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November 23, 2009

Economist's View - 5 new articles

"Immigration, Wages, and Compositional Amenities"

Why do people oppose immigration? Here's the introduction and part of the conclusion to a recent paper on this topic by David Card, Christian Dustmann, and Ian Preston. The bottom line is that the effects of immigration on wages and taxes -- to the extent that such effects exist -- are of concern, but according to this research it is not the primary objection:

Immigration, Wages, and Compositional Amenities, by David Card, Christian Dustmann, and Ian Preston, NBER Working Paper No. 15521, November 2009 [Open Link]: Introduction Standard economic reasoning suggests that immigration, like trade, creates a surplus that in principle can be redistributed so all natives are better off (Mundell, 1957). In practice the redistributive mechanisms are incomplete so both policies tend to create winners and losers. Even so, public support for increased immigration is far weaker than for expanding trade.[1] While the two policies have symmetric effects on relative factor prices, immigration also changes the composition of the receiving country's population, imposing externalities on the existing population. Previous studies have focused on the fiscal externalities created by redistributive taxes and benefits (e.g., MaCurdy, Nechyba, and Bhattacharya, 1998; Borjas, 1999, Hanson, Scheve and Slaughter, 2005). A wider class of externalities arise through the fact that people value the 'compositional amenities' associated with the characteristics of their neighbors and co-workers. Such preferences are central to understanding discrimination (Becker, 1957) and choices between neighborhoods and schools (e.g., Bayer, Ferreira, and McMillan, 2007) and arguably play an important role in mediating views about immigration.

This paper presents a new method for quantifying the relative importance of compositional amenities in shaping individual attitudes toward immigration. The key to our approach is a series of questions included in the 2002 European Social Survey (ESS) that elicited views on the effects of immigration on specific domains – including impacts on relative wages and the fiscal balance, and a country's culture life – as well as on the importance of maintaining shared religious beliefs, language, and customs. ...

Our empirical analysis leads to three main conclusions. First, we find that attitudes to immigration – expressed by the answer to a question of whether more or fewer immigrants from certain source countries should be permitted to enter, for example – reflect a combination of concerns over compositional amenities and the direct economic impacts of immigration on wages and taxes. Second, we find that the strength of the concerns that people express over the two channels are positively correlated. This means that studies that focus exclusively on one factor or the other capture a reasonable share of the variation in attitudes for or against increased immigration.[2]

Our third conclusion is that concerns over compositional amenities are substantially more important than concerns over the impacts on wages and taxes.[3] Specifically, variation in concerns over compositional amenities explain 3-5 times more of the individual-specific variation in answers to the question of whether more or fewer immigrants should be permitted to enter than does variation in concerns over wages and taxes. Concerns over compositional amenities are even more important in understanding attitudes toward immigrant groups that are ethnically different, or come from poorer countries. Similarly, differences in concerns over compositional amenities account for about 70% of the gap between high- and low-education respondents over whether more immigrants should be permitted to enter the country.

Interestingly, concerns over the direct economic impacts of immigration explain a much larger share of variation in responses to a summary question of whether immigration is good or bad for the economy. The contrast suggests that respondents make a distinction between the wage and tax effects of immigration and the effects on the composition of the host country, and place substantial weight on the latter in forming overall views about immigration policies. ...

Differences in compositional concerns also explain most of the differences in attitudes between older and younger respondents. The age gap is a particular puzzle for models of immigration preferences that ignore compositional amenities, because many older people are retired, and face a much lower threat of labor market competition than young people.

While our inferences are based on purely observational data, and rely on a restrictive structural model, we present a number of robustness checks and extensions that support our general conclusions about the importance of compositional concerns. ...

"America's Broken Politics"

Jeffrey Sachs says government is broken:

America's broken politics, by Jeff Sachs, Project Syndicate: ...The difficulties that Barack Obama is having in passing his basic program, whether in healthcare, climate change, or financial reform, are hard to understand at first glance. After all, he is personally popular, and his Democratic party holds commanding majorities in both houses of Congress. Yet his agenda is stalled and the country's ideological divisions grow deeper.
Among Democrats, Obama's approval rating in early November was 84%, compared with just 18% among Republicans. ... Only 18% of Democrats supported sending 40,000 more troops to Afghanistan, while 57% of Republicans supported a troop buildup. ...
Part of the cause for these huge divergences ... is that America is an increasingly polarized society. Political divisions have widened between the rich and poor, among ethnic groups (non-Hispanic whites versus African Americans and Hispanics), across religious affiliations, between native-born and immigrants, and along other social fault lines. American politics has become venomous as the belief has grown, especially on the vocal far right, that government policy is a "zero-sum" struggle between different social groups and politics.
Moreover, the political process itself is broken. The Senate now operates on an informal rule that opponents will try to kill a legislative proposal through a "filibuster"... To overcome a filibuster, the proposal's supporters must muster 60 of 100 votes... This has proved impossible on controversial policies...
An equally deep crisis stems from the role of big money in politics. Backroom lobbying by powerful corporations now dominates policymaking... The biggest players, including Wall Street, the automobile companies, the healthcare industry, the armaments industry, and the real-estate sector, have done great damage to the US and world economy... Many observers regard the lobbying process as a kind of legalized corruption...
Finally, policy paralysis around the US federal budget may be playing the biggest role of all in America's incipient governance crisis. The US public is rabidly opposed to paying higher taxes, yet the trend level of taxation (at about 18% of national income) is not sufficient to pay for the core functions of government. ... Powerful resistance to higher taxes, coupled with a growing list of urgent unmet needs, has led to chronic under-performance by the US government and an increasingly dangerous level of ... government debt. ...
Obama so far seems unable to break this fiscal logjam. To win the 2008 election, he promised that he would not raise taxes on any household with income of less than $250,000 a year. That no-tax pledge, and the public attitudes that led Obama to make it, block reasonable policies. ... America, in fact, needs a value-added tax,... but Obama himself staunchly ruled out that kind of tax increase during his election campaign.
These paralyzing factors could intensify in the years ahead. ... A breakthrough will require a major change in direction. The US must leave Iraq and Afghanistan, thereby saving $150bn a year for other purposes and reducing the tensions caused by military occupation. The US will have to raise taxes in order to pay for new spending initiatives, especially in the areas of sustainable energy, climate change, education, and relief for the poor.
To avoid further polarization and paralysis of American politics, Obama must do more to ensure that Americans understand better the urgency of the changes... Only such changes – including lobbying reforms – can restore effective governance.

The opportunity cost of the spending on the war effort doesn't receive enough attention -- Democrats are still worried about the weak on defense label and that has allowed the right to dominate policy -- so it's nice to see the issue raised. But on another topic, I like the filibuster when George Bush is president (even though it wasn't enough to stop all of the right's damaging policies from being passed into law), but dislike it now (we did manage to get health care by the filibuster, but at what cost?). So, here's a question: Is it time for the filibuster to be reformed or eliminated entirely, or does it provide a useful check on the political process? I find myself hesitant to get rid of it, but I can't fully justify that position.

Existing Home Sales Rise 10.1%

At MoneyWatch, some brief comments (and links to other discussions by Calculated Risk, The Big Picture, and Free Exchange) on today's news that existing home sales rose 10.1 percent in October:

Existing Home Sales Rise 10.1%

Paul Krugman: The Phantom Menace

Why is the administration so fearful of doing more to help employment recover?:

The Phantom Menace, by Paul Krugman, Commentary, NY Times: A funny thing happened on the way to a new New Deal. ... Consider the contrast between what Mr. Obama's advisers were saying on the eve of his inauguration, and what he himself is saying now.
In December 2008 Lawrence Summers ... called for decisive action. "Many experts," he warned, "believe that unemployment could reach 10 percent by the end of next year." In the face of that prospect, he continued, "doing too little poses a greater threat than doing too much."
Ten months later unemployment reached 10.2 percent, suggesting that despite his warning the administration hadn't done enough to create jobs. You might have expected, then, a determination to do more.
But in a recent interview..., the president sounded diffident and nervous about his economic policy. He spoke vaguely about possible tax incentives for job creation. But "it is important though to recognize," he went on, "that if we keep on adding to the debt, even in the midst of this recovery, that at some point, people could lose confidence in the U.S. economy in a way that could actually lead to a double-dip recession."
What? Huh?
Most economists I talk to believe that the big risk to recovery comes from the inadequacy of government efforts: the stimulus was too small, and it will fade out next year, while high unemployment is undermining both consumer and business confidence.
Now, it's politically difficult for the Obama administration to enact a full-scale second stimulus. Still, he should be trying to push through as much aid to the economy as possible. ...
Instead, however, Mr. Obama is lending his voice to those who say that we can't create more jobs. And a report on suggests that deficit reduction, not job creation, will be the centerpiece of his first State of the Union address. What happened?
It took me a while to puzzle this out. But the concerns Mr. Obama expressed become comprehensible if you suppose that he's getting his views, directly or indirectly, from Wall Street.
Ever since the Great Recession began ... some (not all) major Wall Street firms have warned that efforts to fight the slump will produce even worse economic evils. In particular, they say, never mind the current ability of the U.S. government to borrow long term at remarkably low interest rates — any day now, budget deficits will lead to a collapse in investor confidence, and rates will soar.
And it's this latter claim that Mr. Obama echoed in that ... interview. Is he right to be worried? ... A ... model ... is Japan in the 1990s, which ran persistent large budget deficits, but also had a persistently depressed economy — and saw long-term interest rates fall almost steadily. ...
And shouldn't we consider the source? As far as I can tell, the analysts now warning about soaring interest rates tend to be the same people who insisted, months after the Great Recession began, that the biggest threat facing the economy was inflation. ...
Still, let's grant that there is some risk that doing more about double-digit unemployment would undermine confidence in the bond markets. This risk must be set against the certainty of mass suffering if we don't do more — and the possibility, as I said, of a collapse of confidence among ordinary workers and businesses.
And Mr. Summers was right the first time: in the face of the greatest economic catastrophe since the Great Depression, it's much riskier to do too little than it is to do too much. It's sad, and unfortunate, that the administration appears to have lost sight of that truth.

links for 2009-11-22

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