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May 31, 2010

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Paul Krugman: The Pain Caucus

Posted: 31 May 2010 12:15 AM PDT

The budget and inflation hawks are winning the battle to define the "conventional wisdom" over how policymakers should respond now that the economy is just setting out on the long road to recovery. The wisdom may be conventional, but it is not very wise:

The Pain Caucus, by Paul Krugman, Commentary, NY Times: What's the greatest threat to our still-fragile economic recovery? Dangers abound... But what I currently find most ominous is the spread of a destructive idea: the view that now, less than a year into a weak recovery from the worst slump since World War II, is the time for policy makers to stop helping the jobless and start inflicting pain.
When the financial crisis first struck, most of the world's policy makers responded appropriately, cutting interest rates and allowing deficits to rise. And by doing the right thing, by applying the lessons learned from the 1930s, they managed to limit the damage: It was terrible, but it wasn't a second Great Depression.
Now, however, demands that governments switch from supporting their economies to punishing them have been proliferating in op-eds, speeches and reports from international organizations. Indeed, the idea that what depressed economies really need is even more suffering seems to be the new conventional wisdom...
The extent to which inflicting economic pain has become the accepted thing was driven home to me by the ... Organization for Economic Cooperation and Development... The O.E.C.D. is a deeply cautious organization; what it says at any given time virtually defines that moment's conventional wisdom. And what the O.E.C.D. is saying right now is that policy makers should stop promoting economic recovery and instead begin raising interest rates and slashing spending.
What's particularly remarkable ... is that ... the O.E.C.D.'s own forecasts show no hint of an inflationary threat. So why raise rates? The answer, as best I can make it out, is that the organization believes that we must worry ... that markets might start expecting inflation, even though they shouldn't and currently don't...
A similar argument is used to justify fiscal austerity. Both textbook economics and experience say that slashing spending when you're still suffering from high unemployment is a really bad idea — not only does it deepen the slump, but it does little to improve the budget outlook, because much of what governments save by spending less they lose as a weaker economy depresses tax receipts. And the O.E.C.D. predicts that high unemployment will persist for years. Nonetheless, the organization demands both that governments cancel any further plans for economic stimulus and that they begin "fiscal consolidation" next year.
Why do this? Again, to give markets something they shouldn't want and currently don't. Right now, investors don't seem at all worried about the solvency of the U.S. government; the interest rates on federal bonds are near historic lows. ...
The best summary I've seen of all this comes from Martin Wolf..., who describes the new conventional wisdom as being that "giving the markets what we think they may want in future — even though they show little sign of insisting on it now — should be the ruling idea in policy."
Put that way, it sounds crazy. And it is. Yet it's a view that's spreading. And it's already having ugly consequences. Last week conservative members of the House, invoking the new deficit fears, scaled back a bill extending aid to the long-term unemployed — and the Senate left town without acting on even the inadequate measures that remained. As a result, many American families are about to lose unemployment benefits, health insurance, or both — and as these families are forced to slash spending, they will endanger the jobs of many more.
And that's just the beginning. More and more, conventional wisdom says that the responsible thing is to make the unemployed suffer. And while the benefits from inflicting pain are an illusion, the pain itself will be all too real.

links for 2010-05-30

Posted: 30 May 2010 11:03 PM PDT

May 30, 2010

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Posted: 30 May 2010 12:24 AM PDT

"The Impact of the Irrelevant on Decision-Making"

Posted: 30 May 2010 12:15 AM PDT

Bloggers (and Jon Stewart) need help:

The Impact of the Irrelevant on Decision-Making, by Robert H. Frank, Commentary, NY Times: Textbook economic models assume that people are well informed about all the options they're considering. It's an absurd claim... Even so, when people confront opportunities to improve their position, they're generally quick to seize them. ... So most economists are content with a slightly weaker assumption: that people respond in approximately rational ways to the information available to them.

But behavioral research now challenges even that more limited claim. For example, even patently false or irrelevant information often affects choices in significant ways. ...

An intriguing example ... comes from a 1974 ... experiment by the psychologists Daniel Kahneman and Amos Tversky. In the experiment, subjects first spun a wheel that supposedly would stop at random on any number between 1 and 100. Then they were asked what percentage of African countries belongs to the United Nations. For one group of subjects, the wheel was rigged to stop on 10; for a second group, on 65. On average, the first group guessed that 25 percent belong to the United Nations, but the second group guessed 45 percent.

All subjects would have insisted, correctly, that the number on the wheel bore no relation to the correct answer to the question. Yet, obviously,... demonstrably false or irrelevant information can influence judgments, which in turn influence decisions. In such cases, Professors Tversky and Kahneman wrote in 1981, "the adoption of a decision frame is an ethically significant act."

Policy makers have long recognized the potential danger of false statements by advertisers. ... But what about merely irrelevant statements, or only implicitly misleading ones? ... Such ads make no explicitly false claims, but that doesn't make them less misleading, even for informed consumers. ... [P]oliticians employ patently false statements to shift the terms of important public debates. Of course, politicians of both parties have long taken liberties with the truth. But ... Republicans have lately been far more aggressive in stretching traditional boundaries. ...

Can anything be done? For a variety of practical reasons, legal sanctions promise little protection against blatantly false statements. It is helpful, to be sure, when journalists call out politicians who stray too far from the truth. But merely knowing that a statement is false doesn't nullify its impact. To be effective, a remedy must ... discourage people from making false statements in the first place.

Economists have long recognized that social sanctions are often an effective alternative to legal and regulatory remedies. ... People who know they'll be ridiculed for telling untruths are more likely to show restraint. ... In recent years, the most conspicuous public falsehoods have been ridiculed by independent bloggers and Comedy Central's faux news hosts. But television and Internet audiences are highly segmented. Many of Jon Stewart's targets may never hear his riffs about them, or may even view them as badges of honor.

That's why it's important for the circle of critics to widen — and why we need to remember that framing a discussion appropriately is "an ethically significant act."

Growth Policy versus Stabilization Policy

Posted: 30 May 2010 12:06 AM PDT

I posted this at Maximum Utility a few days ago:

Growth Policy versus Stabilization Policy, by Mark Thoma (with a few minor edits): In macroeconomics, there are two important policy questions, and our attention to one or the other changes with the economic events of each era. One question concerns stabilization policy -- keeping the economy as close as possible to the long-run growth path -- and the other is growth policy, i.e. policy that attempts to maximize the long-run growth rate. (There is also work on whether stability and growth are related. More stable economies could grow faster due to reduced uncertainty, but government intervention to stabilize the economy could also stifle growth according to some models, so the relationship is not clear a priori. In modern models, these are not strictly separable, but it is still a useful way to think about policy conceptually)

We could go back further than this, but let me pick the story up in the 1970s. A few economists were worried about growth at this time, but the main concern during the tumultuous 1970s and early 1980s was with how to do a better job of stabilizing the economy. The traditional Keynesian policies, which had not taken account of inflation or expectations in a satisfactory way, had failed to produce the desired stabilization. This led to the search for a new economic model that could provide better guidance. The result was the development of the New Classical model, replaced soon after by the New Keynesian model when the New Classical could not explain both the duration and magnitude of actual cycles, and it's implication that only unanticipated money matters appeared to be contradicted by actual data.

The New Keynesian model, and its new advice for stabilization policy concerning the use of interest rate rules, seemed to work and we entered into a period known as "The Great Moderation"  (stated compactly, the new policy involved targeting an interest rate with a Taylor rule that responds to output and inflation, where the response to inflation was more than one to one). This period, which began in the early 1980s, saw low and stable inflation rates, and a fall in the variation in GDP of around 50 percent. The result was the emergence of the view that the stabilization problem had been solved. By using the correct monetary policy, policymakers had produced the Great Moderation, and that left other policy tools such as fiscal policy free to pursue the maximum growth objective (and the result was supply-side fiscal policies such as cutting capital gains and dividend taxes justified by arguments about their contribution to growth).

Because of this, the profession moved on to growth theory and policy. Stabilization had been solved with monetary policy, and growth was now the major question to be solved. If the economy was still as jittery as it had been in the past, then stabilization policy would have also been of concern to academic economists, but developing optimal monetary policy rules from the New Keynesian structure seemed to have solved that problem.

Of course, recent events show us in no uncertain terms that the stabilization problem has not been solved, and questions about how to stabilize the economy ought to be coming to the forefront again. And they are, to some extent, but I'd argue that our ability to stabilize the economy has been limited by those who still think growth is the only important consideration for evaluating policy. For example, because of this, the stimulus package that was put into place had to be justified by its ability to stimulate long-run growth when its main concern should have been with how to stabilize the economy. That led us to concentrate on tax cuts (because conservatives believe tax cuts increase economic growth) and infrastructure spending. However, tax cuts of the type that were implemented are mostly saved, and infrastructure spending takes much too long to put into place (and may not generate as much employment per dollar as other types of spending). These are not optimal stabilization policies. Other types of spending, the types that get money into people's hands and puts people to work right away, might have worked faster and had a greater benefit in terms of moving the economy closer to trend, but since these policies were harder to justify in terms of their contribution to long-run growth. Therefore, they could not find the support they needed.

I believe that stability is important to people (i.e. that utility is lower when there is more economic uncertainty), and because of this stabilization policy can be justified on its own terms, there's no reason to insist that stabilization policy maximize growth. The policies that maximize growth are different in some cases from the polices that stabilize the economy, and insistence that all policies can be justified by their contribution to long-run growth causes us to sacrifice economic stability. The policies we put into place should pay attention to both goals, but I believe we have paid far too much attention to growth in formulating recent policy, and not nearly enough to stability.

Hopefully, recent events will begin to shift our thinking away from the "growth above all else" policies we've pursued since the early 1980s, and that we will devote more attention to stabilization policy. We can put people back to work faster than we did this time around, and we can do a better job of increasing aggregate demand early in the recession (thereby reducing the fall in GDP and employment). But to do so we have to realize that stabilization is an important policy goal, and that it does not always lead to the same policies that are needed to maximize growth. People's lives, or at least their livelihoods, depend on it.

links for 2010-05-29

Posted: 29 May 2010 11:03 PM PDT

"A Missing Macroeconomic Playbook?"

Posted: 29 May 2010 11:43 AM PDT

Brad DeLong gives an example of what economic historians and economic history has to contribute to the understanding of and response to financial crises:

A Missing Macroeconomic Playbook?, by Brad DeLong: I am reminded of the extraordinary gulf between economics as I see it and economics as at least some others see it when I read things like Narayana Kocherlakota's opening paragraph:

Modern Macroeconomic Models as Tools for Economic Policy: I believe that during the last financial crisis, macroeconomists (and I include myself among them) failed the country, and indeed the world. In September 2008, central bankers were in desperate need of a playbook that offered a systematic plan of attack to deal with fast-evolving circumstances. Macroeconomics should have been able to provide that playbook. It could not. Of course, from a longer view, macroeconomists let policymakers down much earlier, because they did not provide policymakers with rules to avoid the circumstances that led to the global financial meltdown...

My reaction to this is the old one: "Huh?!"

For "macroeconomics" did and does have a playbook that offered a systematic plan of attack to deal with fast-evolving circumstances. The playbook was first drafted back in 1825, during the bursting of Britain's canal bubble.

Let me briefly set out what the macro playbook is, and how it has been developed by economists and policymakers over the past 185 years. Start with Say's or Walras's Law: the circular flow principle that everybody's expenditure is someone else's income--ands everyone's income is somebody else's expenditure. It has to be that way...

How, then, can you have a depression--a "general glut," a situation in which there is excess supply of not one or a few but all commodity goods and services? How can you have a situation in which workers laid off from shrinking industries where demand is less than was expected and thus less than supply are not rapidly hired into industries where demand is more than was expected and hence more than supply?

Moral philosopher, libertarian, colonial bureaucrat, feminist, public intellectual, and economist John Stuart Mill put his finger on the answer in a piece he published in 1844:

[T]hose who have... affirmed that there was an excess of all commodities, never pretended that money was one of these commodities.... [P]ersons in general, at that particular time, from a general expectation of being called upon to meet sudden demands, liked better to possess money than any other commodity. Money, consequently, was in request, and all other commodities were in comparative disrepute. In extreme cases, money is collected in masses, and hoarded; in the milder cases, people merely defer parting with their money, or coming under any new engagements to part with it. But the result is, that all commodities fall in price, or become unsaleable...

Mill was thus explicitly refuting the older French economist Jean-Baptiste Say. ... In 1821 Say published his Letters to Mr. Malthus, in which he argued that the very idea of a "general glut" was self-contradictory, for the very fact that commodities had been produced meant that there was sufficient demand in aggregate to buy them...

Say was thus the first of a long line of economists to argue that the fact that something that appeared to exist in reality could not really be there because it was inconsistent with his theory.

In a normal microeconomic case of market adjustment--excess supply of one good and excess demand for another--it is clear how adjustment proceeds. Those entrepreneurs making the good in excess supply find themselves selling for less than their costs and so losing money. They cut back on the wages they pay and dismiss workers. But this is not a tragedy, because the profits they have lost have gone into the pockets of entrepreneurs in expanding industries, who are eager to expand production, raise wages, and hire more workers. After a short time the structure of production is better-suited to make what people want, and wages and profits in total are higher than if the structure of production had remained frozen in its old pattern.

But what if there is a general glut of commodities? What if the excess supply is for pretty much all goods and services, and the excess demand is for liquid cash or for safe investments that will not lose their value no matter what? How do you expand labor employed in the liquid cash-creating or in the AAA asset-creating businesses to make more of such assets?

One possibility is to rely on the private sector, saying: risky assets are at a discount and safe assets a premium? Good!

Make the profits from creating safe assets large enough, and Goldman Sachs and company will find a way. ... They will hire people to shuffle the papers. They will finance enterprises, and then slice and dice the cash flows from those enterprises in order to create lots of AAA-rated securities. And when they do, the excess demand for safe assets will be satisfied...

Oh.

You say nobody trusts Goldman Sachs or Standard and Poor's when they say: "we know we lied last time when we warranted that the assets we were selling were AAA, but this time for sure!!"? Well, how about investing abroad? There are still lots of AAA assets out there in the wider world. Suppose everybody devalues, puts people to work in newly-competitive export industries, and thus runs an export surplus and, in exchange, imports AAA assets from abroad for our savers and investors to hold.

Oh.

I see. Everybody can't devalue at once. Greece can run an export surplus only if Germany is willing to run an import surplus. The United States can boost its net exports only if China shrinks its own.

Maybe we could ship millions of our citizens to South Africa equipped with picks and shovels and put them to work as gastarbeiteren mining the gold of the Witwatersrand?

I know! Let's cut the price of every good and service by 25%! Then our same stock of nominal AAA assets will meet a 33% larger demand for real AAA assets, and there will be no excess demand for safe assets, and thus no excess supply of goods and services! The problem with this "solution" is that "money" is not just a medium of exchange and a store of value, it is also a unit of account. ... A lot of people have debts denominated in money and were counting on selling their goods and their labor at something like their previous prices to pay off their mortgages, their loans, and their bonds. A whole bunch of assets that were AAA before the decline in the price level are no longer AAA. You haven't fixed the imbalance. Each nominal AAA asset does indeed satisfy a larger slice of demand for real AAA assets as a result of the price-level decline. But the price level decline has shrunk the (nominal) supply of AAA assets just as it has shrunk the (nominal) demand for them. And how have you managed to reduce nominal wages and prices? By years if not decades of idle capacity and high unemployment.

Oh.

So now--drumroll--it is time to pull the rabbit out of the hat. The solution is... the government! The government has the power to tax! And so the government can make AAA assets when nobody else can!

Or the government can until and unless the assets that it has created for others to hold--which are its debts--rise to the point where people begin to get nervous about whether the government's taxing power will actually be deployed in the end to repay those debts--and we in the United States are still very far from that point (although we in Greece are not).

The first and easiest way for the government to create more safe assets is for the central bank to create them by buying up risky assets for safe ones via open-market operations or lending cash and taking other, riskier assets as its sole security. As Walter Bagehot wrote about the Panic of 1825:

The way in which the panic of 1825 was stopped by advancing money has been described in so broad and graphic a way that the passage has become classical. 'We lent it,' said Mr. Harman... [one of the Directors] of the Bank of England:

by every possible means and in modes we had never adopted before; we took in stock on security, we purchased Exchequer bills, we made advances on Exchequer bills, we not only discounted outright, but we made advances on the deposit of bills of exchange to an immense amount, in short, by every possible means consistent with the safety of the Bank, and we were not on some occasions over-nice. Seeing the dreadful state in which the public were, we rendered every assistance in our power...

Since the fall of 2007 the central banks and the Treasuries of the world have been following this playbook. They have expanded the supply of safe assets via open-market operations... They have topped up bank capital. They have guaranteed private-sector loans. They have swapped in risky private-sector debt in exchange for government bonds. They have--via expansionary fiscal policy--printed up huge honking additional tranches of government bonds and used the money raised to pull forward government spending and push back taxes.

Now it may be that we are creeping up on the point at which government debts are rising to the limits of politically-limited debt capacity. But that does not mean that the playbook comes to an end. Indeed, Ricardo Caballero is writing a new chapter about how even now governments can go on:

expanding the real supply of AAA assets.... [So far] governments in safe-asset-producing countries [have] produce[d] a lot more of them.... [We could also] let the private sector create the AAA assets... [with] governments... absorb[ing]... risk the private sector cannot handle... Currently the focus (implicitly) is [still] on the former strategy. ... However... at some point it will make sense to decouple fiscal deficits from asset production.... The US Treasury... [could] start buying riskier private assets rather than running fiscal deficits as the counterpart for its supply of Treasuries to the market.... [A] sounder medium-term strategy than the purely public approach... [is to use] the securitisation industry... [I]f the government only provides an explicit insurance against systemic events to the micro-AAA assets produced by the private sector, we could have a significant expansion in the supply of safe assets without the corresponding expansion of public debt...

by formalizing and making explicit what Charles Kindleberger always called their commitment to act as lender of last resort when systemic risk came calling.

The playbook is old and well-established, and has been put to effective use.

That Narayana Kocherlakota and company did not know it existed--that he and his circle had never studied Kindleberger and Minsky, let alone Fisher and Bagehot and Mill, and knew Keynes and Hicks only as straw men to be ritually denounced as sources of error rather than smart people to be listened to--will doubtless appear to future generations as an interesting episode in the history of political economy. But nobody should confuse the failure of Kocherlakota's branch of macroeconomics with the failure of macroeconomics in general.

It's interesting that as we add the appropriate tweaks to modern models and then ask them these questions, in most cases the old wisdom emerges as the answer.

I'm not sure that, in general, people were as unaware of this work as Brad implies. In some cases that was true, certainly, particularly given the fading attention to economic history within economics programs. But some programs still emphasize economic history, e.g. Berkeley,, and I'd hope Brad's students have been made aware of this work.

So it wasn't complete ignorance. But those who did know about this work discounted it. They found a way to argue that we had moved on from old models for good reason, that taking such advice from the past would be a step backwards. It was the arrogance that the present had nothing to learn from the past as much as ignorance of what the past had to say that caused policymakers to respond to the crisis with a deer in the headlights, "oh no my models have nothing to say about this," manner. After all, if the proponents of modern macro had thought there was something to be learned from the Kindlebergers and Bagehots of the past, then those who were ignorant of what they had to say would have already read and absorbed this work. The fact that they didn't gives an indication of the value they thought it had. Hopefully that assessment has changed.

May 29, 2010

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"Angry Old White Men"

Posted: 29 May 2010 12:24 AM PDT

Claude Fischer is a sociologist at UC Berkeley:

Angry old white men, by Claude Fischer, Berkeley Blog: The April, 2010, New York Times survey of Tea Party supporters found that they skew toward male, white, and old. Journalists' reports on Tea Party events suggest that TPA activists skew even more those ways. The reports also suggest that TPA activists hold a wide set of grievances far beyond their objections to taxes and to Obama. They demand to have their "country back."
Dispossessed in the household
18th-Century America was a society of households each ruled by a property-owning white man. Just about everyone else – wives, children (including older boys awaiting their own households), servants, slaves, apprentices, farm hands, spinsters, widows, orphans of relatives, and the destitute whom the town officers had "bound out" – lived or were supposed to live under the legal, political, and moral authority of a patriarch. ... Occasionally, town officials would remind lax men to rule their households with a tighter fist, if, for example, their servants misbehaved or their wives were too proud.
Over the course of American history, these dependents – perhaps most importantly, the women – became increasingly independent. Generation after generation, the patriarchs lost more and more power over those dependents. (Historian Carole Shammas wrote a particularly nifty, short book on this topic.) Wives, for example, gained some control over their own property and a greater right to divorce; young men – and young women – grasped independence by leaving farms for emerging industrial jobs; journeymen moved out of the masters' houses to their own homes; and so on.
As with most social changes, the dispossession appeared first among the more affluent and educated classes. In the 19th century, couples in these groups "re-negotiated" the terms of households. Wives took on greater authority in the home by, for example, displacing fathers in the role of premier moral instructor to children. In the latter part of the century, observers applauded a new trend: More middle-class men were going straight home to their families after work, bypassing the bar or men's club, and there participating in the emerging sentimental, "feminized" family. (Margaret Marsh tells the homecoming story here and here.) Many historians describe this as the era when middle-class men were "domesticated." We could also say dispossessed.
Such trends spread slowly and for much of working-class, immigrant, and rural America, it took much longer. But by the end of the 20th century, women and youths were independent everywhere. Older men no longer could simply command and be obeyed.
Dispossessed in the community
Roughly in parallel, the power of older, property-holding, white men over the wider community also waned: Propertyless men gained the right to vote, grassroots religious movements (fueled if not led by women) challenged established church leadership, slaves were freed, immigrants flooded into politics, employees organized against their bosses, women voted, courts discovered more and more individual rights – including the rights of children against their parents, an emerging welfare state gave workers new options..., and minorities of all sorts who had once known "their place" stepped out, organized, spoke up, and successfully pressed their claims. Old white guys, especially affluent, Protestant ones, had to give ground. No wonder they're ticked.
It is a delicious irony that currently the lead spokesperson for angry old white men is a bodacious, young, entrepreneurial woman. But when Sarah Palin energizes claims to "take back" the country, she is pressing to give the country back to the angry old white men.

I've been thinking about the extent to which the tea party movement represents resistance to and resentment over waning power in rural America. Obama is a symbol of a shift toward urban interests. Rural America senses that he represents a major shift in the political landscape, one that will no longer put the white male farmer at the center of the American political landscape. Even though the majority of the population moved to cities long ago, the rural myth persisted in American politics. The "small town values" that politicians pay so much attention to is a reflection of this, and Obama is a signal that the special place rural America holds in American politics is coming to an end.

links for 2010-05-28

Posted: 28 May 2010 11:03 PM PDT

"Why Deficit Hawks are Killing the Recovery"

Posted: 28 May 2010 12:33 PM PDT

Making this point once again may be redundant and a bit tedious, but it's an important issue and, unfortunately, the pendulum seems to be swinging the other way, i.e. in favor of the deficit hawks (plus, about to hit the road for a few hours and this is all I have):

Why Deficit Hawks Are Killing the Recovery, by Robert Reich: Consumer spending is 70 percent of the American economy, so if consumers can't or won't spend we're back in the soup. Yet the government just reported that consumer spending stalled in April – the first month consumers didn't up their spending since last September. Instead, consumers boosted their savings, probably because they're worried about the slow pace of job growth..., as well as a lackluster "recovery." They're also still carrying enormous debt burdens. One in four home owners is still underwater. And median wages are going nowhere.

So what's Congress doing to stoke the economy as consumers pull back? In a word, nothing. Democratic House leaders yesterday shrank their jobs bill to a droplet. They jettisoned proposed subsidies to help the unemployed buy health insurance, as well as higher matching funds for state-run health programs such as Medicaid. And they trimmed extended unemployment insurance.

"Members who are from low unemployment areas are very concerned about the deficit," Nancy Pelosi explained. She might have added that so-called Blue Dog Democrats have the same warped view of fiscal policy as most Republicans. They fail to distinguish between short-term deficits (good) and long-term debt (bad).

Deficit-cutting fever has also struck the Senate – except when it comes to the military, of course. Last night the Senate okayed a $60 billion war-funding bill for Afghanistan. So far this year, the Afghan war has cost more than the war in Iraq... But spending on road-building in Afghanistan does little to boost the American economy.

Meanwhile, state and local governments continue to slash and burn. They're laying off even more teachers, fire fighters, social workers, and police; canceling more programs for the poor and working class; and raising sales taxes. The fiscal drag from all of this will be around $150 billion in 2010.

Without consumers opening their wallets, and without government making up the difference, we're careening toward a double-dip recession. The long-term deficit (i.e. Medicare as boomers become seniors) needs attention, but right now it's critical for government to spend. Otherwise we have no hope of getting free of the gravitational pull of this recession.

May 28, 2010

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"Digital Robber Barons?"

Posted: 28 May 2010 01:17 AM PDT

Paul Krugman is on vacation, so I essentially picked an article randomly (by date) from the PKarchive. This column appeared December 6, 2002. Not much has changed:

Digital Robber Barons?, by Paul Krugman, Commentary, NY Times: Bad metaphors make bad policy. Everyone talks about the "information highway." But in economic terms the telecommunications network resembles not a highway but the railroad industry of the robber-baron era — that is, before it faced effective competition from trucking. And railroads eventually faced tough regulation, for good reason: they had a lot of market power, and often abused it.
Yet the people making choices today about the future of the Internet — above all Michael Powell, chairman of the Federal Communications Commission — seem unaware of this history. They are full of enthusiasm for the wonders of deregulation, dismissive of concerns about market power. And meanwhile tomorrow's robber barons are fortifying their castles.
Until recently, the Internet seemed the very embodiment of the free-market ideal — a place where thousands of service providers competed, where anyone could visit any site. And the tech sector was a fertile breeding ground for libertarian ideology, with many techies asserting that they needed neither help nor regulation from Washington.
But the wide-open, competitive world of the dial-up Internet depended on the very government regulation so many Internet enthusiasts decried. Local phone service is a natural monopoly, and in an unregulated world local phone monopolies would probably insist that you use their dial-up service. The reason you have a choice is that they are required to act as common carriers, allowing independent service providers to use their lines.
A few years ago everyone expected the same story to unfold in broadband. The Telecommunications Act of 1996 was supposed to create a highly competitive broadband industry. But it was a botched job; the promised competition never materialized.
For example, I personally have no choice at all: if I want broadband, the Internet service provided by my local cable company is it. I'm like a 19th-century farmer who had to ship his grain on the Union Pacific, or not at all. If I lived closer to a telephone exchange, or had a clear view of the Southern sky, I might have some alternatives. But there are only a few places in the U.S. where there is effective broadband competition.
And that's probably the way it will stay. The political will to fix the 1996 act, to create in broadband the kind of freewheeling environment that many Internet users still take for granted, has evaporated.
Last March the F.C.C. used linguistic trickery — defining cable Internet access as an "information service" rather than as telecommunications — to exempt cable companies from the requirement to act as common carriers. The commission will probably make a similar ruling on DSL service, which runs over lines owned by your local phone company. The result will be a system in which most families and businesses will have no more choice about how to reach cyberspace than a typical 19th-century farmer had about which railroad would carry his grain.
There were and are alternatives. We could have restored competition by breaking up the broadband industry, restricting local phone and cable companies to the business of selling space on their lines to independent Internet service providers. Or we could have accepted limited competition, and regulated Internet providers the way we used to regulate AT&T. But right now we seem to be heading for a system without either effective competition or regulation.
Worse yet, the F.C.C. has been steadily lifting restrictions on cross-ownership of media and communications companies. The day when a single conglomerate could own your local newspaper, several of your local TV channels, your cable company and your phone company — and offer your only route to the Internet — may not be far off.
The result of all this will probably be exorbitant access charges, but that's the least of it. Broadband providers that face neither effective competition nor regulation may well make it difficult for their customers to get access to sites outside their proprietary domain — ending the Internet as we know it. And there's a political dimension too. What happens when a few media conglomerates control not only what you can watch, but what you can download?
There's still time to rethink; a fair number of Congressmen, from both parties, have misgivings about Mr. Powell's current direction. But time is running out.

One way to induce competition is to follow the model used for phone services and force internet service providers to sell their services at wholesale rates to other providers (e.g., see unbundled network elements). In any case, there's no reason why there should be so little competition in this industry other than political power that these firms have.

Will "Huge Teacher Layoffs" be Prevented?

Posted: 28 May 2010 12:25 AM PDT

Christina Romer makes the case for helping states keep teachers in the classroom:

How to prevent huge teacher layoffs, by Christina D. Romer, Commentary, Washington Post: The emergency spending bill before the House would address the education crisis facing communities across America -- and the jobs of hundreds of thousands of teachers are at stake. Because ... state and local budgets are stressed to the breaking point..., hundreds of thousands of public school teachers are likely to be laid off over the next few months. As many as one out of every 15 teachers could receive a pink slip this summer...
Additional federal aid targeted at preventing these layoffs can play a critical role in combating the crisis. Such aid would be very cost-effective. There are no hiring or setup costs. The teachers are there, eager to stay in their classrooms. ...
Furthermore, by preventing layoffs, we would save on unemployment insurance payments, food stamps and COBRA subsidies for health insurance, and we would maintain tax revenue. Accounting for these savings, the actual cost of the program is likely to be 20 to 40 percent below the sticker price...
Yes, we all understand that our budget deficit is too large. ... But it would be penny-wise and pound-foolish to deal with that issue by failing to allot essential spending on teachers at a time when the unemployment rate is still near 10 percent.
The right way to deal with a budget problem that was years in the making is by formulating a credible plan to reduce the deficit over time and as the economy is able to withstand the necessary fiscal belt-tightening. ...

And here's the response:

Bill on jobless benefits, state financial help scaled back, by Lori Montgomery, Washington Post: Under fire from rank-and-file Democrats worried about the soaring national debt, congressional leaders reached a tentative agreement Wednesday to scale back a package that would have devoted nearly $200 billion to jobless benefits and other economic provisions...
After struggling throughout the day to reach a compromise, House leaders scheduled a Thursday vote on the slimmed-down package in hopes of pushing it through both chambers before the 10-day Memorial Day recess...
But the ultimate fate of the package was unclear as Republicans stepped up efforts to paint it as irresponsible when the recession and its aftermath are driving the nation deeply into debt -- a concern many Democrats share. ...
"This is fiscal recklessness. And that's why even some Democrats are starting to revolt," Senate Minority Leader Mitch McConnell (R-Ky.) said...
Senate Majority Leader Harry M. Reid (D-Nev.) was noncommittal when pressed by reporters about the tax bill's chances in his chamber. ... While expressing confidence that some form of the legislation would pass, Reid said he had yet to secure commitments from any Republicans. At least one GOP senator must defect...
But Reid said the Senate would at the very least approve an unemployment extension before adjourning this weekend. "We can't leave here unless we address that issue," he said.

The deficit hawks generally talk about the fate of our children when making the case to reduce the deficit, but at a time like now when the recession is pressuring school budgets, how are kids helped by reducing their educational opportunities?

More on recent trends in education:

Economic segregation rising in US public schools, by Stacy Teicher Khadaroo, csmonitor.com: ...The portion of schools where at least three-quarters of students are eligible for free or reduced-price meals – a proxy for poverty – climbed from 12 percent in 2000 to 17 percent in 2008.
The federal government released a statistical portrait of these schools Thursday as part of its annual Condition of Education report. When it comes to educational opportunities and achievement, the report shows a stark contrast between students in high-poverty and low-poverty schools (those where 25 percent or less are poor).
Economic segregation is on the rise in American schools, and that "separation of rich and poor is the fountainhead of inequality," says Richard Kahlenberg, a senior fellow at The Century Foundation... High-poverty schools "get worse teachers ... are more chaotic ... [have] lower levels of parental involvement ... and lower expectations than at middle-class schools – all of which translate into lower levels of achievement."
Cities aren't the only places facing this challenge: Forty percent of urban elementary schools have high poverty rates, but 13 percent of suburban and 10 percent of rural elementary schools do as well. In some states – Mississippi, Louisiana, and New Mexico – concentrated poverty affects more than one-third of K-12 schools.
Hispanic and black children make up the majority of students in high-poverty schools – 46 percent and 34 percent, respectively, compared with just 14 percent white and 4 percent Asian/Pacific Islander. ...
"There have been gains in achievement in high-poverty schools over the last decade or so ... but what we don't see in most cases is a closing of the gap," says Daria Hall, director of K-12 policy at the Education Trust in Washington...
In graduation rates, there's actually been a backward slide. In 2008, high-poverty schools reported that 68 percent of seniors graduated the previous year, compared with 86 percent in 2000. For students in low-poverty schools, the rate remained about 91 percent.
Solutions have been hard to come by... While efforts to improve high-poverty schools are valiant, they've haven't worked very well...

links for 2010-05-27

Posted: 27 May 2010 11:03 PM PDT

David Andolfatto: Avoid Making Bold Assertions on the Basis of a Single Model

Posted: 27 May 2010 01:08 PM PDT

David Andolfatto responds to my recent posts and sets me straight about his beliefs on fiscal policy and other matters. It turns out that I didn't represent them accurately, something I try to avoid. As he notes below, he is neither for nor against fiscal policy, and remains agnostic about its use. His main point is that different models give different conclusions, some such as Woodford and Eggertsson are quite supportive of fiscal policy while others are not. His objection is about taking the word of one model over another when we really don't have the evidence to know which model is best. That's a fair point. I should also acknowledge, as many people have pointed out, that it's possible to find shrill, over the top attacks on all sides of the debate on macroeconomic policy:

Taken Out Behind the Woodshed, by David Andolfatto : Been out of commission for a while. (Had Lasik surgery on Monday -- I can actually see now -- which will no doubt please those who accuse me of blindness). And I have just now read the replies to my previous two posts. Not very pretty. I'll have a few things to say about this. Before I begin though, I would like to take a moment to thank all my supporters out there: thanks...you've both been great!

When I originally contemplated the idea of Macromania, I thought it might be a cheap and interesting way to learn a few things. By and large, it has turned out to be a successful experiment (for me personally, at least).

But not everything in the experiment has turned out well. My more thoughtful postings were met with thoughtful replies, followed by fruitful discussion. My more childish personal attacks on people I did not even know were met by counterattacks of a similar nature by people who do not even know me. I am now reminded of a useful Bible lesson: As you sow so shall you reap.

There is nothing wrong, I think, with the harsh criticism of an idea. Having a stupid idea does not make one stupid. But it is another thing altogether when one criticizes a person. And here I confess to having gone too far. There are probably times and places where personal attacks might be justified, but I don't want Macromania to be a venue for that sort of activity. Nothing good comes of it.

So I would like to clear the air. Both Paul Krugman and Brad DeLong deserve far more respect that what I afforded them. (Let me also toss Ron Paul in there, who has at times found himself in my crosshairs). My ego is not so large as to expect that they would welcome an apology from me. But I would like to apologize nevertheless, for the record, if for nothing else.

And while I'm clearing the air, I would like to reply to Mark Thoma's post here. Mark takes some justified jabs at me. But he also misrepresents me along a few dimensions. Again, for the record:

[1] I am neither for nor against fiscal stimulus in the form of government purchases to combat a peacetime economic crisis (I have repeatedly said that I am an agnostic whose beliefs on the matter vary over time as I am exposed to more evidence). I have, in fact, made arguments elsewhere in favor of fiscal policy as a redistributive mechanism (but sadly, in my view, redistribution is never mentioned in this debate; it's all about the effect of G on Y).

[2] What I am against is the practice (perhaps it is unintended or simply a product of my imagination) of seducing the public into thinking that our "science is settled" on any given question. Greg Mankiw's more cautious approach as exhibited here teaches us how to persuade without being dogmatic.

[3] I have never, as far as I can remember, disputed the logic of fiscal stimulus in a NK model with zero nominal interest rates. But the NK model is not the only game in town. There are competing frameworks (for example, the so-called New Monetarist framework) that are no less plausible and may deliver very different answers to the same policy question. We need to keep an open mind and avoid making bold assertions on the basis of a single model.

OK, now let's go do some economics.

"The Flight to Quality"

Posted: 27 May 2010 12:24 PM PDT

Brad DeLong argues the world wants more safe financial assets, and that governments ought to provide them:

The Flight to Quality, by J. Bradford DeLong, Commentary, Project Syndicate: In late May, the yield to maturity of the 30-year United States Treasury bond was 4.07% per year – down a full half a percentage point since the start of the month. That means that a 30-year Treasury bond had jumped in price by more than 15%. ... This signals ... an extraordinary rise in market-wide excess demand for such assets.
Why does this matter? Because, as economist John Stuart Mill wrote in the first half of the nineteenth century, excess demand for cash (or for some broader range of high-quality and liquid assets) is excess supply of everything else. What economists three generations later were to call Walras's Law is the principle that any market in which people are planning to buy more than is for sale must be counterbalanced by a market or markets in which people are planning to buy less.
We have seen this principle in action since the early fall of 2007, as growing excess demand for safe, liquid, high-quality financial assets has carried with it growing excess supply for the goods and services... And global financial markets are now telling us that this excess demand for safe, liquid, high-quality financial assets has just gotten bigger. ...
But most of the recent shift has come not from an increase in demand for safe, liquid, high-quality financial assets, but from a decrease in supply: six months ago, bonds issued by the governments of southern Europe were regarded as among the high-quality assets in the world economy that one could safely and securely hold; now they are not. ...
When there is excess demand for safe, liquid, high-quality financial assets, the rule for which economic policy to pursue – if, that is, you want to avoid a deeper depression – has been well-established since 1825. If the market wants more safe, high-quality, liquid financial assets, give the market what it wants.
After all,... a market tells us which things are valuable and thus gives us the signal to make more of them. ... So those governments whose credit is still unshaken ... should be creating a lot more of them. ...
How much should they do? As long as there is a clear global excess supply of goods and services – as long as unemployment remains highly elevated and inflation rates are falling – they are not doing enough. And the gap between what they should be doing and what they are doing grew markedly in May.
This isn't rocket science or capping deep-sea oil blowouts. These are problems that we have long known how to solve.

May 27, 2010

Latest Posts from Economist's View

Latest Posts from Economist's View


Why I Changed My Mind about Tax Cuts

Posted: 27 May 2010 01:08 AM PDT

New post at MoneyWatch:

Why I Changed My Mind about Tax Cuts, Maximum Utility

Tax cuts can be particularly helpful in "balance sheet recessions".

"Deficit Hawk Hypocrisy"

Posted: 27 May 2010 12:42 AM PDT

Marshall Auerback takes on the deficit hawks:

Deficit Hawk Hypocrisy, by Marshall Auerback: Harold Meyerson is spot on: "Of all the gaps between elite and mass opinion in America today, perhaps the greatest is this: The elites don't really believe we're still in recession. Or maybe, they just don't care." What is even more galling is that, having been the greatest beneficiaries of the government's largesse over the past 2 years, these very same people now decry the government's "irresponsible" and "unsustainable" fiscal policy.

The collective amnesia and moral turpitude of these elites is truly mind-boggling.

Why do we have a deficit of about 10% of GDP right now when it was less than 2% about 3 years ago? The reasons are: the Obama stimulus, the TARP, and the slower economy (which arose in response to a major financial crisis, not because the government began an irrational and irresponsible spending binge). A slower economy leads to lower revenues ... and higher spending on the social safety net.

Conveniently lost in all of this furor about the deficit are the beneficiaries of this recent government largesse. It's certainly not the unemployed or the vast majority of people who do not work in the financial services industry.

And let's stop with the now prevailing meme (regurgitated most recently in John Heilemann's New Yorker Magazine piece, "Obama is from Mars, Wall Street is from Venus") that the costs of the financial bailout are minimal thanks to the "successful" measures taken to "save" our financial system (as if it is worth saving in its current incarnation). With the conspicuous exception of Simon Johnson, virtually all analysts fail to factor in the fact that our public debt to GDP ratio has moved from 40% of GDP to 90% in the space of 2 years, directly as a consequence of the crisis of 2008.

Naturally, the deficit terrorists are now out in force about this fact, conveniently forgetting the underlying cause of this increase. So are the journalists who cover it, Meyerson being a conspicuous exception. In a market economy, where most of us have to work to make a material living, the threats posed by the likes of Pete Peterson and the deficit hawk brigade represent a true impingement on our right to work. As my friend Bill Mitchell notes, "the neo-liberals deliberately undermine the right to work of millions and force them into a state of welfare dependence and then start hacking into the welfare system to deny them the pittance that the system delivers." ...

What will happen to the deficit as and when the economy finally improves? The Obama stimulus and TARP go away in a few years regardless. Tax revenues increase and safety net spending falls. We're back to "normal" with deficits around 2-4% depending on the state of the economy, which is where we've been for the past 30 years aside from 1998-2001. Even CBO agrees, though what happens to the Bush tax cuts will have an effect of about + or - 2% of GDP (depending on whether they are extended or ended, respectively).

In fact, full employment is also the best "financial stability" reform we could implement, because with jobs growth comes higher income growth and a corresponding ability to service debt. That means less write-offs for banks and a correspondingly smaller need to provide government bailouts.

Fiscal austerity, by contrast, won't cut it. Our elites seem think that you can cut "wasteful government spending" (that is, reduce private demand further) and cut wages and hence private incomes and not expect major multiplier effects to make things significantly worse. Of course, that "wasteful", "unsustainable" spending never seems to apply to the Department of Defense, where we always seem to be able to appropriate a few billion, whenever necessary. "Affordability" principles never extend to the Pentagon, it appears.

Our policy-making elites also seem to have bought the IMF line that the fiscal multipliers are relatively low and that the automatic stabilizers (working to increase deficits as GDP falls) will not drown out the discretionary cuts in net spending arising from the austerity packages. The overwhelming evidence is that this viewpoint is wrong and implementation of policies based on it cause generational damages in lost output, lost incomes, bankruptcy and lost employment (especially denying new entrants from the schooling system a robust start to their working life).

The real issue is that those who are better off don't want to have government intervention in economic affairs unless it benefits them. With typical ingratitude, Wall Street is now threatening to cut campaign donations for Obama and the Democrats because of their proposals to impose more regulation on the financial sector. However, when the government intervenes with bailouts, Wall Street stands first in the queue, cap in hand. No one wants to bear the actual discipline of markets if that means losses. Those at the high end of income distribution aren't against every kind of government intervention, but are frequently against certain types of government intervention that might make the workers stronger, or create competition for private businesses (in the case of a public option in health care reform, for example).

Full employment is the real value that should guide economic policy, not the bogus emphasis on financial ratios that just play into the hands of the financial sector. Somehow, I doubt that this is the underlying principle guiding our "counsel of wise men" who are deliberating the future of Social Security and Medicare behind closed doors as the rest of us debate this issue in the open.

Maximum Utility: What Economic Policies Should Government Pursue During the Recovery?

Posted: 27 May 2010 12:24 AM PDT

[I am going to start reposting entries from my Maximum Utility blog a few days after they are posted at MoneyWatch. This one is a bit older than that, and it was first noted here.]

What Economic Policies Should Government Pursue During the Recovery?, Maximum Utility: Now that the economy appears to be turning around, how should the government react? What types of policies are needed for the recovery period?

1. Things look better now. Almost all economic indicators are beginning to point upward, but we don't know yet if the recovery will be strong or weak, or if we might be headed for a double dip. For that reason, don't pull back on monetary and fiscal stimulus too soon. It will be tempting to listen to the deficit and inflation hawks as things start to improve, but it's important that the stimulus not be withdrawn before the economy can stand on its own.

2. If the recovery seems to be very slow or stagnating, don't be afraid to give the economy the additional help it needs. Output is starting to grow, but labor markets are lagging behind. It's not yet clear if the lag will be as large as in the previous two recessions, but it's certainly something to keep an eye on.

3. Similarly, there is a huge jobs backlog -- millions and millions of people have lost jobs during this recession -- and it will take a considerable amount of time to reemploy these workers even under strong labor market conditions. Workers will still need unemployment compensation, help with health care, and other social services until they can find work. They are not lazy or playing the system, it's just that the applicant to jobs ratio will remain high until the backlog is cleared, so don't cut them off too soon.

4. If the government does try to take an active rather than a passive role in the recovery, try to anticipate what the post-recession economy will look like and help with the adjustment. For example, there is lots of structural unemployment due to the scaling down of the housing and financial industries. Where will these workers go and what can the government do to help them get there? Will we need to rely upon exports to a greater degree than before the recession in order to maintain robust growth? If so, what can the government do to help this sector to develop? I don't mean the the government should try to manage the economy with a heavy handed industrial policy approach, but when it's clear that change is coming to a particular sector, then the government should do what it can to help (or at least get out of the way).

5. As the economy recovers, it will be easy to forget about the problems we had and what caused them. Don't let exuberance over the recovery get in the way of making the changes that need to be made to try to prevent this from happening again. All of the promises to do better that are made when things are really bad are easily forgotten once things improve.

6. When the time comes -- but not a moment before that -- policy must be reversed. The fiscal policy measures involving both government spending and tax cuts were sold as "targeted, timely, and temporary."  We could have done better at the targeted and timely part, but it's not too late to make it temporary. It will be difficult to cut the stimulus once it's clear that the economy has recovered, there will be an outcry about the jobs that will be lost, the decline in growth, etc., but it's important that we do it. First, there are theoretical reasons to believe that temporary fiscal policy has a much larger effect than permanent changes within modern, New Keynesian structures. Second, we may need fiscal policy again someday. If we don't keep out promises and reverse the spending and tax cuts, the next time fiscal policy is needed nobody will believe that will actually be temporary no matter what is promised, and that will make it much more difficult to pursue the policy that is needed.

Update: 7. State and local governments are still having trouble, and are likely to continue to struggle at least through the next fiscal year. If they don't get more help, this create a big drag on the recovery.

This is surely incomplete. What else should be on the list?

links for 2010-05-26

Posted: 26 May 2010 11:04 PM PDT

John Maynard Keynes: National Self-Sufficiency

Posted: 26 May 2010 02:25 PM PDT

Frank Barry at the Irish Economy Blog:

Keynes in Ireland, by Frank Barry, Irish Economy Blog: Keynes' famous lecture on economic experimentation, delivered at UCD in April 1933, has recently become available online.

If you can't access that copy -- I couldn't -- it turns out it was already online elsewhere. It's an interesting essay:

John Maynard Keynes, "National Self-Sufficiency," The Yale Review, Vol. 22, no. 4 (June 1933), pp. 755-769: I was brought up, like most Englishmen, to respect free trade not only as an economic doctrine which a rational and instructed person could not doubt, but almost as a part of the moral law. I regarded ordinary departures from it as being at the same time an imbecility and an outrage. I thought England's unshakable free trade convictions, maintained for nearly a hundred years, to be both the explanation before man and the justification before Heaven of her economic supremacy. As lately as 1923 I was writing that free trade was based on fundamental "truths" which, stated with their due qualifications, no one can dispute who is capable of understanding the meaning of the words."

Looking again to-day at the statements of these fundamental truths which I then gave, I do not find myself disputing them. Yet the orientation of my mind is changed; and I share this change of mind with many others. Partly, indeed my background of economic theory is modified; I should not charge Mr. Baldwin, as I did then, with being "a victim of the Protectionist fallacy in its crudest form" because he believed that, in the existing conditions, a tariff might do something to diminish British unemployment. But mainly I attribute my change of outlook to something else--to my hopes and fears and preoccupations, along with those of many or most, I believe, of this generation throughout the world, being different from what they were. It is a long business to shuffle out of the mental habits of the prewar nineteenth-century world. It is astonishing what a bundle of obsolete habiliments one's mind drags round even after the center of consciousness has been shifted. But to-day at last, one-third of the way through the twentieth century, we are most of us escaping from the nineteenth; and by the time we reach its mid point, it may be that our habits of mind and what we care about will be as different from nineteenth-century methods and values as each other century's has been from its predecessor's.

It may be useful, therefore, to attempt some sort of a stocktaking, of an analysis, of a diagnosis to discover in what this change of mind essentially consists, and finally to inquire whether, in the confusion of mind which still envelops this new-found enthusiasm of change, we may not be running an unnecessary risk of pouring out with the slops and the swill some pearls of characteristic nineteenth century wisdom.

What did the nineteenth-century free traders, who were among the most idealistic and disinterested of men, believe that they were accomplishing? ...[continue reading]...

"The Economics of Immigration Are Not What You Think"

Posted: 26 May 2010 11:52 AM PDT

With immigration issues coming to the forefront once again, it's a good time to review the evidence on its effects:

The Economics of Immigration Are Not What You Think, by Robert J. Shapiro, NDN [CC]: Waves of new immigrants often spark economic anxiety and cultural discomfort, as well as occasional violence and wide-net crackdowns, on the Arizona model. Even here, a nation comprised almost entirely of immigrants and their descendents, we've seen these reactions not only in recent times but also a century ago, when waves of poor immigrants from Europe arrived here. With a hundred years' distance, however, we can now see that those early waves of immigration were generally associated not with economic dislocation and national decline, but with extraordinary economic boom times and America's emergence as the world's leading economy. And for much the same reasons as a century ago, recent evidence indicates that the economic effects of the current waves of immigration are also largely positive. 
The New Policy Institute (NPI) asked me to review all of the available data and economic studies of recent U.S. immigration. With my colleague Jiwon Vellucci, we found, to start, that more than one-third of recent immigrants come from Europe and Asia, while less than 57 percent have come from Mexico and other Latin American nations. The popular portrait of recent immigrants is off-point in other respects as well. While more immigrants than native-born Americans lack high school diplomas, equivalent shares of both groups have college or post-college degrees. That finding should make it unsurprising that 28 percent of U.S. immigrants work as managers or professionals, including 38 percent of those who have become naturalized citizens or the same share as native-born Americans. 
Many Americans would probably acknowledge that their concerns about immigration lie principally with those who are undocumented. No one likes being reminded that the world's most powerful nation hasn't figured out how to effectively police its own borders. But the data also show that these undocumented people, who account for 30 percent of all recent immigrants, embody some traditional values much more than native-born Americans. For example, while undocumented male immigrants are generally low-skilled, they also have the country's highest labor participation rate: Among working-age men, 94 percent of undocumented immigrants work or actively are seeking work, compared to 83 percent of the native born. One critical reason is that undocumented immigrants are more likely to support traditional families with children: 47 percent of undocumented immigrants today are part of couples with children, compared to just 21 percent of native-born Americans.
The evidence regarding the impact of immigration on wages also turns up some surprising results. First, there's simply no evidence that the recent waves of immigration have slowed the wage progress of average, native-born American workers. Overall, in fact, the studies show that immigration has increased the average wage of Americans modestly in the short-run, and by more over the long-term as capital investment rises to take account of the larger number of workers. Behind those results, however, lie winners and losers – although in both cases, the effects are modest. Among workers, the winners are generally higher-skilled Americans: For example, when a factory or hotel hires more low-skilled workers, demand also increases for the higher-skilled people who manage those workers or carry out other professional tasks for an enterprise that's grown larger. 
The losers are generally the lower-skilled workers who have to compete for jobs with recent immigrants. But studies also show that immigration reform might well take care of most of those effects. Following the 1986 immigration reforms, for example, previously-undocumented immigrants experienced big pay boosts – as much as 15 or 20 percent –  and immigrants who already had legal status saw hefty wage gains, too. But the reforms also led to higher wages for lower-skilled native-born Americans. One reason is that undocumented people who gain legal status can move more freely to places with greater demand for their skills, reducing their competition with native-born people with similar skills. More important, their new legal status confers certain protections such as minimum wage and overtime rules. Today, about one-fourth of low-skilled workers in large American cities are paid less than the minimum wage, including 16 percent of native-born workers, 26 percent of legal immigrants, and 38 percent of undocumented workers. Ending the ability of unscrupulous employers to recruit people to work for less than the minimum wage would not only raise the incomes of those currently paid less than the minimum wage. It also would ease downward pressures on the wages of other lower-skilled Americans, which comes from the below-minimum wage workers. This process is something we have refered to as "closing the 'trap-door' under the minimum wage."
Looking again at immigrants generally, recent research also shows a strong entrepreneurial streak, with immigrants being 30 percent more likely than native-born Americans to start their own businesses. Nor are immigrants the fiscal drain that's commonly supposed, at least not in the long term. In California and a few other states, immigrants today do entail a net, fiscal burden, principally reflecting the costs of public education for their children. But studies that use dynamic models to take account of the lifetime earnings of immigrants – most of whom arrive here post-school age and without elderly parents to claim Social Security and Medicare – show substantial net fiscal gains at the federal, state, and local levels.
Political disputes are rarely settled by facts. Nevertheless, it's reassuring to see that the humane and progressive approach to immigration is also a policy likely to produce good economic results for almost everyone.