Saturday, 29 June 2013

Graph of the week: The Great Gatsby curve

I've posted this curve in my previous blog:
Source: Alan Krueger: "The Rise and Consequences of Inequality in the US"
(FYI: The Great Gatsby is a famous novel by an American author Scott Fitzgerald describing the decadence of the US upper classes in the "roaring 20-ies". There is (another) movie released about the book recently, staring Leonardo Di Caprio).

The source is Krueger's presentation from January last year at the Center for Economic Progress. You can see the slides here. The curve depicts a relationship between inequality (measured by the Gini index) and intergenerational earnings elasticity (if it's more elastic then people find it harder to move between income classes). The US, even though it's positioned pretty high (relative to other developed nations), is projected to be even higher if 2010 Gini were to be taken into account. This means that among the developed countries the US is by far the worst in its high inequality and its lack of upward social mobility, a phenomenon that is both worrying and puzzling for a country that once strived as the land of opportunity (and still is for many). 

But even more interesting than the curve itself was this graph pointing out to the reasons why inequality is said to have expanded in the past few decades:
Source: Alan Krueger: "The Rise and Consequences of Inequality in the US"
The primary reason is said to be technological change. Long behind are reasons such as international trade, minimum wage decreases, decline in unionization and rising immigration. All of these causes certainly did contribute (some more than others in my opinion) to the rising gap between incomes, but technological progress, and more importantly the failure to adapt ones skills to this progress made the situation worse.

The culprit for higher inequality, in my opinion, can be found in the interaction of several factors. Rapid technological progress in the past 30 years resulted in a typical creative destruction process where new jobs and careers made certain types of old jobs obsolete (automated work). Some of these obsolete jobs were outsourced to Asia (even though one phenomenon followed the other, this doesn't imply a direct link of causality; one has to test this hypothesis to see if it holds). In addition, a lot low-skilled labour entered the market (mostly via higher immigration) who failed to adapt to the changes and were left stranded either at lower paid jobs or long-term unemployed. Poor education played an important role as well, while stagnating wages in the "dying" sectors only widened the gap. On the other hand, the innovative part of the equation was working quite well taking advantage of the new technological wave, thus further raising the income of the top 10% (hence the great disparity between college and non-college degree workers). Its not hard to imagine how these two pulling forces (one downwards, one upwards) managed to widen the US inequality gap. 

But none of the aforementioned factors can be held responsible for the lack of social mobility. Furthermore, is low social mobility a consequence of higher inequality, or a cause? Or is it both? As some sort of a negative self-enforcing spiral. Whatever the reason, this is the axis of the curve that the US should worry about. The inequality issue is a result of a changing economy. Social mobility problems lie elsewhere. 

Wednesday, 26 June 2013

The inequality conundrum (1% and beyond)

Greg Mankiw wrote an excellent paper (forthcoming in the Journal of Economic Perspectives) that caused a lot of fuss around the blogosphere. This is hardly a surprise since the title of the paper happens to be: "Defending the One Percent". However, the paper is much less provocative than the title would imply. It is portrayed as a survey of economic ideas on progressive taxation and redistribution equiped with easy to understand examples and basic utilitarian concepts. I recommend it as an excellent argument not against redistribution (as this certainly isn't the case he's making), but as an attempt to shed more light in the controversial debate on inequality and how to approach it.

Mankiw drives a persuasive argument, similar to the one I've pointed out in a previous text, that the top 1% of income earners aren't rent-seekers or those that have inherited their wealth (an argument Stiglitz tries to deliver in his book "The Price of Inequality"; Mankiw reports his evidence as anecdotal rather than systematic). This argument is certainly true in developing countries; their rich classes are made up mostly of monopoly owners who received huge grants from the government (like Carlos Slim in Mexico for example). In the US, even though social mobility has shrugged in the past couple of decades, those on the very top are still entrepreneurs and innovators. Or in other words, people who create new value, new jobs and even give rise to completely new markets. Is there a reason to be jealous at those who gave us Google, Apple, Amazon, Facebook or Microsoft? Or Wall Mart? I understand the social ramifications of a crisis in which a lot of people have lost large amounts of their wealth (some of it is attributed, interestingly enough, to poor math skills), and all of a sudden having seen someone being significantly better off causes much more anger and discomfort. However, the innovations that have occurred since the 1970s made our lives easier (and/or cheaper), and those who made them certainly deserve to reap their rewards. And the beauty of an inclusive institutional environment is that these people could develop their ideas to the fullest and not fear their wealth being expropriated by anyone.

On the contrary, in a more extractive political environment, those who get rich do so by gaining favours from the government, or in an even worse scenario, by undergoing certain criminal activities. And sometimes both! 

But this didn't happen in America. 

A similar argument can be applied to those with unique skills (sports, music, acting, etc.) that the people are willing to pay to see or experience. This unique skill set extends to the banking industry as well, or any other multi-bilion dollar business. The demand, the competition and the risk are all global, and hence are the salaries. Otherwise we risk driving high-quality individuals away from the profession.

Mankiw builds upon this reasoning and explains how inequality in the US is the result of supply and demand for talented and skilled people. He calls upon the arguments of a book by Goldin and Katz (2008) "The Race Between Education and Technology":
"Goldin and Katz argue that skill biased technological change continually increases the demand for skilled labor. By itself, this force tends to increase the earnings gap between skilled and unskilled workers, thereby increasing inequality. Society can offset the effect of this demand shift by increasing the supply of skilled labor at an even faster pace, as it did in the 1950s and 1960s. In this case, the earnings gap need not rise and, indeed, can even decline, as in fact occurred. But when the pace of educational advance slows down, as it did in the 1970s, the increasing demand for skilled labor will naturally cause inequality to rise. The story of rising inequality, therefore, is not primarily about politics and rent-seeking but rather about supply and demand."
And in my own views (which I have emphasized several times on the blog; see here, here or here), these forces will continue to operate for a long time. Particularly if education continues to adapt slowly to the new pace of technological progress thus furthering the downward pressure on the labour market. If the demand for skills is higher than the supply inequality increases, more people start receiving transfer benefits, implying that less people acquire new skills, and the negative spiral continues (I touched upon this problem in a previous text). This is a crucial issue the US needs to work on and I believe this sums up the inequality debate more precisely than any other ideologically-driven argument. 

I don't want to go too much into the criticism delivered by Paul Krugman or the Economist (who do raise some valid points but fail to see the big picture), nor will I attempt to dispute the income inequality data (I do accept the premise that inequality has increased, although some of this increase can be explained by other factors than the ones we usually hear) but I will point out to the issues raised by Alan Krueger, the Chairman of the President's Council of Economic Advisers a year and a half ago. He has presented the so-called "Great Gatsby curve", which measures income inequality and intergenerational mobility, where the US occupies a worrying position having experienced both high income inequality and low social mobility. This remains to be one of the biggest problems in the US. Even though entrepreneurial spirits are still highly rewarded, it is much harder for those on the lowest income levels to advance to the top decile of income distribution than it was 30 years ago. Again, this is due to a whole range of factors including a decline in the quality of education (a public policy issue) and possibly higher immigration of low-skilled individuals who have failed to assimilate due to a number of reasons (a sort of a public policy issue). 
Source: Alan Krueger: "The Rise and Consequences of Inequality in the US"
Notice, btw, the countries clustered at the bottom - those who have both low inequality (low Gini) and low intergenerational earnings elasticity (meaning higher social mobility): the Nordics. How peculiar.

In conclusion, we should acknowledge that inequality and more importantly the lack of social mobility are causing a great line of distress in America. I'm not qualified enough to answer how to fix this, since the solution lies somewhere between the interaction of education, technology, labour market inefficiencies, informal institutions and cronyism. Another important point however is not to portray profits as something inherently negative and not to try and dissolve the one thing that still makes America great - the ability to turn great ideas into great business ventures. The entrepreneurial spirit is still strong in the US, despite a great deal of (unintended) efforts to constrain it. The US should struggle to keep its innovative society, over which it has the edge against the rest of the world, and at the same time reignite their once famous system of upward social mobility. Until then, cronyism combined with an inability to adapt to the ongoing technological progress will continue to produce a bleak future for the US.

Saturday, 22 June 2013

Graph of the week: Global corporate tax rates

From the Financial Times (it's an interactive feature so you can click on the country to see its specific rates)

It is interesting to note that corporate tax rates have decreased on average by 3 percentage points in the last couple of years for the OECD countries. However the biggest decrease was done just before the onset of the crisis, by 2008. Afterwards corporate taxes slightly increased (due to an immediate response to the crisis) and have, on average, started to decrease slowly since 2010. Some would say this was evidence of austerity, at least the "good" type of austerity where taxes go down combined with spending cuts. However spending cuts in OECD economies were scarce, to say the least, while tax cuts were only applied to corporate taxes while personal income taxes, along with all other forms of taxes like VAT, shot up in some countries. As an effect personal consumption was hit hard, since prices were going up, while people were earning less. 

International competitiveness argument

Going back to the corporate tax rates, still among the highest countries are the US and Japan (40% and 38% respectively). Much was said on how corporate tax rates are a good comparison mechanism for international competitiveness, since investors tend to use these rates to make their decisions, which is particularly applicable concerning FDI flows in developing countries. However, as I've mentioned in an earlier text, institutional strength plays an even more important role for investors choosing where to invest. Corporate tax rates are only one side of the story: 
"It's justifiable to have high tax rates in highly efficient and institutionally strong countries like Denmark, Germany or Sweden [or Japan or the US], since they have other factors that attract capital, investments and motivated individuals into these countries. I'm not saying lower taxes wouldn't help them further increase their competitiveness (as they did in Sweden), but their size of government is somewhat justified by its efficiency in providing public goods and not expropriating wealth. These are the two essential functions of the government anyway, so as long as investors and individuals perceive a stable institutional environment where their wealth won't be diminished by bureaucrats, corruption or similar factors, I guess they would be willing to accept higher taxes.  
For countries like Greece or Croatia ... this certainly isn't the case. Their states are seriously inefficient in providing public goods or in attracting investors via institutional stability, so their emphasis must be either on changing this serial inefficiency of the government from within (via public sector reform) or through lowering the overall tax burden thereby making itself more competitive on the international market."
Note: the quoted excerpt was from a text on personal tax rates. Some countries top the list in both corporate and personal tax rates. Others have a system where labour tends to be much more taxed than capital, while some achieve a balance in the lower equilibrium of both low corporate and personal taxes. 

Also among the top rated are countries like Argentina (35%), Pakistan (35%), Honduras (35%), Angola (35%), Zambia (35%), RSA (34.6%), Brazil (34%), Venezuela (34%), Belgium (34%), France (33.3%), Colombia (33%), India (32.4%), Italy (31.4%), Spain (30%), Mexico (30%). Most of these countries should obviously seek to decrease their high corporate tax rates to attract new investments. They have no way to justify their high taxes with the service (or should I say lack of service) they offer to investors. A weak institutional system like the one in African countries, or some South American countries cannot offer safety, stability or confidence to investors. Even though for some of these countries lower tax rates wouldn't help them achieve inclusinvess, they at least would send a different signal to investors worldwide and perhaps attract a bit more of foreign capital which would eventually help them achieve at least some higher level of institutional stability. 

Take, for example, corporate tax rates in new European countries, ranging from 10% in Bulgaria, 16% in Romania, 19% in Poland, Czech Republic and Hungary, 15% in Latvia and Lithuania, and 21% in Estonia. These countries, and many others from the former Soviet bloc, have realized that until they accumulate enough democratic capital and a high enough level of institutional stability, they can only be competitive via lower corporate rates. 

For the record economically free Nordic countries all have competitive corporate rates below 30%, with Sweden having 22%, Iceland 20%, Finland 24.5%, Denmark 25%, and the only slight exception Norway has 28% (due to the fact that Norway receives 12% of GDP in revenues from corporate taxes - which is primarily because of a lot of oil companies operating there.) In the Nordic example, economic freedom is combined with lower tax rates than in similarly strong institutional environments of other European countries, so no wonder they were able to attract much more capital and hence produce much more growth and value added. Eurozone countries should take note. 

Tuesday, 18 June 2013

Online job markets: another game changer

Looking at the supply side of the job market, several online exchanges have emerged attempting to link the demand and supply of workers more successfully across the globe. In particular, online job markets are an increasingly popular way to fight domestic monopolies (or overpriced services) by introducing global competition in the local market. The pool of offered jobs varies from web programming, mobile apps, translation, project management, design, media, to more than 35 different types of jobs. The most important implication is that one does not need to pay the local rate for the service, rather one can simply find the needed workers online and hire them at a much lower rate. The Economist has the story: 
"...According to his Elance page, “oswaldo g”, from Colombia, has already completed 31 jobs, earning a combined $4,193 and a satisfaction rating of 4.9 (out of 5). He quoted a tempting $16.44 an hour—though not as tempting as the five bids on oDesk (three of them by five-star-rated workers), from Argentina, Brazil, Indonesia, Mexico and the Philippines. Each of them offered a flat rate for the completed job, ranging from $33.33 down to just $22.22. 
Such whopping price differences help explain why these and other work marketplaces have been growing fast. Last year the value of this sort of online work topped $1 billion for the first time; it will double to $2 billion in 2014, and reach $5 billion by 2018 ... ODesk was the matchmaker for 35m hours of work in 2012 (over 50% more than in 2011), divided between 1.5m tasks, at a total cost to the employers of $360m. The value of work on Elance rose by 40% in 2012 to exceed $200m for the first time. ...

"... Depending on the definition, between one-fifth and one-third of American workers are now freelancers, contractors or temps, up from 6% in 1989, according to Accenture, a consultancy. Yet the $1 billion of work done through talent exchanges in 2012 is only one-third of one percent of the estimated $300 billion spent worldwide on these “contingent workers”, which suggests that talent exchanges are still barely scratching the surface. However, those they enroll seem to enjoy the experience, which is why the numbers signing up are growing fast."
The supply of such jobs is, of course, limited in its applicability. Not all jobs can be done online, across continents or countries. This is reserved for highly specific jobs (administrative, creative or technology-based). However, even jobs like household repairs can be found this way. There are websites out there specialized for hiring people to make deliveries, assemble furniture or even pick up groceries, but this is hardly a new idea. It is as old as outsourcing. As is the fact that online search for workers can prove to be very helpful for start-ups. So why is it interesting? Simple, it's a cost-effective way to introduce competition to local markets, thus propping up both domestic demand and company revenues, while at the same time being exposed to a global pool of talents (hence the term "talent exchange"). 

But the most important implication is the reputation capital among the employees. They can use the experience they gained doing such work to get a "real", desk job, which could become a potentially useful mechanism for youth during a business cycle downturn. Like on eBay or Amazon, you seek to buy stuff from people with high positive feedback, in order to ensure that you get what you ordered. The same reasoning is applied here; those who have ensured high reputation will find it more likely to get new jobs (both on and offline). In a more developed pattern of this market, one can also debate the issue of market entry. How do new entries ever get jobs (since they have no prior jobs done on the platform)? Uploading your CV is one possible solution. If you misrepresent yourself it will soon be discovered. It's all about feedback. 

Reoccurring consequences

One thing people will worry about is whether this will further the trend of lower wages in rich countries and shift more work towards poor ones? Yes, it most certainly will. Is this necessary a bad thing? No, not necessarily. 

Including for disruptive technologies and the pre-crisis trend of moving jobs abroad, it is true that such attempts will only accelerate the transition of jobs between countries and between skills. Claims have been rampant that the West is advancing too fast for its citizens. Not many are willing to accept the fact that a few decades from now many old, common jobs will be lost forever. But isn't this a predictable, reoccurring scenario? Many jobs in the past such as a typesetter repairmen, telephone operator, or shoeshiner don't exist any more. Video stores are also on the verge of existence. Cinemas however are still holding on, but they too have realized that in order to attract people to go see a movie, they need to offer a different service including the quality of experience. If not, one can always go to Netflix or a similar provider and watch the movie at home. With the rise of internet the demand (and supply) for many products and services has changed, particularly if this can be done in the comfort of your own home, and more importantly, for a much cheaper price. 

If a stainless, self-cleaning shirt ever gets invented, the dry cleaning business will cease to exist. So will the washing machine manufacturers. Does this mean we should strive to protect these jobs? Of course not. The alternative is cheaper and more convenient for us as consumers.

However, when a similar reasoning is applied to jobs in industry or manufacturing, then all of a sudden a many people think these jobs should be protected, since our economy can only grow if it has a strong industrial base. This is a typical misconception that a substantial majority of the people fall under. As I've already pointed out in a previous text, back before the First Industrial Revolution many though the same way of agriculture and simply couldn't see all the benefits of mass industrial production. They feared of being replaced by machines. And rightfully so, because they were replaced by machines (!). Which is why, on the other hand, they could specialize in new types of jobs and eventually (over the next 200 years) significantly increase their living standards. This is a generational shift I often emphasize and should always be examined from a broader picture. 

Today, industry and manufacturing (disputed 300 years ago) are the ones seeking protection and are the ones we apparently can't do without. But who is to say we won't have industry anymore? We most certainly will, but it will take a substantially lower amount of the workforce to do produce all the stuff that we need. Just like with agriculture today. It was transformed from a labour-intensive to a capital-intensive industry, as will happen to many others. The change in these specialization patterns, as well as the adaptation of new online markets to meet the new demand, will change the way our society works. That is, after all, the beauty of an Industrial Revolution.

Friday, 14 June 2013

Graph of the week: An influx of college degrees

Over the past three decades the US has experienced a steady increase of College graduands. New York Times has the story: 
Source: New York Times
"The increases appear to be driven both by a sharp rise in college enrollment and by an improvement among colleges in graduating students. The trends could bring good news in future years, economists say, as more Americans become qualified for higher-paying jobs as the economy recovers. 
College attendance has increased in the past decade partly because of the new types of jobs that have been created in the digital age, which have increased the wage gap between degree holders and everyone else. The recent recession, which pushed more workers of all ages to take shelter on college campuses while the job market was poor, has also played a role."
I made this point several times before, most precisely in an article from January last year, entitled "Percentages and inequality: Where is the middle class?". The increase of the trend (most strongly) started in the beginning of the 1980s, right about the same time when the level of US inequality also started to rise sharply. And the linkage to the new types of jobs in the digital age, and even before that in the services industry, is also correct. This has put significant pressure on rising inequality between those who gained a college degree and could now obtain higher paid jobs in new, booming industries, and those who haven't and who remained on lower salaries. In addition, the low- and middle-income workers have began transferring their earnings from cash to non-cash benefits such as health insurance and pensions, which don't tend to show up as taxable income (thereby resulting in a lower income than it really is for the low-and middle-income workers).  

This surely isn't enough to explain the rising inequality in the US, but it certainly is one part of the picture. Moreover, who is to say such a turn of events (more college graduates, new types of jobs) was bad for the economy? Especially for the >10% more people who gained their college degrees in the past few decades (in total 33.5% of Americans hold a College degree). Finally, this piece of information is also crucial: 
"The unemployment rate for graduates of four-year colleges between the ages of 25 and 34 was 3.3 percent in March, according to the Bureau of Labor Statistics. For high school graduates in the same age group who had not attended college, it was 11.8 percent. 
Today’s premium for college degrees is caused partly by increasing selectiveness among employers about whom they hire and screening based on education even for positions that do not require higher skills. But jobs themselves have changed, too. 
“Think about jobs 15 years ago that didn’t need any college education ... Many of them now do ... “Maybe you don’t need a bachelor’s to change bedpans ... but today if you’re an auto mechanic, you really have to understand computers and other technical things.”
This all bounds down well to the fact that the technological shock of the ongoing Third Industrial Revolution has changed the rules of the game on the labour market. As it always does. Many have adapted to it, and hence the rise of college degrees. Having in mind the upcoming disruptive technological shocks, I expect to see an even steadier rise in college enrollment as new types of skills become necessary. How this will impact inequality, I'm not quite sure, but I do expect a lot of resistance towards this change, even as more and more people start obtaining higher skills. 

Tuesday, 11 June 2013

Disruptive technologies

A new report from McKinsey Global Institute talks about the potential impact of new, disruptive technologies which are already being developed. They identify 12 technologies that are most likely to have the strongest impact on the global economy, with respect to their benefits and challenges: 
Potential economic impacts of new technologies
Source: McKinsey Global Institute Report
"We estimate that, together, applications of the 12 technologies discussed in the report could have a potential economic impact between $14 trillion and $33 trillion a year in 2025. This estimate is neither predictive nor comprehensive. It is based on an in-depth analysis of key potential applications and the value they could create in a number of ways, including the consumer surplus that arises from better products, lower prices, a cleaner environment, and better health."
The crucial point is that all of these technologies are already known to us. They aren't fictional or unimaginable, they already exist in early stages of development, and by estimating their rates of progress, one can easily predict their impact over the next 10-12 years. 

The technologies are the following: 

1. Mobile Internet
2. Automation of knowledge work: intelligent software that can perform complex knowledge tasks (think of the impact on the labour market - both positive and negative)
3. Internet of Things: low cost sensors for data collection, monitoring and process optimization (think of the current US surveillance scandal
4. Cloud technology (iCloud; soon we'll be able to use advanced software and hardware (!) over the internet)
5. Advanced robotics: for performing delicate tasks - such as surgery for example
6. Autonomous vehicles (Google driverless car has already completed 500 000km accident-free)
7. Next generation genomics: low-cost gene sequencing; great potential in the health industry, in improving diagnostics and treatments, but also in agriculture and in the creation of high-value substances like ethanol or biodiesel from E.coli bacteria. 
8. Energy storage: new types of batteries that store substantive amounts of energy; can be used to power consumer electronics (cell phones, laptops, cooking appliances, TVs, etc.) or even electric vehicles (even by making them more affordable). This even has potential to make electricity more affordable in developing countries. 
9. 3D Printing: my personal favourite (creating objects by "printing" digital layers of material). Perhaps not in the next 10 years, but more likely 50 years is this technology going to reap its biggest rewards. I predict this to be the peak of the Third Industrial Revolution. 
10. Advanced materials: materials of higher strength, durability, conductivity; nanomaterials which are self-repairing or self-cleaning (think of our clothes as being self-cleaning - a clear example of a disruptive technology on the washing machine manufacturers and dry cleaning businesses)
11. Advanced oil and gas exploration and recovery: (fracking and shale gas - it could restore the US as the leading world oil exporter)
12. Renewable energy: the constant quest for endless source of power; a very popular and vastly misinterpreted issue; this one is suppose to surpass the previous one, however not very likely in the next 10 years, but in a much longer time span. The estimate is that the costs will decrease by 85% while capacity will increase by 19 times. 

Some of the economic estimates for these technologies are off the charts. For example the mobile internet technology is suppose to cut down 70% of global employment costs (in terms of transaction costs), which is estimated to be worth an astonishing $25 trillion. The effect on GDP related to mobile internet is estimated to be 1.7 trillion. Automation of work is likely to bring in around $9 trillion, internet of things in terms of operating costs in industries like mining or manufacturing is to bring $36 trillion, advanced robotics around $6 trillion, while next generation genomics is suppose to cut global health-care costs by $6.5 trillion. The autonomous vehicle is estimated to bring $4 trillion in revenue to automobile industries, energy storage around $2.5 trillion, cloud technology $3 trillion, fracking and renewables each around $3.5 trillion, while 3D printing is estimated to bring in $11 of global manufacturing GDP. The estimates are total sums across the next 12 years, and are all global.  

There were also a couple of technologies they didn't include but that almost made the list simply because they are unlikely to disrupt the global economy in the next decade. These are nuclear fission, fusion power (even more potential than fission and all the renewable energies we can think of), carbon sequestration (capturing and hence reducing CO2 in the atmosphere), advanced water purification, and quantum computing. Their time is yet to come. 

These technologies reminded me of an excellent book by a brilliant physicist Michio Kaku, "Physics of the Future", where he tries to paint the picture of how the world would look in 2100, based purely on which technologies we have already started developing and researching, thus predicting the speed of their development. The one that the McKinsey report doesn't mention and which I find particularly intriguing is magnetic technology (which is understandable since Kaku predicts that not until 2070 will we be able to use this technology commercially). To anyone interested in technology and popular physics I recommend this fascinating book. 

Don't be afraid of the light 

The report doesn't disregard the challenges however, it emphasizes that they are tremendous. They even stressed out several principles to help businesses and governments plan and adapt to the effects of disruptive technologies. The dramatic change in the current status quo can even lead to a change in the comparative advantages of some nations. This is both a challenge and an opportunity for some developing nations to take advantage of. In terms of job losses they will most certainly be significant in the industries which will experience the biggest direct impact (like manufacturing and automated work). But this is a clear signal that the society should adapt to the new era of human development; an era based on innovation and ideas, not old technologies of massive industrialization. Just like industrialization has changed the patterns of labour market specialization from agriculture to industry, so should the new industrial revolution change the pattern of specialization from industry to innovation and technology. 

The standard argument against it is: "not everyone is suitable to work in IT, finance or services, we need to have people working in production and industry - this is, after all, the main driver of exports and hence economic growth". So was agriculture in the pre-industrial revolution era. People at the time simply couldn't grasp all the potential benefits the future generations could achieve (and I'm not talking about the modern society either, I'm talking about a single generational change back in the 18th century). We have the same problem now. Most people aren't visionaries (neither am I). People base their anticipations on what they see around them (which is often very narrow). A natural response to massive job losses in manufacturing is to blame it all on "neoliberalism" or some other culprit they can think of. But all it takes is to look at the bigger picture. As industry slowly but steadily surpassed agriculture 200 years ago, a lot of people changed their line of work. Today in the West we have a very small amount of people employed in agriculture. And yet these 3% or 4% of the population are able to produce enough food to feed the rest of us. The same thing will happen to industry a few decades from now. A very small number of people will be able to produce enough goods to keep the demand of the society satisfied. The rest will be able to fulfill their potential in a variety of different lines of work; the change in their incentives and career paths will happen in their childhood. Unlike their parents they will have a much wider set of choices to choose from. And that's the technological progress I'm looking forward to. 

Friday, 7 June 2013

Immigration; an economic argument

The immigration debate has been a long standing issue between economists and the general population. I have yet to encounter an economist who is against it, yet many in the general population fear it claiming that immigrants take away domestic jobs and/or social security benefits, in addition to lowering the average domestic wages (since they are prepared to work for less). In Bryan Caplan's excellent book "Myth of the Rational Voter" he stresses that the division of opinions on immigration is the largest between economists and non-economists (the second one is openness to trade, on similar principles really). Even though there exists a whole range of original research that has proven time and time again that immigration leads to better skills in the economy, more specialization, higher not lower wages, that immigrants tend to be more entrepreneurial than average, not to mention bring in more competition, I however feel that many in the population still fail to understand this as they get scared of more competition, which is, in a way, a natural human response. 

From a social point of view many arguments can be find against immigration (e.g. higher crime rates  in areas populated mostly by immigrants) however from a purely economic point of view, there aren't many against it. At least none that make sense. In his column for the NY Times a few months ago, Tyler Cowen wrote about egalitarianism of economics and economists, with a profound example on immigration: 
"One enormous issue is international migration. A distressingly large portion of the debate in many countries analyzes the effects of higher immigration on domestic citizens alone and seeks to restrict immigration to protect a national culture or existing economic interests. The obvious but too-often-underemphasized reality is that immigration is a significant gain for most people who move to a new country. 
Michael Clemens, a senior fellow at the Center for Global Development in Washington, quantified these gains in a 2011 paper, “Economics and Emigration: Trillion-Dollar Bills on the Sidewalk?” ... He found that unrestricted immigration could create tens of trillions of dollars in economic value, as captured by the migrants themselves in the form of higher wages in their new countries and by those who hire the migrants or consume the products of their labor. For a profession concerned with precision, it is remarkable how infrequently we economists talk about those rather large numbers. 
Truly open borders might prove unworkable, especially in countries with welfare states, and kill the goose laying the proverbial golden eggs; in this regard Mr. Clemens’s analysis may require some modification. Still, we should be obsessing over how many of those trillions can actually be realized." 
From the aforementioned paper, the following table sums up some of the empirical estimates of efficiency gains from partial elimination of barriers to labour mobility: (I recommend the paper, it has a few very good intuitive points)
Source: Clemens, M. (2011) Economics and Emigration: Trillion-Dollar Bills
 on the Sidewalk? Journal of Economic Perspectives, Vol 25(3) pp. 83-106;
Table 2
As Cowen points out even if some of these figures are overestimated, and even if complete removal of barriers is in some cases unlikely or implausible, the estimated efficiency gains would still be positive and significant. And as Clemens suggests even the partial removal of barriers to labour mobility would initiate larger welfare gains than, for example, a removal of barriers to trade in goods or capital flows, thus implying that we are seriously underestimating our potential wealth. The graph below is a neat micro approach to show this total welfare gain: 
Source: Clemens, M. (2011) Economics and Emigration: Trillion-Dollar
Bills on the Sidewalk? Journal of Economic Perspectives, Vol 25(3)
pp. 83-106; Figure 1
Where D and D* are the labour demand curves, the two vertical horizontal lines represent wages in low-and high-wage countries, and the horizontal line (OO*) is the labour supply. As you can see from the description beneath the graph, the global welfare gain to society is the shaded area (sum of a+e). And this is not the case of completely free migration (which would equate the wage rates). No, this is just the effect of workers LL' migrating abroad. Their emigration has generated a slightly lower wage rate in high-income countries, and has slightly increased the wage rate in lower-income countries. Migrants gain, non-migrants gain in low-income country, lose in high-income country, while owners of factors of production - the opposite. The loses to non-migrants could be offset by downward shifts in demand curves. If labour demand becomes elastic in high-income countries then the total gain shrinks. 

There are indeed losses to non-migrant labour in high income countries (area d), but the net benefits to society significantly outweigh the losses. Think of this graph the same way you look at the graphs denoting gains from trade, or losses from tariffs or quotas. In a similar microeconomic setting, the theory teaches us that even though imposing tariffs on foreign imports will result in a benefit for the producers of the particular good, their gain is significantly less than the loss to society who has to pay a higher price for that good. The same reasoning is applied here. 

So how should we cope with the necessary loss of jobs of domestic non-migrant workers in high-income countries? The same way we cope with job losses in the West incurred by moving production abroad. The consequential loss of jobs wasn't immediate; it got held off until the current crisis had struck. And now the problem is structural. But in the entire decade before the crisis we could have observed this trend, and adapted to it. The reason why the economy didn't adapt to the new patterns of specialization (both international and domestic) was a series of constraints and interest group pressures that have prevented this then and are still preventing it now. Unfortunately the same forces would operate if barriers to labour mobility were removed (partially or completely). 

As for the wage stagnation problem in high-income countries, Greg Mankiw has a good comment:
I understand that not all workers in the United States will embrace foreign-born competitors with the same equanimity as a Harvard professor. That is especially true of those with fewer skills and opportunities.

Over the last several decades, for the most part, the wages of workers without any higher education have stagnated, while the wages of those with advanced degrees have risen. The main forces driving these trends are technological change, which tends to increase the demand for skilled workers relative to unskilled workers, and, to a lesser extent, international trade. But the immigration of unskilled workers from abroad may be a contributing factor, and one that is all too obvious when these immigrants vie for the same jobs as unskilled workers born in the United States.

The best solution to wage stagnation is to promote educational attainment among Americans. That’s easier said than done, but the task is imperative nonetheless. We won’t substantially help unskilled workers who are already here by denying the American dream to others who wish to pursue it.

Monday, 3 June 2013

How much would you pay for publication at the AER?

From the EJMR
"I have a new paper that I consider my best work. For a variety of reasons, the marginal return professionally for this paper is very small for me. But I think it has an excellent shot a top journal, I would estimate 1/3 at the AER (I have published there before). So I am offering it for sale. Here are the details: 
1. This paper is not yet posted on my website. It has not been circulated and I have not yet presented it. 
2. The paper is applied micro although I will sell it to anyone. 
3. Email bids to Use a fake account and make sure to send no revealing information. 
4. Your bid is for an AER or QJE. If it ends in Restud, you pay 65%. If it ends in the Journal of Labor Economics, Journal of Public Economics, or EJ, you pay 35%. Other journals are negotiable. You can choose the submission path as long as it starts with one of the top journals. 
5. I will contact the winning bid (or highest real bid) to arrange an in person meeting in Philly at the meetings. We will never leave a paper trail.
6. Half of payment is due with a revise and resubmit. I will also make the needed changes. The final half is due with final acceptance. 
7. Spare me any discussion of the ethics here. I am dead serious and I will not be commenting further on this thread."
Is this a troll, an experiment or is it for real? This was the focus of the discussion behind the quoted thread on the EJMR page (btw I recommend this page to my readers - check it out, it a forum that has info on the econ job market, conferences, journal submission timing etc.). Alex Tabarrok estimates a price of $50,000 for publishing at a top journal like AER or QJE, particularly for someone who's a new PhD graduate and wants to move up the academic ladder quickly. I would say, seriously overpriced! And definitely not worth the risk. 

The ethical ramifications are useless to discuss, as the author suggests. Intellectual property is a good like any other and can be bought and sold at the owner's will. But the real question is how big of a market are we talking about? Is the demand for top-tier papers really that big? At first glance one would say definitely; academics need it for their careers (some people were commenting they were only a few top-journal papers away from tenure at their Universities), and after all who wouldn't want their work being published at the American Economic Review or Quarterly Journal of Economics? For those unaware, these are the top journals in economics in the world, alongside Econometrica and Journal of Political Economy - on various rankings these always come on top (see here, here or here). However, if you think more thoroughly the question is how would one get away with this? I mean, to publish a random (brilliant) paper that has nothing to do with the research you did so far in your career, and even more, to try and use it for tenure? I don't think this would quite qualify. One would easily get caught, meaning that your net return would be significantly negative (you paid money AND you lost your academic credibility). Even if you're at the beginning of your academic career it would be rather suspicious if you all of a sudden produce a top-tier paper in a subject you did noting on before. People will be able to see your PhD topic, after all. So this pretty much narrows it down to those who did research on applied micro. But then the question is, what kind of research? Applied micro is a very broad category and is rather vague. I can think of a lot of issues that can be classified as applied micro. The probability that the paper for sale corresponds to the field of research one of the people who saw this "ad" did is actually really small (I can calculate it but I'd have to use too many assumptions - e.g. that every economist who published a topic in applied micro has seen it, then I'd have to narrow down the definition of applied micro, and so on). This also means that the market for this paper is very, very small.

Anyway, I suggest someone pays close attention to applied micro papers published at the AER or QJE in the next year or so. Perhaps this was the initial incentive of the seller? To foster greater scrutiny on the papers that get published in these journals. Maybe, maybe not. We may never know...