Economics

World Opinions on Globalization

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The Economist reports on a new YouGov poll that surveyed “19 countries to gauge people’s attitudes towards immigration, trade and globalisation. The data reveal a split between emerging markets and the West, which is increasingly turning its back on globalisation. Beset by stagnant wage growth, less than half of respondents in America, Britain and France believe that globalisation is a “force for good” in the world. Westerners also say the world is getting worse. Even Americans, generally an optimistic lot, are feeling blue: just 11% believe the world has improved in the past year.”

The chart above demonstrates that “countries with the fastest-growing economies tend to be more positive about globalisation. The French, Australians, Norwegians and Americans tend to oppose the idea of foreigners buying indigenous companies. But most Asians do not see a problem. Few in Hong Kong and Singapore would argue that their city-states should be self-sufficient, whereas most respondents in Indonesia, Thailand, India, the Philippines and Malaysia reckon that their countries shouldn’t have to rely on imports.” But “nationalism is especially pronounced in France, the cradle of liberty. Some 52% of the French now believe that their economy should not have to rely on imports, and just 13% reckon that immigration has a positive effect on their country. France is divided as to whether or not multiculturalism is something to be embraced. Such findings will be music to the ears of Marine Le Pen, the leader of the National Front, France’s nationalist, Eurosceptic party. Current (and admittedly early) polling has her tied for first place in the 2017 French presidential race.” There may even be some comfort for those concerned about growing anti-democratic sentiments. For one, these sentiments may not be as pronounced as often reported. Furthermore, the YouGov poll finds hope in younger generations:[ref]Though there is likely need for caution regarding this conclusion as well.[/ref]

While millennials tend to hold more left-wing economic views, they are far keener on the idea of globalisation, broadly conceived, thanks to their more positive attitudes towards multiculturalism. In America, 46% of those aged 18-34 think that immigrants had a positive effect on their country, compared with just 35% of those aged 55 and over. In Britain the generational gap is even bigger: 53% and 22%, respectively. And millennials were more optimistic in every country surveyed, save for Indonesia.

Let’s hope their left-wing economic views don’t devolve into anti-trade populism.

The Myth of the Rational Voter: Lecture by Bryan Caplan

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This is part of the DR Book Collection.

Image result for the myth of the rational voterFollowing the results of November’s presidential election, I decided to read up on the social science on voter rationality. The first was Ilya Somin’s Democracy and Political Ignorance. The second was economist Bryan Caplan’s Princeton-published The Myth of the Rational Voter: Why Democracies Choose Bad Policies. Caplan argues that voters are not merely ignorant about economic policy; they are systematically biased in a way that puts them at complete odds with the economic profession. These biases include:

  • Anti-market bias: the public drastically underestimates the benefits of markets.
  • Anti-foreign bias: the public drastically underestimates the benefits of interactions with foreigners.
  • Make-work bias: the public equates prosperity with employment rather than production.
  • Pessimistic bias: the public is overly prone to think economic conditions are worse than they are.

For me, the evidence from surveys regarding the opinions of the public vs. economists was the most illuminating. People overwhelmingly support protectionism. Not only that, “solid majorities of noneconomists think it should be government’s responsibility to “keep prices under control”” (pg. 51). Other examples include:

  • Far fewer economists are concerned about “excessive taxation” than the public.[ref]Most academic economists are moderate Democrats: “Controlling for individuals’ party identification and ideology makes the lay-expert belief gap a little larger. Ideologically moderate, politically independent economists are totally at odds with ideologically moderate, politically independent noneconomists. How can this be? Economics only looks conservative compared to other social sciences, like sociology, where leftism reigns supreme. Compared to the general public, the typical economist is left of center. Furthermore, contrary to critics of the economics profession, economists do not reliably hold right-wing positions. They accept a mix of “far right” and “far left” views. Economists are more optimistic than very conservative Republicans about downsizing or excessive profits—and more optimistic about immigration and welfare than very liberal Democrats” (pg. 82).[/ref]
  • Far fewer economists are concerned about the deficit being “too high” than the public.
  • Few economists think foreign aid spending is “too high”, while a large number of the public does (foreign aid actually takes up about 1% of the federal budget).
  • Few economists think their are “too many immigrants”, while this is a concern for the public.

The list goes on. You can see a lecture by Caplan on his book below.

New McKinsey Report on Global Migration

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Now for a topic I never write about: immigration.

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The McKinsey Global Institute has a new report on global migration and the findings are worth reviewing:

Moving more labor to higher-productivity settings boosts global GDP. Migrants of all skill levels contribute to this effect, whether through innovation and entrepreneurship or through freeing up natives for higher-value work. In fact, migrants make up just 3.4 percent of the world’s population, but MGI’s research finds that they contribute nearly 10 percent of global GDP. They contributed roughly $6.7 trillion to global GDP in 2015—some $3 trillion more than they would have produced in their origin countries. Developed nations realize more than 90 percent of this effect.

…Extensive academic evidence shows that immigration does not harm native employment or wages, although there can be short-term negative effects if there is a large inflow of migrants to a small region, if migrants are close substitutes for native workers, or if the destination economy is experiencing a downturn.

Realizing the benefits of immigration hinges on how well new arrivals are integrated into their destination country’s labor market and into society.[ref]Protective labor laws don’t help.[/ref] Today immigrants tend to earn 20 to 30 percent less than native-born workers. But if countries narrow that wage gap to just 5 to 10 percent by integrating immigrants more effectively across various aspects of education, housing, health, and community engagement, they could generate an additional boost of $800 billion to $1 trillion to worldwide economic output annually. This is a relatively conservative goal, but it can nevertheless produce broader positive effects, including lower poverty rates and higher overall productivity in destination economies.

Check it out.

Management Quality Matters

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Building on the work of Stanford economist Nicholas Bloom and the World Management Survey, new research suggests that management quality matters for firm adaptability to adverse competitive shocks. The researchers explain,

Studying the way that corporations adjust to competitive shocks is difficult, and isolating the role of management even more so. New technology directly affects the productivity of firms, but it simultaneously transforms the competitive environment to which management needs to adapt. It is difficult to disentangle the role of external competitive forces from the direct effects of technological change. Policy shocks provide better opportunities to isolate the firm response because they do not directly emanate from an underlying process that is shaping the productivity of a firm. Recent research has therefore focused on policy shocks, such as a new trade agreement, unexpected exchange-rate shocks, or changes to the minimum wage.

Emerging markets might provide a better setting for a test of the relevance of management practice, because these markets have firms which differ more widely in their governance and management quality. Our recent research focuses on the productivity response of Chinese firms to external labour cost shocks (Hau et al. 2016). Many industries in China feature a large numbers of state-owned firms (SOEs), private Chinese firms, and foreign firms. Each have very different management practices…Chinese firms have undergone regular large labour cost shocks because of large revisions to the minimum wage set at the local level. In the seven-year period from 2002 to 2008 alone, there were more than 17,000 minimum wage increases in China’s 2,852 counties and cities…For firms with many workers at, or near, the minimum wage, these minimum wage increases often had a dramatic impact on average labour cost.

What were the firm responses to the 20% increase in the minimum wage?

The incremental productivity increase of SOEs [state-owned firms] was small and statistically insignificant (indicated by the vertical line representing a 95% confidence interval around the mean effect). Private firms show a statistically significant productivity response if their initial productivity is low, whereas foreign firms show by far the largest productivity increase in the year of the minimum wage increase. The point estimate of incremental TFP growth, just under 10%, is economically large and corresponds to almost a full year of trend growth. External competitive shocks therefore trigger large productivity improvements in some firms, but not in others. Ownership structure accounts for a large proportion of this variation.

Drawing on previous research, the authors draw up three dimensions to measure the quality of firm management:

  1. Monitoring practices: The collection and processing of production information;
  2. Target-setting practices: The ability to set coherent, binding, short-term and long-term targets; and
  3. Incentive practices: Merit-based pay, promotion, hiring, and firing.

Their findings indicate that larger firms–especially foreign-owned–are better managed, while state-owned were the least well managed. The graph below “illustrates that the positive productivity response to the labour cost shock tends to be, ceteris paribus, larger for firms with a higher predicted management quality.”

“The horizontal axis shows the triple interaction between the impact function IF(ws/wmin), the (log) minimum wage increase and the predicted management score (Mgmt_Score). To keep the figure simple, we plotted only those 29,998 firm-year observations for which the minimum wage increase was larger than 20%. For the same minimum wage exposure (or value of the impact function) and the same large minimum wage increase, a firm observation with a low predicted management score will tend to be on the left. Those with a high predicted management score will be to the right.”

The “evidence indicates better-managed firms adapt better to adverse competitive shocks, and suggests that management quality matters for this adaptability.” In other words, management matters.

Does the Amount of Sleep Affect Wages?

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I’ve discussed the science of sleep here before. Elements of our arguably overstimulated society can make it difficult to get some truly good rest. Not only does this lead to highways full of practically drunk people, it also lowers our productivity at work. For example, new research from one pair of economists find that increased sleep gain lead to wage gains in both the short run and the long run. From the abstract:

We investigate the labor market effects of the single largest use of time—sleep. Motivated by a productive sleep model, we show that sleep is complementary to work in the short run and complementary to home production for non-employed individuals in both the short and long run. Using time use diaries from the United States, we demonstrate in both parametric and non-parametric frameworks that later sunset time reduces worker sleep and wages. After investigating these relationships and ruling out alternative hypotheses, we implement an instrumental variables specification that provides the first causal estimates of the impact of sleep on wages. A one-hour increase in location-average weekly sleep increases wages by 1.3% in the short run and by 5% in the long run.

Employees: Want a raise? Get some sleep.

Employers: Want more productive employers? Let them get enough sleep.

Entrepreneurial Immigrants

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An October article in Harvard Business Review asks, “Do immigrants take American jobs, or help our economy grow? Do immigrants drain our welfare funds, or can they help refill public coffers as our baby boomers retire?” Furthermore, “state and local governments have clamored to launch initiatives to attract more immigrant entrepreneurs, hoping they will found businesses and create more jobs. Globally, many countries are doing the same — for example, Chile pays overseas entrepreneurs to come visit for six months through its Start-Up Chile program, as a way to build global bridges and foster an entrepreneurial culture at home…Good statistics on immigrant entrepreneurship are exceptionally difficult to assemble, and therefore it’s challenging to create productive policies. Likewise, most standard government sources that are publicly accessible can only tell us about immigrant self-employment, which leaves a big question mark around job creation and economic growth.” The authors–one from Harvard Business School and the other a Senior Research Scientist at Wellesley Centers for Women–explain,

Our recent research aims to address this. We have built a platform that uses restricted-access Census Bureau datasets to explore differences in the types of businesses formed by immigrants and their medium-term survival and growth patterns. The core building block is the Longitudinal Employer-Household Dynamics (LEHD) database, but it incorporates other sources like the Longitudinal Business Database.

This platform gives us a comprehensive view of immigrant entrepreneurship over a long duration (1995 – 2008). The database currently covers 31 U.S. states, with more being added as their unemployment insurance (UI) filings data become available. It spans firms of all shapes and sizes, so long as they have one paid employee or more. For the first time, we can analyze a spectrum of companies — from “Main Street” businesses to VC-backed Silicon Valley firms. We can see what happens to these firms after they have been founded, and whether, for example, immigrant-founded firms perform differently from the start-ups of natives.

And what did they find?:

  • Immigrants constitute 15% of the general U.S. workforce, but they account for around a quarter of U.S. entrepreneurs (which we define as the top three initial earners in a new business). This is comparable to what we see in innovation and patent filings, where immigrants also account for about a quarter of U.S. inventors.

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  • On the whole, immigrant entrepreneurship is somewhat stronger for VC-backed firms, with 31% of VC-backed founders being immigrants, compared to 25% of all entrepreneurs in 2005.
  • Immigrant founders launch firms that are smaller than native-founded firms. The average initial employment for firms founded by immigrants exclusively is 4.4 workers, compared to 7.0 workers for firms launched exclusively by natives. When both types of founders are present (i.e., “mixed founder team”), the average is 16.9 workers.
  • We quantify subsequent firm performance by analyzing employment growth and closure rates. The firms founded by immigrants close at a faster rate than firms founded by natives, but those that survive do grow at a faster rate in terms of employment, payroll, and establishments for the next six years. Previous research has found that this phenomenon — called “up or out” — is how young firms create more jobs. Compared to older firms, which show modest growth regardless of their size, young firms and new entrants have more dynamic patterns that foster greater job creation. Immigrant-founded firms display more of this behavior.
  • Now that we can study the age of arrival, we found that immigrants coming to the U.S. as children are more likely to start larger firms than immigrants arriving as adults. Moreover, firms created by immigrants who have grown up in the U.S. are generally associated with better outcomes, in terms of lower closure rates and higher representation among larger firms. Much remains to be done here, but we hope this serves a spring board to the study of other migrant traits.

The authors conclude, “Global talent flows will continue to be a fundamental force shaping the U.S. economic and business landscape. This is especially true for entrepreneurship given the economic dynamism that startups unleash and the disproportionate role of immigrants in this process.”

Image result for immigrants we get the job done

 

Something to Be Thankful For: Declining Poverty

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“Did you know that, in the past 30 years, the percentage of people in the world who live in extreme poverty has decreased by more than half?”

According to three World Bank economists, the answers from the general public are rather disappointing:

In 2014, 84% of Americans who were asked this question were unaware of such declines in global extreme poverty. In fact, 67% of adult respondents thought global poverty had been on the rise over the past three decades. Unsurprisingly, 68% did not believe it would be possible to end extreme global poverty within the next 25 years (Todd 2014).

A recent study analysing the public awareness around the world of the Sustainable Development Goals confirmed that this widespread ignorance is not a US anomaly (Lampert and Papadongonas 2016). A significant majority of respondents from several countries, both developing and developed, are unaware of this achievement (see Figure 1). Interestingly, Chinese citizens appear much better informed about global poverty trends than those of the US or Germany.

Share of people who believe that extreme global poverty has decreased in the last 20 years

But the public should take heart:

The new Poverty and Shared Prosperity Report 2016 launched this October by the World Bank explains why (World Bank 2016b). The figure below shows that the number of extremely poor people worldwide – measured by the very low $1.90 a day standard – has fallen by 1.1 billion people over the last two and a half decades, a period in which the global population grew by almost 2 billion (see Figure 2). This is true for all regions in the world without exception, from relatively richer Eastern Europe and Latin America to poorer Sub-Saharan Africa and South Asia. True, each region has reduced their poverty numbers at different paces. But the numbers leave little room for doubt – extreme poverty has been effectively and dramatically reduced.

The World Bank is aiming to end extreme poverty by 2030. While there are obstacles to achieve this goal, the above should give us a reason for optimism.

Perhaps more important, it gives us a reason to be thankful.

What’s the Economic Impact of Undocumented Workers?

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Tired of all these supposedly freeloading illegal aliens? Think the economy would be better off without them?

Think again.

Image result for undocumented workersA brand new working paper shows the contribution undocumented workers make to the national economy. As reported by Pacific Standard,

In the research, economists Ryan Edwards and Francesc Ortega break down the economic contributions of unauthorized workers across different industries, while also exploring how mass deportations would affect those industries and looking at the effects of legalization. Undocumented immigrants constitute 4.9 percent of the American workforce. Some industries rely more heavily on these workers. In agriculture, for example, illegal immigrants represent 18 percent of the workforce. In construction, they constitute 13 percent; 10 percent in leisure and hospitality.

If all those workers were to disappear, gross domestic product (GDP) would go down by about 3 percent (that’s $5 trillion) over a 10-year period. “Once capital has adjusted, value-added in Agriculture, Construction and Leisure and hospitality would fall by 8–9%,” Edwards and Ortega write. “However, the largest losses in dollars would take place in Manufacturing, Wholesale and retail trade, Finance and Leisure and hospitality.”

And as for the opposite counterfactual, the one in which the country’s undocumented workforce was suddenly legalized? The authors find that legalization would increase private-sector GDP by about 0.5 percent, with larger gains (anywhere from 1.1 percent to 1.9 percent) in leisure and hospitality, construction, and agriculture.

Edwards and Ortega’s conclusions are consistent with past research, which overwhelmingly concludes that immigration is good for the economy at large, and that legalizing undocumented workers is beneficial to both the economy and native workers.

Maybe amnesty isn’t a bad thing.

Innovation: Another Benefit of Trade

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With many still worrying about the policy outcomes of Trump’s protectionist rhetoric, here’s yet another study demonstrating the importance of trade liberalization. From the abstract:

This paper estimates the effect of trade policy during the Great Liberalization of the 1990s on innovation in over 60 countries using international firm-level patent data. The empirical strategy exploits ex-ante differences in firms’ exposure to countries and industries, allowing us to construct firm-specific measures of tariffs. This provides a source of variation that enables us to establish the causal impact of trade policy on innovation. Our results suggest that trade liberalization has economically significant effects on innovation and, ultimately, on technical change and growth. According to our estimates, about 7 percent of the increase in knowledge creation during the 1990s can be explained by trade policy reforms. Furthermore, we find that the increase in patenting reflects innovation, rather than simply more protection of existing knowledge. Both improved market access and more import competition contribute to the positive innovation response to trade liberalization.

The “Great Enrichment” that has taken place over the last two centuries is due to what economist Deirdre McCloskey refers to as “market-tested innovation and supply“ (or market-tested improvement). If we are interested in the continual enrichment and betterment of the world, we should be fully supportive of international trade.

The entire paper can be read here.

Are Refugees an Economic Burden?

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Many complain that refugees are a financial burden, draining the host country’s economic resources. But new research casts doubt on this assertion. From the abstract:

The number of refugees displaced by civil conflict or natural disasters is on the rise. Economic impacts of refugees on host countries are controversial and little understood, because data have not been available and the question of refugee impacts does not lend itself to conventional impact evaluation methods. We use a unique Monte Carlo simulation approach with microdata from refugee and host-country surveys to obtain the first estimates of refugee camps’ impacts on surrounding host-country economies and to compare impacts of cash versus in-kind refugee aid. An additional refugee increases total real income within a 10-km radius around two cash camps by significantly more than the aid the refugee receives. Impacts around a camp receiving in-kind (food) aid are smaller.

This coincides with the findings of other studies. All of this makes me even more proud of my church’s “I Was A Stranger” initiative.