Brad DeLong's Semi-Daily Journal (2004)

Neil Gabler on why not to be a liberal:

http://www.prospect.org/page.ww?section=root&name=ViewPrint&articleId=7506

The british allowed immigration of the AS&J, who allowed the D,andV to their consternation, so finally the ASJDandVs, decided:enough. As for the Brits they were shunted off to the side, rather like the Amerinds.

Non-sequitur alert Why do we need any adequate theory of market failure to support a redistributive state?

All else apart, the diminishing marginal utility of everything, income included, is sufficient for a Mill/Benthamite to support downward redistribution.

Meself I don't think that sort of abstraction is really convincing. It's just theoretical cover for the real argument, which is that the world is a better place if the well-off contribute at minimum proportionately and preferable disproportionately to paying for the operation of the system that made it possible for them to be well off.

Like kicking a stone, "I disprove it thus!", this needs no complete theory of market failure, simply observation of the obvious. Some deny that it's obvious. Fine. We vote on the question.

"move an extra twenty year old across the Mexican-U.S. border, and you've boosted the world's total wealth by about $500,000."

Half a million that goes mostly to the immigrant? Should not that be $50,000? How did you arrive to your amount?

DSW

You write that, " The labor side of the Democratic coalition doesn't like large-scale immigration because it puts downward pressure on the wages of the unskilled."

Is this still the case? Wilhelm of UNITE/HERE and Stern in the SEIU seem to have moved labor around on this issue, if only because these unions consist of so many immigrants.

Brad,

I consider myself a moderate classical liberal. And I do think that there is plenty of room for fruiful conversation between classical and modern American liberals. For the following reasons:

1. Culturally we are on the same plain. The Bush/southern conservatives simply represent a traditional - on many occassions- hostile to the Enligthenment project. We on the other hand share the same cosmopolitan, open society outlook.

To put it another way, many times, I find myself putting politicians on the dinner test. With whom would I want to have an interesting conversation over dinner? Who understands my lifestyle the best? Most Republican leadership fails that test for me.

2. On foreign policy, consistent libertarians should be ready to adopt not the realist/unilateral/non-conservative-neoconservative Bush outlook, but one that's based on liberal foreign policy theory (see Axelrod) or -even better for my taste- an outlook that looks for institutional prescriptions than the ones offered on Keohane's work.

3. On the issue that presents the most division - economics, I think that classical liberals should recognize that american liberals have presented in the recent past much more sophisticated arguments than the traditional faith in state intevention which was predominant until the mid to late eighties. As such they should be dealt with more sophisticated arguments than the simple stock of the trade arguments about the market omnipotence. Unfortunately that hasn't happened and american libertarians have fortified themselves in ideologically pure positions that fight an enemy that doesn't exist anymore.

The latter point is the one that has turned me off from american libertanianism. I think that what still makes a classical liberal isn't the faith in the market, but rather the distrust toward the state. I do recognize both the Rawlsian justice principle and the fact that there are market failures which need government arbitration. But I am sceptical about the government's ability to deal effectively with a problem, as well with the virtually non-existent altruistic motives of the state actors who end up making the decisions.

That creates in my mind a grey area, a paradox that cannot be solved, but only managed. On the one hand you need government intervention, on the other it might be problematic for inherrent reasons.

This grey area however is one in which both classical and modern liberals can meet and have a fruitful dialogue - especially as long as people like Bush and the Southern/religious/militaristic conservatives run the Republican party.

Brad DeLong writes:
>
> In the immortal words of Margaret Thatcher, immigration
> threatens us because we will be "swamped by people of a
> different race."

As much as it pains me to correct you on this, that apparently is NOT what Thatcher said. The largest context for the quote I can find runs like this:

In 1978, Margaret Thatcher said:
#
# If we went on as we are, then by the end of the century there
# would be 4 million people of the New Commonwealth or
# Pakistan here. Now that is an awful lot and I think it means
# that people are really rather afraid that this country might be
# swamped by people with a different culture. And, you know,
# the British character has done so much for democracy, for law,
# and done so much throughout the world, that if there is a fear
# that it might be swamped, people are going to react and be
# rather hostile to those coming in.

I think we can all agree that this quote isn't all sunshine and daisies, but I think it matters some that she said "culture" and not "race", and that what she was saying was that being swamped was what people were being afraid of. Now I'm not up on how nativist the Tories really were, and the quote is still pretty icky, but this is just so much more graceful than anything you're likely to hear from Republicans demagoguing about workers coming in from Mexico that I think you're actually being unfair to Margaret here. And, no, I can NOT believe I just wrote that, either.

But what can I say? It was *former* Representative Brian Bilbray who introduced legislation in 1997 to deny US citizenship to children of illegal aliens who were born in the US (never mind that pesky 14th amendment). And Bilbray was thought of as a moderate compared with Duncan Hunter or B-1 Bob Dornan.

I second David Lloyd-Jones. And what do we mean by "lack an adequate theory of market failure"? Do we mean one that provides solutions thereto? Do we include lopsided distribution of income as a market failure, because it's a public good to have more evenness therein?

But "market failure" was defined as that which prevents allocative distribution, Pareto optimality: income and wealth distribution be damned. "Market failure" also can't begin to cover the complex outside mechanisms of wilderness clearance, biodiversity loss, biogeochemical rearrangement...--although economists would like to hope that it could.

I vote we make SEPARATE categories: (A) market failure (allocative), (B) inequality (distributive), and (C) ecosystems failure (size-spread-"scale", after Herman Daly).

This might prevent libertarians and conservative pundits from fooling themselves, and others, with their crackpot ministrations from half-digested Intro. Econ. texts. Inequality and ecosystems need intervention and prohibition. Since experimental economics clearly shows that people are highly altruistic when they can expect all others to be the same, it shouldn't be too hard to fool the intellectuals into doing what's right, for a change.

http://www.nytimes.com/2004/04/05/opinion/05HERB.html

We're More Productive. Who Gets the Money?
By BOB HERBERT

It's like running on a treadmill that keeps increasing its speed. You have to go faster and faster just to stay in place. Or, as a factory worker said many years ago, 'You can work 'til you drop dead, but you won't get ahead.'

American workers have been remarkably productive in recent years, but they are getting fewer and fewer of the benefits of this increased productivity. While the economy, as measured by the gross domestic product, has been strong for some time now, ordinary workers have gotten little more than the back of the hand from employers who have pocketed an unprecedented share of the cash from this burst of economic growth.

What is happening is nothing short of historic. The American workers' share of the increase in national income since November 2001, the end of the last recession, is the lowest on record. Employers took the money and ran. This is extraordinary, but very few people are talking about it, which tells you something about the hold that corporate interests have on the national conversation.

The situation is summed up in the long, unwieldy but very revealing title of a new study from the Center for Labor Market Studies at Northeastern University: 'The Unprecedented Rising Tide of Corporate Profits and the Simultaneous Ebbing of Labor Compensation - Gainers and Losers from the National Economic Recovery in 2002 and 2003.'

Andrew Sum, the center's director and lead author of the study, said: 'This is the first time we've ever had a case where two years into a recovery, corporate profits got a larger share of the growth of national income than labor did. Normally labor gets about 65 percent and corporate profits about 15 to 18 percent. This time profits got 41 percent and labor [meaning all forms of employee compensation, including wages, benefits, salaries and the percentage of payroll taxes paid by employers] got 38 percent.'

The study said: 'In no other recovery from a post-World War II recession did corporate profits ever account for as much as 20 percent of the growth in national income. And at no time did corporate profits ever increase by a greater amount than labor compensation.' ...

Just to augment what Paul said: In fact, the entire AFL-CIO is now on record in support of liberalized immigration rights, including amnesty. This movement has indeed been led by service unions like HERE and SEIU, representing fast growing parts of the economy like building services, health care, and the hospitality industry. These industries , of course, by definition, cannot be transferred overseas. Thus unions see the service economy's increasingly immigrant workforce as its primary growth area for the forseeable future.

I respect Brad and Tyler Cowen, but I think that you both are whistling through the graveyard. We (the US tax code and Greenspan’s payroll tax increases) have destroyed American working class families. People are working two jobs just to survive, saving nothing for retirement, rarely available to parent their children or provide examples of how to act. Our schools are crumbling, teachers are being laid off. One of these days a close relative of yours will lose her job and have to take a job with a temporary agency, with little or no benefits. Then you may feel differently about social justice. There’s more to it than justice- how will your relative keep her house when interest rates go through the roof? Who is investing in human capital of the next generation? There’s nothing wrong with work, but a society that provides minimal pensions and healthcare and thinks that outsourcing is the answer to prosperity can not survive. Bob Herbert is a much better guide than either of you. Our country could provide living wages for everyone willing to work, including some immigrants, if we cut the Defense budget in half, pulled out of Iraq, and revised the tax code.

While it is abundantly clear that an immigrant (illegal or otherwise) will almost always do better economically by coming to the US, this is not the whole picture.

It is also true that immigrants tend to depress wages by the simple rules of supply and demand.

Additionally the sort of immigrant who is pulled to the US by economic opportunity tends to be rather more motivated and pro active than one who is "pushed" by crises at home, so this tends to impoverish the native country in terms of its human capital.

I would also argue that the relatively porus borders of the US have functioned as a safety valve, preventing real reform in Mexico, because it's much easier to head north than to fix things at home for many of its citizens.

Looking at the trajectories of certain industries, meat packing and construction come to mind, immigrant labor, and particularly illegal alien labor, have been consciously been used to drive down wages and bust unions.

The real question is not whether the 20 year old from Mexico gains $500,000, but what is the loss to the surrounding community, how these numbers compare, and whether we as a society find this trade off valuable.

"Free trade" applied to immigration leads to a race to the bottom.

I haven't been able to find this paper, but if you're measuring what percentage of growth since 2001 went to capital and labor, it's surely relevant that in 2001 labor's share of income was higher than at any point in the postwar era. It's also the case that whereas in most recessions, real hourly wages fall, they actually rose briskly during this recession. In fact, as I've mentioned before, growth in compensation for employed people was roughly the same between 2001 and 2003 as it was between 1997 and 2001.

All of this makes me very skeptical that, as Herbert implies, we've seen some major shift in the power balance between labor and capital. Two years does not a trend make. In fact, if you go back to the mid-1990s, there were two years (I believe) when capital's share of income was near its postwar high. Yet beginning in 1997, we saw the fastest growth in wages and compensations in almost thirty years.

What does seem clear is that higher productivity allowed businesses to temporarily earn sizeable profits without having to hire more workers. So it's not that individual employed people would have earned more had the experience of the past two years followed trend, but that there would have been more employed people. What's holding down labor's share is not the compensation that employed people are getting, but the fact that so many people have been getting no compensation. Given the most recent jobs report, that may be changing.

http://www.nytimes.com/2004/04/04/national/04WAGE.html

Altering of Worker Time Cards Spurs Growing Number of Suits
By STEVEN GREENHOUSE

As a former member of the Air Force military police, as a play-by-the-rules guy, Drew Pooters said he was stunned by what he found his manager doing in the Toys "R" Us store in Albuquerque.

Inside a cramped office, he said, his manager was sitting at a computer and altering workers' time records, secretly deleting hours to cut their paychecks and fatten his store's bottom line.

"I told him, `That's not exactly legal,' " said Mr. Pooters, who ran the store's electronics department. "Then he out-and-out threatened me not to talk about what I saw."

Mr. Pooters quit, landing a job in 2002 managing a Family Dollar store, one of 5,100 in that discount chain. Top managers there ordered him not to let employees' total hours exceed a certain amount each week, and one day, he said, his district manager told him to use a trick to cut payroll: delete some employee hours electronically.

"I told her, `I'm not going to get involved in this,' " Mr. Pooters recalled, saying that when he refused, the district manager erased the hours herself.

Experts on compensation say that the illegal doctoring of hourly employees' time records is far more prevalent than most Americans believe. The practice, commonly called shaving time, is easily done and hard to detect — a simple matter of computer keystrokes — and has spurred a growing number of lawsuits and settlements against a wide range of businesses....

Matthew, I believe Brad's sentence "And since the bulk of the world wealth gains go to the immigrants, you cannot argue that bad distributional consequences lead this increase in world wealth to be associated with a reduction in social welfare" means that from the perspective of the world as a whole, the trade-off is valuable. And how can you say that immigration leads to a "race to the bottom"? The U.S. received an enormous number of immigrants between the mid-19th century and the 1920s, and living standards, real wages, etc., all rose briskly throughout that period.

Moreover, while the immigration of unskilled workers obviously brings down median wages, it's not a race to the bottom, because those unskilled workers see a massive and immediate improvement in their earning power, living standards, etc. When you say "race to the bottom," you mean current Americans may see their living standards decline. But for that Mexican who's crossing the border, it's a race, if not to the top, then at least to somewhere a long way away from the bottom (with the notable exception, in this case, of slave agricultural labor). At least argue what you're really arguing -- even though immigration makes the group of Americans + Mexicans better off, you're against it because it may not make Americans better off. All that other stuff is just flapdoodle.

Yeah, that worker time-card piece completely infuriated me. I especially hated the quote from the Family Dollar spokesman, who said that it was company policy to "comply fully with wage and hour" laws. How about saying it's company policy to pay people the money they've earned?

Gee, according to this theory the Native Americans should have been enriched by European immigration to the North American continent. Or the Tibetians enriched by Chinese immigration. Or the Roman empire enriched by the Visgoths and Vandals.

Gimme a break. Every time I hear this kind of crap spewed out I have less and less respect for economists as a profession on the whole. The "threat" either to the immigrating persons or to the native community historically from arising social tensions has as often proved dangerous as it proved benign.

Did English blue-bloods have that much to fear from Irish immigration in the 19th century? No. But it could have turned out differently. And the increase in wealth only occurs if greater population leads to greater production, via Says law. If everyone is squabbling over the same capital production opportunities, then no it doesn't lead to greater wealth.

This is the question that has yet to been answered by free trade proponents - if native capital investment in actual business investment that increases production (and labor) assets (Secondary stock sales, corporate debt not directed toward business expansion, and treasury debt doesn't count) results from their trade agreements.

The short answer is that it doesn't, that a dollar spent in the Treasury market doesn't end up being as well spent as a dollar spent in buying an export good or service. This is because government debt is not a zero-sum issuance, and the purchase of more government debt to finance trade flows leads to a lower yield curve and increased government borrowing. Hence you get a cycle of ever increasing labor market "lags" as capital investment is exported with every cyclical recession and the "jobless recoveries" get longer and longer.

Hmmph!

Brad --

I'll wager that less than 1% of your visitors know what the hell you're talking about when you employ the technical(?) term "theory of market failure."

What is it? Some sort of economist's Rosetta Stone? a theory of everything? the antithesis of a theory of market success?

I'm lost.

How the top 5 fare:

http://www.nytimes.com/2004/04/04/business/yourmoney/04watch.html

Option Pie: Overeating Is a Health Hazard
By GRETCHEN MORGENSON

THE escalating excess that passes for everyday pay among corporate executives in America has long been justified this way: If they are not paid huge amounts, they will go to greener pastures. Investors will lose.

But a new and comprehensive academic study shows, once and for all, that increases in executive pay, on average, do not translate into later gains for shareholders. Not in the next year, not in three years, not in five.

Joseph R. Blasi and Douglas L. Kruse, professors at the Rutgers University School of Management and Labor Relations, analyzed executive compensation at more than 1,500 American companies from 1992 to 2002. They wanted to determine whether increases in executive compensation, particularly stock options, predicted share returns.

Using company filings, the professors analyzed some 16,500 corporate board decisions on pay over those years. Compensation of 7,500 top executives over the last decade totaled $177 billion; almost $100 billion of that came from options and restricted stock grants.

The study found that a 1 percent increase in total compensation for each of the top five executives at companies predicted a 0.22 percent decrease in average shareholder return over the next year and a 0.12 percent decline over three years. The effect over five years was statistically insignificant....

I wonder: this might run afoul of the 14th amendment, but could we somehow arrange to have the United States capture a big share of the benefits of immigration? Say, have some form of taxation that has to come out to some total sum over the years before it is lifted, or something like that? That way, we could have freer immigration (which would be somewhat less beneficial to the immigrants who do get in, but more broadly distributed to more immigrants) that's more popular too. Treating people like goods has drawbacks, but it strikes me that if we do, our current system is basically a system of quotas. I understand the desirability of limiting immigration, but what if we did it with tariffs instead, so to speak?

Lee A: I see why we might want to seperate inequality (choosing a "good" point along the Pareto frontier) and market failure (moving toward the Pareto frontier). I don't understand, however, why ecosystem failure should be seperate from market failure. Are you talking about something more fundamental than just the environment as in clean air and water and such? Are you talking about the human ecosystem: i.e. the impact of markets on the non-economic aspects of society?

Ellen -

http://www.oheschools.org/ohech3pg2.html

In theory, markets produce the goods and services we want in the right quantities and at the lowest possible cost. This is why markets are so powerful. But in the real world markets do not always work in the way theory predicts....

“So immigration and the welfare state are substitutes at the relevant margin. I choose immigration. “ No, no, no. This “relevant margins” mumbo-jumbo is just throwing econo-speak at the text to make it sound like he has though deeply and methodically (the method being marginal analysis) about his subject. The “relevant margin” is when the cost of the next unit of one is just equal to the cost of the other. When the costs are as complicated as between immigration and welfare, then putting a price on each is tough. How do we know then things are “equal”? Isn’t htat when we are indifferent between the two choices. “I choose immigration”, pretty much by definition, means he ain’t where he thinks he is on the two cost curves. So enough with the jargon already.

The rest of the argument – with its morally abitrary borders, government having a special duty to its own citizens, Rawlsian formula, principle of benificence – all very fancy, thank you, but it just strikes me as somebody who is trying to load up his argument with high-falutin’ phrases. What he really means to say comes down to one sentence – “I prefer high growth (who doesn’t?), minumum domestic transfers, and a higher rate of immigration.” Yes, he does. And once he realized those were his preferences, he should have just said so. Flowering them up with half-baked economics, morally arbitrary arguments and great splashes of words doesn’t get us any further than his statement of preferences.

Ellen1910,

Markets distribute everything in the optimal way, unless they don't. If there is some interference with the good working of the market (such as inadequate information, monopoly or monopsony power, externalities, inadequate respect for law and property,... a sizable list), then markets may not distribute things in an optimal way. If that is the case, there is a market failure. When there is a market failure, there is an argument for intervention to correct the failure. As a practical matter, the argument is valid to the extent that intervention makes things better rather than worse.

http://www.nytimes.com/2004/04/04/opinion/04FRIE.html?8hpib

Out of the Box
By THOMAS L. FRIEDMAN

MEXICO CITY

Because it happened so peacefully, it's easy to forget that Mexico in one decade has gone through two remarkable revolutions. One of the oldest one-party governments in the world was eased out with ballots, not bullets, and a poor developing country lowered its tariff barriers and became America's second-largest trading partner. Good news, right? So why does it feel like so many people here who were riding high three years ago are losing confidence?

The short answer is that Mexico's political and economic revolutions, driven from the top, were great for the 1990's. But unless they are followed up now by a third revolution — a reform revolution — that mobilizes and upgrades the skills of the whole society, Mexico will not stay competitive, and people here know it. But their politics are gridlocked. If Mexico does not get some real leadership, it's likely to have a real crisis. It is hard to stay competitive when you collect the lowest percentage of taxes among leading Western economies, or when you are an oil-rich country but you import energy from America because your constitution restricts foreign investment in the energy sector.

If Mexico were where Australia is, this would not worry me. Not only is it next door, but Mexico's huge bubble of baby boomers born in the 1970's are now entering their prime working years. If Mexico can't develop an economy that can keep them at home, they will flock to a theater near you.

"What Nafta accomplished was to get Mexicans to think forward and outward instead of inward and backward," said Luis Rubio, president of Mexico's Center of Research for Development. "[But] Nafta was seen as an end, more than a beginning. It was seen as the conclusion of a process of political and economic reforms and was meant to consolidate them. . . . Not only did Mexico not have a strategy for going forward, neither did America." ...

"move an extra twenty year old across the Mexican-U.S. border, and you've boosted the world's total wealth by about $500,000." - you most probably have, well put!

"a problem that it is even hard to think about because we lack an adequate theory of market failure." - if you think a problem is hard to think of because you lack some theory in economics about what is currently outside economics, are you:

a)
an academic imperialist who think everything should be described inside your academic field (of economics)?

b)
an academic conservative who are afraid to think in terms outside the well established theories?

c)
having problems finding students who want to explore new fields because it is career-wise too risky for them?

d)
making a good argument for recieving more research grants?

;)

David -- and what of the unaccounted for benefits? The benefits to the Mexicans who stayed behind and will now have fewer competitors for jobs, rent, etc? The benefits to American dependents (schoolkids, retirees) who'll have a larger workforce ratio to depend upon?

What makes you think unaccounted external costs are greater than unaccounted external benefits?

Brad writes, "How the government should do this, however, is an extremely hard problem--a problem that it is even hard to think about because we lack an adequate theory of market failure. "

Isn't part of the problem thinking about prices or wages and the fact that this information is difficult to find and assess by participants in the labor market as well as economists.

Didn't some of your colleagues at Berkely cover some topics that would fit into this theory. George Akerloff and his paper on ..."_Gift Exchange-" and Card on some aspects of immigration.

"He's right about immigration: move an extra twenty year old across the Mexican-U.S. border, and you've boosted the world's total wealth by about $500,000. Move an extra 2000 young workers across the border, and you've boosted the world's total wealth by about $1 billion. And since the bulk of the world wealth gains go to the immigrants, you cannot argue that bad distributional consequences lead this increase in world wealth to be associated with a reduction in social welfare."

Brad, I'm very pro-immigration (currently I'm an immigrant to the US in fact), but this is just econobabble horseshit.

Basically, Brad is arguing that because measured economic output of the world increases as Mexicans move to the US (low output they would have produced in Mexico is replaced by higher output they would have produced in the US), and because the individual's salary also rises when they come to the US, that it is thus proven that everybody is better off.

The reason that is econobabble horseshit is the unstated assumption that if someone makes more money they must be better off. Thus if "the world" makes more money the world must on average be better off, and if the worker themselves also makes more money then there is no loss of fairness. This assumption is basically a founding principle of neoclassical economics. It also happens to be completely false, empirically speaking.

Allow me to demonstrate that you CAN argue that the increase in world wealth is associated with a decrease in world welfare. (I'm not actually sure this argument is TRUE - you'd have to scientifically test it to know - but it plausibly MIGHT be true, and thus serves as a counterexample to Brad's little attack of arrogant orthodoxy).

What happens if a Mexican manages to legally, permanently immigrate to the US? Based on the US immigration criteria, this likely means that (on average) a relatively young, well off, and well educated person moves from Mexico to the US. This moves above-average human capital from Mexico to the US.

The overall economic effect on the US is a slight increase in GDP, which causes no direct social welfare benefits to the non-immigrants. (Even if it increased their average income, the social welfare benefits of this would be essentially zero, since in an economy as developed as that of the US there is no significant social welfare benefit of increasing GDP). Because of the way US law organizes the economy, the arrival of the immigrant likely contributes significantly to an increase in inequity (wages are depressed in the industry that the immigrant arrives into, but profits are increased, and this creates real welfare inequity). This causes a decrease in the average social welfare of Americans, not including the immigrant.

The immigrant themself seems likely to experience a social welfare benefit. But judging purely from economic effects, the social welfare of the rest of the US might slip.

Now what happens in the home country? It just lost a productive member of society. Just as US wealth is increased by the move, home country wealth is decreased. But things are a bit different because of Mexico's much lower standard of living. At the level of the Mexican economy, GDP differences are far more likely to actually matter to social welfare. Thus despite the gain in US output being bigger in dollars than the loss in Mexican output, the loss in Mexican output could actually outweight it in social welfare terms. The effect on income equity in Mexico depends on the industry the immigrant is leaving and other factors. I don't know if it would be positive or negative.

Thus you get a situation where the immigrant themself may clearly benefit, but social welfare in both countries might plausibly drop from the economic effects. The issues are far, far more complicated than Brad's simplistic response might lead one to believe.

Why do I support immigration? Because I expect there are social welfare benefits and issues which have nothing to do with a straightforward economic analysis. I think that if other countries worry about "brain drain" let them manage it on the supply side - the US doesn't need to try and micromanage the decision of whether immigrants are a big loss to their home countries. I think that the cure to immigration's impact on equity is more equitable laws for all, not putting a band-aid on inequity by decreasing the supply of unskilled workers. I think that the world in general should encourage mobility of human capital, which can lead to movement in all directions (immigrants don't all stay or sever all ties with their home country - many go back to start a business, send money home, and so forth). I think that in the long term, a society that is positive toward immigration is more vibrant and dynamic and tolerant, and a better place to live. [However I should note that increasing immigration levels doesn't automatically increase tolerance - much of the US is increasingly intolerant of immigrants, due to social trends that probably have nothing to do with the actual immigration level].

So that's it for today's rant against the tremendous oversimplifications of economists who think they can produce the Unassailable Argument on a complex and contentious issue with a few simple principles about how much money is gained and lost.

Thank you, Anne. 'Cause after I got the diatribe out of my system, it occurred to me that there is, or at least may be, a big inconsistency in Cohen's argument. Putting aside the nonsense that government's true obligation is other than to its own citizens, let's rub Cohen's view on that issue against his notion that immigration is a good thing because of the benefits it offers. If we are to accept that the US government has obligations to other than its own citizens, are such obligations to the citizens of the sending country, the source of immigrants? If so, then it is an open question whether the "safety valve" sort of immigration seen over the US/Mexican border is good for those who remain in Mexico. If the existence of a safety valve lessens demand for better governance, how do we know that the balance is positive? What about the poor slobs who stay? The movement of labor from Mexico to the US hasn't done all that much to equalize wages, to reduce strains on Mexican resources. Mexico has certainly made strides since Nafta. Mexico has certainly moved toward a more market oriented economy, but is there any reason to think these are the result of a porous border? Is there any reason to think that all the immigration of the past has made Mexico's own political, social and economic circumstances such that immigration will become unattractive? If not, then an open immigration policy does not necessarily serve the interests of most Mexicans. It may, but that is hardly proven.

Meanwhile, you may not like the notion that living with those like yourself is preferable to living in a melting pot, but that is a difference in preferences. One guy's preferences are as good as another's, right? If Republicans have cleared out of Orange County because of immigration, it's pretty clear that their preferences were not served by immigration to Orange County. Immigration has immposed a cost on Orange County expats. As Brad points out, GDP is likely to rise faster with immigration than without. That's good. It does, however, create winners and losers on a pretty vast scale. So disagree with the other guy's preferences, fine, but don't pretend the other guy's preferences don't matter.

"Markets distribute everything in the optimal way, unless they don't. If there is some interference with the good working of the market (such as inadequate information, monopoly or monopsony power, externalities, inadequate respect for law and property,... a sizable list), then markets may not distribute things in an optimal way."

I actually found out recently that this isn't true. Markets involving more than one person provably do NOT distribute things in the optimal way (even if they meet all the usual criteria for no externalities, perfect information, and so on). In other words, the fundamental foundation of neoclassical economics is a lie. (Originally it was an error born of ignorance, but for a couple of decades it's been basically a lie as textbooks have continued to include the "proof" of market optimality).

Basically, what most people (including economists) understand of the proof of market optimality is as follows:

Assume society is made up of many individuals with their own "utility functions" (a mathematical way of describing what they want). They may all have different, idiosyncratic wants. This produces a utility function that, if drawn as a curve (indifference curve), slopes in a variety of ways. It's all a very neat model of individual behavior.

Now consider that those individuals are involved in a market, buying and selling.

If the "ideal market conditions" are met (perfect information, no externalities, etc.), then supply and demand will interact to ensure that the market produces the utility maximizing outcome. Basically the proof aggregates the supply and demand curves of all individuals to produce a single supply and demand curve for society, and shows that the market will reach the ideal intersection of society's supply and demand curves.

The catch is that this popular conception doesn't work. Modern mathematics proves that the economic model of individual behavior makes it impossible to "sum" individual supply and demand curves into supply and demand curves for society. The social supply and demand curves would have no mathematically predictable structure, and may intersect at any number of points rather than one unique optimum.

This essentially serves as a proof by contradiction. Assuming ideal conditions and the economic model's utility maximizing agents, there is no market optimum. Therefore, the market cannot ever be expected to produce the best outcome. QED.

What economists did, however, is basically cover up this result. They created a proof of market optimality that rejected the fundamental assumptions about individual behavior. Essentially, they made it possible to sum up supply and demand curves by assuming that all individuals have the same supply and demand curves (in other words, the market consists of one person or of a number of identical clones). The proof of market optimality thus applies to this one-person market. But economics textbooks don't exactly advertise this. Far from it - they generally present the proof's peculiar assumption as a minor bit of "plausible" modeling convenience. When they say what the proof means, it's still portrayed as a proof that the market is optimal for a society of individuals who actually have different preferences and utility functions.

K Harris -

"Mexico has certainly moved toward a more market oriented economy, but is there any reason to think these are the result of a porous border? Is there any reason to think that all the immigration of the past has made Mexico's own political, social and economic circumstances such that immigration will become unattractive?"

Important questions and argument.
Thanks!

Where does the $500,000 number come from? A while back the total GDP gain for _all_ immigrants was estimated at about $10 billion:

http://books.nap.edu/books/0309063566/html/153.html

http://www.nytimes.com/2004/04/01/opinion/01FRIE.html

What's That Sound?
By THOMAS L. FRIEDMAN

MEXICO CITY

I hadn't been to Mexico since 1996, so it definitely caught my ear when I started to hear two non-Spanish words on this trip that I'd never heard here before: "China" and "India." Mexicans are increasingly aware that these two countries are running off with jobs and markets that Mexicans once thought they owned. You have to feel sorry for the Mexicans: they are hearing "the giant sucking sound" in stereo these days — from China in one ear and India in the other. Worse, they seem stuck, unable to forge a coherent strategic response.

"We are caught between India and China," remarked Jorge Castañeda, the former Mexican foreign minister who just decided to run for president in 2006. "We have lost about 500,000 manufacturing jobs. It is very difficult for us to compete with the Chinese, except with high-value-added industries. Where we should be competing, in the services area, we are hit by the Indians with their back offices and call centers. . . . Not enough people here speak English." And that's not all. While China and India each send tens of thousands of students to be educated abroad every year in science and engineering, particularly in the U.S., Mexico sends just 10,000.

Go into any discount store in Mexico and look at low-priced clothing, toys, shoes and electronics, or even some Christian religious objects, and it is hard not to buy Chinese, added Mr. Castañeda, speaking at the Mexican Council on Foreign Relations. But more important, "the U.S. markets that we had a corner on is where we are losing jobs. . . . We knew it would happen when China [entered the World Trade Organization in 2001], but we did not get prepared." ...

Mexico, a 3rd World nation, borders a 1st World nation. The inevitability of mass migration is understandable only in the context of huge population increases in Latin America, afforded primarily through reduced infant mortality and modern medicine.

The environmental strain on America is showing. Our population will increase to 400 million by 2050. We live in a civilization where automobility is given a higher value than other quality-of-life indices such as open space. The decline in our quality of life is inevitable.

The real question is not whether immigration is good or bad (again, it's inevitable), but whether we are prepared as a nation to grow in such a way that does not destroy the intangibles of the good life. Economics that only measure income and wealth distribution cannot illuminate the deeper quandaries of environmental quality in a finite world.

Yes, it's clear that labor mobility within the US (which still has significant regional differences in wealth—but they once were much greater) has resulted in a "race to the bottom".

Oh, wait. Maybe not.

Two assertions struck me as silly:
TC:I prefer high growth, minimum domestic transfers
BdL: we lack an adequate theory of market failure

Tyler's comment is typical of the arch-fantasy, which is libertarian ideology. Rather than argue about what the rules will be, they assert that there doesn't have to be any rule; rather than argue about what the income transfer should be, they assert that it can be minimal to non-existent.

Brad's comment is typical of economists, who are drawing a blank at the moment they say it.

High economic theory long ago identified risk as a key factor in economic decision-making under uncertainty, with the natural consequence that incentives and insurance are intertwined. (Think Arrow-DeBreu -- you can't get more fundamental in economic theory than that!)

Insurance is subject to well-known "market failures" which make government the natural provider in many circumstances in which insurance is at all practical.

Social insurance and income redistributive government programs (e.g. free public education) are necessary if large numbers of economic actors are going to be able to make effective, efficient entrepreneurial choices -- the kinds of good choices, which create rapid economic growth. (Think G.I. Bill after WWII!)

Transferring all the wealth to the top 1% and all the economic risk to the bottom 70%, as Bush is determined to do, will eventually get you Haiti -- a society full of poor, desperate people.

How come I got erased and Ian Montgomerie didn't? Sure, his was better, but what gives?

Ian:

''If the "ideal market conditions" are met (perfect information, no externalities, etc.), then supply and demand will interact to ensure that the market produces the utility maximizing outcome. Basically the proof aggregates the supply and demand curves of all individuals to produce a single supply and demand curve for society, and shows that the market will reach the ideal intersection of society's supply and demand curves.''

I don´t know what you are talking about. The classical proof works without representability by utility functions and doesn´t involve demand functions. Here are the three classical papers on this and links to them:

Arrow 1951, An Extension of the Basic Theorems of Classical Welfare Economics:
http://cowles.econ.yale.edu/P/cp/p00b/p0054.pdf

Debreu 1951, The Coefficient of Resource Utilization:
http://cowles.econ.yale.edu/P/cp/p00a/p0045.pdf

Debreu 1954, Valuation Equilibrium and Pareto Optimum:
http://cowles.econ.yale.edu/P/cp/p00b/p0084.pdf

I don´t know where the proof you talk about can be found, any hints would be appreciated.

''The catch is that this popular conception doesn't work. Modern mathematics proves that the economic model of individual behavior makes it impossible to "sum" individual supply and demand curves into supply and demand curves for society. The social supply and demand curves would have no mathematically predictable structure, and may intersect at any number of points rather than one unique optimum.''

What you are talking about are probably the Sonnenschein-Mantel-Debreu results which basically say that any continuous function on the price-simplex that satisfies Walras law and a certain boundary behavior can be generated as the result of individual behavior in accordance with the usual theoretical assumptions.

''This essentially serves as a proof by contradiction. Assuming ideal conditions and the economic model's utility maximizing agents, there is no market optimum. Therefore, the market cannot ever be expected to produce the best outcome. QED.''

Pareto optima exist under very weak assumptions (continuous preferences in finite-dimensional economies). And any continuous excess-demand function from the price simplex to itself has a fixed-point and therefore a market equilibrium. This is guartanteed by the Brouwer fixed-point theorem, a old topological result. The SMD-results have no bearing whatsoever on this.

"What economists did, however, is basically cover up this result. They created a proof of market optimality that rejected the fundamental assumptions about individual behavior."

None of the papers shown above do this. And the SDM-results are well known. You can find them in the standard graduate microeconomics textbook by Mas-Collel, Whinston and Green. There is no secrecy here.

I would object to Mexico being classed as a 3rd world nation.

It's more like a 2nd world nation. It's 80th out of 231 in per capita GDP at $9,000, just behind Russia's $9300.

By comparison Cuba, which even with US sanctions has less poverty and a better educated populace, is 165th with $2,300.

It's a relatively well off country full of desperately poor people.

They are desperately poor because so many of the resources are directed toward the well off.

You see this poverty all the time when economies "liberalize".

erased again, huh? I like how dissent is tolerated around here.

Would somebody like to tell me what kind of job our theoretical rural Mexican gets in Houston for $10 an hour? I'm assuming he isn't one of those extraordinary rural Mexicans who is polylingual, has U.S. citizenship, and possesses a PhD.

"And that's not all. While China and India each send tens of thousands of students to be educated abroad every year in science and engineering, particularly in the U.S., Mexico sends just 10,000."

It was pointed out (by Daniel? on Crooked Timber?) that China and India each have 10x the population of Mexico (or more). Assuming that 'tens of thousands' <100K, then Mexico is at least holding it's own, in the 'send students to America' contest.

Again, Friedman is full of sh*t.

Damn, Michael beat me too it. But yeah
Ian doesn't really know what he's talking about.
It sounds as if he's been reading that
"debunking economics" book by Steve Keen, which
is a really really really stupid book dressed
up in some economic terminology and low grade
math. I actually wasted about 45 minutes of my
life reading that book in a bookstore because
at first glance it seemed like it could have
some legit criticism in it. At best it's a
half ignorant critique of high school economics.
More likely a piece of charlatanism.

The argument that Ian makes is straight out
of that book. (In fact Keen repeatedly confuses
DMS theorem with the Gorman Form Representation
Theorem, without actually understanding (or
pretending not to understand since apparantly
he does have a position in economics) either one
of them).

Rural Mexicans in Houston making $10/hr? I live in Houston and I see big masses of Mexican daylaborers on Durham Street waiting for someone to come by and hire them for the day. If they get any work at all, it probably pays about 1/2 that.

rps,
I do not have firm data but people I know say that day labor out of Central America in Redwood City (CA) go for about $8/hr. I don't participate because I have heard stories about some who "work the system" and file suit for injury. OTOH I got one hell of a great job done by a contractor who used this kind of labor.

Stop equivicating. Let's do the reducto absurdum. Why not open our borders to a solid one billion Third World immigrants, using all our resources to accomodate them just as rapidly as it is humanly possible to do? After all, our GNP would go up, world welfare would go up, business profits would go way up. Did we leave anything out? How about the American people? -- they, and a little clause in the pre-amble to the Constitution that reads, "We the people . . . in order to create a more perfect union, provide for the common defense, and PROMOTE THE GENERAL WELFARE..... do hereby ordain, etc. Did it ever occur to our liberal friends in the Berkeley hills, that we have a contract in this country to protect the well-being of the mass of common, ordinary, decent working families, who make up the overwhelming majority of the citizenry? That, in fact, because they are the majority, when push comes to shove, this is their country and not yours? Does it occur to you that what you are proposing is a complete betrayal of their most fundamental interests?

I may be a hick in the hills of Tennessee, but I am also a liberal from way back, and let me tell you something: you guys may think you are cosmopolitan, enlightened humanists of high principle, but you are like ignorant children playing with sticks of dynamite.

So if you really want Patrick Buchanan to be president, keep it up.

A reductio ad absurdum like that only makes sense if you think increasing immigration logically, necessarily leads to totally uncontrolled immigration. Unless you believe that any changes in immigration policy that increase immigration DO lead to that, then one must debate a specific level and method of immigration control on its merits.

Julian, I think the (relatively) unrestricted immigration we have now is hurting the living standards of average Americans, along with the opening to free trade with China and India, and the introduction of tons of labor-saving technology in the IT sector and elsewhere. Until the government (starting in the acadamy) is prepared to face, recognize, and rectify these effects, we are courting political disaster in this country. What infuriates me is the total blindess of people like Brad to the growth of this menace. There are good, progressive ways to deal with these problems -- you don't have to be a protectionist or a Luddite -- but I see know signs we are trying to, or even recognize the problem. Frankly, the situation frightens me.

Yes, I got the bit on market optimality from Steve Keen's book. If that bit is so off base it really puts it into a "what is original isn't good" category. I'll have to castigate the economist who recommended it to me.

"Where does the $500,000 number come from? A while back the total GDP gain for _all_ immigrants was estimated at about $10 billion"

The $500,000 is an estimate of the increase in wealth (present value of future income), not of income or GDP.

I'm not an economist, but it does seem to me that the project of increasing World Wealth and alleviating the sufferings of the Third World are not at all the same thing. Yes, world wealth is increased through immigration, in that the immigrant tends to be better off, his family is better off, and the average consumer in the US is better off, but the big question is how many immigrants can come to the US, reasonably, and how much wealth is used to improve standards of living across the board. Without improvement in the Mexican economy, the number of immigrants must increase every year, driving down wages. This way, Capital stays in the US, under the control of business owners, and does not get used in Mexico. Improving the Mexican Economy would almost seem to be antithetical to this immigration-based policy: once Mexicans are on the same level as Americans, why would they continue to immigrate? Immigration is great for us, in providing a low-cost and easily exploitable work-force, but is this really a step forward for humanity? And how does increasing the 'suppply' of labour take the pressure off the people on welfare? It seems too much like Volokh, at least, is talking about a return to Neo-Liberalism, even if he's willing to deal with state intervention.

Also, when has there ever been a market that was not based on government intervention? Private Property (as opposed to Personal Property), a police force, an army, a court system, etc, are all government-supplied services, and it's ridiculous to say that because they are 'public goods' that they don't count when talking about a 'free market'. This goes back to that whole politics/economics divide that the Classical Liberals were so hot about.

I've put these comments on my blog:

http://jfaughnan.blogspot.com/2004_04_01_jfaughnan_archive.html#108137159106641273

"...we lack an adequate theory of market failure". I read those words last week, they percolated to the top of my consciousness today.

We just spent $17 (w/ shipping) an a clock timer we ordered from a vendor of laboratory equipment. Five years ago one could spend $9 at the grocery store on a perfectly adequate mechanical timer that worked well and lasted for years. Now one can spend $5 on a nice-loooking mechanical timer that's absolute garbage and breaks within a few weeks of use. (Yes, it's made in China, but that's not the real point.)

The $17 timers we ordered don't feel any more robust or reliable than the ones now sold in the hardware store.

For me, this is a market failure. I run into these market failures every day, all over the place. The things the market is providing aren't the things I want or need, they aren't the things my family wants or needs. The only toys we can find that are any good are made in Germany -- and they are getting harder to find. Sure -- the price is right. But it's not the right stuff even if it were free.

Yes, we need an economic theory of market failures. My gut sense is that they're getting more and more common. My suspicion is that the complexity of the modern economy, and modern products, has outstripped the capacity of human beings to make informed decisions. We need to upgrade humanity to deal with the 21st century marketplace. But if the market is not serving us, then who (or what), is it serving ...?

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