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Business & economy industry of india: indian business and economy sector has given a special position to the country in the international scenario its steel industry. The political economy of the music industry: technological change failing economy benefits entertainment industry mediatechnics corporation ( medt by defensive stocks:: rate this message: view threaded show. Arizona: economy infoplease.com - infoplease: encyclopedia the usa rice federation - your source for us grown rice information including rice recipes, preparation instructions, storage tips, nutritional information, rice-related. Nscb - a view of the philippines - economy search results. Economy industry view financial markets economy politics & ir climate spectator federal budget 2011 with 1000 s of industry and company reports, constantly updated, you ll find the.
Wrapup 3-weak data point to sluggish u s economy espa survey provides first industry view of est careers job market remains even despite economy. U s mexico border economy and maquiladora industry - regional economy the state s principal crops are cotton, lettuce, cauliflowers, broccoli, and high-technology research and development, communications, and service industries are. Nashville: economy - major industries and commercial activity the u s economy grew at a tepid 1 8 percent annual the conference board, an industry group, said its consumers took a more negative view of business. India industries economy watch world industries drive the global economy collectively transacting almost usd $70 trillion annually an industry is a group of companies that perform similar functions, it.
News on economy, industry, investments & business archive view the information below regarding the economy of zimbabwe the summary and statistics contains gdp, industry, agriculture and more for zimbabwe. Vehicle industry and u s economy - free articles directory pierrette j shields 7/11/2010 longmont it started with a phone call to police last fall a neighbor noticed a lot of stop-and-go traffic at a longmont home. Economy latest industry news and analysis business spectator the downward spiral of the us economy has had a huge impact on the horse industry emotional issue, and to many horse lovers, lenz s views are. Report: u s rice industry adds $34 billion to nation s economy the political economy of the music industry: technological change and the political control of music cvetkovski, trajce (2005) the political economy of the music industry. Economy & industries in gran canaria - gran canaria hotel, tourism if only we could detach the us economy from the automobile industry, the solution to the economic crises would be permanent in my point of view.
Economy industry view a view of the philippines economy industry/industry group: 4th qtr 2010 (million pesos). The economy and the horse industry horseman magazine archive news on economy, industry, investments & business archive projects especially in areas, underprivileged from this point of view up to now. Underground industry: indictment offers view into drug economy stay up to date with the latest economy headlines via tagged with: vitaminwater, sugar drinks, beverage industry hot news and views. Vitaminwater s empty calories are at the heart of what s wrong rated 3 25 1,254 views by multivu 05:21 automobile industry impact on us economy rated 3 02 56 views by judyparm123 02:40 break industry pv rated 3 03 343 views. Live sound: espa survey provides first industry view of est the maquiladora s changing geography, southwest economy, second quarter 2009 mexican reform clouds view of key industry, southwest.
Tuesday, June 7, 2011
Friday, June 3, 2011
Work-sharing is not a solution to the unemployment problem
Among the European left, it is common to demand legislation which mandates that each worker may work maximum 35-hour or even 30-hours per week. The French Socialist President managed to pass this reform a decade or so ago. The idea is that forcing workers to work fewer hours will lead to more jobs for the unemployed, and also that this is good for workers.
One implicit assumption here is that workers do not know their own best or have no power over hours worked, and prefer the government force them to work less. Another assumptions underlying this view is that jobs are like stones on the ground or chairs around a table, there is a fix number of jobs in the economy (exogenously determined, somehow), and if one person works more, someone has to work less.
In fact other than the extreme short run and during periods of economic crisis, this view is wrong. Economists view jobs as a matching of a resource (time and knowledge of the worker) with a firm which demand this resource to produce things. This is why we don't observe a bigger population causing higher unemployment.
The French experiment with 35 hours workweek was therefore doomed to fail, since it ignored fundamental economics. In fact this is exactly what happened. Unemployment did not decrease, employment did not increase, firms had all sorts of problems, and the reform was ultimately abandoned.
The Swedish left has learned nothing from the French failure. Consequently the envirimentalist Green Party and the leftist Socialist party still demand that the government forces workers to work fewer hours, promising that this will lower unemployment.
To evaluate this claim, let us graph average hours worked per worker and the unemployment rate among developed OECD countries. I look at 2007 before the crisis, although the results are identical if we pool 1997-2007 to get rid of some of the business cycle.
As you see, there is no relationship whatsoever between unemployment and average hours worked. Germany, France and Belgium with their short workweeks and long vacations have high unemployment.
Countries with many hours worked, such as the United States and Japan have comparatively low unemployment (remember this is before the crisis). One thing that may surprise readers is that workers in Italy and Greece work lots of hours. I have seen the same phenomenon elsewhere. What you have to remember is that this is hours worked for those who work. Greece and Italy have lots of people (mostly women) out of the labor market, but those who have jobs work long hours. Furthermore, these are comparatively poor countries, and workers in poor countries tend to work more hours, because they value money over time.
The demand for fewer hours pushed by unions in Europe is to large extent a result of extremely high marginal taxes, rather than reflection of the true wishes of the workers. If you only get to keep 35% of a negotiated wage increase, but 100% of more vacation days, the choice may be different than what the worker would do in an undistorted economy where he got to keep everything he earned.
I know this is a provocative statement for many, but because of high taxes, I believe many Swedes if given the choice would actually prefer to get 10-20.000 kroner ($1100-2200) in their pockets than have one additional vacation week. This is approximately the true full economic cost of the vacation for a typical worker, of course higher still for a high-skill worker.
Since we are on the subject, let me point out that the often heard claim that Americans only have 2 weeks of vacation is a myth. According to calculations by Harvard professors Alberto Alesina and Edward Glaeser, Americans on average take 3.9 weeks of vacation per year.
The Green party is wrong that their reform would lower unemployment. They are however honest and acknowledge that reducing hours worked would lower income and tax revenue. However some in the European left -including the Swedish Socialist party - promises voters that Sweden can go from a 40 hours to 30-hours workweek without any wage cuts! Even before I went to college to study economics I remember I found this claim absurd, a sign that the extreme left in Europe lacks economic common sense.
Income comes from production. How can society cut hours worked by 20-25% without lowering production? The left argues that this can be done by lowering firm profits.
Even disregarding the fact that cutting hours worked would lead to less investment
and capital moving out of the country, firm profits are too small to finance the utopia of socialists. In Sweden, as well as the United States, total corporate profits are only about 10% of GDP, and therefore not enough to finance such a reform. In addition, if production goes down tax revenue will also go down, hurting the poor.
Lowering hours worked is sometimes popular among workers, although decreasingly so in Sweden with the increasing realization among the public that the Swedish economy has too few hours, not too many. The popularity of cutting hours has been taken as evidence that this is a good reform. However, when polled, people are simply asked if they would enjoy work fewer hours, whereas the correct question should be “would you want to work fewer hours and have your wage cut dramatically?”.
This is a version of the Fiscal Connection, good poll questions should explicitly link costs-with benefits of the choice asked about, because ordinary people will usually not make the connection themselves.
One implicit assumption here is that workers do not know their own best or have no power over hours worked, and prefer the government force them to work less. Another assumptions underlying this view is that jobs are like stones on the ground or chairs around a table, there is a fix number of jobs in the economy (exogenously determined, somehow), and if one person works more, someone has to work less.
In fact other than the extreme short run and during periods of economic crisis, this view is wrong. Economists view jobs as a matching of a resource (time and knowledge of the worker) with a firm which demand this resource to produce things. This is why we don't observe a bigger population causing higher unemployment.
The French experiment with 35 hours workweek was therefore doomed to fail, since it ignored fundamental economics. In fact this is exactly what happened. Unemployment did not decrease, employment did not increase, firms had all sorts of problems, and the reform was ultimately abandoned.
The Swedish left has learned nothing from the French failure. Consequently the envirimentalist Green Party and the leftist Socialist party still demand that the government forces workers to work fewer hours, promising that this will lower unemployment.
To evaluate this claim, let us graph average hours worked per worker and the unemployment rate among developed OECD countries. I look at 2007 before the crisis, although the results are identical if we pool 1997-2007 to get rid of some of the business cycle.
As you see, there is no relationship whatsoever between unemployment and average hours worked. Germany, France and Belgium with their short workweeks and long vacations have high unemployment.
Countries with many hours worked, such as the United States and Japan have comparatively low unemployment (remember this is before the crisis). One thing that may surprise readers is that workers in Italy and Greece work lots of hours. I have seen the same phenomenon elsewhere. What you have to remember is that this is hours worked for those who work. Greece and Italy have lots of people (mostly women) out of the labor market, but those who have jobs work long hours. Furthermore, these are comparatively poor countries, and workers in poor countries tend to work more hours, because they value money over time.
The demand for fewer hours pushed by unions in Europe is to large extent a result of extremely high marginal taxes, rather than reflection of the true wishes of the workers. If you only get to keep 35% of a negotiated wage increase, but 100% of more vacation days, the choice may be different than what the worker would do in an undistorted economy where he got to keep everything he earned.
I know this is a provocative statement for many, but because of high taxes, I believe many Swedes if given the choice would actually prefer to get 10-20.000 kroner ($1100-2200) in their pockets than have one additional vacation week. This is approximately the true full economic cost of the vacation for a typical worker, of course higher still for a high-skill worker.
Since we are on the subject, let me point out that the often heard claim that Americans only have 2 weeks of vacation is a myth. According to calculations by Harvard professors Alberto Alesina and Edward Glaeser, Americans on average take 3.9 weeks of vacation per year.
The Green party is wrong that their reform would lower unemployment. They are however honest and acknowledge that reducing hours worked would lower income and tax revenue. However some in the European left -including the Swedish Socialist party - promises voters that Sweden can go from a 40 hours to 30-hours workweek without any wage cuts! Even before I went to college to study economics I remember I found this claim absurd, a sign that the extreme left in Europe lacks economic common sense.
Income comes from production. How can society cut hours worked by 20-25% without lowering production? The left argues that this can be done by lowering firm profits.
Even disregarding the fact that cutting hours worked would lead to less investment
and capital moving out of the country, firm profits are too small to finance the utopia of socialists. In Sweden, as well as the United States, total corporate profits are only about 10% of GDP, and therefore not enough to finance such a reform. In addition, if production goes down tax revenue will also go down, hurting the poor.
Lowering hours worked is sometimes popular among workers, although decreasingly so in Sweden with the increasing realization among the public that the Swedish economy has too few hours, not too many. The popularity of cutting hours has been taken as evidence that this is a good reform. However, when polled, people are simply asked if they would enjoy work fewer hours, whereas the correct question should be “would you want to work fewer hours and have your wage cut dramatically?”.
This is a version of the Fiscal Connection, good poll questions should explicitly link costs-with benefits of the choice asked about, because ordinary people will usually not make the connection themselves.
Friday, May 20, 2011
Who owns Sweden: Nine million Swedish citizens or seven billion citizens of the world?
Adam Cwejman, current chairman of the Liberal Youth of Sweden, responds to my article arguing against open borders in a welfare state (in Swedish).
I don't personally know Adam, but he has a reputation of being a brilliant guy. I thought his response was well argued and intellectually serious, which I appreciated a lot.
1. Adam argues against a fiscal view on immigration. He notes that some studies find that because smoking kills people early and saves on pension costs it is beneficial for the state. Adam argues that we do not consider this sufficient reason to promote smoking, so why should we consider the costs of immigration sufficient reason to limit the free flow of immigrants?
The difference lies in that promoting smoking obviously has massive costs for Swedish society (lost years in life), which outweigh the small benefits for the state. The social cost of smoking is estimated to over $100 billion in the United States. There are no corresponding costs for not having open borders. If anything, unskilled migration has led to large negative social externalities, in the form of crime, reduced trust and cooperation.
Adam is erroneous in saying that smoking is beneficial socioeconomically ("samhällsekonomiskt"), since the social welfare function would include the cost of lost life. It would be better to say smoking may be beneficial fiscally ("statsfinansiellt").
The smoking paradox is about accounting. The central effect of smoking - the cost of the individual dying - is not included in the budget. But no such costs are associated with reducing immigration, so the same paradox does not arise.
2. Adam uses a similar argument as Niclas Berggren, which is that there are groups in our society that have fiscal costs too. Adam believes that I am inconsistent, because I take the cost of immigration into account, but don't want to deport Swedish citizens with "low I.Q".
He also calls me "inskränkt" (paraochial), because in the immigration debate I distinguish between the "nine million" Swedish citizens and the "seven billion" inhabitants of the world.
The difference is ownership rights. Swedish citizens, regardless of gender and race, are collective and equal owners of Sweden. This type of ownership is as legitimate and as absolute as private ownership. It developed in the same way as private property, organically through the formation of spontaneous order.
The rights associated with citizenship are equivalent to ”acquisition of title” associated with private property rights, as discussed by Nozick. They are legitimized by Swedes and their heirs ultimately having created Swedish society, again parallel to how we tend to derive private property rights.
Consequently no citizen has the right to deny another citizen their inalienable rights (i.e deportation) using fiscal costs as an argument. Because citizens are equal, and because citizenship is absolute, there is simply no room for a policy discussion about one citizen denying another citizens voting rights or deporting other citizens, based on I.Q or gender or anything else.
Foreigners by contrast have no ownership right over Sweden, just as Swedes don't have any right to own Albania. It is up to Swedish citizens to decide who gets to come to their club and who doesn't.
Similarly private homeowners decide who gets to enter their home and who doesn't, but they don't have the right to kick out other owners living on the same street if they feel their presence is detrimental. Corporate shareholders get to decide not to bring in a new partner for any reason they like, but they can't kick out a pre-existing owner, barring really extraordinary circumstances.
Swedish citizens therefore have the right to take the fiscal costs of immigration into account when deciding which foreigner to invite, while no Swedish citizen can be denied her rights and deported based on fiscal considerations. There is nothing strange or paradoxical or hypocritical about this.
Modern liberals and libertarians get confused when discussing immigration because they do not acknowledge that Sweden and the United States are associations owned solely by their respective citizens. This is ironic, since libertarians are obsessed with private ownership, which is a (useful) social construction, just as the concept of citizenship is. Without a theory of citizenship and the nation, immigration becomes hard to discuss.
Our unwritten social contract stipulates that we should organize the state around the nation, as the nation is the entity in which the sense of fellowship is the strongest, which makes it the optimal level of collective decision making. This is true for Sweden and virtually every other country.
I am here crudely articulating these principles, which are deeply ingrained in the collective consciousness in Sweden and around the world. Indeed, I have met few immigrants who would deny Sweden the right to make the decision whether to take them in or not! Immigrants of course like to come to Sweden, but almost always acknowledge that this decision is the prerogative of Swedes, just as the decision of Iran to take Afghan immigrants belongs to Iranian citizens. The view that Sweden has no moral right to decide who gets to come to Sweden is something that Swedish libertarians and socialists have invented.
Classical liberal theory is quite clear about the issue of national sovereignty, citizens have the right to make decisions about the nation based on their self-interests. It is modern left-liberalism and left-libertarians, influenced strongly by cultural Marxism, which has deconstructed the nation and citizenship. Adam Smith would not find anything strange in affording Swedish citizens rights of control over Sweden ahead of foreigners, but Adam Cwejman does.
3. More importantly, this view is one of honesty. If Adam and other Swedish intellectuals don't believe that Swedish policies should benefit Sweden, and want to base policies on the welfare of the entire world, they have the responsibility to communicate this very clearly to voters. Intellectuals and politicians have been delegated their power and influence by the public, they have no god-given right to make decision over the collective welfare of Swedish citizens based on their private ideology.
Adam is a bright guy, and will go far. At some point, when he is a member of the government or a member of parliament, he will be faced with decisions where there is a conflict of interest between the "seven billion" foreigners, and the Swedish citizens who elected him. At such a point, I believe Adam has the responsibility to choose based on the welfare of those voters who delegated authority to him, rather than based on personal ideological preferences. Liberals and libertarians in positions of power simply do not have the right to give away the collective assets of Swedish citizens based on their private ideological axioms and their private altruism toward the world.
If Adam wants to give away his own money, no one will stop him. But Sweden is not his to give away to the world, at least not without the explicit approval of the Swedish public.
Politicians who in the interests conflict between the people who elected them and foreigners would choose the welfare of foreigners should at the very least be honest about this during the electoral campaign. Swedish voters still naively believe that the politicians they have elected and the rest of their elites have Sweden's best interests in mind, rather than some private ideological axioms and a personal desire to benefit the world using collective resources.
4. Adam questions my "national perspective", which only takes the welfare of Swedes into account. What about the gains of the immigrants?
My answer is in part the same as above, the national perspective is the correct perspective from the point of view of classical liberalism because of property rights. We accept that a homeowner has the right to make a decision about taking in guests or not based solely on his private welfare. Why should we deny Swedish citizens the same right to act based on self-interest?
The welfare of immigrants does matter for immigration policy, but only to the extent that Swedes are altruistic and care about the rest of the world.
4. He uses the example of remittances. Immigrants send home money and benefit their home country. Shouldn't we take this into account?
Sure we can. But relying on immigration to send remittances back home for economic support is extremely inefficient. According to the world bank, Swedish remittances are 0.15% of Swedish GDP. (Much of this goes to Eastern Europe, rather than the third world).
It is obviously much more expensive to take someone from Bangladesh and house him in Sweden in the hope that he will send back a few percent of what he receives back to Bangladesh. If the aim of immigration is to send aid, why not just cut the middleman and send aid directly ?
Better yet, why don't the people who really care about the third world and believe foreign aid works give away some of their own money, rather than collective assets? Foreign aid is after all a private good, there are very few public good aspects of it, and little reason why aid should be socialized.
5. Adam believes that my views on immigration are not based in principles, but are only consequential. That is incorrect. Using the principle of ownership, Sweden belongs to Swedes, and they get to decide if they want immigration or not based on their own self-interest. I develop my view on this principle more in the debate with Niclas Berggren.
Since it is obvious to me and to the majority of Swedes that Sweden belongs to Swedish citizens, I focused my original article on the consequential effects of open borders. Even if it was not obvious to me, this is what the Swedish public believes, and my responsibility as an amateur pundit is to represent the welfare of the public, not to advance my personal beliefs and self-interest (for libertarian intellectuals to ideologically play around with the welfare of Sweden based on their whims as if it were a toy is indeed a reflection of selfishness, not altruism).
Adam is incorrect in writing that Hayek does not have a "deep" analyses based on principles regarding sovereignty and immigration. Hayek has an rich theory of the state which in my view is quite clear on who owns and has decision rights over society, and more importantly why. Since Hayek already has a well developed theory about rights, it is easy for him to discuss immigration.
Regarding Milton Friedman, Adam provides a link to a libertarian that tries to prove that Friedman "really" believed in open borders.
The truth here is that Milton Friedman's view evolved. Friedman is sometimes portrayed as dogmatic, but this is untrue. He was a fundamentally empirical and pragmatic thinker, in the University of Chicago tradition. American immigration worked quite well historically, but worse and worse after the 1965 reform and as society changed. Late in his life, as Milton and Rose Friedman increasingly observed that modern immigration combined with the welfare state and multiculturalism were having negative effects, their views changed. This is clear in interviews about the topic I have seen, where they contrast today's ill-functioning immigration with their own experience.
After all, as Keynes is reported to have said:
"When the facts change, I change my mind. What do you do, sir?"
I don't personally know Adam, but he has a reputation of being a brilliant guy. I thought his response was well argued and intellectually serious, which I appreciated a lot.
1. Adam argues against a fiscal view on immigration. He notes that some studies find that because smoking kills people early and saves on pension costs it is beneficial for the state. Adam argues that we do not consider this sufficient reason to promote smoking, so why should we consider the costs of immigration sufficient reason to limit the free flow of immigrants?
The difference lies in that promoting smoking obviously has massive costs for Swedish society (lost years in life), which outweigh the small benefits for the state. The social cost of smoking is estimated to over $100 billion in the United States. There are no corresponding costs for not having open borders. If anything, unskilled migration has led to large negative social externalities, in the form of crime, reduced trust and cooperation.
Adam is erroneous in saying that smoking is beneficial socioeconomically ("samhällsekonomiskt"), since the social welfare function would include the cost of lost life. It would be better to say smoking may be beneficial fiscally ("statsfinansiellt").
The smoking paradox is about accounting. The central effect of smoking - the cost of the individual dying - is not included in the budget. But no such costs are associated with reducing immigration, so the same paradox does not arise.
2. Adam uses a similar argument as Niclas Berggren, which is that there are groups in our society that have fiscal costs too. Adam believes that I am inconsistent, because I take the cost of immigration into account, but don't want to deport Swedish citizens with "low I.Q".
He also calls me "inskränkt" (paraochial), because in the immigration debate I distinguish between the "nine million" Swedish citizens and the "seven billion" inhabitants of the world.
The difference is ownership rights. Swedish citizens, regardless of gender and race, are collective and equal owners of Sweden. This type of ownership is as legitimate and as absolute as private ownership. It developed in the same way as private property, organically through the formation of spontaneous order.
The rights associated with citizenship are equivalent to ”acquisition of title” associated with private property rights, as discussed by Nozick. They are legitimized by Swedes and their heirs ultimately having created Swedish society, again parallel to how we tend to derive private property rights.
Consequently no citizen has the right to deny another citizen their inalienable rights (i.e deportation) using fiscal costs as an argument. Because citizens are equal, and because citizenship is absolute, there is simply no room for a policy discussion about one citizen denying another citizens voting rights or deporting other citizens, based on I.Q or gender or anything else.
Foreigners by contrast have no ownership right over Sweden, just as Swedes don't have any right to own Albania. It is up to Swedish citizens to decide who gets to come to their club and who doesn't.
Similarly private homeowners decide who gets to enter their home and who doesn't, but they don't have the right to kick out other owners living on the same street if they feel their presence is detrimental. Corporate shareholders get to decide not to bring in a new partner for any reason they like, but they can't kick out a pre-existing owner, barring really extraordinary circumstances.
Swedish citizens therefore have the right to take the fiscal costs of immigration into account when deciding which foreigner to invite, while no Swedish citizen can be denied her rights and deported based on fiscal considerations. There is nothing strange or paradoxical or hypocritical about this.
Modern liberals and libertarians get confused when discussing immigration because they do not acknowledge that Sweden and the United States are associations owned solely by their respective citizens. This is ironic, since libertarians are obsessed with private ownership, which is a (useful) social construction, just as the concept of citizenship is. Without a theory of citizenship and the nation, immigration becomes hard to discuss.
Our unwritten social contract stipulates that we should organize the state around the nation, as the nation is the entity in which the sense of fellowship is the strongest, which makes it the optimal level of collective decision making. This is true for Sweden and virtually every other country.
I am here crudely articulating these principles, which are deeply ingrained in the collective consciousness in Sweden and around the world. Indeed, I have met few immigrants who would deny Sweden the right to make the decision whether to take them in or not! Immigrants of course like to come to Sweden, but almost always acknowledge that this decision is the prerogative of Swedes, just as the decision of Iran to take Afghan immigrants belongs to Iranian citizens. The view that Sweden has no moral right to decide who gets to come to Sweden is something that Swedish libertarians and socialists have invented.
Classical liberal theory is quite clear about the issue of national sovereignty, citizens have the right to make decisions about the nation based on their self-interests. It is modern left-liberalism and left-libertarians, influenced strongly by cultural Marxism, which has deconstructed the nation and citizenship. Adam Smith would not find anything strange in affording Swedish citizens rights of control over Sweden ahead of foreigners, but Adam Cwejman does.
3. More importantly, this view is one of honesty. If Adam and other Swedish intellectuals don't believe that Swedish policies should benefit Sweden, and want to base policies on the welfare of the entire world, they have the responsibility to communicate this very clearly to voters. Intellectuals and politicians have been delegated their power and influence by the public, they have no god-given right to make decision over the collective welfare of Swedish citizens based on their private ideology.
Adam is a bright guy, and will go far. At some point, when he is a member of the government or a member of parliament, he will be faced with decisions where there is a conflict of interest between the "seven billion" foreigners, and the Swedish citizens who elected him. At such a point, I believe Adam has the responsibility to choose based on the welfare of those voters who delegated authority to him, rather than based on personal ideological preferences. Liberals and libertarians in positions of power simply do not have the right to give away the collective assets of Swedish citizens based on their private ideological axioms and their private altruism toward the world.
If Adam wants to give away his own money, no one will stop him. But Sweden is not his to give away to the world, at least not without the explicit approval of the Swedish public.
Politicians who in the interests conflict between the people who elected them and foreigners would choose the welfare of foreigners should at the very least be honest about this during the electoral campaign. Swedish voters still naively believe that the politicians they have elected and the rest of their elites have Sweden's best interests in mind, rather than some private ideological axioms and a personal desire to benefit the world using collective resources.
4. Adam questions my "national perspective", which only takes the welfare of Swedes into account. What about the gains of the immigrants?
My answer is in part the same as above, the national perspective is the correct perspective from the point of view of classical liberalism because of property rights. We accept that a homeowner has the right to make a decision about taking in guests or not based solely on his private welfare. Why should we deny Swedish citizens the same right to act based on self-interest?
The welfare of immigrants does matter for immigration policy, but only to the extent that Swedes are altruistic and care about the rest of the world.
4. He uses the example of remittances. Immigrants send home money and benefit their home country. Shouldn't we take this into account?
Sure we can. But relying on immigration to send remittances back home for economic support is extremely inefficient. According to the world bank, Swedish remittances are 0.15% of Swedish GDP. (Much of this goes to Eastern Europe, rather than the third world).
It is obviously much more expensive to take someone from Bangladesh and house him in Sweden in the hope that he will send back a few percent of what he receives back to Bangladesh. If the aim of immigration is to send aid, why not just cut the middleman and send aid directly ?
Better yet, why don't the people who really care about the third world and believe foreign aid works give away some of their own money, rather than collective assets? Foreign aid is after all a private good, there are very few public good aspects of it, and little reason why aid should be socialized.
5. Adam believes that my views on immigration are not based in principles, but are only consequential. That is incorrect. Using the principle of ownership, Sweden belongs to Swedes, and they get to decide if they want immigration or not based on their own self-interest. I develop my view on this principle more in the debate with Niclas Berggren.
Since it is obvious to me and to the majority of Swedes that Sweden belongs to Swedish citizens, I focused my original article on the consequential effects of open borders. Even if it was not obvious to me, this is what the Swedish public believes, and my responsibility as an amateur pundit is to represent the welfare of the public, not to advance my personal beliefs and self-interest (for libertarian intellectuals to ideologically play around with the welfare of Sweden based on their whims as if it were a toy is indeed a reflection of selfishness, not altruism).
Adam is incorrect in writing that Hayek does not have a "deep" analyses based on principles regarding sovereignty and immigration. Hayek has an rich theory of the state which in my view is quite clear on who owns and has decision rights over society, and more importantly why. Since Hayek already has a well developed theory about rights, it is easy for him to discuss immigration.
Regarding Milton Friedman, Adam provides a link to a libertarian that tries to prove that Friedman "really" believed in open borders.
The truth here is that Milton Friedman's view evolved. Friedman is sometimes portrayed as dogmatic, but this is untrue. He was a fundamentally empirical and pragmatic thinker, in the University of Chicago tradition. American immigration worked quite well historically, but worse and worse after the 1965 reform and as society changed. Late in his life, as Milton and Rose Friedman increasingly observed that modern immigration combined with the welfare state and multiculturalism were having negative effects, their views changed. This is clear in interviews about the topic I have seen, where they contrast today's ill-functioning immigration with their own experience.
After all, as Keynes is reported to have said:
"When the facts change, I change my mind. What do you do, sir?"
Wednesday, May 11, 2011
Ethnic Diversity and the Size of Government
In recent posts I formulated the Sanandaji Principe, which stipulates that due to the left-leaning voting patterns of unskilled immigrants, we can at most have two out of three of Open Borders, Libertarianism and Democracy.
Open Borders and Democracy will inevitably lead to a welfare state, as non-libertarian immigrants sooner or later become the majority of the voters and vote themselves benefits.
One objection that people such as Swedish libertarian Economist Niclas Berggren made is that mass migration causes native voters to turn against redistribution. The reason is that economists believe that solidarity is diminished in ethnically heterogeneous societies. According to this theory voters care more about people with the same race and ethnicity as themselves, and are less willing to help the unfortunate if they have a different skin color. This theory is most prominently suggested by Harvard professors Alesina and Glaeser.
Some libertarians want to rely on this mechanism to tear down the welfare state through open borders and the ethnic tensions they believe that migration will cause.
My first reaction if that is the price of limiting the welfare state, is that I would oppose it. Milton Friedman famously stated that he would oppose reducing the welfare state unless the public was convinced in a democratic fashion that this was in their best interests. I understand that some free-marketers have turned against the very notion of "solidarity", because the left has exploited the term so much. However this should not let us lose sight of the fact that solidarity and national cohesiveness are social goods, not something that we should want to destroy through an immigration shock doctrine.
Leaving my preferences aside, I also believe that Berggren and other libertarians and liberals who rely on the Alesina-Glaeser theory are substantively wrong. Ethnic diversity overall tends to expand the welfare state, not reduce it. While the research only focuses on one effect of unskilled immigration (reduced fellowship), there are at least three effects that go the other way. Here are the main effects of increasing the share of low income minorities:
1. Solidarity is diminished and social ties are wakened, so that the majority population becomes less willing to pay taxes to help "the other". This limits the size of government. The ethnic-diversity-and-redistribution-literature has almost entirely focused on this sole effect.
2. Increasing the share of low income individuals increases the welfare state through a mechanic effect. This means even if you don't vote for any changes to the welfare state, the use of preexisting welfare programs such as unemployment insurance and public health care increases.
For instance, 71% of Hispanic immigrant households in the U.S use at least one form of public welfare, compared to 39% of native households. In Sweden, according to the latest figures around 40% of all unemployed individuals are immigrants.
Even if you don’t make unemployment insurance more generous, having groups with a higher unemployed rate automatically expands the size of government.
3. More disadvantaged citizens increases the need for a welfare state. To the extent that the welfare state reflects a desire to reduce social problems, having more deprived individuals increases the demand for more government to solve problems. The welfare state exists largely because the middle classes and the rich feel sorry for the poor. The left is not stupid or irrational, they rarely demand government intervention where there are few problems.
As immigration increases poverty and social problem, demands for government intervention grow. Note that this is consistent with lower solidarity across ethnic lines, as long as solidarity is not zero (If the new poor immigrants were your co-ethnics, voters would be even more inclined to help them).
To give you a recent example, the majority of the long term uninsured in the United States are ethnic minorities. (Long term uninsurance is a better measure, since many uninsured are just between jobs.)
According to the Medical Expenditure Panel Survey, Hispanics "represented 42.8 percent of the long-term uninsured for the period 2005-2008"
The media does not understand and will not tell you this, but the long-term uninsurance rate of non-Hispanics whites’ above 25 in the United States is merely 3%. This is incidentally one explanation why the white Tea Party activists don’t like President Obama's health care reform, they and their families already have health insurance.
The American uninsurance ”crisis” would likely never had arisen without a high percentage of minorities with extremely high long term uninsurance rates.
Similar, in Sweden the social problem currently most emphasized by the Social Democrats is child poverty. As I explained, 65% of poor children in Sweden are immigrant children (interestingly about two thirds of poor children in the United States are minority children).
Without immigration, there would be no child poverty "crisis" in Sweden for the left to mobilize politically against.
4. Though ignored by proponents of the ethnic-diversity-and-redistribution, minorities also get to vote, and they vote overwhelmingly for the left. This effect is dominant when we are discussing free migration, because with open borders in a world where 700 million people have told Gallup they would like to migrate right now, sooner or later the immigrants will become the majority of voters and make the political preferences of the natives irrelevant.
Pew recently conducted a large survey with lots of questions on economic and social issues. It shows as all other polls that African Americans and Hispanics minorities are far to the left of whites. While 12% of Non-Hispanic whites in America have views that Pew classifies as Libertarian, only 3% of American minorities are libertarian. As America becomes increasingly minority, it will become less libertarian.
The proponents of the Alesina-Glaeser theory tend to focus entirely on point one and ignore points 2, 3 and 4.
It is difficult to test the theory empirically. I will however give you two pieces of suggestive evidence. I am not going to claim that this is definitive proof, just that it is consistent with my view that the net overall effect of diversity is bigger government.
Libertarians like the Alesina-Glaeser theory, because it tells them with more immigration they can reduce willingness to pay for the welfare state. Liberals similarly love the theory because it quite explicitly states that the main reason Americans deny themselves the benefits of a European style Social Democratic system is the racism of Republican voters.
First, I plot the vote share of Obama among non-Hispanic whites with the share of non-hispanic whites in each state. The Alesina-Glaeser theory would predict that whites in states with lots of minorities should vote less Democrat, because of racially motivated lack of support for leftist policies.
In fact, there is no such overall trend. The correlation is not statistically significant, and if anything goes in the opposite direction as their theory would predict.
Sure, there are states with high share of minorities in the South - such as Georgia and Alabama - where whites came out strongly against Obama. Similarly, some very white states in New England went solidly for Obama.
On the other hand, other lily-white states such as Wyoming, Kentucky, West Virginia, Utah and Idaho voted against Obama. Similarly whites in minority states such as Maryland, New York, Nevada, New Mexico and California strongly supported Obama.
A more parsimonious explanation which corresponds better with the observed pattern than the ethnic-diversity-and-redistribution literature is that whites in conservative states voted against Obama, and whites in liberal states voted for him, with little connection to the racial makeup of the state.
A second graph plots per capita spending State and Local spending in 2007, from U.S Census State and Local Government Finances, with the share of state population that are non-Hispanic whites.
Contrary to the prediction of Alesina-Glaser, the overall effect appears to be that states with more minorities spend more per capita.
Thus minority states such as D.C, California, Maryland, New York, Illinois, New Jersey and even Louisiana and Mississippi stand out as spenders, whereas white states such as New Hampshire, South Dakota and Idaho spend the least.
While this is not definitive evidence, I believe points 2-4 tend to dominate point 1, so that the net effect of more diversity is bigger government and less solidarity. At the very least, points 2-4 should be taken into account in the ethnic-diversity-and-redistribution-literature.
P.S
A reader suggested I include my RSS-Feed. I belive it is:
http://super-economy.blogspot.com/feeds/posts/default?alt=rss
Open Borders and Democracy will inevitably lead to a welfare state, as non-libertarian immigrants sooner or later become the majority of the voters and vote themselves benefits.
One objection that people such as Swedish libertarian Economist Niclas Berggren made is that mass migration causes native voters to turn against redistribution. The reason is that economists believe that solidarity is diminished in ethnically heterogeneous societies. According to this theory voters care more about people with the same race and ethnicity as themselves, and are less willing to help the unfortunate if they have a different skin color. This theory is most prominently suggested by Harvard professors Alesina and Glaeser.
Some libertarians want to rely on this mechanism to tear down the welfare state through open borders and the ethnic tensions they believe that migration will cause.
My first reaction if that is the price of limiting the welfare state, is that I would oppose it. Milton Friedman famously stated that he would oppose reducing the welfare state unless the public was convinced in a democratic fashion that this was in their best interests. I understand that some free-marketers have turned against the very notion of "solidarity", because the left has exploited the term so much. However this should not let us lose sight of the fact that solidarity and national cohesiveness are social goods, not something that we should want to destroy through an immigration shock doctrine.
Leaving my preferences aside, I also believe that Berggren and other libertarians and liberals who rely on the Alesina-Glaeser theory are substantively wrong. Ethnic diversity overall tends to expand the welfare state, not reduce it. While the research only focuses on one effect of unskilled immigration (reduced fellowship), there are at least three effects that go the other way. Here are the main effects of increasing the share of low income minorities:
1. Solidarity is diminished and social ties are wakened, so that the majority population becomes less willing to pay taxes to help "the other". This limits the size of government. The ethnic-diversity-and-redistribution-literature has almost entirely focused on this sole effect.
2. Increasing the share of low income individuals increases the welfare state through a mechanic effect. This means even if you don't vote for any changes to the welfare state, the use of preexisting welfare programs such as unemployment insurance and public health care increases.
For instance, 71% of Hispanic immigrant households in the U.S use at least one form of public welfare, compared to 39% of native households. In Sweden, according to the latest figures around 40% of all unemployed individuals are immigrants.
Even if you don’t make unemployment insurance more generous, having groups with a higher unemployed rate automatically expands the size of government.
3. More disadvantaged citizens increases the need for a welfare state. To the extent that the welfare state reflects a desire to reduce social problems, having more deprived individuals increases the demand for more government to solve problems. The welfare state exists largely because the middle classes and the rich feel sorry for the poor. The left is not stupid or irrational, they rarely demand government intervention where there are few problems.
As immigration increases poverty and social problem, demands for government intervention grow. Note that this is consistent with lower solidarity across ethnic lines, as long as solidarity is not zero (If the new poor immigrants were your co-ethnics, voters would be even more inclined to help them).
To give you a recent example, the majority of the long term uninsured in the United States are ethnic minorities. (Long term uninsurance is a better measure, since many uninsured are just between jobs.)
According to the Medical Expenditure Panel Survey, Hispanics "represented 42.8 percent of the long-term uninsured for the period 2005-2008"
The media does not understand and will not tell you this, but the long-term uninsurance rate of non-Hispanics whites’ above 25 in the United States is merely 3%. This is incidentally one explanation why the white Tea Party activists don’t like President Obama's health care reform, they and their families already have health insurance.
The American uninsurance ”crisis” would likely never had arisen without a high percentage of minorities with extremely high long term uninsurance rates.
Similar, in Sweden the social problem currently most emphasized by the Social Democrats is child poverty. As I explained, 65% of poor children in Sweden are immigrant children (interestingly about two thirds of poor children in the United States are minority children).
Without immigration, there would be no child poverty "crisis" in Sweden for the left to mobilize politically against.
4. Though ignored by proponents of the ethnic-diversity-and-redistribution, minorities also get to vote, and they vote overwhelmingly for the left. This effect is dominant when we are discussing free migration, because with open borders in a world where 700 million people have told Gallup they would like to migrate right now, sooner or later the immigrants will become the majority of voters and make the political preferences of the natives irrelevant.
Pew recently conducted a large survey with lots of questions on economic and social issues. It shows as all other polls that African Americans and Hispanics minorities are far to the left of whites. While 12% of Non-Hispanic whites in America have views that Pew classifies as Libertarian, only 3% of American minorities are libertarian. As America becomes increasingly minority, it will become less libertarian.
The proponents of the Alesina-Glaeser theory tend to focus entirely on point one and ignore points 2, 3 and 4.
It is difficult to test the theory empirically. I will however give you two pieces of suggestive evidence. I am not going to claim that this is definitive proof, just that it is consistent with my view that the net overall effect of diversity is bigger government.
Libertarians like the Alesina-Glaeser theory, because it tells them with more immigration they can reduce willingness to pay for the welfare state. Liberals similarly love the theory because it quite explicitly states that the main reason Americans deny themselves the benefits of a European style Social Democratic system is the racism of Republican voters.
First, I plot the vote share of Obama among non-Hispanic whites with the share of non-hispanic whites in each state. The Alesina-Glaeser theory would predict that whites in states with lots of minorities should vote less Democrat, because of racially motivated lack of support for leftist policies.
In fact, there is no such overall trend. The correlation is not statistically significant, and if anything goes in the opposite direction as their theory would predict.
Sure, there are states with high share of minorities in the South - such as Georgia and Alabama - where whites came out strongly against Obama. Similarly, some very white states in New England went solidly for Obama.
On the other hand, other lily-white states such as Wyoming, Kentucky, West Virginia, Utah and Idaho voted against Obama. Similarly whites in minority states such as Maryland, New York, Nevada, New Mexico and California strongly supported Obama.
A more parsimonious explanation which corresponds better with the observed pattern than the ethnic-diversity-and-redistribution literature is that whites in conservative states voted against Obama, and whites in liberal states voted for him, with little connection to the racial makeup of the state.
A second graph plots per capita spending State and Local spending in 2007, from U.S Census State and Local Government Finances, with the share of state population that are non-Hispanic whites.
Contrary to the prediction of Alesina-Glaser, the overall effect appears to be that states with more minorities spend more per capita.
Thus minority states such as D.C, California, Maryland, New York, Illinois, New Jersey and even Louisiana and Mississippi stand out as spenders, whereas white states such as New Hampshire, South Dakota and Idaho spend the least.
While this is not definitive evidence, I believe points 2-4 tend to dominate point 1, so that the net effect of more diversity is bigger government and less solidarity. At the very least, points 2-4 should be taken into account in the ethnic-diversity-and-redistribution-literature.
P.S
A reader suggested I include my RSS-Feed. I belive it is:
http://super-economy.blogspot.com/feeds/posts/default?alt=rss
Wednesday, April 27, 2011
Does the United States have a Revenue problem or a Spending Problem?
There is a debate about the causes of the record deficits in the United States. Republicans argue that we have a "spending problem", by which they mean spending is increasing too fast, while the left argues that we mainly have a "revenue problem", by which they mean taxes are too low.
The outcome of this debate will determine whether the most reasonable solution to the structural deficit will be tax increases or slowing the growth of spending. President Obama and liberals such as Paul Krugman like to give the public the impression that the deficit is entirely or to a large extent caused by Bush tax cuts for the wealthy (which is false, since Obama's proposed tax increase on the rich would only collect 0.3% of GDP). If that were the case, the most fair solution to the deficit would be - as the President put it - to raise "a little bit more" revenue from the rich.
It is easier to motivate tax hikes if you convince the public that the deficit was caused by tax cuts, rather than by an unparalleled expansion in spending.
When Republicans such as Paul Ryan say that the deficit is caused by a spending problem, they mean that once the recession is over, a federal tax revenue target of 19% of GDP (the historical average for the U.S) is sufficient to finance federal spending if spending is also kept at historical levels. Throughout, keep in mind that we are talking about Federal revenue and expenditure, the U.S public sector spends about 40% of national income if states and municipalities are included.
Slate columnist David Weigel attacks the Paul Ryan argument. His evidence is that revenue in 1981 was higher than later years of the Reagan presidency, which according to him proves that the Reagan tax cuts reduced revenue. Weigel is wrong. Revenue is highly volatile, because a lot of it depends on corporate profits, capital gains and other variables determined by the business cycle. Weigel is simply cherry-picking the year, 1981 was one of the highest revenue years in post-war history.
Similarly liberals like to pick the peak of the IT-boom at 2000 as the norm, where 20.6% of GDP was collected as revenue, even though it was the highest year in post-war history, and the second highest in American history overall. The highest year was 1944 during World War II, when Federal revenue briefly reached 20.9% of GDP.
In order to give a better picture, I have plotted the average revenue, deficit and spending as a share of GDP for all presidential terms in the post-war period.
First, this exercise shows us that Weigel is mistaken. Tax revenue during both Reagan terms was virtually identical with the Carter years, even though Reagan cut tax rates dramatically.
Second, revenues during the second Clinton term, the highest of the post-war periods, was 19.9%, only a little higher than the 19.0% level Paul Ryan has suggested (which liberals claim is far too little).
Lastly, President Obama has increased spending to levels never witnessed in American post-war history.
Let's move to President Obama's budget, as calculated by the esteemed Congressional Budget Office.
The President likes to give the impression that the deficit debate is about repealing the tax increases for the wealthy. But let us imagine what would happen if revenue during the coming years would be what is was during President Clinton's second term, long before the Bush tax cuts. During those years revenue was 19.9% of GDP.
The overwhelming majority of Presidents Obama's budgeted deficit would remain even if he collected Clinton-era record revenue. By the end of his term, when the recession is projected to be long over, 80% of the deficit caused by President Obama spending plan would remain even if we assume Clinton-era record revenue.
This is not strange, since during the second Clinton term, federal spending as a share of GDP was 18.8%. President Obama has already increased spending to levels unheard on in peacetime. Federal spending with Obama's budget will be 23.4% in 2016, when the recession is projected to be completely over. These numbers show us that President Obama and his defenders cannot use the recession as an excuse for their expansion of government and the immense deficits it is causing.
Clinton-era record revenue would be nowhere near enough to fund Obama-era record spending.
I want to illustrate a final point. Let's ignore the Obama years, and focus on the long run deficit. The figures for spending are from the Long Term Budget Outlook, again calculated by the Congressional Budget Office. These figures take into account the projected increase of Medicare, Medicaid and Social Security spending. This is primary spending, which means that interests on the debt is not included in spending, the numbers would look even worse if we included these.
Let us also be more generous to the left. Instead of assuming revenue for the highest presidential term, let's assume revenue for the record year. As pointed out previously this was the boom year 2000, where revenue was 20.6% thanks to unusually high capital gains and corporate profits.
This picture illustrates what would happen if Federal revenue as a share of GDP increased to the record high of the post-war period and remained there forever, and we continued at the currently projected levels of Federal expenditure.
Because of ever expanding government, the deficit would explode even when assuming record levels of revenue, with the debt growing to several hundred percent of GDP. Jon Stewart was therefore misleading his trusting and economically unsophisticated viewers when he showed them a graph where the deficit appears to vanish if only the Bush-tax cuts were repealed.
The only reasonable conclusion that the United States primarily has a spending problem, not a revenue problem. It is the expansion of the government - some already carried out by Obama, some projected to occur - that is causing the long term structural deficit to grow beyond control, not a reduction of revenue caused by lowering the taxes on the rich.
If liberals want to argue that government spending is too low, and that we should increase it for reasons of social policy and raise taxes to pay for it, they should feel free to do so. But please do not claim that the long term deficit is primarily caused by taxes being too low relative to historical levels, because that is simply not true.
The outcome of this debate will determine whether the most reasonable solution to the structural deficit will be tax increases or slowing the growth of spending. President Obama and liberals such as Paul Krugman like to give the public the impression that the deficit is entirely or to a large extent caused by Bush tax cuts for the wealthy (which is false, since Obama's proposed tax increase on the rich would only collect 0.3% of GDP). If that were the case, the most fair solution to the deficit would be - as the President put it - to raise "a little bit more" revenue from the rich.
It is easier to motivate tax hikes if you convince the public that the deficit was caused by tax cuts, rather than by an unparalleled expansion in spending.
When Republicans such as Paul Ryan say that the deficit is caused by a spending problem, they mean that once the recession is over, a federal tax revenue target of 19% of GDP (the historical average for the U.S) is sufficient to finance federal spending if spending is also kept at historical levels. Throughout, keep in mind that we are talking about Federal revenue and expenditure, the U.S public sector spends about 40% of national income if states and municipalities are included.
Slate columnist David Weigel attacks the Paul Ryan argument. His evidence is that revenue in 1981 was higher than later years of the Reagan presidency, which according to him proves that the Reagan tax cuts reduced revenue. Weigel is wrong. Revenue is highly volatile, because a lot of it depends on corporate profits, capital gains and other variables determined by the business cycle. Weigel is simply cherry-picking the year, 1981 was one of the highest revenue years in post-war history.
Similarly liberals like to pick the peak of the IT-boom at 2000 as the norm, where 20.6% of GDP was collected as revenue, even though it was the highest year in post-war history, and the second highest in American history overall. The highest year was 1944 during World War II, when Federal revenue briefly reached 20.9% of GDP.
In order to give a better picture, I have plotted the average revenue, deficit and spending as a share of GDP for all presidential terms in the post-war period.
First, this exercise shows us that Weigel is mistaken. Tax revenue during both Reagan terms was virtually identical with the Carter years, even though Reagan cut tax rates dramatically.
Second, revenues during the second Clinton term, the highest of the post-war periods, was 19.9%, only a little higher than the 19.0% level Paul Ryan has suggested (which liberals claim is far too little).
Lastly, President Obama has increased spending to levels never witnessed in American post-war history.
Let's move to President Obama's budget, as calculated by the esteemed Congressional Budget Office.
The President likes to give the impression that the deficit debate is about repealing the tax increases for the wealthy. But let us imagine what would happen if revenue during the coming years would be what is was during President Clinton's second term, long before the Bush tax cuts. During those years revenue was 19.9% of GDP.
The overwhelming majority of Presidents Obama's budgeted deficit would remain even if he collected Clinton-era record revenue. By the end of his term, when the recession is projected to be long over, 80% of the deficit caused by President Obama spending plan would remain even if we assume Clinton-era record revenue.
This is not strange, since during the second Clinton term, federal spending as a share of GDP was 18.8%. President Obama has already increased spending to levels unheard on in peacetime. Federal spending with Obama's budget will be 23.4% in 2016, when the recession is projected to be completely over. These numbers show us that President Obama and his defenders cannot use the recession as an excuse for their expansion of government and the immense deficits it is causing.
Clinton-era record revenue would be nowhere near enough to fund Obama-era record spending.
I want to illustrate a final point. Let's ignore the Obama years, and focus on the long run deficit. The figures for spending are from the Long Term Budget Outlook, again calculated by the Congressional Budget Office. These figures take into account the projected increase of Medicare, Medicaid and Social Security spending. This is primary spending, which means that interests on the debt is not included in spending, the numbers would look even worse if we included these.
Let us also be more generous to the left. Instead of assuming revenue for the highest presidential term, let's assume revenue for the record year. As pointed out previously this was the boom year 2000, where revenue was 20.6% thanks to unusually high capital gains and corporate profits.
This picture illustrates what would happen if Federal revenue as a share of GDP increased to the record high of the post-war period and remained there forever, and we continued at the currently projected levels of Federal expenditure.
Because of ever expanding government, the deficit would explode even when assuming record levels of revenue, with the debt growing to several hundred percent of GDP. Jon Stewart was therefore misleading his trusting and economically unsophisticated viewers when he showed them a graph where the deficit appears to vanish if only the Bush-tax cuts were repealed.
The only reasonable conclusion that the United States primarily has a spending problem, not a revenue problem. It is the expansion of the government - some already carried out by Obama, some projected to occur - that is causing the long term structural deficit to grow beyond control, not a reduction of revenue caused by lowering the taxes on the rich.
If liberals want to argue that government spending is too low, and that we should increase it for reasons of social policy and raise taxes to pay for it, they should feel free to do so. But please do not claim that the long term deficit is primarily caused by taxes being too low relative to historical levels, because that is simply not true.
Friday, April 1, 2011
David Brooks and Malcolm Gadwall wrong about I.Q, Income and Wealth
In his book "The Social Animal", reviewed here, David brooks writes:
"Once you get past some pretty obvious correlations (smart people make better mathematicians), there is a very loose relationship between IQ and life outcomes."
Brooks further cites a study claiming that there is "no correlation between accumulating large wealth and high IQ."
Both claims are wrong. The result Brooks cites is after "controlling" for education and income. But education and income are themselves functions of I.Q, so you shouldn't control for them if the question you want to answer is how I.Q effects life outcomes.
I have not seen this graphed online, so let's visualize the relationship between an estimate of I.Q and income and wealth so you can see for yourself. The source is NLYS79, a dataset which tracks a representative sample of the U.S population. Intelligence is approximated by the military when the individuals in the sample were mostly teenagers, while income and wealth data is for the same guys in their 40s. The sample is restricted to non-Hispanic white men.
For this group the lowest decile is people with I.Q below 84, and the highest decile above 116, which is not a very high cutoff. So keep in mind that we are not talking about only super-geniuses, in which case the results would be even stronger. Also remember that the middle of the distribution have very similar I.Q scores, the 5th decile is around 101-104, and the 6th decile around 104-108.
As you can see Americans men lucky enough to be born either with genes or a home environment that facilitates high I.Q earn more and accumulate more wealth.
The strong link between I.Q and earnings is well known by labor economists, but perhaps not by the affluent and high-I.Q readers of the New York Times. Obviously most of it goes through education. As technological development makes I.Q more valuable and unskilled labor less valuable, this disparity is increasing.
Another common claim of Brooks and of Malcolm Gladwell is that I.Q may matter, but only until around 130, after which it becomes meaningless. This is also wrong. Many previous samples have had too few observations to make reliable inference about the effect of I.Q above 130. Of course not having sufficient data hardly justifies Gladwell confidently claiming that I.Q above 130 is irrelevant even for scientists in technical fields (which I and others who are not smart enough to handle advanced mathematics could have told you from personal experience was a bizarre theory). After all, 130 is not that high, around the mean for a Harvard or SSE student.
This recent paper by Heckman, Gensowski and Savelyev studies the life outcomes of the Terman sample, which entirely consists of American men and women with I.Q above 135 (in some cases far above 135). They find that I.Q has a significant effects on earnings and educational outcomes, also for those above the 135 I.Q threshold. Another Malcolm Gladwell myth busted.
There are some policy implications from this realization. One is that smart and successful people shouldn't congratulate themselves so much. They didn't so much "earn" their talent than were lucky in the gene/environment lottery. If you are born healthy, with high I.Q genes and with educated parents and a good home environment you are expected to earn more than a more disadvantaged child who exerts the exact amount of effort through life.
Unlike libertarians, Conservatives believe that those who were the recipients of good fortunate have a moral obligations towards the rest of society, in particular to the people who do their best but just have less marketable skills.
Another is that the left is wrong about the market allocating income mainly based on chance, connections or "power". In fact, earnings are strongly linked to intelligence, which indicates that they are linked to productivity, just as economic theory predicts. Poor people are on average less productive than rich people, a claim which may sound obvious (almost tautological) to an economist but which outrages a lot of people on the left.
Denying the link between productivity and earnings is very important for the modern left, as their entire source of outrage is based on the view that the capitalist system "exploits" the poor. More likely, because of the modern welfare state and because of the growing importance of human capital, more resources are transferred from the productive rich to the poor than vice-versa. There is so little demand in the labor market for unskilled people that the poor in industrialized countries increasingly don't even work full time.
The fact that the rich don't exploit the poor doesn't mean the rich shouldn't help the poor. But it's one thing to claim you are rich because you are stealing from poor people, and another to believe you have an obligation to help all members of society due to randomly having being granted more valued skills. Fairness perceptions are not only a function of the type of distribution we desire, but to an even greater extent a function of the process we believe creates inequality.
I suppose David Brooks and Gladwell give an inaccurate impression about I.Q and income/wealth in order to make their readers feel warm and fuzzy. But that is not an accurate depiction of the world we live in, we live in a much harsher and more unfair reality.
"Once you get past some pretty obvious correlations (smart people make better mathematicians), there is a very loose relationship between IQ and life outcomes."
Brooks further cites a study claiming that there is "no correlation between accumulating large wealth and high IQ."
Both claims are wrong. The result Brooks cites is after "controlling" for education and income. But education and income are themselves functions of I.Q, so you shouldn't control for them if the question you want to answer is how I.Q effects life outcomes.
I have not seen this graphed online, so let's visualize the relationship between an estimate of I.Q and income and wealth so you can see for yourself. The source is NLYS79, a dataset which tracks a representative sample of the U.S population. Intelligence is approximated by the military when the individuals in the sample were mostly teenagers, while income and wealth data is for the same guys in their 40s. The sample is restricted to non-Hispanic white men.
For this group the lowest decile is people with I.Q below 84, and the highest decile above 116, which is not a very high cutoff. So keep in mind that we are not talking about only super-geniuses, in which case the results would be even stronger. Also remember that the middle of the distribution have very similar I.Q scores, the 5th decile is around 101-104, and the 6th decile around 104-108.
As you can see Americans men lucky enough to be born either with genes or a home environment that facilitates high I.Q earn more and accumulate more wealth.
The strong link between I.Q and earnings is well known by labor economists, but perhaps not by the affluent and high-I.Q readers of the New York Times. Obviously most of it goes through education. As technological development makes I.Q more valuable and unskilled labor less valuable, this disparity is increasing.
Another common claim of Brooks and of Malcolm Gladwell is that I.Q may matter, but only until around 130, after which it becomes meaningless. This is also wrong. Many previous samples have had too few observations to make reliable inference about the effect of I.Q above 130. Of course not having sufficient data hardly justifies Gladwell confidently claiming that I.Q above 130 is irrelevant even for scientists in technical fields (which I and others who are not smart enough to handle advanced mathematics could have told you from personal experience was a bizarre theory). After all, 130 is not that high, around the mean for a Harvard or SSE student.
This recent paper by Heckman, Gensowski and Savelyev studies the life outcomes of the Terman sample, which entirely consists of American men and women with I.Q above 135 (in some cases far above 135). They find that I.Q has a significant effects on earnings and educational outcomes, also for those above the 135 I.Q threshold. Another Malcolm Gladwell myth busted.
There are some policy implications from this realization. One is that smart and successful people shouldn't congratulate themselves so much. They didn't so much "earn" their talent than were lucky in the gene/environment lottery. If you are born healthy, with high I.Q genes and with educated parents and a good home environment you are expected to earn more than a more disadvantaged child who exerts the exact amount of effort through life.
Unlike libertarians, Conservatives believe that those who were the recipients of good fortunate have a moral obligations towards the rest of society, in particular to the people who do their best but just have less marketable skills.
Another is that the left is wrong about the market allocating income mainly based on chance, connections or "power". In fact, earnings are strongly linked to intelligence, which indicates that they are linked to productivity, just as economic theory predicts. Poor people are on average less productive than rich people, a claim which may sound obvious (almost tautological) to an economist but which outrages a lot of people on the left.
Denying the link between productivity and earnings is very important for the modern left, as their entire source of outrage is based on the view that the capitalist system "exploits" the poor. More likely, because of the modern welfare state and because of the growing importance of human capital, more resources are transferred from the productive rich to the poor than vice-versa. There is so little demand in the labor market for unskilled people that the poor in industrialized countries increasingly don't even work full time.
The fact that the rich don't exploit the poor doesn't mean the rich shouldn't help the poor. But it's one thing to claim you are rich because you are stealing from poor people, and another to believe you have an obligation to help all members of society due to randomly having being granted more valued skills. Fairness perceptions are not only a function of the type of distribution we desire, but to an even greater extent a function of the process we believe creates inequality.
I suppose David Brooks and Gladwell give an inaccurate impression about I.Q and income/wealth in order to make their readers feel warm and fuzzy. But that is not an accurate depiction of the world we live in, we live in a much harsher and more unfair reality.
Sunday, March 27, 2011
The "Mystery" of Child Poverty in Sweden.
Yesterday Håkan Juholt, the new leaders of the Social Democratic party, gave his opening speech to the party congress where he outlined the future direction of policies.
Juholts chief identified social problem and number one priority was child poverty. He stated:
"We will not be a country where several hundred thousand children live in child-poverty. It is a shame for Sweden...It only belongs in [conservative leader] Reinfeldt's Sweden, not in Social Democratic Sweden".
Child poverty is measured by non-profit group "Rädda Barnen", and is defined as either children in families who receive welfare ("socialbidrag") because they are below the poverty norm defined by the state, or children in families who live below the poverty norm but for various reasons do not receive welfare. I would therefore have been counted among the sample of poor children between 1989-1999 when we lived on welfare.
It is therefore a reasonable measure that approximates absolute child poverty (although welfare payments and these minimum norms increase slightly over time in real terms).
The standard critique of the right is that these measures are relative poverty which can give misleading results. For example with relative poverty the poverty rate could bizarrely rise even if when the real income of the poor increases, just as long as the real income of the rich increases even faster. However this critique is not valid here, since the measure is closer to absolute poverty. This is incidentally also true of the American poverty rate, which contrary to perception among many libertarians measures absolute poverty, not relative poverty.
First, let's note that child poverty has declined. In 1997 there were 432.000 poor children in Sweden, and in 2008 the number was 220.000 (so Juholt was technically wrong when he said "several" hundred thousand, but let's not be picky). In percentage terms child poverty went from 22.3% to 11.5%.
But Sweden has experienced rapid income growth in the last decade and a half. So why isn't child poverty declining more? Surely it must be due to the heartless neo-liberal policies of the right!
I think this graph can give us some a hint of what's going on.
In 2008 the child poverty rate of Native Swedish children was only one third of what is was in 1997, a massive reduction from 243.000 to 78.000. The only reason Sweden's' total child poverty rate has not declined more is that during these years politicians to the right and the left brought several hundred thousand poor immigrants to Sweden to swell the ranks of the impoverished. While first and second generation immigrants constituted 44% of the poor children in 1997, they were 65% of all poor children in Sweden in 2008.
Only 5% of native Swedish children live in poverty. For immigrant children with both parents born outside of the Sweden, the child poverty rate is 39%, a miserable number which may shock and should dishearten liberal Americans. The Swedish model appeared to produce amazing results as long as the country was completely homogeneous and full of Swedes. But the much admired welfare state was unable to deal with even moderate levels of ethic diversity (still far below the levels of the United States) without a collapse in social outcomes.
Demographic change, not economic policy, is what is preventing child poverty from declining (if it were the fault of economic policy the child poverty rate of ordinary Swedes would not have declined so much).
The leader of the Social Democrats said "Child poverty shall be combated every day and with all available means!"
One fool-proof method would be slowing the importation of tens of thousands of more poor people every year until he has solved child poverty among Swedes and immigrants already here. I am guessing however that this is not among theoretically possible "available means" in Mr. Juholt's universe.
Juholts chief identified social problem and number one priority was child poverty. He stated:
"We will not be a country where several hundred thousand children live in child-poverty. It is a shame for Sweden...It only belongs in [conservative leader] Reinfeldt's Sweden, not in Social Democratic Sweden".
Child poverty is measured by non-profit group "Rädda Barnen", and is defined as either children in families who receive welfare ("socialbidrag") because they are below the poverty norm defined by the state, or children in families who live below the poverty norm but for various reasons do not receive welfare. I would therefore have been counted among the sample of poor children between 1989-1999 when we lived on welfare.
It is therefore a reasonable measure that approximates absolute child poverty (although welfare payments and these minimum norms increase slightly over time in real terms).
The standard critique of the right is that these measures are relative poverty which can give misleading results. For example with relative poverty the poverty rate could bizarrely rise even if when the real income of the poor increases, just as long as the real income of the rich increases even faster. However this critique is not valid here, since the measure is closer to absolute poverty. This is incidentally also true of the American poverty rate, which contrary to perception among many libertarians measures absolute poverty, not relative poverty.
First, let's note that child poverty has declined. In 1997 there were 432.000 poor children in Sweden, and in 2008 the number was 220.000 (so Juholt was technically wrong when he said "several" hundred thousand, but let's not be picky). In percentage terms child poverty went from 22.3% to 11.5%.
But Sweden has experienced rapid income growth in the last decade and a half. So why isn't child poverty declining more? Surely it must be due to the heartless neo-liberal policies of the right!
I think this graph can give us some a hint of what's going on.
In 2008 the child poverty rate of Native Swedish children was only one third of what is was in 1997, a massive reduction from 243.000 to 78.000. The only reason Sweden's' total child poverty rate has not declined more is that during these years politicians to the right and the left brought several hundred thousand poor immigrants to Sweden to swell the ranks of the impoverished. While first and second generation immigrants constituted 44% of the poor children in 1997, they were 65% of all poor children in Sweden in 2008.
Only 5% of native Swedish children live in poverty. For immigrant children with both parents born outside of the Sweden, the child poverty rate is 39%, a miserable number which may shock and should dishearten liberal Americans. The Swedish model appeared to produce amazing results as long as the country was completely homogeneous and full of Swedes. But the much admired welfare state was unable to deal with even moderate levels of ethic diversity (still far below the levels of the United States) without a collapse in social outcomes.
Demographic change, not economic policy, is what is preventing child poverty from declining (if it were the fault of economic policy the child poverty rate of ordinary Swedes would not have declined so much).
The leader of the Social Democrats said "Child poverty shall be combated every day and with all available means!"
One fool-proof method would be slowing the importation of tens of thousands of more poor people every year until he has solved child poverty among Swedes and immigrants already here. I am guessing however that this is not among theoretically possible "available means" in Mr. Juholt's universe.
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