Wednesday, October 31, 2012

Open-Borders Daydreams [Updated]

The Swedish government Framtidskommissionen is poised to release a report on Somali immigration. It argue that Somali immigration in the United States, Canada and the U.K has been successful and that Sweden should learn from those countries:

“Hittills har somalier haft svårt att ta sig in på den svenska arbetsmarknaden. Nästan fyra av fem somalier i arbetsför ålder har inte ett arbete. Däremot har somaliska invandrare lyckats betydligt bättre i länder som Storbritannien, USA och Kanada.”

Their source for these claims are apparently “field studies”. But why rely on anecdotal evidence when there is high-quality official statistics available?

The OECD reports the employment rate of working age Somali immigrants in Sweden, the U.K, the United States and Canada. To provide context, typical employment rate for natives in those countries is around 70-80%.

Here is the employment rate for Somali immigrants aged 16-65:
Sweden 24%.
U.K: 15%
Canada: 36%
United States: 52%

America does best but still poorly. Not only do half of Somali-immigrants not work and those who do are often low-income (earning around half the U.S average wage). 

The Census Bureau finds that: “The foreign-born from Somalia and the Dominican Republic had some of the lowest median household incomes…about 51 percent of residents born in Somalia are living in poverty.” That is for 2007, following the recession the poverty rate has increased to 58 percent.

Nor is the situation encouraging in Canada. According to this U.N report “One study of national poverty rates by ethnicity found that 62.7 percent of Somali-Canadians lived in poverty, one of the highest levels of all Canadian ethnic and immigrant groups”.

A report for the British government similarly concludes: “Somali born migrants have the lowest employment rate of all immigrants in the UK and levels of education within the community are also low, with 50 per cent having no qualifications and only 3 per cent having higher education qualifications.”

Relying on anecdotal evidence and wishful thinking, Swedish libertarians have convinced themselves that Somali immigration in Anglo-Saxon countries is a great success-story. This Utopia is undermined if we instead look at statistics from official sources. The countries which Erik Ullenhag and Fores paint as role-model for Sweden to be inspired by have 50-60% poverty rates among Somali immigrants.

Sure, Sweden can increase employment among low-skilled immigrants a bit by lowering wages. Disregarding the fact that the Swedish public never asked for Dickensian inequality, low-wage immigration is also a bad deal for Sweden.

The economics of immigration is after all not magical. If immigrants pay in more taxes than they get back in transfers and public services the economy benefits. But working is a minimum requirement,  not a sufficient condition to be a net-contributor. The welfare state was after-all designed so that workers with low income would be subsidized by high-income workers. Estimates are that about two thirds of the Swedish population pay in less taxes than they receive in benefits, with a minority of high-income earners financing the rest.

In order to be net-contributors, immigrants should as a rule of thumb have as high or preferably higher employment rates than native and as high or preferably higher average wages. In 2010 the average market income of adult non-European immigrants was 45% of native born Swedes. You have to either ignore economics or arithmatics to think that a group that earns half the average income is a net contributor in a generous welfare state. 

Integration minister Erik Ullenhag likes to say “600.000 foreign born go to work every week”. Moderate party MP Lars Beckman bids one up and writes that “700.000” foreign born go to work every week.

First of all the oft-repeated figure is incorrect if taken literary. What Ullenhag and Beckman probably mean is that around 700.000 foreign born aged are employed among those 15-74. However not every employed person goes to work (for instance you can be sick or on maternity leave). According to SCB 540.000 foreign born went to work in a given reference-week while 720.000 foreign born did not go to work. This is to a large extent due to people being on vaccation or on sickleave.

Ullenhag has also said that “the number of foreign born who work has increased six quarters in a row” and that “never as now have so many foreign born gone to work every week”.

Counting the number of people who work rather than the employment rate is just silly. 500 million Indians go to work compared to only 5 million Swedes, does that prove that India is richer than Sweden? The employment rate of the foreign-born is lower now than it was five years ago and has not increased sex quarters in a row

Another amusing line of reasoning increasingly advanced by libertarian economists is that low-skilled immigration is good for “society”, as long as we redefine “society” to include the entire planet! Andreas Bergh thus concludes that immigration is “en samhällsekonomisk vinst” (societal gain). You see, immigrants benefit more from immigration than native Swedes lose, and Bergh thinks gains must be taken into consideration “wherever they arise”. According to this confused interpretation economic theory compels us to redistribute our assets to others as long as their gain is greater than our loss.

I guess if a company hired Andreas as a consultant he would enthusiastically encourage them to sell their assets at below market price to their competitors, as long as they gain more than you lose. What gives you the right to privilege your self-interest over others? 

It is of course trivial that immigrants benefit from immigration. What the Swedish public pays Swedish economists for is determining what policies Swedish society benefits from, in this case immigration policy. Bergh never even addresses this question, preferring instead to daydream about donating Sweden to the world based on some private utilitarian morality. 

I guess dealing with depressing reality is less fun than fantasies about redistributive universalism or Somali utopias in Minnesota.

Update:


Fores Vice President Andreas Bergström criticizes me in the comment for not being impressed by the Somali-American employment numbers I provided. If  around 25% of working age Somali immigrants work in Sweden but around 52-54% in the United States, isn’t it still correct to view the U.S experience as a “success story”?  



No, it is not. As I have written previously, labor market success is not just about working, it is also about income. Even if immigrants work, they will not be net contributors if they earning are low.

Fores and has written reports proclaiming Somali-immigration success in the United States without providing national data on employment, poverty or income. Let me fix that for you. I have looked at Census Bureau numbers for 2006-2010 for those aged 15-65. 

The employment rate for Somali immigrants in the sample is 53 percent, including both full-time and part-time workers. 

The low employment underestimates the problem, since Somali-Americans who work earn less than average. Among the 53 percent of Somali-American immigrants who work, the median income (wage and self-employment income) is 17.000$, which using PPP-adjustment comes to around 13.000 kr per month. Even if we look at full-time workers, thirty percent of Somali-Americans earn less than the equivalent of 13.000 kr. per month. 

In fact the aggregate labor market income of Somali immigrants in the U.S relative to others is probably not far above levels in Sweden. Sure, the share that works is higher in the U.S, but those who work earn around 45 percent less than the national average. In Sweden a lower share of immigrants works, but wages are closer to the national average. I cannot find data for Somali workers. According to this LO-report wages for immigrants from Africa, Asia and Latin America were 16 percent lower than the national average.

Because of effective minimum wages and generous welfare, Sweden lacks an extreme-low-wage sector, a conscious decision. Therefore labor market problems for an immigrant group will be reflected more in the quantity margin (employment). In the U.S the same problem will be reflected in the price margin (lower wages). In both examples the immigrant groups ultimately earns too little to be net contributors. 

About 6 percent of employed American’s are still below the American poverty rate. Among employed Somali-Americans the number is 34 percent. Andreas Bergström doesn’t like me talking about libertarians. Fair enough. Does left-liberal Fores believe that these poverty numbers and half of Somali-American employees earning less than around 13.000 kr. per months is an example of success for Sweden to be inspired by? Is this the vision of Sweden’s future the Center-Party is running on in 2014?

Friday, October 26, 2012

Stagnating

In his highly effective DNC speech Bill Clinton gave the impression that employment had increased during the Obama Presidency:

“when President Barack Obama took office, the economy was in free fall....Are we doing better than that today? The answer is yes. Now, look. Here’s the challenge he faces and the challenge all of you who support him face. I get it. I know it. I’ve been there. A lot of Americans are still angry and frustrated about this economy. If you look at the numbers, you know employment is growing...here’s another job score. President Obama: plus 4 1/2 million. Congressional Republicans: zero.”

Since it is impossible to measure counterfactuals, we will never know if employment would have been better or worse with other policies than those pursued by Obama. Because science cannot give us the answer it is reasonable to give the actual record of each President some weight when evaluating them. This is precisely the standard followed by Clinton in his speech, where he for instance takes credit for the 1990s boom.

The “Employment-to-Population ratio” or “Employment rate” measures the share of the population that works and is robust to discouraged workers exiting the labor force. The Employment-Rate for the working age population (20-64) is the best measure of labor market health.

Contrary to the impression given by Clinton there has been no recovery in employment during the Obama Presidency. The share of American who work is lower now (70.9%) than when President Obama entered office (71.8%).


Everyone knows that the job-market was declining when Obama entered office and that the decline stopped during his Presidency. Employment not dropping forever is however a pitifully low bar to set for oneself. The historical experience is that recessions always end and are always followed by recoveries.

The most remarkable story of the Obama-economy is the failure to sustain a vital recovery. The employment situation is actually worse now than when Obama took over. Even if we instead measure from the end of the recession in mid-2009, only one fifth of employment lost during the recession has been recovered in three years. This is despite President Obama’s Keynesian experiment of pumping $4 trillion in deficit financed spending into the economy. 

Another way to measure the recovery than employment is the output-gap. This is the difference between actual GDP and Potential GDP. Potential GDP is a constructed measure; it is estimated by the CBO as what output would be if resource utilization in the economy was at normal levels. 


Based on this metric the economy is not doing worse now than when Obama entered office; it’s doing barely noticeably better. The output-gap was 7% of Potential GDP when Obama entered office and was 6% in the second quarter of 2012. Once again only one fifth of the increase in the output-gap during the recession has been recovered in the three years since the recession in mid-2009. 

It is also interesting to compare employment situation for ethnic groups. 


Non-Hispanic Whites weather the crisis best, with their employment rates declining the least. In the third quarter of 2012 White employment was 5 percent (note: not percentage-points) below where it was when the recession started.

Hispanics employment decline was steeper and started earlier than Non-Hispanic White employment, presumably because of concentration in the sun-belt and in the construction industry. At the same time Hispanic employment recovered faster than other groups during the Obama presidency. Hispanics are the only group that has higher employment now than when the President entered office. 

African-Americans fared worst during the Bush crisis and the Obama non-recovery. Their employment was already the lowest prior to the crisis, it declined the most during the downturn and recovered the least since. Currently the Black employment rate is 9 percent below where it was when the recession started and 2.5 percent below where it was when President Obama entered office. 

African-American income also fell faster than white income during the crisis. It is a bit ironic that the decline in African-American income and employment occurred during the Obama Presidency.  In fairness the tendency of the employment of African-Americans to be more sensitive to the business cycle is not unique to Obama and has long been documented by economists.

Friday, October 19, 2012

Are Capital Gains Taxes Irrelevant?


President Obama proposes to raise the top capital gains tax from 15% to 23.8% in general and to 30% under the Buffet rule for high income earners. Because of this, economists on the left have launched a campaign arguing that there is no evidence that the capital gains tax harms economic activity

Paul Krugman argues that the argument that low taxes “are needed to promote economic growth and job creation” is “false”, and that "the economic record certainly doesn’t support the notion that superlow taxes on the superrich are the key to prosperity”. Krugman writes elsewhere “the case for low rates on capital gains is that by taxing investment income as ordinary income, we effectively discourage saving...There is, however, no evidence that this effect is at all important.”

First, note the straw-man. A reasonable criterion for a not raising the capital gains tax is that doing so would hurts the economy relative to the revenue it brings in, not that the current rate it is “the key” to prosperity or “needed”. If we look at the period 1970-2008, capital gains were on average only 3.4% of GDP and capital gain tax revenue on average only 0.6% of GDP. Obviously small taxes like this will not singlehandedly determine growth or job creation even in cases where they are too distortive to be worth the revenue.    

Bloomberg News recently wrote“Leonard Burman, who teaches economics at Syracuse University’s Maxwell School, presented a graph at the joint hearing that plotted capital gains tax rates against economic growth from 1950 to 2011. He found no statistically significant correlation between the two. This was true even if Burman built in lag times of five years. After several economists took him up on an offer to share his data, none came back having discovered a historical relationship between the rates and growth over those six decades.”

This methodology is overly crude. Growth is determined by variables such as the rate of technological innovation, population change, the business cycle and the overall policy environment. We would not expect a tax which on average constituted one half of one percent of GDP during the period to drive growth to such an extent that the effect is visible in a graph. 

But if Professor Burman insists on this graphing-correlation-over-time methodology, let me take up his offer. Instead of looking at GDP, let’s look at a variable theorized to be more directly affected by the capital gains tax, namely funds invested by Venture Capitalist in entrepreneurial ventures. 

In an influential 1998 study Harvard Professor (and Obama supporter) Josh Lerner and his coauthor Paul Gompers found that capital gains tax cuts increased venture capital investments, driven by higher rates of entrepreneurial activity. They measure investments as how much money Venture Capital funds raise each year in commitments. The link between the capital gains tax and venture capital commitment is so strong that it is visually detectable, which is rare in economics. Here is the graph, which only goes up to 1994. 


Let me update the Lerner, Gompers graph through 2012. I will use Venture Capital investments as a share of GDP rather than the absolute amount (results are unchanged if the absolute amount is used). I will rely on the left-leaning Tax Policy Center for the historic long-term capital gains tax. Data for total U.S Venture Capital commitments is from the textbook Entrepreneurial Finance up to 1995 and from PricewaterhouseCoopers until the first half of 2012 (both are based on Thomson Reuters).


Again we see a remarkably strong association between the capital gains tax and Venture Capital Investments. Following tax cuts in the late 1970s Venture Capital fund-raising explodes. The tax increase a decade later is followed by a decline in committed fund. Investments again increased when Clinton cuts the capital gains tax in the late 1990s. The Bush-tax-cut - which the left claims had no effect - is also followed by an uptick in Venture Capital investments as a share of GDP. 

This methodology is as I mentioned crude. I use it because Professor Burman used an even cruder method (correlating capital gains taxes with GDP as a whole). By the standards left-of-center economists themselves have defined, I can indeed detect a strong negative correlation between capital gains taxes and a strategically important component of economic activity


 The correlation between the capital gains tax rate and VC-investments as a share of GDP 1970-2012 is -0.45. (The correlation is even stronger if the outlier year 2000 were to be excluded). 

Paul Krugman declared that there is “no evidence” that capital taxes have hurtful effects on economic activity and that "the economic record certainly doesn’t support the notion" that low taxes are beneficial for prosperity. Either our eyes and systematic empirical research are misleading us, or Paul is not being his usual trustworthy self.

Regardless of the economics, isn’t it unfair to tax “unearned” capital gains at a lower rate than wages? First, capital gains of entrepreneurs are hardly “unearned”. Innovative entrepreneurs produce more economic value in relation to their income (even if the income is in billions of dollars) than other groups in the economy. This furthermore ignores double taxation. The capital gains tax is only part of the total tax burden, the company where capital gains are generated also has to pay taxes at the corporate level. The effective corporate tax rate is estimated at 27%. When Mitt Romney pays a visible capital gains tax of 15%, his total tax burden including the corporate tax is on around 38%. The impression that capital gains taxes are unfairly low is based on the government hiding much of the statutory capital tax burden through fiscal obfuscation.

Tuesday, October 16, 2012

Tinfoil Central


My good friend Danjell Elgebrandt has started a new blog called Tinfoil Central. It is devoted to analyzing, debunking, and most importantly having fun at conspiracy theories. Conspiracy theories are more important than commonly acknowledged, not the least in the Middle East. It is futile to put a lot of effort into discussing finer points of U.S foreign policy when most Arabs think 9/11 was an inside job or orchestrated by Jews.

Wednesday, October 10, 2012

Poverty and Causality

This article I have written in the journal Critical Review is behind a pay-wall. But if you have access through a library or better yet want to buy the issue, it's a good one. I review a book on poverty by Duke sociologist David Brady called "Rich Democracies, Poor People: How Politics Explain Poverty". 

Abstract: "David Brady argues that low European poverty rates are a result of the welfare state. His finding relies on a relative measure of poverty, according to which the threshold for being poor differs across countries. Using the American poverty threshold as a fixed measure, though, Western Europe has a poverty rate of 18 percent, higher than that of the United States. Moreover, Brady's thesis that welfare-state spending explains cross-country differences in inequality does not take account of the problem of reverse causality. Historically, welfare states developed in homogeneous nations that started out with higher levels of social capital and lower inequality. Scandinavia, for example, had unusually low poverty rates a century ago, and even today Americans with Scandinavian ancestry exhibit a poverty rate no higher than that in Scandinavia. Since poverty, social capital, population homogeneity, and the size of the welfare state relate in multiple ways to each other, we cannot rely on cross-country correlations to isolate the causal effect of the welfare state on poverty rates."

Teaser: 

"...Material poverty turns out to be higher in Western Europe than the United States, which takes some of the zing out of Brady’s indictment of America. However, poverty rates are lower in the Germanic countries and Scandinavia, regardless of how we measure them. As everyone knows, the Scandinavians have among of the lowest levels of poverty and among the biggest welfare states. This seems to be a powerful argument in favor of the welfare state.

As appealing as the theory might sound, I believe it to be incorrect because of reverse causality. Random chance did not determine which countries expanded the welfare state the most. The countries that built the biggest and most successful welfare states were already prone to lower poverty because they already had higher rates of social capital, were more ethnically homogeneous, and started with a more even distribution of income.

American scholars who write about the success of the Scandinavian welfare states in the postwar period tend to be remarkably uninterested in Scandinavia’s history prior to that period. Scandinavia was likely the most egalitarian part of Europe even before the modern era. For example, it was the only major part of Western Europe that never developed full-scale feudalism and never reduced its farmers to serfdom (Scott 1988). Certainly the region was poor compared to the rest of Europe until the late nineteenth century. But this has been confused with Scandinavia having a high poverty rate prior to the welfare state, which it did not. The Illustrated Atlas and Modern History of the World, for instance, writes about the surprisingly low poverty rates in low-income Sweden and Norway as of 1851, noting that there are ‘‘few paupers’’ (Martin [1851] 1989). Already by the 1840s, and for decades thereafter, Sweden and Norway were ‘‘record-holders’’ in life expectancy among countries for which we have data.

Nineteen thirty-six is sometimes given as the start of the Social Democratic era in Sweden; the welfare state had not yet come into existence, but was about to be born. Yet according to economic historians who use almost the same definition of poverty as Brady’s, in 1936 the relative poverty rate in a representative region of Sweden was approximately 19 percent (Gustafsson and Jansson 2010). This is substantially lower than the American relative poverty rate today and was less than half the U.S poverty rate at the time. We thus know that large differences in relative poverty rates between Scandinavia and the United States predate the welfare state. It is therefore questionable to attribute the lower poverty rate in Sweden today to that state...."

As they say, read the whole thing. 
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