Rich in spite of ourselves

The immigration debate has always revealed the anti-market bias of many U.S. liberals as well as conservatives. Dan Heninger (in today's WSJ, excerpted below) elaborates.

Denying market forces is about as useful (and bright) as denying gravity. People will cross borders, no matter what, in pursuit of a better life. They will even risk drowning, dehydration, and other horrors -- as boat people and many others do all over the world all the time. So the best that can be done is a flexible set of policies that implement reasonable monitoring (as with legalizing drugs, prostitution, etc.). But that does not get votes.

Bryan Caplan hammers this home in his wonderful new book. (And to think of all the years that I had taken "rational ignorance" seriously.)

We are rich in spite of ourselves.

How About Amnesty for the Market?
Dan Heninger
WSJ, May 31, 2007; Page A14

Several years ago, a think tank called the Migration Policy
Institute produced a digital map of all the counties in the U.S., depicting
where the foreign-born population lives. In other words, the immigrants, not
only Hispanic but all ethnicities. The map is color-coded -- with deep purple
and navy-blue counties holding the largest raw numbers of foreign-born people,
from 23% to 50% of total county population (the U.S. county average then was
11.1%).

When your eyes fall on the map, they are drawn immediately to
a long strip of deep blue and purple counties running from the southern tip of
Texas and northwest along the border and deep into California. Undeniably, it is
difficult to go nearly anywhere in California -- its cities or its smaller
farming communities -- without realizing that the state is under pressure from
the influx of Latin American migrants. Then more deep blue spreads into Nevada
and Arizona. And of course southern Florida.

The map also shows the swath of immigrant-dense areas around
New York City and northern New Jersey and, less publicized, around Chicago on
the southwest shore of Lake Michigan. Though heavy with Hispanics in their
midst, neither New York nor Chicago produce the nightmarish accounts of social
destruction from this in-migration.
In raw numbers, according to MPI's
tables, six states over time have held far and away the largest number of
foreign-born people, with California's 9.6 million as of 2005 overwhelming
runner-up New York at almost 4 million. Texas and Florida each hold more than 3
million with Illinois and New Jersey at about 1.6 million.

However, the percentage increase from 2000 to 2005 shows a
different picture. California's growth rate, at 9.1%, ranks 40th. In fact save
for Florida (ranked 25th by growth rate), all the other states with large
immigrant populations experienced growth below the national average of
16%.

The state with the highest percentage growth of immigrants in
those five years was South Carolina, at 47.8%. Rounding out the top 10
high-growth immigrant states, all up more than 30%, are New Hampshire,
Tennessee, Arkansas, Delaware, Alabama, Georgia, Nebraska, Kentucky and North
Carolina. (If you really want to get away from it all, head to Wyoming -- dead
last with about 11,000 foreign-born and 49th in growth with a -5% rate.)
What
that list of states with high rates of in-migration tells me is that immigrants,
legal or illegal, go where there's work. They constitute what in one of the few
felicitous phrases in economics is called "labor-force
participation."

A study last September by the Pew Hispanic Center tracked
migration flows back to 1990 and found that the most notable factor affecting
the rise and fall of total migration numbers was the state of the U.S.
economy.

What this in turn suggests is that the best way to stanch the
flow of illegal immigration would be to drive the growth rate of U.S. GDP back
toward zero.

But of course no serious person would propose any such thing.
Labor-force participation is as American as apple pie. This country, as the
saying goes, was built on work. And that may be precisely why Congress is having
a hard time passing an immigration bill.

Notwithstanding all the calls for enforcing the borders and
obeying our laws -- unassailable as ideas -- one is still left with the
legislative challenge of transforming several million people who are going to
work every day into a national "problem." Not for nothing has this congressional
effort turned into the most amazing Rube Goldberg contraption -- a point system
to measure a worker's worth, a $5,000 fine for working here, a go-home
requirement and a system whereby the boss has to conclusively prove that José
and Maria are kosher.

No wonder it's hard to pass a bill. It's hard because Congress
is trying to elevate one American value, respect for the law, by demoting an
American value that up to now has been an unambiguous, uncontested ideal --
respect for work, for labor. The tension here is especially difficult for
conservatives.

Conservatives and liberals will fight unto eternity over whose
notions of the law, society and justice are right. But the one idea owned by
conservatives is the market.

For many Democrats in politics, the market -- the daily
machinery of the private economy -- is a semi-abstraction. It's a barely
understood thing that mainly sends revenue to the government, without which the
nation is incapable of achieving social good. Liberals happily concede the idea
of salutary "market forces" to their opposition. For them, markets are for
taming.

Why, then, would Republican politicians and conservative
writers want to run the risk of undermining, perhaps for a long time, their core
belief in the broad benefits of free-market economic forces in return for a law
that hammers these illegal Mexicans?
If I'm a liberal or progressive
Democrat, I'm gleeful to see conservative foes who have preached "the market" at
me since the days of FDR now arguing that these millions of workers are an
artificial, "unskilled" labor force whose presence merely prevents "the market"
from replacing them with machines.

Conservatives also argue, with considerable force, that any
conceivable path to citizenship or guest-worker status for these workers -- no
matter how long or arduous -- would be "amnesty" and so make a mockery of the
rule of law. But so massively setting aside years of principled, market-based
argument -- the environment, pharmaceuticals, labor, antitrust -- to thwart
these movements of immigrants is a risky proposition.

The massive migrant flows across the states described earlier
-- into the private industries of construction, restaurants, agriculture,
food-packaging, hotels, health and landscaping -- is irrefutably the result of
powerful, lava-like free-market economic forces.

No matter how principled conservatives may think themselves on
this issue, the fact remains that at crunch time they sent the market to the
back of the southbound bus. Sounds much like the extra-market case their
opponents make for the Kyoto Treaty. It also sounds like an argument for sending
a $2,000 contribution to Hillary Clinton, so the country can be run by people
who truly believe in managed economies.

Getting inside their heads

I am on-board ship in the Baltic and reading More Sex Is Safer Sex by Steven E. Landsburg. How would I know that it's a conversation starter? And who wants to start conversations if one can blog?

I estimate that I have taught about 10,000 econ principles students over the many years. Getting inside their heads is the challenge. One always looks for precisely the kind of analysis, examples and flair that Landsburg demonstrates.

In "How to Read the News", he takes us through the dreary standard analysis that we get from news sources re racial profiling, disaster relief, the sack of Baghdad, global warming, trade deficits, outsourcing, the racism of protectionism.

He begins Ch 14 this way: "The problem with the news is that it tends to be reported by journalism majors. That's probably better than letting them design bridges, but it does call for a certain skepticism on the part of the reader. Even when the facts are right, the interpretation can be very wrong -- especially on hot-button issues like racial profiling or outsourcing, where prejudices run deep. If you want to know what's realy happening, a little economic analysis can go a long way." This is what he does, perhaps better than most.

The more things change ...

One of my favorite IHT features is their "In Our Pages" section. Seventy-five year ago today, they ran "Changes in Capitalism."

"ATLANTA: Calling for a radical and far-reaching change in the entire economic structure of the U.S., Governor Franklin D. Roosevelt of N.Y., in an address here tonight [May 24], advocated national social planning that will achieve "a more equitable distribution of national income." Departing from the deep-rooted doctrines of either political party, Governor Roosevelt borrowed liberally from the Socialist party's handbook, asserting that capital in the future must be content with a smaller return and give labor more and that the country needed and demanded a social program that called for "bold and persistent experimentation." The governor argued that the country can no longer afford an economic life controlled by a "small group of men whose chief outlook on social welfare is tinctured by the fact that they can make huge profits by lending money and borrowing securities. It is common sense to take a method and try it," he said. "If it fails admit it frankly and try another, but above all try something that the millions in want do not have to stand by silently forever while the things to satisfy their needs are within easy reach."

He did not cite climate change and the need for energy independence. Otherwise, we hear very similar sentiments from FDR's 2007 successors.

Great modern American history

If there is a better modern American history than Brink Lindsey’s The Age of Abundance: How Prosperity Transformed America’s Politics and Culture, I have not seen or heard of it. I greatly enjoyed’ the author’s Against the Dead Hand: The Uncertain Struggle for Global Capitalism when it came out a couple of years ago. It now appears that Lindsey has put together two books in rapid succession that are both must-reads as well as greatly enjoyable.

He develops this theme. “Over the course of the sixties and seventies, American society was convulsed by two opposing religious movements: the Aquarian awakening and the evangelical revival. At the core of each was a vital half-truth, though the partisans on either side were unsurprisingly oblivious to their own partiality. The devotees of the Aquarian awakening grasped that mass affluence made possible wider horizons of experience and inclusiveness, but they lacked proper appreciation of the institutions that in turn made mass affluence possible. The leaders of the evangelical revival, on the other hand, were staunch in their defense of alliance-creating institutions – and excessively rigid in their suspicion of the new social and cultural possibilities created by affluence.

“By the 198os, enough dust had settled for the broad outlines of a resolution to become visible. …” (p. 264).

Coercion

Over at Cato Unbound, Dan Klein has prompted a thoughtful discussion with Richard Epstein, Ed Glaeser, and Liam Murphy. The whole exchange has to be read to be fully appreciated. The writers discuss the usefulness of the distinction between actions that are coerced vs. those that are voluntary. Is the minimum wage an example of coercion? Is any coercion acceptable?

I always prefer to add space, geogrpahy and exit to such discussions. People do choose to trade residential rights for protections. This is how and why they choose particular private neighborhood associations (private governments). Libertarians, I suppose, can abide all of this as long as the units of government are geographically small enough to make easy exit possible. Efficient rights-for-protections trades are also vetted this way. This is the objection to large cities regulating land use but under the guise that they are offering property protections that people want.

I would apply this test to all possible coercions. In other words, I want a Bill of Rights, checks and balances, etc., and a judiciary that takes them all seriously and all the rest. But to be safe, I want the bulk of legislation/regulation done at local enough levels where easy exit is possible. This is why I like clear and easy rules for neighborhood secession.

This is also why I go a little nuts when I hear talk of the importance of "regional governance to solve regional problems."

"Coincidence? I don't think so"

The May 2007 issue of Econ Journal Watch is now available. I am working through it and greatly enjoying it. (Full disclosure: I am listed on its Advisory Council).

In this issue, John Dawson surveys the growing literature on institutions and development that has made its way into refereed journals. He finds that papers that rely on the Economic Freedom of the World Index have trouble making it into top-tier journals.

"Coincidence? I don't think so." This is Dawson's view and his numbers are compelling.

Another project (for the future) would be to see how this literature will fare in the textbooks.

Google Scholar shows 35,600 hits for "market failure" but only "7,750" for "government failure".

"Coincidence? I don't think so,"

Great food for thought

I am greatly enjoying Bryan Caplan's The Myth of the Rational Voter: Why Democracies Choose Bad Policies.

Democracies have some well known problems, as we have known ever since the first democracies. "Rationality" is a quirky idea but one that has meaning to economists. And the idea of rational voters has been qualified by the public choice idea of rational ignorance.

But Caplan elaborates and starts with the important idea that voter irrationality is widespread; economic thinking is not second nature or even of interest to very many people.

Teachers of economics know that non-zero-sum outcomes are seemingly exotic for many. Zero-sum is fundamental in most cultures and some say that it is part of out evolutionary heritage; trust extended to anyone outside the immediate group was for eons a risky strategy.

Politicians understand this and veer to what we call "populism." It is then a race to test which flavor of populism works best at any time. This is tempered by the fact that there is complex voter selection in many directions -- including toward those who are slightly more economically literate.

This is one book where the tumbnail sketch is not adequate. It is chock-full of ideas and insights.

Economists not agreeing

Economists are still debating the Great Depression so it is no surprise that there is little agreement on the causes of current growth. Daniel Altman reports (today's NY Times, see below) on his "Pop Quiz" sent to the NBER economists that look at macro-economic fluctuations. He finds that economics is "not an exact science."

When I first started following politics in the news, I was always intrigued that pollsters and economists hired by any candidate were routinely identified as by their party affiliation. Why was that any more relevant than, say, their religion (I thought)? Silly me. Neither can seriously be presumed to offer purely "scientific" advice. So why are they hired?

Politicians have certain instincts and they hire all sorts of advisors that might elaborate them. As is the case with all political consulting, it is easy to spot the gaffes but much more difficult to identify the successes. Politics is not an exact science.

Pop Quiz: Did the Tax Cuts Bolster Growth?
By DANIEL ALTMAN

POLITICIANS from the president on down have lately been saying
that the tax cuts passed in 2001 and 2003 were responsible for the quick growth
of the economy starting in mid-2003. That growth has since tapered, but as Republicans lobby to make the tax cuts permanent,
it’s worth asking — are they right?

I decided to pose that question to a large group of mainstream
economists through an informal survey. The answer, in a nutshell, was no — the
tax cuts don’t deserve most of the credit for the economy’s strong growth. But
there was a lot more to the story.

Here’s how the information was collected. Last week, I sent
e-mail messages to the 177 members of the National Bureau of Economic Research’s
program on economic fluctuations and growth. The bureau is the nonpartisan,
nonprofit institute whose macroeconomists conduct their own research and
ascertain the timing of the nation’s booms and recessions.
The e-mail message had just one question: “Which factor was most important for the economy’s growth from mid-2003 through the end of 2006?”

It offered the economists five possible responses:
a. The tax cuts signed by President George W. Bush.
b. Pent-up demand following
the recession, the corporate scandals and the invasion of Iraq.
c. Both (a) and (b) were important.
d. Neither (a) nor (b) was important; it was the
regular business cycle.
e. There’s no way to tell now.

As a check of the economists’ willingness to answer beyond the
multiple choices, the options didn’t include anything having to do with monetary
policy, including the Federal Reserve’s actions, global interest rates or the
refinancing in the home loan market — factors that could have been important.

Forty-nine economists responded to my message, including many
of the best-known names in the field. Of these, only five, about 10 percent,
said that the tax cuts were the most important factor in the economy’s growth.

Two were Nobel laureates known for their conservative
views — Robert E. Lucas Jr. of the University of Chicago and Edward C. Prescott of Arizona State University. Two other professors, Martin S. Feldstein of Harvard and Gary D. Hansen of the University of California, Los Angeles, qualified their answers by mentioning other factors.

Three economists chose pent-up demand, and three answered
both.

But the majority, 30 economists, answered neither or supplied
an answer not listed. Robert E. Hall of Stanford wrote that “the U.S.
economy recovered from every single recession it ever had, so the growth in
2003-2006 was generally part of the normal cyclical recovery.”
Several economists volunteered other factors, among which monetary policy was the most
popular.

“I can’t believe you left off the list: superlow interest
rates caused by the Federal Reserve,” wrote Alan S. Blinder, a Princeton
professor who was vice chairman of the Fed in the mid-1990s. Paul M. Romer of
Stanford echoed Professor Blinder’s sentiments.

Robert J. Gordon of Northwestern University added: “I hope others
tell you that your question is absurd, because it leaves out the most obvious
cause — an unprecedented period of negative short-run interest rates that fueled
spending on housing, made possible consumer cash-outs through mortgage
refinance, and also supported consumer spending more generally.”
Some professors were just as adamant in supporting an alternative hypothesis, arguing
that changes in productivity had been responsible for the economy’s
growth.

“Productivity growth and financial innovation are the big
stories of the 2000s,” said Kenneth S. Rogoff of Harvard. “Innovation helped
cushion the economy during the 2001 downturn, and fueled a stronger than
expected recovery for several years thereafter.” Erik Hurst of the University of
Chicago said that “aside from the inventory correction in 2001, the growth in
2003-2006 was not that different than 1996-2000 (which had nothing to do with
tax cuts or pent-up demand).”

And one economist said that most of the factors named, with
the exception of the tax cuts, were part of the usual behavior that followed
recessions. “Pent-up demand following a recession sounds like the regular
business cycle,” wrote Robert J. Shiller of Yale. “Also, part of the regular
business cycle is the Fed and the behavior of speculative
markets.”

DEBATES about the business cycle aside, most of the
respondents were unconvinced by the politicians’ claims about the benefits of
tax cuts. In fact, one actually argued that the tax cuts hurt the economy. “The
tax cuts, by increasing uncertainty about how impending fiscal imbalances will
be resolved, probably hurt growth, if anything,” said Christopher A. Sims of
Princeton.

That wasn’t the only point of contention, though. A similarly
contrary argument was suggested by Lee E. Ohanian of U.C.L.A. concerning the war
in Iraq. “Large increases in military expenditures are almost always associated
with rapid growth (e.g. World War II, when government spending reached about 70
percent of trend output), but the size of the Iraqi conflict spending is quite
small as a fraction of total income.”

Economics is not an exact science, even in hindsight. Indeed,
economists rarely say that they’ve proved an empirical hypothesis. Rather, they
say that a hypothesis can’t be ruled out. In that spirit, several answered that
there was no way to say for sure which factors had caused the economy to
grow.

Paul S. Willen, a senior economist and policy adviser at the
Federal Reserve Bank of Boston, said that he would answer “neither,” but added
that “if we hold ourselves to the highest standards of scholarly rigor, we could
not answer anything but (e),” the response for there’s no way to tell now.
Perhaps, for the politicians, a similar measure of caution may be warranted.

Not even dumb growth

As many readers of this blog know, "Smart Growth" as applied to cities is the idea that auto-oriented development (sprawl) is a "problem" and that central planning is a "solution."

It is a ignorant at best and pernicious at worst. But it has become common parlance in elite circles, widely espoused and cited without embarrassment.

In "Ten Years of Smart Growth: A Nod to Policies Past and a Prospective Glimpse Into the Future" (Cityscape, 2007), Regina C. Gray is not bothered by any of this but reports some numbers of interest. In the years, 1994-2006, voters around the U.S. voted on 1,810 "smart growth" measures and approved 1,397 of them. In so doing, the approved $75.8 billion to be spent on various "smart growth remedies."

Not only are market mechanisms blunted in favor of politicization but boatloads of money are allocated to the enterprise. It is not even dumb growth.

There will be less growth. And that has consequences that are rarely mentioned.

Demography is destiny -- politics is local

Michael Barone writes about "The Realignment of America" (gated) in today's WSJ. He looks for the voting bloc implications.

Blue state-red state and the other cliches obscure much more than they reveal. And immigration is very big, especially in the coastal cities. And as immigrants arrive, others move out.

"The result is that these Coastal Megalopolises are increasingly a two-tiered society, with large affluent populations happily contemplating (at least until recently) their rapidly rising housing values, and a large mostly immigrant working class working at low wges and struggling to move up the economic ladder. The economic divide in New York and Los Angeles is starting to look like the economic divide in Mexico City and Sao Paulo."

Can the politics of these places be far behind? In part this recalls David Brooks' Patio Man, who sought places where he could best avoid his two nemises, the very rich and the very poor.

Crying wolf is a bad idea

Crying wolf is always a bad idea. Deception is harmful and so is the loss of credibility. It is awful when it is done in the supposed service of a greater good.

Lately, this has been the last refuge of green scoundrels. When the whistle is blown on some over-the-top claim about the environment, the response has often been that there is something virtuous about lying for a "good cause."

Tell that to Stanford Prof. G. Pascal Zachary ("The silver lining of impending doom", in today's NY Times) who even links the tactic to Joseph Schumpeter's idea of creative destruction.

"The world goes to town"

The Economist of May 5 includes "The world goes to town," a survey of the nature and the promise of the world's cities. Much of the survey makes great sense. Institutions that preclude predation are critical. Sustained economic development came with the industrial revolution but that required sustained urbanization.

A better way to say it is that entrepreneurial success accompanies and is the driver for all three. The survey alludes to the "reinvention test". And "a strong base of skilled workers ... has been a source of long-run urban health." Also "With age, cities go centrifugal -- but maybe not forever." Maybe. But why not connect all of these ideas?

Skilled workers arrive and become productive because there is entrpreneurial success. The latter requires flexible institutions. And these make reinvention possible, including new spatial forms. In other words, many of the phenomena alluded to in the survey interact in very important ways.

This view undermines the article's weird pining for better coordination of urban plans. Yet, all in all, it's a good read.

"The world goes to town"

The Economist of May 5 includes "The world goes to town," a survey of the state and the promise of the world's cities. Much of the survey makes great sense. Institutions that preclude predation are critical. Sustained economic development came with the industrial revolution but that required sustained urbanization.

A better way to say it is that entrepreneurial success accompanies and is the driver for all three. The survey alludes to the "reinvention test". And "a strong base of skilled workers ... has been a source of long-run urban health." Also "With age, cities go centrifugal -- but maybe not forever." Maybe. But why not connect all of these ideas?

Skilled workers arrive and become productive because there is entrpreneurial success. The latter requires flexible institutions. And these make reinvention possible, including new spatial forms.

This view undermines the article's weird pining for better coordination of urban plans. Yet, all in all, it's a good read.

Getting in front of eyeballs

Hip-hop wannabees also have skills that pay off. In my part of the world, "human directionals" can be seen by most busy intersections. They do put standard billboards to shame. A recent LA Times front-page feature (excerpted below) tells the story.

The fine art of making a point ... 'Human
directionals' -- those guys spinning advertising arrows -- can cost $60 an hour.
Some of their best moves are filed in the patent office.

By Alana Semuels
May 1, 2007

JEREMY White was holding a sign advertising $5 pizza deals at
Little Caesars in North Hollywood when two young men stopped their white pickup
truck.After noticing his strong arms and athletic frame, they made him an
instant offer. "We can pay you $10 an hour. Give us a call," White recalled the
men saying.

A few days later, the 20-year-old met them at a North
Hollywood park where coaches with clipboards barked at dozens of teenagers doing
push-ups, part of a regimen preparing them to spin arrow-shaped signs for
tanning salons and new homes. Four days later, White quit his Little Caesars gig
to join the men's company, Aarrow Advertising of San Diego.

The payoff was immediate: $10 an hour, almost double his
previous wages. During his second day on the job, a passerby was so impressed
with his spinning that she gave him a $250 Croton watch. Within a month, he got
a raise to $15 an hour. "I don't like to toot my own horn, but I'm one of the
best out there," White said.

White is part of the competitive world of "human
directionals," an industry term for people who twirl signs outside restaurants,
barbershops and new real estate subdivisions.

Street corner advertising on human billboards has existed for
centuries, but Southern California — where the weather allows sign spinners to
work year-round — has endowed the job with style.

Local spinners have cooked up hundreds of moves. There's the
Helicopter, in which a spinner does a backbend on one hand while spinning a sign
above his head. In the Blender, a spinner twirls the sign behind his back.
Spanking the Horse gets the most attention. The spinner puts the sign between
his legs, slaps his own behind and giddy-ups.

Thanks to growing demand, the business has turned cutthroat.
There's a frenzy of talent poaching. Spinners battle one another for plum
assignments and the promise of wage hikes. Some of the more prominent compete
for bragging rights by posting videos on YouTube and Google Video, complete with
trash talking. One YouTube comment reads, "i don't know if you stole my tricks
or i just do them better."

Time and oddities

Back in 1969, William Vickrey argued that congestion road pricing in Manhattan was a no-brainer (not his words). Ever since, economists and others have elaborated the idea thousands of times, citing its environmental, efficiency and equity aspects.

Of course, no one knew that it would take a London socialist mayor to take bring it to the world's attention (no slight to Singapore, which has been there all along, and Stockholm but London is London). And no one could have known that it would take global warming hysteria to bring it to New York (see Elizabeth Kolbert's "Dont Drive, He Said" in the May 7 New Yorker).

Good ideas eventually have their day, even if it takes time and a few oddities.