Saturday, April 25, 2015

The Mediterranean Exodus and the Trolley Problem

How should we think about the migrants who are trying to cross the Mediterranean from Africa to Europe?  Thousands of them are paying smugglers to take them in unsafe boats to countries where they have no legal right to live, work or visit.  Many are dying in the attempted crossings.

Until very recently, Europe had more people than Africa, and so immigration pressure was limited.  Over the next few decades, however, Europe's population will be steady, while Africa's will explode.  The divergence between perceived opportunities in Europe and Africa will also increase.

If the possibility of a European population that is majority African and Arab is of no concern, then of course Europe should end the humanitarian crisis, run a free ferry service across the Mediterranean, and allow anyone who wants to settle in Europe.  But if Europe wants to remain majority European, it must do something to stop people from crossing over. 

There are three options:  Working to improve conditions in Africa so that people there will be less interested in migrating; paying people to stay in Africa; and using force.  The first two options are unrealistic.  The more Europe spends to improve conditions in Africa, the more apparent it will be to Africans that things are even better in Europe.  It is not the desperately poor who emigrate, it is the ones who have begun to glimpse the advantages of middle-class life and want more.  Foreign aid programs are unlikely to succeed in improving conditions in Africa - as P.T. Bauer said, the money spent will end up like water thrown on sand.  But even if it succeeds, it will increase immigration pressure, not reduce it.  And given population projections, Europe will not have enough money to bribe everyone to stay home.

The final option is force.  Europe could pay African dictators to patrol the beaches and prevent boats from launching, as they did before the Arab Spring.  Europe can also intercept boats in the water, arrest the smugglers and return the passengers to Africa.  Fatalities at sea will be an inevitable consequence, at least until Africans are convinced that Europe is serious about stopping immigration.

Many other countries, such as Australia, Israel, Caribbean nations, and the United States take a hard line on illegal immigrants coming by sea, but Europe seems to be having a crisis of conscience over the issue.

There are two questions that must be answered:  First, is keeping Europe majority European a legitimate objective, and second, is this goal worth the cost of thousands of drowned migrants?

My view is that Europe has a unique and valuable culture that is not shared by most Africans, Arabs and Asians, even those who have lived in Europe for generations.  If Europe becomes majority non-European, that culture might die.  Majorities always oppress minorities, and an African or Arab majority in Europe would be no exception.  Whenever Africans, Arabs and Asians have conquered European territory, European civilization has suffered.  When Europeans have conquered territory, they have attempted to impose their own values on local civilizations.

European civilization is something that European people possess, and might lose if unlimited immigration is allowed.  Do people have a right to defend their possessions?  Most individuals seem to think so.  Most nations also seem to think so.  Deadly force is what ultimately backs this right.  We catch burglars and put them in prisons patrolled by guards who shoot escapees.   European civilization is certainly more important than many of the possessions we defend in this way.

Perhaps the real moral dilemma comes from the fact that while the mass of millions of migrants might threaten European civilization, individual migrants in isolation do not, and it is these individual migrants who are dying at sea.  Our moral intuitions, having evolved while humans lived in small hunter-gatherer groups, are confused by questions like this.

Some might say that the value of European civilization is reflected in Christian values, and that if we must allow migrants to drown to protect it, we have already lost it.  Others believe that European civilization means more than turning the other cheek.  Jesus himself suggested that there were values higher than charity to individual poor people.

It seems to me that Europe is past the point of diminishing returns to immigration, and that it is absurd to think that morality demands that Europeans extinguish their own civilization by allowing hundreds of millions of foreigners to move in.  Half-hearted efforts only encourage more hazardous crossings.  The only way to defend Europe and stop migrants from trying is to convince them with force that they cannot succeed in reaching Europe.

It is a trolley problem.  Achieving the best end result for the most people requires tough action against current migrants for a short period of time.  Europe will be better off with a European majority, Africa will be better off by retaining its most ambitious people, and lives will be saved if fewer people attempt to cross the sea illegally.  To achieve this end, the migrants who might have snuck into Europe will be worse off, and some will drown while the message is still getting through that crossing is hopeless.

Hand-wringing over the problem helps to milk votes and sell newspapers, but most rational people agree that sometimes you have to throw the switch on the trolley track.

Saturday, April 18, 2015

Global Warming Update

I updated my data on global temperatures, CO2 levels, the index of the Southern Oscillation Index, and sunspot activity to see if there has been any change in the relationship between temperature and CO2. 

A Chow Test still shows a structural break in the temperature trend in 1998, and there is no statistically significant temperature increase since then.  After 1998 there is also no statistically significant relationship between the 12 month change in temperature and the change in CO2, either in a simple regression, or in one where changes in the SOI and sunspots are included.  I am not cherry-picking time periods in which there is no relationship - regardless of the date endpoints, there is no consistent relationship between CO2 and temperature after 1997.

Since the 1880s there has been about a 2.2 degree Celsius increase in the global temperature, for an average of  about 0.16 degrees per decade.  ARGO data on ocean temperatures were supposed to demonstrate that all of the heat trapped by CO2 was going into the oceans, which would explain why we were not measuring significant atmospheric heating over the last 17 years.  The latest ARGO data, however, show ocean heating of about 0.02 degrees per decade since the ARGO system was activated in 2004.  This is consistent with the atmospheric readings showing that warming has essentially stopped in recent years.

Of course, the warming that occurred between late 1970s and the late 1990s was unexpected, and something similar could happen again.  But if it doesn't, how many years will it take before the elite consensus on global warming begins to crumble?

Saturday, April 11, 2015

Inequality and Age

David Steele recently gave an excellent talk defending the top one percent of the income distribution. I agreed with almost everything he said, but there was one point he made that I had to think about.  He suggested that some of the income inequality we see is due to the fact that older people earn more money than young people.  As the population ages, we should see an increase in inequality.  

Steele also made the point that as the need for skilled labor has increased, this effect should have become more important.  Long ago, when a strong body was the most important requirement for most jobs, young people could earn more than older people, but today the young lack skills and experience that gives older people an advantage.

Can the age distribution account for the magnitude of measured income inequality?  Here is a simple model that I found helpful to begin to think about the question.  Suppose that people work from age 18 to 67, a total of 50 years.  Suppose also that people receive two raises per year, so that there are a total of 100 distinct pay rates a person has during his career.  Assuming a uniform age distribution, the top 1% will therefore be exactly those people in the second half of their 67th year of age.

Suppose incomes increase by x% every 6 months, and that income at age 18 is normalized to equal one.  Then the total income of 100 people evenly distributed across all ages from 18 to 67 will be:

This is a sum of a geometric series, which is equal to: (see http://en.wikipedia.org/wiki/Geometric_series)


The income of the person in the top 1% will be:


Dividing (3) by (2) gives the fraction of income that goes to the top 1%.  Doing the algebra gives the following formula for this share:


We can compute (4) for different values of x to see if we can generate observed income inequality levels.  Here is a graph:



At a realistic growth rate of 2% every six months (4.04% per year), the top 1% only receives 2.3% of all income.  It would take growth of 30% every six months (69% per year) to produce an income share for the top one percent of 23%, which is the currently reported level.  Actual observed lifetime income increases on average by approximately 3.3% per year, and growth rates tend to fall with age. (see http://www.mrrc.isr.umich.edu/publications/papers/pdf/wp302.pdf)

So it seems unlikely to me that age explains much of the income inequality that has been reported.  I do believe that idiosyncrasies of the U.S. tax code explain a great deal of inequality, but the fact that other developed countries report similar trends in income inequality suggests that something else is also going on.  

Just because there is inequality doesn't mean we should try to reduce it, however, as Steele argues very well.

Tuesday, March 31, 2015

Interest Rates

Martin Feldstein's op-ed in today's Wall Street Journal is headlined "The Fed Needs to Step Up Its Pace of Rate Increases."  Why does he think so?

Basically, Feldstein is convinced that low interest rates are bound to cause runaway inflation and asset price bubbles at some point, so the Fed should be cautious.  He cites one piece of academic research, which I believe is this one from the San Francisco Fed.  Here is the abstract of that paper:
The well-known Phillips curve suggests that future inflation depends on current and past inflation and a measure of economic slack or resource utilization. Using the unemployment gap to measure slack, a simple Phillips curve currently predicts that inflation will remain quite low through 2015. Two variations of the model, which impose a higher anchor for inflation expectations or focus only on a short-term unemployment gap, still predict that inflation will remain low, albeit higher than implied by the basic model.


The "basic model" predicts inflation of around 1.3%, while the model Feldstein worries about predicts inflation of about 1.6%.  The authors also say that "it is difficult to prove that any one specification of the model is the true one."

Given that the last time the Fed raised rates we fell into the worst recession since the Great Depression, and that even the pessimistic model predicts inflation well below the Fed's target of 2%, it is hard for me to see why anyone wants higher rates, unless they are sitting on piles of cash and wanting to invest them in bonds.

The back and forth between people like Feldstein and Krugman demonstrates that there is no consensus in the macroeconomic community about what to do.  It is also clear that their core beliefs are based more on intuition than on solid scientific evidence.

Sunday, March 29, 2015

Sergeant Bergdahl

An editorial in Friday's New York Times essentially acknowledges that Army Sergeant Bowe Bergdahl is guilty of desertion, but argues that it would not be worthwhile to prosecute him.  Bergdahl has suffered enough as a Taliban prisoner, the editorial says, and he was just a naïve young man whose medical benefits would be jeopardized by a conviction, and whose civilian life would be more difficult with a dishonorable discharge.

The Times allows that
As a general matter, the American military has good reason to punish service members who desert. However, it should exercise discretion in extraordinary cases.  


But it is extraordinary cases like Bergdahl's that shape public perception of how offenses like desertion are treated.  When a high profile deserter is praised by the President's National Security Advisor (Susan Rice said Berdahl “served the United States with honor and distinction") and given an honorable discharge, other disgruntled soldiers will be more likely to follow Bergdahl's example.

Punishment of criminal offenders is always distasteful, except maybe to the crime victims themselves.  But only the most naïve argue that punishments are not needed to deter crime.  Society imprisons and even executes people, not because doing so will help the offender or the victim, but because it prevents the offender from committing more crime, and it sets an example that discourages other potential offenders.  In Bergdahl's case there is no danger of a repeat offense, but every U.S. soldier is aware of the case, and how Bergdahl is treated will have a lasting effect on military morale and discipline. 

The New York Times is a window to elite U.S. opinion.  Editorials like this one convince me that the elites governing the U.S. are without common sense.

Saturday, March 14, 2015

Who is winning in Ukraine?

Russia has accomplished two things over the past year:  The annexation of Crimea, and the establishment of a small section of Ukraine with still unspecified powers of autonomy.  The cost of these accomplishments has been the alienation from Russia of the rest of Ukraine, a new Cold War with the West, and direct costs of military action.

What have been the benefits to Russia?  Russian people have enjoyed the pleasures of nationalist fervor, and President Putin has seen his popularity rise.  But if real gains do not result, these good feelings will disappear quickly.

Economically, the invasions have been a disaster for Russia.  The new regions under Russian control are net economic drains. The resulting economic sanctions from the West have made the adventure even more costly.

Strategically, invading Crimea had little value for Russia.  It already had a lease on a naval base there, and it was constructing another base on the Russian coast of the Black Sea.  The Donbass region provides a small buffer protecting Russian possessions in the Caucasus region, but if the rest of Ukraine becomes more pro-West than it was and holds onto the Sloboda region of northeast Ukraine the strategic losses will outweigh the gains.  On the other hand, if Ukraine falls apart and Russia moves in to take control, and if the West cannot respond effectively, then Russia will at least have gained a buffer state against the West.

Russians and Germans are similar - they are both clever, ambitious people living in regions that are impossible to defend.  The solution to their security problems has been to conquer neighbors to create empires with defensible borders.  Germany had to be destroyed, humiliated and shamed in order to stop it from doing what came naturally.  The same may be true of Russia.  It will feel insecure until it controls everything between the Baltic Sea, Carpathian Mountains, Black Sea, and Caucasus Mountains.  Then it will focus on gaps between these natural features, such as Poland.

If Russia ever gets to the point where it feels secure, it will be too powerful for the rest of the world to be comfortable.  The empire Russia creates will require massive repression of nationalities under its control, which will mean constant instability.

To avoid wars, revolutions, and economic waste, the Russian empire (known now as the Russian Federation) might eventually be dismantled, and Russia will become a normal country dependent on the goodwill of its neighbors for security.  Western countries know this, and are slowly chipping away at Russia's buffer zones.  Ukraine, with or without the Donbass, would be a great prize - it would open up a new invasion route into the Russian heartland, and it would put pressure on Belarus.

I am not endorsing the campaign against Russia, only observing and predicting it.  Whether it is a good idea is related to a constant dilemma in international affairs; whether to manage problems or seek a permanent solution.  I don't know enough to say whether the risks outweigh the benefits of either approach.  But I think there is a reasonable chance that we will see the end of the Russian empire as we know it sometime in the next few decades, and maybe sooner.

Friday, March 6, 2015

The Fed's Fault?


This is a chart that ought to get more attention.  It shows the Federal Funds Rate increasing dramatically right before the 2008 crash and recession. 

Conventional wisdom holds that an irrational housing bubble that was bound to burst caused the crash of 2008 and subsequent recession.  But what if the Federal Reserve had kept rates low instead of quintupling them over 24 months?  Houses were affordable even at the height of the bubble - the ratio of mortgage payments to income was lower in 2006 than at any time during the 1970s or 1980s, and was comparable to levels seen during the 1990s.  In other words, house prices were not at levels that were unheard of given incomes and interest rates.  Perhaps interest rate hikes weakened the economy, weakening house prices, instead of the reverse story; weakening house prices bringing down the economy as a whole.

Today we had great economic news, a nearly 300,000 net increase in employment, but the stock market fell significantly because people are worried that the Federal Reserve will overreact by raising rates.

I think most people would agree that rate hikes of the magnitude of what happened 10 years ago would cause serious problems today.  But the situation in July of 2004 wasn't so different - as of today, the unemployment rate is exactly the same, 5.5%.  The Shiller PE ratio is higher today - 27.7 vs. 26.4 in July of 2004.  Inflation was higher then - 3% versus 1.7%, measured by the trailing 12 month change in the CPI, but inflation expectations, measured by the difference between 10 year TIPS and Treasuries were only 2.5% then versus 2% today.

So with just another half a percentage point of inflation we will be in the situation that convinced the Fed to dramatically increase rates just 10 years ago. 

By any reasonable estimate, the welfare cost of an additional 0.5% of inflation is low, but the welfare cost of recessions is high.  Interest rate hikes by the Federal Reserve appear to cause recessions.  Are they really worth it?

I have been aware of this problem for a while - I shared a computer lab with Campbell Harvey while he wrote his pioneering dissertation on the relationship between the term structure of interest rates and the business cycle 30 years ago.  My boss's boss at the Federal Reserve Bank of New York published the other seminal paper on the same topic while I was there in the early 1990s.  I also happen to be in interest rate sensitive businesses that would have difficulties if rates move sharply higher.

There are many examples - the Federal Funds rate rose from 6.5% in August of 1987 to 8.4% at the end of September, and the market crashed on October 19.  At the beginning of 1999 the rate was 4.1%, but in July of 2000 it reached 7%.  A recession began in March of 2001.

The key problem for the Federal Reserve is its dual mandate - price stability and economic growth.  All in all, it seems as if the Fed before 2008 leaned too much in the direction of price stability.  Ever since November of 2008 the Fed has leaned in the direction of growth.  Let's hope it keeps doing so.