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Tyler Cowen: moral imperatives for expanding immigration

Published March 17, 2013 Economics , Immigration 4 Comments

I thought this segment of prof. Cowen’s NYT op-Ed was brilliant:

(…) Michael Clemens, a senior fellow at the Center for Global Development in Washington, quantified these gains in a 2011 paper, “Economics and Emigration: Trillion-Dollar Bills on the Sidewalk?” He found that unrestricted immigration could create tens of trillions of dollars in economic value, as captured by the migrants themselves in the form of higher wages in their new countries and by those who hire the migrants or consume the products of their labor. For a profession concerned with precision, it is remarkable how infrequently we economists talk about those rather large numbers.

Truly open borders might prove unworkable, especially in countries with welfare states, and kill the goose laying the proverbial golden eggs; in this regard Mr. Clemens’s analysis may require some modification. Still, we should be obsessing over how many of those trillions can actually be realized.

IN any case, there is an overriding moral issue. Imagine that it is your professional duty to report a cost-benefit analysis of liberalizing immigration policy. You wouldn’t dream of producing a study that counted “men only” or “whites only,” at least not without specific, clearly stated reasons for dividing the data.

So why report cost-benefit results only for United States citizens or residents, as is sometimes done in analyses of both international trade and migration? The nation-state is a good practical institution, but it does not provide the final moral delineation of which people count and which do not. So commentators on trade and immigration should stress the cosmopolitan perspective, knowing that the practical imperatives of the nation-state will not be underrepresented in the ensuing debate.

Under the Staircase: Kickstarter project related to Milton Friedman and teaching economics to young kids

Published March 17, 2013 Economics , Education 3 Comments
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Zowee Batman, I wish our grand kids had the opportunity to read these books by author I. M. Lerner! We don’t how great they will turn out to be when complete – but the project looks very promising. Ms. Lerner begins her Kickstarter project: 

One sunny September morning, many (many) years ago, I walked cautiously into a classroom and slid into an empty seat. I was a junior in high school and I had just signed up for an Econ 101 class. When I left the classroom that day, I was a completely different person. It took a few more classes for me to realize what had happened. And it was really quite simple. The blindfold had been removed and a whole new world opened up.

Milton Friedman, Friedrich Hayek, Thomas Sowell, Adam Smith, Ayn Rand, Walter Williams…I read anything and everything I could get my hands on from these and many other writers. And I found myself questioning, for the first time, what I had been spoon-fed during my years in school. I went back to my economics base often during my college years, as a counterweight to what was being advanced (no longer spoon-fed, now shoveled) within the college environment. It was my bulwark.

I started thinking about “crazy” ideas and values like personal responsibility, free enterprise, self-sufficiency, self-determination, individual rights, entrepreneurship, freedom and liberty…well, you get the idea.

As the mother of two young kids, I originally planned to recommend these (and other) great economists to my kids during their teenage years. And yes, that idea was probably doomed to failure. Not only because most teenage kids pretty much run away from anything parents would recommend. No, the reality is that by playing defense until their teenage years, we’re essentially relinquishing the field. We’re abdicating our responsibility to help shape our kids’ values by always staying two steps behind, as these values (and basic common sense) are drilled out of our kids.

It’s time to stop playing defense.

So where to begin?

A book. And more specifically: a book series. An economic adventure series that fosters the values we care so deeply about. Created specifically for our kids, at an age where they soak up everything around them. Incorporating mystery and adventure to engage our young readers, and using examples from our kids’ day-to-day lives – in school, with friends, and in familiar situations – so that they can be armed with logic and a healthy dose of critical thinking skills.

There will be six books in the initial phase.

  • Under the Staircase: Meeting Milton (Milton Friedman) 
  • Under the Staircase: Hello Hayek! (Friedrich Hayek) 
  • Under the Staircase: Talking to Thomas (Thomas Sowell) 
  • Under the Staircase: Waiting for Walter (Walter Williams) 
  • Under the Staircase: Asking Adam (Adam Smith) 
  • Under the Staircase: Adventures with Ayn (Ayn Rand)

Buy them all!

The Bankers’ New Clothes – reviewed by John Cochrane

Published March 7, 2013 Financial Crisis Closed
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Why do banks and protective regulators howl so loudly at these simple suggestions? As Ms. Admati and Mr. Hellwig detail in their chapter “Sweet Subsidies,” it’s because bank debt is highly subsidized, and leverage increases the value of the subsidies to management and shareholders. To borrow without the government guarantees and expected bailouts, a bank with 3% capital would have to offer very high interest rates— rates that would make equity look cheap. Equity is expensive to banks only because it dilutes the subsidies they get from the government. That’s exactly why increasing bank equity would be cheap for taxpayers and the economy, to say nothing of removing the costs of occasional crises.

John Cochrane reviews The Bankers’ New Clothes By Anat Admati and Martin Hellwig Princeton, 398 pages, $29.95

(…) the clear, central argument of “The Bankers’ New Clothes”: More capital and less debt, especially short-term debt, equals fewer crises, and common contrary arguments are nonsense. More capital would be far more effective at preventing crises than the tens of thousands of pages of Dodd-Frank regulations and its army of regulators, burrowed deep in the financial system, on a hopeless quest to keep highly leveraged and subsidized too-big-to-fail banks from taking too much risk. Once the rest of us accept this central idea, the details fill in naturally.

How much capital should banks issue? Enough so that it doesn’t matter! Enough so that we never, ever hear again the cry that “banks need to be recapitalized” (at taxpayer expense)!

Do read John’s long, thoughtful review. Then do what we just did, buy the Kindle edition for yourself, and gift one to your congress-person or MP. I’m not sure politicians can read, but if they read and understand this book, there is a very small chance of change. However politicians won’t touch this issue unless there is a surefire way to get re-elected, including replacing all the campaign funds they get from the financial lobby.

Burton Malkiel: Bond buyers should be mindful of history

Published March 6, 2013 Finance , Financial Crisis 1 Comment
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Prof. Malkiel has been for three months CIO of Wealthfront. His recommendations are now being integrated into much-expanded asset classes, managed by the Wealthfront software for 0.25% management fee. Of special interest to the retired cohort is what to do about the negative returns offered by bonds? In this FT essay Malkiel first outlines the history of what happened to bond holders the last time Treasury yields were 1.5% in 1946:

(…)

But does this flight to so-called havens really provide investors with the protection they desire? Or, are bond buyers making a huge mistake that is likely to guarantee them a period of negative real (after inflation) returns? The answer is almost certainly the latter. Bonds today in countries such as Japan, Germany, and the US are more expensive than at any time in history. Bond investors face virtually sure losses and equities are as attractive as they have been in a generation.

We can illustrate the fundamental unattractiveness of bonds with the US market. The buyer of a 10-year US Treasury bond at a 1.5 per cent yield to maturity will receive a nominal return well below the current rate of inflation and below the Federal Reserve’s informal target rate of inflation of 2 per cent. Thus, even if inflation does not accelerate, long-term US Treasuries will provide a negative real rate of return. If inflation does accelerate, that real rate of return will be further reduced.

It is important to remember what happened to bond investors the last time that Treasury bond yields were at 1.5 per cent, in 1946. Bond yields remained pegged at low rates until the early 1950s to enable the government to more easily finance the debts from the second world war. Therefore, bond prices remained fairly stable. But moderate inflation reduced the real value of both coupon payments and the face value of the bonds, and bondholders lost considerable purchasing power. And that was only the beginning of the pain.

Interest rates began to rise to more normal levels and bond prices started to fall. Oil and food shocks then boosted inflation further and, by the end of the 1970s, bond yields had increased to double digit levels. Thus, bond owners not only earned negative real income returns but also suffered punishing capital losses. No wonder a “bond” came to be considered an unmentionable four letter word and bond investors came to believe they had in effect been slaughtered. Investors should be mindful of history. The current era of financial repression may well lead once again to the euthanasia of the bondholding class.

All the developed countries of the world are burdened with excessive amounts of debt. As in the US, governments around the world are having an extraordinarily difficult time reining in entitlement programmes in the face of ageing populations. The easier path for the US government is to keep interest rates artificially low as the real burden of the debt is reduced and the debt is restructured on the backs of the bondholders. We reduced the debt to gross domestic product ratio in the US from 122 per cent in 1946 to 33 per cent in 1980. But it was achieved at the expense of bondholders.

Equities are reasonably priced and are downright cheap in comparison with bond alternatives. (…) 

Emerging market equities are even cheaper. (…) 

If you are a retired saver you should have a profound grasp of the meaning of financial repression by now. Please read the full Malkiel analysis at FT.

Wealthfront has added five new income-producing asset classes to improve bond diversification as follows:

  • Municipal Bonds
  • Corporate Bonds
  • Treasury Inflation Protected Securities (TIPS)
  • Emerging Market Bonds
  • Dividend Growth Stocks

Each asset class has a different set of risk, return and tax characteristics, so adding them gives us more ability to customize portfolios. Not every account will include all of the 11 asset classes we now use; a different subset of the asset classes will be used depending on account type and each client’s tolerance for risk. To read more about the rationale behind our changes please see our blog post, Burt Malkiel On Wealthfront’s Promise.

The wisdom of Scott Sumner

Published February 13, 2013 Economics Closed
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Ryan Avent considers The wisdom of Scott Sumner. What would the (US) citizens choose if offered three monetary policy  alternatives? 

BACK in December, Scott Sumner mused:

People form their views of politics and economics when they are young, and are given the reins of power when in their late fifties. Any thoughtful person in the 1930s could have easily predicted what would go wrong in the 1960s. The generation that grew up in the Great Depression would have a single-minded obsession with boosting [aggregate demand] to prevent mass unemployment. They would see everything as a demand issue, and ignore the supply side. Thus the ‘Liberal Hour’ of 1961 turned into the Great Inflation.

Any thoughtful person in the 1970s could have easily predicted the policy mistakes of the 2000s. The generation that came of age during the 1970s would be obsessed with the threat of inflation—seeing it just around the corner whenever there was a spike in the money supply, a dip in interest rates, or a blip in the CPI from commodity prices. The 1970s generation (including me) would overreact until NGDP growth was driven so low that interest rates fell to zero, making conventional monetary policy impotent. The inflation targeting consensus turned into the Great Recession.

The young people today have grown up in a world dominated by two giant bubbles…

Any thoughtful person today can predict that the macroeconomics policy failures of 2040 will be produced by a generation of late middle-aged policymakers obsessed with preventing bubbles.

(…) I suspect that so long as we’re considering hypotheticals Mr Sumner would request that we introduce a third option in which the Fed successfully targeted nominal output, leading to faster growth from 2001 to 2003, slower growth from 2003 to 2006, and a burst of moderate inflation rather than a recession from 2007 on. I feel confident that the typical American would also prefer that to the outcome we actually got. I’m not sure which of the alternative options she’d prefer, though I have my suspicions.

The important point, however, is that this kind of trade-off is not the one thats available in the real world. 

(…) 

Continue reading Ryan Avent and the thoughtful comments. I’ve contributed one comment to the conversation:

Ryan wrote “The important point, however, is that this kind of trade-off is not the one that’s available in the real world.”

I object. A rule-based central bank executing NGDPLT (nominal GDP level targeting) will dampen the big swings. There will still be surprises but the damages done willbe less severe.

fundamentalist wrote “Monetarists think nothing happens in the economy unless the Fed makes it happen.”

My understanding of the market monetarist thinking is more that the Fed can only impact short term nominal output (NGDP). The Fed cannot plot a path for real GDP. To overstate what Sumner would probably say “everything important for future productivity and wealth happens outside monetary policy”. I would say an economy with long term stable NGDP growth is a good garden for investment and innovation.

PS – one of the frequent commenters hedgefundguy signs his remarks “NPWFTL, Regards”. Like many others I’m wondering what?? I finally found his answer – which refers to disabling the default Economist publish-comment everywhere:  

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NPWFTL

“The Next Supermodel”: The Economist special issue on Nordic countries

Published February 6, 2013 Economics Closed
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How’s that for an attention-grabbing cover? I recommend you start your explorations with the excellent overview by Adrian Woolridge: Northern Lights. Adrian quickly gets into the directional reversal taken by Sweden in the 1990s:

Sweden has reduced public spending as a proportion of GDP from 67% in 1993 to 49% today. It could soon have a smaller state than Britain. It has also cut the top marginal tax rate by 27 percentage points since 1983, to 57%, and scrapped a mare’s nest of taxes on property, gifts, wealth and inheritance. This year it is cutting the corporate-tax rate from 26.3% to 22%.

Sweden has also donned the golden straitjacket of fiscal orthodoxy with its pledge to produce a fiscal surplus over the economic cycle. Its public debt fell from 70% of GDP in 1993 to 37% in 2010, and its budget moved from an 11% deficit to a surplus of 0.3% over the same period. This allowed a country with a small, open economy to recover quickly from the financial storm of 2007-08. Sweden has also put its pension system on a sound foundation, replacing a defined-benefit system with a defined-contribution one and making automatic adjustments for longer life expectancy.

Most daringly, it has introduced a universal system of school vouchers and invited private schools to compete with public ones. Private companies also vie with each other to provide state-funded health services and care for the elderly. Anders Aslund, a Swedish economist who lives in America, hopes that Sweden is pioneering “a new conservative model”; Brian Palmer, an American anthropologist who lives in Sweden, worries that it is turning into “the United States of Swedeamerica”.

(…) 

Why are the Nordic countries doing this? The obvious answer is that they have reached the limits of big government. “The welfare state we have is excellent in most ways,” says Gunnar Viby Mogensen, a Danish historian. “We only have this little problem. We can’t afford it.” The economic storms that shook all the Nordic countries in the early 1990s provided a foretaste of what would happen if they failed to get their affairs in order.

Do read Adrian Woolridge top to bottom. It’s just chock full of resources – as is the whole special issue. I’m reading the Immigration segment next.

John Cochrane: More new-Keynesian paradoxes

Published January 25, 2013 Economics Closed

Dont miss Cochrane's latest: More new-Keynesian paradoxes

….Furthermore, all the new-Keynesian models are “Ricardian.” They predict the same stimulus whether spending is financed by borrowing or by lump-sum taxes today. Good, we don't need to argue about “Ricardian equivalence,” but to believe their predictions for spending borrowed money, you have to believe that taxing you and me a trillion dollars and spending it on a trillion dollars of alien defenses will raise overall output by 2, 3, or 4 (you can get really big multipliers in these models) trillion dollars.

Cleveland Fed Estimates of Inflation Expectations

Published December 31, 2012 Economics 1 Comment
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This is from the Cleveland Fed Inflation Expectations Estimator, updated through Dec 1, 2012. One of the primary goals of the Fed’s new rule-based QE3 is to reduce real interest rates by increasing inflation expectations. Is it working?

The markets obviously do not agree with the inflation hawks that warn of runaway inflation any day now due to all that “money printing”. Look at the following time series yield curve:

Someone Forgot to Tell California’s Bankrupt Cities About the Golden State’s Alleged Economic Revival

Published December 28, 2012 Financial Crisis 3 Comments
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Libertarian editor of Reason magazine Matt Welch sprays bracing ice water on the recent optimistic articles on California’s fiscal mess.

(…) For a reality check against premature it’s-back-ulation, I recommend the relentlessly grim website Pension Tsunami, where you can see the daily nitty-gritty of blue-state interest groups (read: governments and public sector unions) fighting like wolverines over the ever-shrinking pie of available government revenue. For instance, here’s a recent article from the Riverside Press-Enterprise:

The city of San Bernardino won an important victory in its request for bankruptcy protection Friday, Dec. 21, when a judge denied CalPERS’ attempt to force payment of unpaid pension obligations through state court.

CalPERS, the state retirement system, is the city’s largest creditor. CalPERS had filed a motion for relief from the automatic protection from creditors under bankruptcy law that came with San Bernardino’s Aug. 1 Chapter 9 petition.

In order to make payroll and keep basic operations going, the city has stopped paying many of its debts, including the employer share of biweekly payments to CalPERS.

The city now owes $8.3 million and is accruing a debt of $1.7 million a month even as the agency continues to pay $3.75 million in benefits to city retirees a month, said Michael Gearin, an attorney for CalPERS, during an almost five-hour hearing in U.S. Bankruptcy Court in Riverside on Friday.

The agency depends on timely payments from its members, he said.

“Without that, the system falters, and it will ultimately fail if enough employers don’t participate,” Gearin said.

Matt ends with this:

I’ll be happier than Huell Howser tripping on acid when the Golden State makes its long-delayed comeback, but the structural problems of converting tax dollars into a guaranteed pension machine are vast and ongoing, and it’s going to take more than one month of sub-10% unemployment since January 2009 to get me busting out the Phantom Planet catalogue.

An Economics Masterpiece You Should Be Reading Now: Justin Yifu Lin’s “The Quest for Prosperity”

Published December 28, 2012 China , Development , Economics 1 Comment

My reading list is overflowing, but it looks like Clive Clook’s recommendation has to go on the top of the Development Economics list. Are you ready for “new structuralism”?

The most valuable new book I’ve read this year is Justin Yifu Lin’s “The Quest for Prosperity.” George Akerlof, a Nobel laureate in economics and a man not given to reckless overstatement, calls it “a masterpiece.” I’d say that’s right.

(…)

Lin … was an observer and participant in China’s economic miracle. From 2008 until earlier this year, he was the World Bank’s chief economist. Today he’s back in China, at Peking University.

Lin’s book is intellectually ambitious. He sets out to survey the modern history of economic development and distill a practical formula for growing out of poverty. It’s a serious undertaking: Lin isn’t trying to be another pop economics sensation. But “The Quest for Prosperity” is lightly written and accessible. It weaves in pertinent stories and observations, drawing especially from his travels with the World Bank. He leavens the economics skillfully.

Two Schools

Essentially, he proposes a middle way between two contending schools: structuralism, which emphasizes barriers to development that government intervention is needed to overcome, and the neoclassical approach, which stresses market forces and frowns on industrial planning. He calls his hybrid “new structuralism,” suggesting a closer affinity with the first. (That branding is a bit misleading, but I can see that the alternative — new neoclassicism — doesn’t roll off the tongue.)

(…) 

China’s Success

Structural transformation, of course, is exactly what China has achieved. Elsewhere Lin has acknowledged that China needs further policy reforms and that all is not well. Yet the country’s success of the past several decades is indisputable — and this is no Soviet-style industrialization mirage. Russian factories sold their output to captive markets. Nobody with a choice ever bought a Soviet-made car or television. China’s outward-looking producers are world-class. I’m typing this on a best-of-breed Apple Inc. laptop, manufactured in China.

As I argued in my last column, China is a capitalist country. But how did it get that way?

Lin’s answer draws on both development paradigms. He sees a vital role for government in overcoming barriers to development. But interventions, he argues, must respect compelling market realities. Of these, the most important is international comparative advantage. Poor countries have lots of cheap labor. For them, capital-intensive heavy industry isn’t the way to go.

For today’s developing countries, Lin says, the global economy is the indispensable setting, and looking outward is the sine qua non of rapid development. On the input side, that’s because of the opportunity it affords for technologically driven catch-up growth. On the output side, it’s because the world is a market for exports. On this view, “export pessimism,” the idea that poor countries couldn’t prosper through international trade, was one of the biggest mistakes of the import- substitution school. Globalization is the poor’s best friend.

Currently $15.37 on Kindle.

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