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Archive for category Economics

Immigration Ecomonics

Jun 20

Posted by Kevin Murphy in Current Events, Economics | No Comments

I expect you’ve heard this big picture thermodynamics question before: You have a thermally isolated room with a refrigerator. You plug the refrigerator into a working outlet and open its door. Does the room get colder, warmer, or stay the same? The answer is that the room gets warmer because the total energy in the room is increasing due to the electricity flow via the plug. If you look at the big picture, it’s really a very easy problem.

So we come to the point of this post, the effect of large scale immigration on workers. The relevant law here is that of supply and demand, and if you increase the supply of workers, the price at which they are employed will inevitably fall relative to the price without an increase. Now it may well happen that if the increase in demand is greater than the increase in supply the actual price increases, just less than it would have if there had been no increase in the supply. So if you get a lot of immigrants who are increasing the supply of labor, then that will inevitably lower the price everybody is getting paid in that labor pool relative to what they would get without a change in labor supply. I’m not saying this is a good or bad thing, I’m just saying what happens.

What sparked this particular post is a John Tierney column which would appear to be behind the Times Select Wall since the St. Louis Post Dispatch ran a column the NYTs published May 30th today. I’m a fan of Mr. Tierney, but I think he stumbles a bit in this article as he’s pretty breezy with one consequence of large scale immigration (legal or not). And yes Virginia, there isn’t just one consequence.

First off, neither Mr. Tierney nor I compete in the same labor pool with the overwhelming majority of immigrants, so we are able to offer a bit more detachment than those who do. I admit its easy to be blase, even upbeat about trends that you don’t think affect you.

Secondly, Mr. Tierney makes the common mistake of confusing an anecdote with data. He offers the nice tale of a native American women (not to be confused with Native American) who loses her nail salon to the more numerous, lower cost salons run by Vietnamese immigrants. But she lands on her feet by going freelance and working for the wealthy of LA who are willing to pay to have someone who can carry on an intellegent conversation while doing their nails at home. So, despite the fact that a particular person was able to land on her feet, did the average wage in the nail salon business go up or down? Mr. Tierney doesn’t comment on this directly, but I think we are safe to infer from the rest of the story it went down. And I’ll point something out that Mr. Tierney doesn’t — the (better) job that his nail salon owner found existed before she found it; that is there were plenty of wealthy people who were willing to pay extra for in home nail care before the Vietnamese took over the salon business, its just that the salon owner was comfortable in her job and was not looking to make a change. But what about the wages of such freelance workers – have they gone up or down with the influx of American workers into that niche, displaced by the Vietnamese into the salon business? Again, Mr. Tierney is silent on this subject, but uses the anecdote to claim out that everything will be just fine for all the displaced workers because everything worked out for the particular lady he featured. What would the story have been like had this particular worker moved into the at home/freelance nail business several years ago? Would it have been quite to happy and upbeat? Or would she have been complained of declining wages due to the increased competition with her fellow natives who were moving into the business?

Well, I have no doubt that some workers will move to better jobs because they will actively seek jobs where they weren’t looking in the past. But I also have no doubt that some workers will not move to better jobs, and there will be downward pressure on the wages of those workers who remain in their jobs.

And whether you considered this a positive or negative affect might depend if you were a worker in the field, or if you were a consumer of this product or service who was seeing a decline in its price.

And this raises an even bigger point for me — I think we are better off as a nation looking at the issue, exploring the costs and benefits, weighing the options, and then devising the laws and regulations through the political process with representative government, than we are with our current system of immigration policy by default, with inflows determined by the immigrants themselves, because they aren’t looking at the big picture, nor would I expect them to. They are looking at what it means to them.

One of the problems with illegal immigration is that not only the immigration, but so much of the life of such an immigrant takes place off the books. And as Hernado De Soto observes, this life in legal limbo is what makes so many countries poor, and will certainly hurt our own nation. So for me, whatever else the outcome of immigration reform, I just want to see the illegal, off the books part brought back into the law, back onto the books.

A great American, Stephen Decatur once said “Our country! In her intercourse with foreign nations may she always be in the right; but our country right or wrong.” I’m going to say: “Our representative goverment! May the outcome of our representative government always be in the right; but the process of representative government right or wrong.”

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The Tragedy of Declining Births

May 10

Posted by Kevin Murphy in Economics | No Comments

The Tragedy of the Commons is the classic illustration of why private property works and communal property doesn’t.

I see the tragedy repeating itself in most government run old age support/pension systems in the developed world. In the original example, it was grazing land that was held in common. In the developed world, it is children who are held in common, or more accuately, their productivity. Not that long ago, children were not only cheap to raise, but a source of labor in their youth and support in a parent’s old age. Children were a modest investment with a large payout. That’s one reason families were larger – large families made economic sense. That is no longer the case – as children cost on the order of $250,000 and provide very little labor and support directly back to their parents. Large families no longer make economic sense; in fact children no longer make economic sense at all anymore for most parents in the developed world.

Where does the money come from for the government to support retired/old people? Taxpayers. And who are these taxpayers? The children and the grandchildren of the retired/old people. But the support a government pensioner receives is not related to how many children that person raised.

Let’s dispose of one objection right away – that government saves the contributions of individuals, invests it wisely, and then returns the principle and interest after retirement. Social Security, and other defined benefit plans that do not include some form of individual accounts, are all pay as you go systems – today’s retirees are paid by today’s workers. Our own government has skimmed money off the top by setting the tax rate higher than it needs to be, setting up a “trust fund” which it immediately takes all the money out of the trust fund and spends but leaves an IOU behind. The amazing thing is how this bit of theft manages to fool so many people (maybe not so amazing when you consider how many people still fall for the Nigerian money transfer fraud) in this country.

So the tragedy is that we have developed a system that removes the clear link (OK, the system doesn’t just hide the link, it tries to substitute a fraud in its place) between where a government payment comes from and where it goes. Parents might be too proud or too caring to take money from their own children, but are perfectly fine with taking the money from everybodies children. So each recipient expects a comfortable retirement but has no incentive to provide for it; in fact, the recipient pays a penalty through the high cost of raising a child to provide for it. Is it any wonder than that societies that set up such government funded retirement schemes face collapsing birthrates and unsustainable finances?

Reality Catches Up

May 5

Posted by Kevin Murphy in Economics | No Comments

The easiest promise to make is the one you don’t think you’ll have to keep. A few years back the government issued accounting rules that made corporations put future retiree healthcare costs on their books. It wasn’t pretty. Now governments will have to do the same, and it won’t be any prettier. And of course the cry will go up to nationalize healthcare, which won’t lower the cost, but shift it to the federales, who are already looking at (I sure hope it’s a misprint) 33.4 trillion dollar unfunded liability for Medicare. I guess the state and locals will figure that any increase from their liability won’t be noticed in that eye popping figure.

Via Winterspeak at Asymetrical Information.

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Gas Prices

Apr 26

Posted by Kevin Murphy in Economics | No Comments

We Americans seem to think that it’s our right to always have cheap and plentiful gas. You may have noticed, the price is going up. And as always, we don’t ask ourselves why, we look for scapegoats and quick fixes. So Econobrowser has a partial answer to why and thus who’s to blame. And in this mornings newspaper, there was an excellent letter to the editor about this very subject that gives a pretty good overview:

I began my week by filling my tank with $2.77-per-gallon gas. The radio was tuned to a station that was commenting on the price of gas and quoting prominent Democratic senators who blame President George W. Bush and Republicans for the lack of a national energy policy. I thought perhaps they are right; maybe we don’t have a cogent energy policy. 

When I read the Post-Dispatch, I saw a picture of a crowd of Woodstock-wannabes celebrating Earth Day. It occurred to me that we do have an energy policy — a policy influenced by the likes of the “dancers” in the picture.

Since the first Earth Day, with the help of the media, politically driven educational unions, unelected judges and self-serving elected officials, a de facto energy policy has evolved. That policy forbids drilling for oil and natural gas in places where huge amounts are known to exist, erects countless legal barriers to the building of new gasoline refineries and safe, pollution-free nuclear power plants and limits the use of coal, our most abundant resource, for the generation of electricity.

Before complaining about the high price of gasoline, natural gas and electricity, remember how our energy policy was established and by whom.

Tom Mueller | St. Charles

 

I think together they tell us why – we’ve decided there are other things about energy more important than it’s price. Gas was getting cheaper, so why not worry more about things other than the price. And guess what, we’ve raised the price by acting on those values. Now that isn’t the complete story, because its the increase in world wide demand coupled with the relative decrease in supply that drives the price up.

Would we be happier if the asian economies weren’t booming but the price of gas were cheaper?

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Freakonomics: My Take

Apr 19

Posted by Kevin Murphy in Economics | No Comments

I read Freakonomics last week. My brother Sean has already provided a great synopsis, so I’m going to content myself with impressions. I found the book a quick and sometimes enjoyable read, but less so as the book went on. Very interesting info on the bagel man, cheating teachers, and real estate agents, but down hill aftwards. Not what I expected from a brilliant eoncomist writting a best seller — and the cheating teachers section has nothing to do with economics.

I remember when I was in my one and only Economics class (yes, I loved the subject that much) the textbook, probably Economics by Samuelson, or possibly the professor went on about how economics was the study of scarcity. At the time I thought this a logical error, as economics is the study of the production, distribution, and consumption of wealth. Relative scarcity is an important component of wealth, but it isn’t the actual subject matter. I bring this up because there seems to be a trend with economists who confuse techniques used in economics with economics itself. The use of regression analysis (or any statistical analysis for that matter) isn’t performing an economics analysis, it’s the use of a mathmatical tool widely used by many disciplines, including science and engineering. And while human behavior is an integral part of economics since we’re the ones doing the producing, distributing, and consuming, economics isn’t just about human behavior nor is all of human behavior of interest to economists. Once again the examination of incentives in areas outside traditional economics isn’t economic analysis, it’s human behavior analysis. So while I thoroughly agree with the importance of incentives to understanding human behavior, I suppose only in academic circles is the application of common sense thought to be revolutionary. (Yes, I know

The book is made up of chapters that don’t have anything to do with each other than Dr. Levitt finds the subjects interesting. Of itself this isn’t a problem for me, but there are times when the chapters are contradictory. For instance, Dr. Levitt claims in one chapter that abortion lowered the crime rate, and we can tell this because maternal characteristics such as education, age at birth, and marriage status — none of which are genetically determined — has a significant effect on whether their children become criminals. And let me be clear – as confirmation of his thesis on crime and abortion, he says that parents who have children they don’t want understandably do a worse job at parenting than those that do so it’s reasonable that such children are more likely to commit crime. In the next chapter on how much influence parents have on their children, the conclusion is that it’s pretty much genetic. Parents matter because of their genetic contribution, not their parenting contribution. He arrives at this conclusion by looking at educational achievement. So if smart parents have smart kids, can we then generalize that parenting doesn’t have much effect on their children? In one chapter parenting does, and in the other parenting doesn’t.

And there are a couple of big threads left dangling that I would think somebody like Dr. Levitt would just love to pull. One is if the crime rate has returned to the rate of the first part of the century because of abortion, what else has changed that is keeping it there despite abortion’s lowering affect? The other is if parenting (as opposed to the genetics of parents) has no effect on children, is crime genetic?

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1 Billion Sold

Feb 24

Posted by Kevin Murphy in Economics | No Comments

While reading this article about Apple hitting the 1 billion song download mark, yes, I said billion, I noticed the claim that essentially Apple breaks even on the downloads but makes money on the iPods. What this means is that it will be hard to dethrone Apple in the music business. And I assume that this is why a lot of the other entrants are chosing a model of charging a flat fee to provide access to everything – that way they can set the monthy fee high enough to actually make a profit of the downloads without requiring people to buy their hardware. But that also means that it will be hard for other companies to make money following the Apple model without their own proprietary hardware to listen to the songs — which will tend to limit the companies that can compete that way, and by that I mean good hardware for the player and a good store experience in iTunes.

(full disclosure, I own Apple Stock and I download songs from iTunes).

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I’d Be Willing To Pay Real Money

Dec 20

Posted by Kevin Murphy in Economics | No Comments

Are some companies famous for their cost cutting reaching the point of doing more harm than good? Megan McCardle has sworn off Dell because of their low cost support. I was in the Wal-Mart in Kirkwood the other day, and even though the store is newer than the one near me in Town & Country (where I haven’t had a bad experience other than their refusal via red tape to honor tax exempt status for the Boy Scouts), it is poorly lit and dirty, the staff is surly and unhelpful. My wife observed we always have a bad experience there – this time it was the clerk in the Photo department who told my wife she had no idea where the film drop off was and then ignored her.

Don’t get me wrong, cheap is good, but there comes a point in cutting costs where service and quality suffer far more than the price comes down. And it may be that at certain companies, the drive to cut cost above all else may have become counter productive.

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Frames Matter

Nov 15

Posted by Kevin Murphy in Economics | No Comments

Yeah, I know I’ve been on an economic kick lately, but it’s either that or intestinal bacteria. OK, now that we’ve cleared that up, on with the numbers and cents.

There has been the usual wailing and gnashing of teeth over the record Current Account Deficit (otherwise known as the trade deficit). First I’m going to point you to another fine piece by David Nicklaus:

Fortunately, there is another way of viewing the trade deficit. Instead of being a sign of weakness in our goods- and services-producing industries, it’s a sign of strength in our capital markets. 

By definition, the current account deficit must be matched by a capital account surplus, which means foreigners invest more here than we invest abroad. If foreign investors simply view the U.S. as a great opportunity, their enthusiasm may be driving the trade equation.

Bill Poole, president of the St. Louis Federal Reserve Bank, explored this line of thinking Wednesday in a speech at Lindenwood University.

“It may be that the trade deficit is driven by … investors seeking the best combination of risk and return in the international capital market,” he said. “The mechanism creating this outcome is that capital inflows keep the dollar stronger than it otherwise would be, tending to boost imports and suppress exports.”

That does make the trade deficit sound less scary. But, the alarmists would argue, the U.S. is in a vulnerable position. Foreigners can simply pull their money out, cause the dollar to plummet and throw us into recession.

Poole thinks that is highly unlikely. “For the United States, unlike almost every other country in the world, a hard-landing process is inherently self-limiting,” he said.

That’s because our external debts are denominated in dollars. A decline in the dollar’s value has no effect on our debts – we still owe the same amount in dollars as we did before – and it makes our overseas assets, denominated in foreign currencies, more valuable.

“To the extent that the foreign exchange value of the dollar declines, the effect on the values of U.S. and foreign asset holdings works not as an accelerator of crisis, but as part of a self-correcting mechanism,” Poole said. “The composition of the U.S. international investment account, therefore, contributes to stability rather than to instability.”

His view is that the trade deficit will be reduced in a “slow and orderly” way and that the adjustment “may not begin for quite some time.”

 

The real question is if that’s the better way to look at the issue (“I’m not overweight, I’m undertall”) but since I’ve been hearing just how bad the trade gap is for a very long time now, and it doesn’t seem to have a noticable effect, I’m going to go with looking it as a sign of capital market strength. I recall reading something similar in regards to when Britannia ruled the world — at least in the economic sense — and how having the world currency provided certain capital benefits, but I’m too lazy to go track it down.

In addition to the main thrust of the article, a couple of things caught my attention. First, is the use of absolute dollar numbers when comparing ecomonic events that occur at different times. This can be misleading. The best way to compare such figures is to use non-dimensionalized figures, in other words divide dollars by dollars, which removes the effects of inflation and gives a real apples to apples comparison. So in this case, you should divide the gap by either the size of all trade, or by GNP, just as you would divide the budget deficit by either the total budget or the GNP to give meaningful figures. Whenever somebody just gives you absolute numbers and then makes a comparison, even if only implied (e.g. worst deficit ever), take it with a grain of salt.

Secondly, buried in the piece was this interesting fact: Even with record trade deficits, the economy has grown at a rate of 3 percent or better for 10 straight quarters, the longest such streak in more than two decades. What’s this, the “Bush” economy beats the “Clinton” economy. Gee, that’s not something you hear from the press, mired in a loss of advertising revenues that has gone from glitch to downturn to slump to permanent loss.

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TANSTAAFL

Nov 11

Posted by Kevin Murphy in Economics | No Comments

A Quote of the Day over at Listless Lawyer reminded me of something (There’s more inspiration over at Listless than I have time) the other day:

There is no more dangerous illusion than the belief that one can get something for nothing. —– Bernard Baruch, Baruch: My Own Story.

A decade or so ago I was refinancing Murphy Manor. I was working through a mortgage broker, and just before closing they gave me their itemized closing costs. Since it was a lot different than the sample closing costs they had provided back when I started with them, I looked over the figures carefully enough to spot a mistake. That led to a fine tooth comb and a phone call where I went over every line – both what it was for and why it cost what it did. One of the lines had some boilerplate description and the lady provided me with some boilerplate explanation that was mighty similar to one she had given me for a previous item. I explained that I would like to know exactly what I was getting for my money on this line, and why I should pay twice for what sounded like the same thing. After a couple of other unsuccessful attempts to explain it, she talked to her supervisor and came up with a much better explanation, although still obscure. When I said “It’s your fee”, she agreed but was apologetic and seemed to expect me to object. I told her I’d much rather they were upfront about their fee rather than trying to hide it since they had to be making money out of the deal somewhere and I’d just as soon know how much than worry about how bad they were screwing me. It’s not like they were working for free.

Oil Economics 101

Nov 10

Posted by Kevin Murphy in Economics | No Comments

Since Jane Galt is tackling abortion at the moment, I’m going to seize the opportunity to talk about the Senate hearings on oil prices. I suppose the whole thing is one of those moments that Yakov Smirnoff loves — only in America are private companies called in to explain why in a capitalist system they are making the huge, windfall profit of a whopping 10 percent. The really sad thing is that I, with but one college economics course under my belt understand economics more than our august Senators do (at least some of them, anyway). Or perhaps it’s that they understand politics far better than economics.

It continues to astound me how people confuse cost and price. The price is what the buyer pays, and cost is the aggregate of the sellers expenses for a given transaction. Profit (or loss) is the difference between the two. The real beauty is that there are least two ways to figure cost — average or marginal — but only one way on price. And you can play all kinds of fun games by picking and choosing which basis to determine cost.

Now the funny thing is, back when I learned my economics (1983) — and from a marxist, no less — they taught that price is set by the intersection of supply and demand curves, as illustrated here. Cost enters in through the back door, as it is part of the supply curve. So let’s review – if demand goes up (shifts to the right), the price will go up, but then so does the quantity sold. And if supply goes down (shifts to the left), price goes up, but the quantity sold goes down. Wow, cutting edge economics, only formulated this way for 115 years.

Now pay close attention here, the price changes as rapidly as the change in supply and/or demand, even nearly instantaneously. There’s no wait to change for a given product, made at a particular price point, to eventually make it’s way all the way through the distribution system to the final consumer. So if for instance a hurricane roars through the Gulf of Mexico overnight and decreases the supply of oil overnight, why the price changes overnight too! Wow, no government price board meets to make it happen, the market simply reacts to the new information. Maybe more countries should use that market thingy.

Permit me a small digression [OK, I’ve come back from the bottom of the paragraph and it turns out that this is really a great big digression, but its a good one, so stay with it] here, because I know a little something about control theory (OK, a lot more than I know about economics). And if you’re into controls, lag is your enemy. You hate lag. Lag screws up your system. Lag can make your system go unstable, lag is something you would like to eliminate completely if you could. Except, then setting up real world control systems would be too easy, and you wouldn’t get paid the big bucks to do it, so OK, you love lag, because lag makes your genius necessary. But say I’m a user of a controlled system, then lag is my enemy. For all the reasons I cited above, only now I’d just as soon have geniuses working other problems so I don’t even have that incentive. The market is simply a control system for economic activity. One big reason it’s better than any other method so far devised, is that it is less laggy than the other systems (such as government control). What is one of the things businesses hope for when they flatten their management structure or better integrate different parts of the enterprise? They are trying to reduce lag inside their own control system – vertically and horizontally. So the ability to make rapid price adjustments isn’t a bug, it’s a feature, and a very important one at that. It means economies can turn on a dime, and not keep overproducing unwanted products and services and fail to produce wanted products and services. One of the reasons improved information technology has helped the ecomony is that it has wrung lag out all over the system. OK, enough about lag, but once you understand control theory, you’ll laugh when Princeton economics professors write columns for newspapers saying they worry that increased informational speed and flow could destabilize an economy, and you’ll laugh because they got it exactly wrong, and you don’t even have a big pointy head.

Another great thing about the market is that in a transparent, open economy we’re all colluding together to get what we want, when we want it, where we want it. We all contribute to setting the price and the quantity of each and every good and service out there. We even stimulate the formulation of brand new goods and services. Wow. The amazing thing about price is not only is it feedback from the customer to the producer, it’s feedfoward from the producer to the customer.

OK, back to the oil companies. So what do higher prices and higher profits tell us, hopefully including the oil companies. To the oil companies, it says produce more oill!!! That’s what it says. And while it’s telling the companies that, its actually giving them the money to do it with. Wow. You get told what to do and you get the resources to do it with. But wait, there’s more. Because to us consumers, it’s saying cut back on oil consumption!!! because there is a greater reward for it than there was before the price went up. Or we could wait for Congress to pass a sense of the Congress resolution that the oil companies should produce more and consumers consume less, and then pass some legislation to give companies incentives to produce and consumers not to consume, and by the time that all happens, we’ll be in the middle of an oil glut. See why lag is bad?

So why is it so hard, absent hurricanes and other natural disasters, to figure out the gyrations of gas prices. Because from where you sit, you can’t see the supply and demand. You’re driving down the road thinking everybody I know is driving just as much, so why does the price go up and down all the time? Energy markets are global, so the whole world is setting the price. So changes in global supply and demand drive the price at your corner gas station. I suppose that’s one opposition to globalization – since we can’t see the inputs (supply and demand), we distrust the output (price).

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