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Greg Clark in A Farewell to Alms:
“The focus on material conditions in this history will strike some as too narrow, too incidental to vast social changes over the millennia. Surely our material riches reflect but a tiny fraction of what makes industrialized societies modern? On the contrary, there is ample evidence that wealth—and wealth alone—is the crucial determinant of lifestyles, both within and between societies.
Income growth changes consumption and lifestyles in highly predictable ways. The recent demise first of the American farmer and then of the manufacturing worker were already preordained when income began its upward march during the Industrial Revolution. Had we been more clear-sighted, we could have foreseen in 1800 our world of walk-in closets, his-and-her bathrooms, caramel macchiatos, balsamic reductions, boutique wines, liberal arts colleges, personal trainers, and $50 entrees.”
Lant Pritchett in Let Their People Come: Breaking the Gridlock on Global Labor Mobility:
“Hamilton and Whalley (1984) calculate that free migration could as much as double world income—which makes it very hard to stay motivated about the fractions of 1 percent that further trade liberalization can generate. These empirical results make intuitive sense. Goods markets are in fact quite deeply integrated, and though there are still gaps across countries in prices and evidence that the “border” effects inhibiting trade are still quite large, the price differences in goods across countries induced by restrictions on trade are very small relative to the observed wage gaps of as much as 10 to 1. Because, in the standard economic “triangle” calculations, the efficiency losses rise with the square of the distortion, further liberalization of trade (where distortions have been reduced) just cannot.”
Yesterday I wrote about how exponential economic growth has a much larger impact on employee welfare than unions can hope to. Well low wages isn’t the only problem economic growth can solve!
Economist and Judge Richard Posner, influential member of the law and economics movement, thinks that with the debt and obligations the US has piled up, their only real option is to focus on maximising exponential economic growth (HT Robin Hanson):
I conclude that there probably is only one way out of our fiscal dilemma, apart from default, devaluation, or runaway inflation, and that is to increase the rate of economic growth to the point at which a growing public debt falls, or at least does not increase further, in percentage of GDP. But measures to increase economic growth must satisfy four criteria: that they not interfere with the economic recovery; that they not put the government in the futile position of trying to pick tomorrow’s industry winners and investing in them (“industrial policy”); that they not cost too much, as that will contribute to the deficit, because the costs are likely to be incurred before the benefits are obtained; that they be politically feasible.
What is the easiest way to get economic growth? Immigration, says Bill Easterly!
In 2001, I published an obscure paper that concluded “Econometric tests and fiscal solvency accounting confirm the important role of growth in debt crises.” Based on this, I can now say that Haitians can rescue the US from an impending budget crisis. The crisis is already severe, with previously unthinkable warnings that US government bonds might lose their AAA rating.
Here’s the short version. If you are worried about having enough tax revenue to pay interest on the government debt, find more taxpayers! And look, here are some people volunteering to become new taxpayers: Haitian immigrants fleeing quakes and poverty! So let’s open the door to our Haitian fiscal rescuers, who will also lift themselves out of poverty as dramatized by a previous post. It’s a TWOFER!
End poverty and get your bill paid on time! Immigration – is there anything it can’t do?
Added: Posner also mentioned immigration, though only of skilled migrants, in his list: “1. Remove all limits on the immigration of highly skilled workers, or persons of wealth. (This should be done gradually, so as not to increase unemployment while the unemployment rate remains very high.)”
Added: A video about the huge contribution migration has made to ending poverty in the past and how it could do so again today if we let it.
In the popular imagination labour unions are a significant factor in the incomes of ordinary people and a major reason we don’t endure the relative poverty of past generations. Here I will try to argue that in a long run view labour unions, even given very generous assumptions, are pretty inconsequential, using some data from the Australian case. In the process I’ll help explain why just 6% of leading economics bloggers described unions as very important ‘for the health of the US economy‘ in a recent survey, while 70% described them as unimportant.
Recent research from the Melbourne Institute suggests that the lowest income earners in Australia receive a premium of ~12% of their wage from union activity, while the highest income earners receive a ~6% premium from union activity. They speculate that the reason for this is that high income employees are more skilled at bargaining individually and so benefit less from expert union representation. Such a premium is roughly comparable with union premiums observed across Europe and the US, and a bit higher than past estimates of the premium in Australia probably due to recent changes in industrial law.
This wage premium is entirely what we would expect from economic theory; where monopolies or cartels can push up prices and improve their earnings they will surely do so. Even where unions lack what economists term ‘market power‘, by allowing workers to pool their knowledge and skill when negotiating wages they can produce better outcomes for workers who might otherwise be convinced to take low wages. Unions can also use their power to push for better working conditions. Here I will assume that workers use unions to push for higher ‘non-wage compensation’ (safe and pleasant work environments, breaks, amenities) and wages roughly equally. In any round of bargaining workers might get larger improvements in one or the other of these but over decades they probably want them to rise proportionately.
Australia has recently experienced a small increase in the number of refugees attempting to arrive here by boat from Indonesia. The Government is trying to avoid accepting them into Australia, believing that public opinion does not support receiving ‘potentially dangerous queue jumpers’ into the country. In my view rejecting these refugees is a terrible decision both for them and for Australia. As Andrew Bartlett put it: “history shows the vast majority go on to become very productive and responsible members of our community”. It is only by an act of collective moral blindness that most Australians can feel righteous enforcing rules that prevent people suffering poverty and persecution from enjoying the benefits of living in Australia; benefits which they experience either by an accident of birth or because they themselves were allowed to come here.
Nonetheless, it is unlikely that public fear about accepting large number of asylum seekers into the community will go away any time soon or that the Labor Government will risk an electoral backlash by ignoring it. What then can we do for the tens of millions of desperate refugees in the world who won’t find wealthy and functioning countries to accept them? Paul Romer has an idea:
Charter cities offer a truly global win-win solution. These cities address global poverty by giving people the chance to escape from precarious and harmful subsistence agriculture or dangerous urban slums. Charter cities let people move to a place with rules that provide security, economic opportunity, and improved quality of life. Charter cities also give leaders more options for improving governance and investors more opportunities to finance socially beneficial infrastructure projects.
All it takes to grow a charter city is an unoccupied piece of land and a charter. The human, material, and financial resources needed to build a new city will follow, attracted by the chance to work together under the good rules that the charter specifies.
Action by one or more existing governments can provide the essentials. One government provides land and one or more governments grant the charter and stand ready to enforce it.
Romer suggests such a city would be viable in northern Australia:
Case 2: Australia and Indonesia create a new regional manufacturing hub
In a treaty that Australia could sign with Indonesia, Australia would set aside an uninhabited city-sized piece of its own territory. An official appointed by the Australian prime minister would apply Australian law and administer Australian institutions, with some modifications agreed to in consultation with the government of Indonesia.
The main insight here is that some of what makes high income countries so rich can be franchised. Rich countries are rich largely because they have large quantities of natural, physical and human capital, access to technology and the expertise to use it, as well as governmental, legal and cultural institutions which facilitate wealth production. Refugees moving to Australia from dysfunctional states would suddenly have access to far more of all of these things, but Australians presumably fear they might also reduce the natural, cultural and physical capital available for those, including themselves, who are already here. If Australians aren’t so enthusiastic about sharing their good luck with refugees, a Charter City administered by Australia could at least allow them access to the governmental and legal institutions which have served Australia so well. By credibly providing those rules in this new city Australia would make it a desirable place for investment, thereby also increasing the residents’ access to physical capital and technological expertise. While migrants to the charter city wouldn’t have access to the cultural and human capital that a new resident of Sydney would have, the close proximity to Australian culture and citizens would be sure to provide at some benefits in these areas as well. Romer is even confident that these cities would be able to pay for themselves and eventually turn a profit for the host country through tax revenue, which would essentially be selling their legal institutions to willing buyers.
The primary difficulty of building a city of refugees from scratch would be putting together the social capital and norms necessary for disparate social groups to obey the law and work together effectively and by so doing attract the investment necessary to build such a city. As Arnold Kling has pointed out:
Paul Romer, in presenting his idea for charter cities, makes it sound as though we can take rules “manufactured” in, say, Canada, and export them anywhere in the world. Leoni would say that instead most law is embedded in social customs In fact, my daughter who just spent the summer in Tanzania, says that the custom of seeing law as something that ought to be obeyed is not nearly as natural there as it is here.
Would refugees from a variety of different cultures be able to produce and follow a common set of laws and norms which would allow them to work and life well together? Would refugees, with little hope of returning home, jump at such an opportunity to start a new life in such an experimental city? If the answers are yes, it is possible Australians could help many more refugees than they would be willing to accept as immigrants to their country.
Alternative view: Greg Clark says culture and personality matter more than institutions.