why the welfare state needs foreign labor

Continuing on the Breaking the Gridlock kick, foreign labor opponents are keen to depict foreigners as a threat to the host nation’s economic self-interest. At their most beneficent, opponents argue against an influx of unskilled labor, which would hurt unskilled labor currently in the country. In theory, this argument is valid. As Lant Pritchett notes, however, evidence suggests the impact is marginal:

The evidence of the Mariel boatlift of a huge influx of workers into a single labor market (Miami) shows little impact on employment or wages (Card 1990). Even Borjas’s (1999) regression evidence that the labor movement of nationals is affected by the patterns of migration and hence the impact on the national labor market needs to be considered shows that only 4 percent of the decline in the real wage of high-school-educated workers can be attributed (and the cross-state regression evidence was apparently driven by the experience of California).

Given that national legislation involving a similarly “huge influx of workers” is politically impossible, the economic fate of low-skilled nationals will not be much affected by foreign labor for the foreseeable future. For those whose concerns stand unabated, Pritchett takes another tact:

The economists’ usual response to distributional arguments against efficient policies is “instruments to targets,” and for economists to resist migration on this ground while advocating free trade is intellectually inconsistent.

For fear of some anti-free traders remaining unimpressed, I would add that we also don’t allow distributional considerations to take precedence over more efficient technological innovations.  I don’t expect this counter-argument to impress anti-free traders in isolation, but free labor has the advantage over free trade in that the direct benefits accrue to those most in need; folks against an unskilled labor influx out of a concern for distributional effects would do well to consider Pritchett’s points in the previous post on the morality of labor mobility.

It would do the case for labor mobility a disservice, however, to simply argue that it wont harm national interests. I won’t waste kilobytes on the obvious benefits of allowing in more labor that firms want to pay to create products, but Pritchett does offer useful clarity on foreign labor as a way to address the problems facing aging industrial countries:

The populations of Germany, Japan, and Italy have already begun to shrink and, for Italy and Japan, are projected to be only 60 percent of their 2000 size by 2050. France and the United Kingdom will remain roughly the same size during the next fifty years. Among large industrial countries, only the United States is expected to continue to experience sizable population growth (these projections already assume some level of migration).
…
Current projections show support [to retiree] ratios falling in Germany from 4 to 2, and in the more dramatic cases of Italy and Japan they fall to about 1.5—only 1.5 workers for every retiree. The systems of social transfers in Europe can be sustained only with very high tax rates even at current support ratios and program design parameters (which include a combination of tax rates, ages, benefits, and so on). But if support ratios fall to anything like projected levels, then it is not clear that there are politically feasible combinations of design parameters that can make the systems solvent—either tax rates need to be too high or retirement benefits drastically curtailed.

This country-specific focus foretells of Pritchett’s final recommendations for bilateral labor agreements, which I’ll explore soon. More generally, it stirs a hope that the industrial nations will soon understand that it is in their economic interest to allow in young, tax-paying workers to correct their demographic imbalances.

Filed under: General Welfare, World , book byte

help people, not plots of land

Returning for another round (first round: the illiberal global labor market) of Breaking the Gridlock, Lant Pritchett attacks international organizations’ assumption that economic development should focus on the nation-state, rather than the national, as the primary unit of interest. This nation-centric perspective pervades most international institutions and frustrates support of labor mobility. If you didn’t know any better, you might believe that the primary objective is to increase the productive capacity of low-yield geographic areas rather than the economic well-being of the inhabitants. Still the perception of economic development as a national phenomena would be of little concern if it wasn’t often at odds with the interests of the nationals themselves. For example, the de facto measure of development progress, GDP, presents the migration of a productive national to another country for a better paying job as a loss. The real benefits of labor mobility are only apparent when development is centered on people, not arbitrary lines.

Filed under: General Welfare, World , book byte, book

the right charter city analogy

Chris Blattman and Paul Romer provide a productive back-and-forth on Romer’s charter cities idea. Blattman posted a question of particular interest, “How is this different than Chicago’s notorious housing authority, and the failure that was Cabrini-Green?” He later adds, “Singapore stumbled upon a successful model, Chicago did not. Ex-ante, I think it may have been hard to predict which would succeed.

“A trial-and-error process would, without doubt, produce dozens of successful charter cities around the world. But the error and trial could have a very heavy human cost. A half century after its birth, Cabrini-Green and the Robert Taylor homes have been razed.”

Filed under: World

the illiberal global labor market

Lant Pritchett concludes “Let Their People Come: Breaking the Gridlock on Global Labor Mobility” not by talking about amnesty, but bilateral temporary work agreements. In just 151 pages (available for free), Pritchett not only presents a convincing argument for the reduction of labor movement restrictions, but also thoughtfully and respectfully engages the anti-immigration ideas that keep labor mobility reform off the agenda. While unafraid to voice disagreement with these ideas, Pritchett is careful to acknowledge their political import, and -in a welcomed bow to pragmatism- produces his final recommendations in the context of these realities. This post will be the first in a series to explore Pritchett’s arguments, beginning with an introduction to the matter at hand and the morality of the foreign labor debate.

Filed under: General Welfare, Philosophy , book byte

violence and social orders, ch. 1

D North, J Wallis, and B Weingast (NWW) offer a “conceptual framework for interpreting recorded human history” in their new work Violence and Social Orders. As a fan of North’s defining institutional economics work, as well as Weingast’s papers on China, I was pleased that Arnold Kling found so much to like about the new book, and decided to pick it up myself. I am happy to say that Violence lives up to its potential, crystallizing NWW’s earlier work in a simple and useful framework and clearly explaining its application. I found so much to like about the book, that I’ve decided to write up a post on each of the seven chapters. (Will I have the endurance? We’ll see.)

Filed under: World , book bytes

complexity science, wow!

The current recession has induced a barrage of criticism of the economics profession for its failure to foresee the impending crisis. While these criticisms often aim to indict classical liberal economic thought, a more accurate analysis would not label this as a failure of economics, but as a blind spot to all disciplines: the crisis was just the most recent example of a “cascading failure,” a phenomena that no one has done a particularly good job of foreseeing or preventing. Wikipedia cites a few other examples of cascading failure -which the site defines as “a failure in a system of interconnected parts in which the failure of a part can trigger the failure of successive parts”- most appropriately, the power grid failures we’ve all come to know and love, as well as ischemia, a health event I’ve come to known from my time in health care.

I greatly enjoyed Melanie Mitchell’s overview (Complexity: A Guided Tour) of the current state of complexity science for the very reason that complexity scientists are exploring chaos, dynamic, and network theory, which are fundamental to better understanding the dark recesses that frustrate many disciplines. As Duncan Watts says, “Next to the mysteries of dynamics on a network – whether it be epidemics of disease, cascading failures in power systems, or the outbreak of revolutions- the problems of networks that we have encountered up to now are just pebbles on the seashore.”

Filed under: General Welfare

jane jacobs: a model for conciliation

Jane Jacobs ushered in a revolution in city planning with her classic Death and the Life of Great American Cities in 1961, inspiring a generation of urbanites to fight off the technocratic meddling of big government. She fostered an appreciation for the natural ecology of the city, the emergence of an exciting and productive spontaneous order. She rallied against central planning, mounting a Hayekian stand to defeat Robert Moses, the Great Man of NYC development. Jacobs’ New Urbanism represents a unique conciliation of Austrian economics and the political left. In Death and the Life of Great American Cities, Jacobs spins a tale of well-intentioned but brutally wrongheaded urban planners -some of the the smartest folks of the time- whose hubris leads to nothing but destruction and blight. Austrian economists, such as Hayek, have been telling this story for years, in all areas of government, but never managed the success of Jacobs.

Filed under: Economic Policy, Philosophy

on thoreau’s civil disobedience

I had meant to read up on Thoreau for quite some time now, and took the opportunity yesterday to read the Project Gutenberg text of Civil Disobedience on my Kindle. I found the essay well-conceived, enjoyable, and dripping with an arrogance that only comes with a supreme confidence in one’s intellect, moral standing, and social status. That said, while I was impressed by Thoreau’s well-articulated respect for the individual, his moral outrage at the crimes of slavery and the Mexican War, and his criticism of those who recognized the injustice and paid but lip service, I found his Rousseau-like worldview naive and his writing self-indulgent. Below I have written up some of my initial thoughts; they should not be read as conclusive opinions, but hopefully will spark some discussion.

Filed under: Philosophy

vacationing in orhan’s istanbul

Istanbul always maintained a special status on my long list of world cities to visit. Not only did it have a storied past as a hub of conflict and collaboration between East and West, but it was an ancient city that actually maintained a certain relevance in modern times as the third largest city in the world. And while I treasured the ruins of Rome and other bygone civilizations, Istanbul held the promise of something more. I hoped there to find an eternal city, one that had not lost its creative spark.

Filed under: World

expanding coverage with actuarial vouchers

I was going to write a post on the current health care reform debate, but at this point the proposals are too amorphous and the debate too inane. That said, there are numerous problems with the American health care system, and today I’ll share an idea I have for tackling the problem of non-existent or inadequate health care coverage. Perhaps in another post I’ll tackle cost control, but now I just want to drill down on this actuarial auction idea.

Filed under: Health