. Either India must push forward with a new vision for itself based on business, free and open markets and liberal views (on gender, the disabled, religion and other issues) or it will indeed fall back into internal strife and corruption.

I love the theme of Guru but the movie wouldn’t work without a great performance from Abhishek Bachchan. The beautiful Aishwarya Rai, a Miss World champion, gives a very good performance (she married Bachchan as the movie premiered) as do a host of other actors.

I find it encouraging for India that the movie was a hit and has a 90% rating on RT. You can buy the movie at Amazon or watch it on Youtube.

Addendum: Guru is loosely based on the life of Dhirubhai Ambani who from humble beginnings built Reliance Industries into one of the largest and most profitable firms in the world.

Two papers suggest numeracy improves financial outcomes and can be taught.

Numeracy and Wealth: We examined the relationship between numeracy and wealth using a cross-sectional and a longitudinal study. For a sample of approximately 1000 Dutch adults, we found a statistically significant correlation between numeracy and wealth, even after controlling for differences in education, risk preferences, beliefs about future income, financial knowledge, need for cognition or seeking financial advice. Conditional on socio-demographic characteristics, our estimates suggest that on average a one-point increase in the numeracy score (11-point scale) of the respondent is associated with 5 percent more personal wealth.

High School Curriculum and Financial Outcomes: Financial literacy and cognitive capabilities are convincingly linked to the quality of financial decision-making. Yet, there is little evidence that education intended to improve financial decision-making is successful. Using plausibly exogenous variation in exposure to state-mandated personal finance and mathematics high school courses, affecting millions of students, this paper answers the question “Can high school graduation requirements impact financial outcomes?” The answer is yes, although not via traditional personal finance courses, which we find have no effect on financial outcomes. Instead, we find additional mathematics training leads to greater financial market participation, investment income, and better credit management, including fewer foreclosures.

Global fishing stocks are collapsing due to the tragedy of the commons and the resulting overfishing. Technology, however, suggests a possible solution:

Global Fishing Watch is the product of a technology partnership between SkyTruth, Oceana, and Google that is designed to show all of the trackable fishing activity in the ocean….

The tool uses a global feed of vessel locations extracted from Automatic Identification System (AIS) tracking data collected by satellite, revealing the movement of vessels over time. The system automatically classifies the observed patterns of movement as either “fishing” or “non-fishing” activity.

This version of the Global Fishing Watch started with 3.7 billion data points, more than a terabyte of data from two years of satellite collection, covering the movements of 111,374 vessels during 2012 and 2013. We ran a behavioral classification model that we developed across this data set to identify when and where fishing behavior occurred. The prototype visualization contains 300 million AIS data points covering over 25,000 unique vessels. For the initial fishing activity map, the data is limited to 35 million detections from 3,125 vessels that we were able to independently verify were fishing vessels. Global Fishing Watch then displays fishing effort in terms of the number of hours each vessel spent engaged in fishing behavior, and puts it all on a map that anyone with a web browser will be able to explore.

Can vessels turn AIS off?

Sure, but that is certain to draw attention, like wearing a trenchcoat and sunglasses on a hot summer day. Global Fishing Watch will enable us to flag suspicious behaviors like suddenly disappearing, or appearing as if from nowhere, or jumping 1,000 miles and appearing to fish in the middle of Asia. It will give us the opportunity to identify who may have something to hide, and who is operating openly and transparently. Secondly, more countries and intergovernmental agencies like Regional Fisheries Management Organizations (RFMOs) are requiring AIS use within their waters, so more fishing vessels will be legally compelled to use AIS in the coming years. Many already are. For example, as of May 2014, all European Union-flagged fishing vessels over 15 meters in length are required to use AIS. Perhaps most importantly, AIS was primarily designed as a safety mechanism to help avoid collisions at sea. Turning off your AIS just to avoid being tracked puts your vessel and crew at risk of being run down by a cargo ship in the middle of the night.

Mark this as another example of the end of asymmetric information.

Hat tip: GHABS.

Police versus Prisons

by on April 26, 2016 at 7:31 am in Economics, Law | Permalink

Here’s a remarkable graph from the Council of Economic Advisers report on incarceration and the criminal justice system. The graph shows that the United States employs many more prison guards per-capita than does the rest of the world. Given our prison population that isn’t surprising. What is surprising is that on a per-capita basis we employ 35% fewer police than the world average.* That’s crazy.

polce v prison

Our focus on prisons over police may be crazy but it is consistent with what I called Gary Becker’s Greatest Mistake, the idea that an optimal punishment system combines a low probability of being punished with a harsh punishment if caught. That theory runs counter to what I have called the good parenting theory of punishment in which optimal punishments are quick, clear, and consistent and because of that, need not be harsh.

We need to change what it means to be “tough on crime.” Instead of longer sentences let’s make “tough on crime” mean increasing the probability of capture for those who commit crimes.

Increasing the number of police on the street, for example, would increase capture rates and deter crime and by doing so it would also reduce the prison population. Indeed, in a survey of crime and policing that Jon Klick and I wrote in 2010 we found that a cost-benefit analysis would justify doubling the number of police on the street. We based our calculation not only on our own research from Washington DC but also on the research of many other economists which together provide a remarkably consistent estimate that a 10% increase in policing would reduce crime by 3 to 5%. Using our estimates, as well as those of some more recent papers, the Council of Economic Advisers also estimates big benefits (somewhat larger than ours) from an increase in policing. Moreover, what the CEA makes clear is that a dollar spent on policing is more effective at reducing crime than a dollar spent on imprisoning.

Unfortunately, selling the public on more policing is likely to be difficult. Some of the communities most in need of more police are also communities with some of the worst policing problems. We aren’t likely to get more policing until people are convinced that we have better policing. Moreover, people are right to be skeptical because the type of policing that works is not simply boots on the ground. As the CEA report notes:

Model policing tactics are marked by trust, transparency, and collaborations between police and community stakeholders…

Better policing and more policing complement one another. Greater trust can come with body cameras as well as community oversight and other efforts to bring transparency and accountability. Most importantly, the drug war has eroded trust between police and community and that has led to an endogenous equilibrium in which some communities are rife with both drugs and crime. Fortunately, marijuana decriminalization and legalization have begun to move resources away from the war on drugs. Legalization in states like Colorado does not appear to have increased crime and has likely contributed to a dramatic decline of violence in Mexico. As we move resources away from drug crime, police will have more resources to raise the punishment rate for those traditional crimes like murder, robbery and rape that communities everywhere do want punished.

Addendum: See also Peter Orszag’s column on this issue.
* Corrected: Earlier I said spending rather than employment.

united-charities-building-287-park-avenue-south-777x959The NYTimes ran a full page ad yesterday congratulating NY real estate broker Mark Weiss for winning the Real Estate Board of New York’s Most Ingenious Deal of the Year Award. I was curious, so I did some research and found some information about one of Weiss’s most succesful deals.

A Chinese developer bought 287 Park Avenue South, a nine-story building built in 1893, in order to convert it to a mix of condos and retail. But a problem arose:

The 1893 landmarked building straddled two zoning districts, which left one half of the property overbuilt….trying to expand the building at 287 Park Avenue South would be like struggling in quicksand: additional FAR purchased would essentially be sucked up bringing the overbuilt part of the property into compliance.

That’s what prompted listing broker Geoffrey Newman and his Newmark Grubb Knight Frank colleague Mark Weiss to MacGyver a solution that earned the brokers a nomination for the Real Estate Board of New York’s “Ingenious Deal” award.

Here’s what they did:

By removing several floors from the interior part of the building that was overdeveloped, Newman realized, a buyer could bring the entire building into compliance, freeing the way to add bonus square footage from inclusionary housing certificates the NGKF team identified in the area.

“The idea was, that by removing 4,000 square feet we were able to add 27,000 square feet onto the building,” he told The Real Deal. “That was really the basis of what differentiated our approach to other ways of selling the building.”

The idea was indeed ingenious but you will also note that all of the ingenuity was devoted to evade the zoning and the price of evasion was high. In order to work around the zoning law, 4,000 square feet of very valuable New York real estate had to be destroyed. (Not to mention all the hours of ingenuity and legal effort that was used up devising and implementing the deal).

When thinking about why it’s so expensive to build in many American cities just remember that the deal of the year is when you build 31,000 square feet of space and only have to destroy 4,000 square feet of space to do it.

In the past twenty years [the] U.S. has lost almost 50% of its publicly traded firms [from 6,797 in 1997 to 3,485 in 2013, AT]. This decline has been so dramatic, that the number of firms these days is lower than it has been in the early 1970s, when the real gross domestic product in the U.S. was one third of what it is today. This phenomenon has been a general pattern that has affected over 90% of U.S. industries.

A rather stunning finding from Grullon, Larkin and Michaely.

The total number of firms has dropped far less than the number of publicly traded firms, so in part this is probably due to laws affecting publicly traded firms in particular such as Sarbanes-Oxley. But there has also been a small drop in the total number of firms (depending on year measured) and concentration ratios have increased which suggests that competition might have fallen. (I wish the authors had looked more closely at the entire size distribution). Have international firms risen to offset the decline of publicly-trade firms? The authors discuss but discount the role of globalization. I don’t see, however, how their findings of small effects on output competition are consistent with big labor market effects. Nevertheless the bottom line is that as concentration rates have increased so have profits, as a recent CEA report also argues.

Is this all the after-effects of the Great Recession? I hope so but the decline in the number of publicly traded firms is also consistent with the research on long-run declining dynamism (including my own research on regulation and dynamism) which shows that startup and reallocation rates have been trending down for thirty years.

Guy Rolnick at Pro-Market also discusses these trends and adds another thought to keep you up at night:

…One question may even loom larger: given that more and more Americans’ pensions and long-term savings today are invested in the stock market in defined contribution schemes, have we created a pension model that is based on a growing share of investments in rent-seeking activities? Put another way, are we facing an economic model in which tens of millions of Americans’ pensions are relying on the ability of companies to extract rents from consumers and taxpayers?

More Lead, More Crime

by on April 16, 2016 at 7:28 am in Economics, Medicine | Permalink

In the second half of the nineteenth century, many American cities built water systems using lead or iron service pipes. Municipal water systems generated significant public health improvements, but these improvements may have been partially offset by the damaging effects of lead exposure through lead water pipes. We study the effect of cities’ use of lead pipes on homicide between 1921 and 1936. Lead water pipes exposed entire city populations to much higher doses of lead than have previously been studied in relation to crime. Our estimates suggest that cities’ use of lead service pipes considerably increased city-level homicide rates.

That’s from Feigenbaum and Muller in Lead Exposure and Violent Crime in the Early Twentieth Century. Lead, it ain’t just about Flint.

Here is how I think about these issues. The Artificial in AI can sometimes mislead so let’s start by getting rid of the A and asking instead whether more NI, Natural Intelligence, will decimate the middle class. For example, will increasing education in China decimate the American middle class? I don’t think so.

As I said in my TED talk, the brainpower of China and India in the 20th century was essentially “offline”. Instead of contributing to the world technological frontier the people of China and India were just barely feeding themselves. China and India are now coming online and I see the increase in natural intelligence as one of the most hopeful facts for the future. It’s been estimated that a reduction in cancer mortality of just 10 percent would be worth $5 trillion to U.S. citizens (and even more taking into account the rest of the world). A reduction in cancer mortality is more likely to happen with a well-educated China than with a poorly educated China. So we have a huge amount to gain by greater NI.

In the case of low-skill labor the rise of China has hurt some US low-skill workers (although US workers as a whole are almost certainly better off due to lower prices). The US has historically had an abundance of highly-skilled labor and with greater education around the world we have less of a competitive advantage. In the case of high-skill labor, however, I think the opportunities for gains are much greater than with competition for low-skill labor. Ideas are what drives growth and ideas are non-rivalrous, they quickly spread around the world. The more idea creators the better for everyone. At the world level, for example, the standard of living and the growth rate of world GDP have both gotten larger as population has increased.

Greater foreign intelligence and wealth could be a threat if intelligence turns from production to destruction (this is also a potential problem with AI). We probably can’t keep China poor, even if we tried, and any attempt to try to do so would likely backfire in the worst possible way. Thus, if we want to keep high-skill Chinese workers working on medical rather than military breakthroughs, we must preserve a peaceful world of trade. Indeed, peace and trade become ever more important the richer the world gets.

Now let’s turn from NI to AI. For the foreseeable future I see AI as being very similar to additional NI. Smart people in China aren’t perfect substitutes for smart people in the United States and there are also plenty of opportunities for complementarity. Similarly AI is not a perfect substitute for NI and there are plenty of opportunities for complementarity. An AI that drives your car, for example, complements your NI because it leaves more time for more productive tasks.

(What happens when AI does become a perfect substitute for NI? We could easily be 100 years or more from that scenario but my foresighted colleague, Robin Hanson, has a new book The Age of Em that discusses the implications of uploads, human intelligence copied into software—Hanson’s book is the most complete and serious scenario analysis of the implications of a new technology ever written but most of us won’t live long enough to know whether he is right although Robin might.)

Thus, the analysis of AI and NI is similar except for one important fact. As Chinese workers become better educated a significant share of the gains will go to Chinese workers (although by no means all).  AI, however, is produced by capital. But in our world capital isn’t scarce. The world is awash in capital and computing power is getting ever-cheaper. AI isn’t like an oil field owned by a handful of people. AI will be cheap and ownership will be widespread. Just look at your cellphone—it’s faster and more powerful than a multi-million dollar Cray-2 supercomputer of 1990. Moreover, in 1990 there were only a handful of Cray-2s and today there are billions of cell-phone super-computers including hundreds of millions and soon billions in poor countries. The gains from AI, therefore, will flow not to capital but to consumers. So if anything the gains from more AI are even larger than the gains from more NI.

From my answer on Quora.

How to Bring Prosperity to Iran

by on April 10, 2016 at 7:28 am in Economics | Permalink

I was pleased to be one of a group of economists asked to publish a letter to Iran in the New Year’s issue of Tejarat-e Farda, an Iranian business weekly. The issue features messages from economists around the word.

Here is my letter:

TabarrokIranHappy Nowruz! I celebrate today not only a New Year but what I hope will be a new beginning. Political differences have cut Iran, long a center of world trade and commerce, from the world economy. As a result, the Iranian economy has performed for a generation or more well below its potential. But Iran has great national resources and could experience an explosion of prosperity if it adopts the right institutions.

Turkey and Iran once had similar standards of living but GDP per capita today is more than twice as high in Turkey as in Iran. On the World Bank’s Ease of Doing Business Index, Turkey is not a world leader, it ranks just 55th in the world (Singapore ranks 1st), but Iran ranks only 118th out of 189 countries.

Iran, however, is moving in the right direction. Privatization of state enterprises, when combined with competitive and open markets, will improve efficiency and innovation. Greater experience with private markets and commercial law also hold the promise of building a more secure foundation for property rights, especially for foreign investors. With the right business climate, billions of dollars could flow to Iran including many billions from successful Iranians who live in the United States and around the world.

The United Arab Emirates provides an interesting model. The UAE has the best business climate in the region and its reputation for security of property has allowed the UAE to attract investment from all over the world including at least $200 billion from investors of Iranian heritage. The government of the UAE takes pride in its business climate and they have used international benchmarks to attract investment and measure their own achievements. It’s remarkable that in their vision document the UAE explicitly aims to be the number one ranked country on the World Bank’s Ease of Doing Business Index by 2021. Iran could similarly set goals and mark achievements using international benchmarks such as the Ease of Doing Business Index, the Global Competitiveness Index and the Transparency Index.

The size of the Iranian market makes it attractive to foreign investors as does the sophistication of the Iranian consumer. Iran has a great history of investment in education and its population is among the best educated in the region. Iran is well poised to succeed in information technology and internet startups especially if it offers guarantees and protections for free movement of information.

Iranians have a long history of entrepreneurship and trade, they are among the best educated people in the region, and there is a large Iranian community in the world who would like to invest in their homeland. Iran has strong foundations and with the right institutions it could achieve a prosperity takeoff that would be welcomed by Iranians as well as by the many people around the world who wish the best for the Iranian people in the community of nations.

Mobility has been slowly falling in the United States since the 1980s. Why? One possibility is demographic changes. Older people, for example, are less likely to move than younger people so increases in the elderly population might explain declines in mobility. Mobility has declined, however, for people of all ages. In the 1980s, for example, 3.6% of people aged 25-44 had moved in the last year but in the 2000s only 2.2% of this age group had moved.

(Graph from Molloy, Smith, Trezzi and Wozniak).

In fact, mobility has declined within age, gender, race, home ownership status, whether your spouse works or not, income class, and employment status so whatever the cause of declining mobility it has to be big enough to affect large numbers of people across a range of demographics.

My best guess is that the decline in mobility is due to problems in our housing markets (I draw here on an important paper by Peter Ganong and Daniel Shoag). It used to be that poor people moved to rich places. A janitor in New York, for example, used to earn more than a janitor in Alabama even after adjusting for housing costs. As a result, janitors moved from Alabama to New York, in the process raising their standard of living and reducing income inequality. Today, however, after taking into account housing costs, janitors in New York earn less than janitors in Alabama. As a result, poor people no longer move to rich places. Indeed, there is now a slight trend for poor people to move to poor places because even though wages are lower in poor places, housing prices are lower yet.

Ideally, we want labor and other resources to move from low productivity places to high productivity places–this dynamic reallocation of resources is one of the causes of rising productivity. But for low-skill workers the opposite is happening – housing prices are driving them from high productivity places to low productivity places. Furthermore, when low-skill workers end up in low-productivity places, wages are lower so there are fewer reasons to be employed and there aren’t high-wage jobs in the area so the incentives to increase human capital are dulled. The process of poverty becomes self-reinforcing.

Why has housing become so expensive in high-productivity places? It is true that there are geographic constraints (Manhattan isn’t getting any bigger) but zoning and other land use restrictions including historical and environmental “protection” are reducing the amount of land available for housing and how much building can be done on a given piece of land. As a result, in places with lots of restrictions on land use, increased demand for housing shows up mostly in house prices rather than in house quantities.

In the past, when a city like New York became more productive it attracted the poor and rich alike and as the poor moved in more housing was built and the wages and productivity of the poor increased and national inequality declined. Now, when a city like San Jose becomes more productive, people try to move to the city but housing doesn’t expand so the price of housing rises and only the highly skilled can live in the city. The end result is high-skilled people living in high-productivity cities and low-skilled people live in low-productivity cities. On a national level, land restrictions mean less mobility, lower national productivity and increased income and geographic inequality.

From my answer on Quora.

Here is my post on occupational licensing and declines in mobility.

It’s time to apply or encourage your students to apply to the annual Public Choice Outreach Conference! This conference is a “crash course” in public choice with talks by Tyler Cowen, Robin Hanson, Bryan Caplan, Dan Houser, Johanna Mollerstrom and many others.

Graduate students and advanced undergraduates are eligible to apply. Students majoring in economics, history, international studies, law, philosophy political science, psychology, public administration, religious studies, and sociology have attended past conferences.

The conference is June 10-12 in Arlington VA, there are no fees, room and board are paid and some stipends are available.

You can find more information and an application here. Apply now!

I will be doing an AMA on Quora on Thursday. Questions and votes are populating now.

Here are some previous sessions with economists Jon LevinAustan Goolsbee and Susan Athey. Lots of others, including Noam Chomsky,  Bob Metcalfe and Gillian Anderson.

Mark Gibson writing in the Washington Post:

Virginia has a personal vehicle safety program overseen by the state police that cannot be shown to enhance public safety. The people who perform inspections are often the same people who fix any identified deficiencies. By contrast, neighboring Maryland requires only that a safety inspection take place upon transfer of ownership. That’s a reasonable consumer protection. The District does not require safety inspections.

A government program that requires the purchase of a good or service in return for a nonexistent public benefit is illiberal and anti-consumer. Two-thirds of states see no need to impose the burden of annual personal vehicle safety inspections on their citizens; Virginia should end its inspection requirement.

Tyler and I have been writing Marginal Revolution for 13 years now and one of the disadvantages is that you learn how little has changed. I first wrote about this absurd government program in 2003:

Virginia requires yearly “safety” inspections of automobiles. Yesterday, it was my turn – it cost me $15 bucks and an hour of my time. What a pain. Merrell, Poitras and Sutter estimate that nationally inspection programs cost in excess of a billion dollars a year (I think this is a serious underestimate – see below). What do we get for our time and effort? Not much. MPS find that mandatory inspections do not reduce highway fatalities or injuries. Not surprising really since there are already good incentives to maintain one’s car and accidents are most often caused by factors, primarily driver behaviour, that are not inspected. (By the way, yes there is an externality but if self-interest alone causes you to replace a broken headlight then on the margin the externality is irrelevant – economists often forget this point.)

MPS arrive at the billion plus figure by summing inspection fees and travel time. But the major cost of the inspection system, in my opinion, is unnecessary repairs. Mechanics have an incentive to indicate a car needs repairs and it is difficult to know when they are speaking the truth. This problem is bad enough when you have brought your car to the mechanic voluntarily – at least then you know the car has a problem. But the potential for opportunistic behaviour is worse when you are required to take your car in for inspection and if you don’t follow the mechanic’s advice you fail. The mechanics know they have you over a barrel and act accordingly.

About the only thing that has changed is that now I spell behavior differently.

In Belgium high unemployment and crime-ridden Muslim ghettos have fomented radicalism but as Jeff Jacoby writes:

Muslims in the United States…have had no problem acclimating to mainstream norms. In a detailed 2011 survey, the Pew Research Center found that Muslim Americans are “highly assimilated into American society and . . . largely content with their lives.” More than 80 percent of US Muslims expressed satisfaction with life in America, and 63 percent said they felt no conflict “between being a devout Muslim and living in a modern society.” The rates at which they participate in various everyday American activities — from following local sports teams to watching entertainment TV — are similar to those of the American public generally. Half of all Muslim immigrants display the US flag at home, in the office, or on their car.

Jacoby, however, doesn’t explain why these differences exist. One reason is the greater flexibility of American labor markets compared to those in Europe.

Institutions that make it more difficult to hire and fire workers or adjust wages can increase unemployment and reduce employment, especially among immigrant youth. Firms will be less willing to hire if it is very costly to fire. As Tyler and I put it in Modern Principles, How many people will want to go on a date if every date requires a marriage? The hiring hurdle is especially burdensome for immigrants given the additional real or perceived uncertainty from hiring immigrants. One of the few ways that immigrants can compete in these situations is by offering to work for lower wages. But if that route is blocked by minimum wages or requirements that every worker receive significant non-wage benefits then unemployment and non-employment among immigrants will be high generating disaffection, especially among the young.

Huber, for example, (see also Angrist and Kuglerfinds:

Countries with more centralized wage bargaining, stricter product market regulation and countries with a higher union density, have worse labour market outcomes for their immigrants relative to natives even after controlling for compositional effects.

The problem of labor market rigidity is especially acute in Belgium where the differences between native and immigrant unemployment, employment and wages are among the highest in the OECD. Language difficulties and skills are one reason but labor market rigidity is another, as this OECD report makes clear:

Belgian labour market settings are generally unfavourable to the employment outcomes of low-skilled workers. Reduced employment rates stem from high labour costs, which deter demand for low-productivity workers…Furthermore, labour market segmentation and rigidity weigh on the wages and progression prospects of outsiders. With immigrants over-represented among low-wage, vulnerable workers, labour market settings likely hurt the foreign-born disproportionately.

…Minimum wages can create a barrier to employment of low-skilled immigrants, especially for youth. As a proportion of the median wage, the Belgian statutory minimum wage is on the high side in international comparison and sectoral agreements generally provide for even higher minima. This helps to prevent in-work poverty…but risks pricing low-skilled workers out of the labour market (Neumark and Wascher, 2006). Groups with further real or perceived productivity handicaps, such as youth or immigrants, will be among the most affected.

In 2012, the overall unemployment rate in Belgium was 7.6% (15-64 age group), rising to 19.8% for those in the labour force aged under 25, and, among these, reaching 29.3% and 27.9% for immigrants and their native-born offspring, respectively.

Immigration can benefit both immigrants and natives but achieving those benefits requires the appropriate institutions especially open and flexible labor markets.