Dean Baker on predicting recessions

Does this apply to predicions about the mortgage meltdown (or otherwise)? I suppose so.

Economists Don’t Predict Recessions:

It would be helpful if the many articles reporting on economists’ predictions about the future state of the economy reminded readers that economists do not forecast recessions. For whatever reason (I don’t care to speculate), economists are notoriously bad at seeing recessions coming, even when they are right in front of their face.

In the fall of 2000, not one of the “Blue Chip 50” forecasters saw the 2001 recession coming. The Philadelphia Fed’s Livingstone Survey in December of 2001 saw nothing but clear skies ahead. Even in June of 2001, three months after the recession is now dated as having begun, the wise forecasters still saw a relatively healthy scenario, including a 1455 S&P 500 by the end of 2002 (try 900).

One of my favorite Greenspan moments was when he spoke confidently at a Fed meeting in July of 1990 that the economy looked healthy for the immediate future. The recession is now dated as having begun in June of 1990.

The point here is that there is an incredible bias among economists that prevents them from seeing recessions until they are well underway. (I’m the only one that predicts recessions that don’t happen.) This information should be included in a cautionary note in articles on economic forecasts.

–Dean Baker

(Via Beat the Press)

Getting COLA right?

A while back, Dean Baker wrote a piece in response to a NY Times review of Naomi Klein’s book The Shock Doctrine: The Rise of Disaster Capital. It’s all worth reading (as usual), but along the way Baker touches on the claim, made in the context of various attempts to “reform” Social Security, that the CPI has been overstating SS’s cost of living increases by a percent or so, and that scaling the COLA back would help “save” the program.

Did it seem plausible to you at the time? Baker thinks it shouldn’t have.

The Social Security debate provides the most obvious example. Consider the effort to change the post-retirement indexation formula in the mid-nineties, which had support from the Clinton administration, many prominent members of Congress (Senator Daniel Moynihan led the crusade), and many of the country’s most respected economists.

The argument was that the consumer price index (CPI) overstated the true rate of inflation by approximately 1 percentage point, so therefore Social Security benefits to retirees should rise each year by approximately 1 percentage point less than the rate of inflation shown by the CPI, rather than the CPI, as is the case under current law.

While the evidence for their claim was weak as I argued in my book, Getting Prices Right: The Debate Over the Consumer Price Index, there was a more basic issue that there were huge and unavoidable implications of this claim that none of its advocates were willing to accept. Specifically, if their claim was true, then most of the people who would see their benefits cut by the change in the indexation formula had grown up in poverty. Furthermore, the future generations who they wanted to protect by reducing the deficit were actually going to be far richer than we could possibly have imagined.

The logic is simple. If the CPI overstated inflation by 1 percentage point annually, then real incomes had been rising much more rapidly than the official data show. Instead of rising by about 2.0 percent annually over the prior forty years, if inflation had been overstated by 1.0 percentage point, real per capita income had actually risen by 3.0 percent annually. (That’s arithmetic – if nominal income had risen by 5.0 percent, and the real inflation rate was 2.0 percent, rather than the 3.0 percent shown by the CPI, then real income rose by 3.0 percent.) If real income had been rising by 3.0 percent instead of 2.0 percent, then we were much poorer 40 years ago relative to the present than the official data show. In fact, if we go back 40 to 50 years with this adjustment, the median family was below the current poverty line.

On the other side, if the yardstick against which we are measuring future income growth is overstating inflation by 1 percentage point annually, then we should adjust upward our projections for future income growth accordingly. This means that our children and grandchildren will be hugely richer than our current projections show – we can’t even think of any economic policies that we would expect to lift income growth by a full percentage point.

Anyhow, virtually all the leading lights of the economic profession were prepared to completely ignore the logical implication of their own claim about the CPI in the effort to force a reduction in Social Security benefits. The drive was only halted by the refusal of Richard Gephardt, then the leader of the Democrats in the House, to go along with the scheme. At the time Gephardt was considering a challenge to Vice-President Al Gore for the 2000 Democratic presidential nomination. There could have been no better issue for Gephardt in the Democratic primaries than the defense of Social Security against the guy who cut it. Therefore, the Clinton administration nixed the benefit cut.

Note that all the economists who lined up behind the cut to Social Security are not currently expressing concern about the enormous distortions in our official data that result from the fact that the CPI has not been “fixed.” (The CPI overstatement would contaminate all price and quantity data over time.) They also don’t adjust for this error in their own work.

China, demographics, and the NY Times

Over in the margin, I link to Dean Baker’s Beat the Press, and I hope you all read it religiously. Here’s one reason you should.

More Arithmetic Problems With Demographics at the NYT

The NYT tells us that China is facing a demographic crisis due to the aging of the population and should try to encourage families to have more kids (seriously, read the article).

It’s hard to know where to begin with this one. The articles reports onimously that “The proportion of people 60 and older is growing faster in China than in any other major country, with the number of retirees set to double between 2005 and 2015, when it is expected to reach 200 million.” This means that the share of people over age 60 will rise from about 7.7 percent to 15.4 percent over this decade. Considering that the share of the population over age 60 will be close to 30 percent at that point in the U.S., the Chinese can be forgiven if they are not too worried, as the article claims.

Let’s play with a little arithmetic here. China’s productivity is increasing at a rate close to 8 percent annually. This means that in ten years, workers on average will be producing more than 2.1 times as much per hour as they do today. Let’s say that the average retiree gets 60 percent of the income of the average worker. If the ratio of workers to retirees falls from 5:1 to 3:1 over the next decade (a far more rapid decline than is actually described in the article), then workers could still have 90 percent more income in a decade than they do today, after being taxed to support the growing population of retirees.

(The NYT article goes a step further than most in pushing the retirement scare story. It claims that raising the retirement age won’t help because it has a big problem with unemployment among the young. Okay, the scare story is too many retirees and too few workers, but the workers are unemployed, that sounds like too many workers. I guess China is suffering from too many workers and too few workers. They really have problems there.)

The rich countries have seen a consistent growth in the ratio of retirees to workers and have continued to sustain improvements in living standards for both workers and retirees. The key to rising living standards, which somehow is never mentioned in this article, is higher productivity. If China can sustain a productivity growth rate that is even half its current pace, then it has no reason to fear an aging population. (This doesn’t mean that government pension programs may not need to be adjusted.)

The conclusion of this piece — that China needs more children and a larger population, should be enough to get millions to cancel their subscription to this paper. The world (and China) does not need more people (someone please tell the NYT about global warming).

–Dean Baker

While I’m at it, here’s another on a favorite Baker theme, Social Security, health care, and the budget.

More Budget Scare Stories from NPR

NPR joined the never ending scare campaign this morning, telling listeners that our standard of living will be threatened if we don’t get the deficit under control. Of course the whole story, as always, is the projection of exploding health care costs which, if they prove accurate, will sink the economy regardless of what we do with the budget. If health care costs are contained, as they are in every other rich country, then there would be no plausible story, based on current projections, in which budget deficits would seriously impact our standard of living.

But, NPR would apparently rather beat up on retirees and Social Security than go after the pharmaceutical industry, the insurance industry, and the doctors’ lobby.

–Dean Baker

Contra CAFE

James Hamilton argues against CAFE and in favor of a gasoline tax.

CAFE standards are based on the premise that auto manufacturers and consumers are making inappropriate decisions about the kind of vehicles that get produced. The clearest way to motivate this from an economic perspective would be to suggest that there are costs to using gasoline beyond those paid directly by consumers, such as a geopolitical cost when the U.S. relies on imported oil or possible consequences for the world climate. But if that is the motivation, an economically more efficient way to accomplish the objective would be to tax the gasoline use itself so that the after-tax price paid by consumers completely reflects whatever these true costs are deemed to be. This has the benefits of providing an incentive not just to purchase more fuel-efficient cars, but also to encourage more fuel conservation in the use of the existing fleet through such measures as driving slower, driving less, or getting more of the existing mileage from the more fuel-efficient vehicles. And it allows consumers and firms the maximum flexibility to figure out how to do this in the least disruptive way.

Hamilton cites research by Stanford economics student Mark Jacobsen.

Overall, Jacobsen estimates that a one-mile-per-gallon increase in the required average corporate fuel efficiency would increase the average fuel-efficiency of all new cars sold by 2.5%. However, since most of the older cars would still be on the road, Jacobsen estimates that during the first year, total U.S. gasoline consumption would decline by only 0.8%. He estimates the costs of this 1 mpg tightening of CAFE would be $20 billion in the first year, with these first-year costs shared about equally between U.S. consumers and producers. For comparison, Jacobsen claims that a gasoline tax could accomplish the same first-year effect at an efficiency cost of significantly less than $1 billion.

Over time, the fuel savings from tightening CAFE would of course increase, but even after 10 years, Jacobsen concludes that that a gasoline tax could accomplish the same thing at 1/6 the cost.

What kind of economy?

The first in a series from The Nation: an article by James K Galbraith, toward a new progressive economic agenda.

In a debate over the Democratic future, no one should confuse the Hamilton Project with the Republican past. Robert Rubin and his associates have invited a broad dialogue on economic inequality and strategic investment, and on many specific policy questions–including education, health, taxes and wages–they will define the high-profile, wholly respectable neo-Clintonian position in the season ahead. There’s nothing wrong with that.

But these advances come at a price, which will be exacted in two areas: the world trading system and domestic fiscal policy. Both of these are far more fundamental to the Hamilton mission than any particular social policy reform. Indeed, one purpose of the Hamilton Project, it seems clear, is to propose just enough creative social advances–such as wage insurance, better teacher pay and healthcare reform–so as to divert discussion from the bedrock commitments to free trade and a balanced budget.

Progressives shouldn’t let this happen. And yet we have our own work to do: Our trade position is obsolete, and there is for now no clear progressive fiscal policy. We need to be talking trade and budgets, not simply because they are too important to bargain away, and not just to contest Rubin’s worldview, but to build one of our own that is realistic, compelling and also serves larger purposes, including environmental survival and social justice.

Deficit-fetishism also bolsters the perennial campaign to cut the Social Security system, now taken up by the alarmist David Walker, head of the Government Accountability Office, and by Ben Bernanke, chair of the Federal Reserve System. Here the Hamilton Project strategy document is extremely reticent–it barely mentions Social Security by name. But it is riddled with code words about the long-term “entitlement problem,” which, it avers, can be solved only by a “bipartisan commission” acting on well-known options, behind closed doors. This is not reassuring.

In fact, Social Security is in better financial shape than ever, holding vast stocks of Treasury bonds on which interest can and will be paid. No economic or budget imperative requires that Social Security be cut, now or later. In private discussion Hamilton leaders let on that they understand this. But they are prepared, nevertheless, to include Social Security cuts–pension cuts for America’s elderly, many of whom would otherwise be poor–in some sort of grand deficit bargain. Progressives must be absolutely categorical in rejecting any such deal.

Healthcare costs are a big problem. But they are a problem affecting both public and private healthcare, not Medicare and Medicaid alone. And it’s highly unlikely that the problem of rising healthcare costs will extend to the point projected by Bernanke and Walker, who imply that healthcare will absorb one-third of the GDP within a generation–two or three times as much as in any other country. If that happens, as Dean Baker, co-director of the Center for Economic and Policy Research, has pointed out, we could cost-effectively contract out medical care to the Canadians and the French.

Ethanol subsidies

James Hamilton wonders over at Econbrowser why corn-based ethanol is so popular with consumers.

The NAS study claimed that even if 100% of the U.S. corn crop were devoted to ethanol production (leaving zero for exports, corn flakes, or whatever), it would only displace 12% of our gasoline consumption; (thanks again to Jerry Taylor for steering me to that estimate).

Although powering our cars with corn is vastly more expensive than other alternatives, this choice seems to be tremendously popular with most Americans. If an economist were asked to justify this attitude, the argument would have to be that the market cost of imported oil vastly understates its true cost to us in terms of geopolitical implications of U.S. dependence on foreign oil. But if that is the underlying rationale, the preferred economic solution would not be a subsidy to corn producers, but rather a tax on oil imports.

The subsidies and economic inefficiencies they create result in taxpayers and consumers paying more than they would under a simple, direct import tariff. A tariff would also produce strong incentives not just for ethanol production but also a variety of alternative energy sources and conservation, with the big advantage that market forces would guide us to the most efficient options on the table. But I guess the ethanol subsidies have the advantage that Americans can pretend that somebody else is footing this bill.

John Edwards’ health care plan

Both Paul Krugman (via Mark Thoma) and Dean Baker have nice things to say about the universal health care plan advanced by presidential candidate John Edwards.

It’s not the cleanest plan in the world (there remains a substantial role for private health insurance, for example), but on the other hand it has some features that set it apart from, say, Schwarzenegger’s proposal in California.

Krugman (edited by Thoma):

But Mr. Edwards goes two steps further. People who don’t get insurance from their employers would… purchase insurance through “Health Markets”: government-run bodies negotiating with insurance companies on the public’s behalf. …

Why is this such a good idea? …[M]arketing and underwriting — … screening out high-risk clients — are responsible for two-thirds of insurance companies’ overhead. With insurers selling to government-run Health Markets, not directly to individuals, most of these expenses should go away, making insurance considerably cheaper.

Better still, “Health Markets,” …, “…modeled after Medicare” … offer a crucial degree of competition. The public insurance plan would almost certainly be cheaper … — after all, Medicare has very low overhead. Private insurers would either have to match the public plan’s low premiums, or lose the competition. …

So this is a smart, serious proposal. It addresses both … the uninsured and the waste and inefficiency of our fragmented insurance system. And every candidate should be pressed to come up with something comparable.


This is a serious plan. What I find most interesting (agreeing with Paul Krugman) is the proposal to create a public Medicare type system that any individual or employer can buy into. [Cheap political advice for the Edwards campaign: hype this item to the moon as a small business friendly proposal. Small businesses hate to deal with insurers who can raise their premiums by ridiculous amounts, especially if one of their workers develops a serious illness.] This sets up a head to head competition between the public system and private insurers. We should all benefit from this sort of competition.

Krugman again:

So far, all we have from Mr. Obama is inspiring rhetoric about universal care — that’s great, but how do we get there? And how do we know whether Mrs. Clinton, who says that she’s “not ready to be specific,” and that she wants to “build the consensus first,” will really be willing to take on this issue again?

To be fair, these are still early days. But America’s crumbling health care system is our most important domestic issue, and I think we have a right to know what those who would be president propose to do about it.

As Baker points out, “Representative Dennis Kucinich has put forward a universal Medicare plan, but the media have largely opted to ignore his candidacy.” Still, it’s eleven months until the first primary; we’ll see what happens. Not ignoring the fact that it’ll take 60 votes in the Senate to pass anything remotely resembling universal health care.

Selling Indulgences: Monbiot on carbon trading

George Monbiot suggests that “The trade in carbon offsets is an excuse for business as usual”:

The problem is this. If runaway climate change is not to trigger the irreversible melting of the Greenland and West Antarctic ice sheets and drive hundreds of millions of people from their homes, the global temperature rise must be confined to 2C above pre-industrial levels. As the figures I have published in Heat show, this requires a 60% cut in global climate emissions by 2030, which means a 90% cut in the rich world. Even if, through carbon offset schemes carried out in developing countries, every poor nation on the planet became carbon-free, we would still have to cut most of the carbon we produce at home. Buying and selling carbon offsets is like pushing the food around on your plate to create the impression that you have eaten it.

Also: Monbiot’s new book, HEAT, and a website, turn up the heat.

My fear is not that people will stop talking about climate change. My fear is that they will talk us to Kingdom Come.
Few corporations or public figures are now stupid enough to deny that climate change is happening, or that we need to reduce our emissions of greenhouse gases. Instead, most of them now claim to be on the side of the angels. They make public statements or publish reports designed to persuade us that they are “working towards sustainability”.
In a few cases, they really are. But for every genuine reformer, there are half a dozen who are simply greenwashing their existing practices. The people who will destroy the ecosystem are not, or not only – sneering industrialists in pinstriped suits, but nice-looking people in open-necked shirts who claim that they are just as concerned as the rest of us to save the planet.
This site aims to ensure that they don’t get away with it. Its purpose is to expose the fudged figures, dodgy claims and empty public relations campaigns of the charming people who are wrecking the biosphere.

Republicans vs Democrats on the economy

Kevin Drum:

Did you know that Democratic presidents are better for the economy than Republicans? Sure you did. I pointed this out two years ago, back when my readership numbered in the dozens, and more recently Michael Kinsley ran the numbers in the LA Times and came to the same conclusion.

The results are simple: Democratic presidents have consistently higher economic growth and consistently lower unemployment than Republican presidents. If you add in a time lag, you get the same result. If you eliminate the best and worst presidents, you get the same result. If you take a look at other economic indicators, you get the same result. There’s just no way around it: Democratic administrations are better for the economy than Republican administrations.

Skeptics offer two arguments: first, that presidents don’t control the economy; second, that there are too few data points to draw any firm conclusions. Neither argument is convincing. It’s true that presidents don’t control the economy, but they do influence it — as everyone tacitly acknowledges by fighting like crazed banshees over every facet of fiscal policy ever offered up by a president.

The second argument doesn’t hold water either. The dataset that delivers these results now covers more than 50 years, 10 administrations, and half a dozen different measures. That’s a fair amount of data, and the results are awesomely consistent: Democrats do better no matter what you measure, how you measure it, or how you fiddle with the data.

But it turns out there’s more to this…

School parcel taxes are bad public policy

Last June, a parcel tax proposal by my local school district failed, for the fifth time in recent memory. This Tuesday, Californians will vote on Proposition 88, an initiative that seeks a perpetual statewide $50/year parcel tax.

Sidebar: California School Funding

California school districts are primarily funded by the state, through a complicated formula that needn’t concern us here. As a consequence of Proposition 13 (1978), school districts are limited to parcel taxes to raise money locally for operating expenses.

In California, parcel taxes differ from ad valorem property taxes in that they’re assessed at a flat rate per parcel. Amounts vary; my local district’s requests have varied from $75 to $250 per year, generally for a period of five years.

(This 1997 report from the Little Hoover Commission is nearly ten years old, but it’s still the best treatment of K-12 funding in California that I’ve ever seen.)

Reliance on local parcel taxes to supplement public education funding is bad public policy, for two main reasons.

Parcel taxes are regressive

First, parcel taxes are regressive. Whether you live in a 10,000 square foot McMansion in Beverly Hills or in a shotgun shack on a postage-stamp lot, your parcel tax assessment is the same (if you’re only renting the shack, the parcel tax will almost certainly show up as a rent increase).

Parcel taxes are inequitable

Second, affluent school districts are much more likely than poor districts to be able to pass substantial parcel taxes, and so supplement California’s rather low level of state funding for education, leaving poorer districts stuck at the bottom. This flies in the face of the state supreme court’s Serrano decisions in 1971 and 1976 that basing school funding primarily on local property taxes is unconstitutionally inequitable.

Maybe in an emergency…

There is some merit in the argument that, during an acute budget emergency, a short-term parcel tax may be justified on the grounds that it’s the only recourse available to the district (or at any rate the least bad recourse). I accepted that argument, for example (and made it myself) in 2003, though not in 2006.

55%: even worse

Various people have advocated lowering the election threshold for a parcel tax to 55%, from the current Prop 13-mandated 2/3, as was done some years back for facilities bonds. That’s a bad idea, and more than a little disingenuous. Lowering the threshold for parcel tax measures requires a constitutional amendment. But once we’re amending the constitution, we’re no longer bound by the strictures of Proposition 13, and are free to restructure public school funding equitably. That is, if we’re going to pass a constitutional amendment, why not fix school funding right?

Fix it right.

K-12 funding in California is broken and needs to be fixed, and one way or another that will require higher taxes. But parcel taxes, whether local or statewide, are the wrong way to do it.

What about California Proposition 88?

A statewide parcel tax, as proposed by Proposition 88, largely avoids my second criticism; it will be collected (and presumably distributed) more or less uniformly across the state. On the other hand, it does nothing to address existing inter-district inequity.

Proposition 88 introduces a variation not found in local parcel tax proposals: no time limit. Local parcel taxes run for a few years, often five, and generally in the range of three to seven. But the statewide parcel tax proposed by Proposition 88 has no time limit at all. It would become a permanent part of California public school financing, embedded in the state constitution.

Because Proposition 88 includes a constitutional amendment, it could have implemented a more progressive revenue source (such as income taxes) instead of relying on regressive parcel taxes. It’s a bad measure, and should be defeated.

Increasing income inequality

From Mark Thoma, a series of posts on income inequality.

New Data Show Increasing Income Inequality points us to work published by the Center on Budget and Policy Priorities.

It should be noted that wage and salary growth has been unusually weak during this recovery, while the growth of corporate profits has been exceptionally strong. This contributes to growing income inequality, since high-income households own a highly disproportionate share of corporate assets and derive significant income from those assets. With weaker-than-normal wage growth and stronger-than-normal growth in corporate profits having continued into the first part of 2006, it is likely that the increase in income inequality that Piketty and Saez have documented through 2004 has continued since that time and that the nation’s already-large disparities in income are growing yet wider.

Thoma then points us to Paul Krugman:

I’d like to say that there’s a real dialogue taking place about the state of the U.S. economy, but the discussion leaves a lot to be desired. In general, the conversation sounds like this:

Bush supporter: “Why doesn’t President Bush get credit for a great economy? I blame liberal media bias.”

Informed economist: “But it’s not a great economy for most Americans. Many families are actually losing ground, and only a very few affluent people are doing really well.”

Bush supporter: “Why doesn’t President Bush get credit for a great economy? I blame liberal media bias.” …

Many observers, even if they acknowledge the growing concentration of income…, find it hard to believe that this concentration could be proceeding so rapidly as to deny most Americans any gains from economic growth. Yet newly available data show that that’s exactly what happened in 2004 …

…and finishes up with commentary on an ongoing argument on the subject between Greg Mankiw and Brad DeLong, and along the way providing some remarkable graphs.

WSJ: Deficits and economic pies

As Bigger Piece of Economic Pie Shifts To Wealthiest, U.S. Deficit Heads Downward
By Greg Ip and Deborah Solomon
WSJ; July 17, 2006; Page A2

In announcing a big drop in its estimate of this year’s federal budget deficit, the Bush administration was quick to credit itself.

“Tax cuts worked to generate economic growth, and economic growth is now working to raise revenues,” White House budget director Rob Portman said last week during an online discussion with the public.

But this explanation falls short. While tax revenue is growing far faster than the Bush administration forecast in its budget projections in February, the nation’s economy isn’t.

What has changed isn’t the size of the economy, but how the economic pie is divided. The share of national income going to corporations and the wealthiest individuals, already large, has expanded, while the share going to typical wage earners has shrunk. Because corporations and the wealthy generally pay income tax at higher rates than does the typical wage earner, that shift benefits the federal Treasury.

(Via Mark Thoma)

Wage growth taking off? Uh, no.

Dean Baker. Again.

Big News: Arithmetic Problems at the Council of Economic Advisors

If we focus on just the last three months, nominal wages rose at a 4.5 percent annual rate over the three months April, May, and June compared with the prior three months. This is equal to the annual rate of growth of the CPI in the three months of March, April, and May compared with December, January, and February. In other words, the most recent data indicate that wages may now be just keeping even with inflation.

If wages have slightly trailed inflation over the last year and are just now roughly breaking even, how can President Bush’s chief economist say that wage growth “seems to be taking off?” Mr. Lazear either does not know arithmetic or is not being honest. The fact that he is making a claim so completely at odds with reality should have been big news.

NPR Doesn’t Believe in Markets

Dean Baker is annoyed with NPR’s economic reporting. Its quality varies, of course, but this kind of stuff is much more the rule than the exception, in my listening experience.

NPR Doesn’t Believe in Markets

NPR had a piece this morning warning of a shortage of agricultural workers in California. It reported that some crops may rot in the field, if farmers there can’t get more workers by the end of the summer.

Those of us who believe in markets would suggest that the farmers try raising wages. It is possible that some of the crops being farmed now in California would not be profitable, if farmers had to pay the wage necessary to attract workers in the current market (or if they had to pay the market price for water). In a market economy, that means that the farmers made bad choices on crop choices.

That’s unfortunate for the farmers, but that’s how markets work. I would like to be able to get a lawyer for $20 an hour, but because we have a lawyer shortage, that is not an option. Maybe NPR will be able to find some folks who understand markets to help with their reporting on economic issues.

The Debate over Immigration

Mark Thoma, The Debate over Immigration:

From a policymaker’s perspective, what should U.S. policy address, the welfare of poor anywhere in the world which may represent the preferences of constituents, or should U.S. economic policy attempt only to maximize the welfare of U.S. citizens?

Scroll down to the extensive excerpt from Roger Lowenstein’s otherwise paywalled NY Times article.

This would be a good time to finally link to an earlier post of Thoma’s on this subject, Martin Wolf: Unskilled Immigration.

Martin Wolf has a pretty good summary of the economic and equity issues involved with the immigration of unskilled workers. A thought that strikes me is that this debate is partly about how one values costs and benefits to non U.S. citizens. Suppose you can make people better off with a particular policy, but a subset will be worse off worse off, but the subset does not contain any U.S. citizens. It is a Pareto improvement to enact the policy?

Some people will value the costs and benefits to non U.S. citizens highly – those that care deeply about the positive impact of immigration on the lives of the immigrants fall into this category. Some will place very little weight on those outside the country – policymakers such as the Fed do not recognize costs and benefits except as they relate to the U.S. economy and the welfare of its citizens. The Fed has made it clear it is not its job to worry about the unemployment rate in Mexico in the conduct of policy unless it somehow affects the U.S. In making welfare assessments, how those costs and benefits are evaluated can have a big affect on the recommended course of action. And I don’t think there’s a right answer as to what someone should consider in making such evaluations. A person isn’t more or less liberal or progrssive (or conservative) for considering their family or community first and placing domestic low skill wage earners at the forefront, or for caring deeply about immigrants.

If I thought politicians would actually follow through on the proposal, my own view is that those who benefit most from both legal and illegal immigration, those at the higher end of the income scale, would have part of those benefits taxed away to compensate those who are hurt by the policy, low-skilled wage earners in particular. In such a case, a liberal immigration policy would be my preference.

Who Owns Bolivia?

Joseph E Stiglitz:

A few months ago, Evo Morales became Bolivia’s first democratically elected indigenous head of state. Indigenous groups constitute 62% of Bolivia’s population, and those with mixed blood another 30%, but for 500 years Bolivians had been ruled by colonial powers and their descendants. Well into the twentieth century, indigenous groups were effectively deprived of a vote and a voice. Aymara and Quechua, their languages, were not even recognized for conducting public business. So Morales’ election was historic, and the excitement in Bolivia is palpable.

For now, the world should celebrate the fact that Bolivia has a democratically elected leader attempting to represent the interests of the poor people of his country. It is a historic moment.