Category: Economics

Here is my Washington Post Op-Ed on Latino assimilation, with Daniel M. Rothschild.  Free registration may be required.  Excerpt:

The children of Latino immigrants do especially well at work. James
P. Smith of Rand Corp. has shown that the children and grandchildren of
Latino immigrants come very close to closing educational and income
gaps with native whites. This is the same as it has always been in
American immigration: Newcomers know what keeps them outside the
mainstream and work hard to make sure that their children do better.
Immigrant Latino men make about half of what native whites do; their
grandsons earn about 78 percent of the salaries of their native white
friends.

Studies such as Smith’s, because they track trends over
time, are better at discovering patterns of assimilation than studies
that compare immigrants in 2006 to natives. The latter present a
snapshot; they can’t demonstrate long-term trends.

It’s true that
recent immigrants have not been closing the wage gap as fast as earlier
immigrants. But David Card of the University of California at Berkeley,
John DiNardo of the University of Michigan and Eugena Estes of
Princeton attribute this to an increase in inequality nationwide.
Controlling for this, Latino immigrants are doing as well as immigrants
a century ago.

I’m looking for a good example or two of "Markets in Sloth," or markets in extremely slothful behavior.  For instance say there was an extremely lazy rich man who hired a servant to perform basic tasks such as flushing the toilet for him, etc.  Examples and a link, or other documentation, would be most welcome.  Of course comments are open, or email me.  I thank you all in advance…

It starts off like this:

Economic growth is terribly important. Small differences in growth
rates eventually overwhelm most other considerations, so the clustering
and innovation externalities that create growth differences deserve far
more public attention. Unfortunately most people yawn at growth theory;
they prefer stories about conflict, status, moral fiber, heroes, and
epic changes.

Thank goodness Richard Florida has written a national bestseller on
economic growth, calling attention to the crucial externalities. But
curses, Florida has done this by telling people the kind of stories
they want to hear. Florida tells us that one side in today’s culture
wars is very right, while the other side is very wrong; our wealth, as
well as our morality, is at stake in the culture wars.

While
growth might once have come from boring stuff like raw materials,
trade, giant factories, distribution networks, and organizational
conformity, Florida says, an epic revolution over the last half century
has put growth in the hands of bohemians with diverse and unusual
dress, speech, hygiene, work hours, and sexual practices.

Dog and I are profiled in Hawaii Business Magazine.  Well actually he’s the one on the cover, Helland and I get a mention in the text.  Clearly to get on the cover, I need to grow longer hair and get some tattoos.

The first issue is to pin down what we mean by open borders.

Land use restrictions are often a more important ""immigration
policy" than border control per se.  It is not just how many people get
in at what cost, but who can afford to live here.  This includes zoning laws,
restrictions on the number of people allowed to live in an apartment,
policies toward "squatters," and rules for the homesteading of public
property.  So by "open borders" I mean also liberal land use policies;
nominally open borders would matter far less if unskilled laborers
couldn’t also afford to live in the U.S.  (Note to anti-immigration
types: you are focusing too much on the ease of crossing the border
and not enough on the costs of living here.  How much the best
immigration restrictions involve land use policy or border policy is a
curiously underexplored question.)

If both the border and land use were free, markets would be very
powerful in organizing mass migration.  Consider Hyderabad.  Many of
the very poor live either at or right next to garbage dumps.  They live
in tents or ramshackle lean-tos.  Their jobs often involve scavenging
the garbage dump for potentially useful scraps.  Why do they live
there?  Do they like the short commute?  Is it because they love the
Indian culture one finds right next to the garbage dump?  No, no, and
no.  They live there because they will put up with almost anything to
have a chance of survival.

How many of these people would book passage on a slow ship to
Baltimore, with the hope of living in a richer garbage dump?  The ship
would serve cheap rice and lentils, make them sew garments while sailing, and collect further payment five years after
arrival, tagging them with GPS if need be or "monitoring" relatives
back home.  Or perhaps the Indian government would pay their way.

How about the nine or so million Haitians — almost all living in
extreme poverty — who face a much shorter and cheaper boat trip?

I can imagine the U.S. staying a high-quality capitalist democracy
with some percentage of the population living in garbage dumps and
shantytowns.  While I think we are underinvesting in shantytowns, the permissible percentage is not very high and almost certainly falls short of fifteen percent.  (Btw,
there is much complaining about the Mexicans, but in fact we share a
long land border with a relatively wealthy third world country; this is
rarely appreciated.)

That is why I do not favor unlimited immigration.  To the extent
that nominally "open borders" would be tolerable, it is because we already impose
implicit immigration restrictions through land use policies.

That all said, I will reiterate my view that we could take in many
more immigrants than we are doing now, both skilled and unskilled.

By "new," restrict yourselves to 1990 and afterwards.  I see mid-1980s as the end of a great era in economic theorizing.  Take game theory, principal-agent theory, and the economics of information, and apply them to everything, for better or worse.  This was an exciting, indeed intoxicating, time to learn economics.  While applications continue, we have run out of new ideas on those fronts.  Experimental economics is completely Nobel-worthy, but it is now over forty years old.  What are the next breakthroughs or the breakthroughs which have just been made?  Comments are open…

This is from The Berkeley Electronic Press, here is the link, along with the papers.  Edmund Phelps directs a very prestigious Board.  Here is the description:

We publish scholarly work on topics central to the mission of the Center on Capitalism and Society
whose length, subject matter, approach, etc. would normally preclude
publication in a standard journal. We want to stimulate and provide a
forum for discourse for ideas that may not be proven beyond a
reasonable doubt. Accordingly we will publish papers along with the
commentary of a reviewer, leaving room for “agreement to disagree.”

Here is further description; it should please the Austrians.  Thanks to David Boaz for the pointer.

I should have known you were going to ask.

I will bet on up.  Remember when Western Europe moved to the Euro?  A disproportionate share of retail prices went up, leading to the designation "the Teuro."  ("Teuer" means "expensive" in German.)  It seems that retailers had wanted to increase their prices in the first place, but were afraid of irritating their loyal customers.  The regearing of the monetary unit gave an "excuse" for price increases plus not everyone noticed the higher prices in the new monetary unit.  I predict similar results, albeit smaller ones in absolute terms, from abolishing the penny.

How bad an outcome would this be?  Ironically it was Greg Mankiw who wrote of excessively high prices, by a small degree, leading to large welfare costs for the economy as a whole.   But this model may not apply to abolition of the penny.

Under one scenario, prices go up but they would have gone up sooner or later anyway.  Within a year or two, inflation has caught up with the price increase.  In the long run the whole thing is more or less a wash, although we do suffer from higher prices and higher deadweight loss for just a little while.

Under a second scenario, prices go up and remain at a permanently higher plateau.  Future price decisions are taken from this new reference point.  For this model to work, we must assume that price is a signal of quality and that the frame of reference for interpreting the meaning of a price is based upon an observed status quo.  So the price boost comes, everyone assumes that is just how much food (or whatever) is now worth, and that is our new marker for judging future price movements.  Keep in mind that these assumptions cannot be true globally (there cannot be Walrasian slack at every margin), but only have to be true across relatively small price increases (N.B.: many tricks lie in here, since the price increases will be large in percentage terms for some goods).

I would bet my money on the first scenario, as I assume Greg Mankiw would as well.  If you believe in the second, you probably shouldn’t want to abolish the penny.

You can modify these scenarios in many ways, including through the explicit recognition of option value.  Do you know of any empirical tests on which model of prices is the better guess?

Barry Chiswick, head of the economics department at the University of Illinois at Chicago and a respected scholar of immigration, had a surprisingly poorly argued op-ed in the NYTimes.  Here’s the opening paragaraph:

It is often said that the American economy needs low-skilled foreign
workers to do the jobs that American workers will not do. These foreign
workers might be new immigrants, illegal aliens or, in the current
debate, temporary or guest workers. But if low-skilled foreign workers
were not here, would lettuce not be picked, groceries not bagged, hotel
sheets not changed, and lawns not mowed? Would restaurants use
disposable plates and utensils?

On the face of it, this assertion seems implausible.

… If the number of low-skilled foreign workers were to fall, wages would increase.  Low-skilled American workers and their families would benefit…

Bizarrely, the rest of his op-ed explains why these statements are mostly wrong!  First, the lettuce:

A farmer who grows winter iceberg lettuce in Yuma County, Ariz., was
asked on the ABC program "Nightline" in April what he would do if it
were more difficult to find the low-skilled hand harvesters who work on
his farm, many of whom are undocumented workers. He replied that he
would mechanize the harvest. Such technology exists, but it is not used
because of the abundance of low-wage laborers. In their absence,
mechanical harvesters – and the higher skilled (and higher wage)
workers to operate them – would replace low-skilled, low-wage workers.

In other words, if the number of low skilled workers were to fall the lettuce would no  longer be (hand) picked and low-skilled American workers would not benefit from an increase in wages!

What about lawn mowing and hotel cleaning?

Facing higher costs, some homeowners would switch to grass species
that grow more slowly, to alternative ground cover or to flagstones.
Others would simply mow every other week, or every 10 days, instead of
weekly…

Few of us change our sheets and towels
at home every day. Hotels and motels could reduce the frequency of
changing sheets and towels from every day to, say, every third day for
continuing guests, perhaps offering a price discount to guests who
accept this arrangement.

And how about this for a pathetic attempt to get the environmentalists on board the anti-immigration bandwagon?

Less frequent lawn mowing and washing of hotel sheets and towels would reduce air, noise and water pollution in the bargain.

Note how reduction in services, denied in paragraph one, has now become a virtue!

Chiswick also points out that:

With the higher cost of low-skilled labor, we would import more of some
goods, in particular table-quality fruits and vegetables for home
consumption (as distinct from industrial use) and lower-priced
off-the-rack clothing.

That is correct, but this is another reason why restricting the immigration of low-skilled workers will not much increase the wages of low-skilled Americans.

Chiswick makes statements in his op-ed like the "increase in low-skilled workers has contributed to the stagnation of wages for all such workers."  But unlike my Open Letter he never tries to quantify these assertions.  Yet he surely knows that an 8% decline is on the high end of such estimates and a zero percent decline on the low-end.

Quantifying, however, would put the immigration and wages issue in perspective which is that immigration is at worst a small contributor to the decline in the wages of low-skilled workers.  Indeed, economists are agreed that technology, not immigration, is by far the more important force which is why any serious attempt to raise the wages of low-skilled workers must begin with efforts to raise skills.

In my TCS article I said:

Immigration makes immigrants much better off. In the normal debate
this fact is not considered to be of great importance — who cares
about them? But economists tend not to count some people as worth more
than others, especially not if the difference is something so random as
where a person was born.

Chiswick, however, lets the economists down.  He never once mentions the benefits of immigration to the immigrants.

Greg Mankiw says yes, and I am inclined to agree.  When I lived in New Zealand, they didn’t have Kiwi pennies and no one minded.  My problem, however, is that I don’t know what to do with sales tax (New Zealand had a General Services Tax [correction: Goods and Services Tax], akin to a VAT).  In essence we would have to abolish sales tax on "small" items.  That idea warms my libertarian heart, but what is then to stop suppliers from selling a car piece by piece, painted inch by painted inch?  (But of course they wouldn’t ring it up that slowly at the cash register.)  Must we eliminate sales taxes altogether?  Or can the law accurately specify what is the "natural unit" of a given commodity purchase?  Inquiring minds wish to know…

Here are some relevant links on penny elimination.  It is an interesting microeconomic (macroeconomic?) problem to figure out which prices get rounded up to the nearest nickel and which prices get rounded down.  A related question is why businesses do not already round to the nearest nickel; of course some do.

Spelling bees:

Will the winner be wearing glasses? Will it be a boy or girl? Will the final word have an "e" in it?

The odds on the former proposition are 4-7, but they won’t let you bet on the individual identities of the little demon tykes. 

In addition, here are some unusual insurance markets.

Addendum: The contest was decided by German words, here are the results.

Some people have long suspected me of being a pod person but now it’s official.  Russ Roberts interviews me for EconTalk on the Economics of Medical Malpractice.