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July 18, 2010

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Latest Posts from Economist's View


Strengthening the Border Leads to More Illegal Residents

Posted: 18 Jul 2010 03:33 AM PDT

What's the best way to reduce illegal immigration? This argues that "far more rigorous enforcement of labor laws on wages, hours and overtime, and of worker safety laws" is the "most promising workplace strategy":

Why strengthening the U.S.-Mexican border leads to more illegal immigration, by Peter Schrag, Commentary, Washington Post: ...[W]ith immigration reform again on the table, President Obama has duly taken up the call for a stronger border. ...
Immigration reform has a long history of unintended consequences: More than two decades of increased enforcement since the passage of the Immigration Reform and Control Act of 1986 has done little to reduce the number of illegal immigrants. In fact, it seems to have increased their numbers. ...
Princeton University sociologist Douglas Massey pointed out ... that measures to secure the border seemed to produce almost the opposite of what was intended. ... With increasing border enforcement, workers who used to shuttle between jobs in California or Texas and home in Zacatecas or Michoacán simply began to stay put and sent for their families, becoming permanent, if sometimes reluctant, residents. According to Massey, post-IRCA border enforcement may have increased the size of the permanent Mexican population in the United States by a factor of nearly four.
More unintended consequences: The anti-immigrant backlash that sparked Arizona's string of anti-immigration legislation ... was produced in large part by tighter border controls in Texas and California. That enforcement squeezed the smuggling of immigrants and drugs into Arizona's Sonoran Desert and mountains.
As noted by the nonpartisan Public Policy Institute of California among many others, the element missing from this picture is that immigration, both legal and illegal, is driven more by the economy than it is restrained by border enforcement. ...
None of this means giving up on border control, especially if it's focused on drugs and other criminal activities. But if the objective is to reduce ... undocumented workers -- about a third to half of whom, in any case, have overstayed their visas, not crossed the border illegally -- it requires different strategies.
In the past year, the federal Immigration and Customs Enforcement agency has conducted "silent raids" -- auditing ... employee records... But ... it's hard to imagine that quiet raids will be enough to drive out many of those 11 million illegal immigrants.
Probably the most promising workplace strategy, which has hardly been tried, would be far more rigorous enforcement of labor laws on wages, hours and overtime, and of worker safety laws. That would sharply reduce employer incentives to hire and exploit illegal immigrants. ...
For the long term, immigration scholars ... argue that in order to deter illegal immigration we should shift funding from ever-tighter border control to collaborative efforts to bolster Mexican infrastructure and economic development. ...
Given the world's integrated economy, and the rapidly changing nature of, and constraints on, the nation-state -- think terrorism, or the flow of illegal drugs, or the regulation of multinational corporations, or the Internet, or pollution -- no wall, moat or border patrol will be large or wide or deep enough to fully stop the flow of immigrants.
Trying to tightly seal any border will almost inevitably bring unintended consequences -- in reluctant illegal residents, in increased offshoring of industry and jobs, in cross-border smuggling and crime or, as with Arizona's new immigration law, in a whole new set of foreign policy problems.
"Show me a 50-foot wall," Homeland Security Secretary Janet Napolitano said when she was governor of Arizona, "and I'll show you a 51-foot ladder."

links for 2010-07-17

Posted: 17 Jul 2010 11:01 PM PDT

Is Galbraith Right that Deficits are Never a Problem?

Posted: 17 Jul 2010 01:17 PM PDT

Paul Krugman has a "wonkish" post on deficits rebutting Jamie Galraith's contention that deficits are never a problem. Jamie's reply follows the excerpts from Krugman's post:

I Would Do Anything For Stimulus, But I Won't Do That (Wonkish), by Paul Krugman: It's really not relevant to current policy debates, but there's an issue that's been nagging at me, so I thought I'd write it up.

Right now, the real policy debate is whether we need fiscal austerity even with the economy deeply depressed. Obviously, I'm very much opposed — my view is that running deficits now is entirely appropriate.

But here's the thing: there's a school of thought which says that deficits are never a problem, as long as a country can issue its own currency. The most prominent advocate of this view is probably Jamie Galbraith, but he's not alone.

Now, Jamie and I are, I think, in complete agreement about what we should be doing now. So we're talking theory, not practice. But I can't go along with his view that

So long as U.S. banks are required to accept U.S. government checks — which is to say so long as the Republic exists — then the government can and does spend without borrowing, if it chooses to do so … Insolvency, bankruptcy, or even higher real interest rates are not among the actual risks to this system.

OK, I don't think that's right. To spend, the government must persuade the private sector to release real resources. It can do this by collecting taxes, borrowing, or collecting seignorage by printing money. And there are limits to all three. Even a country with its own fiat currency can go bankrupt, if it tries hard enough.

How does that work? A bit of modeling under the fold. ...[see original post for model]...

[L]et's ask what happens if the government has run up enough debt that the upper limit on the primary surplus is a binding constraint, and it's necessary to run the printing presses to make up the difference. In that case,... the higher the debt burden, the higher the required rate of inflation — and, crucially,... inflation heads off to infinity. ...

So there is a maximum level of debt you can handle. In practice,... at some point ... the government would decide that default was a better option than hyperinflation. ... So there are real limits to deficits, even in countries that can print their own currency.

Now, I'm sure I'm about to get comments and/or responses on other blogs along the lines of "Ha! So now Krugman admits that deficits cause hyperinflation! Peter Schiff roolz" Um, no — in extreme conditions they CAN cause hyperinflation; we're nowhere near those conditions now. All I'm saying here is that I'm not prepared to go as far as Jamie Galbraith. Deficits can cause a crisis; but that's no reason to skimp on spending right now.

Here is Jamie's reply which will appear in comments under the original post once it's approved (it's not there yet or I'd provide the link):

Paul's argument is that *infinite* inflation is a theoretical possibility. Well, yes. It happened in Germany in 1923.
There is no reason to cut Social Security benefits or Medicare now, with effect in the future, in order to avoid the theoretical possibility that some combination of policies might at some time in the future give us the economic conditions of post World War I Germany.
Those conditions were desperately resource-constrained.
In the actual world we live in, government does not have to \"persuade the private sector to release real resources.\" In the actual world, the private sector has already released those resources by the tens of millions of people.
All the government has to do, in the actual world, is mobilize those resources, which it does by issuing checks, preferably to pay people to do useful things.
There is no reason why this should be considered "costly." Done correctly, in economic terms it amounts simply to the reduction of the waste that is associated with unemployment.
Nor is it necessary, when the government issues a check, that it issue a bond to "borrow" the money behind that check. The check creates money in the first place. (Yes, it does this from thin air, by changing numbers in bank accounts.)
Operationally, this is a free reserve in the banking system. The reason the government issues a bond later, is that the banks like to have a higher rate of interest than they can earn on reserves, and the government likes to oblige them.
This is why Treasury auctions don't fail: the government has already created the demand for the bonds, by issuing checks to the banking system.
If the government spent but declined to "borrow," what would happen?
Nothing much. Banks would hold their reserves as cash rather than bonds, and their earnings would be a bit lower. It is *not* true, as a rule, that people (or banks) move readily to substitute lumps of coal for dollars, unless the price level is already moving up and out of control.
It is very difficult to get other people to accept coal in place of dollars!
Paul's logical error here is that of assuming-the-consequent. He assumes the inflation which causes dumping of money. But if there is no dumping of money, the inflation will not generally occur.
Yes, again, it's technically possible that the banks and others would start dumping dollars and buying up oil, wheat, rubber, and so forth (and leasing storage facilities for the stuff) thereby driving up the price level.
I wrote -- correctly and deliberately -- that bankruptcy, insolvency and high real interest rates were not risks. Inflation *is* a risk.
By this, to be clear, I mean an ordinary garden-variety increase in the inflation rate is a risk -- not the *infinite-inflation* scenario.
Inflation, though unattractive, is not remotely comparable to bankruptcy or insolvency, unless you get to Paul's *infinite* inflation scenario. So what about that?

In his model, it is driven by his monetarist (quantity-theory) simplification, that the increase in money flows directly into prices.

But this is just a modeling error. In the real world, especially in broadly deflationary conditions, people -- and banks -- simply hang on to cash. There is a Paul Krugman who understands this, from close study over many years of the Japanese stagnation.
However, and again, in the present state of the world economy, and for the foreseeable future -- and except for the energy sector -- surely a small rise in the inflation rate is a trivial risk.
My position is that the government should focus on real problems: unemployment, care for the aging, energy, climate change, and the disaster in the Gulf of Mexico.

The so-called long-term deficit is not a real problem. And the capital markets demonstrate every day that they agree with this judgment, by buying long-term Treasury bonds for historically-low interest rates.

I'll keep an eye out for a response from Paul Krugman, and will post it if he does reply. My view is that the debt load does matter at some point, but we are not at the point where it constrains our ability to help an economy struggling to recover from a severe recession.

Update: Paul Krugman responds:

More On Deficit Limits, by Paul Krugman: Jamie Galbraith responded to this post in comments...

My response: there's no question that right now there is no problem: if the Fed issues money, it will in fact just sit there. That's what happens when you're in a liquidity trap. And there's also no question that right now, the proposition that the government can "create wealth by printing money", which some other commenters call absurd, is the simple truth: deficit-financed government spending, paid for with either debt or newly created cash, will put resources that would otherwise be idle to work.

But we won't always be in this situation — or at least I hope not! Someday the private sector will see enough opportunities to want to invest its savings in plant and equipment, not leave them sitting idle, and the economy will return to more or less full employment without needing deficit spending to keep it there. At that point, money that the government prints won't just sit there, it will feed inflation, and the government will indeed need to persuade the private sector to make resources available for government use.

And that's why I don't accept the idea that deficits are never a problem.

Again, as a practical matter I don't think we have a disagreement: right now we're in a world where deficits really, truly don't matter. And at the rate we're going, it seems unlikely that we'll have to worry about policy choices near full employment until, oh, late in Sarah Palin's second term.

Update: Jamie Galbraith:

Paul, thanks for this response.

Let's first notice that the concerns about national bankruptcy, hyperinflation and so forth that characterized your first post have now disappeared.

At this point, we agree on the (fairly trivial, and highly remote) thesis that at full employment, a higher rate of (garden-variety) inflation can be a problem.

And we agree that this thesis is both trivial and highly remote.

However, there still remains an important question.

Should we, or should we not, act *today* to cut *projected* deficits at some future date?

For instance, by cutting Social Security and Medicare?

I say no.

I say there is absolutely no economic reason to enact future cuts in these vital programs.

I say that the economic forecasts of vast deficits and high interest rates *after* the return of full employment are implausible and internally inconsistent, for reasons given in my testimony to the deficit commission, and elsewhere.

I say that good policies cannot be based on bad forecasts, that we should solve the unemployment problem first, and that when we have done so, the most likely thing is that tax revenues will rise and the deficit forecasts will be proven wrong.

This is what happened in the late 1990s. Why should we think it wouldn't happen again?

Paul, I challenge you to drop the long-term deficit argument entirely
-- it will be used in a few months, in a dishonest way by unscrupulous people, to support cuts in Social Security and Medicare that cannot be justified by economic logic. These are cuts which, I am sure, you will oppose when they are proposed.

Don't set yourself up.

Roubini: Double-Dip Days

Posted: 17 Jul 2010 01:08 PM PDT

Nouriel Roubini is gloomy:

...policymakers are running out of tools. Additional monetary quantitative easing will make little difference, there is little room for further fiscal stimulus in most advanced economies, and the ability to bail out financial institutions that are too big to fail – but also too big to be saved – will be sharply constrained.
So, as the optimists' delusional hopes for a rapid V-shaped recovery evaporate, the advanced world will be at best in a long U-shaped recovery, which in some cases – the eurozone and Japan – may be long enough to stretch into an L-shaped near-depression. Avoiding double dip recession will be difficult.
In such a world, recovery in the stronger emerging markets – the great hope for the global economy – will suffer, because no country is an island economically. Indeed, growth in many emerging-market economies – starting with China – is highly dependent on retrenching advanced economies.
Fasten your seat belts for a very bumpy ride.

In this piece with Ian Bremmer that appeared recently in the WSJ, which is very similar to the Project Syndicate article from Roubini alone excerpted above, there is much more emphasis on using fiscal policy to reduce the risk of a double dip or a new financial crisis:

Plans to boost government spending in the near term, and to embrace austerity in the longer term, will only become more difficult if the president fails to explain the need for them. For their part, America's Republicans need to accept that the path to a global recovery begins at home, with extended unemployment insurance and help for state and local governments.
Countries that save too much must also do their part for global demand. ... The eurozone needs fiscal austerity, but it also needs a level of growth best provided by an easing of monetary policy from the European Central Bank. Early debt-restructuring of insolvent members should also be on the agenda. Germany should postpone its fiscal consolidation for a couple of years to boost disposable income and consumption...
These steps will take time. Even if all are undertaken properly, global growth will recover only slowly. But if they are not undertaken at all, the risk of a global double dip, and a new financial crisis, will grow sharply. Policymakers cannot keep kicking the can down the road for much longer.

I expressed surprise when I posted this as I had thought Roubini was more hawkish, even in the short-run, and the absence of the call for fiscal stimulus when he is writing alone makes me think it is mainly due to his coauthor. But, no matter who is making the point, I think we need to listen and take action on both the monetary and fiscal policy fronts. If we don't, there's still a chance that things will OK, eventually -- it will likely be frustratingly slow -- but there's also a non-trivial chance that things won't be OK that can be reduced with further action. In addition, more aggressive policy now (or better, months and months ago when economists first began calling for this) can also help to reduce the time it takes the economy to recover. I gave up on policymakers long ago, so unless things take a strong turn for the worse, I don't expect any action, at least nothing beyond a few token dollars that allow them to campaign as though they tried to help. But that doesn't mean that policymakers should not be doing more.

I know I've said this again and again and it is probably getting tiresome to hear yet again that the economy need more help. But it does need the help, and it's been frustrating to watch quarter-hearted measures produce quarter-hearted results (I just can't go all the way to half-hearted, that gives too much credit). It's been hard to constrain that frustration and not become repetitive when policy has been so inadequate.

(Another reason for a somewhat repetitive post is far, far less compelling. My high school reunion is tonight, I want to go hang-out with old friends. I'll keep my eyes open and try to quickly post anything that looks interesting, but for the moment this is it.)

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