Promises, Promises

Many economists are so religiously wedded to their models that it takes an awful long time, and an awful lot of contrary evidence, to shake them from what they learned in graduate school. We are now in the midst of such a reappraisal when it comes to globalization in general, and immigration in particular. Larry Summers’ new oped in the Washington Post illustrates just how much momentum this rethinking has gathered.

It is clear after the Brexit vote and Donald Trump’s victory in the Republican presidential primaries that electorates are revolting against the relatively open economic policies that have been the norm in the United States and Britain since World War II. If further evidence is needed, one need only look to the inability of Congress to pass legislation on immigration reform and the observation that the last four candidates left standing in the U.S. presidential contest all oppose the Trans-Pacific Partnership…Studies are produced about the jobs created by trade agreements, the benefits of immigration and the costs of restrictions on trade. In most cases, certainly including the cases for TPP and against Brexit, the overall economic merits are clear. But in this advocacy there is a kind of Gresham’s Law (the economic principle that bad money drives out good) whereby bolder claims drive out more prudent ones, causing estimates to often be exaggerated and delivered with far more confidence than is warranted. Over time, this has caught up with the advocates of integration.

And it’s about time, I would add!

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Brexit, Immigration, and the Experts

A lot of commentators seem to be singling out immigration as a root cause of the dissatisfaction that led the British people to vote to leave the European Union. Here’s Reihan Salam in Slate:

Ever since the 1960s, when large-scale Commonwealth immigration sparked intense controversy, the Conservatives have been seen as the more anti-immigration party. And during the Blair years, Conservatives struggled to shake their image as narrow-minded bigots…In more recent years, however, the challenges presented by mass European immigration complicated this neat picture of the prejudiced Conservative…Once the less-skilled immigrants at the heart of the immigration debate were Poles and Bulgarians rather than blacks and South Asians, one could more credibly argue that anti-immigration sentiment was driven by concerns about the fiscal and environmental impacts of immigration, not a blind hatred of outsiders.

Donald Trump has weighed in as well:

I think a lot of it has to do with immigration…[The British people] got tired of seeing stupid decisions, just like the American people are tired of seeing stupid decisions…the border where people just flow across the border like Swiss cheese…I really do see a parallel between what’s happening in the United States and what’s happening here. People want to see borders. They don’t necessarily want people pouring into their country that they don’t know who they are and where they come from.

And here’s David Frum in the Atlantic:

Is it possible that leaders and elites had it all wrong? If they’re to save the open global economy, maybe they need to protect their populations better against globalization’s most unwelcome consequences—of which mass migration is the very least welcome of them all?

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Cracks in the Wall

David Autor, David Dorn, and Gordon Hanson have been producing a steady stream of very important papers that examine and measure the labor market impacts of trade. Their latest NBER working paper is a really nice one. Let me quote from the abstract:

China’s emergence as a great economic power has induced an epochal shift in patterns of world trade. Simultaneously, it has challenged much of the received empirical wisdom about how labor markets adjust to trade shocks. Alongside the heralded consumer benefits of expanded trade are substantial adjustment costs and distributional consequences. These impacts are most visible in the local labor markets in which the industries exposed to foreign competition are concentrated. Adjustment in local labor markets is remarkably slow, with wages and labor-force participation rates remaining depressed and unemployment rates remaining elevated for at least a full decade after the China trade shock commences. Exposed workers experience greater job churning and reduced lifetime income.

I was struck by how the very slow adjustment reduces the short-run gains from trade to nearly zero:

The mobility costs that rationalize slow adjustment imply that short-run trade gains may be much smaller than long-run gains…Using a quantitative theoretical model, Caliendo, Dvorkin, and Parro (2015) find that in the immediate aftermath of a trade shock, constructed to mimic the effects of growth in U.S. imports from China, U.S. net welfare gains are close to zero.

This reappraisal about the net benefits from trade is happening concurrently with a reappraisal of the gains from immigration, that other aspect of globalization that generates even more controversy. A recent post by Branco Milanovic entitled “Migration’s Economic Positives and Negatives” shows the scope of the rethinking.

Migration, by raising incomes of the migrants…, is the most potent force for the reduction of global poverty, as well as for the reduction of global inequality…

However, I think that this is not so simple. There may be also some negative economic effects to consider. I see three of them. First, the effect of cultural or religious heterogeneity on economic policy formulation…Second, cultural differences may lead to the erosion of the welfare state…Third, migration might have important negative effects on the emitting countries…

We have, I think, to take into account also the negative economic effects of migration.

I am not so sure that Milanovic identified the most important adverse effects that we need to consider, but they are certainly effects worth pondering. It is the possibility that migration has many unintended consequences, and that some of these consequences might not be so beneficial, that I tried to address more formally in my recent JEL paper.

There is a very simple starting point for trying to understand the strange dynamics of the 2016 electoral cycle in the United States (and the ongoing political upheaval in Europe). Why exactly did it take so long for the obvious insights offered by the “new” trade literature and the reassessment of immigration to filter up the food chain and penetrate elite thinking?

By the way, this all reminds me of a very good and prescient book written by my colleague Dani Rodrik back in 1997: Has Globalization Gone Too Far?

Germany and Open Borders

Last month’s issue of the Journal of Economic Literature published my take on the perceived economic benefits from open borders. Some advocates claim that open borders would generate tens of trillions of dollars of additional wealth worldwide, so that policy makers in the industrialized world are stupidly walking by–and leaving behind–“trillion-dollar bills on the sidewalk.”

I never believed those arguments, but it wasn’t until I saw a presentation by one of the leading lights in the open-borders camp that it dawned on me that the whole edifice was built on quicksand. So I started working out simple examples to use in my immigration classes some years ago, with a slight expansion of the model each time I retaught it, until it all came together in the JEL paper.

The basic point of that paper is that those trillion-dollar bills are manufactured by an economic model so far removed from reality that it makes you wonder whether some people are living in a parallel universe. Along with the huge increase in world GDP, that model also predicts that over 5 billion people will move. Somehow that small–and very inconvenient–detail is glossed over more often than not. And it’s easy to see why: the model hinges on the assumption that, despite the billions of movers, nothing will happen to the cultural, political, social, and economic infrastructure of the receiving countries.

Which brings me to Germany. This headline from the New York Times three months ago made such an impression that I took a screenshot of it immediately, knowing that I would use it someday. And today is the day.

German Village

I thought to myself: this is almost like a natural experiment in open borders. Subsequent news reports state that at least 600 of those 750 refugees did settle in the village of Sumte, a “bucolic, one-street settlement of handsome redbrick farmhouses [with] more cows than people.” I’ve looked around the web to find the gloating from the open-borders camp about how their theories were proved right; how the economic pie accruing to those 852 fortunate people increased dramatically and everybody lived happily ever after. But I haven’t found it.

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