An economist for President?

My two young US citizens have been badgering me about the US election, and when I tell them I’m just glad I don’t have to choose this year, one says “but what if someone had a gun at your head and forced you to choose between Trump and Clinton?”.  Watching Trump’s convention address last week confirmed many of the reasons why I would not support him, and watching Clinton’s address yesterday had much the same effect for her.  Last week’s New Yorker had an interesting profile of the Libertarian Party candidate Gary Johnson, but the more I read about him the less appealing he also seems to be.   I’m still glad I don’t have to choose –  and, what’s more, get to live in a country that has had women as head of state for 128 years of its 176 year modern history.

About the same time I was reading the Johnson profile, I stumbled on “Kotlikoff for President“: prominent economist Laurence Kotlikoff (a professor at Boston University) is running for President, urging voters to give him –  and his running mate, another prominent economist, Ed Leamer (at UCLA) –  a write-in vote in this year’s presidential election.  Kotlikoff is perhaps best known for his push to ensure that governments are fully transparent about the nature of the intergenerational fiscal obligations they take on.

A quick skim through Kotlikoff’s campaign website confirms that there are many issues I disagree with him on – not limited to his banking reforms proposals, contained in his 2010 book. Jimmy Stewart is Dead: Ending the World’s Ongoing Financial Plague with Limited Purpose Banking which he presented, and I had a chance to discuss with him, when he visited New Zealand two or three years ago.  It wasn’t so much that I thought his proposal was wrong, as that I thought he was much too optimistic as to what difference it would make –  my typical reaction to monetary reform proposals.

But what really interested me in working through his economics material was his discussion on immigration and population issues, in particular the bolded passage.

Immigration

Immigration has been a major topic in the Republican Presidential debates. But the discussion has been remarkably disconnected from the facts. Notwithstanding the suggestion that illegal immigrants are overrunning our borders, there are and have been more illegal immigrants leaving our country than entering it. Indeed, over the last decade, roughly 1 million more illegal immigrants have left our country than have entered it. This is tribute, in large part, to our immense, decades-long effort to secure our borders. We still need to work extremely hard on border enforcement to eliminate illegal entry to our country. But we shouldn’t presume nothing has been accomplished.

The real issue with immigration is legal immigration. We are adding 1 million legal immigrants to the population each year. The great majority are unskilled. This isn’t hurting investment bankers or the software engineers at Google. This is hurting low-skilled U.S. workers. It’s the last thing we need if we are trying to restore our middle class.

Population Explosion

Legal immigration is also fueling a veritable population explosion. Unless we reduce legal immigration, our population will rise by one-third – over 100 million people – in just 45 years. That’s the current population of the Philippines. Most of these additional people will locate in the nation’s major cities. Driving in our major cities at peak hours is already a major challenge. With one-third more people, driving in our major cities may be like driving in Manila – an experience I don’t recommend.

Kotlikoff’s academic speciality is public finance, and Leamer specialises in trade and econometrics, but it was unusual to see  any such prominent academic economists speak up on the issue, expressing unease about the US immigration policy.  And recall that legal US immigration –  the bit Kotlikoff and Leamer focus on –  is one third the size, in per capita terms, of New Zealand’s non-citizen immigration programme.  The US grants around one million green cards a year –  every year roughly one new person for every three hundred already there. We aim to grant 45000 to 50000 residence approvals a year –   every year roughly one new person for every hundred already here.  In a single year, that difference might not sound like much.  Over even 20 years, it is enormous: over 20 years the US will have let in one person for every 15 already there, and we’ll have given the right to live here to one person for every five already here.

I’ve been reluctant to focus on the implications of immigration for wages.  My focus has been on the more macro perspectives: the potential impact on real interest rates, the real exchange rate, and tradables sector growth and investment prospects, in a country that has a modest savings rate and is constrained by its remoteness from the rest of the world.  I’ve also been a little uneasy about the wages story in aggregate in the short-term, since I read the evidence as suggesting that in aggregate immigration tends to boost demand more than it does supply in the short-term.  If anything, surprise immigration surges tend to lower the unemployment rate not raise it, at least in the short-term.

But the repeated (fallacious) insistence of business groups that large scale immigration eases skill shortages for the economy as a whole –  a proposition I dealt with here – eventually forced me to realise that at least in those occupational groupings where there is substantial immigration, that immigration simply must be holding down wages for New Zealanders in those sectors below what they would otherwise be.    The effect might be quite small at an economywide level, but if your sector can persuade the central planners in MBIE (and their Minister) to allow relatively easy recruitment of immigrant labour it simply must dampen the wage rate you as employer would otherwise have to pay.   If the available supply of labour diminishes, the typical response will be for the price to rise.

One could readily think of a number of occupational groupings that stood out when I looked last year at either residence approvals’ occupations or those getting Essential Skills work visas (and that is before starting on the sorts of role the people on working holiday visas tend to cluster in), such as

  • chefs
  • retail managers
  • dairy workers
  • aged care worker or nurse
  • restaurant or café managers
  • cook
  • truck driver

For each of these occupations, the alternative to a ready availability of immigrant labour must have involved, at least in part, higher wages.  Each firm would tend to pay higher wages to attract good people from other employers, and the industry as a whole will end up paying higher wages which will, over time, attract more locals into the industry.  Sympathetic as I am to aged care workers, it has always seemed that the heavy reliance –  as a deliberate matter of policy – on immigrant labour probably explains rather more about the pay differentials they complain about in pay-equity suits, rather than any sort of structural gender-based discrimination.

I understand why government politicians will want to deny these sorts of adverse wages effects. It is more puzzling why Opposition ones do  – especially Opposition parties with their roots in the trade union movement.  And even more so why most economists are at pains to try to deny any adverse effects on anyone.    Unless there are big productivity spillovers from the sheer presence of super-talented foreigners –  and in the New Zealand, most immigrants just aren’t super-talented (any more than most locals are), and no one has been able to find evidence of such spillover benefits at all – if there are any medium-term economic benefits from immigration at all they result from dampening the price of labour relative to the price of capital.  If labour is cheaper more projects are viable than would otherwise be the case.

In case anyone thinks this is just crazy stuff, there is a huge  formal literature on how immigration worked, and affected economic outcomes, in the first great modern age of immigration – the 50 to 70 years prior to World War One.   I’ve touched this in a previous post, referencing a piece by leading Irish economic historian (and professor at Oxford), Kevin O’Rourke.    Overnight, I stumbled on a new accessible essay by O’Rourke written prompted by the recent 100th anniversary of the Irish rising of 1916.  Here is what he has to say about the implication of emigration for wages.

Ireland was hardly the only country to experience mass emigration in the nineteenth century. If its emigration rates were particularly high, this was not due to a uniquely repressive environment (of either Irish or British origin). Irish wages were much lower than American wages, Ireland’s marital fertility rate was high, and there was a large stock of previous migrants to facilitate the transition to a new life in a New World. High emigration is precisely what would be predicted under such circumstances; the Irish were not unusually prone to emigrate, other things being equal.

And as was the case elsewhere, high emigration had a profound impact on the Irish economy, lowering the supply of workers competing for jobs, and raising wages. The wages of unskilled Irish building labourers rose from around 60 per cent of what their British counterparts were earning in the 1830s, to more than 90 per cent in the decade before World War I. Something similar happened in economies as superficially dissimilar as Italy and Norway, and in all three countries emigration was largely or entirely responsible for this wage convergence.

Irish wage convergence was emphatically not due to a superior Irish growth performance

This is just a standard non-contentious result in the modern literature about this historical period –  for anyone interested check out the writings of Hatton, Williamson and O’Rourke himself, for example. Emigration from Europe to the New World (including New Zealand) lowered wages here and raised them in the source countries. It greatly helped the process of income convergence –  although in New Zealand’s case, it took significant public subsidies to make even the high wages on offer here attractive to “enough” people.

There are occasional attempts to explain why the 19th and early 20th century experience might not be applicable today, but I’ve not found any of them even remotely persuasive. Instead,  most modern academic enthusiasts for high immigration to Western countries are either altogether unaware of the historical literature, or simply choose to ignore it.    That is particularly unfortunate –  one could think of worse descriptions –  in the New Zealand case, where since the 1970s we have had huge net emigration of New Zealanders and since the end of the 1980s huge policy-facilitated and promoted immigration of non-New Zealanders.  If it had just been the outflow of New Zealanders, the 19th and early 20th century experience might have led us to expect a substantial measure of income convergence between New Zealand and Australia (as outflows from Invercargill or Taihape helped keep factor returns in those places somewhat in touch with those in the rest of the country).  But if such a process had been incipiently at work, the policy programme to bring in so many non New Zealanders to a country no longer sufficiently attractive to its own would have worked to directly stymie the prospects of such convergence.   And yet in none of the MBIE or Treasury work on immigration I’ve seen has the historical convergence literature been applied to the New Zealand experience.  That seems like quite an omission.

It seems like a good year for Kotlikoff and Leamer to get some coverage for the issues they are promoting. I hope their sensible comments on the immigration policy issues do get some more attention.   And that as we approach our election next year –  with one of the largest controlled non-citizen immigration programmes anywhere in the world (and one of the worse long-term productivity performance –  we can have some thoughtful engagement with the costs and benefits of immigration, including the distributional ones, informed by the historical experience, as well as by the models of modern academic immigration enthusiasts.

 

 

9 thoughts on “An economist for President?

  1. Thank you Michael. Interesting and thoughtful post.

    I would imagine your reaction to both candidates would be shared by a significant section of the US centre right and so it will be interesting to see how much non-voting occurs as a result.

    Oh and cute – albeit not entirely comparable – comparison to our own constitutional arrangements.

    Liked by 1 person

  2. I was going to point out that the US (13 colonies) had already had two female heads of state – Queen Mary and Queen Anne – but decided that might be a bit OTT. But when we lived there it constantly had me catching my breath – Prince George’s County, Maryland, Queen Anne’s County etc.

    What I find fascinating tracking the polls is that when they do Trump vs Clinton head to heads, and then do Trump vs Clinton vs Johnson vs Stein (Greens) Trump does slightly better in the latter polls than the former. The Clinton unfavourables among Dem voters are pretty high. Both sides are probably saying – quietly on the Dem side, openly on the R side – “with any other we’d be cruising to victory”.

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  3. I too am perplexed as to why the opposition parties (labour and green) are so quiet on the impacts of immigration on wages. Even Bernie Sanders spoke out on this in the past but has been silent during this election cycle. The Greens have a population policy which advocates keeping NZs population within the carrying capacity of NZs ecosphere but I’ve never heard it referenced by their MPs.

    Liked by 1 person

    • The Greens and Labour want the refugee target which John Key reluctantly moved to 1000 a year up much much higher. I think they want that refugee target closer to 5000 a year. Don’t forget Germany has taken in 1 million refugees recently.

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  4. When have political parties ever based their policies on hard evidence (other than that produced by Colmar Brunton)?

    My deeply cynical response would be to the extent that high levels of immigration repressed local wages it plays to Labour’s perceived strength of being the party of the poorer working class, while the Greens just mindlessly support immigration as a keystone of socially progressive ideals.

    I’d also say that Labour and the Greens don’t want to antagonize recent immigrants as they see them potential constituents. After all they’re probably younger, poorer and more liberal than the resident population.

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  5. Frankly I do not consider 14k real migrant arrivals each year a problem. Offering residency to an additional 36k international students and foreign workers already in NZ paying taxes and living in NZ for 3 to 5 years whilst on a student visa and on work permits already working hard and contributing to NZ is also not a problem because we are a small nation with small career opportunities. There is a huge churn rate ie they leave for better career prospects in larger cities within the next 3 to 5 years anyway.

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  6. I think all Kiwis would be happy with a sensible level of immigration however none of us seem to know what that means hence we need a discussion on it. An anecdotal example of a colleague if you will. My colleague spent a lot of money to come here and has been here now for several years. He’s just recently married an arranged partner by way of his parents in India and his new wife arrived a few weeks ago. He’s doing moderately well and got himself into a position where they’re buying a house out in Manukau in Auckland. Good on him! So far – so good

    One day however we were chatting and he mentioned that he’ll be bringing his parents to NZ to retire on a NZ pension. I will not lie. I had a flash of anger because I thought of how hard my parents had worked to get to the end of their lives and they aren’t able to retire.

    I do wonder how common are these sort of stories for recent immigrants and are these sorts of stories being captured in the official statistics. Thoughts?

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    • There are still far too many people coming on parent visas (from memory around 4000 a year) – people who typically won’t add to NZ productivity or econ performance, and will almost inevitably be a fiscal burden.

      Mind you, people do need to live in NZ for 10 years to be eligible for NZS. That is something, but not enough. I wrote a post last year broadly supportive of a NZ First MP’s private members’ bill suggesting that perhaps 30 years residence should be required to be eligible for a full NZS. The parent system has been tightened up somewhat, with a clearer delineation between those fully able to support themselves and those not,

      Of course, a much much bigger fiscal risk is that all the NZers in Australia are eligible to come back here at 65 and get NZS (and health?) with no additional residence requirement – living in Aus counts as eligible residence for these purposes.

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      • Bernie Sanders is the latest in a very long line of politicians who have criticised international trade liberalisation on the basis that it exerts a downward pressure on wages in the rich world.

        that was of course the old mercantilist argument until the rise of the “classical” economists in the 18th century: trade could only create jobs (or raise wages) in one country at the expense of workers in another.

        The modern view is that international trade doesn’t affect the number of jobs: it simply re-allocates them across the economy in a more efficient way, which in the long-run will lead to higher average wages for the workforce as a whole.

        However, there are a number of other trends which can have a negative effect on some workers, even if average wages are rising. One is technological change, which in both the US and the UK has been polarising wages.

        All those relatively middle-waged industrial jobs – machine operators and so on – can be more easily replaced by machines, while the share of very low waged jobs (like retail work) and high waged jobs (like design) has been rising.

        It is no longer possible, in countries like the US, to earn a middle-range living with very little education, simply by learning technical on-the-job skills in a local factory or suchlike. Hence the massively increased demand for higher education.

        That said, most jobs at the lowest end of the labour market will usually be better than before: a modern retail floor worker enjoys much better conditions, and can buy more with their wages, than the lowest-paid industrial workers 40 years ago.

        But the transition is slow, and in some countries (including the UK) the switch from heavy industry to services was very badly managed. Even while overall living standards are slowly getting better, some communities have seen their prospects worsen dramatically over the past few decades.

        So Sanders’ problems are closer to home than he realises and putting up trade barriers isn’t going to solve them; indeed, he’ll just end up hurting the poorest workers who tend to benefit most from overall rises in productivity.

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