The Benefits of Internal Migration

The books above arrived yesterday, making them the latest additions to my library. The picture does a decent job of capturing my general interests, intellectually speaking. My concern about and interest in the topic on the right is heavily influenced by the topic on the left. (I’ve made this evident in my past writing.) I’m excited to dive into both, but Gardner’s reminds me of some recent work on internal migration that I wanted to highlight:

• Data from Indonesia show “moderate aggregate gains but important heterogeneity. Removing all frictions is predicted to increase aggregate productivity by 22 percent. These gains are modest relative to the potential gains suggested by studies such as Gollin et al. (2014), but are in line with what one may expect from other microeconomic studies. For the people born in some locations, however, the results are much larger, with predicted gains peaking at 104 percent. We show, theoretically and empirically, that gains are larger for origins that have higher dispersion in average wages across destinations. Because complete barrier removal may be impossible, we also compute the gains from moving to the US level of movement costs, which we see as a high-mobility benchmark. We predict an aggregate productivity boost of 7.1 percent, with the origin that gains most seeing a 25 percent increase. We conclude that while migration that improves the static allocation of labor is unlikely to have very large productivity effects of the sort estimated, for example, by Hsieh and Klenow (2009), targeted policies may have big impacts on the lives of some communities” (pg. 2232).

• Data from China demonstrate “that, on net, increased access and returns to internal migration are beneficial for rural households. Food consumption becomes less variable. The findings rule out a negative wealth effect from having a migrant and rule out the possibility that the total consumption risk a household faces increases as a result of having a migrant. Furthermore, the results suggest that low-yielding assets are liquidated. The proceeds of the liquidation of the assets, potentially combined with net positive transfers from migrants, serve to increase households’ cash on hand. The increased cash on hand may fund the observed increase in food consumption and the observed increase in investment in high-risk, high-return assets. An alternative interpretation of the liquidation of low-yielding assets is that they were used to finance the costly migration of a household member” (pg. 111).

As Lant Pritchett has shown, labor mobility is the most well-established anti-poverty program around.

New Stuff on Trade & Globalization

Some recent noteworthy studies:

• Data from India indicates that foreign direct investment can reduce capital misallocation. The researchers conclude, “Capital misallocation can be an important hurdle for development. By preventing the firms with the highest returns from growing, it reduces the quantity produced, increases the prices consumers face, and reduces the wage bill. If changing the local banking market is complicated because of bureaucracy or political capture, governments have a powerful lever that can be used to reduce misallocation: Increasing access to foreign capital for domestic firms.”

• A recent World Bank report finds:

  • Global value chains (GVCs) account for almost 50% of global trade today. Over the past 30 years, they have helped poor countries grow faster, lifting many out of poverty.

  • GVCs can further boost inclusive and sustainable growth, create better jobs and reduce poverty, if developing countries implement deeper reforms and industrial countries pursue open, predictable policies.

  • A 1% increase in GVC participation is estimated to boost per capita income levels by more than 1% - about twice as much as conventional trade.

  • New technologies, such as automation and 3D printing, are a frequent cause for concern. But they are more likely to boost GVCs as trade and communication costs come down, new products are developed, and productivity increases.

• A brand new Federal Reserve paper concludes, “Most previous work on the “China shock” emphasized its detrimental consequences for U.S. employment. Our findings send a different message: the price effects of trade with China were large and beneficial to U.S. consumers. We estimate that falling prices in product categories that were more exposed to trade with China created hundreds of thousands of dollars in consumer surplus for each displaced job. These prices effects are particularly large in product categories selling to low-income consumers” (pg. 42).

What Anti-Poverty Programs Actually Reduce Poverty?

According to the Tax Policy Center,

The earned income tax credit (EITC) provides substantial support to low- and moderate-income working parents, but very little support to workers without qualifying children (often called childless workers). Workers receive a credit equal to a percentage of their earnings up to a maximum credit. Both the credit rate and the maximum credit vary by family size, with larger credits available to families with more children. After the credit reaches its maximum, it remains flat until earnings reach the phaseout point. Thereafter, it declines with each additional dollar of income until no credit is available (figure 1).

By design, the EITC only benefits working families. Families with children receive a much larger credit than workers without qualifying children. (A qualifying child must meet requirements based on relationship, age, residency, and tax filing status.) In 2018, the maximum credit for families with one child is $3,461, while the maximum credit for families with three or more children is $6,431.

…Research shows that the EITC encourages single people and primary earners in married couples to work (Dickert, Houser, and Sholz 1995; Eissa and Liebman 1996; Meyer and Rosenbaum 2000, 2001). The credit, however, appears to have little effect on the number of hours they work once employed. Although the EITC phaseout could cause people to reduce their hours (because credits are lost for each additional dollar of eanings, which is effectively a surtax on earnings in the phaseout range), there is little empirical evidence of this happening (Meyer 2002).

The one group of people that may reduce hours of work in response to the EITC incentives is lower-earning spouses in a married couple (Eissa and Hoynes 2006). On balance, though, the increase in work resulting from the EITC dwarfs the decline in participation among second earners in married couples.

If the EITC were treated like earnings, it would have been the single most effective antipoverty program for working-age people, lifting about 5.8 million people out of poverty, including 3 million children (CBPP 2018).

The EITC is concentrated among the lowest earners, with almost all of the credit going to households in the bottom three quintiles of the income distribution (figure 2). (Each quinitle contains 20 percent of the population, ranked by household income.) Very few households in the fourth quinitle receive an EITC (fewer than 0.5 percent).

Recent evidence supports this view of the EITC. From a brand new article in Contemporary Economic Policy:

First, the evidence suggests that longer-run effects[1]”Our working definition of “longer run” in this study is 10 years” (pg. 2).[/ref] of the EITC are to increase employment and to reduce poverty and public assistance, as long as we rely on national as well as state variation in EITC policy. Second, tighter welfare time limits also appear to reduce poverty and public assistance in the longer run. We also find some evidence that higher minimum wages, in the longer run, may lead to declines in poverty and the share of families on public assistance, whereas higher welfare benefits appear to have adverse longer-run effects, although the evidence on minimum wages and welfare benefits—and especially the evidence on minimum wages—is not robust to using only more recent data, nor to other changes. In our view, the most robust relationships we find are consistent with the EITC having beneficial longer-run impacts in terms of reducing poverty and public assistance, whereas there is essentially no evidence that more generous welfare delivers such longer-run benefits, and some evidence that more generous welfare has adverse longer-run effects on poverty and reliance on public assistance—especially with regard to time limits (pg. 21).

Let’s stick with programs that work.

Cross-posted at Difficult Run.

Do Tariffs Cancel Out the Benefits of Deregulation?

In June, the Council of Economic Advisers released a report on the economic effects of the Trump administration’s deregulation. They estimate “that after 5 to 10 years, this new approach to Federal regulation will have raised real incomes by $3,100 per household per year. Twenty notable Federal deregulatory actions alone will be saving American consumers and businesses about $220 billion per year after they go into full effect. They will increase real (after-inflation) incomes by about 1.3 percent” (pg. 1).

David Henderson (former senior economist in Reagan’s Council of Economic Advisers) writes, “Do the authors make a good case for their estimate? Yes…I wonder, though, what the numbers would look like if they included the negative effects on real income of increased restrictions on immigration and increased restrictions on trade with Iran. (I’m putting aside increased tariffs, which also hurt real U.S. income, because tariffs are generally categorized as taxes, not regulation.)”

But what if we did include the tariffs? A recent policy brief suggests that the current savings from deregulation will actually be cancelled out by the new tariffs. As the table shows below, the savings due to deregulation stack up to $46.5 billion as of June. However, the tariffs imposed between January 2017 and June 2019 rack up to a dead loss of $13.6 billion. By the end of 2019, however, the dead loss will rack up another $32.1 billion. If the currently planned tariffs are put into effect on top of the already existing ones, then we’re looking at a dead loss of up to $121.1 billion.*

Maybe if economists start putting clap emojis in their work, people will finally get that tariffs aren’t good for the economy.

*Deregulation and trade go well together.

This is cross-posted at Difficult Run.

The Paradox of Trade Liberalization

From a brand new study in the Journal of International Economics:

Using household survey data for 54 low and middle income countries harmonized with trade and tariff data, this paper offers a quantitative assessment of the income gains and inequality costs of trade liberalization and the potential trade-off between them.

A stylized yet comprehensive model that allows for a rich range of first-order effects on household consumption and income is used to quantify welfare gains or losses for households in different parts of the expenditure distribution. These welfare impacts are subsequently explored by deploying the Atkinson social welfare function that allows us to decompose inequality adjusted gains into aggregate gains and equality (distributional) gains.

Liberalization is estimated to lead to income gains in 45 countries in our study, and to income losses in 9 countries. The developing world as a whole would enjoy gains of about 1.9% of real household expenditures, on average. These income gains are negatively correlated with equality gains, such that liberalization typically entails a trade-off between average incomes and income inequality. In fact, such trade-offs arise in 45 out of 54 countries, and are primarily the result of trade exacerbating income inequality. By contrast, consumption gains tend to be more evenly spread across households.

While trade-offs are prevalent, our findings also suggest that liberalization would be welfare enhancing in the vast majority of countries in our study: in a large part of the developing world, the current structure of tariff protection is inducing sizable welfare losses. Explaining what drives these patterns is beyond the scope of this paper but an interesting avenue for future research (pg. 16).

I’m sure this offers a bit of a conundrum for those who have conflated concerns over inequality with caring for the poor.*

*It should be noted that global inequality is actually decreasing. And this isn’t really a paradox when you realize that concerns over poverty and inequality aren’t one and the same.

This is cross-posted at Difficult Run.

What Would the World Look Like Without FDI?

What would happen if foreign direct investment (FDI) simply disappeared? Or, more specifically, what would “a hypothetical world without outward and inward FDI from and to low- and lower-middle-income countries” look like? A brand new study tries to quantify this hypothetical. They find,

On average, the gains from FDI in the poorer countries in the world amount to 7% of world’s trade in 2011, the year of our counterfactual analysis. Second, all countries lose from the counterfactual elimination of FDI in the poorer countries.  Third, the impact is heterogeneous. Poorer countries lose the most, but the impact varies widely even within this group – some lose over 50% and some very little. The impact on countries in the rest of the world is significant as well. Some countries lose a lot (e.g. Luxembourg, Singapore, and Ireland) while others (such as India, Ecuador, and Dominican Republic) lose less. Pakistan and Sri Lanka actually see an increase in their total exports due to the elimination of FDI.

Figure 1 Percentage change in total exports from eliminating outward and inward FDI to and from low- and lower-middle-income countries

There’s more:

On average, the gains from FDI amount to 6% of world’s welfare in 2011. Further, all countries in the world have benefited from FDI, but the effects are very heterogeneous. The directly affected low- and lower-middle-income countries see welfare changes up to over 50% (Morocco and Nigeria), while some of the remaining 68 countries, such as Ecuador, Turkmenistan, and Dominican Republic are hardly affected. A higher country-specific production share of FDI leads to larger welfare losses, all else equal.  Intuitively, a larger importance of FDI in production leads to larger welfare losses when restricting FDI. A larger net log FDI position leads to larger welfare losses. Intuitively, if a country has more inward than outward FDI, restricting FDI will lead to larger welfare losses, as FDI is complementary to other production factors and therefore overall income increases more than FDI payments.

Figure 2 Welfare effects of eliminating outward and inward FDI to and from low- and lower-middle-income countries (%)

The authors conclude, “Overall, the analysis reveals that FDI is indeed an important component of the modern world economic system. The results suggest positive payoffs to policies designed to facilitate FDI, particularly those concerning protection of intellectual property.”

This is cross-posted at Difficult Run.

How Does Occupational Licensing Impact Immigrants?

From a recent working paper out of the Center for Growth & Opportunity:

We use two sources of data—the Current Population Survey (CPS) and the Survey of Income and Program Participation (SIPP)—to explore the differences in occupational licensing between natives and immigrants. Each dataset provides unique advantages, allowing us to paint a clearer picture of how occupational licensing differs between natives and immigrants than would be possible by using either dataset alone.

Though the CPS and SIPP differ in some key ways, where comparable our results are quite similar between the two datasets. We find that immigrants are significantly less likely to have an occupational license than natives; this gap is larger for men than for women and is especially large for the highest education level. The wage premium from having a license may not differ between natives and immigrants when controlling for English language ability, suggesting that though immigrants are less likely to have a license, they seem to benefit at least as much as natives from having one. Licensed workers tend to work more hours per week than otherwise similar unlicensed workers, so the wage premium understates the earnings premium.

Using the CPS, we find that the native/immigrant licensing gap declines with years since migration, consistent with immigrants assimilating toward natives. We also find large differences in licensing rates by region of origin; in particular, women from the Caribbean, Southeast Asia, and Africa have a higher probability of having a license than otherwise similar natives.

Using the SIPP, we find that a lack of English language proficiency lowers the probability that an immigrant has a license, even when controlling for other individual characteristics such as education level. Utilizing the richer set of occupational licensing questions available in the SIPP, we find no evidence to suggest that license characteristics differ between natives and immigrants, and thus we find no evidence that natives and immigrants are acquiring different types of licenses.

Our results suggest that occupational licensing disproportionately affects immigrants, especially male immigrants, those lacking English proficiency, and the most educated group. Indeed, insofar as occupational licensing helps to protect incumbent (largely native) workers in an occupation from competition, it is unsurprising that immigrants are particularly impacted (pg. 18-19).

They also find, “Skill-based immigration would favor immigrants with high levels of education. Our results indicate that it is precisely this group that exhibits the largest licensing attainment gap with natives. Increasing the flow of immigrants from this education level may lead to substantial occupational mismatch for this group of immigrants if they face difficulty in acquiring licenses needed to work in their pre-migration occupations” (pg. 20).

Regressive regulations like this are low-hanging fruit that can easily be changed.

This is cross-posted at Difficult Run.

Free Trade Is Good

From Art Carden over at Forbes:

A new paper forthcoming in the journal American Economic Review: Insights estimates the effect of trade with China on American consumers and shows us what we stand to lose if we don’t end the trade war.

In “Estimating US Consumer Gains from Chinese Imports,” economists Liang Bai of the University of Edinburgh and Sebastian Stumpner of the University of Montreal and the Bank of France study price data from the Nielsen Homescan panel to find that trade with China reduced the prices Americans paid for consumer tradables by 0.19 percentage points per year. You can download a draft of the paper here.

Bai and Stumpner argue that about a third of the consumers’ gain from trade with China comes from greater product variety while the other two-thirds come from lower prices for the goods people were already buying.

Another way to put it is that inflation was lower–prices didn’t rise as rapidly–because of trade with China…The direction of the result won’t surprise economists, who have argued for centuries that international trade helps a country’s citizens by making it possible for them to get more with every hour of their hard-earned labor.

Scott Lincicome of the Cato Institute weighs in as well:

Trade and globalization have provided undeniable economic benefits for the vast majority of American families, businesses, and workers. Most obvious are the consumer gains. Several recent studies have found that freer trade with China, for example, has generated, through increased competition and lower prices, hundreds of billions of dollars in U.S. consumer benefits — benefits that, according to economists Xavier Jaravel and Erick Sager, are the equivalent of giving every American “$260 of extra spending per year for the rest of their lives.”1 Consumer gains from imports, in general tilted toward the poor and the middle class, are especially tilted toward them when it comes to goods that are made in China and sold at stores like Walmart. The magnitude of such benefits also debunks the well-worn myth that free trade is mainly about cheap T-shirts. Indeed, trade’s consumer surplus is a big reason that Americans today work far fewer hours to own far better essentials than at any prior time in U.S. history.

Then there are trade’s overall benefits for the economy. A 2017 Peterson Institute paper calculated the payoff to the United States from expanded trade between 1950 and 2016 to be $2.1 trillion, increasing U.S. GDP per capita and per household by around $7,000 and $18,000 — with benefits, again, disproportionately accruing to households in the bottom income decile. The U.S. International Trade Commission, moreover, found in 2016 that U.S. bilateral and regional trade agreements such as NAFTA generated small but significant annual increases in GDP, as well as in employment and real wages among highly skilled and less skilled American workers. As the American Enterprise Institute’s Michael Strain has noted, trade-skeptical populists who downplay this impressive macroeconomic boost ignore that, as our current economic moment attests, a small bit of extra GDP growth can mean big things for lower-wage, lower-skill workers in terms of employment and possible government assistance.

Trade and globalization also support American companies and workers, even in manufacturing. The Commerce Department, for example, has estimated that almost 11 million jobs depended on exports of U.S. goods and services in 2016, and foreign direct investment in the United States — the necessary flip side of our oft-maligned trade deficit — supported millions more. Meanwhile, American companies that adapt and thrive in today’s economy most often do so by making use of imports and global supply chains. The San Francisco Fed, for instance, recently estimated that almost half of U.S. imports are intermediate products purchased by American manufacturers to make globally competitive finished goods; the country’s biggest exporters, therefore, are also its biggest importers. Numerous other studies have found that the vast majority of the value of an American company’s assembled-abroad product (such as an iPhone, assembled in China) accrues to the U.S. company, including its workers and shareholders — not to the place of final assembly (despite what a gross bilateral trade balance, which attributes an import’s full cost to its final export source, might say).

…My 2017 survey of the academic literature on over a century of U.S. protectionism pre-Trump showed that, with very few exceptions, it imposed immense economic costs on American consumers, workers, and companies (more than $600,000 per year for every U.S. job created) while also failing to open foreign markets or resuscitate protected American firms and workers over the longer term. In case after case, the jobs still disappeared, and the companies either went bankrupt or came back to the government for more help. And it’s happening again: Though American steel consumers are paying much higher prices than their global competitors, U.S. steel-industry stocks lag far behind the S&P 500 index. For these and related reasons, economists of the Left, Right, and center continue to oppose tariffs overwhelmingly (93 percent of a recent IGM Economic Experts Panel of dozens of top economists, to be exact), and they support freer trade and globalization.

Say again: free trade is good.

This is cross-posted at Difficult Run.

The Economic Illiteracy of Journalists: Venezuela Edition

Modern journalism often makes me want to go lay down in the middle of I-35 during rush hour traffic. I’ve complained about economic illiteracy before, but I think this one from Pacific Standard takes the cake. It begins,

These days it seems you can’t talk about socialism without being required to talk also about Venezuela—largely because certain people on the right bring up the failures of Venezuela every time the word “socialism” appears. Right-wing pundits claim incessantly that socialist policies are to blame for the terrible conditions that Venezuelans are now living through.

But this story is fundamentally false.

And who does the author consult to establish the falsity of this story?

• A Marxist (Wolff), which is about as fringe as fringe can get in economics. Marxists are the anti-vaxxers of mainstream economics.

• A supporter of Modern Monetary Theory (Galbraith), which has virtually no support among mainstream economists.

• Noam Chomsky.

The author declares,

Most crucially, it was a government rife with corruption that shattered Venezuela…Anat Admati, a professor of economics and finance at Stanford University, tells me that corruption can devastate any country. Regardless of the ideology that inspires your economic policies, Admati says, if there’s too much corruption, the country will fail…Corruption, not socialism, is the malignant tumor on democracy worldwide—in Venezuela, yes, but also here at home.

First off, to say socialism has nothing to do with Venezuela’s collapse is absurd. A 2018 report from the Council of Economic Advisers provides a rundown of some of Venezuela’s socialist policies, from the nationalization of industries (such as oil) to heavy taxation on earning and spending to price controls. Using a synthetic control methodology, economists Kevin Grier and Norman Maynard compared Venezuela’s performance under Hugo Chavez to its expected performance based on similar oil-producing, non-socialist Latin American countries. They find that “after 1998 (the year of Chavez’s successful presidential campaign) synthetic and actual Venezuela sharply diverge. By 2003, Venezuelan per-capita income is more than $3500 below that of synthetic Venezuela, and the gap exceeds $2500 in all subsequent years. It appears that Chavez’s leadership and policies were quite bad for the overall level of wealth in Venezuela” (pg. 8). They conclude, “We find that although average incomes rose somewhat during his time as president, they lagged far behind where they might have been if Chavez had not taken office” (pg. 14). In short, the oil boom masked Venezuela’s socialist underbelly. When the oil prices collapsed, the rot was exposed.

Even still, to say that “corruption, not socialism” led to Venezuela’s downfall reminds me of a quip by the assassin Vincent (played by Tom Cruise) in the film Collateral. After a dead body falls on his cab and the realization sinks in that Vincent is responsible, a shocked Max (Jamie Foxx) says, “You killed him!” Vincent, unfazed, responds, “No, I shot him. The bullets and the fall killed him.” It’s a distinction without a difference.

In their book Why Nations Fail: The Origins of Power, Prosperity, and Poverty, Daron Acemoglu and James Robinson distinguish between inclusive and extractive institutions, with the former creating the conditions for prosperity. “Inclusive economic institutions,” they write,

…are those that allow and encourage participants by the great mass of people in economic activities that make best use of their talents and skills and that enable individuals to make the choices they wish. To be inclusive, economic institutions must feature secure private property, an unbiased system of law, and a provision of public services that provides a level playing field in which people can exchange and contract; it also must permit the entry of new business and allow people to choose their careers…Inclusive economic institutions foster economic activity, productivity growth, and economic prosperity (pg. 74-75).

In other words, inclusive institutions are largely free-market economies. On the other hand, extractive economic institutions lack these properties and instead “extract incomes and wealth from one subset of society to benefit a different subset,” empowering the few at the expense of the many (pg. 76).

The Fraser Institute’s Economic Freedom of the World (EFW) Index, published in its annual Economic Freedom of the World reports, defines economic freedom based on five major areas: (1) size of the central government, (2) legal system and the security of property rights, (3) stability of the currency, (4) freedom to trade internationally, and (5) regulation of labour, credit, and business. According to its 2018 report (which looks at data from 2016), countries with more economic freedom have substantially higher per-capita incomes, greater economic growth, and lower rates of poverty. This makes economic freedom an excellent proxy for Acemoglu & Robinson’s “inclusive institution.” What’s more, Venezuela comes in dead last in the list of 162 countries.[1] Drawing on the EFW Index, Georgetown political philosophers Jason Brennan and Peter Jaworski point to a strong positive correlation between a country’s degree of economic freedom and its lack of public sector corruption.[2]

“Corruption,” writes economist Joseph Connors, “is institutionalized exploitation and…it becomes institutionalized in the least capitalist countries. Transparency International, the creator of the Corruption Perception Index, is an organization dedicated to eradicating corruption. According to its metric of corruption, people who live in capitalist countries experience significantly less corruption than people in less capitalist countries. Market competition helps explain why this is true. Market competition diffuses power, and corruption thrives on centralized power. Thus, capitalism provides the environment that allows markets to keep corruption at bay.”[3]

Granted, a lack of corruption could very well give rise to market reforms and increased economic freedom instead of the other way around. However, recent research on China’s anti-corruption reforms suggests that markets may actually pave the way for anti-corruption reforms. Summarizing the implications of this research, Lin et al. explain,

Reducing corruption creates more value where market reforms are already more fully implemented. If officials, rather than markets, allocate resources, bribes can be essential to grease bureaucratic gears to get anything done. Thus, non-[state owned enterprises’] stocks actually decline in China’s least liberalised provinces – e.g. Tibet and Tsinghai – on news of reduced expected corruption. These very real costs of reducing corruption can stymie reforms, and may explain why anticorruption reforms often have little traction in low-income countries where markets also work poorly. China has shown the world something interesting: prior market reforms clear away the defensible part of opposition to anticorruption reforms. Once market forces are functioning, bribe-soliciting officials become a nuisance rather than tools for getting things done. Eliminating pests is more popular than taking tools away … A virtuous cycle ensues – persistent anticorruption efforts encourage market-oriented behaviour, which makes anticorruption reforms more effective, which further encourages market oriented behaviour.

There is also evidence that suggests that more government fingers in the pies increases corruption. For example, a 2017 study finds that larger municipality councils in Sweden result in more corruption problems. A 2009 study finds that more government tiers and more public employees lead to more bribery. Finally, a 2015 study shows that high levels of regulation are associated with higher levels of corruption (likely because of regulatory capture).

So while some may think socialism couldn’t have crippled Venezuela because Sweden, they’re wrong. And wrong in a big way.

Notes

1. It’s also 188 of 190 in the World Bank’s latest Doing Business report.

2. This could be in part due to economic growth undermining corruption and economic freedom promoting growth.

3. Joseph Connors, “Is Capitalism Exploitative?” in Counting the Cost: Christian Perspectives on Capitalism, ed. Art Lindsley, Anne R. Bradley (Abilene, TX: Abilene Christian University Press, 2017), 130-131.

This is cross-posted at Difficult Run.

More on Trump’s Trade War

NBER Digest has a nice rundown of recent work on Trump’s trade war. One study finds

that the costs of the new tariff structure were largely passed through as increases in U.S. prices, affecting domestic consumers and producers who buy imported goods rather than foreign exporters. The researchers estimate that the tariffs reduced real incomes by about $1.4 billion per month. Due to reduced foreign competition, domestic producer prices also increased. The prices of manufactured goods rose by one percentage point relative to a no-trade-war scenario. The reduction in real incomes represents the welfare cost of higher consumer prices, less the government revenue collected by the tariffs and the additional income of domestic producers who were able to sell their products at higher prices.

This could end up being “especially costly for multinational companies that have made substantial sunk-cost investments in supply chains in other countries, for example by relying on facilities in China or other impacted countries. The study estimates that around $165 billion worth of trade has been rerouted to avoid them.”

Another study

estimate[s] that the new tariff regime reduced U.S. imports by 32 percent, and that retaliatory tariffs from other countries resulted in an 11 percent decline of U.S. exports. They use these responses to estimate import demand and export supply elasticities, and then apply these estimates to calibrate a general equilibrium model of the U.S. economy with detailed input-output linkages. They estimate that higher prices facing U.S. consumers and firms who purchased imported goods generated a welfare loss of $68.8 billion, which was substantially offset by the income gains to U.S. producers who were able to charge higher prices ($61 billion). The researchers estimate the resulting real income decline at about $7.8 billion per year, a value broadly comparable to the net income decline estimated in the previous study. 

What’s more, “The average real wage of workers in tradeable sectors declined by 0.7 percentage points, with a standard deviation of 0.4 percentage points across counties, with workers in the Midwest suffering more than those in other regions.” The protectionist policies also appear to be (of course) political. It turns out that “the U.S. tariffs protected industries that tended to employ workers in the most politically competitive counties. Foreign governments imposed retaliatory tariffs in sectors based in more Republican-leaning counties. The researchers estimate that counties with at least an 85 percent Republican vote share bore losses over 50 percent greater than counties in which the Republican vote share was less than 15 percent.”

Surprise, surprise.

This is cross-posted at Difficult Run.

CBO on the Minimum Wage

The following comes from the Congressional Budget Office’s July report. It pretty much captures one of the major trade-offs of minimum wage hikes.

The people who get the wage increases will obviously be better off. Not so for the 1.3 million (at $15 an hour) who lose their jobs.

So the question boils down to this: are we willing to make that trade?

This is cross-posted at Difficult Run.

Blog Post Roundup @ Difficult Run

• “Sounds a lot like Trump”: Peterson Institute economists weigh in on Warren’s “Economic Patriotism”

• Immigration horrors predate Trump.

• Global technology and knowledge diffusion is beneficial.

• Americans are religious illiterates.

• Religion goes well with good sex.

• Children aren’t living on $2 a day.

• Immigrants don’t impact native wages in Norway (but they may negatively affect other immigrants).

• The Nordic countries aren’t socialist.

Unintended Consequences: Chinese Edition

It is honestly kind of hard not to laugh at the Chinese response to Trump’s tariffs. From the Peterson Institute:

China increased its retaliatory tariffs hitting US exports on June 1 in response to President Donald Trump’s latest escalation of his trade war. Yet, this action is only half of the bad news for US exporters. The other half is that China has begun rolling out the red carpet for the rest of the world. Everyone else is enjoying much improved access to China’s 1.4 billion consumers, a fact that has been little noticed or reported in accounts of the US-China economic confrontation.

…Trump’s provocations and China’s two-pronged response mean American companies and workers now are at a considerable cost disadvantage relative to both Chinese firms and firms in third countries. The result is one more eerie parallel to the conditions US exporters faced in the 1930s.

Another important implication of China’s action is that Americans are likely suffering more than President Trump thinks due to his trade war. Inflicting such punishment on Americans may be one factor motivating China. A separate motivation may be that it is trying to minimize the harm to its own economy by importing vital goods at better prices from other parts of the world.

Lovely.

This is cross-posted at Difficult Run.

Critical Literature Reviews: International Trade & Political Ignorance

I recently completed two critical literature reviews for my graduate courses this semester.

For my Economic Growth class, I surveyed the academic literature on the effects of trade liberalization on poverty. This was explored through two main channels. First, through trade’s indirect effects on poverty via economic growth. Most research on trade liberalization and poverty is focused on the relationship between trade and growth. Other possible avenues associated with trade, growth, and poverty—such as innovation or institutional change—were largely be ignored. The final section mined the scant research on direct effects of trade liberalization on poverty.

For my Government & Politics class, I reviewed the academic literature on the extent of political ignorance, demonstrating that Americans know very little when it comes to politics and policy. I then looked at the scholarly explanations for the lack of political knowledge among the average citizen. Finally, I briefly (though not exhaustively) showed how political knowledge affects political preferences and, therefore, potential policy outcomes.

Portions of the papers are linked below.

International Trade

• Indirect Effects of Trade on Poverty

• Direct Effects of Trade on Poverty

Political Ignorance

• The Extent of Political Ignorance

• The ‘Why’ of Political Ignorance

• Political Ignorance and Policy Preferences

What Were the Results of the Washing Machine Tariffs?

As reported by The Washington Post,

When economists at the University of Chicago and the Federal Reserve studied the 2018 duty on washing machines, they found the expected rise in retail prices from foreign manufacturers such as Samsung and LG. Surprisingly, though, these brands also increased dryer prices. Then domestic manufacturers followed suit, simply because they could.

All told, the research shows, U.S. consumers are spending an additional $1.5 billion a year on washers and dryers as a result of the tariffs. That’s an extra $86 for each washing machine and $92 for each dryer, the authors estimate. And less than 10 percent of that goes to the U.S. treasury — about $82.2 million — the study showed…Foreign manufacturers are passing some costs on to consumers, while domestic ones are simply pocketing extra profits, according to the study.

…Manufacturers also capitalized on buyer habits when they bumped up the price of dryers, which were not subject to the tariffs. “Many consumers buy these goods in a bundle,” Tintelnot said. “Part of the price increase for washers was hidden by increasing the price of dryers.”

In sum, “U.S. consumers shouldered 125 to 225 percent of the costs of the washing-machine tariffs. And the duty was mostly a dud on the job-creation front,” costing consumers about $815,000 for every one of the 1,800 jobs created.

That’s exciting. Looks like tariffs are exactly what they are cracked up to be.

This is cross-posted at Difficult Run.

Do Minimum Wage Hikes Drive Some Restaurants Out of Business?

From a recent NBER paper (quoting from an earlier draft): 

As theory would suggest, we find robust evidence that the impact of the minimum wage depends on how close a restaurant is to the margin of exit, proxied by its rating. Looking at city-level minimum wage changes in the San Francisco Bay Area (the “Bay Area”), we present two main findings. First, at all observed minimum wage levels, restaurants with lower ratings are more likely to exit, suggesting that they are less efficient in the economic sense. Moreover, lower rated restaurants are disproportionately affected by minimum wage increases. In other words, the impact of the minimum wage on exit is most pronounced among restaurants that are closer to the margin of exit. 

…Our results suggest that a $1 increase in the minimum wage leads to an 14 percent increase in the likelihood of exit for the median 3.5-star restaurant, but no impact for five-star restaurants (the point estimate is in fact negative, suggesting that the likelihood of exit might even decrease for five-star restaurants, but the estimate is not statistically different from zero). These effects are robust to a number of different specifications, including controlling for time-varying county characteristics that may influence both minimum wage policies and restaurant demand, city-specific time trends to account for preexisting trends, as well as county-year fixed effects to control for spatial heterogeneity in exit trends.

…Overall, our findings shed on the economic impact of the minimum wage. Basic theory predicts that the minimum wage will cause firms that cannot adjust in other ways to cover their increased costs to exit the market. We find that lower rated firms (which are already closer to the margin of exit) are disproportionately impacted by the minimum wage. After a minimum wage increase, they are more likely to exit the market altogether and more likely to raise their prices (pg. 2-5).

This matches previous research,* which finds that labor-intensive restaurants tend to exit and make room for capital-intensive restaurants. 

*This same research finds that consumers bear the costs of minimum wage hikes. Lastly, the authors found “a short-run disemployment effect of just under −0.1 that likely grows by three to five times in the long run” (pg. 71).

This is cross-posted at Difficult Run.

Who Bears the Cost of the Minimum Wage?

From a forthcoming article in the American Economic Review (quoting from the draft version) on Hungarian minimum wage hikes:

Most firms responded to the minimum wage by raising wages instead of destroying jobs. Our estimates imply that out of 290 thousand minimum wage workers in Hungary, around 30 thousand (0.076% of aggregate employment) lost their job, while the remaining 260 thousand workers experienced a 60% increase in their wages. As a result, firms employing minimum wage workers experienced a large increase in their total labor cost that was mainly absorbed by higher output prices and higher total revenue. We also estimated that firms substituted labor with capital and their profits fell slightly. These results suggest that the incidence of the minimum wage fell mainly on consumers. Given the relatively small effect on employment, our results also suggest that minimum wages can redistribute income from consumers to low-wage workers without large efficiency losses. Our findings also indicate that the optimal level of the minimum wage is likely to vary across industries,cities and countries. In countries where low-wage jobs are concentrated in the local service sector (such as Germany or the U.S.) raising the minimum wage is likely to cause limited disemployment effects or efficiency losses. Moreover, in cities where mainly rich consumers enjoy the services provided by low wage workers this redistribution will be from rich to poor. The heterogenous responses across industries also underline the advantages of sector-specific minimum wage polices used in some European countries such as Italy or Austria. For instance, setting a higher minimum wage in the non-tradable sector than in the tradable sector can push up wages relatively more where it will generate more modest disemployment effects (pg. 23-24).

Passing the costs on to consumers fits with previous evidence. This also makes evident that the kind of industry (e.g., tradable vs. non-tradable) also matters when it comes to positive/negative effects of the minimum wage. *

*One of the study’s authors has found this elsewhere as have other scholars.

This is cross-posted at Difficult Run.

Is Student Loan Forgiveness for the Marginalized?

I saw this floating around Facebook recently with the news of Elizabeth Warren’s student loan plan. For those unfamiliar with what Mayfield is referencing, here’s the entry from the HarperCollins Bible Dictionary:

As another Bible dictionary clarifies, “Though Leviticus 25 does not explicitly discuss debt cancellation, the return of an Israelite to his land plus the release of slaves implies the cancellation of debts that led to slavery or the loss of land.”

So does Warren’s plan benefit “the marginalized”?

According to Adam Looney at the Brookings Institution, Warren’s proposal is “regressive, expensive, and full of uncertainties…[T]he top 20 percent of households receive about 27 percent of all annual savings, and the top 40 percent about 66 percent. The bottom 20 percent of borrowers by income get only 4 percent of the savings. Borrowers with advanced degrees represent 27 percent of borrowers, but would claim 37 percent of the annual benefit.”

He continues,

Debt relief for student loan borrowers, of course, only benefits those who have gone to college, and those who have gone to college generally fare much better in our economy than those who don’t. So any student-loan debt relief proposal needs first to confront a simple question: Why are those who went to college more deserving of aid than those who didn’t? More than 90 percent of children from the highest-income families have attended college by age 22 versus 35 percent from the lowest-income families. Workers with bachelor’s degrees earn about $500,000 more over the course of their careers than individuals with high school diplomas. That’s why about 50 percent of all student debt is owed by borrowers in the top quartile of the income distribution and only 10 percent owed by the bottom 25 percent. Indeed, the majority of all student debt is owed by borrowers with graduate degrees.

Drawing on 2016 data from the Federal Reserve’s Survey of Consumer Finances, Looney’s final analysis

shows that low-income borrowers save about $569 in annual payments under the proposal, compared to $900 in the top 10 percent and $2,653 in the 80th to 90th percentiles. Examining the distribution of benefits, top-quintile households receive about 27 percent of all annual savings, and the top 40 percent about 66 percent. The bottom 20 percent of borrowers by income get 4 percent of the savings…[W]hile households headed by individuals with advanced degrees represent only 27 percent of student borrowers, they would claim 37 percent of the annual savings. White-collar workers claim roughly half of all savings from the proposal. While the Survey of Consumer Finances does not publish detailed occupational classification data, the occupational group receiving the largest average (and total) amount of loan forgiveness is the category that includes lawyers, doctors, engineers, architects, managers, and executives.  Non-working borrowers are, by and large, already insured against having to make payments through income-based repayment or forbearances; most have already suspended their loan payments. While debt relief may improve their future finances or provide peace of mind, it doesn’t offer these borrowers much more relief than that available today.  

The Urban Institute’s analysis has similar findings (though their tone is more optimistic):

I’m not sure whether or not Warren’s plan is a good one (I’m skeptical, especially given some of the results abroad). But I’m not big on acting like college graduates in a rich country are the marginalized of society.

This is cross-posted at Difficult Run.

Does Good Management Produce More Equal Pay?

Nicholas Bloom–whose research on the economics of management I’ve relied on in my own work–and colleagues have an interesting article in Harvard Business Review:

For 2010 and 2015, the U.S. Census Bureau fielded the Management and Organizational Practices Survey (MOPS) in partnership with a research team of subject matter experts, including one of us (Nick), as well as Erik Brynjolfsson and John Van Reenen. The MOPS collects information on the use of management practices related to monitoring (collecting and analyzing data on how the business is performing), targets (setting tough, but achievable, short- and long-term goals), and incentives (rewarding high performers while training, reassigning, or dismissing low performers) at a representative sample of approximately 50,000 U.S. manufacturing plants per survey wave. We refer to practices that are more explicit, formal, frequent, or specific as “more structured practices.” From the MOPS and related data, researchers have demonstrated just how important the use of these structured management practices is for companies and even entire economies, since firms that implement more of these practices tend to perform better.  We wanted to know what effect these management practices have on workers.

We found that companies that reported more structured management practices according to the MOPS paid their employees more equally, as measured by the difference between pay for workers at the 90th (top) and 10th (bottom) percentiles within each firm.

The authors fully admit, “To be honest, it surprised us…If anything, we expected the opposite…We hypothesized that more structured management would lead to rewarding high-performers over others, therefore leading to a rise in inequality inside of the firm. As the chart above shows, the reality is exactly the reverse – and that remains true even after controlling for employment, capital usage, firm age, industry, state, and how educated the employees are.” They continue,

Our research finds that the negative correlation between structured management and inequality is driven by a strong negative correlation between the use of structured monitoring practices and inequality. By contrast, higher usage of structured incentives practices was positively correlated with inequality, albeit weakly. In other words, our finding seems to suggest that companies that collect and analyze specific and high-frequency data about their businesses tend to have a smaller gap between the earnings of workers at the top of the income distribution and the earnings of workers at the bottom of the distribution.

The authors offer several possible explanations:

Previous research shows that firms with more structured management practices are more profitable on average, and there’s long been evidence that when companies make extra profits they share some of them with workers. Perhaps companies with more structured practices allocate these profits such that less well-paid workers get more of the pie.

The relationship could also result from increased efficiency. Maybe firms with more structured practices have more efficient low-paid workers, as a response to training or monitoring practices, and their pay reflects that extra efficiency.

Finally, it could be that firms with more structured practices are more focused on specific tasks and rely more on outsourcing. More and more companies are outsourcing tasks like cleaning, catering, security, and transport. If outsourcing is more common for firms that use more structured practices, workers performing tasks outside of the companies’ core tasks would no longer be on those companies’ direct payrolls. If the jobs that are outsourced are lower-paying than the jobs that are held by employees, the companies’ pay data will become more equal.

Other research finds that paying employees higher wages

• Motivates employees to work harder.

• Attracts more capable and productive workers.

• Lead to lower turnover

• Enhance quality and customer service

• Reduce disciplinary problems and absenteeism

• Require fewer resources for monitoring

• Reduces poor performance caused by financial anxiety

Looking forward to Bloom et al.’s published work.

This is cross-posted at Difficult Run.

Is Contract Enforcement Important for Firm Productivity?

Contract enforcement is a major player in measuring the ease of doing business in a country. A new working paper demonstrates the importance of enforceable contracts to firm productivity:

In Boehm and Oberfield (2018) we study the use of intermediate inputs (materials) by manufacturing plants in India and link the patterns we find to a major institutional failure: the long delays that petitioners face when trying to enforce contracts in a court of justice. India has long struggled with the sluggishness of its judicial system. Since the 1950’s, the Law Commission of India has repeatedly highlighted the enormous backlogs and suggested policies to alleviate the problem, but with little success. Some of these delays make international headlines, such as in 2010, when eight executives were convicted in the first instance for culpability in the 1984 Bhopal gas leak disaster. One of them had already passed away, and the other seven appealed the conviction (Financial Times 2010)

These delays are not only a social problem, but also an economic problem. When enforcement is weak, firms may choose to purchase from suppliers that they trust (relatives, or long-standing business partners), or avoid purchasing the inputs altogether such as by vertically integrating and making the components themselves, or by switching to a different production process. These decisions can be costly. Components that are tailored specifically to the buyer (‘relationship-specific’ intermediate inputs) are more prone to hold-up problems, and are therefore more dependent on formal court enforcement.

…Our results suggest that courts may be important in shaping aggregate productivity. For each state we ask how much aggregate productivity of the manufacturing sector would rise if court congestion were reduced to be in line with the least congested state. On average across states, the boost to productivity is roughly 5%, and the gains for the states with the most congested courts are roughly 10% (Figure 3).

Cross-posted at Difficult Run.