Economics Of Immigration & Social Cohesion.

With the Brexit vote behind us (in which immigration was a major issue) as well as the fact that immigration is a major topic in the U.S. presidential election, it is worth looking at the economic benefits and costs of the subject.

Economic theory and the ideology of free trade argues that the free flow of labor as a factor of production from one country to another will help lead to an economically efficient outcome. On the surface, it makes sense. A global labor pool that can move freely to where it is most rewarded (i.e. most productive) should, all things being equal (a key assumption in economic models), result in higher global output and a higher global standard of living. It should be mentioned that this free movement of people is but a subset of free flow of goods which would, in theory, allow countries to specialize in producing those products that they produce most efficiently and trade for those products that they do not. In short, higher global output=a higher standard of living. I myself have taught this theory in front of groups, and there is nothing wrong with it as a framework for thinking about general principles. In fact, it underpins the global economic paradigm that we are living under today, a paradigm that has seen increased living standards globally. Overall, it is hard to argue that this paradigm has been anything but successful.

However, the model underlying this paradigm which argues for the free movement of peoples largely assumes that people are the same. In other words, it ignores the costs associated with groups of people who think differently coming into close contact and economic competition with each other. The first problem present is that the newcomers present the natives with something that they didn’t have before, either skills or competition. If the newcomers are bringing skills that are lacking in the area (engineering, doctors, other technical skills), the immigrants may be welcomed (or not), but the benefits will become clear to most (when you are ill and your choice is between ‘no doctor’ and ‘Pakistani doctor’, you will probably go with the ‘Pakistani doctor’) and the country will likely be better off economically. However, if the immigrants are bringing competition, then they are not likely to be welcomed by the natives. The country may be better off on paper (higher GDP and a lower level of inflation due to reduced wage pressures), but there is going to be some resentment created and this is a cost.

One of the arguments put forward as an attempt to counter the resentment is that immigrants do work that the natives “won’t do”.  What isn’t much discussed is why natives “won’t do” the work. One possible reason is that wages in those industries have been pushed so low by immigrant competition that natives have better (i.e. higher paying) options to go to. Some studies have purported to show that in the U.S. that immigrants, don’t depress the overall wage picture, so it might not be that. However, it does seem difficult to believe that large immigration numbers, and the increased wage competition that it would bring, won’t have any downward pressure on wages. Another possible reason is that there are welfare benefits available to the natives and the difference between what they get on welfare and what they could earn in the workforce isn’t great enough to motivate the natives to get out of bed and go to work. For example, if I am getting $10/hr in welfare benefits or I could work at a job that pays $12/hr, is it worth my time to go through all the trouble for what effectively for me is a$2/hr job? Probably not. In any case, let’s get one thing clear: there are no jobs out there that natives “won’t do” if the wage is high enough. Whether or not immigrants are pushing the wages down from the “natives will do the job” range to the “natives won’t do the job” range depends on the industry and is an empirical question beyond the scope of this article. But the thought that they might be doing just isn’t an irrational thought produced only in the mind of a fevered racist.

The second cost of immigration, related to the first, is the feeling that your government isn’t standing up for you. In this case, the reality of what immigrants do or don’t do to wages, or whether they make a given country better off or worse off is really irrelevant. If the feeling is there, rational or not, it eats away at the legitimacy of the government. To the extent that immigration unsettles a portion of the native population, this is a cost. It may turn out to be a cost worth paying at a national level as immigration can bring in benefits to a country, but it is nonetheless a cost.

All governments need, at some level, at least tacit consent of the governed. Usually the population is much larger than the group of people actually governing, making overpowering brute force to control the population impractical over a long period of time. The fundamental legitimacy of all governments, whether tribal, democratic, communist, fascist, monarchy, or anything else, is the feeling that this ruling group is protecting the population from some danger. That danger could be an enemy force that would kill the population if it had the chance. The danger could be economic insecurity. Or it could be something else. The cohesion of society is dependent upon the perception that we are all in this together and the government, whatever faults or injustices that it commits, is at least willing and capable of protecting us from a greater harm.

When the governing class allows immigration to the point that a significant fraction of the population feels unsettled, threatened, and that their government isn’t standing up for them, the rulers lose legitimacy. From the point of view of those who have to compete with the newcomers for jobs (or having their wage bargaining position undercut by them), it appears that the government is siding with foreigners over them. At that point, these people start to wonder why they owe loyalty to a state that doesn’t stand up for them.  It is a fair question, and the resulting reduced social cohesion is an actual cost of immigration.

In conclusion, whether or not this becomes a problem for a state depends on a variety of factors (how much immigration, type of immigration (skilled labor/unskilled labor), the ability of the new immigrants to assimilate, whether or not they are a burden on the social system etc.). How these factors play out will also depend on the national culture, and how accepting it is of immigrants in general. This is not an argument against all immigration. But it is an argument against the idea that immigration is cost-free and always a net benefit to the host society. If handled properly, a country can be enriched and can benefit handsomely from it. On the other hand, if handled poorly, it can delegitimize a government and destabilize a society.

The Problem With Experts

With the Brexit vote behind us, the American presidential election in front of us, and some nationalist movements in Europe demanding a ‘Brexit’ referendum of their own, people are making their voices heard against the rule of ‘experts’. For their part, the reaction of the experts has ranged from confusion to dismissal of their opposition as ‘idiots’ (or other not very nice names). Without a doubt, from California to Paris, ordinary people are pushing back against a class of people who think they know best.

But why?

The reason can be summed up thus: the experts simply haven’t been doing a good job. There seems to be a sense in national capitals (where many experts reside) that the population has gone ‘insane’, either by supporting Donald Trump or voting for a Brexit (i.e. not listening to the experts). This really shouldn’t be surprising considering the number of Americans (7 in 10 as of last year) who think that America is still in recession.

Think about that.

The recession (at least as statistically defined) has been over for 7 years and yet nearly 70% of Americans don’t seem to have gotten the memo. When the perception of 70% of your country is that you haven’t been able to get the economy back on track for 8 years, you can’t be surprised when they question whether you really know what you are doing and stop listening to you.

But why have the experts failed? I believe that there are several reasons.

1.)    The experts think that they know more than they actually do.

There seems to be a human psychological tendency to overestimate our knowledge in many things, and experts are not immune from this either. The world is a big, complex thing. It is unreasonable to think that anyone can get their arms around it, understand it, and make the right call in most cases. The problem is, experts think that they can, and they expect you to think that they can too. In financial markets, how many ‘experts’ are out there on T.V. touting this or that? Lots. How many of them are right at predicting the future consistently? Almost none (if any). Sure, they might get a few calls right here or there, but then they will get others wrong. In short, they think that they know more than they actually do.

2.)    The experts don’t have as much power as they think that they do.

One area where the experts imagine that they have a lot of control is the ability to control the economy. Around the world, central banks and other governmental agencies are trying to steer the economy. While monetary and fiscal policy can have some effect on an economy, there is an implied assumption that central banks can steer economies like a pilot steers an aircraft. Talk of ‘soft landings’ and other such expression imply a level of skill and control that simply doesn’t exist. On a battlefield, leaders on both sides try and control the action. They get information, issue orders, make corrections, develop tactics, all the while chaos is erupting and the situation is developing rapidly. Sometimes they make the right call, and sometimes they don’t. But most generals in large battles, if honest, will tell you that they don’t really have control of the situation (which is constantly changing) and are just making their best guess. A modern economy is a much more complex animal than a battle, and central bankers (and other experts) are often just making their best guess. They are not actually in control.

3.)    The experts rely on faulty numbers.

One of the primary numbers that they rely on is the unemployment number. Currently, the unemployment rate is 4.7%. According to economic theory, this is the full-employment rate. And yet, the majority of the country thinks we are in recession. The reason is the unemployment figure is fake. It doesn’t take into account people who have given up looking for work. In the past, this adjustment didn’t really have a distorting effect on reality as this category wasn’t a large number of people. However today, it is. Millions of people have given up looking for work due to lack of jobs and are not counted as unemployed. So the numbers are giving one picture, and the reality is something else entirely.

4.)    The expert’s assumptions on how the world works is outdated.

In the various agencies and departments populated by experts, certain assumptions about how the world works have become institutionalized. In other words, these assumptions are not questioned or revised, but they guide everything that the experts do. However, when the world changes, slow-moving institutions are not quick to react and change their assumptions. Expert’s, who have achieved their positions by relying on old assumptions tend to double down and hold to those old assumptions that have been so good to them. But that simply makes the expert’s and institutions appear out-of-touch and ‘stupid’ as their actions seem to become more and more disconnected from the reality that people are seeing right in front of them. The result is that people lose faith.

Going forward, whether people regain faith in experts and institutions will depend on whether those institutions begin to perform in a way that positively influences people’s lives in a visible and tangible way. Currently, the reaction of the experts (with a few notable exceptions), rather than using the Brexit vote as cause for reflection, have lashed out at the dumb, stupid, racist, masses. The idea that they, the experts, could be mistaken is not something that they are prepared to accept (yet). The fact is, experts do tend to be very smart people, and they have the potential to play a very positive role in their respective societies. Currently, their actions are out of touch with the times that we live in. Assuming that they are able to reform, they can win back the trust of the people. Until then, they can expect discontent and ‘rebellion’ from various parts of society.

The Costs And Opportunities Of Economic Independence (Reflections On The Brexit Vote)

Last week at this time, if one is to believe the popular press, the world economy was heading towards Armageddon; and blissfully unaware of it. To hear the popular narrative, one would think that the  stupid voters in the UK, singlehandedly, in the course of an evening, managed to wipe out 20 centuries of Western civilizational progress. There has been talk that voters should be allowed the opportunity to correct their ‘mistake’, that the vote should be ignored, that the government should, by hook or by crook, by any means necessary, find a way to avoid doing what the British people voted for last Thursday.

The howling that has been done from various quarters, such as declarations by singers, actors, and other celebrities that the British people were ‘stupid’, and ‘throwing away prosperity’, or were ‘xenophobic’ says more about those people making the assertions than it does about the voters themselves. Most, if not all, of these celebrities lack training in economics or mass psychology and have no basis for their opinions. They are just parroting what they hear ‘experts’ saying. The experts could be right, or they could be wrong. For example, in 1981 Margaret Thatcher’s economic policies were denounced by 364 economic experts who stated in a letter that, among other things, that her policies would “threaten Britain’s social and political stability”. Certainly the belief that she and her supporters were “stupid” and “throwing away prosperity” was widespread. But history has proven Thatcher correct.

That is not to say that the critics of the Brexit vote are not right today. It is just that a consensus of the experts was wrong then, even though they were convinced otherwise. The saying that “economists have predicted 9 out of the last 4 recessions” is not a testament to their reputation for accuracy

So are they wrong? It is impossible to say right now. In the short run, there is bound to be some uncertainty, especially once negotiations over the “divorce settlement” with the E.U. start. And as the elite were entirely against the Brexit, look for every economic ‘hiccup’ to be blamed on those ‘stupid’ voters. But the idea that the world economy is going to collapse and that we are about to descend into an economic “dark age” is completely without merit for the following reasons:

1.)    The United Kingdom is the world’s 5th largest economy.

Much of the commentary has focused on the idea that in punishment, Europe will stop trading with the U.K. The image proffered is one where the EU slaps Iran-like sanctions on Britain destroying its economy in the process. Maybe. But as the world’s 5th largest economy, many countries around the world will be will to trade with the U.K., even if the EU were not. No longer being part of the EU will allow Britain to form its own bi-lateral trade agreements with various countries, instead of being bound by EU rules which may not be beneficial for Britain. Whether future trade agreements are better or worse for Britain than what they currently have will be based on a variety of factors (terms of trade, negotiating skill, etc.). But they need not necessarily be worse. As the world’s 5th largest economy, Britain can’t simply be ignored.

2.)    The big EU countries are running trade surpluses with Britain.

This means that big EU economies (Germany, Italy, and France, among others) are exporting to Britain than they are importing from Britain. In other words, cutting Britain off from their markets in ‘punishment’ is likely to hurt them more than it will hurt Britain. This means that a Brexit trade meltdown where Britain is cast out into the cold economic world is not likely to happen. And certainly won’t happen if Germany, Italy, and France oppose it.

3.)    The largest British trade surpluses are with non-EU countries.

Of the 10 markets where Britain exports more than it imports, only 1 is an EU country (Ireland at #5). This indicates that Britain is dependent on non-EU countries for the bulk of its export sector. The British export sector is not going to shrivel up and die because of retaliatory EU action.

4.)    The EU regulatory regime is not necessarily the optimal one for Britain.

As part of the EU, Britain has been forced to submit to a regulatory regime that has been produced by negotiations with 27 other countries. The idea that this regulatory regime is optimal for any single one of them is ludicrous. Being free of the EU will allow Britain the ability to craft a regulatory regime more optimal for its specific situation. Whether this turns out to be better or worse than the current arrangement will depend on the skill of policymakers. But policymakers concerned only with the U.K. are likely to come up with a more optimal regulatory regime for Britain than policymakers who have to take 27 other countries into account.

None of this means that the Brexit naysayers won’t ultimately be proven correct. There is a lot nobody really knows. Currently, the idea that the Brexit will be a bad thing for Britain (and that voters were stupid to vote for it) is taken as an unassailable fact. However, that celebrities and other know-nothings parrot what they have heard experts saying doesn’t make it so. And if experts, central bankers, politicians, and prognosticators were truly a bunch of folks who always get it right, then we would not have had the financial crisis and sluggish economic growth over the last 8 years. There are reasons why Britain might be better off out of the EU.

That there will be losers from the Brexit is a certainty. There will also be some winners as well. The howling from the elite indicates that they are pretty sure that the losers will be them.

Economic Profession’s Ignorance Of Cultural Effects

The year 2016 will likely go down in history as either an oddity, or the start of a major shift in something. This week, the British will go to the polls to vote on whether to make a radical change in exiting the E.U. No matter which way the vote goes, it is a virtual certainty that at least 40% of the voters will vote to leave. Because roughly 60% of current British law is handed down in some way from Brussels, this isn’t a normal statement of not liking the Party in power and wanting the other Party to have a shot. No, this says that at least 40% of the U.K. doesn’t like the current SYSTEM of government and wants a fundamental change. In other words, they have lost faith in the institutions.

The arguments that are being made on the “Remain” side involve assertions of economic problems (or disaster) that will befall the country in Britain votes to “Leave”.  These assertions, to put it mildly, simply aren’t having a large effect (and we will see on Thursday if they move the needle enough to win). At its heart, the reason that the conventional wisdom seems to be having difficulty is that the economic profession simply has forgotten culture in its economic analysis.

For the better part of 3 generations in the West, professional economists have dominated economic policy making. In an effort to smooth the business cycle and/or manage economic shifts, they have developed models, mathematical equations, and statistics to enable them to manage the economy competently. The idea of free trade has dominated policy making circles for over two generations. But the economic models that declare that free movement of labor and resources necessarily lead to economically efficient outcomes tend to assume that all labor is equal. In other words, an influx of foreign labor that displaces domestic labor is not thought of as a bad thing (if the foreign labor is more efficient). The assumption is that domestic labor will then do something else that will lead to overall increased wealth creation in society. The disruption in livelihood of the domestic workers is blithely ignored.

In some ways, this is understandable. After all, it is relatively easy to mathematically measure wages, number of immigrants, lower inflation (from lower wage immigrants pushing down the overall level of wages), etc. Measuring the disruption or feeling of being betrayed by your own government who appears to view immigrants as more deserving of a job than the home folks is difficult to quantify. It is easy to say that people should be tolerant of other cultures, and shame on them if they aren’t. But the fact is that national cohesion and social peace is dependent on people thinking of total strangers like family. This is easy to do if a group of people have had similar experiences or seem similar enough. The feeling of unity that many Americans had on 9/11 was based on a feeling that we had all been attacked. There have been other attacks and atrocities around the world that haven’t hit the American psyche the same way. As horrible as those attacks on foreign soil were, Americans didn’t feel that their ‘family’ had been attacked. National cohesion is indispensable for the modern nation state.

The fact is, economists have forgotten about this. If your cousin loses his job due to foreign competition and you are viewed as an awful person if you complain, it is easy to see why frustration would mount. This doesn’t even take into account the conflicts that will inevitably arise when two cultures clash. Focusing on high level numbers as GDP growth, inflation, the stock market, etc. has historically measured the wealth of society, but is leaves out part of the picture (that of people whose lives have been made economically less secure). As the economics profession has become more mathematically oriented, it is hardly surprising that they have discounted variables that don’t lend themselves to easy mathematical expression.

But these costs are real. And they have been rising. And on Thursday, although Britain may ultimately end up staying in the EU, it appears that the vote will be close. This is the effect of ignoring these costs. The political class (and the economics profession) had better start to take notice. Otherwise, it will continue to lose legitimacy in the eyes of the broader population.

Would A Brexit Be A Disaster?

Over the last few weeks as polls have shown that the vote on whether Britain will leave the E.U. to be exceedingly close with the “Leave” crowd gathering strength, we have been treated to increasing amounts of editorializing that a British exit would be a disaster; both for the British and for the world economy as a whole. Even Barack Obama has weighed in and stated that a British exit would seriously impact the “special relationship” that Britain has historically enjoyed with the U.S. The institutional infrastructure has lined up behind the “Remain” campaign, and as of this writing, it is unclear as to whether this will be enough to keep Britain in.

But the question of the whether a British exit would be an economic disaster is one that is far more complex than what the analysis currently on offer seems to appreciate. The sometimes shrill denunciations remind one of the promises of disaster that will befall the world economy if Greece (accounting for 2% of the E.U. economy) were to be forced out of the euro or the E.U. Although the exit of the British economy (which is the world’s 9th largest national economy and second largest in the E.U. after Germany) would have a significant negative impact on the E.U. as a whole, it is not exactly clear that the long-term impact on the British economy would be negative.

What IS clear is that the current economic structure and Britain’s place within the E.U. is very good for the elites of Britain. For them, unity with Europe and the economic linkages resulting from that, have provided a living, if not wealth/power/status. Naturally, they don’t want a disruption to the status quo. The shrillness of some arguing for the “Remain” camp implies that they believe that an exit would negatively impact them personally.

What is also clear is that there is a significant fraction of the population that doesn’t feel that they are benefitting from the current arrangement. What they do feel in many cases is that they, and the government that they help to elect, has limited control over their destiny. Many feel that their concerns, such as uncontrolled immigration that forces competition for scarce jobs (or drives down their wages), are dismissed and ridiculed as racist by an elite insulated from the effects of the policies that they impose on others. While the magazine “The Economist” dismisses “romantic notions of national sovereignty”, a population that feels disempowered and ignored is not going to care that GDP grows by an extra 1% or that inflation is 2.5% instead of 2%. What they are going to care about is that they feel that they can change things to their benefit through collective action. Simply being told that they have to accept things as they are because an unaccountable, uncontrollable, bureaucracy in Brussels says so (when they don’t feel that they benefit from the arrangement) is a real problem. It is not some imagined problem with an imagined solution.

But this doesn’t mean that a Brexit won’t be economically problematic in the short-term. There is a certain amount of jobs that are dependent upon the current arrangement, and a change in the nature of the status quo will likely mean some economic dislocation. During the recession caused by the financial crisis of 2008, the British economy shrunk by 7.2% from peak to trough. Although problematic and undesirable, it did not mean the end of Western Civilization as we knew it. Were the Brexit to have a similar economic effect, it might be thought of as a small price to pay for the future flexibility that British governments will enjoy not being tied to the E.U. in the same way that they are now.

Also, the sometimes boisterous arguments against leaving could possibly mean that economic problems that caused by an exit are being oversold. The idea that there will be a “sucking” sound as jobs leave for the continent imply that Britain has no economic leverage. In fact, the British GDP represents roughly 16% of the total E.U. economy, which means that it can’t just be ignored. In addition, the fact that Switzerland and Norway have thrived outside of the E.U. means that a British exit doesn’t have to mean a massive economic depression with a lost economic generation on par with Japan.

Whether a Brexit will ultimately prove to be beneficial or damaging economically speaking is really something that can’t be said for certain at this time. Whether any economic dislocation associated with a Brexit turns out to be a transitory phenomenon or a more permanent reduction in GDP will depend on the skill of certain policymakers going forward. However, simply being outside the E.U. is not likely, by itself, to turn Britain into a third class economy. Pretending that it will reflects a blindness, dishonesty, or perhaps both.

Is Greece This Generation’s Economic Eastern Bloc/Soviet Union?

It may be difficult for anyone much younger than 35 to remember the Soviet Union. That was the last time that the world watched an economic collapse of what had been assumed to be a first world economy play out on T.V. For those too young to really remember, the Soviet Union and its allies in Eastern Europe were a first world military power, and most people (along with many analysts) assumed that it was a first world economic power too. Unfortunately, before the internet, not a lot of people understood what was happening economically behind the ‘Iron Curtain’ as it was then called.

Then, in 1985, Mikhail Gorbachev came to power and began opening up the Soviet Union to the outside world. For the first time, the world saw that the Soviet Union, far from being a competitor to the United States, was actually a 3rd world country that happened to have nuclear weapons. We saw long lines simply to obtain basic necessities. We saw empty stores with nothing to sell. It was hard to process what we were seeing because our institutions and our institutional assumptions were geared for a “fight to the death” with an opponent we assumed to be every bit as powerful as we were. But what we were seeing on our television screens was an economic collapse of a first rate political power.

When Gorbachev launched his economic reforms, he assumed that some “tweaks” of the system would be enough to put the Soviet Union (and Eastern Europe) on a sustainable economic path. He was wrong. The entire system basically had to be scrapped. The institutions, the assumptions, the political alliances, the public welfare system, all had to be done away with. During the 80’s, the Soviet Union had been kept economically afloat with loans from the West, but now it was no longer enough. The institutions that had tried to stave off economic collapse were not flexible enough and had failed.

Today, like the Soviet Union then, the Greek economy has been kept afloat in its current condition by loans from outsiders. It is these loans that have enabled the Greeks to continue to enjoy an unsustainable situation. But now the outsiders are beginning to realize that the Greek system, as it is currently constructed, will never be able to repay the loans, and that they are looking at a situation where the bailouts will be a permanent fact of life. This is not politically sustainable. Consequently, whether this bailout, or the next time Greece needs one, or the next time after that, the other E.U. countries will stop lending (i.e. giving) money to Greece.

Like the Soviet Union then, Greek society today is one whose institutions, assumptions, etc., can no longer sustain the society in a manner to which it has become accustomed. The types of reforms that are necessary to make it economically competitive again are of the sort that would require a complete restructuring of society which would be extremely painful.

Another difference of note is that while the Soviet system was imposed from above, the system that the Greeks have is one that they have chosen over the years. As such, the Greek system is more an expression of Greek culture than was the Soviet system. In other words, economic reforms won’t be enough. Greek cultural assumptions will have to change as well. Culture is an extremely stubborn opponent. It can decades, or even centuries, to change, and the process is always extremely messy.

The parallels between the Soviet experience and the Greek experience are that they show the limits of a certain type of economic structure. Today it is hard to imagine, but the from about the 1920’s/30’s until the collapse of the Soviet Union, many (especially in academia) argued that a centrally-planned economy was a superior method of economic organization that would produce more wealth and better outcomes than a free-market economy. The Soviet Union showed the end result of such a system, and it wasn’t pretty. Since the 1930’s, others have argued for a “social-market” market economy. Europe has largely organized itself along this model, and many in the U.S., especially in academia and the political left, have long argued that the U.S. should adopt this model as well. Greece shows the end result of this model (or at least where this model, if taken far enough, can lead). The results won’t be pretty in this case either.

Time For Greece To Leave The Euro

This week, much has been made of the possibility that it is looking increasingly likely that Greece will be forced (or choose) to leave the euro. While some have been saying for a long time (years) that the Eurozone will be fine without Greece and that Greece (eventually) will better off with its own currency, this is just now coming around to being recognized. Why?

For starters, conventional wisdom has the tendency to become entrenched; even more so when it is self-interested conventional wisdom. Europhiles have seen a Greek-exit from the euro (and maybe even the E.U., although this is unlikely) as breaching the principle that entrance into the euro (and the E.U.) is a one-way decision that can never be reversed. They see this principle of “no-exit” as key to holding together their vision of a politically/economically united Europe that will be a global player in a multi-polar world along with the U.S., Russia, and China. With it breached, they fear that the Euro (and the E.U.) could unravel (again, not likely). Consequently, they have been keen to play up all the horror scenarios that could happen if Greece were to leave the euro/E.U. The latest one is that pushing Greece away from the West could be geo-politically to Russia’s advantage. The idea that an economy that represents about 2% of the E.U. could cause global contagion and therefore needs to be kept on what amounts to a permanent welfare program was always unconvincing. It would be as if Vermont, Montana, Rhode Island, Wyoming, South Dakota, and Maine decided that they were going to use a currency other than the dollar, and there was fear that would cause the dollarzone that is the United States to collapse. The comparison isn’t exact as the U.S. is much more politically integrated than is the E.U., but if a marginal economy in the E.U. has the power to blow everything up economically, then the situation is so unstable that something else is going to come along in the future that would have the same effect.

The second reason why it has taken so long to be recognized is that the world (financially speaking) is a more stable place that it was a few years ago. While I personally am skeptical that there was ever a danger of ‘contagion’ from Greece that would have blown up the Eurozone/E.U., the fact is that with Spain, Portugal, and Italy apparently on more solid footing, the idea that investors panicked by Greece would end up forcing more countries out of the Eurozone has become much more remote. A few years ago, the possibility of a Grexit could roil financial markets. Today, it doesn’t seem to do it that much.

Thirdly, this recognition has also been driven by an acceptance of the fact that Greece will never get out the mess that it is in without either A.) a massive forgiveness of the debt that it owes, or B.) an exit from the Eurozone (or C. both). As time has gone on, it has become obvious that the longer the inevitable is postponed, the worse things will be when the inevitable finally happens. Greece never should have been let in the Eurozone and effectively defrauded its way in. If the E.U. had kicked Greece out of the Eurozone at that time this was discovered when the world was an economically strong footing, they wouldn’t have been throwing good money after bad all these years. But they decided to hope that Greece would eventually become Eurozone worthy. But it never has.

Finally, this recognition has come about by the lessening of a psychological effect that allows people to not see things coming simply because it hasn’t happened before. For example, nobody foresaw WWI happening, even though it seems obvious to us in hindsight. Likewise nobody believed that the Holocaust was actually happening because they could not imagine a regime being that vicious. Finally, the collapse of the Soviet Union was completely missed by everyone (especially the CIA) because it had been a fixture on the global stage for so long that nobody could imagine a world without it. Likewise, the idea of a country leaving the Eurozone has been seen as ridiculous, mainly because it hasn’t happened before. After Greece exits, whether next week, or next year, or the year after, its exit will be seen as obvious in hindsight as WWI and the Soviet Union’s collapse.

My Political/Economic Platform

With many people announcing their candidacy for the Presidency and other political offices, I thought that I would “announce” what my platform would be, were I running for the Presidency myself. Unlike most of what you are likely to hear, my plan is based on what I think should actually be done, not what I think you want to hear so that you will vote for me. Please contact my campaign for more information and with donation pledges at baeconomist@badasseconomist.com.

Plank # 1: Abolish the income tax, the IRS, and replace it with a national sales tax.

Ronald Reagan said that Democrats thought that every day was April 15th. Under my plan, this would be reality. My plan would increase economic efficiency and prosperity. Instead of being used by government as a poor man’s attempt at economic central planning and by politicians looking to pay off their politically connected friends with tax breaks, my tax code would return to its intended purpose: raising needed revenue for government functions. The tax code, by some estimates, costs Americans over $100 billion to comply with. Saving this amount annually and simply growing it at a 3% rate of inflation would result in an economy that would be over $7.7 trillion larger than it would otherwise be 40 years from now. That would be like adding another economy nearly half the size of today’s economy.

Plank# 2: Eliminate regulations, bureaucracy, and forcibly retire a significant fraction of the federal workforce.

Virtually every candidate on the Republican side will promise to do something similar. However, I am the only candidate for President who actually will as I don’t actually care about getting elected, or being re-elected. Regulations are not free. They have economic costs. They cost businesses and individuals a lot of money and time to comply with. This is time that they could be using enjoying life and/or building prosperity for themselves and their businesses. A significant fraction of the regulations serve little to no purpose, and are not really necessary. One need only look at the mountains of regulations that have been generated in the last 20 years to question how many of them are really necessary for a functioning society. As for slimming down the bureaucracy, it is all a question of incentives. In my Administration, we will move to reward individuals within an agency that we wish to reduce or eliminate by putting one year of the savings into an annuity for those whose jobs are eliminated. In addition, those who lose their jobs will be awarded their pension as if they had worked a full career to be paid immediately for life. Reducing regulations and eliminating bureaucracy currently standing on the throat of the economy will unleash economic growth that will put the U.S. in a much stronger economic position.

Plank# 3: Secure the U.S. border and control immigration.

Uncontrolled immigration has increased the pool of labor and undercut the wages of working Americans. Under my Administration, this will stop. The purpose of American government is to represent and fight for the interests of Americans; not be some sort of neutral arbiter between Americans and the rest of the world that wants to come to America. I have nothing against those who want to come here. I would try and do the same thing were I in their shoes. But my job as President will be to secure and support Americans. Under my Administration, the border will be secure, by militarization if necessary. American workers will no longer be forced to watch their government stand by as an uncontrolled wave of immigrant enter the country illegally to compete for their jobs and undermine their bargaining position with employers. For those who complain that American government is held in low regard by large swathes of the citizenry, maybe if the government actually stood up for the interests of actual Americans relative to the rest of the world, it might be held in higher regard.

Plank# 3: Make government work better.

My Administration isn’t just about making government smaller. It is also about making government work better. Today, government services are lousy Government workers can’t lose their jobs, even if they cause the death of someone. Under my Administration, this will stop. I will work with Congress to produce legislation that will force the federal workforce to function more like a private sector workforce. Specifically, something that would clearly result in a firing in the private sector will now result in a firing in the public sector. Something that would cause an employee to be personally and/or criminally liable in the private sector will produce the same result in the public sector. A government that wants to be held in high esteem has to hold itself to a higher standard.

Plank # 4: Withdraw the federal government out of as much as possible and leave the states and municipalities to sort things out for themselves.

Part of making government work better means that it should function in a way that is relevant to the people who it is meant to serve. This means having as many decisions as possible made as close to the people as possible, by individuals who might actually be forced to run into said people in line at the grocery store. Dishonest government is easier when the people making decisions never have to worry about coming face to face with the people who they have screwed. In addition, being closer to the people means that those making decisions have to balance a narrower range of interests, have a better chance of understanding the day-to-day lives of those they are impacting, and have a better chance of crafting laws/regulations that will make sense in the context in which they are being applied.

Plank #5: Force reform on the college/university system.

The college/university system today has largely become a place where normal constitutional rights of students are trampled, a mockery is made of due process, and in many cases has become little more than a left-wing seminary. America is weakened when the elite of this country are essentially taught that half the country’s political views are evil (not mistaken, evil) and illegitimate. We would rightly be up in arms if taxpayer funds were used to promote a religion, and this is no different. This has come about because those with center/right views have been routinely discriminated against in faculty and staff hiring for almost two generations. In a perfect world, professorships that would have gone to first class center-right intellects, allowing the clash of ideas with first class center-left intellects, have instead gone to leftists with 3rd or 4th rate intellects. Students and faculty are robbed of the opportunity to have their beliefs questioned and be exposed to people who see the world fundamentally different than they do. The result is students (and professors) on one side of the political aisle who can arrive at the heights of academia and politics only being exposed to an echo chamber of one side of the political aisle. For a country as large and diverse as ours, having an elite that is divorced from, and has no experience with, a large fraction of the country is not healthy. So, my Administration will come up with a plan that will force universities to achieve intellectual balance in hiring, and implement procedures to ensure that constitutional rights of students AND faculty are not infringed upon, and institute due process for any disputes. Any university/college that accepts federal funding and whose students get federally subsidized loans will have to meet these standards, or their funding will be eliminated.

Plank# 5: Produce a coherent foreign policy that makes America safe and promotes our interests around the world.

The current Administration seems to have an ad hoc foreign policy that appears to be incoherent and cooked up in a university whose members have been isolated from reality. This is what happens when you have an elite that has never encountered people who see the world completely differently from themselves. My foreign policy will be based on the reality, experience, and shared interests. Far from hating our freedom, sometimes a country or a people is opposed to us for no other reason than their interests are diametrically opposed to ours. Sometimes, we are culturally incompatible. Sometimes, our moving to defend our interests displaces them. Such is the way of the world. Such is the way it has always been. Such is the way it will always be. American exceptionalism has been based on a certain set of unique cultural and historical factors that often cannot be transplanted into other places. Strengthening our country and strategic position will ensure that a place such as America will continue to exist. To that end, my foreign policy will not be about defending the underdog, or reacting to a heart-rending massacre on T.V. To the extent that we need to understand our enemies, it is only to be better able to destroy them. To the extent that we enter into trade agreements, it will only be if we get something out of it. To the extent that we commit troops to battle, it will be because there is a strategic interest at stake (i.e. it improves our position relative to our enemies and rivals), not because it makes us “feel better about ourselves”.

In conclusion, my fellow Americans, we need a President with a vision for transformation, but also with a recognition of what America can do, would like to do, and absolutely has to do. We need a President committed to changing the structure of government. The way our government functions was designed in the 1940’s and 1950’s. That worked for awhile. But we have reached a point at which these institutions no longer function. The world has changed, and we have to change with it. Or stagnate.  If we were starting to build today, we wouldn’t design a government/regulatory structure like this. So why put up with one now? If elected, we won’t have to much longer.

Vote for me.

 

Some Negative Impacts Of Free Trade

Over the last 50 years or so, the concept of free trade has expanded around the globe, as economists (particularly U.S. economists) and policymakers have extolled its economic benefits. There is little doubt that free trade has lifted millions out of poverty around the globe and has made countries richer and more prosperous. However, it has also been extremely disruptive in wealthier countries (especially the U.S.) as the middle classes in those countries have seen their living standards stagnate, or only increase incrementally over the last 30-40 years or so.

The reason this has happened is not hard to guess. If a company or an industry or a country is suddenly exposed to competitive pressures that it was not exposed to before, then it must either A.) improve the quality of its product to justify its higher cost, or B.) lower the price of its product to meet the competition, or C.) go out of business. While industries and job opportunities have expanded in lesser developed countries as a result of free trade, the result has been the offshoring of U.S. jobs overseas.

But why was this allowed by our policymakers to happen? Some might argue that the captains of industry were able to “capture” politicians to push free trade agreements through that would improve the value of their stock price, but this doesn’t explain why professors, economists, and policymakers not obviously monetarily influenced by special interests would be proponents of free trade. The reason is, quite simply, that free trade does benefit the GDP numbers. Trade is not a zero-sum game, and both countries can be made ‘numerically’ better off with increased trade.

The problem is that the academic theories assume that the labor disruption from free trade will be minimal over the long term as workers move into new, more efficient, industries. The academic theories often assume no cultural clashes as workers move from one country into another, and are accused of “stealing” jobs from the local population. The academic theory doesn’t account for the fact that jobs today (in the U.S.) are highly complex requiring substantial training and experience. Whereas a middle class manufacturing job on an assembly line 2 generations ago only required a basic education and a strong back, the middle class jobs that replaced it require general computer knowledge (which most have), but also specific job knowledge that can often only be gained by experience, and company specific knowledge that often only be gained by experience within that specific company. In short, labor use is not as flexible as theories have assumed. A manufacturing worker 2 generations ago laid off at one company could either wait for the factory to re-open, in which case he would be rehired, or he could go to another manufacturing facility, many of the jobs of which would be similar to the one he just left. Over the last generation or so, so many manufacturing jobs were shipped overseas that there was nothing for the displaced worker to do but start over in another industry, usually for a much lower salary than what he was getting before.

It is hardly then surprising that there has been a nagging feeling for a long time, a feeling that has intensified over the last 8 to 10 years or so, that something in the U.S. has gone wrong. The trust in public institutions has deteriorated over the last 40 years, and part of it is that people feel that the institutions are only bringing value to the “insiders” and the “connected”, and not people “like them”. The feeling that government and institutions aren’t working for your benefit and don’t have your back inevitably leads to a sense of alienation, which can be seen in declining participation in the political process and of civic engagement. While certainly no trade (aka North Korea) leads to an impoverished population, too much free trade can lead to economic and social disruption as well. Policymakers should bear in mind that free trade is not ALWAYS a ‘good thing’ the next time they are considering signing a free trade agreement.

Memorial Day: Keeping The Faith With Those Who Died

When you go home, tell them of us and say, for your tomorrow, we gave our today’ – Enshrined on the Kohima war memorial in Nagaland, built to commemorate soldiers of the British Empire who laid down their lives to repel a Japanese assault in 1944 during World War-II.

On Memorial Day, part of the country will simply take another day off to enjoy time with family & friends. The other part will take a brief moment to think about those who died, and then go about taking the day off with family & friends. But few will truly stop and ask themselves what those who sacrificed gave up, and whether what this country has become is what they truly died for. Nor will they likely give much thought as to why it is that this country doesn’t really seem to give anything more than lip service at best to Memorial Day.

Imagine the life of a hypothetical 20 year old who was killed at Normandy in 1944. What might his short life have been like, and what would he have seen? Being born in 1925, he would have just become aware of the world around him as the stock market was crashing 1929. There is a decent chance that he would have probably grown up in a smaller town, away from big cities. He would have experienced the Depression personally, either as his immediate family struggled, or as extended family/friends struggled. Good economic times would merely have been something that heard existed before he was born. He would have heard the call to enlist as WWII became a truly national project for the entire population, with basic goods being rationed. He would have seen that roughly 1/3 of those who tried to enlist were rejected as being unfit for military service. He likely would have left the love of his life behind, with promises that they would start a family when he returned; promises that would never be fulfilled. He experienced the terror of combat, felt the pain as a bullet tore him apart. And then he died. He never knew what marriage was. He never saw his kids grow up. He never grew old with a very special person. He never saw his grandkids. He never experienced television. He never experienced the massive increases in living standards that occurred from 1950-2000 (he might never have even experienced indoor plumbing until he went in the Army). He never experienced life. This is what he gave up.

And what are we today as a country? If our hypothetical 20 year old, who would now be 90, could see us today, would he be happy? Or would he feel that he had died for nothing. Would he like that only half the country sacrifices to federal income taxes, while the other half receives tax benefits? Would he like the fact that there are so many regulations that a person who wants to cut hair for a living needs permission? Would he think that we had advanced socially when a large segment of our youth (many of whom are older than he was when he died), are little more than narcissistic spoiled brats who think that the world should conform to them? Would he think that sending the IRS to harass people for political views was a good thing? How about that average taxpayers are left bailing out big financial institutions, some of whose employees made (and continue to make, thanks to the bail out), more in salary and bonus in 2 or 3 years than those average taxpayers will see in their entire lifetimes? Would he like the universities today where many of the political views of the taxpayers aren’t represented? Would he think it a good thing that college graduates, far from being able to rationally consider different points of view as those in his day were, lack basic critical thinking skills and are content to demonize their political opponents as basically being Nazi’s, something that he fought against. Would he think that these people are even intellectually serious? Would he worry that a segment of our political elite think that it is acceptable to force people to violate their consciences as a condition of employment? How about that the NSA listens scoops up phone records and listens into private conversations without anything remotely approaching adequate safeguards? In short, would he ask himself whether his sacrifice was even worth it?

And would he feel appreciated on Memorial Day; a holiday that often gets only lip-service from the population?  Would he feel understood by a population in which very few have ever served in the military or even know someone who has? How about what sacrifices his own family made? As civilians, we were not called upon to curtail our consumption or accept rationing, as the WWII generation was. We have a generation reaching adulthood which never really knew that generation, nor heard the experiences first-hand. Today, “grandpa’s war” was Vietnam, and most of the population didn’t experience that at all. And our war in Afghanistan & Iraq? Short of that one horrible day in September when we really did experience war on mainland America of a sort not seen since the Civil War, we haven’t really had to experience it (No, taking our shoes off in airport security lines doesn’t count). If we don’t watch the news, we don’t even have to hear about it. It hasn’t dominated our conversation. Our mothers don’t ask their friends if they have heard from John at the battlefront recently. Unlike the generation of which our hypothetical 20 year old came from, war isn’t real to us or our families (thankfully). And because it isn’t real, we don’t really appreciate the sacrifices made. The 20 year old who died in 1944 likely wouldn’t feel understood and appreciated today. And because of that, it is hard to make the case that we are truly keeping faith with those who died.