Month: May 2013

Do low wages for unskilled workers weaken the case for more immigration?

Here is a point which I think the anti-immigration forces are getting wrong, mostly on the side of economics.  It can be pointed out that low-skilled (native) labor in the United States has not seen strong income gains for some time.  You might then wonder whether it makes sense to bring more unskilled labor into the country.

In my view the evidence (and here) suggests that the negative wage pressures on unskilled labor, to the extent they have international origins at all (as opposed to TGS or automation or political factors), come more from outsourcing and trade than from immigration.  So if you limit low-skilled immigration, outsourcing likely will go up, as it would be harder to find cheap labor in the United States.  The United States will lose the complementary jobs as well, such as the truck driver who brings cafeteria snacks to the call center.  Conversely, if you increase low-skilled immigration, you will also get more investment in the United States and more complementary jobs as well and possibly some increasing returns from clustering and maybe more net tax revenue too.  On top of that the individuals themselves have greater choice as to where to spend their lives and build their careers.

Here’s another way to put it.  Either factor price equalization will go on or not, noting that capital flows are the more active marginal lever here and there is no serious talk of banning capital outflow.  If FPE isn’t going to happen much, no big deal either way.  If FPE is going to happen, you still might want to have it happen with more of those jobs inside your country.

Again, you may wish to counterbalance this against any political costs from having more unskilled labor in your country, as I mentioned earlier.  But from an economic point of view, the case for accepting the immigration — including low-skilled immigration — still seems strong to me.

Some of the longer-run economic news is turning around

Here is my latest New York Times column.  I would stress that the observed good news is not much showing up in real wages, but at least the outlines of a potential positive narrative are falling into place.  For instance:

The nation’s high school graduation rate has risen — to 78 percent in 2010, the Education Department says in its most recent estimate. That’s obviously still not where it should be, but it’s the highest figure since 1974. (For a long time, the rate was under 70 percent. After decades of stagnation, the graduation rate started to turn up in 2000, and the growth has been robust for more than a decade.)

On average, these additional high school graduates — not to mention college degree recipients — will find better jobs and enjoy better health, long-lasting benefits that will be reaped for many decades.

And this:

The growth rate in health care costs has been slowing for the last four years. In some years, in fact, it’s been no higher than the growth rate of the economy as a whole. And much of the change appears driven by efficiencies, rather than by the recent recession. This is documented in a paper by David M. Cutler, an economics professor at Harvard, and Nikhil R. Sahni, a fellow at Harvard Business School; it appeared in the May 2013 issue of Health Affairs.

This cost deceleration isn’t guaranteed to stick, but the danger that sharply rising health care costs, compounding over time, will crash the entire economy is now somewhat reduced.

That’s hardly the Jetsons, but still education and health care have been major productivity drags on the economy in the past (not in terms of the measured number, but in terms of actual performance).  Coming from another direction, we even find that California suddenly has a budget surplus.  One other reason for optimism is this:

While the populations of countries like the United States are aging, the number of innovative young people worldwide has never been higher. Countries like China, India, Brazil and Russia, despite recent slowdowns in growth, still are making progress in improving their educational systems and scientific networks. That increases their ability to supply technological innovations — or scientists and entrepreneurs — to the United States. These gains can be reaped in coming decades.

For the cold water, do note that none of these other countries are currently major innovators in a way which benefits the United States.  Still, perhaps the dependency ratio should be defined in terms of potential ideal creators, rather than bodies and ages per se, and then it is more favorable looking forward.  Finally:

Note, too, that none of these trends can be reduced to breathless or utopian claims about the future of information technology, even though each is intertwined with tech progress in subtle ways. Further breakthroughs in technology, perhaps in the field of quantum computing, could add substantially to these positive trends.

The forthcoming clustering of human capital

A radical change is taking place in the German job market: Today’s immigrants to Germany are better trained and have a higher level of education than native Germans, according to a study carried out by labor market researcher Herbert Brücker on behalf of the Bertelsmann Stiftung, a private think tank based in Gütersloh. Today, 43 percent of newly arriving immigrants between the ages of 15 and 65 have graduated from a university, a technical school or a graduate program, compared to only 26 percent of Germans without an immigration background.

The German public still largely believes that immigrants come primarily from low-skilled segments of the population, according to research done by the Nuremberg-based Institute for Employment Research (IAB).

Here is a bit more.

Oops, and double oops…

Au pair programs are in danger of ending, a possible victim of legislation now moving through Congress…

At issue is a provision of the bill that would bar any labor contractor from charging a fee to foreign workers being brought into the country. Supporters say the measure is aimed at preventing the exploitation of foreign workers.

The roughly 13,000 au pairs who enter the U.S. each year are considered participants in an “exchange visitor program” run by the State Department. The Senate bill would change their status to “workers,” meaning the new bar on charging upfront fees would apply to them.

The story is here.  I predict they will find some semi-legal way around this stipulation, should the bill pass, but still this is a big mistake.  Au pairs should not be considered controversial immigrants.

The second oops is this, from the Detroit Institute of Arts:

Museum officials here said Friday they strongly opposed any forced art sales, after the powerful emergency manager of the city indicated that its prized holdings could be sold to pay off creditors in the event of a bankruptcy filing…legal experts say that in a municipal bankruptcy, it is possible for a city to sell assets, even cultural icons. James Spiotto, a bankruptcy attorney and author on municipal-finance issues based in Chicago, said that “in order to provide essential government services like public safety, roads and education, certain other programs are going to be curtailed or eliminated. So it’s not surprising that the sale of art is on the table.”

Putting that museum into private hands would not have been a bad idea.  You also can take this as an illustration of the more general point, which I am fond of stressing, that once you consider wealth, hardly anywhere is actually bankrupt or insolvent.  Debt problems are most of all problems of politics.

Assorted links

1. “Wanting to be liked.”

2. Trifecta (good photos too).

3. Hobson, underconsumption, globalization, and the great stagnation, by Robert Skidelsky; uneven but interesting.  I’ve been waiting for this tradition to be rediscovered, I suppose Hilferding is next.

4. WSJ reviews the excellent Arnold Kling.

5. I am more pro-immigration than he is, but Ross Douthat is right now writing the best material on immigration reform.  It is odd for me how, in the midst of a major policy discussion of the issue, most of the people I read cover the topic but do not mention or much discuss five nights of riots in Sweden.  The economics of additional immigration work out fine in my view, and I am happy to count the well-being of foreigners without hesitation.  The real question is how much immigration a nation’s politics can handle.  Fortunately we are not at the “five nights of riots” margin in the United States, but Ross still raises the key question, namely “the kind of social solidarity that mass immigration often tends to undercut…” and the role of that solidarity in supporting a free society.  The key question is how many low-skilled immigrants a nation can take in and still keep a good politics.

6. Location-aware radio.

Prisoner unemployment is rising in California

Prison labor, once best known for making license plates, has grown to 57 factories doing such work as modular building construction, toner cartridge recycling, shoemaking and juice packaging, according to its latest annual report. Convicts supply closed-captioning for television and transcribe movies into Braille…

Yet even with workers paid 35 to 95 cents an hour, business is off. Sales are exclusively to state and local governments, almost all under budget pressure. The biggest customer, the Corrections Department, has 43,000 fewer inmates since 2006, many shifted to county jails to ease crowding. Revenue slipped 18 percent to $173 million in the fiscal year that ended in June, from almost $210 million five years earlier.

“We are statutorily required to be self-sufficient,” said Eric Reslock, a spokesman for the California Prison Industry Authority. Some work programs have been scaled back and all are being reviewed, he said.

That is from James Nash of Bloomberg.  Here is one specific report for Bakersfield.

You can see that the initial shock to this system is largely demand-side.  Yet there is still a relevant supply-side reason why many of these laid-off workers remain unemployed.

Painted into a corner?

According to the BoJ [Bank of Japan], a 100 basis-point increase in interest rates across all maturities would lead to mark-to-market losses equivalent to a fifth of tier one capital for regional banks, and 10 per cent for the major banks.

At the same time, rising interest rates could undermine the government’s attempts to improve its own finances, precipitating a fiscal crisis.

Here is further FT coverage.  The general point is that very often we — correctly or not — are more willing to live with the distributional consequences of lower inflation than of higher inflation.  (This topic should be the subject of dozens of public choice papers, although I don’t from my vantage point see the flow.)  The Japanese effort at “Abenomics” may already be faltering, but for political rather than economic reasons.  And the elderly defenders of gerontocratic deflation haven’t even spoken up yet, if only because Japanese prices have not yet started to rise.  Keep in mind that Japan has had a lot of political stagnation too, and that is not an accident which can easily disappear overnight.

Can we imagine a world in which “expansionary” open market operations are in fact contractionary?

John Cochrane discusses Andy Kessler:

The usual thinking is that bank reserves are “special.” They are connected to GDP in a way that Treasuries are not.  In the conventional monetary view, MV = PY.  Bank reserves, through a multiplier, control M. The bank or credit channel view says that bank reserves control lending and lending affects PY. The red M&Ms, though superficially identical, have more calories.

In Andy’s view (my interpretation), that is turned around now. Now, Treasuries supply more “liquidity” needs than bank reserves, and (more importantly) the supply of treasuries is more connected to nominal GDP than is the supply of bank reserves.

Part of this inversion of roles is supply. In place of the usual $50 billion, we have $3 trillion or so bank reserves. Bank reserves can only be used by banks, so they don’t do much good for the rest of us. Now, they just sit as bank assets in place of mortgages or treasuries and don’t make a difference to anything. More treasuries, according to Andy, we can do something with.

More deeply, constraints only go one way. Normally, the banking system is up against a constraint. Reserves pay less interest than other assets, so banks use as little as possible. Now, they are awash in liquidity. You can’t push on a string, as the saying goes. Much “constraint” economics forgets that once the constraint is off, the relationship doesn’t hold any more.

Andy describes the repo market and the sense in which Treasuries are “special” in providing low-haircut collateral. Lots of academic research is now viewing Treasuries as special or liquidity-providing in the shadow banking system.

The Kessler piece is here.

The Battle over Junk DNA

Last year the ENCODE Consortium, a big-data project involving 440 scientists from 32 laboratories around the world, announced with great fanfare that 80% of the human genome was functional or as the NYTimes put it less accurately but more memorably “at least 80 percent of this DNA is active and needed.” What the NYTimes didn’t say was that this claim was highly controversial to the point of implausibility. A fascinating, sharply-worded critique, On the immortality of television sets: “function” in the human genome according to the evolution-free gospel of ENCODE has recently been published by Graur et al. Here is some of the flavor:

This absurd conclusion was reached through various means, chiefly (1)
by employing the seldom used “causal role” definition of biological function and
then applying it inconsistently to different biochemical properties, (2) by committing
a logical fallacy known as “affirming the consequent,” (3) by failing to appreciate
the crucial difference between “junk DNA” and “garbage DNA,” (4) by using
analytical methods that yield biased errors and inflate estimates of functionality, (5)
by favoring statistical sensitivity over specificity, and (6) by emphasizing statistical
significance rather than the magnitude of the effect. Here, we detail the many logical
and methodological transgressions involved in assigning functionality to almost
every nucleotide in the human genome. The ENCODE results were predicted by one
of its authors to necessitate the rewriting of textbooks. We agree, many textbooks
dealing with marketing, mass-media hype, and public relations may well have to be

Graur et al. make a number of key points. ENCODE essentially defined “functional” as sometimes involved in a specified set of biochemical reactions (I am simplifying!). But every microbiological system is stochastic and sooner or later everything is involved in some kind of biochemical reaction even if that reaction goes nowhere and does nothing. In contrast, Graur et al. argue that “biological sense can only be derived from evolutionary context” which in this case means that functional is defined as actively protected by selection.

There are a variety of ways of identifying whether a sequence is actively protected by selection. One method, for example, looks for sequences that are highly similar (conserved) across species. Once evolution has hit on the recipe for hemoglobin, for example, it doesn’t want that recipe messed with–thus the chimp and human DNA that blueprints hemoglobin is very similar and not that different from that of dogs. In other areas of the genome, however, even closely related species have different sequences which suggests that that portion of the DNA isn’t being selected for, it’s randomly mutating because there is no value to its conservation. When functional is defined using selection, most human DNA does not look functional.

It’s also interesting to note that the size of the genome varies significantly across species but in ways that appear to have little to do with complexity. The human genome, for example, is about 3GB, quite a  bit more than the fruit fly at 170MB, But the onion is 17GB! (One of the reasons that onions are used in a lot of science labs, by the way, is that the onion genome is so big it makes onion nuclei large enough so that you can easily see them with low-powered microscopes.) Now one could argue that this lack of correlation between genome size and complexity is simply a result of an anthropocentric definition of complexity. Maybe an onion really is complex. Two points counter this view, however. First, similar species can have very different genome sizes. Second, we know why the genome of some species is really large. It’s filled with transposons, so-called jumping genes, sometimes analogized to viruses, that cut and paste themselves into the genome. Some of these transposons, like Alu in humans, are short sequences that repeat themselves millions of times. It’s very difficult to believe that these boring repetitions are functional (n.b. this is not to say that they don’t have an effect.) The fact that it’s this kind of repetitious, not-conserved DNA that accounts for a large fraction of the differences in genome size is highly suggestive of non-functionality.

Why discuss such an esoteric (for economists) paper on a (nominally!) economics blog? The Graur et al. paper is highly readable, even for non-experts. It’s even funny, although I laughed somewhat sheepishly since some of the comments are unnecessarily harsh. Many of the critiques, such as the confusion between statistical and substantive significance, arise in economics and many other fields. The Graur paper also makes some points which are going to be important in economics. For example they write:

“High-throughput genomics and the centralization of science funding have enabled Big Science to generate “high-impact false positives” by the truckload…”

Exactly right. Big data is coming to economics but data is not knowledge and big data is not wisdom.

Finally, the Graur paper tells us something about disputes in economics. Economists are sometimes chided for disagreeing about the importance of such basic questions as the relative role of aggregate demand and aggregate supply but physicists can’t even find most of the universe and microbiologists don’t agree on whether the human genome is 80% functional or 80% junk. Is disagreement a result of knaves and fools? Sometimes, but more often disagreement is just the way the invisible hand of science works.

Hat tip: Monique van Hoek.

Questions that are rarely asked

In my email, from Eric Crampton:

Imagine the following deal, which is entirely not on any PPF so it’s not really a deal anyway. But imagine it. Genie offers a button. Push the button, and it burns the last n years of every journal in economics, along with all knowledge that those results ever existed, though they can be rediscovered. At the same time, every potential voter is brought up to a thorough Econ 101 level of understanding of Economics. At what value of n is the deal no longer worthwhile? A decade? Two?

Here is a related blog post by Eric.  And here is Eric in praise of New Zealand health care institutions.

From the comments

Hazel Meade wrote:

The banning of catastrophic-only plans infuriates me the most. Those are the only plans that are actually financially sensible for a healthy individual to purchase. Everything else on the market is a perverse by-product of the employer-based insurance system.

Worst case scenario with a catastrophic-only plan is you end up with $10,000 in debt. That’s a debt load many times smaller than what the Federal government thinks students should take out to get a college degree. We’ll let you borrow $100,000 to get a sociology degree but, we think that $10,000 is an unconscionable amount to pay for medical expenses? So unconscionable that we have to FORCE YOU to buy a plan with more extensive coverage?

Of course, we all know the real reason for this. it’s meant to force healthy young people to subsidize healthcare for older sicker people. Just force them to pay more for insurance than they ought to, and force them to buy more extensive coverage than is rational.