Slok on Greek Wages

Source: Torsten Slok

Torsten Slok, prodigious producer of graphs, sends this one along.

A section of macroeconomics holds that nominal wages are sticky, pretty much forever. Hence, countries like Greece need their own currencies so they can depreciate them. Somehow this didn't produce great prosperity the first, oh, 147 times Greece tried it, but anyway, it's common to bemoan how terrible it is for Greece to be part of the euro because wages can't fall and it can't depreciate.

Or not, as the graph shows.


Now, obviously, it took 5 years, and those haven't been pleasant 5 years. A devaluationist might counter that an exchange rate could have fallen 25% overnight. But this graph hides the composition. I would guess that not all Greek wages went down by the same 25% -- that some are going down more than others, and that like all prices the dispersion is more interesting than the average. That process -- moving out of inefficient businesses (and government, where wages have also fallen) and into better ones -- is always painful and would not happen under a quick depreciation.

So, before critics go all nuts, I'm not making a case that wages are as flexible as exchange rates -- clearly not. But the common view that nominal wages may never fall, and eternally sticky wages account for years or decades of stagnation, just isn't true per the graph.

A slight complaint -- the graph title is "competitiveness," not "relative wages." There is a lot more than wages in "competitiveness," like, say, productivity. You can be "competitive" with very high wages if you have a dynamic, efficient, high-productivity economy. And "competitive" is a terrible word anyway -- it has a very mercantilist ring, which is not how trade works.

Immigration and wages

Following up on my last immigration post, a thought occurred to me.

The most common objection is the claim that letting immigrants in will hurt American wages. Before, I've addressed this on its merits: If labor doesn't move, capital will. Your doctor's lower wages are your lower health costs. Immigrants come for wide open jobs, and to start new businesses. And so on.

What occurs to me this morning is the inconsistency that conservatives make this argument.

Suppose it were true. Would that mean the government should keep out migrants to keep American wages up?

Well, do you believe that the Federal government should mandate a large minimum wage, to raise American’s wages? Do you believe that the Federal Government should ban imports and subsidize exports, to raise American’s wages? Do you believe that the Federal Government should give more power to unions, to raise American’s wages? Do you believe that the Federal Government should pass even more stringent rules in its own contracts to pay higher wages? Do you believe that the government should pass more licensing restrictions, to lessen competition and raise American's wages? Should Illinois restrict people Indianans working in Illinois, to keep up Illinoisans' wages?

These are all the same sorts of steps. At least people who believe all these wrong things believe them together. It makes no sense whatsoever to oppose, correctly, all of these counterproductive economic interventions, but to support exactly the same intervention aimed at immigrants.

As usual in the immigration debate, incoherence is a sign that the real arguments are not the ones people are talking about.  On both sides. 

The optimal number of immigrants

Hoover's Peregrine asked me to write an essay with the title, "What is the optimal number of immigrants to the U.S?"  (Original version and prettier formatting here. Also a related podcast here.)

My answer:

Two billion, two million, fifty-two thousand and thirty-five (2,002,052,035). Seriously.

The United States is made up of three and a half million square miles, with 84 people per square mile. The United Kingdom has 650 people per square mile. If we let in two billion people, we’ll have no more population density than the UK.

Why the UK? Well, it seems really pretty country and none too crowded on “Masterpiece Theater.” The Netherlands is also attractive with 1,250 people per square mile, so maybe four billion. Okay, maybe more of the US is uninhabitable desert or tundra, so maybe only one billion. However you cut it, the US still looks severely underpopulated relative to many other pleasant advanced countries.

As you can see by my playful calculation, the title of this essay asks the wrong question.

What is the optimal number of imported tomatoes? Soviet central planners tried to figure things out this way. Americans shouldn’t. We should decide on the optimal terms on which tomatoes can be imported, and then let the market decide the number. Similarly, we should debate what the optimal terms for immigration are – How will we let people immigrate? What kind of people? – so that the vast majority of such immigrants are a net benefit to the US. Then, let as many come as want to. On the right terms, the number will self-regulate.

Econ 101: Figure out the price, set the rules of the game; don’t decide the quantity, or determine the outcome. When a society sets target quantities, or sets quotas, as the U.S. does now with immigration, the result is generally a calamitous waste. With an immigrant quota, an entrepreneur who could come to the U.S. and start a billion dollar business faces the same restriction as everyone else. The potential Albert Einstein or Sergey Brin has no way to signal just how much his contribution to our society would be.

Why fear immigrants? You might fear they will overuse social services. Morally, just why your taxes should support an unfortunate who happened to be born in Maine and not one who happened to be born in Guadalajara is an interesting question, but leave that aside for now. It’s easy enough to structure a deal that protects the finances of the welfare state. Immigrants would pay a bond at the border, say $5,000. If they run out of money, are convicted of a crime, don’t have health insurance, or whatever, the bond pays for their ticket home. Alternatively, the government could establish an asset and income test: immigrants must show $10,000 in assets and either a job within 6 months or visible business or asset income.

In any case, welfare is a red herring. Immigrants might go to France for a welfare state. The vast majority of immigrants to the US come to work, and pay taxes. Overuse of social services is simply not a problem. But if you worry about it, it’s easy to structure the deal.

You might fear that immigrants compete for jobs, and drive down American wages. Again, this is not demonstrably a serious problem. If labor does not move in, capital – factories and farms -- moves out and wages go down anyway. Immigrants come to work in wide-open industries with lots of jobs, not those where there are few jobs and many workers. Thus, restrictions on immigration do little, in the long run of an open economy such as the US, to “protect” wages. To the extent wage-boosting immigration restrictions can work, the higher wages translate into higher prices to American consumers. The country as a whole – especially low-income consumers who tend to shop at Wal-Mart and benefit the most from low-priced goods – is not better off.

And finally, if it did work, restricting labor benefits some American workers by hurting Mexican workers. Is it really America’s place in the world to take opportunities from poor Mexicans to subsidize our workers’ standard of living? We are a strange country that rigorously prohibits employment discrimination “because of birthplace, ancestry, culture, linguistic characteristics common to a specific ethnic group, or accent….” [EEOC] and then requires such discrimination because of, well, birthplace.

But if that’s a worry, fine. The government could license protected occupations such that only US citizens can hold the protected occupational licenses. Too intrusive? Well, that’s what we’re trying to do by keeping people out, and good policy is not produced by putting nice appearances on nasty policies.

More seriously, one can worry that our society quickly absorbs educated people: engineers, programmers, venture capitalists, MBAs, and professors, but does not quickly absorb people with less education. If the low-skill, low-assimilation objection has merit, let in anyone with specific skills and credentials. Let’s talk about the terms, not the numbers.

Maybe you worry about social values. One can easily demand that immigrants speak English, and have a vague understanding of American institutions, history, and law, though we don’t require this of our citizens. Fine. Let’s talk about the deal, not the numbers.

Maybe you worry, how will we build homes and find jobs for all these people? “We” don’t. They will. Markets, not the government, already provides homes and jobs for citizens. And anyway, aren’t we supposed to be worried about our stagnant economy? Everyone wants more housing construction in the US, yet there are only so many people who need only so many houses. Imagine the construction boom from millions of additional immigrants each year. Our ancestors did not need the American Indian Federal Government to provide them jobs or build them houses. Neither do new immigrants.

The first order issue facing the US is the ridiculous number of talented people who are forced to leave after visiting, often getting engineering diplomas from US colleges, and our mistreatment of de-facto immigrants who are here. Anyone who gets a degree here should be able to stay. Instead, we kick them out. Another 11 million people are here, working hard, paying taxes, owning property, but scurrying around in semi-legal status. This is a national embarrassment. We criticize other nations for “apartheid” when they deny legal status to people who have been living there for decades, or even generations. Yet one in twenty people living within US borders suffers the same fate.

If you’ve been here x years, have a job, stayed out of trouble, then you should get to stay. If we let everyone else who wants to migrate on these same terms, then we don’t have to worry about the unfairness of letting illegals “jump the line.” Get the terms right, and there will be no lines and no unfairness.

Let’s talk about the deal, not the numbers. For every objection to open immigration, it’s easy enough to find terms of the deal to resolve the matter. The right terms will allow the optimal amount of immigration to settle itself, so that no apparatchik in Washington has to come up with a number. Once we get the terms right, every person who can benefit our society will come, and America will truly be a great nation of great immigrants again.

*****

If I were to write it again, I might add doctors and nurses. While revising "after the ACA," an essay on health issues,  I realized how immigration and health economics are linked. We keep doctors and nurses out. And we bemoan how expensive health care has become. Well, immigration restrictions are designed to keep American wages up, and there they are, working as promised. But keeping doctor wages up means keeping your health costs up. The principle applies everywhere.

I also have been looking for a more forceful analogy for  the plight of 11 million "illegal alien" (right) or "undocumented workers" (left) (I would like to find a neutral, unpoliticized word). Here we have 11 million people, living among us, often for decades or their whole lives, working here, owning houses and cars, starting businesses, paying taxes, taking part in our society... and yet with few legal rights. They can't really sue if swindled, they certainly can't vote on how the society they live in works, they can't get driver's licenses, they live in constant fear.

Watching some of the civil rights anniversaries, perhaps the plight of African-Americans in the 50s south is a resonant example. They had similarly few legal rights and in particular the right to vote. We are outraged. Why are we not outraged at the same plight of 11 million immigrants? OK, they are "illegal." But Jim Crow had the full force of law too.  Does "they should respect the law" apply to segregation laws? The fugitive slave act was a law too. Not all laws are good. And "they should get in line and follow the law" is empty -- it is simply impossible for the average migrant from Mexico, China, or India to come legally to the US.

It's not a perfect analogy. There is not a KKK or systematic violence against immigrants.  Historical analogies too quickly trivialize the past, like calling people Nazis.  But I do think that eventually we will see our current treatment of immigrants as an almost similar moral outrage, and good analogies to things we rightly deplore are worth pursuing. I need better ones.

Summers on Stagnation

Larry Summers has published a very interesting speech, U.S. Economic Prospects: Secular Stagnation, Hysteresis, and the Zero Lower Bound. I heard a version of the same thoughts last October, at the joint Brookings-Hoover conference "The U.S. Financial System—Five Years After the Crisis."

I was struck then, as I am now, at how much consensus there is among macroeconomists. Yes, you heard it here. And Larry expresses it elegantly, as you might expect. While the press talks about recovery, macroeconomists look at output growth and employment and it still looks pretty dismal.

Source: Larry Summers

GDP fell in the recession, but has not recovered relative to trend. What was a recession is turning into everyone's nightmare, perpetually slow growth.

Usually, GDP rises back to "potential" or "trend." This time, the "potential" is falling to meet the lackluster results. Potential decline, Larry points out, already closed 5% of the gap, leaving only 5% left. This is starting to look like lack-of-growth theory, not business cycle dynamics.

The unemployment rate is declining, but the employment-population ratio has not budged, even looking at prime-age men to offset some of the demographic effects.

Source: Larry Summers

You have heard these very points on this blog and John Taylor's blog. Ed Lazear's slide deck starts the same way. Bob Hall's macro annual paper starts the same way. Charlie Plosser's speech starts the same way.  I repeat here, with Summers' pictures, to emphasize the extroardinary consensus.

It's also extraordinary because the Washington policy machine has gotten bored with growth or lack of growth and moved on to squabble about other things.

Now, to analysis. Larry makes a very interesting case that fundamental forces in the economy push us to low real interest rates. The ones I found most interesting,

First, reductions in demand for debt-financed investment. ...probably to a greater extent, it is a reflection of the changing character of productive economic activity... Ponder the fact that it used to require tens of millions of dollars to start a significant new venture, and significant new ventures today are seeded with hundreds of thousands of dollars. All of this means reduced demand for investment, with consequences for equilibrium levels of interest rates.

and

[Fourth] is a substantial shift in the relative price of capital goods [falling about 20% since 1980].. Something similar, but less dramatic, is present in the data on consumer durables. To take just one example, during a period in which median wages have been stagnant over the last 30 years, median wages in terms of automobiles have almost doubled..

In sum, one aspect of the new "stuff cheap, people [with skills] expensive" economy is a reduction in the real rate of interest. It took a lot of money to build railroads. It doesn't take a lot of money to build apps.

Source: Larry Summers

Summers points to an interesting calculation of the "natural" rate of interest by Laubach and Williams, which I will have to look up. So far, the "negative natural rate" at the basis of all the new-Keyensian analysis I have read has been a deus-ex-machina, not independently measured. Interesting.

Here, as must be the case, inevitably, we part company. It's a quantitative problem. The natural rate is per Laubach and Williams, about -0.5%. But we still have 2% inflation, so the actual real interest rate is -1.5%, well below -0.5%. With 2% inflation, we need something like a 4-5% negative "natural rate" to cause a serious zero bound problem.  While Summers' discussion points to low interest rates, it is awfully hard to get any sensible economic model that has a sharply negative long run real rate

Moreover, to Summers, the one and only problem worth mentioning in the US economy is that the "natural rate" is negative while nominal rates cannot fall below zero. Can't we think of one single solitary additional distortion in the American economy?

What to do? Summers sees the problem as eternal lack of "demand" and recommends more of it. I think this more of a microeconomic/lack of growth theory problem needing the removal of distortions.

We still agree a bit -- Summers starts with "There is surely scope in today’s United States for regulatory and tax reforms that would promote private investment." That's distortion removal.

And I am interested that his calls for stimulus do not rely on the idea that consumers ignore the fact that government debt must be repaid. "Although it should be clear from what I am saying that I do not regard a prompt reduction in the federal budget deficit as a high order priority for the nation, I would be the first to agree with Michael Peterson and his colleagues at the Peter G. Peterson Foundation that  credible long-term commitments would be a contributor to confidence." Apparently the confidence fairy reads Ricardo, as do fully-Ricardian new-Keynesian models.

It's hard to object to "policies that are successful in promoting exports, whether through trade agreements, relaxation of export controls, promotion of U.S. exports, or resistance to the mercantilist practices of other nations when they are pursued, offer the prospect of increasing demand," though that can quickly be misread as invitation to our own mercantilist efforts.

But this is all small potatoes, compared to 5% loss of potential, 5% loss of GDP, and a creepingly slow escalator, no? So, really the core of Larry's prescription is

as I’ve emphasized in the past, public investments have a potentially substantial role to play...ask if anyone is proud of Kennedy Airport, and then to ask how it is possible that a moment when the long-term interest rate in a currency we print is below 3 percent and the construction unemployment rate approaches double digits is not the right moment to increase public investment in general—and perhaps to repair Kennedy Airport in particular

It's hard to argue with fixing potholes, especially in Chicago. And there is no argument against investment that earns a positive rate of return. The question, though, is not whether those are good investments but whether making such investments can raise GDP 5%, potential GDP by 5%, and raise the desultory growth rate.  Even at a multiplier of one, there are not $750 billion of positive net present value roads and bridges to build -- and we haven't started with the opposition of anti-sprawl and environmental lobbies who don't want roads and bridges built in the first place. The Keystone pipeline, and LNG export terminals are infrastructure too. (I should be careful however. There surely are $750 billion a year of alternative-energy boondoggles to build!)

Here, of course, Summers thinks multipliers -- even multipliers for tax financed (notice the Ricardian comment) and wasted (that's in the models, the usefulness of the infrastructure has nothing to do with the multiplier) is in the range of 4 to 5.

To me, this is just magical thinking -- that the key to long run prosperity is government spending, even if wasted.

But these are old arguments, and I did not write to rehash old controversies. From my point of view, the speech is an eloquent statement of the problem, and the gulf between Summers and people who think like I do is much narrower than the gulf between macroeconomists and the policy establishment which is not even thinking about slow growth anymore. From my point of view, the focus on and evident emptiness of the "demand" solution -- its reliance on magic -- just emphasizes where the real hard problems are.

A last note of praise. Notice Summers said nothing about the minimum wage, the earnings of the top 1/10 of a percent, and other fixations of the current partisan squabble.

Revolving Door

Source: Lucca, Seru and Trebbi

David Lucca, Amit Seru and Francesco Trebbi have an interesting working paper, "The Revolving Door and Worker Flows in Banking Regulation." (NBER working paper here, ungated ssrn link here.

They construct

"a unique dataset of career paths of more than 35,000 former and current regulators across all regulators of commercial banks and thrifts -- the Federal Reserve Banks (Fed), the Federal Depository Insurance Corporation (FDIC), the Office of Comptroller and Currency (OCC), the Office of Thrift Supervision (OTS), and state banking regulators -- that have posted their curricula vitae (CVs) on a major professional networking website." 

I found Figure 4, above, pretty interesting. 10% of people in this sample move from regulator to industry or back again each year. And this flow has doubled since the financial crisis and regulatory expansion.


Much of the paper is about business cycle effects, and doesn't really get in to the political economy which we're all chomping at the bit to understand. Section 4 does talk about the "quid pro quo" vs. "regulatory schooling" channels, and they find that

The evidence on higher gross inflows and outflows during periods of more intense regulatory activity are consistent with the regulatory school view. According to this view, workers may move into the regulatory sector to get schooled in the new complexity and then move from regulation to the private sector to earn the returns from regulatory schooling at times of higher enforcement activity when their regulatory human capital may be more valuable. The evidence is inconsistent with the quid-pro-quo channel 

which they explain

according to which future employment opportunities in the private sector may affect the strictness of actions of regulatory personnel.

but they are full of caution about the results.

Most of all I want to cheer a deeply empirical approach to what usually are anecdotal analyses. This is a good first step, not the conclusive end of a literature.

The conclusion is interesting too. A sign of a good economist is he or she always has two hands.

Critics of the regulatory revolving door have proposed restricting the ability of regulatory personnel to transition to the private sector, which under federal law (see 12 U.S.C. § 1820(k)) is subject to a 30 one-year “cool-off” period for any compensation -- as an employee, officer, director, or consultant -- with a previously supervised institution. There have also been discussions to further tighten the hiring of industry insiders by regulatory agencies. Such arguments, while no doubt important, ignore other important positive aspects of the revolving door, such as its potential to enhance the ability of regulatory agencies to hire better quality workers. Our results suggest that the regulatory sector faces a retention challenge, as measured by the lower employment spells of regulatory personnel in more recent years and for workers with higher education. While more work is needed to quantify the regulatory distortions induced by the revolving door, our findings do suggest that tightening the revolving door without altering other aspects of worker incentives may further create challenges for regulatory agencies to seek and retain talent.

Shakman Decree

A piece of local news in Chicago is worthy of wider attention. As reported on the front page of the Chicago Tribune June 16, A federal judge lifted the 42 year-old "Shakman decree" covering city hiring.

Back in the day, city employees from garbage collectors on up were hired and promoted for political work. Literally, garbage collectors had to bring in campaign cash or get fired.  Mike Shakman and a group of other lawyers sued the city in 1969, and doggedly stayed after the city in scandal after scandal since.

Why do you care? An enduring puzzle to me, as a macroeconomist, and hence not particularly expert on political questions, is how do governments ever become clean and competent, or stay that way? We economists tend to throw up our hands, say "public choice" or "rent-seeking" and then assume regulators will always be captured and governments always corrupt. But that's empirically not true. Some governments and government institutions are remarkably honest and efficient, at least by libertarian economists' cynical expectations. How do they do it? What's the machinery? How do you fight corruption? This is one concrete example worth studying of just such machinery.


Quoting Shakman,

it is realistic to expect and recognize that the city has put in place the systems and the people and the commitment to clean up its act. 

And the judge

U.S. Magistrate Judge Sidney Schenkier declared the city in “substantial compliance” with a set of rules, procedures and internal policing requirements to keep politics out of hiring.
The judge noted that Chicago has put in place procedures governing hiring, firing, promotions, discipline, overtime and the like that are designed to remove the influence of politics from those decisions. It also has set up an internal policing process, under the auspices of the Department of Human Resources and the inspector general's office.

So it is possible to set up bureaucracy to police bureaucracy -- if the people at the top (Emanuel) find it in their best interests to do so.

It's not a magic bullet, and requires perserverance:

“None of us think there will never be another example of patronage hiring in the city or public employment influenced by patronage,” Shakman said. “That's unrealistic to expect,...

U.S. Magistrate Judge Sidney Schenkier ..cautioned that “substantial compliance does not mean the city has achieved a state of perfection.”

Killing off patronage is “not a revolutionary process, but an evolutionary one — it happens over time,” said Schenkier, the seventh judge to preside over the case.

Part of the machinery is dedicated lawyers like Shakman, who bring about such important change, at not inconsiderable cost. Fighting the machine for 42 years is not good career advice for a Chicago lawyer. Another part of the machinery is our local newspapers, who have pretty much supported the process all along. A sadder part of the machinery is Federal law. Local corruption is most often fought by Federal lawsuits and Federal prosecutions.  That leaves open the question, how do we fight Federal corruption?

Disclosure: Mike is a friend, neighbor, and fellow glider pilot, so I'm also personally glad to see his efforts recognized here and by a University of Chicago Distinguished Alumnus Award.

FERC Follies

The Monday lead editorial in the Wall Street Journal on a FERC (Federal Energy Regulatory Commission) story is revealing on the increasingly politicized nature of the American Regulatory State. Pulling the FERC story out of the editorial's larger point,

For 10 years Mr. Van Scotter has run a paper mill in the northern Maine town of Lincoln, population 3,000. [FERC Director] Mr. Bay accuses Lincoln Paper and Tissue of having manipulated in 2007-08 a federal program meant to promote energy conservation.... Lincoln Paper may be liable for a $5 million civil penalty and $379,016.03 in disgorgement, plus interest.

... Yet Lincoln Paper broke no known law.... 

Lincoln Paper chose to participate in "demand response" on the New England electric grid, where large power users were paid for the electricity they didn't use...Lincoln Paper had an aging steam-powered generator on site that supplied a minority of the mill's energy needs and took the remainder from the regular grid. Mr. Bay claims that Mr. Van Scotter intentionally ran this generator less than he normally would when the baseline was being created. Then he ramped the generator back up to make it seem as if he was drawing less energy off the meter and thus stealing the demand payments. ...

But...FERC never defined "baseline" and made no rules about the right way to set one or how equipment should be operated during the measurement period.

So how can Mr. Van Scotter be accused?

As Mr. Bay recently told the Senate in a letter, "the absence of a violation of market rules is not a defense to market manipulation..

The journal calls this "Orwellian."  Catch-22 might be better. Under a FERC program, you can get federal money for cutting energy below a baseline. How do we compute the baseline? We won't tell you. But we can come after you later if we don't like what you did.

I found the last tidbit the most revealing.

...Lincoln Paper is entitled to no discovery during FERC investigations or even to know the identity of its accusers. Seven of the nine deposed witnesses remain anonymous under Mr. Bay's rules. He wants to play prosecutor, jury and executioner.

In the regulatory state, rights that we have had since about the Magna Carta dissolve.

With "baseline" undefined, surely lots of companies made, er, interesting computations to get Federal dollars. How did Mr. Van Scotter attract attention? Who did he not pay off, or do a favor for? Did he give to the wrong political action committees? Did he say something impolite about the FERC? The secrecy with which the FERC operates is an open invitation to this sort of abuse. (See, IRS.)

Keeping this kind of trouble at bay is how companies less "unsophisticated in the ways of Washington" now operate -- see big banks, health insurers, energy companies.  Long and vague laws, authorizing longer and vaguer regulation, with few of the rights of the accused that legal proceedings involve, let politically-appointed regulators treat companies with capricious discretion.  Threatening this kind of trouble is how Washington gains political support. Smart companies play along.

Fortunately, in this case, there is a legal remedy, though slow and expensive. Smart journalism still serves its disinfecting role, as the existence of the editorial attests. And eventually, one hopes, an outraged electorate will rise to demand change once it understands what "regulation" has become.