Topic: International Economics and Development

Immigration Illusions Part One: “Average Wages” Severely Muddled

By
Alan Reynolds

The Senate immigration bill would ease quotas on legal immigration (particularly for highly-skilled and farm workers), and also allow those now here unlawfully to apply for a green card after ten years if they pay a fine and back taxes.  In an effort to defend our current tight but leaky immigration quotas, a few legislators and commentators seized on the first half of a sentence in the Congressional Budget Office report on this bill:  “CBO’s central estimates also show that average wages for the entire labor force would be 0.1 percent lower in 2023… under the legislation than under current law.”  The CBO goes on to predict average wages would be “0.5 percent higher in 2033” (roughly in line with academic studies).  But the CBO cannot possibly predict such data with any precision for a year ahead, much less 10 or 20.  The larger problem is a common yet severe misunderstanding of what “average wage” really means.

If the Senate bill were enacted, claims Alabama Republican Senator Jeff Sessions, “the wages of U.S. workers – which should be growing – will instead decline… It would be the biggest setback for poor and middle-class Americans of any legislation Congress has considered in decades.” Indeed, if it were to pass, he added, “the wages of American workers will fall for the next 12 years. They will be lower than inflation rates.”

This is quite mistaken.  The CBO never said wages of U.S. workers would fall for even one year, much less twelve, nor did the CBO claim wage gains might be “lower than inflation rates.” All the CBO did was to predict that average nominal wages might end up one-tenth of one percent (0.1%) lower in 2023 than they would be if legal immigration remained as restrictive as it is under current law. If the average wage would otherwise have risen to $45 an hour in 2023, for example, it would instead turn out to be just $44.996 with the Senate bill.

Under the current law baseline, the CBO projects that the employment cost index would rise by 3.7 percent per year from 2014 to 2023, while prices would rise by only 2 percent. That means real compensation (the projection includes benefits, not wages alone) is projected to rise by 1.7 percent a year over the next decade, with or without immigration reform.  

If you add up all the yearly increases, the estimated cumulative rise in worker compensation would be 48.7 percent from 2014 to 2023 under current law, or 48.6 percent − 0.1 percent lower − with the Senate immigration bill.  The difference is doubly insignificant, because CBO ten-year projections are no better than throwing darts.  But for a U.S. Senator to misidentify such as trivial 0.1 percent difference over 12 years as a 12-year spell of falling wages, and for Fox News and others to report that error as though it had substance, involves monumental misunderstanding.  

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Topics: 
International Economics and Development, Trade and Immigration

Syria’s Annual Inflation Hits 200%

By
Steve H. Hanke

In an attempt to beat Western sanctions and halt the fall in the Syrian pound, the Assad regime – with the help of Iran, Russia, and China – has begun conducting all of its business in rials, roubles, and renminbi. This decision supplements other existing arrangements between Syria and its allies that are keeping the Syrian economy on life-support. These include transfers of $500 million per month in oil and an unlimited credit line with Tehran for food and oil-product imports.

According to Kadri Jamil, Syria’s prime minister for the economy, this life support is necessary because Syria’s devastated economy is the target of an elaborate plot, hatched by the U.S. and Britain, to “sink the Syrian pound.”

So, what about the sinking pound? As the accompanying chart shows, the Syrian pound has lost 66.2% of its value in the last twelve months.

The rout of the Syrian pound has been widely reported in the press.  But, Syria’s inflation problems that have accompanied the collapse of the pound have gone largely unreported.  That’s because, beyond the occasional bits of anecdotal evidence, there has been nothing to report by way of reliable economic data.

To fill that void, I employ standard techniques to estimate Syrian’s current inflation. Currently, Syria is experiencing an annual inflation rate of 200% (see the accompanying chart).

Indeed, Syria is experiencing a monthly inflation rate of 34%. To facilitate the monitoring of the quickly deteriorating situation in Syria, I am creating a resource which will allow readers to view up-to-date data on the Syrian pound and the country’s inflation problems. Soon, black-market exchange-rate data and ­inflation estimates for countries with troubled currencies like Syria will be made available via the “Troubled Currencies Project” – a joint Cato Institute-Johns Hopkins collaboration under my direction. In consequence, the days of Syria’s plunging pound and raging inflation being covered in a shroud of secrecy are soon coming to an end.

Topics: 
Finance, Banking & Monetary Policy, International Economics and Development

Whither Egypt?

By
Dalibor Rohac

On Sunday, one year since President Morsi’s arrival in office, Egypt saw what might have been the largest protests in the history of the country. The anti-Morsi ‘Rebel’ campaign claims they have collected over 22 million signatures asking for his departure, and they are asking the Egyptian head of state to resign by 5 p.m. tomorrow.

The current events were predictable. There was a long build-up of popular dissatisfaction with the direction Mr. Morsi and his Freedom and Justice Party (FJP) had taken the country. Little has been done to reduce the deficit, restore robust growth and tackle the country’s debilitating subsidy problem. To the extent to which the events of the Arab Spring were driven by people’s desire to access economic opportunity, Mr. Morsi’s presidency has been a lost year.

Politically, Mr. Morsi’s presidency has been marked with a disdain for civil society, and few signs of a genuine commitment to limited, constitutional, and democratic political order. So is it time for Mr. Morsi to go, as many in Egypt seem to believe?

Though we may agree that Mr. Morsi is an inept leader, what are the alternatives to the continuation of his presidency? Given the severity of the country’s economic problems, and the existing political uncertainty, a protracted transition – with a likely involvement of the Supreme Council of the Armed Forces – might be even worse than the status quo. The journalist Farah H. Hope, who runs the blog Rebel Economy, says:

While politically his exit may be required by the millions who want him out, economically, the last thing Egypt needs is another period of chaos, uncertainty and confusion. Investors and Egyptians alike are looking for rule of law and order, not another limbo period.

However that may be, Mr. Morsi’s political mandate is tenuous. If he goes, it is imperative that the transition is orderly and planned. Setting a firm early date of the parliamentary election – which has already been postponed – would be a good place to start, accompanied by a broad agreement to shorten Mr. Morsi’s presidency and convene an early presidential election.

Although it looks like Egypt is quickly running out of good options, it may well be that the current unrest is exactly the impetus needed for political elites to start addressing the country’s economic problems. The sooner we see credible reformers fixing the country’s public finance problem and removing barriers to trade, entrepreneurship and innovation, the better.

Topics: 
International Economics and Development

Banning Fancy French Cheese

By
Simon Lester

I’m no cheese connoisseur.  I’m usually happy with American or provolone, and I’ll even go for that Philly favorite, Cheese Whiz.  But I understand that some people have more refined tastes, and they feel very strongly about the issue.  And they get very upset when their favorite cheese is taken away. The Washington Post reports on a recent instance of this:

For centuries, microscopic mites have been part of the process for making Mimolette, a mild-tasting cheese shaped like a cannonball and electric orange in color. For decades, the cheese has been imported from France and distributed to shops and grocery stores across the United States.

That is, until this spring, when the Food and Drug Administration began blocking shipments of the Gouda-like product at U.S. ports, leaving thousands of pounds of it stranded in warehouses from New Jersey to California.

The FDA says inspectors found too many cheese mites per square inch crawling on the cantaloupe-like rinds of Mimolette, raising health concerns. But it hasn’t explained exactly why it began holding up the cheese shipments after decades of relatively few problems. “The only thing we can do is cite our regulations, which show very clearly that our job is to protect the food supply,” FDA spokeswoman Patricia El-Hinnawy said.

Cato’s Caleb Brown has just done an excellent video on this issue, and Walter Olson explains a bit more here:

Mimolette is a beloved French cheese produced for hundreds of years around the city of Lille. It looks somewhat like a ripe cantaloupe and tastes not unlike classic Dutch Gouda, to which it is related. Its distinctively pitted rind and hard-to-pin-down taste both arise from the action of microscopic cheese mites that are deliberately introduced to its surface as part of its production. Mimolette has been imported to specialty cheese shops in the United States for many years without incident, but now it’s come to the attention of the federal Food and Drug Administration (FDA), which is afraid that someone might have an allergic reaction to lingering remnants of the insect helpers (which are mostly removed in processing before final shipment). Now a large quantity of the expensive cheese is sitting in a warehouse in New Jersey, legally frozen, while its American fanciers prepare to go without. 

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Topics: 
International Economics and Development, Trade and Immigration

Why Is European Unemployment So High?

By
Simon Lester

The issue of unemployment is a complex one for economists.  There are many factors involved.  I’m a lawyer, not an economist, so I’m not the best person to spell out a comprehensive plan to deal with the problem.  But in the particular context of high European unemployment, I was struck by this Economist article about the Italian fashion industry, which notes that there are lots of jobs available:

With youth unemployment running at 35% in Italy and annual net pay for a young leather-cutter starting at around €18,000 ($24,000), fashion firms ought to have applicants beating down their doors. …

… the shortage of craftspeople is so widespread that some firms have taken to poaching from competitors, much as football clubs try to lure the best players from rival teams. So those with skills can be sure of finding work and commanding good pay. …

But Italians aren’t going for these jobs, and companies have to look elsewhere:

Some firms have looked abroad for skilled sewers and knitters. Mr Scervino has brought in knitwear specialists from Bosnia and Moldova, for example. But these, again, are typically middle-aged workers who will need replacing before long. Other Italian fashion firms have caused controversy by sending some sewing work abroad, bringing the pieces back to add the final stitches before slapping a “Made in Italy” label on them.

Why aren’t Italians interested?

Like people in other rich countries, Italians tend to look down on manual work, however skilled, and families prefer to push their children towards careers in the professions and the public sector. The education system, at all levels, generally provides a poor preparation for working life. Italian universities are full of youngsters studying subjects in which they are not interested but which their parents think are good, regardless of the job prospects.

Topics: 
International Economics and Development

Doing Business Under Fire

By
Dalibor Rohac

Since its inception, World Bank’s Doing Business project has attracted a lot of criticism from groups that do not share its broadly pro-market policy ramifications. It is dispiriting to see the review panel of the project, appointed by the Bank’s president, Jim Yong Kim, cave to the attacks and regurgitate the ideologically motivated myths spread by the project’s most vocal critics.

The report by the review panel, which was released on Monday, and which will inform the decision about the future of the project, recommends stripping the publication of important parts of its content and weakening its role as a focal point for governments that are striving to improve business environments in their countries. That is a grave mistake.

1. Scrapping the rankings

The report recommends that the aggregate rankings of countries should be dropped:

The act of ranking countries may appear devoid of value judgment, but it is, in reality an arbitrary method of summarising vast amounts of complex information as a single number. (p. 20)

It is true that aggregation is always contestable and that there is no objective way of weighing the ten Doing Business indicators to create the final index. But that is true of any aggregate measurement exercise in the social sciences. As long as the weights used in creating the ranking are transparent and the underlying data are known, no information is lost in producing the ordinal rankings of countries.

If one is concerned about the arbitrariness of the weights attributed to the different indicators (they are weighed equally), it would have been easy to enhance the functionality of the Doing Business website to allow readers to pick their own weights.

But make no mistake, this is not an arcane dispute about methodology. One of the criticisms leveled against Doing Business was that its use of aggregate rankings encouraged governments to use them as focal points for their policymaking. Is that bad?

The aggressive reformers that recorded quick improvements in their Doing Business rankings—like Mauritius or Rwanda—have not only seen significant economic growth, but have also witnessed dramatic improvements in different measures of governance and a fall in corruption. The critics of the project and the panel fail to provide any evidence of cases where an unscrupulous pursuit of higher Doing Business rankings has led to a deterioration of either economic or social outcomes.

2. Scrapping the tax rate indicator

Another common criticism of the Doing Business report relates to its indicator of Paying Taxes which includes a measure of the total tax rate facing companies, adding different local, regional and nation-level taxes. According to the critics, the Paying Taxes indicator encourages governments to cut taxes, harms revenue collection and prevents governments from productive spending.

In response, in 2012 the Bank has introduced a threshold of 25.7 percent, below which tax cuts do not affect countries’ performance on this indicator. This time around, the review panel favors removing the indicator altogether because

a tax rate indicator is not a relevant measure of the ease of doing business in a country (although it does provide an imperfect indicator of the amount of tax paid by businesses). (p. 38)

That is preposterous. Tax rates do matter for locational decisions. Furthermore, it is recognized that corporate taxes are distortionary, and have potentially large economic costs. If one cares about economic efficiency, one should be happy about encouraging governments to rely more on other tax instruments.

But whatever one’s take on the issue is, it is obvious that marginal and average tax rates imposed on firms’ activities do constitute an obstacle to doing business, regardless of whether their final burden falls on consumers, employees, or firms themselves. The reasonable attitude would be to recognize the cost that business taxation represents and, if needed, balance it against other policy considerations. But to deliberately choose to disregard it is a recipe for disastrous policies.

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Topics: 
International Economics and Development

The Stopped Clock at the IMF Tells Us that It Is Time to Reduce Bureaucratic Excess

By
Daniel J. Mitchell

I’ve repeatedly explained that Keynesian economics doesn’t work because any money the government spends must first be diverted from the productive sector of the economy, which means either higher taxes or more red ink. So unless one actually thinks that politicians spend money with high levels of effectiveness and efficiency, this certainly suggests that growth will be stronger when the burden of government spending is modest (and if spending is concentrated on “public goods,” which can have a positive “rate of return” for the economy).

I’ve also complained (to the point of being a nuisance!) that there are too many government bureaucrats and they cost too much.

But I never would have thought that there were people at the IMF who would be publicly willing to express the same beliefs. Yet that’s exactly what two economists found in a new study. Here are some key passages from the abstract:

We quantify the extent to which public-sector employment crowds out private-sector employment using specially assembled datasets for a large cross-section of developing and advanced countries… Regressions of either private-sector employment rates or unemployment rates on two measures of public-sector employment point to full crowding out. This means that high rates of public employment, which incur substantial fiscal costs, have a large negative impact on private employment rates and do not reduce overall unemployment rates.

So even an international bureaucracy now acknowledges that bureaucrats “incur substantial fiscal costs” and “have a large negative impact on private employment.”

Well knock me over with a feather!

Next thing you know, one of these bureaucracies will tell us that government spending, in general, undermines prosperity. Hold on, the European Central Bank and World Bank already have produced such research. And the Organization for Economic Cooperation and Development has even explained how welfare spending hurts growth by reducing work incentives.

To be sure, these are the results of research by staff economists, whom the political appointees at these bureaucracies routinely ignore. Nonetheless, it’s good to know that there’s powerful evidence for smaller government, just in case we ever find some politicians who actually want to do the right thing.

Topics: 
Government and Politics, International Economics and Development, Tax and Budget Policy

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