Friday, July 1, 2016

The Transition to Transfer Payment Government

Government in the United States, especially at the federal level, has become more about transfer payments and less about provision of goods and services.

Here a figure showing government transfer payments to individuals--everything from Social Security and Medicare/Medicaid to welfare payments of various kinds--as a share of GDP. The pattern is bumpy, but the overall upward rise in the last half-century from 5% of GDP back in the 1960s to about 15% of GDP in the last few years is clear. The lower blue line shows transfer payments to individuals from just the federal government. (The figure is created using the ever-helpful FRED website from the Federal Reserve Bank of St. Louis.)




Conversely, the category of "government consumption expenditures and gross investment" has been a generally falling share of GDP over time. The top red line shows this pattern for government overall, including federal, state and local government. The blue line shows just federal spending on "government consumption expenditures and gross investment."



Back in the 1960s, the federal government was spending about 12-13% of GDP "government consumption expenditures and gross investment," which was more than the state and local government spending of about 10% of GDP in these categories (as shown by the gap between the red and blue lines in the second figure). Now the federal government is spending about 7-8% of GDP on "government consumption expenditures and gross investment," which is now less than state and local government spending of about 10% of GDP in this category. State and local government has continued to be about provision of goods and services, from education to roads/transportation to law enforcement. But over time, the federal government in particular has become less focused on "government consumption expenditures and gross investment," and more focused on transfer payments.

The political economy of such a shift is simple enough: programs that send money to lots of people tend to be popular. But I would hypothesize that this ongoing shift not only reflects voter preferences, but also affect how Americans tend to perceive the main purposes of the federal government. Many Americans have become more inclined to think of federal budget policy not in terms of goods or services or investments that it might perform, but in terms of programs that send out checks.

For those who are interested, one way of measuring gross domestic product is to add up the sources of demand in the economy: consumption plus investment plus government plus exports minus imports. In this formula for GDP, the "government" category includes only "government consumption expenditures and gross investment," as explained here by the US Bureau of Economic Analysis.  In contrast, transfer payments become income to those who receive them, and thus are counted in GDP when the recipients spend the money to consume a good or service.

Thursday, June 30, 2016

Corporate Boards: Stop Expecting the Impossible?

Economists have been worried about what is  often called the "separation of ownership and control" in large corporations since at least 1932, when Adolf A. Berle, Jr., and Gardiner C. Means wrote a book called The Modern Corporation and Private Property. The shareholders who legally own the company are technically represented by a board of directors, who then oversees the top executives who control the company on a daily basis. But when an Enron-style corporate scandal occurs, or when top executives receive very high levels of compensation, concerns arise that boards of directors have failed in their task of monitoring the firm.

But what if the entire vision of expecting corporate boards to monitor daily operations of large companies is simply implausible? Steven Bovie, Michael K. Bednar, Ruth V. Aguilera, and Joel L. Andrus argue that this is the case in "Are Boards Designed to Fail? The Implausibility of Effective Board Monitoring," which appears in a 2016 issue of the Academy of Management Annals (10:1, pp. 319-407). They offer an extensive review of the literature on how well corporate boards perform the function of monitoring companies, and conclude that such monitoring often doesn't work very well. They write:
"In fact, most academic research, popular press accounts, and even U.S. legislation all echo the sentiment and deeply held belief that boards should be able to actively monitor and control management. ...  Our review focuses on literature that directly or indirectly explores one of the core assumptions of governance research-that a correctly designed and staffed board will be  able to properly fulfill its primary function of effectively monitoring managerial action. The fundamental question that we hope to shed light on is the following: Is it reasonable to expect that boards can offer effective ongoing monitoring of firms, even if we assume that directors are sufficiently qualified and motivated? ... Specifically, we outline a number of barriers stemming from information-processing challenges that   ultimately inhibit directors from pro­viding effective oversight on an ongoing basis. ... Our review and assessment of the literature suggests that effective, ongoing monitoring of managerial  action is unlikely in most large corporations due in large part to these varied barriers."
What sort of barriers do they have in mind? For starters, effective board members should have what they call "board capital," meaning that they have personally invested the time and energy to have a fairly deep level of knowledge about the specific company, and also that board members should be compensated in a way that provides the right incentives to act in the interests of shareholders, not corporate insiders. The issues involved here are substantial! But drawing on their review of the literature on why board monitoring has often been ineffective, they argue that even when these conditions are reasonably well-met, directors typically face substantial problems in monitoring, which can stem from basic issues like firm size, firm complexity, outside job demands, complexity of those job demands, dissimilarity of those job demands, size of the board, frequency of board meetings, diversity of the board, norms of deference of the board, and power of the existing CEO.

Given the research reviewed in this article, we are pessimistic about the possibility of boards being able to effectively monitor managers on an  ongoing basis in many circumstances. ... Given the size and complexity of many modem firms, we believe some firms may effectively be "too  big to monitor", and that successful monitoring by boards may be highly unlikely in many large public firms. It might be time to concede that our conception of boards as all-encompassing monitors is doubtful ... After many of the  corporate scandals over the past several years, the initial reaction has often seemed to be  "where was the board?" Our review calls into question whether boards are really equipped to  catch or stop misbehavior. Governance failures are likely to often be the result of the many   barriers that we have outlined in this review, rather than directors who are shirking their duty as is often assumed.
What are some implications of this line of argument for corporate monitoring and the purposes of corporate boards of directors?


First, it's possible to improve the ability of boards to do monitoring on all of these dimensions, and such efforts can be worthwhile. Somewhat improved monitoring by corporate boards is likely better than no monitoring by boards.

Second, given that even improved board monitoring is likely to be highly imperfect, it's important to think about how to strengthen, emphasize, and rely on the other social mechanisms beyond corporate boards for monitoring the ongoing operations of firms. For example, there is analysis from investors and sources of finance like banks. There are reports of auditors, and government rules about how such audits should be done. There are articles in the financial press. Most industries have oversight in some dimensions (say, workplace safety, product safety, or environmental laws) by government regulators. There can be groups representing workers, including unions, and groups representing various community stakeholders.

Third, when evaluating whether a corporate board is performing well, it may be useful to knock expectations about the extent of monitoring down to more reasonable levels. Instead, in many cases the most important aspects of a corporate board may involve tasks like "providing resource," meaning as a source of expert advice and connections to corporate management, ans well as dealing with "punctuated events" like replacing the CEO or a big decision about a merger. Bovie, Bednar, Aguilera, and Andrus write: "Consequently, we believe that future research and theorizing needs to focus on boards as advice-giving bodies, or bodies that get involved in punctuated events, and look to  other corporate governance mechanisms to secure monitoring."

For a quite different vision of overhauling corporate boards, a couple of years ago I discussed a proposal to "Outsource Corporate Boards?" (August 28, 2014).

Wednesday, June 29, 2016

Alfred Marshall: Not Competition, But Deliberateness and Freedom

A common complaint against economics and economists is that their theories and outlook place an emphasis on competition, when instead they should encourage cooperation and altruism. I've offered some of my own thoughts that the supposed opposition between competition and cooperation is a false dichotomy here,  and posted on the topic here and here.

Alfred Marshall, a towering figure in the history of economics, offers some pointed comments on how to think about the interaction of competition and economics in the opening chapter of his Principles of Economics, which was originally published in 1890 and became the dominant economics textbook for several decades. Here, I quote from the eighth edition, published in 1920, which is freely available online from the ever-useful collection of writings of past economists available at the Library of Economics and Liberty. Marshall argues that while "poets and dreamers" may describe a world in which purely altruistic people work only for the common good, such a world has never existed, and that when thinking about potential evils of competition, it is also necessary to remember its benefits. Marshall writes:
"The term "competition" has gathered about it evil savour, and has come to imply a certain selfishness and indifference to the wellbeing of others. Now it is true that there is less deliberate selfishness in early than in modern forms of industry; but there is also less deliberate unselfishness. It is deliberateness, and not selfishness, that is the characteristic of the modern age."
To put that short comment in context, with more of how Marshall sees the interaction of deliberateness, freedom, and competition, here is an extended quotation:
"It is often said that the modern forms of industrial life are distinguished from the earlier by being more competitive. But this account is not quite satisfactory. The strict meaning of competition seems to be the racing of one person against another, with special reference to bidding for the sale or purchase of anything. This kind of racing is no doubt both more intense and more widely extended than it used to be: but it is only a secondary, and one might almost say, an accidental consequence from the fundamental characteristics of modern industrial life.
"There is no one term that will express these characteristics adequately. They are, as we shall presently see, a certain independence and habit of choosing one's own course for oneself, a self-reliance; a deliberation and yet a promptness of choice and judgment, and a habit of forecasting the future and of shaping one's course with reference to distant aims. They may and often do cause people to compete with one another; but on the other hand they may tend, and just now indeed they are tending, in the direction of co-operation and combination of all kinds good and evil. But these tendencies towards collective ownership and collective action are quite different from those of earlier times, because they are the result not of custom, not of any passive drifting into association with one's neighbours, but of free choice by each individual of that line of conduct which after careful deliberation seems to him the best suited for attaining his ends, whether they are selfish or unselfish.
"The term "competition" has gathered about it evil savour, and has come to imply a certain selfishness and indifference to the wellbeing of others. Now it is true that there is less deliberate selfishness in early than in modern forms of industry; but there is also less deliberate unselfishness. It is deliberateness, and not selfishness, that is the characteristic of the modern age.
"For instance, while custom in a primitive society extends the limits of the family, and prescribes certain duties to one's neighbours which fall into disuse in a later civilization, it also prescribes an attitude of hostility to strangers. In a modern society the obligations of family kindness become more intense, though they are concentrated on a narrower area; and neighbours are put more nearly on the same footing with strangers. In ordinary dealings with both of them the standard of fairness and honesty is lower than in some of the dealings of a primitive people with their neighbours: but it is much higher than in their dealings with strangers. Thus it is the ties of neighbourhood alone that have been relaxed: the ties of family are in many ways stronger than before, family affection leads to much more self-sacrifice and devotion than it used to do; and sympathy with those who are strangers to us is a growing source of a kind of deliberate unselfishness, that never existed before the modern age. ...
"Again, the modern era has undoubtedly given new openings for dishonesty in trade. The advance of knowledge has discovered new ways of making things appear other than they are, and has rendered possible many new forms of adulteration. The producer is now far removed from the ultimate consumer; and his wrong-doings are not visited with the prompt and sharp punishment which falls on the head of a person who, being bound to live and die in his native village, plays a dishonest trick on one of his neighbours. The opportunities for knavery are certainly more numerous than they were; but there is no reason for thinking that people avail themselves of a larger proportion of such opportunities than they used to do. On the contrary, modern methods of trade imply habits of trustfulness on the one side and a power of resisting temptation to dishonesty on the other, which do not exist among a backward people. Instances of simple truth and personal fidelity are met with under all social conditions: but those who have tried to establish a business of modern type in a backward country find that they can scarcely ever depend on the native population for filling posts of trust. It is even more difficult to dispense with imported assistance for work, which calls for a strong moral character, than for that which requires great skill and mental ability. Adulteration and fraud in trade were rampant in the middle ages to an extent that is very astonishing, when we consider the difficulties of wrong-doing without detection at that time.
"In every stage of civilization, in which the power of money has been prominent, poets in verse and prose have delighted to depict a past truly "Golden Age," before the pressure of mere material gold had been felt. Their idyllic pictures have been beautiful, and have stimulated noble imaginations and resolves; but they have had very little historical truth. Small communities with simple wants for which the bounty of nature has made abundant provision, have indeed sometimes been nearly free from care about their material needs, and have not been tempted to sordid ambitions. But whenever we can penetrate to the inner life of a crowded population under primitive conditions in our own time, we find more want, more narrowness, and more hardness than was manifest at a distance: and we never find a more widely diffused comfort alloyed by less suffering than exists in the western world to-day. We ought therefore not to brand the forces, which have made modern civilization, by a name which suggests evil.
"It is perhaps not reasonable that such a suggestion should attach to the term "competition"; but in fact it does. In fact, when competition is arraigned, its anti-social forms are made prominent; and care is seldom taken to inquire whether there are not other forms of it, which are so essential to the maintenance of energy and spontaneity, that their cessation might probably be injurious on the balance to social wellbeing. The traders or producers, who find that a rival is offering goods at a lower price than will yield them a good profit, are angered at his intrusion, and complain of being wronged; even though it may be true that those who buy the cheaper goods are in greater need than themselves, and that the energy and resourcefulness of their rival is a social gain. In many cases the "regulation of competition" is a misleading term, that veils the formation of a privileged class of producers, who often use their combined force to frustrate the attempts of an able man to rise from a lower class than their own. Under the pretext of repressing anti-social competition, they deprive him of the liberty of carving out for himself a new career, where the services rendered by him to the consumers of the commodity would be greater than the injuries, that he inflicts on the relatively small group which objects to his competition.
"If competition is contrasted with energetic co-operation in unselfish work for the public good, then even the best forms of competition are relatively evil; while its harsher and meaner forms are hateful. And in a world in which all men were perfectly virtuous, competition would be out of place; but so also would be private property and every form of private right. Men would think only of their duties; and no one would desire to have a larger share of the comforts and luxuries of life than his neighbours. Strong producers could easily bear a touch of hardship; so they would wish that their weaker neighbours, while producing less should consume more. Happy in this thought, they would work for the general good with all the energy, the inventiveness, and the eager initiative that belonged to them; and mankind would be victorious in contests with nature at every turn. Such is the Golden Age to which poets and dreamers may look forward. But in the responsible conduct of affairs, it is worse than folly to ignore the imperfections which still cling to human nature.
"History in general, and especially the history of socialistic ventures, shows that ordinary men are seldom capable of pure ideal altruism for any considerable time together; and that the exceptions are to be found only when the masterful fervour of a small band of religious enthusiasts makes material concerns to count for nothing in comparison with the higher faith. ... 
"We may conclude then that the term "competition" is not well suited to describe the special characteristics of industrial life in the modern age. We need a term that does not imply any moral qualities, whether good or evil, but which indicates the undisputed fact that modern business and industry are characterized by more self-reliant habits, more forethought, more deliberate and free choice. There is not any one term adequate for this purpose: but Freedom of Industry and Enterprise, or more shortly, Economic Freedom, points in the right direction; and it may be used in the absence of a better." 


Tuesday, June 28, 2016

Can the US Continue to be an Outlier in Long Term Care?

As population ages, it seems plausible that more people will rely on long-term care. Such care could be delivered in a variety of ways: for example, within their own home, or a specialty adapted house where care is available 24/7, or or in an institutionalized setting, and by some mixture of paid providers, volunteers, and family members. Compared with other high-income nations of the world, the US is something of an outlier when it comes to long-term care: spending less, fewer recipients of long-term care, as a result a healthier over-65 population. The figures below come from the OECD databook published last November, Health at a Glance 2015.

Here's a figure showing public spending on long-term care as a share of GDP. The OECD average is 1.7% of GDP. The US spends 0.5% of GDP. The other countries that spend this little tend to have lower GDP per capita than the rest of this comparison group.


The main reason for this lower level of spending on long-term care seem to be that a much smaller share of the sUS poulation is receiving long-term care. For the OECD countries with data available, an average of 2.3% of the population is receiving long-term care; for the US, it's just 0.4%.

In turn, a main reason why the share of over-65 Americans receiving long-term care is so low is because, compared with other countries, the American cohort feels it's in pretty good physical shape.  In the US and Canada, about 80% of the over-65 population reports being in good or very good health. For comparison, less than half of the over-65 population in for the other OECD countries is reports being in good or very good health.

It's wise to take these kinds of international comparisons with a bit of skepticism. For example, the figure above shows public spending on long-term care. The Congressional Budget Office estimated in 2013 that the value of informal care provided in the US without compensation by family and friends was  slightly larger than the amount of paid-for care. But other countries presumably have some long-term care that is informally provided, too. One might also wonder if Americans (and Canadians) over-65 are actually in better health than their counterparts in other countries, or just more likely to say that they are in better health. 

However, the US is falling so far below the average in its spending on long-term care and number of recipient of long-term care, and so far above the average in self-reported health status for the over-65 population, that it seems unlikely that either a greater prevalence of informal care or a greater degree of optimism about health status explains the difference. 

As I argued back in 2011, in the context of a previous OECD report, provision of long-term care is just one of many adjustments that countries will need to make in response to aging populations. The easy, costly, and unsatisfactory answer is to make it quite easy for elderly people to qualify for receiving long-term care in an institutional setting. The less costly, harder-to-implement, and more satisfactory answer is to encourage ways for people to receive only the degree of assistance they really need, so that they can live in their homes or their communities as long as possible while being supported by family and friends, but still have a backstop of public support for institutional care when needed. 

The "baby boom generation" refers to those born from roughly 1945-1960. Thus, members of that group will be turning 65 over the 15 years from 2010 to 2025, and will be reaching 80 over the 15 years from 2025 to 2040.  As that generation ages, designing and implementing long-term care policies will be a continual work in progress. 

Monday, June 27, 2016

Seven Reflections on Brexit

A long-planned family vacation had me visiting in Great Britain last week during the Brexit vote. Here are some reflections on the event, in no particular order.

1) The Brexit vote seemed to me a strangely American moment. Some of the lasting slogans handed down from the American revolution against England are "no taxation without representation" and "don't tread on me." Thus, for an American there was some historical irony in hearing many of the British argue, in effect, that there should be "no regulation without representation," or perhaps "no legislation without representation." There was similar irony in hearing some of the British turn loose their "don't tread on me" spirit while railing against annoying but in some sense small-scale regulatory impositions from the central power, like rules that sought to standardize shapes and sizes for fruit and vegetable produce, or the rules with force of law that sales of loose and packaged good use only metric measurements.  I found myself half-expecting some "Leave" advocates to start quoting the US Declaration of Independence: "When in the Course of human events, it becomes necessary for one people to dissolve the political bands which have connected them with another, and to assume among the powers of the earth, the separate and equal station to which the Laws of Nature and of Nature's God entitle them ..."

2) There was a widespread feeling, even among the Remain supporters with whom I spoke, that the nature of the European project had mutated over time. My sense was that many of the Leave voters were (mostly) fine with the progress of the greater European project from the founding of the European Economic Community back in 1957 up through the 1980s. But after the effort had transmogrified into the European Union in 1993, the project was no longer focused on facilitating trade between nations. Instead, it had become focused on an agenda of gradually erasing national boundaries, or in the phrase often-used, a push for "ever-closer union," which pushed beyond the comfort level of many of the British. For example, when the European Union describes its own history, it refers to early participants in the European project back in the 1950s as "Founding Fathers," a phrase with a strong resonance for Americans of those who seek to create a single nation.  The EU website also describes how the 1957 treaty aimed at a "common market" between countries, while the 1986 update treaty aimed at a "single market."

I ran across a 1982 European court decision that involved imposing value-added taxes across countries, which included an explicit statement that the European project viewed itself as involving a smooth movement from a common market, to a single market, then to "bringing about conditions as close as possible to those of a genuine internal market." The Court decision said:
The concept of a common market as defined by the Court in a consistent line of decisions involves the elimination of all obstacles to intra-Community trade in order to merge the national markets into a single market bringing about conditions as close as possible to those of a genuine internal market. It is important that not only commerce as such but also private persons who happen to be conducting an economic transaction across national frontiers should be able to enjoy the benefits of that market.
3) A shuttle driver at Heathrow airport surprised me by explaining the Brexit vote by saying: "Well,
you know, we're a nation of shopkeepers." I don't get a casual conversational reference to Adam Smith's The Wealth of Nations every day! Smith uses the phrase in Book IV, Chapter VII, in a discussion "Of Colonies," and in particular, in part of the discussion subtitled "Of the Advantages which Europe has derived from the Discovery of America, and from that of a Passage to the East Indies by the Cape of Good Hope." In a frequently quoted passage, Smith wrote:
"To found a great empire for the sole purpose of raising up a people of customers may at first sight appear a project fit only for a nation of shopkeepers. It is, however, a project altogether unfit for a nation of shopkeepers; but extremely fit for a nation whose government is influenced by shopkeepers."
There are several odd twists and turns in relation to this passage. A first twist is that Smith using "shopkeepers" as a pejorative term. He is arguing that is after England and the colonists had gone to the effort and expense of developing the colonies, then "shopkeepers" in England wanted the British government to guarantee that the colonists would be required to buy what they needed only from English producers, and also to sell only to English producers. Here's some of what Smith writes in the same paragraph as the above quotation:
"England purchased for some of her subjects, who found themselves uneasy at home, a great estate in a distant country. The price, indeed, was very small, and instead of thirty years purchase, the ordinary price of land in the present times, it amounted to little more than the expence of the different equipments which made the first discovery, reconnoitred the coast, and took a fictitious possession of the country. The land was good and of great extent, and the cultivators having plenty of good ground to work upon, and being for some time at liberty to sell their produce where they pleased, became in the course of little more than thirty or forty years (between 1620 and 1660) so numerous and thriving a people that the shopkeepers and other traders of England wished to secure to themselves the monopoly of their custom. Without pretending, therefore, that they had paid any part, either ofthe original purchase-money, or of the subsequent expence of improvement, they petitioned the parliament that the cultivators of America might for the future be confined to their shop; first, for buying all the goods which they wanted from Europe; and, secondly, for selling all such parts of their own produce as those traders might find it convenient to buy. For they did not find it convenient to buy every part of it. Some parts of it imported into England might have interfered with some of the trades which they themselves carried on at home. Those particular parts of it, therefore, they were willing that the colonists should sell where they could; the farther off the better; and upon that account purposed that their market should be confined to the countries south of Cape Finisterre. A clause in the famous act of navigation established this truly shopkeeper proposal into a law.
"The maintenance of this monopoly has hitherto been the principal, or more properly perhaps the sole end and purpose of the dominion which Great Britain assumes over her colonies." 
A second twist is that that Napoleon (who was familiar with Smith's writings) is reputed to have snarked that England was not a worthy opponent in war, because it was merely "a nation of shopkeepers. There doesn't seem to be much evidence that Napoleon ever actually made this comment, but as the legend metamorphosed into what people thought they remembers, some in England began to treat Napoleon's intended insult about "nation of shopkeepers" as mark of pride. Indeed, news stories in recent years point out British government ministers who now argue that the country should become "a nation of shopkeepers,"  by which they mean entrepreneurs, along with poll results suggesting that "shopkeeper" is viewed as a quite desirable job.

Clearly, applying Smith's argument to the Brexit phenomenon in any direct way is a stretch! But it is true that in Smith's usage, Britain was a nation of "shopkeepers" who expected their government to cut them a profitable deal in world markets--and the seeming inability of the British government to cut such deals was part of the fuel for the "Leave" forces.

4) A comment I heard several times from "Leave" proponents is that the United Kingdom has fifth-largest economy in the world, and even outside the EU, it will remain an important player in the global economy. This argument strikes me as whistling in the dark. Yes, if GDP across countries is compared at market exchange rates, the United Kingdom ranks fifth (after the US, China, Japan, and Germany). But world GDP isn't a race, where finishing 5th of the 195 economies where the World Bank estimates a GDP level gives you a prize. Absolute size matters, and the UK is only about 3.8% of the global economy by size. In other words, if countries don't want to deal with the UK for whatever reason, there are lots of other options out there. If one compares GDP across countries using "purchasing power parity" exchange rates, then the UK ranks only 10th in the world, and is 2.4% of the total world economy. One of the main economic justifications for the EU is that with an internal market of more than 500 million people, and with a total GDP exceeding either the US or China (at market exchange rates), members will be better-positioned both to trade within the group and to be part of better deals negotiated outside the group.


5) Along with issues of democratic representation and the possibility of negotiating alternative international agreements, the other big issue in the Brexit vote concerned immigration. Here are a couple of graphs from the "Migration Statistics Quarterly Report: May 2016" published by the UK government. From 1970 up to the early 1990s, immigration and emigration were roughly equal in the UK. But then immigration rises rapidly, and in many year there is overall net in-migration of 200,000 per year or more.

Are Britain's migrants coming from inside the EU or outside? This figure shows "net" migration--that is, immigration minus emigration--for various groups. You can see that in starting around 1997, the main surge in net migration was at first from outside the EU, a change often said to be triggered by pro-immigration policies adopted by the government of then-Prime Minister Tony Blair. However, in since about 2010, net migration from within the EU has stepped up as well. After 2004, a substantial share of this migration from inside the EU was from eastern European countries. In the last few years since 2010, there has been increased immigration to the UK from countries in the so-called EU-15, which are the countries that were members of the EU up to early 2004, as well as from Romania and Bulgaria.

Thus, greater immigration had a fairly modest affect on the UK through the earlier decades of the European project, up through the 1990s. The big change in UK immigration around 1997 was mostly a result of decisions by Britain's government, not imposed by the EU. It was also a decision of Tony Blair's government, not imposed by the EU, to allow workers from the eastern European countries joining the EU after 2004 to work in the United Kingdom.  Although the more recent issues about refugees from Syria and north Africa who are seeking asylum in Europe and the United Kingdom have clearly added heat to the immigration issue, the underlying message here is that immigration--a rising share of it from within poorer countries of the European Union--has been shaking up the UK economy for the last 20 years.

Martin Ruhs offers an interesting overview of these issues in "Is unrestricted immigration compatible with inclusive welfare states? The (un)sustainability of EU exceptionalism," published in 2015 as Working Paper #125 for the Centre on Migration, Policy and Society at the University of Oxford. As Ruhs points out, a standard argument why high income countries cannot allow mass immigration from lower-income countries was given in a speech by Milton Friedman back in 1978. Friedman said:
"... it is one thing to have free immigration to jobs, it is another thing to have free immigration to welfare, and you cannot have both. If you have a welfare state, if you have a state in which every resident is promised a certain minimum level of income or a minimum level of subsistence regardless of whether he works or not, produces it or not, well then it really is an impossible thing.”
As Ruhs points out, this conventional wisdom doesn't quite summarize the issue accurately. Most intra-EU migrants are workers, not welfare recipients. He writes (citations omitted for readability:
The paper is not concerned with the intra-EU migration and social rights of EU citizens who are not workers, a group that has recently been much discussed in debates about alleged “benefit tourism”. This usually refers to claims that EU citizens move to other EU countries for the primary purpose of accessing benefits rather than working and contributing. Although popular in media and public debates across the EU, there is little evidence to support this claim. In the UK, for example, there is no evidence to support the idea that access to the welfare state is a major driver of EU immigration and EU migrants are significantly less likely than UK workers to access out-of-work benefits. In any case, the great majority of EU migrants across EU member states are labour migrants who qualify as “workers”.
But that said, the United Kingdom has a lightly regulated labor market compared to other high-income countries within the EU, and thus is more likely to attract unskilled workers. In addition, many of the benefits received by British workers are "non-contributory," meaning that they are paid out of general government revenues rather than out of payments from workers (and their employers). Ruhs sums it up this way:
In a free movement area with unrestricted labour migration across countries, the nature of the labour market plays an important role in shaping the scale of immigration in particular countries. More flexible labour markets tend to attract more migrant workers, especially for employment in lower-waged jobs, than more regulated labour markets. At the same time, the nature of the welfare state, especially the extent to which it provides non-contributory benefits, impacts on the net-fiscal contribution that new migrants make. In countries with welfare systems characterized by a high share of non-contributory benefits, low-skilled immigration will, ceteris paribus, create a smaller net-benefit (or greater net-loss) than in countries with welfare states that include a greater share of
contributory benefits.
Most economic studies (although not all) suggest that the native population of a country as a whole benefits from immigration. However, those who find themselves in most direct competition for jobs with the new migrants are more likely to incur costs. And the UK labor market and welfare policies, relative to the other high-income economies in the EU, are set up in a way that will raise the economic tensions from a more-open immigration policy. .

6) After the vote, a number of "Remain" proponent often emphasized that the margin seemed very narrow. I disagree. In big elections with millions of voters, a 51.9% to 48.1% vote is actually pretty decisive. In absolute terms "Leave" won 17.4 million votes and "Remain" had 16.1 million. Thus, it would have taken a swing of something like 700,000 voters to alter the outcome--and that's a lot of voters. As another perspective, President Obama won reelection in 2012 over Mitt Romney with 51.9% of the two-party vote, and that isn't (and shouldn't be) thought of as a narrow marginal victory, either.

7) Finally, consider in broadest terms the many ways in which the relationship between the United Kingdom and European Union, or between the United Kingdom and various subsets of European countries, might be arranged. Such relationships have many possible dimensions, involving trade, competition policy, environmental policy, immigration policy, workplace regulation, welfare policies, spending, taxes,  monetary policy, and others. This very multidimensional set of policy choices can't really be distilled into a binary choice labelled either "Leave" or "Remain." 

The Brexit vote doesn't determine what the eventual outcome of the renegotiated relationships between the countries will be, but it may alter the default negotiating positions of the two sides. In some sense, it's similar to the change that occurred in marital divorce laws. When divorce required that one party be found to be at "fault," the person in the marriage who least wanted to divorce had greater power to block the divorce. When divorce shifted to "no-fault," the party who wanted to get divorce had more power in the negotiation that followed. Similarly, before the Brexit vote, the presumption in Britain's negotiations with the EU, or other countries around the world, was that Britain would more-or-less follow the consensus of the rest of the EU. With that negotiating position, the European Union wasn't willing to concede much at all to Britain's Prime Minister David Cameron in negotiations before the Brexit vote. After the vote, the presumption will be that Britain will not follow the group, so any negotiations either with the EU or with other countries will have a different tone. The default negotiating position will be shifted. The United Kingdom will have less leverage in cutting international deals than the EU as a whole, but it will also gain greater flexibility.

Friday, June 24, 2016

China's Share of Global Economic Growth

How much any country or region contributes to global economic growth is based on two factors: the size of the economy of that country or region, and how fast that region is growing. China's economy is now big enough, and is (still) growing quickly enough, that it is now contributing as much to global economic growth at the advanced economies of the world. Here's a figure from the African Development Outlook 2016, which is an annual report written by the African
Development Bank, the OECD Development Centre and the United Nations Development
Programme.



The report notes:
China’s high growth has boosted global growth in recent years (Figure 1.3). From 2011 to 2015, China’s relative contribution to global growth was on a par with advanced countries, despite stagnating at a high level for a decade. India’s contribution to global growth has also risen since the early 2000s. However, China has contributed almost 30% to global growth in recent years, approximately 20 percentage points more than India. As India is more closed and still considerably poorer than China, it cannot yet offset the impact of China’s slowdown on global growth and trade."
I still fairly often run into an implicit attitude that the US, or perhaps the US and the rest of the high-income countries taken together, dominate the global economy and can set the rules. That's a very twentieth-century point of view.

Thursday, June 23, 2016

Global Overpopulation Circa 200 AD

Global population is now almost 7.3 billion. But almost two millennia in the past, when total world population was (roughly) 200 million people, concerns about overpopulation were already being expressed.

I am deeply ignorant concerning the early centuries of the Catholic Church, but even I have heard of Tertullian, for his formulation of Trinitarian doctrine and his nickname as "The Father of Latin Christianity." Here's a comment from his A Treatise on the Soul, in a  chapter where part of the heading reads, "The State of Contemporary Civilization" (from the 1868 translation by Peter Holmes):
Surely it is obvious enough, if one looks at the whole world, that it is becoming daily better cultivated and more fully peopled than anciently. All places are now accessible, all are well known, all open to commerce; most pleasant farms have obliterated all traces of what were once dreary and dangerous wastes; cultivated fields have subdued forests; flocks and herds have expelled wild beasts; sandy deserts are sown; rocks are planted; marshes are drained; and where once were hardly solitary cottages, there are now large cities. No longer are (savage) islands dreaded, nor their rocky shores feared; everywhere are houses, and inhabitants, and settled government, and civilized life. What most frequently meets our view (and occasions complaint), is our teeming population: our numbers are burdensome to the world, which can hardly supply us from its natural elements; our wants grow more and more keen, and our complaints more bitter in all mouths, whilst Nature fails in affording us her usual sustenance. In very deed, pestilence, and famine, and wars, and earthquakes have to be regarded as a remedy for nations, as the means of pruning the luxuriance of the human race ...

Of course, the fact that a writer in 200 AD had some mistaken views that the "teeming population" had already overwhelmed the natural resources of the the world doesn't mean that modern writers with similar views are incorrect in their concerns. Similarly, the fact that the economist Thomas Malthus was expressing concerns about global overpopulation back around 1800 when the world population had reached about 800 million doesn't doesn't mean that modern writers with similar views are incorrect in their concerns, either.

But these examples of the ongoing fear of overpopulation, and many more examples that can be given through history, do suggest that worries about overpopulation--together with an inability to imagine how the population might be fed--may represent an internal bias that is baked deeply into the human psyche. Sometimes biases turn out to be right, eventually--after all, even a stopped clock shows the correct time twice each day--but it's still worth being aware of their existence.