Remember all the old Canadian nationalists? The ones who said that the (Canada-US) Free Trade Agreement would destroy Canadian culture? The ones we economists defeated back in the 1988 election? I'm beginning to wish we hadn't defeated them quite so thoroughly.
They were wrong. But they sorta, kinda, did have a point. Social/economic institutions are endogenous. They are not part of the unchanging geological landscape. Social/economic institutions are part of what people do; they are part of how people interact with each other, and expect others to interact with them. And, at least in principle, there is no reason why those social/economic institutions should be exogenous with respect to our imports and exports. And there is, or there used to be, a whole school of Canadian economics that pushed exactly that idea. So if you could make a reasonable case that the FTA and importing or exporting more apples would cause Canadian social/economic institutions to become, well, like North Korea, then OK. All that guff about comparative advantage and economies of scale and the gains from trade wouldn't be very convincing.
"The essence of the economic case for migration is very simple: it is the same as the case for markets in general. If people take decisions on the basis of their own economic self-interest, this will maximise overall welfare. This applies to where people live and work just as much, if not more, than it applies to buying and selling goods and services. Of course markets fail here, as elsewhere, and "more market" is not always better. But the view that, as a general proposition, markets are good at allocating resources – including human resources – is widely shared among economists.
And this analogy holds in a narrower, more technical sense as well. The classic argument for free trade, as advanced by Adam Smith, is not just analogous to, but formally identical to, the argument for free movement. It is easy to see this. In economic terms, allowing somebody to come to your country and trade with you (or work for you, or employ you) is identical to removing trade barriers with their country." [bold added]
Sometimes I am proud of what some people unkindly call economists' "autism". At other times I despair. This is one of those other times.
Importing people is not like importing apples.
It's not just "labour services" and "consumer demand" that crosses the border; it's people. And there's a lot more to people than just bundles of labour services and consumer demands, where tariffs and transport costs make the only difference to whether they are inside or outside the borders.
"Total Factor Productivity" is not some geological feature like the Canadian shield. There has to be a reason why some countries are rich and other countries are basket cases, and unless you are lucky enough to find yourselves sitting on great reservoirs of oil that someone else will pay you to pump out of the ground, that reason seems to have something to do with social/economic institutions, and social/economic institutions seem to have something to do with people.
If you have a model which treats Total Factor Productivity as exogenous, then yes, if "resources" flow from places with low TFP to places with high TFP, as they will if the invisible hand is allowed to operate, that would be a Good Thing. But you need to stop and ask: "Hang on. I wonder why TFP is higher in some places than in others?" Which should lead you to the next question: "I wonder if TFP really would be exogenous to the sort of policy experiment I'm using my model for?". Which should lead you to the next question: "I wonder if social/economic institutions really would be exogenous to the sort of policy experiment I'm using my model for?"
How exactly will social/economic institutions change when we import people? God only knows. They might change for the better; they might change for the worse. It depends on them; it depends on us. But they almost certainly will change. And if you can't even see that question, and wonder about it, then you really are missing something that even the great unwashed uneducated rabble can see. And the great unwashed uneducated rabble are going to put even less credence on what you intellectual elites are telling them they ought to think.
Mrs Thatcher was not wrong, but misunderstood. There is such a thing as society, but society is not something that exists apart from the rules of action and belief of the people who create that society on an ongoing basis. We don't just do it once and leave it cast in concrete; we re-create it every day. And as Hobbes said, Total Factor Productivity wasn't so great in the State of Nature.
Worthwhile Canadian Initiative 
You raise lots of interesting questions. But the answers aren’t clear. What if there was an optimal number of people to import a year as a strong function of native birth rates and civilian labor force growth rate, but only a weak function of where the people originate from? How could we find out if such a function existed, and what its sensitivity was to its arguments?
Tom: I’m afraid my guesses to the answers aren’t much better than anyone else’s. Canada has a very high immigration rate, as a percentage of population, compared to most countries. But, touch wood, things seem to be mostly OK, as far as I can tell. But it’s a mostly controlled immigration, with a points system, which I think makes a big difference, including a symbolic difference.
If you want some clear economic thinking on this issue, here is what John Cochrane has to say:
“What is the optimal number of imported tomatoes? Soviet central planners tried to figure things out this way. Americans shouldn’t. We should decide on the optimal terms on which tomatoes can be imported, and then let the market decide the number. Similarly, we should debate what the optimal terms for immigration are – How will we let people immigrate? What kind of people? – so that the vast majority of such immigrants are a net benefit to the US. Then, let as many come as want to. On the right terms, the number will self-regulate.
Econ 101: Figure out the price, set the rules of the game; don’t decide the quantity, or determine the outcome. When a society sets target quantities, or sets quotas, as the U.S. does now with immigration, the result is generally a calamitous waste. With an immigrant quota, an entrepreneur who could come to the U.S. and start a billion dollar business faces the same restriction as everyone else. The potential Albert Einstein or Sergey Brin has no way to signal just how much his contribution to our society would be.
For every objection to open immigration, it’s easy enough to find terms of the deal to resolve the matter. The right terms will allow the optimal amount of immigration to settle itself, so that no apparatchik in Washington has to come up with a number.”
For the whole thing see: http://johnhcochrane.blogspot.ca/2014/06/the-optimal-number-of-immigrants.html
Avon, thanks. Funny that by chance I used the same phrase John criticizes: “optimal number of immigrants.” BTW, your previous question was answered, and I suspect this was meant for you.
… funny how my 1st instinct was to contemplate this problem like an “apparatchik in Washington” (according to John).
A monopolist faces a downward-sloping demand curve (or a monopsonist faces an upward-sloping supply curve). P(Q), or Q(P). When he picks a point on that demand curve, is he setting P or Q? If the demand curve shifts, would he change P, Q, or both?
Adam Smith did not write about importing people (immigrants). Also, at his time there were no immigrants from the UK to America, only SETTLERS which is a totally different concept. To talk of Adam Smith as the paradigm of economics on trade is misleading, because for about a century after Smith England did not apply much free trade, even raised tariffs against India on textiles in order to develop its textile industry. America also mostly ignored free trade and Germany and Japan built their industry on the base of protectionism (Liszt not Smith). There is just nothing in classical economic thought about mass immigration of cheap labour from totally different civilization. Even the “melting pot” idea of Zwingler was “melting pot of european races” if you quote him exactly. Every Pew and Gallup poll in every country in the western world shows a majority against immigration. Here in Italy the latest Pew/WSJ poll has 80% saying they want to reduce immigration. And in rich East Asian countries and Israel they just do not allow mass immigration despite low fertility. I do not know about Canada but the majority of Americans say they “do not recognize their country”. I lived in London in 1990 and I do not recognize it, people say “I go the England” when they live London for the countryside. I do not recognize now even Milan, Italy. But turning to Economics since the start of the crisis in 2009 we got 3,3 millions immigrants in spite of 10-12% unemployment here in Italy. Before the Euro we had less than 50k immigrants per year, with the Euro up to 500k, but with slower economic growth and even a Depression. In the USA the numbers are different, but not by much if you look at participation rate and real wages. Which economic theory proves the West needs mass immigration (and also Japan or Korea) ? We have 23 millions people working now in Italy out of 60 millions, about 8-10 millions could go to work if we would reach a participation rate like that of Japan, where much more people are at work, inequality is less and they do not let basically anybody in. Same Korea, Taiwan, Singapre. People should read Richard Wernerm who explains the German and Japanese model
Gzibordi,
It’s not the immigrants that are hurting Italy or Europe – it’s the welfare state. Immigrants create as many jobs as they take – they need places to live, haircuts, cars to drive, etc…
I think… no, IKNOW that Jonathan would say that you are committing a lump of labour fallacy. How do I know? Because Portes once wrote that he thought explaining the lump-of-labour fallacy to Secretaries of State for Work and Pensions was “probably the most useful thing I did, from a public policy perspective, in my six years as Chief Economist at Department for Work and Pensions.” Portes defaults to the fallacy explanation whenever he has to deal with questions like yours. “Oh, you say ‘blah,blah,blah total factor productivity…’ but what you REALLY are thinking…”
If you have any reservations about immigration, it has to be because you think there is a fixed amount of work to be done. That’s all there is to it. Jonathan Portes isn’t the only one with this compusion. Alan Manning of the London School of Economics gave a talk on the “Economics of Migration” about a month ago and his “take away” is that people who worry about the effects of immigration do so because they believe in the… ta-da! lump of labour fallacy. Check out the excerpt I made from his talk: https://youtu.be/FfutZTw1nrc Three minutes and 44 seconds going on about the lump. That’s the “interpretation” part of his lecture (so labeled in his power point).
What would Josiah Tucker say (in Reflections on the expediency of a law for the naturalization of foreign protestants, part II, 1758)?
“IV. If we have a considerable Number of Hands now unemployed, for the want of a Demand for their Labour, Which would be the right Policy. To drive out some of the present? or admit more Consumers?
“V. Suppose the Expulsion of one half of the People of all Denominations in Great Britain—Would this be a Means of procuring more Work for them that remained? Or would not five Millions more of People increase all Employments and Consumption one half?
“VI. Whether Sir Josiah Child did not call it a Vulgar Error to say, We have more Hands than we can employ? Whether he was a Judge of Trade? And Whether it is not an infallible Maxim, That one Man’s Labour creates Employment for another?”
Nick, were you addressing your 11:26 comment to Avon? Regarding John Cochrane’s post?
Tomatoes have a buyer and a seller, while immigrants have God given free will. These things are not equivalent.
Dunno where you studied Econ 101, but in the Austrian school, prices are free floating and represent an important market signal between the buyer and the seller.
Having said that, if we are talking immigration (which I might just mention is nothing like tomatoes) it just so happens that setting a price of citizenship is indeed a real immigration policy (of a very fringe party).
Liberty and Democracy Party: Immigration
All of this has nothing whatsoever to do with tomatoes.
@Avon “Immigrants create as many jobs as they take”
Is this right?
Surely part of what underlies populist concerns over immigration is the sense that immigrants run a significantly lower marginal propensity to consume than the equivalent native household, especially in poorer demographics, as a surplus is saved for remittance to the home country. There is a second deflationary effect from the fact that lower-consuming immigrants put a downward pressure on wages for certain jobs.
So immigrants do boost employment, but not by as much as you imply.
I would say that individual migrants are “price takers” where institutions are concerned, both in their country of origin and in their new country. They tend to be powerless. As are the citizens in Canada – how many of us have any real power to change or control institutions? That’s why people feel their vote doesn’t count.
The thing we probably want to be careful about is that we don’t end-up importing broken institutions (e.g. the Baath Party). AFAIK, this hasn’t ever been a real problem in Canada. Not sure if it’s due to luck or policy or something else.
“Sometimes I am proud of what some people unkindly call economists’ “autism”. At other times I despair.”
Could you do a more general post on this sometime?
The discussion of whether or not immigrants create jobs is largely beside the point. To fix ideas, think about David Card’s study of the Mariel boat lift (here). The Mariel boat lift was a more-or-less exogenous shock which swelled the unskilled labour force in Miami by 7%. Card found that this influx of unskilled labour had no negative impact on the wages or employment of other less-skilled workers in Miami. Immigrants don’t kill jobs: Q.E.D.
But Nick’s point is that – even if the conclusions of the Card study are correct and generalizable – immigrants may have long-run effects on social and economic institutions that are either positive or negative. Miami is a very different city as a result of years of Cuban immigration. Better? Worse? Probably better in some ways, worse in others (though I’ve probably watched too much CSI Miami over the years).
But different.
And one of the big accomplishments of economics in recent years has been documenting that institutions matter – see e.g. this early summary by Douglass North http://www.ppge.ufrgs.br/giacomo/arquivos/econ-crime-old/north-1991.pdf. This passage, in particular, seems relevant to Nick’s post:
When economies do evolve, therefore, nothing about that process assures
economic growth. It has commonly been the case that the incentive structure
provided by the basic institutional framework creates opportunities for the
consequent organizations to evolve, but the direction of their development has not been to promote productivity-raising activities.
There is also a good sized empirical literature (e.g. here) documenting that immigrants bring social and cultural norms with them, retain them for at least a generation or two, and that these social and cultural norms have real impacts on people’s economic decision-making.
As an aside – Canada has a more positive attitude towards immigrants than just about any other country in the world – see, e.g. here.
Frances: “The discussion of whether or not immigrants create jobs is largely beside the point.”
Yes. Holding social/economic institutions constant, the effect of immigration on the unemployment rate, both theoretically and empirically, seems to be about 0. (Maybe small short run increase as new immigrants search for jobs etc.)
Canada, Australia, New Zealand have very high percentage immigration, but it’s very controlled immigration. That makes a big difference, including symbolically. “We invited them to join us. They asked our permission.”
Very good comment Frances.
Nick and Frances,
Frances: “And one of the big accomplishments of economics in recent years has been documenting that institutions matter.”
Of course institutions matter. Canada’s reliance of free(ish) markets and the rule of law are almost certainly the most important determinants of our wealth. A priori, there is no sense in which immigrants undermine our institutions. In countries that have serious problems with immigrant integration we find large welfare states which effectively institutionalize racism. (Of all the transfers to citizens in France with free/low cost post-secondary tuition, how much of it ends up in the hands of North African immigrants living in the outer banlieues of Paris?) The United States let in huge numbers of people in the 19th and 20th century, with no welfare state, and their institutions continue to work – and to the extent that they don’t, it’s not because of the immigrants.
But fine, if you want to keep the welfare institution, as John Cochrane puts it: “It’s easy enough to structure a deal that protects the finances of the welfare state. Immigrants would pay a bond at the border, say $5,000. If they run out of money, are convicted of a crime, don’t have health insurance, or whatever, the bond pays for their ticket home. Alternatively, the government could establish an asset and income test: immigrants must show $10,000 in assets and either a job within 6 months or visible business or asset income. In any case, welfare is a red herring. Immigrants might go to France for a welfare state. The vast majority of immigrants to the US come to work, and pay taxes. Overuse of social services is simply not a problem. But if you worry about it, it’s easy to structure the deal.”
Frances: “When economies do evolve, therefore, nothing about that process assures economic growth.”
What does this mean? If we allow people to make Pareto improving trades with one another, rely on markets, and the rule of law, there is no reason to think that the hallmark of economic growth, innovation, will diminish. And however economies might evolve, there is no sense in which economists made masters of the universe can engineer them better.
Frances: “It has commonly been the case that the incentive structure provided by the basic institutional framework creates opportunities for the consequent organizations to evolve, but the direction of their development has not been to promote productivity-raising activities.”
I certainly hope that you don’t allow your students to write like that.
Frances “…that immigrants bring social and cultural norms with them, retain them for at least a generation or two, and that these social and cultural norms have real impacts on people’s economic decision-making.”
These were exactly the reasons people gave for keeping the Jews out in the 1930s. So what if different people make different economic decisions? Why should we fear that? What’s wrong with places like Toronto, NYC, and London?
Frances: “The discussion of whether or not immigrants create jobs is largely beside the point.”
I agree. What is NOT beside the point, though, is that Say’s Law and the lump of labour are invoked ad nauseum by economists discussing immigration (e.g., Jonathan Portes, Alan Manning) AS IF IT WASN’T beside the point — as if it was THE point.
Things change with or with out new people. Taking a stance of keeping out new people will have its own effects on society and institutions, not necessarily good ones.
Provided the central bank increases the supply of money in line with the increased demand for money resulting from immigration, we don’t have to worry about Say’s Law. But yeah, non-economist critics of immigration generally won’t get that point.
JKH: “Could you do a more general post on this sometime?”
I would like to try, but it might be very hard to do well.
Tom: yep, the P&Q stuff was a response to Avon.
The problem with David Card’s Mariel study is its reception. Card took an innovative approach and he qualified his findings appropriately. But his research is cited as if it is definitive PROOF of a generalization that it does not purport to prove. It is appealed to out of proportion to its definitiveness. Thoughtful research has been hyped to the status of dogma through appeal to authority.
louis: yep. Could be good or bad. But humans are not good at doing quick institutional change, because there’s a coordination problem, where history matters. We might end up with conflicting institutions, or none at all. It makes sense to take it slow, to allow time to adjust and blend.
“Provided the central bank increases the supply of money in line with the increased demand for money resulting from immigration, we don’t have to worry about Say’s Law.”
Provided the central bank knows what the supply of money will be and what the demand for money will be in the near future… Actually we don’t have to worry about Say’s Law anyway because, as J.-B. himself pointed out, whatever does not create its own demand is not supply. It’s a tautology.
I think it’s a matter of network effects, assimilation costs, and insular subculture formation. It’s not at its root a story about immigration — everything discussed in this thread can also apply to the questions of (say) Jewish minority groups in medieval and early modern Europe or the prospects of black Americans after the end of legal segregation.
A member of a local minority (let’s say a recent immigrant) faces two choices: they can integrate into the majority culture or they can become part of a distinct local minority “ghetto.” This is at its core a rational decision, weighing:
) The costs of assimilation: learning a new language, adapting to new social customs, and updating/renewing/receiving recognition for existing credentials
*) The benefits of assimilation: the quality of life possible from being a member of the majority’s cultural grouping
*) The benefits of non-assimilation: the quality of life possible while remaining essentially distinct from broader society and integrated in one’s minority groping.
Policy influences all of these variables. Filtering out immigrants with poor chances of assimilation, for example, reduces the average cost of assimilation for immigrants who are accepted. On the other hand, ineffective filtering (such as the US’s porous southern border) causes these administrative barriers to *raise the cost of assimilation: an illegal immigrant in the US essentially cannot fully and legally join the majority workforce, taking the choice away from them.
Similarly, the presence of absence of de-facto discrimination puts its thumb on the benefits side of the equation. If a society is patently racist, even a nominally-welcomed minority immigrant may be confined to a ghetto.
The level of immigration is only a secondary concern here, in that it takes a certain critical mass of a distinct minority group before an insular subculture is possible.
It’s the ghettoization of minority groups that is then the problem, because these groupings allow competing institutions to develop in a protected environment. That might not actually be a bad thing (see Jewish moneylending throughout pre-modern Europe), but simple reversion to the mean suggests that on average it is a bad thing for nations that begin with high-functioning institutions.
Conflict between these quasi-institutions and the mainstream then can undermine a nation’s unity — see for example the relative inefficacy of police services in areas controlled by the competing quasi-institutions of gangs and/or the mafia.
To look at this problem in a Canadian context without much reference to immigration proper, look at the language laws of Québec — these are designed both to encourage linguistic assimilation of non-Francophones and to resist linguistic assimilation of French-speaking Québec into a broader English-speaking Canada and American hegemony.
Majro: good comment.
You make a good case against overwhelming “open the floodgates” change, and for showing preference to groups likely to harmonize more easily with the existing institutions. I just want to make the contrary point that introducing diversity increases the resilience of a society and exposes it to new ideas. A more diverse society will likely also be more apt to develop links with other nations and adapt to global changes.
Immigrants to the US in the 20th and 21st centuries have been a major source of positive social dynamism and have contributed to a cultural acceptance of pluralism as people become used to working with other from different backgrounds.
louis: fair point.
I think the biggest questions, at least for the long run, are scale economies and congestion costs. I doubt that the U.S. real per capita income would benefit from more immigration. The “jobs” question, usually in the forefront of the debate over immigration, is a red herring. (The argument that the immigrants take only jobs that current residents will not take is worse, but the worst argument I have heard is that a greater population will support greater U.S. dominance in global political affairs.)
I believe strongly that the quality of life in Switzerland, Singapore and the U.S. would decline for the current residents if they allowed unfettered immigration. China discovered that average welfare can improve with reductions in population and took action accordingly. For the benefit of my children, I’m willing to sacrifice the discomfort of a temporarily high ratio of retirees to workers (as the baby boomers move to retirement in the U.S.).
don, you write:
“I doubt that the U.S. real per capita income would benefit from more immigration.”
Take a look at this plot. The “model” in the title is really just a simple (theory derived) monotonically increasing function of the Civilian Labor Force (CLF) with two parameters adjusted for best fit with NGDP, and then rates calculated. I don’t know what the CLF does as a function of immigration rates, but I’d guess it would increase it. And I know that’s the NGDP growth rate in the plot, not “real per capita income.”
Frances, George Borjas’s more recent and disaggregated study of the Marielatos boat lift effect tells a rather different story to Card’s.
Click to access Mariel2015.pdf
Speaking as the resident from a country which has (proportionately) a higher income take than Canada’s (among OECD countries, only Israel and Luxembourg have a higher proportion of the population be migrants + children of migrants than Australia), two points keep getting overlooked.
(1) Voters hate illegal immigration because it means they get no say in something that is very important for the future direction of their country. If you don’t want your migration debate to go feral, have border control.
(2) A migration policy justified in the public interest–and so selective towards those most likely to contribute–can get public support. In particular, ensuring the migrants bring a reasonably high level of capital (such as human capital) with them counterbalances any downward effect on labour incomes.
The US has neither border control nor a coherent migration policy. Hence, particularly given economic distress, a migration debate that tends to go feral. Europe has massive border control policies and migration policies which are a series of ad hoc expedients–they are creating voter anger and social dysfunction.
The benefits to migration tend to accrue at the higher end of society, the costs to the bottom. This differentiation in effects is one of the reasons migration can be so politically divisive.
Sandwichman: “If you have any reservations about immigration, it has to be because you think there is a fixed amount of work to be done. That’s all there is to it.” That would be Autism, even leaving aside the the balance of labour and capital makes a difference to labour incomes.
It is quite clear, for example, that large-scale Muslim immigration (I mean heading up towards 10% of the population) is a de facto decision to export your Jews and reduce the practical social rights of your queer citizens. Not all groups play well with others. Folk bring bundles of preferences and expectations with them. The bundles of preferences and expectations associated with mainstream Islam are problematic, (various dissident streams of Islam–Ismailis, Alevis, Ahmadis, etc not so much) and are the more problematic the more “critical mass” enclaves are acquired.
The habits of civil society and democratic government take time to acquire. Assimilating to the local culture takes time: being a high trust, shared expectations culture has real benefits. Importing great lumps of particular cultures encourages taking refuge in the original culture. Another reason why Australia and Canada’s migration policies work is their diversity–having folk from lots of places (diverse ethnicities, language groups, religions) reduces that effect.
Lorenzo: spot on.
“Go feral” Such a lovely Australianism! (I’m thinking of feral cats killing off native Oz fauna.)
“Canada has a very high immigration rate, as a percentage of population, compared to most countries.”
Perhaps Canadians can blame Gordon Lightfoot’s “Canadian Railroad Trilogy” for inspiring the flow of new immigrants. It certainly stirs me up.
Tom Brown:
What country is that?
Not sure about the direction of causality in the graph.
I would expect more people to bring greater total income, but the whole question to me (I’m not all that altruistic) is what happens to well-being of current residents, not total income. And total income needs to be further adjusted for other costs that come with more people crowding a given space, including traffic congestion. For example, such costs seem to have changed the desirability of living in sunny California compared with cloudy Oregon.
We probably need to be more careful with our definitions. Canada has a high immigration rate compared with various other countries. It does not have a high immigration rate compared with historic trends and stated targets. Over the last 25 years, immigration (not net of emigration, mind you), has been as low as 216,000 (1990), as high as 262,000 (2005). Completed immigration for 2015 is estimated at 260,000, so quite high, but is a smaller proportion of the total population than the 1990 figure, at 0.73% compared with 0.77. Canada’s target, such as it is, is 280,000ish. This has never been reached.
Avon calls for a supply-and-demand based immigration rate. Well, we’ve put our demand before the global labour market, and the price that we’re prepared to pay, and it looks like the price is too low. It’s not quotas, but what we’re prepared to pay which determines the supply. Yes, we could probably get more if we staffed Immigration Canada better, but, well, that’s part of the price we’re prepared to pay, and, at that price, this is what we get: below target immigration. Well, congratulations, because we’ve got that!
As for losing our Canadian values due to waves of foreign immigrants, all I can do is point the curious in the direction of the history of Canadian immigration. Per this table, four half-decadal periods have a contribution from immigration likely to be larger than the current half-decade. I invite attention to which half-decades those were, and further upon the subject the wise course would be to say no more.
don, that’s the US.
If anything, it looks like immigration improves economic institutions. http://link.springer.com/article/10.1007%2Fs11127-015-0254-y#page-1
Ryan Murphy,
From the abstract: “A growing empirical literature supports the importance of strong private property rights, a rule of law, and an environment of economic freedom for promoting long-run prosperity.”
Translation: “We examine how migration impacts countries’ economic institutions using the [Fraser Institute] Economic Freedom of the World Annual Report…”
Can one help having the impression that the term “long-run prosperity” is a persuasive one that conceals a value judgement? Or that the authors are finding the institutions they prefer to be “better” because that’s the premise underlying the persuasive terms they elect to use?
In “The Foundations of Welfare Economics,” (1949) I. M. D. Little conceded that there is “no reason why we should not make persuasive definitions if we want to,” but, he went on to warn, ‘we should realize what we are doing.” Perhaps the authors of the article don’t realize what they are doing. In that case, their analysis and conclusions are unreliable.
On the other hand, perhaps the authors do realize what they are doing. That would be worse; their analysis and conclusions would be untrustworthy.
Prosperity is very difficult to measure in a universal and absolute manner. I don’t know if I’m better off than my grandfather… he could afford a much nicer house than what I can afford even though in the scheme of things I have a much more impressive jobs-market skill set. Then again, I have more computers than my grandfather did, so maybe that compensates, or perhaps not, hard to say.
However, within a given time frame, and strictly in a relative sense, we see a lot more people wanting to come to Western democratic nations, than we see people wanting to leave and go to third world trash dumps. This would be a revealed preference I think, on a “vote with your feet” basis. Possibly at some stage this trend will reverse, when first world economies become sufficiently stifled with over-regulation and socialist wealth transfer scemes that the relative freedom of the third world looks like a better option. Hasn’t happened yet. Seems like there’s a lot of ruin in a nation (which doesn’t mean it cannot be ruined, just takes time).
@Nick: “the effect of immigration on the unemployment rate, both theoretically and empirically, seems to be about 0”
I’d have thought you could argue that the unemployment rate as a percentage might actually rise, as the increase in AD was less than the increase in AS, but even granting the point that the rate remains unchanged, what if the unemployment rate for immigrants were lower than the unemployment rate for natives? Ie the rate remains at 5% but the number of unemployed natives increases. The argument for this would be that immigrants have a greater work ethic or skill level than some of the natives.
Has any work been done on this question? Anecdotally the picture seems to vary widely by nationality of immigrant: in the UK, Somalis tend to suffer higher unemployment whilst I believe Poles have lower.
Re the Ryan Murphy article (which can be found ungated at http://object.cato.org/sites/cato.org/files/pubs/pdf/working-paper-19_2.pdf – there’s a literature out there that argues that it’s harder to build support for universal public provision of stuff when the population is more heterogeneous. E.g. in a world where every child plays hockey, it’s relatively easy to get people to agree that it’s a good idea to use public funds to build local arenas and ice surfaces where kids can play hockey. In a world where some children play hockey, some baseball, some cricket, some basketball, etc etc it’s harder to build a consensus around any particular type of public provision.
Therefore we would expect immigration – to the extent that it leads to greater population heterogeneity – to lead to lower levels of government provision of goods and services. Given that the authors of the piece Ryan cites use the Fraser Institute’s economic freedom index as their measure of institutional goodness, it’s not surprising that it gives this result.
Also to the extent that immigration has at least a temporary dampening effect on wage growth – and it’s really hard to believe that employers would be so enthusiastic about Canada’s temporary foreign worker program and various provincial nomination programs if there weren’t some wage growth effects – it’s not unlikely that immigration levels are endogenous to Fraser Institute style “economic freedom.”
But having said all of that, I quickly searched through Ryan’s article for the word “robust”. Couldn’t find it. Panel data will almost produce highly statistically significant results unless you use robust standard errors. Also – before you place any faith in results derived from x-country data, read this (suitable for fairly relaxed and liberal workplaces): https://helda.helsinki.fi/bitstream/handle/10138/27239/maleorga.pdf
Frances,
“Therefore we would expect immigration – to the extent that it leads to greater population heterogeneity – to lead to lower levels of government provision of goods and services.” Why is this a problem? It that what we mean by institutions – how much redistribution the state does? The institutions that made us wealthy had nothing to do with “institutions” of the welfare sort. And even if you can get high support for redistribution in a homogeneous society, is it a harmless idea anyway?
“Also to the extent that immigration has at least a temporary dampening effect on wage growth – and it’s really hard to believe that employers would be so enthusiastic about Canada’s temporary foreign worker program and various provincial nomination programs if there weren’t some wage growth effects – it’s not unlikely that immigration levels are endogenous to Fraser Institute style “economic freedom.” ”
But didn’t a Pareto improving trade happen? People who wanted to work for someone at a wage they were willing to accept? These are pecuniary effects, not true externalities. Should we stop innovation on the same grounds – that remuneration to semi-skilled labour might go down?
“But having said all of that, I quickly searched through Ryan’s article for the word “robust”. Couldn’t find it.” Yeah, yeah, fine. This guys regression isn’t done right, etc. Yes, it’s important to do econometric right, but this experiment has been done with the United States. Huge levels of immigration and the outcome resulted in massive prosperity. That story is repeated around the New World for countries that have the rule of law. Just like the natural experiments of North and South Korea, East and West Germany, let’s not miss the forest for the tress – there is a big important effect with economic freedom going on here. More to the point, we have a theory on how freedom and choice lead to prosperity – it’s not just blind empirical measurements.
“Also – before you place any faith in results derived from x-country data.” Yes, but most empirical research is wrong anyway. If you only publish positive results, which is what most econ journals do, then a huge, order one fraction, of those results must be wrong, whether they report robust standard errors or not. That pesky type I error compounds beautifully with selection bias – and that far outweighs econometric Godliness. There is a reason that physics will not accept discovery unless the signal is at 5 sigma or higher. When the gravitational wave discovery comes out later this week, that discovery will be over 5 sigma.
Avon: “But didn’t a Pareto improving trade happen?”
No.
Frances,
I can’t speak for my co-authors, but a few points. One is that Table 5 breaks down where it is having an impact. “Area 1” is size of government. The effect is actually coming from Area 2 (legal system and property rights) and Area 5 (Regulation).
I have some experience with these regressions and robust standard errors don’t do much. If I reproduce Regression 11 and add “, robust”, then the standard error goes from 0.813 to 0.851. It stays *** significant.
“…after I. M. D. Little’s Critique there could be no further pretence that judgments about economic efficiency were, in any acceptable sense, scientific.” E.J. Mishan, “The Futility of Pareto-Efficient Distributions” (1972)
Yet the pretence continues unabated. It is the critique that appears to have been forgotten.
The concept of Pareto improvement “could apply strictly only to a community of perfectly consistent individuals, in which no one died or was born.”
Pareto used a extremely fanciful assortment of assumptions in order to demonstrate the hypothetical superiority of market exchange. The heirs of Pareto mistakenly assume that the demonstration also works in reverse: market exchange somehow magically generates the fantastic conditions under which it is superior.
This idea isn’t even wrong, it is simply bonkers. What is astonishing is not that some people would make such bizarre assertions but that the broader community would think nothing of it, even if they “disagree.”
The best lack all conviction,
while the worst. Are full of passionate intensity.
Surely some revelation is at hand;
Let’s dispel once and for all with this fiction that Vilfredo Pareto didn’t know what he is doing. He knew exactly what he was doing.
O/T: Nick, can you think of a way to relate your long thin island PPF (apples doing best in the North, with bananas doing best in the South (Great example BTW!)) to this? (i.e. your “shotgun” example). I take a stab in a prior comment.
Sandwichman, Re: Pareto optimal, Roger Farmer recently wrote this (which is probably not news to anyone here except me):
“…if the social planner gives everything to one selfish person: that allocation is Pareto Optimal.”