Topic: Trade and Immigration

Income Inequality and Social Unrest: What’s Their Function?

The current debate on Cato Unbound, particularly today’s contribution from economist Edward E. Leamer, circles around the danger that income inequality poses to political stability.

Leamer argues that computer technology amplifies innate talent differences, and hence will widen existing income disparities. This seems undeniable. He then goes on to imply that this is necessarily a threat to political stability or social harmony. But is it?

Leamer’s unstated assumption is that there is a simple monotonic relationship between income disparities and social unrest. That is certainly a reasonable hypothesis, but it is not the only such hypothesis.

Isn’t it also possible that the relationship is more complex, and multivariate? It seems at least worth investigating the possibility that the relationship between income inequality and political instability is asymptotic – that the richer and richer Bill Gates becomes, the less impact any further increase in his income will have.

More importantly, isn’t it also worth considering the possibility that there are other variables in the equation besides income inequality; for example, the sufficiency of the incomes earned by those in the lowest quartile of the earnings distribution. If the poorest quarter of citizens were destitute, that would seem more socially destabilizing than if they could comfortably feed, clothe, and house themselves and their families – regardless of the incomes of the rich. Someone able to live comfortably might not care if the richest citizens double their incomes tomorrow, whereas someone who is barely scraping by might resent even the most modest increase in the incomes of the rich.

So perhaps the seemingly inevitable increase in income inequality will not pose a threat to social stability, so long as those with the least marketable skills can still earn a comfortable living.

It would be interesting to see a natural experiment conducted to test this theory using historical data.

New at Cato Unbound: Frank Levy on Education and Inequality in the Creative Age

In today’s reply to Richard Florida’s lead essay on “The Future of the American Workforce in the Global Creative Economy,” Frank Levy, Daniel Rose Professor of Urban Economics in the MIT Department of Urban Studies and Planning, agrees that creativity is more important than ever in a world where computers and foreign workers can do routine work less expensively than domestic workers. This shift, Levy says, requires better education in problem-solving. But better education can only do so much. The gains from rising labor productivity are going largely to the wealthy, Levy argues. Unless policies and norms are reinstated that spread those gains more widely, “all of the nation’s institutions will be at risk.”

A Jobs Program for Lawyers

Earlier this week, Rep. Phil English (R-Pa.) introduced some of the most cynical trade legislation in recent memory. Simply put, English’s bill and a Doha Round agreement are mutually exclusive. 

English calls for significantly lowering the already laughably lax evidentiary thresholds (described by Brink Lindsey and me here, here, here, here, here, here, here, and here) required to impose antidumping, countervailing duty, and safeguard protection. The legislation collides head on with the practical requirement of the Doha negotiating mandate that those rules be tightened, not loosened.

In introducing his legislation, English relies on the same tired, well-refuted rhetoric: “Failing to update our outdated trade laws allows foreign countries to continue robbing Americans of their jobs,” he says. Pu-lease

Granted, in Mr. English’s district of Erie, Pa., the unemployment rate of 5.1 percent is slightly higher than the downward-trending national rate of 4.6 percent (just announced today). Yet Erie’s rate is still well below the national average in each of the past four decades. 

But it’s not the jobs of his Erie constituents that English seeks to protect. Rather, it’s the jobs of Washington’s legions of underutilized trade lawyers who are the primary beneficiaries of this proposal. 

“My initiative streamlines the process for American companies seeking relief against import surges, illegal imports, and other crippling circumstances stemming form trade,” English says. “Our trade laws are essential to police our domestic market and are used only when others break the rules. Now is the time to fix the law to serve our interests, not those of predatory trading partners.”

Exactly whose interest he means by “our interests” should be clear. There’s been a lot of talk within the trade community recently about the paucity of new trade remedy cases. In fact, there has been only one U.S. antidumping initiation this entire year, and only three over the past 10 months, which is a major dropoff from the one or two per months we’ve seen for the past few years. Combine that trend with the recent “softwood lumber” truce between the United States and Canada, and you have a sudden glut of starving trade lawyers. (And Research-in-Motion thought it was out of the woods when its patent infringement suit settled!)

The reduction in trade remedy cases is attributable to a few laudable facts: 

First, the U.S. economy has been growing steadily, if not handsomely, for over four years now. Under those circumstances, it’s difficult to make the case that your industry is materially injured (one of the stubborn requirements of winning antidumping protection). 

Second, the U.S. steel industry, which accounts for the preponderance of antidumping protection, is healthier than it has ever been. 

Third, as globalization has progressed, supply chains have gone international. The once clear definition of a domestic industry has been blurred by the fact that production of a final product often takes place in multiple countries. Bringing antidumping suits has a greater downside now, as domestic petitioners are more likely to ensnare an entity in its own supply chain or related to them in some other way. 

And fourth, as the world economy has expanded, producers have many more sales opportunities around the globe than they used to. Emerging demand in previously flat markets has caused managers to rethink their sales strategies: fewer are pursuing a strategy of competing on price in the United States, while more are looking to be early entrants in developing markets.

So, since the conditions that give rise to successful antidumping petitions are scarce today, the lawyers are trying to create demand for trade remedy measures by lowering the standards. If Congressman English’s bill were to become law, they just might succeed. What will be interesting to track is the rigor with which respondent law firms (those firms that typically represent importer and foreign-producer interests) oppose this legislation. The current environment favors their clients, but the lack of legal action doesn’t pay those hefty lawyer salaries.

A Flood of Immigrants?

In the midst of the Senate debate on an immigration bill this month, the Heritage Foundation published a report claiming that legalization of undocumented workers already here and creation of a temporary-worker program would unleash a flood of more than 100 million new immigrants in the next 20 years. The headline-catching number turned heads on Capitol Hill, provided grist for talk radio, and hardened the opposition to immigration reform.

In hindsight, however, the number looks less and less plausible. Consider: If immigrants did come in such numbers, the average would be 5 million a year. That compares to an average immigration inflow, legal and illegal, of about 1.5 million during the past decade. The U.S. economy simply could not produce enough jobs each year during the next two decades to attract and employ that many immigrants. We also know from experience that previous attempts at legalization did not unleash a flood of so-called chain migration, in which newly legalized and naturalized workers sponsor spouses, children, parents and siblings. Check out an op-ed article posted today on the Cato web site that spells out in detail why the 103 million figure is a gross exaggeration. 

The Congressional Budget Office, in its own study [.pdf] released May 16, calculates that immigration reform along the lines of what the Senate passed last week would increase immigration over the next decade by less than 8 million. And an analysis by the President’s Council of Economic Advisers found numerous methodological faults with the Heritage study, including double counting and failure to account for emigration.

The Heritage study generated a lot of heat in an already over-heated immigration debate. Unfortunately, it failed to provide any real light.   

Jump Ship!

Thursday’s New York Times Economic Scene article by Austan Goolsbee made the rounds late last week. Here’s Alex Tabarrok’s take. Be sure to read the comments. From the left, here’s Lindsay Beyerstein and commenters. Goolsbee presents research that shows that the state of the economy when you take your first job can have a long-lasting effect on future earnings:

Lost in the argument over whether young people today know how to work, however, is the mounting evidence produced by labor economists of just how important it is for current graduates to ignore the old-school advice of trying to get ahead by working one’s way up the ladder. Instead, it seems, graduates should try to do exactly the thing the older generation bemoans — aim for the top.

The recent evidence shows quite clearly that in today’s economy starting at the bottom is a recipe for being underpaid for a long time to come. Graduates’ first jobs have an inordinate impact on their career path and their “future income stream,” as economists refer to a person’s earnings over a lifetime.

The importance of that first job for future success also means that graduates remain highly dependent on the random fluctuations of the economy, which can play a crucial role in the quality of jobs available when they get out of school.

[…]

These data confirm that people essentially cannot close the wage gap by working their way up the company hierarchy. While they may work their way up, the people who started above them do, too. They don’t catch up. The recession graduates who actually do catch up tend to be the ones who forget about rising up the ladder and, instead, jump ship to other employers.

What’s really the advice here? Shoot for the top, or do a lot of switching? Goolsbee seems to be endorsing aiming for the top, but the last sentence above, about jumping ship, seems to support something else altogether.

In 1995, with my degree in Studio Art and the History and Philosophy of Art firmly in hand, I landed a plum “you want fries with that” gig at the Arby’s in the Iowa City mall. I guess I should be glad I didn’t try work my way up the Arby’s ladder!

Stanford’s Paul Oyer, whose study Goolsbee cites, says: “Try to get lucky. And also, think carefully about that first job because it can matter for the rest of your career.” Isn’t this is terrible advice?

First, Oyer assumes that maximizing lifetime income is our goal, which is absurd. I imagine you should try to get a job you will like. And it is lucky indeed to hit the career bullseye with the first throw. So you should simply assume that you won’t get lucky, won’t get the dream job out of the gate. Even if you do get the dream job, you’ll likely find that it’s not such good luck after all, and find yourself dreaming a different dream. It will take a while to find the right fit, so plan for that.

Still, even if your goal is lifetime income maximization, the article seems to indicate that you should bail from your first job just as soon as you can get one that pays more. Your earnings are path-dependent as long as you stay on the same path. So don’t. Switch paths. The days of 35 years, a gold watch, and a pension are long gone.

Anyway, why even try to get lucky with your first job? If I’m giving advice to undergrads, I’m going to tell them to study something they really enjoy—something they’ll get satisfaction from for their rest of their lives. I don’t use it on the labor market, but my art history major is and will continue to be a source of enjoyment to me. About the first job: don’t think ladder, think springboard. (However, if you’re studying something interesting but not very marketable, make sure you get some real work experience in another area, so you don’t find yourself in the dread category “educated but unskilled.”) As I mentioned before, people are afraid of volatility, but many would be happier if they took more risks. In a society like ours, a good diploma from any decent college, grad, or professional school is pretty much all the safety net you’ll ever need, especially when young and childless, so the risk of job-switching isn’t actually very risky at all.

Doha Round: Curb Your Enthusiasm

In a sure sign of how desperate negotiators are to get a signal that something—anything—is going to come of the Doha Round of global trade talks, there has been much ado this week about the revised “offer” that the European Union has made on agricultural market access, one of the necessary elements in a successful deal.

Even the Australians—usually one of the most reliable critics of European agricultural policy—have welcomed the sign of flexibility.

But what would this offer mean exactly? There doesn’t seem to be a whole lot to get excited about. For a start, no numbers were mentioned. The message from EU trade commissioner Peter Mandelson, delivered by David O’Sullivan, director general of the EU’s trade directorate, merely said that “if, and only if, key partners also put something worthwhile on the table—the EU will be prepared to enhance further its current agricultural offer.”

The EU’s current agricultural offer would certainly benefit from some enhancing. Its last substantive offer in October 2005 proposed cuts to developed country farm tariffs that fall far short of the demands of the United States, the Cairns Group of agricultural exporting countries, and even the more modest demands from the G-20 developing countries. In a press interview prior to the official statement, O’Sullivan was somewhat more detailed about the EU’s bottom line, saying that they would be willing to “move towards, but certainly not as far as, the G-20 position.”

The lack of numbers was no deterrent to deputy U.S. trade representative and WTO ambassador Peter Allgeier expressing his indifference. According to him, the EU’s proposal “would not be nearly sufficient…for there to be new trade flows.” That benchmark seems a sensible one: surely new trade flows should be the ultimate aim of trade liberalization talks.

I wonder if O’Sullivan talked to French president Jacques Chirac before he made his tentative and conditional offer of flexibility. The French have been blamed for the obstinacy so far shown by the EU, and their attitude can be gleaned from this comment from President Chirac to Brazilian television: “[The] three areas to which we’ve attached the greatest importance [are]: industry, services and, above all, the aid and interests of the poor countries with which Europe has very strong ties and who could be the victims of the WTO’s actions.”

Even overlooking the unnecessary and inflammatory swipe at the WTO, Chirac’s comments must be seen as a cynical attempt to exploit former colonies’ so-called “dependence” on non-reciprocal preference rates. Despite research from the World Bank and the WTO that shows that most of the risks from preference erosion (the loss of competitive advantage, enjoyed by preference beneficiaries, that results from non-disriminatory—or “most-favoured-nation”—trade liberalization) are limited to a few items in a few markets and that developing countries will gain significantly from reducing their own tariffs, many preference recipients, encouraged by some NGOs, are threatening to block consensus on a final agreement if their “needs” are not addressed.

Instead of issuing statements that inflame such tensions, maybe President Chirac should step up consultations with French services and manufacturing bodies and find out how they would feel about the failure of the trade talks. Then he should pick up the telephone and call Mandelson.

Maybe then we’ll see an offer to get excited about.