Immigration might be good, but does it look good?

One claim about liberalized immigration policy is that it will raise the incomes of immigrants and quite possibly natives, but that average incomes of First World countries will fall.

How is this possible? It’s a matter of averaging two groups together. Suppose you have Country A with 100 people each earning $50,000, and Country B with 100 people each earning $10,000. Then, everyone in Country B moves to Country A and earns $30,000 due to their higher labor productivity in Country A. And in this case, Country B’s labor complements Country A’s labor. So the people of Country A see their incomes rise to $60,000. Both groups benefit. But now the average income of Country A has fallen from $50,000 to $45,000, even though every single person is better off. This is an example of Simpson’s paradox.

So there is a political concern that, even if immigration doesn’t harm natives, it could look like it’s harming natives. What’s the solution? One possibility is publishing another set of income figures: not income per person in America, but average income of native-born Americans. (And average household income for households whose heads are natives, and average hourly compensation for native workers; a variety of measures would exist.) This is the “income per natural” idea developed by Michael Clemens and Lant Pritchett of the Center for Global Development.

Is this dishonest? No. The new figures would be published alongside the old ones, not as replacements. And the concepts these figures refer to are relevant: they reflect how well native-born Americans are doing. If people care about the welfare of native-born Americans, surely these numbers matter. Citizenists want to maximize the well-being of native-born Americans, and if they used numbers for all people living in America, they would come to policy conclusions that are not actually optimal for native-born Americans. Clearly that’s a failure for them.

I think natives probably would benefit on net from liberalized immigration, so I think publishing these statistics would politically help supporters of liberalized immigration. But either way, it would help better depict what’s happening to the welfare of natives.

Immigration and the Zero Lower Bound: A Twist on the “Alien Invasion” Metaphor

I was thinking earlier today about the effect of immigration on interest rates. In particular, I thought of an unusual argument for immigration restrictions when short-run interest rates are at the zero lower bound.

Some New Keynesian economists have suggested that destroying productive capacity can raise current output in said circumstances. (For academic journal articles asserting this, see the beginning of this paper by Johannes Wiedland, also cited below.)

The reasoning is that a negative supply shock can lower expected production, thereby increasing expected inflation. When short-term nominal interest rates are stuck at zero, this has the effect of lowering expected real interest rates. This in turn causes people to spend more money now, raising output and employment.

Intuitive example: You have money in a bank account earning nearly zero interest. A hurricane forms, threatening the supply of various goods. What do you do? Simple: you take money out of the account and buy goods whose prices you expect to go up. The opportunity cost of doing so is minimal, and buying the goods before they go up in price makes you better off.

Paul Krugman’s example of an “alien invasion”: Nobel laureate economist Paul Krugman gave an infamous example of an attack by aliens on Earth, in which governments would scramble to spend money on defense. This example is a bit different from the one I gave, because the spending is done for the purpose of fighting off a potential supply shock, rather than just reacting to one.

However, in the case of the alien invasion, there is an expected possibility of aliens doing damage to the earth, and some diversion of resources towards fighting aliens instead of producing other goods. Both of these raise inflation expectations, lower real interest rate expectations, and increase present-day spending.

What does this have to do with immigration? When the economy is at the zero lower bound, it could make sense (under the model previously described) to further restrict immigration. This reduces expectations of real GDP, thereby increasing inflation expectations and inducing more spending.

Indeed, some people have referred to the existence of an “illegal alien invasion” (Google the term for examples); namely, of people entering the United States unlawfully. (Put aside the question of whether it is accurate to call mostly-peaceful migration an “invasion”.) But, unlike Krugman’s, this “alien invasion” would lower current output! With more immigrants adding to future real GDP, and short-term nominal interest rates stuck at zero, people would expect that goods will be cheaper in the future than they previously thought, and would hoard more money as a response.

A few reasons why I don’t actually endorse this argument for immigration restrictions:

  1. Even accepting the described view on supply shocks, one might not want to trade off future production for present production. Krugman was joking with his suggestion of faking an alien invasion, and it’s unfair to say that people who endorse this model don’t care about the long term at all.
  2. There are empirical issues with the claim that negative supply shocks at the zero lower bound are expansionary. Johannes Wieland of UC Berkeley argues in the previously linked paper “Are Negative Supply Shocks Expansionary at the Zero Lower Bound?” that “financial frictions” prevent this effect from working. He claims that negative supply shocks reduce the value of banks’ balance sheets, thereby constraining their lending and preventing the positive effect on aggregate demand from taking place. Using a general equilibrium model with these “financial frictions” built in, he finds that negative supply shocks at the zero lower bound do hurt short-run output. More research here may be needed, but his case seems plausible.
  3. There are better ways of dealing with the zero lower bound. I don’t want to get into my views on monetary policy here, but it should suffice to say that most people across the various schools of thought find there to be better ways of getting out of the zero lower bound than deliberately destroying productive capacity.
  4. Immigration could raise returns on capital and investment demand, thereby raising interest rates. Generally speaking, expanding the supply of labor is expected to raise the return on capital by acting as a complementary good. However, I say “could”, because the complementarity between labor and capital is very complex, and there are cases in which immigrants act as substitutes for capital. Dartmouth economist Ethan Lewis has done some work on this subject; see, for instance, “Immigration and Production Technology”.

I can’t say I find the “restrict immigration more at the zero lower bound” argument persuasive, but it is at least interesting, and I think I am the first to suggest it.

What Does the Center for Immigration Studies Consider to be “Exploitation”?

David North has a post on his blog at the Center for Immigration Studies titled, “CIS Gets an Offer We Will Refuse from a Bangladeshi Organization”. He explains that a recruiting agency had emailed a foreign recruiting firm, offering to pay his organization for finding employment for a worker sponsored by their agency and arranging for a visa.

He then says that, “In any case, it is highly unattractive, and is an indication of how badly nonimmigrant workers are treated in such cases, and how attractive they can be to exploitative U.S. employers”.

Yet these employers are offering employment to the workers in question, employment which generally pays far better than alternatives. Conversely, the U.S. government prevents workers from offering their labor at higher wages.

If “exploitation” actually has to do with harming workers, then it is clear who is really engaged in it.

Could Zoning Laws Affect Political Outcomes and Marriage Rates?

From a Nathan Smith post on windfalls in land value from immigration (which I recommend), I found an interesting paper by George Hawley entitled “Home affordability, female marriage rates and vote choice in the 2000 US presidential election: Evidence from US counties”. Abstract:

This article tests the hypothesis that differences in the housing market can partially explain why some American counties are strongly Republican and others strongly Democratic, and that this phenomenon can be largely attributed to the relationship between home values and marriage rates within counties. Specifically, I test the hypothesis that, in the 2000 election, George W. Bush did comparatively better in counties with relatively affordable single-family homes, even when controlling for other economic, demographic and regional variables. Using county-level data, I test this hypothesis using spatial-lag regression models, and provide further evidence using individual-level survey data. My results indicate a statistically significant relationship between Bush’s percentage of the vote at the county level and the median value of owner-occupied homes, and that at least part of this is explained by the relationship between home values and marriage rates among young women.

The author finds that a $10,000 decrease in the median home price yielded an additional 0.3 percentage points for Bush in the 2000 election (so, a 0.6 point swing per $10,000). Although I have not reviewed the paper enough to determine whether I agree with its conclusion, it is at least interesting.

Given that zoning is often considered a factor in higher housing costs (see, for instance, Glaeser and Gyourko 2002), I wonder if restrictive zoning laws could have the impact of lowering marriage rates and making voters more leftist. Housing cost wedges can be quite large (in the hundreds of thousands of dollars sometimes), so the impact could be sizable. The difference between median owner-occupied housing prices in California and Texas, for instance, is $295,200 ($421,600 – $126,400). If California’s housing prices fell to those of Texas and the effect identified in the paper took place over time, there could be a 17.7 point swing in presidential elections in the favor of the Republican candidate (0.6 times 29.52)! Rough extrapolations are what they are, and certainly not all of the housing price gap is due to zoning, but the effect could be large.

Some types of zoning encourage rather than discourage sprawl (such as free parking mandates), and eliminating those might have contrary effects if they induce more people to live in cities. Nevertheless, zoning could still be a significant factor in political outcomes.

Sloppy Economics and Part-Time Austrians

The economy must have been hit harder than expected, given that so many Austrian Economists have switched to being only part-time Austrians, and otherwise thoughtful economists (whether Austrian or not) have shirked their duties.

What am I talking about? I’m talking about two recent waves of libertarian appeals to poor minimum wage empiricism that would not pass the sniff test in an introductory econometrics class.

The first round:

Kevin Erdmann blog post on the effects of minimum wage on teen employment. Erdmann originally regressed teen employment over time before and after the minimum wage was increased at different times in US history, concluding that there is strong evidence that the minimum wage caused the decrease in the employment trend.

This article was shared by (at least) Steve Horwitz, Peter Boettke, Don Boudreaux, and Mark Perry.

Horwitz introduces the article with

Evidence about the minimum wage harming teen employment you say? Evidence you shall have.

Boudreaux says

These data and these estimates combine with the compelling nature of – and with the central role in economic science of – the law of demand to make an empirically persuasive case that, as employers’ costs of employing low-skilled workers rises, fewer such workers will be hired than otherwise. [emphasis in original]

And Perry tosses in some snarky strikethrough formatting to note that

Marginal RevolutionCafe Hayek and the Coyote Blog are all featuring the chart above and the blog post about the minimum wage law government-mandated wage that guarantees reduced employment opportunities for teenagers by Kevin Erdmann on his Idiosyncratic Whisk blog.

The problem with all of these authors sharing the blog post and praising its conclusion is that the evidence provided is simply useless. One of the most fundamental aspects of science is the idea of controlling for external variables. The original post by Erdmann simply regressed teen employment over time – before and after the minimum wage was increased – without including any controls. However, it is notable that at least some of the periods with minimum wage increases overlap with recessions. And when the two competing theories about why employment has fallen are a minimum wage increase and a recession, my bet is always with the recession.

This is not to say, of course, that I believe minimum wages do not have teen disemployment effects. Rather, my point is that the evidence presented provides no backing for the claim, given the naive data processing performed. Not only can recessions help to explain the trends in employment, but they can also help to explain minimum wage hikes (or at the very least there is a plausible pathway): the economy goes south, so politicians argue for a higher minimum wage to help out struggling families (and win the left-liberal vote). As such, recessions are a classic example of a confounding variable in the analysis.

Yet even if the analysis somehow included the effects of recessions, there would still be too many variables uncontrolled that could be causing the observable effect (Dube also mentions that state-level variation in minimum wages could have an important effect). This is fairly standard Austrian Economics 101 mantra – you can’t control the necessary variables to claim causation (at least in most situations – I believe Imbens et al (1999) to be a tantalizing attempt at empiricism Austrians wouldn’t dislike).  I do not use the word “mantra” disparagingly, as I am strongly influenced by the Austrian position on empiricism and I approach all econometric studies with extreme caution. This case is no different – especially when so little work was done to rule out confounding factors.

The second round:

A Steve Hanke blog post at the Cato blog arguing that data from across European countries shows that minimum wages increase unemployment. Hanke shows a graph of unemployment for countries with and countries without minimum wages. Those without minimum wages have lower unemployment:

This is another piece of fairly useless empiricism. Once again, there are no controls for confounding factors. Is it so strange to think that countries that are more likely to enact minimum wages are also more likely to enact other labor market regulations that weaken the job market? If this is the case, then what we are seeing in the graph could very well be the effect of those other regulations – and we learn absolutely nothing new about the effect of minimum wages. I am not sure whether Dr. Hanke considers himself to be an Austrian, but in either case, the argument is unworthy of being published.

Sadly, the post has been propagated across at least a few websites already (including Boudreaux’s Cafe Hayek).

What could have been said

Once again, I am not disagreeing with the ultimate conclusions of the two posts discussed above. I believe that, if not in the unemployment rate, minimum wage hikes would have impacts in other variables, some seen, some unseen – perhaps job training, perhaps the intensity of the work environment, and so on.

Here’s what the articles could have said, which I would have found not only acceptable but a fantastic argument for their side:

Suppose the correlations in the two analyses ran in the completely opposite direction. That is, minimum wages tended to correspond with higher teen employment in the US over time, and minimum wage countries in Europe tended to correlate with a lower unemployment rate. What would the left-liberals do? They would parade this fact around in victory. Yet the facts are not like that, but the complete opposite. We do not see a corresponding pensiveness and pause on their side as to why the facts might not be so.

In this case, this argument wouldn’t be a critique of the minimum wage policy, but of the opposition itself. This doesn’t make it bad – it points out the dishonesty of loudly parading when the data superficially supports their side, but crickets when it doesn’t.

Conclusion

Austrians should be consistent Austrians: Do not reject empiricism when it disagrees with your policy stances and accept it when it agrees. If an analysis cannot possibly control all relevant variables, the analysis cannot be used to make a causal claim. If an analysis doesn’t even begin to attempt to control variables, then this is not science but toying with numbers.

And if you don’t want to be an Austrian, then at least don’t be a sloppy economist.

Update (2/1/2014): Jonathan Catalán takes on the same study, though he appears more mild-mannered than I am here: http://www.economicthought.net/blog/?p=5633