Category: Economics

Immigration can help offset some of the side-effects of an ageing population in Europe but would be nowhere near sufficient to salvage struggling pension schemes, the United Nations said on Monday.

The UN’s 2004 world economic and social survey said even with immigration projected to average 600,000 a year between 2000 and 2050, Europe’s population was expected to decline by 96m in that period.

“Incoming migration would have to expand at virtually impossible rates to offset declining support ratios, that is, workers per retirees,” the UN report said.

It estimates that France would have to bring in nearly 90m migrants to 2050 to maintain 1995 support ratios, compared with the nearly 4m projected. Germany would have to accept more than 181m immigrants, against 10.5m projected between 2000 and 2050.

Europe does not need to replicate previous support ratios, but still the prognosis is grim.  By the way, don’t take this as an argument against immigration, there is no way to solve the problem without it.  But many different things will have to go well to avoid a major European fiscal crisis.

And this fact will surprise many:

The study revealed that Latin American immigration to the US roughly doubled over the 1990s, while the total number of Latin American migrants remained stable, as the end of military conflicts in Central America allowed many migrants to return home…

Here is the full story. Here is the original UN report.

An Australian phone company is offering customers the chance to blacklist numbers before heading out for a night on the town so they can reduce the risk of making any embarrassing, incoherent late-night calls.

A survey of 409 people by Virgin Mobile, a joint venture of The Virgin Group and Optus, found 95 percent made drunk calls [TC: surely the percentage is lower in good ol’ New Zealand…].

Of those calls, 30 percent were to ex-partners, 19 percent to current partners, and 36 percent to other people, including their bosses.

The company also found that 55 percent of those polled would grab for their phone first the next morning to check who they had drunkenly dialled, compared with just eight percent who went for the headache pills first.

Here is the link, and thanks to Courtney Knapp for the pointer.

All [social security] benefits are based on something called the primary insurance amount.  This amount, in turn, is based on a worker’s earnings, indexed to the growth in average real wages, for the highest 35 years of earnings…So every retiring worker gets to take advantage of overall economic prouductivity, pushing up the level of wages during the time in which the work was performed.  This adjustment allows the purchasing power of benefits to grow over time…the purchasing power of benefits paid to today’s teenager are scheduled to be 60% higher than benefits paid to a typical worker who retired in 2001.

…If benefits were indexed to prices, however, Social Security would, at this very minute, be in balance over the long-term – the system would be permanently solvent.  Not only would future revenues equal future costs, but there would be a surplus…

Did you get that right?  Just stop boosting benefits.

That is by Susan Lee, from The Wall Street Journal Op-Ed page, November 23.

I want to comment on a common error in the discussion of my post Nature, Nuture, and Income.  (See for example the comments at Jane Galt, Kevin Drum and also the trackbacks).

Despite my warning, many people thought that graph was saying something important about the average income of adoptees versus that of biological children.  Hence many people argued that "the results" were explained by discrimination against Korean Americans, poor nutrition of the adoptees before being adopted, or low IQ of children given up for adoption.

For the record, Asian Americans in general and the children in this sample have higher income and more education than the average American.  More fundamentally, however, these comments have misunderstood what is to be explained.  It is true that the average income of the adoptees was lower than that of biological children but the adoptees are also younger.  Once you control for this and a few similar factors the mean income difference goes away (think of shifting the adoptee line up).  What remains, and this is the key point, is that the biological line is upward sloping and the adoptee line is flat.

What my post and the paper are all about is the difference in the slope of the two lines, i.e. why is it that child income increases with parental income for biological children but not for adopted children.

Addendum: Suppose we control for age and other factors which in effect will raise the adoptee line then we could phrase the results as ‘adoptees do better than biological children raised in poor households but worse than biological children raised in rich households.’  The explanation is simple from the genetic point of view – adoptees are drawn more or less randomly while high income parents tend to pass on high-income genes and low income parents tend to pass on low-income genes.  It’s going to be very difficult, however, to explain why poor parents treat their adopted children better than their biological children but rich parents treat their adopted children worse.

Who wants to talk about economic armageddon?  Not me, I want to know,

What if the alpaca bubble bursts, as did the emu, ostrich and llama bubbles?

That’s from a front-page (!) article on alpacas in the New York Times.  But seriously, alpacas do make for an amusing illustration of bubble economics.

Alpaca fleece is very nice but five pounds, a year’s worth of production from one alpaca, is worth only $200 while alpacas sell for about $20,000.  The price of alpacas is supported not by their earnings but by the prospect of capital gain, specifically the hope that more people, "attracted by the lifestyle," will enter the alpaca business driving up demand.  A Ponzi scheme with a cute face.

The Ponzi scheme has some prospect of continuing a little while longer because export and import controls make it difficult to bring new alpacas into the country.  Furthermore, a breeding registry uses DNA analysis to prevent competition from "riff-raff."  Breeders like to think that the registery is about improving quality.  More likely it’s about holding down supply and creating a bubble focal point.

Why does the price of a highly valued art work by a famous artist plummet when it is revealed to be a forgery?  Can the aesthetic value drop by nearly as much as the price? I doubt it, despite what my art-loving co-blogger may argue.  The price drops because the artist’s name is a focal point for buyers – the buyers aren’t buying because of the aesthetic pleasure of the object so they can’t buy on taste alone.  Instead they must buy what they think others will buy.  Who knows how the intial craze begins?  But once it does the artist’s name is a focal point that brings on the inflating returns.  The alpaca registry does the same thing for alpaca buyers – it coordinates the buyers on the bubble object even if alpaca fleece from non-registered alpacas is just as soft.

My guess is that the alpaca bubble will burst quite soon.  Why?  Because when the rubes in the street know what an alpaca is, someone is about to be fleeced.    

The eminent Stephen Roach says yes.  The nub of the argument is that foreigners will abandon the dollar, thereby ceasing to fund our dual deficits.  This will force interest rates to skyrocket and lead to a rash of U.S. bankruptcies.  Brad DeLong is less alarmist, but wonders why long bonds are not plummeting in price.

Before you sign up for space tourism, keep the following in mind:

1. Doomsayers usually compare one financial flow to another; today they are focusing on trade deficits, budget deficits, and U.S. savings rates.  It is easy to make measured flows appear unsustainable, because indeed they probably are.  However it is less common for a flow-based problem to be compared to the total stock of wealth.  One very rough estimate pegs the U.S. as worth well over $100 trillion net.  And don’t forget the recent increase in the future expected value of China and India.  Problems with flows are real, but they won’t, in general, bring us to our knees.

2. The late 1970s were a terrible time by many measures.  The prime rate approached 20 percent, gold was above $800 an ounce, inflation and unemployment were high at the same time, and the U.S. was seen as having lost world leadership.  By 1983 — a mere few years later — matters were running well once again.  If a collapse did come today, we might expect a comparably quick recovery.

3. The doomsayers are not obviously richer than the rest of us.  Many of them (they know who they are!) do not invest on the basis of their gloomy prognoses.  And no, buying a house is not enough, I want to see at least five percent of your net worth in puts on T-Bond futures.

4. Richard Cooper offers the best case for sustainability of the status quo.

The most likely outcome: We will limp along with a government that refuses to accept fiscal responsibility.  A ruling political party will not raise taxes and/or cut spending until the last possible moment.  It will always look toward the problem falling in someone else’s lap.  In the meantime, the wealth of the world, and the benefits of investing in the U.S., will bail us out.  (Didn’t Winston Churchill once say "The Americans always do the right thing, once they have exhausted all other options", or something to that effect?) 

A few decades from now the crunch will come, as growing Medicare and Social Security liabilities are matched against low levels of accumulated savings.  We will have Western European levels of taxation and growth for a good twenty years or more, unless we get lucky with productivity growth in the meantime.  The costs will be very real, but economic Armageddon does not appear to lie around the corner.

…none of the increase in U.S. GDP in the short term will come at the expense of China, Malaysia, or Taiwan.  Rather, the bulk of the adjustment to the lower value of the dollar will be borne by the euro area, Canada, Mexico, and Japan.

Read the whole thing, if you wish to feel better (for the U.S.) about the falling dollar.

Overall, the more scare stories you read about a falling dollar, the less you should worry.  The Major Media aren’t exactly ahead of the curve on an issue like this.  Their scare-mongering means that the real dangers have already been capitalized and digested.  It is when you read blog posts like this one that you should fear the worst…

Addendum: Here is a new blog about the global economy, with much on the falling dollar, thanks to Dan Drezner for the pointer.  Dan, by the way, is the place to go for analysis and updates on the Ukraine.

"Anybody who thinks borrowing money for the transition to personal accounts is going to solve the problem of the long-term solvency of Social Security doesn’t understand the size of the problem," said Senator Charles E. Grassley, Republican of Iowa, the chairman of the Senate Finance Committee, which has jurisdiction over the retirement system.

Here is the full story, NYT password required but invaluable reading, or try the archive link.

Addendum: Read Brad DeLong for more.

I vow to stop calling these programs "privatizations."

The Argentine government must continue to provide benefits to workers who have retired under the old pay-as-you-go system. Meanwhile, payroll taxes are being diverted to personal retirement accounts. The government must also find some way to recognize contributions to the old system made by workers now participating in the new system. Argentina has chosen to recognize those contributions with the compensatory pension. Some analysts estimate that it will take 75 years or more to pay off the transitional obligations.

Might this soon be coming to an American screen near you?  Here is the whole Argentine story.  Here are other international examples.  Here is an essay on how social security transition problems worsened Argentina’s fiscal crisis.  Here is a summary of the lessons from international experience.  No one — even among countries with weaker "welfare state" traditions — has done away with an underlying safety net, behind the private accounts.  No one has avoided real and significant fiscal costs, no matter how the transition plan was structured.

Ah, but will the U.S. do it better?  Unlikely.

Chile, of course, had a dictatorship and instituted some radical market-oriented reforms.  How did their scheme proceed?

In Chile, that [revenue] shortfall was partly financed by fiscal tightening through a reformed tax system, including a new consumption tax, prereform cuts in spending, and the sale of some government enterprises. 

The U.S. "privatization" plans, whatever their merits or demerits in absolute terms, have no chance of going well without comparable domestic reforms up front. 

Although the nominal price has increased by almost $7, the inflation-adjusted price is over $14 cheaper (in 2004 $) than it was in 1986.

Here are the data.

"There are a few other factors that might contribute to NZ not being as successful as we should be:

1. Monetary policy. We do have low inflation but the Reserve Bank’s official cash rate is 6.5%, not exactly Greenspanesque. Borrowing money is expensive.

2. Labour markets are only free in the sense that union membership is not compulsory. Instead, pay and conditions are extremely heavily regulated and our Employment Court is weighted heavily against employers. Employers may appear to be acting voluntarily, but actually they are being coerced in all kinds of subtle ways. Our minimum wage is $9 per hour and this also makes entire areas of economic activity unviable.

3.  Welfare benefits are much too generous and little or not effort is made to ensure that the unemployed attempt to find work. Refusing to take a job that is offered is rarely penalized. Every year fruit growers watch some of their product die because they can’t get enough pickers, even though there are people just down the road collecting welfare benefits.

4. There is a serious underinvestment in infrastructure, since the consent procedures allow green and Maori groups to bring about enormous costs and delays in gaining approval. We have had power shortages on several occasions, while at the same time no new dams have been approved and burning coal (or even digging up our massive
stockpiles of it) is out of the question. We even had an extension to a state highway held up because a taniwha (a mythical river-dwelling creature) was angered and had to be appeased (i.e. paid) before contruction could continue.

5. Some of the privatization efforts have since been rolled back. In the last 5 years, the Labour government has nationalized our airline, the railways and accident compensation insurance and established a massive state superannuation fund. They are well on the way to nationalizing kindergartens and have just started on primary healthcare. Where they don’t own businesses they still regulate heavily, e.g. telecommunications.

6. Taxes are not as low as it might appear. The top rate of personal tax is 39% but there is also a 12.5% universal sales tax, property taxes and many others. Recent figures show that over the last four years, average household income has increased by $7700 while average household taxation has increased by $5200. Once you take into account price increases, our purchasing power has dropped. Since education and hospitals are fully state-funded with no voucher scheme, if you want private provision of those you have to pay twice.

7. There is a widespread and irrational dislike of foreign investment. We have always been a country that had land, labour and far too little capital. That is unlikely to change because the public, fuelled by politicians and the media, go on the attack any time an overseas business or individual tries to invest here. At the moment Shania Twain is trying to spend $14 million to buy a farm in a remote area of the South Island. You wouldn’t believe the outrage: it’s front page news and questions have been asked in Parliament.

You might wish to start reading Rodney Hide’ s blog here: http://rodneyhide.com/Diary/  Rodney is the leader of ACT, which is New Zealand’s (maybe the world’s) only classic liberal political party. He was an economics professor before being elected to Parliament."

Henry Hazlitt’s Economics in One Lesson was the second economics book I ever read; The Incredible Bread Machine was number one.  The Freeman has just published a tribute to Hazlitt, included is a short biography.

Thanks to http://www.politicaltheory.info/ for the pointer.