Sunday, November 30, 2014

Homeownership and Newspapers

Today's lead editorial in the New York Times extolls homeownership, in spite of the disasters caused in recent years by government promotion of it.  Is it possible that the Grey Lady is biased by the fact that homeowners are more likely than renters to subscribe to print newspapers?  Renters are able to move easily to take advantage of job opportunities, better schools or changing neighborhoods, but frequent movers often neglect subscriptions to dead tree publications.  Secure apartment complexes can also be more difficult for newspaper delivery than single family homes.

Of course this couldn't be true, any more than it could be true that the Times is biased in favor of immigration because a major shareholder made his fortune on cross-border phone calls.

Thursday, November 20, 2014


The first major confrontation between President Obama and the new Republican congress will apparently be over immigration.  I hesitate to write about immigration because it is such a touchy topic, but I suppose the time has come to stop ducking it.

The first question to ask about immigration is whether we favor completely open borders.  Before thinking that this is an absurd straw man, recall this quotation from a Wall Street Journal editorial in 1984:

               ...we propose a five-word constitutional amendment: There shall be open borders.

Economists tend to support higher levels of immigration, and some support completely open borders.  What would be the effect of completely open borders on the U.S.?  According to a Gallup survey, 150 million adults around the world would like to move to the U.S.  If other destination countries kept their borders closed, a large number of the total of 640 million adults who would like to move somewhere would come here.  Open borders would trigger a rush of immigration, since many immigrants would worry that the border might later close and would want to get in while it was still possible.

Each adult who immigrated would probably bring an average of one to two family members, for a total that might exceed the current population of the U.S.  Over time, the number of immigrants would probably grow, because families would attract extended family members, and immigrant enclaves would ease the transition of additional immigrants less eager to assimilate into native American society.

My guess is that the vast majority of my readers would oppose a rapid doubling of the population of the U.S. from immigration.  Why?  Probably because they like things as they are and are reluctant to gamble on the political, cultural, and economic changes that might result.

On the other hand, most of my readers probably believe that immigration has benefitted the U.S. in the past, and that some level of immigration is desirable.  So what would be the best amount of immigration?  And who would make the best immigrants?  The answer depends on the economic, political, and social effects of immigration.

My view is that the U.S. government should act to maximize the well-being of U.S. citizens.  If immigration benefits current citizens, we should have more of it, but if it doesn't we should have less.  Of course, if we can benefit non-citizens at a trivial cost to citizens we should consider doing so.  But the New York Times editorial welcoming Obama's speech made no mention at all of possible benefits of Obama's actions to current citizens, only benefits to immigrants themselves.  The Times made its position clear on Sunday, saying the following while arguing against admitting Cuban doctors to the U.S:
American immigration policy should give priority to the world’s neediest refugees and persecuted people.
By legalizing current residents who entered the country illegally, Obama will encourage many more people to come.  They will not be deterred by his talk of border security - they will rightly reason that those being legalized now entered illegally, and so if they enter illegally they will probably be legalized sometime in the future.  Will that help current U.S. citizens?


Bringing in foreign doctors would lower medical costs and improve access to medical care.  Bringing in accountants would lower business costs.  Bringing in low-skill workers lowers wages of native unskilled workers, hurting them and benefiting their employers.  Most immigrants into the U.S. are unskilled, probably because doctors, accountants and employers have better political representation.

To determine the overall effect of low-skill immigration we need rough estimates of the government services consumed by immigrants, and the economic benefit of their employment in the U.S.

How much does government spend on new immigrants?  A commenter at marginalrevolution last year pointed out that total US healthcare spending per year divided by total hours worked in the US would tell us something about which workers earn enough to cover average healthcare costs.  Assuming that lifetime expected healthcare costs are the same for everyone, if immigrant wages are less than average healthcare costs per hour, then it might be true that the native population is subsidizing immigrants. (the answer also depends on benefits to employers, which I will discuss)

Total healthcare spending in the US is estimated to be $3.8 trillion in 2014.  Subtracting out discretionary healthcare costs and all out-of-pocket expenditures, the amount is $2.8 trillion.  I subtract these amounts because poor immigrants might do without these services.  The idea of immigration reform and Obamacare is to provide medical insurance to everyone, so the remaining $2.8 trillion is an appropriate amount to use.

According to the Conference Board, the total number of hours worked in 2013 was 248.61 billion.  Division produces a result of $11.26 per hour.  The same calculation for education adds another $1.80 per hour.  Assuming that immigrant households receive 46% more welfare than native households, welfare spending adds another $2.91, for a total of $15.97.  The overall effects of immigration on the federal budget are discussed here.  As George Borjas put it:
There’s also been a lot of fake fog thrown into the the question of whether immigrants pay their way in the welfare state. It’s time for some sanity in this matter as well. The welfare state is specifically designed to transfer resources from higher-income to lower-income persons. Immigrants fall disproportionately into the bottom part of the income distribution. It is downright ridiculous to claim that low-skill immigrants somehow end up being net contributors into the public treasury.
On the other hand, immigrants lower wages, benefiting employers and in turn, consumers of products made by these employers.  I did a very simple calculation of the "immigration surplus" by specifying demand and supply curves for labor. This is a very, very simple model and I don't claim much for it, but I think it might give some idea of how to think about the costs and benefits of immigration, and why it is probably the case that it costs more than it comes to.

I assumed that no one in the U.S. would work for less than $0 per hour, and that no one would hire anyone for low-skill jobs for more than $30 per hour.  Denmark pays fast food workers $20 per hour, but how high could low-skill wages go before workers are replaced by automation?  Assuming that a single robotic arm costs $100,000 and fast food work consists of at least 6 tasks, I assume a cost per employee replaced of $600,000.  Assuming a 12 year machine life and a long-term corporate borrowing rate of 3.5%, and assuming that maintenance costs are similar to costs of maintaining human employees (training, uniforms, HR departments, etc), I think that low-skill workers would be replaced if their wages rose to $30 per hour. Since approximately 3.3 million people are employed at or below the minimum wage of $7.25 per hour, I have the other point I need to determine the demand and supply curves. 

I model immigration as a pivot of the labor supply curve.  If a single low-skill immigrant comes to the U.S., the wage floor is still zero, but at equilibrium one more worker is employed.  This additional worker drives the wage down slightly below the minimum wage, which might happen with illegally low payments, unpaid overtime, worse working conditions, etc.

The overall addition to worker and employer welfare from adding an additional worker is shown by the lavender area. Since everything is linear, it is simple to calculate the areas of the triangles formed by the supply and demand curves.

I did the same calculation for non-linear supply and demand curves.  I just assumed that the wage was proportional to the log of employment plus a constant and fit the points required by the assumptions. Finally, I took the integrals of the curves to calculate the areas under them. The curves look something like this (not to scale):

I calculate the total economic surplus added by an additional immigrant to be $15 per hour using the linear model, and $1.87 using the log model.  Either way, the surplus is less than the $15.97 estimated cost per hour.  If the true economic surplus is somewhere in between, the net cost of low skill, illegal immigration in the U.S. might be between 0.14% and 2% of GDP.  These are not numbers that will bankrupt the country, but they are not trivial either.  Either way, it is difficult to believe that low-skill immigration provides net economic benefits.

It is important to note that the benefits go to employers, while native workers lose.  Conservatives often justify income inequality by arguing that it is needed for overall economic growth, but with low-skill immigration we get more income inequality and lower overall economic well-being.


From a political point of view, immigration is always bad for Republicans.  As I argued a year ago, immigrants are most likely to vote for Democrats.  So Republicans understandably begin the debate biased against immigration, while Democrats are biased in favor.  If immigrants happened to vote Republican, these biases would be reversed.  Given current realities, anyone favoring lower taxes and smaller government has a good reason for opposing any additional immigration. 

Republicans were happy that they almost received 40% of the Hispanic vote in 2014, but they will do worse than that in 2016, a presidential election year. 

There is also a case to be made that most countries from which the US attracts immigrants are far less democratic than the US.  Immigrants bring their own political ideas with them, and might water down support for some traditional American ideas and freedoms, as Pim Fortuyn argued in the Netherlands before he was murdered for saying so.

Setting partisanship aside, importing new voters as a political tool just doesn't seem fair.  As the playwright Bertolt Brecht put it (although he was not talking about immigration):
Would it not be easier
In that case for the government
To dissolve the people
And elect another?


The social and cultural effects of immigration are complicated.  A diverse population brings an interesting variety of food, music, ideas and lifestyles.  On the other hand, traditional American food, music, ideas and lifestyles are comfortable and desirable for many Americans.  Too much diversity might crowd out traditional American culture, whatever that is, just as 19th century immigration crowded out traditional English colonial culture in America.  Just as many people bemoan the growth of chain businesses at the expense of mom-and-pop restaurants, stores and other businesses, too many immigrants around the world might homogenize world culture, dissolving native cultures.  

Of course, this has happened many times in American history.  Waves of immigrants swept away traditional lifestyles and institutions in many cities and rural areas.  Immigration strengthened and invigorated the country in many ways, but old ways of thinking and doing things, some good, some bad, were lost due to massive immigration. There were important positive effects of immigration, but there were also negative effects, such as city government corruption, labor violence, organized crime, and disease in overcrowded cities.

Immigration was severely curtailed from 1921 until 1965, with negative and positive social and cultural effects.  Cultural diversity declined, and perhaps the perceived blandness of American culture contributed to the youth rebellion of the 1960s.  On the other hand, national cohesiveness and trust in institutions were at high levels.  A recent academic paper summarized the results of Robert Putnam as follows:
for the United States, that at least in an unspecified short run ethnic diversity is likely to reduce social solidarity, social capital and particularly social trust between citizens.
Robert Putnam is not anti-immigration, but his work demonstrates that there are some social costs of large-scale immigration. The current academic consensus appears to be that there is evidence suggesting that diversity in North America does have some cost in terms of social capital, but the situation may be different in Europe.

Disruptive effects of immigration are not always by accident.  In the UK, for example, the Labour Party allowed mass immigration in order to "radically change the country and 'rub the Right's nose in diversity.'"


Massive immigration of low skill workers costs more in added government expenditures than the economic benefits it provides, and at the same time it exacerbates income inequality within the U.S.  It also has potentially disruptive social and political effects.  The effects of high skill, high income immigrants would be different, and possibly more beneficial to Americans.

By legalizing immigrants who entered the U.S. illegally, President Obama will encourage massive new illegal immigration of people hoping for future amnesties.  The vast majority of these immigrants will be low-skill, low-wage workers and their families, and they will cost U.S. taxpayers much more than their low wages will benefit U.S. employers.  They will also have disruptive political and social effects.  Even the Democratic Party might lose if more native voters turn against them than new immigrants vote for them. 

But employers of low-wage labor will win, and unions believe that they will organize newly legalized immigrants.  Bleeding hearts favor immigration regardless of the costs, as do libertarians who oppose border restrictions on principal, regardless of the additional taxation it might cause.  This is apparently a very strong coalition, stronger than the majority of the population that will pay the price.

Friday, November 14, 2014

Another Global Warming Update

President Obama has announced major initiatives in two policy areas for his last two years in office:  global warming and immigration.  I will discuss immigration next week.  For this week, I noticed that it has been a year since my last global warming update.

Last year I argued that the most reliable data show no statistically significant warming since 1997, and no statistically significant relationship between temperatures and CO2 levels over the same period.  My main caveat was that new data was expected from Argo, a set of deep ocean probes that might show that the missing heat is being stored in the world's oceans instead of in the atmosphere.

Data are starting to come in from Argo, and they show negligible ocean heating.  A longer time series is needed to have much confidence in the results, but for now there are no data to contradict the lack of observed atmospheric warming over the past 17 years.  Of course, if these small amounts of data showed significant ocean warming there would have been national headlines.

I have updated the regressions I ran last year, and the results are the same - a Chow Test shows a structural break in the temperature time series in 1997, with a statistically significant increase before that time, but no statistically significant rise afterward.  Multiple regression of the 12 month change in temperature on the change in CO2, sunspots, and a measure of the intensity of the El Nino effect in the Pacific Ocean shows no statistically significant effect of CO2 on temperature from 1998 to 2014.

The earth has been warming off and on since the last ice age, with a relatively rapid increase from 1975 to 1997, a time when global CO2 levels also increased.  Given theoretical reasons to expect CO2 to increase temperatures, the idea that human activity was causing warming was plausible.  It is certainly a long way from being ruled out, but 17 years of flat temperatures while CO2 levels continued to increase is good reason to doubt the theory.  I think these doubts, plus uncertainty about the true costs of warming should be enough to convince us to put the anti-warming program on hold.

Wednesday, November 5, 2014

Democratic Dilemmas; Republican Resurgence

Last night's election was about age and race.

There have been two sets of offsetting trends in US elections over the past 20 years:
  • Young voters increasingly prefer Democrats, but a decreasing percentage of voters are young.
  • White voters increasingly prefer Republicans, but a decreasing percentage of voters are white.

Since the early 1970s, I think that the attention young people pay to conventional economic and foreign policy questions has declined, but the attention they pay to issues involving group identity has increased.  Why?  Perhaps college students and recent graduates prefer not to dwell on issues on which they might feel pressure to take a stand against their own economic interests.  At the same time, they find refuge in support for policies that they believe will cost them nothing but will still convince others of their political correctness.

As college attendance rates have increased, the average academic ability of those not attending or graduating from college has declined, and so has their understanding of complex political issues, so they also focus on simpler issues involving group identity.

A combination of increased cynicism and ignorance has caused the decrease in young voter participation.


Democrats have capitalized on the opportunity presented by the changing preferences of young voters by increasingly emphasizing group identity issues.  The dilemma for Democrats is that this strategy tends to alienate white voters.

The critical task for Democrats is to appeal to blacks and young whites who care about racial issues without alienating whites.  In 2008 they found the perfect tactic - nominating a black man.  White voters are happy to vote for black candidates, but they mostly disagree with nearly all actual policies that blacks believe would benefit black people.  Black voters like voting for black candidates so much that they are willing to overlook the fact that once elected, they do not deliver on issues they care about.  Obama won because he appealed to all voters, and was able to placate whites without alienating black voters.

White Democrats will have a much harder time running for office.  They won't appeal to black voters unless they deliver something substantial to blacks, but if they do they will alienate whites.  Eventually black politicians might also need to deliver results to maintain black support, but then they will also alienate whites.


Suppose that minority voters all vote Democratic, and that the percentage of voters who are minority increases linearly.  At the same time, the percentage of white voters who vote Republican increases exponentially.  This occurs as whites increasingly fear the power of growing minorities.

I start in the year 2000 with even strength for both parties and 25% minority voters.  Minority voters increase their share, reaching a majority in 40 years.  Republican support among whites increases proportionately with the square of the number of years since 2000, calibrated so that 100% Republican support among whites is reached in 20 years.

The percentage voting Democratic evolves as follows:

There is randomness in election results, so not all elections would exactly follow this pattern, but results would roughly move in the indicated directions. 

The 2000 election is 50/50.  Democratic strength increases, reaching a peak around 2008.  By 2014 Republicans have the advantage, and their advantage continues to increase until they capture the support of all white voters.  As minority voters increase in number, however, Republicans eventually start to lose again.

Of course, Republicans could use their electoral dominance from 2014 to 2039 to change the demographics of the electorate, perhaps with immigration policy, or perhaps with policies designed to selectively discourage or encourage voter turnout.  Democrats attempted to do so during their period of dominance with some limited success. 

Saturday, November 1, 2014

Was the Korean War Worth Fighting?

A brilliant and loyal reader of this blog took exception to my unexplained characterization of the Korean War, among other wars, as a "debacle."  More explanation is in order.

Ask anyone what the U.S. gained by fighting in Korea in the early 1950s, and you will probably receive two answers:  South Korea is wealthy, while North Korea is poor; and the West ultimately won the Cold War, with Korea as a battle contributing to that victory.  I will discuss each of these rationales.

The War Resulted in a more Prosperous South Korea

South Koreans living today are unquestionably better off than they would be if they lived under a system similar to that of North Korea.  But U.S foreign policy should be in the interests of Americans, not Koreans or anyone else.  For the moment setting aside Cold War strategic considerations, how much better off is the U.S. because South Korea is prosperous?

The U.S. gains from trade with Korea -  we wouldn't buy cars and electronics from them if these things weren't worth more to us than what we pay, and we wouldn't sell soybeans and wine to them if they didn't pay more than they cost us to produce.  Our gains from exports and imports are less than the total value of goods shipped and services provided, however.  Our gain is the difference between what we pay or are paid and the deals we would have gotten from the next best alternative.  I think it is a reasonable guess that this difference is considerably less than 10% of the total flow of goods and services.  (the average net margin for the entire S&P 500 is 9%, and the difference we are concerned with would probably be less than that)  On the other hand, South Korea exports to countries besides the U.S., who benefit and then trade more with the U.S., but this is clearly a second-order effect, and so 10% of gross flows still seems to be a generous estimate of the benefit the U.S. receives from trade.

The cost of the Korean War to the U.S. has been estimated to have been nearly $1 trillion from 1951-1954 in 2013 dollars.  I spread this cost over these years, added $50,000 per life-year lost from U.S. deaths for the average remaining lifespan of soldiers, and I added continuing medical benefits paid by the U.S. government over time to obtain a time series of total annual costs of the war from 1951-2013.

I estimated the economic benefit by taking 10% of the total volume of exports and imports between South Korea and the U.S.  I only have data going back to 1999, but the real level of exports and imports has close to a linear trend between 1999 and 2013, so I used a linear extrapolation to estimate exports and imports before 1999, which become zero in 1974 using this method.

To estimate the economic benefits of the war after 2013 I assume that real exports and imports will continue to grow at the same rate for the next 50 years.  I stop at 50, because it seems reasonable to believe that after that time whatever regime would have been in place in the absence of a Korean War would fall by 2064.  I calculate total future benefits using the standard formula for a growing annuity, and the result is the NPV of future benefits as of the year 2014.  The NPV of the entire time series from 1951 to 2014 gives the net economic cost or benefit of the Korean war.

The remaining input needed to calculate the net cost or benefit of the war is the discount rate.  If we want to calculate the net benefit or cost given the risks as they appeared in 1951, a high discount rate is appropriate, perhaps the long-term government borrowing rate plus a reasonable risk premium.  I believe that the Korean War, which put the U.S. in conflict with a nuclear-armed China, was riskier than a typical business enterprise, so a risk premium of at least 3% seems reasonable.  In 1951, the outcome of the war was uncertain, so a high discount rate would have been appropriate.  I calculated the long-term government borrowing rate by taking the average real 10 year Treasury rate (because that is the longest duration series available for that time period) and adding the average spread between 10 year Treasuries and 30 year Treasuries from 1977-2014 (because 30 year Treasuries are available for this period).  The result was 2.8%  Adding a risk premium of 3% produces a discount rate of 5.8%.

Using this discount rate, the NPV of the war is negative $214 billion.  Even with no risk premium and a discount rate equal to the long-term government borrowing rate the NPV is negative $133 billion.

Keep in mind that this is the NPV as of 1951.  The cost to today's economy is that amount plus any return that could have been earned on that capital over the past 63 years.  If it had earned a real return of 5.8%, as other risky projects did on average, we would be $7.5 trillion richer today.  This is a lot of money - to put it into perspective, the Federal Reserve estimates total household and non-profit net worth today to be $81.5 trillion.

This calculation assumes that without the Korean War, trade with Korea would have been non-existent, but this assumption probably overstates the war's benefits.  Without the Korean War, all of Korea would probably have been tied more closely to China, and Korea would have liberalized as China has.  The situation in North Korea would probably be much better than it is today, while the situation in South Korea would be worse.

In other words, the cost of the war was not repaid to Americans from additional trade with Korea.  The Korean War was a net economic drain.

The Korean War Helped the U.S. Win the Cold War

But what about strategic benefits in the Cold War?  Early in the Cold War Americans were worried about "Who lost China?"  Later Cuba became a Soviet ally.  Both of these events were seen as huge strategic disasters for the West, but in the end they were not decisive.  By comparison, the loss of Korea would have been strategically insignificant.  Korea had neither a large population nor a key strategic location.  The West won the Cold War because it turned out that centrally planned economies are far weaker than free market economies.  Minor differences in the evolution of battle lines would not have changed this central fact, or the outcome of the larger war.

The best defense of the war is probably that the strategic costs of inaction were uncertain at the time.  Failure to act would have meant the loss of Korea, while acting provided some chance of keeping at least part of the country on the side of the West.  It seems clear now that the loss of Korea would not have been catastrophic, but that was not as obvious in 1951.  The discount rate applied to strategic costs of inaction should have been high, possibly high enough to offset the economic costs of action.

Today, however, we have much more experience with the costs and benefits of modern wars.  We should know better than to stampede into new conflicts that we know will be economically costly and will probably produce very limited, if any strategic benefits.  It is reasonable to give the benefit of the doubt to the leaders of our grandparents' generation, but not to our current leaders who seem determined to take us into Eurasian wars.

Saturday, October 25, 2014

Does the New York Times Understand Finance?

An editorial this week in the New York Times made reasonable points about why it might be a good idea to keep interest rates low, but its logic was muddled by an attempt to inject leftist ideas:
bond holders — a powerful political constituency that includes financial firms, investment funds and wealthy individuals — generally want the Fed to raise rates sooner rather than later, and they have ample opportunity to dominate public discourse. Their aim is to pre-emptively attack inflation, which diminishes the value of their bonds.
Inflation is not the only thing that can diminish the value of bonds, and so holders of different kinds of bonds might view interest rate increases in different ways: 
  • Holders of long-term bonds who might want to liquidate them before maturity definitely do not want the Fed to increase interest rates, since rate increases automatically decrease the market price of  a bond. 
  • Holders of corporate bonds are sensitive to default risk, which would increase in a recession triggered by a rate increase.
  • Investors intending to hold bonds with low default risk to maturity might welcome the opportunity to reinvest at higher rates. 
  • Holders of Treasury Inflation Protected Securities are indifferent to inflation, but dislike rate increases, since they reduce the principal value of their bonds.
There is no monolithic, evil group of bond holders manipulating the Fed.  Some want high rates, some want low rates.  Some care about inflation, others don't.  Conflict over rates isn't between rich and poor either, since many wealthy people borrow at fixed rates and benefit from inflation.  Others hold investments that are eroded by inflation.

There is plenty of legitimate disagreement about Fed policy, but it is silly to caricature the disagreements in Marxist terms.

On the other hand, there are institutions that benefit from higher rates: government regulated banks.  Because deposits are insured and subsidized, banks have access to nearly free money to lend.  They also receive cheap money from the Fed, Federal Home Loan Banks, and other government sources.  When rates rise the cost of these sources of funds stays low, but rates at which they can lend increase, raising bank profits.  Banks that rely on less regulated sources of funds like CDs can run into problems in high interest rate environments, but in general regulation tends to push them into favoring higher rates.

The New York Times should oppose regulators, not bond holders and rich people if they want to keep interest rates low.

Saturday, October 18, 2014

Why Shouldn't Governments Compete?

I noticed two interesting editorials in the New York Times this month. On October 1, writing about Ireland's tax treatment of Apple Computer, the Times opined:
Lawmakers around the world must agree not to compete by offering relative tax advantages that hurt everyone.
But in an October 7 editorial about the beer industry, they wrote:
if corporate deal makers have their way, there will be even less competition...Consolidation on this scale leads to higher prices and fewer choices.
Apple employs thousands of people in Ireland.  If Ireland can tax Apple at a low rate and raise enough money to run its government, why is it a concern of the New York Times, or anyone else?  If the United States wants to tax Apple's activities in the United States, it certainly can.  If Ireland can provide the extra government services needed to accommodate Apple less expensively than the United States can, then it is best for Apple to operate in Ireland.

Governments can be inefficient and wasteful.  They sometimes tax too much and provide too little.  Competition between political parties for government control is not always enough to improve the situation; sometimes competition between governments is needed.

In the case of beer, the Times understands that competition is a good thing.  Of course, when I look at the store shelves in my local supermarket I see an amazing number of beer choices, and this week's CVS flyer advertises a 30-pack of 12 ounce cans of Miller High Life for $17.99.  I doubt that the New York Times editorial writers have any idea that folks in the provinces pay 60 cents for a 12 ounce beer, since they are probably paying $15 for 12 ounces of Crooked Stave Vieille Artisanal Saison, with a "floral, citrusy hop character, a subtle herbal note and a tart finish."

In the market the Times complains doesn't have enough competition I see low prices and plenty of choices, but in the market they think is too competitive the situation is just the opposite.  I wish that on April 15 I had the choice and value that is available in a supermarket beer aisle .