Economics

Immigration and the Local Economy

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With Donald Trump making waves (again) via his immigration speech last week, I thought I’d highlight an NBER paper[ref]Here’s an earlier, ungated version.[/ref] from last year on immigration’s impact on local economies. The abstract reads:

Most research on the effects of immigration focuses on the effects of immigrants as adding to the supply of labor. By contrast, this paper studies the effects of immigrants on local labor demand, due to the increase in consumer demand for local services created by immigrants. This effect can attenuate downward pressure from immigrants on non-immigrants’ wages, and also benefit non-immigrants by increasing the variety of local services available. For this reason, immigrants can raise native workers’ real wages, and each immigrant could create more than one job. Using US Census data from 1980 to 2000, we find considerable evidence for these effects: Each immigrant creates 1.2 local jobs for local workers, most of them going to native workers, and 62% of these jobs are in non-traded services. Immigrants appear to raise local non-tradables sector wages and to attract native-born workers from elsewhere in the country. Overall, it appears that local workers benefit from the arrival of more immigrants.

Maybe we should want taco trucks on every corner.

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Innovation Is a Product of the Collective Brain

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The work of cultural psychologist Joseph Henrich has been brought up before and a recent post at Evonomics demonstrates why his work (along with others) is so important:

Innovations don’t require singular genius or Carlyle’s “Great Man”; instead both innovations and innovators are a product of the real Secret of Our Success—our social learning psychology, shaped by evolution to hone in on and learn from individuals with more knowledge, greater skill, and more success. When this selective learning plays out in our societies and social networks, these networks act as “collective brains”.

Innovations occur when previously isolated ideas meet. From the innovator’s perspective, it’s an independent discovery, but from the perspective of the collective brain, it is an inevitable consequence of spreading ideas that converge across an entire social system—a veritable “marketplace of ideas”. The upshot to the collective brain perspective is that increasing innovation means focusing not on individual talent, but rather on societal factors. The paper [by Henrich and Muthukrishna] identifies three key factors driving the rate of innovation: sociality, transmission fidelity, and cultural variance.

These three factors are defined as follows:

  • Sociality: “the degree to which society facilitates connections between people. Larger, more interconnected societies will have higher sociality, resulting in everyone being exposed to more people and more ideas.”
  • Transmission fidelity: “the replication of knowledge through formal and informal learning. In WEIRD societies—those that are Western, Educated, Industrialized, Rich, and Democratic—a primary form of transmission is formal schooling. Unsurprisingly, more educated populations have higher innovation rates and these rates should continue to rise with educational improvements[.]”
  • Cultural variance: “the variety of ideas that are created and tested. Although most new ideas are less than brilliant…society benefits from the rare game-changing unicorns. Muthukrishna and Henrich argue that weaker patent laws facilitate more recombination, as do stronger social safety nets, which give more “wantrepeneurs” the security to become entrepreneurs.”

In conclusion,

The work of Muthukrishna, Henrich, and their colleagues demonstrates that underneath any innovation, be it a steam engine or a mathematical equation, lies a package of psychology that allowed our species to acquire a second, independently evolving line of inherited information—culture.

And just as natural selection has produced complex designs without a designer, so too have individuals connected in collective brains, selectively transmitting ideas and learning information, produced complex inventions without the need for an inventor. Innovations, in other words, don’t require a specific innovator any more than your thoughts require a particular neuron.

Teach a Man to Fish…and Give Him Some Nets: International Anti-Poverty Program

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Extreme poverty worldwide has been declining over the past few decades (unbeknowst to most Americans) with the chance of eradicating it by 2030. Organizations are testing new anti-poverty programs, including a 10-year experiment with guaranteed basic income in Kenya. One program titled Graduation “included 10,495 households in Ethiopia, Ghana, Honduras, India, Pakistan, and Peru. Almost half of the families in the study lived on less than $1.25 a day.” The results of this experiment were published last year:

The specifics of Graduation varied by country, but the basic premise was the same. All the Graduation programs gave families some kind of “productive asset,” such as sheep, goats, seed corn, bees, or small shops. They all provided training on how to build a business using the assets, and gave food or cash aid to the families for up to a year, in part to discourage them from eating or selling their “productive asset.” The programs also gave families access to a savings account, and some programs required that families contributed to the account regularly.

One year after the program ended, researchers found that Graduation families bought more, owned more, spent more time working, were more politically active, and missed fewer meals than similar families who hadn’t enrolled in the program. The changes were all statistically significant, but, the researchers note, not very large.[ref]”The exception was Honduras,” the author writes, “where families didn’t consume more one year after the end of Graduation (though they did immediately after the program ended). The driving factor there was likely that most Hondurans chose chickens as their productive asset, and most of the chickens died of illness a year after Graduation finished[.]”[/ref]

Admittedly, the program “is expensive, costing between $3,000 to $6,000 per household, depending on the country. But in five out of the six countries the researchers studied, Graduation provided a slight positive return on investment because households in those countries ended up consuming more — thus paying more money into their local economies — than it cost to aid them.”

I’m excited about these experiments and the future of evidence-based policies and programs. I’ve often complained (privately) over the years about the “solutions” to poverty by both the American Right and Left. To generalize in a rather cynical way, the Left assumes that if you throw money at the problem, it will go away. The Right, on the other hand, just thinks the poor should “pull themselves up by their bootstraps.” To soften it a tad, the Left believes in providing the poor with resources/capital. The Right believes that to truly rise out of poverty requires proper incentives, behaviors, and work. Programs like the one above might demonstrate that “the true answer to poverty requires a little bit of everything: Teaching people how to fish, giving them fishing nets, and giving them the fish too.”

If the Chair Industry Was Regulated Like the Drug Industry

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There is another pharma scandal in the news over the astronomical increase in EpiPen’s price. Yet, before we begin to blame and denounce the abstraction “capitalism” for all our woes, it might be useful to recall my post on the Shkreli/Daraprim scandal and its discussion of healthcare regulations. This new case appears to be incredibly similar and the site Slate Star Codex has an excellent post contrasting the way the drug industry operates compared to the chair industry:

when was the last time that America’s chair industry hiked the price of chairs 400% and suddenly nobody in the country could afford to sit down? When was the last time that the mug industry decided to charge $300 per cup, and everyone had to drink coffee straight from the pot or face bankruptcy? When was the last time greedy shoe executives forced most Americans to go barefoot? And why do you think that is?

The answer?:

The problem with the pharmaceutical industry isn’t that they’re unregulated just like chairs and mugs. The problem with the pharmaceutical industry is that they’re part of a highly-regulated cronyist system that works completely differently from chairs and mugs.

If a chair company decided to charge $300 for their chairs, somebody else would set up a woodshop, sell their chairs for $250, and make a killing – and so on until chairs cost normal-chair-prices again.

And in his final act, he drives the point all the way home (worth quoting at length):

Imagine that the government creates the Furniture and Desk Association, an agency which declares that only IKEA is allowed to sell chairs. IKEA responds by charging $300 per chair. Other companies try to sell stools or sofas, but get bogged down for years in litigation over whether these technically count as “chairs”. When a few of them win their court cases, the FDA shoots them down anyway for vague reasons it refuses to share, or because they haven’t done studies showing that their chairs will not break, or because the studies that showed their chairs will not break didn’t include a high enough number of morbidly obese people so we can’t be sure they won’t break. Finally, Target spends tens of millions of dollars on lawyers and gets the okay to compete with IKEA, but people can only get Target chairs if they have a note signed by a professional interior designer saying that their room needs a “comfort-producing seating implement” and which absolutely definitely does not mention “chairs” anywhere, because otherwise a child who was used to sitting on IKEA chairs might sit down on a Target chair the wrong way, get confused, fall off, and break her head.

Image result for chair break gif…Imagine that this whole system is going on at the same time that IKEA spends millions of dollars lobbying senators about chair-related issues, and that these same senators vote down a bill preventing IKEA from paying off other companies to stay out of the chair industry. Also, suppose that a bunch of people are dying each year of exhaustion from having to stand up all the time because chairs are too expensive unless you’ve got really good furniture insurance, which is totally a thing and which everybody is legally required to have.

And now imagine that a news site responds with an article saying the government doesn’t regulate chairs enough.

“And Then They Blamed…Poor People”: The Role of the Middle Class in the Mortgage Crisis

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Earlier this year, a new study was published in The Review of Financial Studies that “highlights the importance of middle-class and high-FICO borrowers for the mortgage crisis.” In an excellent summary by The Washington Post‘s Robert Samuelson,[ref]This is of the 2015 working paper version.[/ref] he summarizes the three main findings:

First, mortgage lending wasn’t aimed mainly at the poor. Earlier research studied lending by Zip codes and found sharp growth in poorer neighborhoods. Borrowers were assumed to reflect the average characteristics of residents in these neighborhoods. But the new study examined the actual borrowers and found this wasn’t true. They were much richer than average residents. In 2002, home buyers in these poor neighborhoods had average incomes of $63,000, double the neighborhoods’ average of $31,000.

Second, borrowers were not saddled with progressively larger mortgage debt burdens. One way of measuring this is the debt-to-income ratio: Someone with a $100,000 mortgage and $50,000 of income has a debt-to-income ratio of 2. In 2002, the mortgage-debt-to-income ratio of the poorest borrowers was 2; in 2006, it was still 2. Ratios for wealthier borrowers also remained stable during the housing boom. The essence of the boom was not that typical debt burdens shot through the roof; it was that more and more people were borrowing.

Third, the bulk of mortgage lending and losses — measured by dollar volume — occurred among middle-class and high-income borrowers. In 2006, the wealthiest 40 percent of borrowers represented 55 percent of new loans and nearly 60 percent of delinquencies (defined as payments at least 90 days overdue) in the next three years.

Remember this the next time you hear someone blaming the financial crisis on the “irresponsible poor.”

In the Zone

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You know how I’ve been preaching against zoning laws over the last year? Well, allow me to do so again.

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According to Richard Reeves and Dimitrios Halikias at the Brookings Institution, “the movement of less-skilled workers to higher-growth areas has not risen in recent years, a break with the historical pattern[.]” It seems that regulation is the culprit. “The number of court cases mentioning “land use” (an innovative measure of regulation used in a Hutchins Center working paper by Peter Ganong and Daniel Shoag) has risen steadily:”

“The Hutchins paper,” the authors continue, “complements earlier economic analyses, including a study published last year by Chang-Tai Hsieh and Enrico Moretti which estimates that the U.S. economy is 14 percent smaller as a result of constraints on housing development…By using local government powers to zone out lower-income families, upper middle class Americans protect the value of their homes. (Federal policy helps, of course, by regressively supporting richer home owners through mortgage interest deductions.)” Zoning acts as a kind of “opportunity hoarding,” even when it comes to elementary education:

According to Jonathan Rothwell, there is a strong link between zoning and educational disparities. Homes near good elementary schools are more expensive: about two and half times as much as those near the poorer-performing schools. But in metropolitan areas with more restrictive zoning, this gap is even wider. Loosening zoning regulations would reduce the housing cost gap and therefore narrow the school test-score gap by 4 to 7 percentiles, Rothwell finds.

Some of the most effective things are also some of the most mundane.

WSJ Survey: No White House Economists Openly Support Trump

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Surprise, surprise:

The Wall Street Journal this month reached out to all 45 surviving former members of the White House Council of Economic Advisers under the past eight presidents, going back to Richard Nixon, to get their views on this year’s presidential election.

Among 17 Republican appointees who responded to Journal inquiries, none said they supported Mr. Trump. Six said they did not support Mr. Trump and 11 declined to say either way. An additional six did not respond to repeated messages. Among the 21 Democrats who responded to the Journal, 14 said they supported Mrs. Clinton, none said they opposed her and seven declined to say either way. One Democratic appointee didn’t respond to messages.

 

Check out the full article to see what the economists are saying.

 

The Upper Middle Class Has Doubled

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…Since 1979, according to The Wall Street Journal. The paper’s national economics correspondent Josh Zumbrun argues that

a growing body of evidence suggests the economic expansion since the 2007-2009 financial crisis has enriched a much larger swath of the upper middle class, and that a deeper income divide is developing between that top quarter or so of the population and everyone else.

The latest piece of evidence comes from economist Stephen Rose of the Urban Institute, who finds in new research that the upper middle class in the U.S. is larger and richer than it’s ever been. He finds the upper middle class has expanded from about 12% of the population in 1979 to a new record of nearly 30% as of 2014.

Rose defines the upper middle class “as any household earning $100,000 to $350,000 for a family of three…Smaller households can earn somewhat less to be classified as upper middle-class; larger households need to earn somewhat more.” These findings fit comfortably with a number of other studies:

Research from Sean Reardon of Stanford University and Kendra Bischoff of Cornell University, for example, found in research published in March that the number of families living in affluent neighborhoods has more than doubled, to 16% of the population in 2012 from 7% in 1980. They define these neighborhoods as those where the median income is at least 50% higher than the rest of the city.

The Pew Research Center last month found that 203 metropolitan areas have seen their middle class shrink, but in 172 of those cities, the shrinkage was in part due to the growth in wealthier families. (In 160 of the cities, the share of lower-income families grew as well.) So Pew found the middle class shrinking from both ends – not just from families falling below the middle class, but also because of families rising out.

While this news can be inspiring, there are nonetheless

way[s] upper-middle class families perpetuate their status across generations…that can sometimes be harmful to middle- or lower middle-class families…Take high housing costs or the soaring costs of higher education. The spread of $3,000-a-month apartments or a national average $32,000-a-year college tuition bill is not driven by heirs or CEOs renting dozens of apartments or sending dozens of children to college. It’s driven by millions of upper middle class families with enough income to foot those bills[.]

What Does Research Say About Trade Liberalization?

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As of now, both major presidential candidates oppose the Trans-Pacific Partnership trade deal. Trump’s position isn’t all that surprising, while Clinton’s is a complete flip-flop.[ref]It’s odd to find that Democrats are more supportive of free trade than their supposedly capitalism-loving Republican opponents.[/ref] With trade openness being challenged in both American politics and abroad, it’s important to review what scholarship says about free trade. For example, a new IMF report demonstrates the benefits of trade liberalization. After speaking favorably of TPP, the authors explain,

Past multilateral trade liberalization rounds have helped boost productivity, so these recent agreements—albeit not global—could do the same, given their broad geographic coverage, both as a percentage of total world GDP and total world trade. Policymakers, however, need to be mindful of the distributional effects of open trade and take steps to mitigate the impact on those displaced to realize the full potential of lower trade barriers on productivity and economic well-being.

As shown below in Chart 1, even in advanced economies, which have already liberalized tariffs in the past, further reductions in nontariff/regulatory barriers to trade and FDI offer scope for additional productivity gains.

The authors then cite the “wide consensus that liberalization of trade and FDI [foreign direct investment] can lead to improved resource allocation across firms and sectors, boosting productivity and output. For instance, existing evidence suggests that more-productive firms tend to gain market share at the expense of less-productive firms. But two specific effects of liberalization additionally enhance productivity:

  • Increased competition: Lower trade and FDI barriers on final goods can strengthen competition in the liberalized sector(s). This can help firms exploit economies of scale, improve efficiency, absorb foreign technology, and innovate.
  • Enhanced variety and quality of available inputs: Trade liberalization can also boost productivity by increasing the quality and variety of intermediate inputs used in final goods production.”

There are substantial gains in productivity to be had with the lowering of tariff barriers:[ref]This doesn’t even tell the whole story: “The analysis of productivity gains that would follow from tariff liberalization is only an illustration of how trade liberalization more broadly could bring about even larger gains in productivity. Indeed, our estimated productivity gains from tariff liberalization should be viewed as lower bounds because they do not account for the gains that would arise from reallocation of resources across industries, that is, from more efficiently capitalizing on each country’s comparative advantage or, most importantly, from a reduction of non-tariff barriers” (italics mine).[/ref]

In summary,

Our findings provide a case for further liberalization to raise productivity and output in advanced economies. That the estimates vastly understate potential gains by overlooking the much larger economic benefits of easing non-tariff barriers makes the case all the stronger.

While compensation programs may be in order for those who suffer job loss or wage reduction due to increased trade (something the authors acknowledge and suggest), this should not distract us from the massive gains that trade liberalization brings. Those seeking to be the “Leader of the Free World” take note.

The State of Modern Economics

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Herbert Gintis

Economist Herbert Gintis has an excellent piece over at Evonomics on the current state of economics, including developments in behavioral and evolutionary economics and their relationship to traditional economic theory. Gintis has done some fine interdisciplinary work and I’m greatly anticipating his forthcoming book Individuality and Entanglement: The Moral and Material Bases of Social Life. For Gintis, “The most creative behavioral and evolutionary economists remain inspired by the successes of, and consider their work as extensions of traditional economic theory. The most creative supporters of traditional economic theory, in turn, embrace behavioral and evolutionary perspectives and build on its insights.” Gintis walks the reader through a helpful analysis of general equilibrium, comparative statics, economic dynamics, and economic policy. He notes, “Traditional microeconomic economic theory is at its best in analyzing general equilibrium and comparative statics. Behavioral and evolutionary economics have as yet neither altered nor added to our understanding of general equilibrium and comparative statics.” It is in the case of dynamics “that traditional economic theory has the least to offer. Microeconomic theory has virtually nothing to say about market dynamics when there is more than a single good.” He claims that macroeconomics was a framework “economists invented wholecloth…for dealing with economic dynamics that has nothing to do with the microeconomic model of general equilibrium.” While macroeconomics is “widely taught in economics departments and policy makers pay attention to it faute de mieux…it is frankly virtually worthless, except in the very short run, where the near future can be reliably forecast from the recent past.” Gintis recognizes that “the economy is a complex dynamical system and nobody, not even the experts who spend all their time studying the economy, can predict even the direction of the long-term effects of most regulatory changes on the position of individual economic actors.” It is here that he bridges evolutionary economics with traditional, providing much-needed feedback to both the right and left of the political divide:

Evolutionary models of economic dynamics invariably assume adaptive expectations rather than rational expectations. Adaptive expectations assume individuals tend to copy the most successful behavior of others whom they observe in the market, with innovation taking place through random variation.

In the popular press, free market lovers blame financial crises on government intervention, and intervention lovers blame financial crises on insufficient regulation. Neither view is correct. The recent financial crisis was due to improper regulation of the financial sector. The notion that the financial sector of a market economy is robust in the absence of extensive regulation is simply an article of faith unsupported by theory or experience. Evolutionary economists are working on a theory of the financial sector that fits synergistically with our models of generalized market exchange and technological change, but no general model has yet been developed.

He continues by dissecting both market and state failures, which should be an eye-opening discussion for both free-marketers and those favoring more state intervention. In conclusion, he writes,

It is a serious error to reject standard economic theory on the grounds that it supports a free-market ideology. It does nothing of the kind. Correctly deployed, it carefully explains where, how, and when to intervene in the regulation of market exchange. Evolutionary and behavioral game theory are wonderful additions to the economist’s repertoire, but they complement rather than undermine traditional public sector economic theory. The most serious defect in traditional economic theory is its treatment of economic dynamics, and it is here that behavioral and evolutionary theory has the most to contribute.

Some criticize standard economic theory for failing to take into account that reliance on markets promotes selfishness and greed. The evidence from behavioral economics is quite the contrary. Even hunter-gatherers and members of other small-scale societies act more fairly if their society has significant contact with the larger market economy. And we must never forget that virtually every powerful pro-democratic, anti-racist and anti-sexist movement for social change in the world has taken place in market economies with democratic political institutions. Milton Friedman noticed this in his famous Capitalism and Freedom, and it remains valid even more a half-century later.

Check out the full article. It’s one I’ll be continually revisiting.