Monday, 22 May 2017

Most studies of the economics of immigration are useless.

There’s a very simple reason. Most of them do not consider a HUGE cost that net immigrants impose on host countries, which is the fact that each person requires several tens of thousands of pounds worth of infrastructure and other forms of capital, like housing. (The phrase “net immigrant” refers to the excess of immigration over emigration.)

Thus for each net immigrant, taxes have to be imposed on existing residents of the country to pay for the infrastructure that each net immigrant requires.

Of course the latter point assumes that the host country ACTUALLY DOES create suitable amounts of infrastructure when net immigrants arrive or shortly thereafter. An alternative assumption (one that actually occurs in the real world to some extent no doubt) is that the host country FAILS to create suitable amounts of infrastructure. But the result is still a burden placed on the host country: in the form of overcrowded or inadequate infrastructure.

The above infrastructure point is not to deny that OVER THE LIFE-TIME of each net immigrant, those immigrants will pay, roughly speaking, enough tax to cover their contribution to the country’s infrastructure. But certainly during net immigrants’ first decade or two in the host country, they are “free riders”, thus on balance over their lifetimes, net immigrants do not pay their fair share of infrastructure costs.

As for what the total value of infrastructure and other forms of capital per head is, this study puts the figure at £141,000. The title of the study is “Warning: Immigration Can Seriously Damage Your Wealth” and is published by the Social Affairs Unit. £141,000 is a HUGE AMOUNT.

That is not to suggest that all net immigrants on arrival owe the host country £141k. The issue is more complicated than that. For example the amount of capital that immigrants bring with the must be taken into account. But the size of that figure does mean that to TOTALLY IGNORE the above infrastructure point in any study which purports to measure the costs and benefits of immigration is a huge blunder. And most such studies do in fact ignore the above infrastructure point.

Thus, to quote the title of this article, most such studies are “useless”.

Saturday, 20 May 2017

Pavlina Tcherneva suggests that sales don’t create jobs!*?*!??

If you want to know why the Job Guarantee or “government as employer of last resort” idea is getting nowhere, reason is that the more vociferous advocates of the idea are incompetent  – which is not to say I oppose the JG idea. It’s an idea with definite possibilities, as long as the current leading advocates of the idea are sent to Siberia.

Tcherneva is one of those “leading advocates”. In this article (entitled “Full employment through social entrepreneurship: the non-profit model for implementing a job guarantee” published by the Levy Economics Institute) she starts by questioning whether “expansionary fiscal policy” as she calls it, creates jobs. (I actually referred briefly to this article a few weeks ago, but a closer look at it will do no harm.)

Her first para says (I’ve put her words in green italics), “When it comes to fiscal stimulus, the conventional approach always centers on tax cuts, investment subsidies, accelerated depreciation, contracts to firms with guaranteed profits, and extensions to unemployment insurance and food stamp programs. Though the specific preferences for certain policies may differ from one political party to the next, the objective remains the same: boost private investment and growth by all means possible and jobs will hopefully follow.”

Why “hopefully”? If households are given more money, whether via the above mentioned tax cuts or unemployment insurance, the empirical evidence is that they spend a significant proportion of their newly acquired wealth (gasps of amazement). And that spending creates jobs – how else are relevant goods and services produced other than by people working, at – er – “jobs”?  A large majority of the economics profession believe that fiscal stimulus increases demand and jobs. They are right.

As to the “guaranteed profits” point, that’s irrelevant. Certainly some corporations sign guaranteed profits contracts with government, while other contracts involve a fixed quote for a specific task. In the latter case, relevant firms may then make a profit or loss depending in how well they estimated the cost of the task. But the important point is that when government places orders with firms for goods and services, jobs are created. Or at least a large majority of economists think jobs are created. Tscherneva evidently thinks otherwise.

Modern Monetary Theory.

Another strange aspect of Tcherneva’s above point is that she claims to back Modern Monetary Theory (MMT). But stimulus as proposed by MMT is not much different to stimulus under conventional policies. That is, one of the main forms of stimulus under conventional arrangements is government deficits, while MMTers tend to go for the simpler “just create money and spend it (and/or cut taxes)”. But given that central banks have created money and bought up most of the extra government debt created over the last few years, stimulus over the last few years has in effect taken the above mentioned form that MMT advocates!!!

A total re-think.

Anyway, since sales don’t create, or may not create jobs, Tcherneva claims we need a total re-think here. Her second paragraph reads:

“This way of thinking about the problem, however, is precisely upside down. Growth declines when investment and consumption fall. Investment falls when sales fail. Sales and consumption fall when employment falls. To reverse this vicious cycle, policy must begin by fixing the unemployment situation, which will then lead to a recovery in sales and consumption, which in turn will improve business conditions and profit expectations - all of which will finally boost investment and growth. Growth, in other words, is a by-product of strong employment, not the other way around.”

So apparently if we create lots of JG type jobs – planting trees, picking up litter, charity work, etc – then by some unexplained magic, millions of hi-tech manufacturing jobs, etc will appear from nowhere. This bizarre!

To re-phrase Tcherneva’s argument, she is saying that given a grossly excessive amount of unemployment, instead of giving households money and having government spend money on normal public sector jobs (as per conventional stimulus) we should pay the unemployed to do relatively unproductive and low paid JG type work. There is of course a problem there, and as follows.

If pay for JG work is for the sake of argument half the average wage (and certainly most proponents of JG rightly advocate relatively low pay for such work – e.g. the minimum wage) then there won’t be a huge addition to aggregate demand. Thus relatively few PRODUCTIVE jobs will be created as a result.

In contrast, if demand is boosted in the normal manner, the average job created will be an average sort of public or private sector job paying around the national average wage. More output per job! So why go for the “Tcherneva / JG” option?

In other words, as long as we are talking about a GROSS DEFICIENCY in demand, then normal demand increasing measures (increased deficits, interest rate cuts, etc) are best.

In contrast to GROSS deficiencies in demand, there is the question as to what to do about the 5% or so of the workforce who remain unemployed even at so called “full employment”. Well certainly there is a case there for JG type jobs. To take a crude example, it is theoretically possible to dispose entirely of that “5% unemployment”: just tell the unemployed their unemployment benefit is henceforth conditional on walking up and down their street keeping it free of litter, with pay being equal to unemployment benefit. Anyone refusing the work would no longer be counted as unemployed on the grounds that they had refused work. Hey Presto: unemployment vanishes!

Of course that is a very crude JG system and doubtless we can do better. But it illustrates that the basic role for low paid JG type work is (contrary to Tcherneva’s suggestions) dealing with the above 5%, not dealing with the grossly excessive amounts of unemployment, which we saw for example in the recent recession (which is not to say there isn't a case for expanding JG a bit during recessions).

Tcherneva’s third para.

This reads, “How do we launch a virtuous circIe? One of the most effective ways is through direct job creation in the public sector. John Maynard Keynes spoke of "on-the-spot" employment (Keynes [1982], 171; Tchemeva 20]2b), while Hyman P. Minsky proposed the employer of last resort (ELR) (Minsky 1986). In both cases, the objective is to bring the job contract to the worker in distressed areas and regions with high unemployment, and to attain true full employment over the long run. One modern proposal inspired by Keynes and Minsky is the job guarantee (]G), in which the public sector provides a voluntary job opportunity, in a community project that serves a public purpose, to anyone who is willing and able to work but unable to find private sector employment.”

As regards “distressed areas”, developed countries have had policies in place since the 1930s, if not earlier, to create work in distressed areas!!!! In fact there’s a very large industrial estate covering several square miles just North of where I live in the UK which was started in the 1930s with precisely the latter objective in mind. That’s the “Team Valley” estate, which is now a hive of economic activity. And those efforts to create jobs in high unemployment areas continued after WWII in the UK and elsewhere.

Moreover, if one of the objectives of JG is to deal with distressed areas and ignore the rest of the country, that’s news to me, plus it will be news to most advocates of JG.

If Tcherneva put her “JG / distressed area” idea to the unemployed in distressed areas their response would probably not be couched in entirely diplomatic language. What people in high unemployment areas want primarily is normal, regular private and public sector jobs. No doubt they wouldn’t object to a few “non-profit / charity / JG” type jobs. And no doubt there’s a case for more JG jobs in distressed areas than other areas. But people in distressed areas do not want EVERY JOB or even every other job to be of the “charity / non-profit” type.

Plus the idea that the charity / non-profit sector can absorb a significant proportion of the unemployed in high unemployment areas is plain delusional.


Well that’s the first three paragraphs of Tcherneva’s paper dealt with. Or rather I’ve dealt with SOME OF the flaws in those paragraphs. Any reader with half a brain will have spotted other flaws.

I won’t be wasting time reading any more of this article. Hopefully I’ve gone some way to establishing the point made at the outset above, namely that some of the leading advocates of JG are not too clued up.

However Tcherneva, like many economists, is good at churning out pages of technical sounding text complete  with references to suitably impressive economists like Keynes and Minsky (mentioned above). That sort of stuff fools 99% of the population and about two thirds of fellow academic economists. So doubtless her job and career are safe.

Wednesday, 17 May 2017

The FERI Cognitive Finance Institute have a sense of humour.

I’m reading this work of theirs. I may do a post on it, but meanwhile I’m impressed by their sense of humour. The following two passages illustrate that.


When Lehman Brothers collapsed and subsequently several other banks in several countries in the US and Europe veered on the brink of bankruptcy, it was apparent that events in the   banking system exert a major impact on the rest of the eco-  nomy, including the future path of economic growth. However,   it is less well known that when journalists interviewed leading   experts in ‘economics’ and ‘finance’, namely professors of  economics and finance at major universities, such as Harvard,   Oxford or MIT, their honest response to the questions from the   journalist should have been: ‘I am sorry, but I cannot comment   on the banking crisis.’ An astonished journalist would have   inquired why this was not possible. And an honest academic would have responded: ‘The economic models and theories I use in my work do not include any banks. None of the leading   macroeconomic models and theories include any banks. We   simply do not analyse banks at all.’  


The futility of such a narrow inflation targeting can be illustrated by the European  Central Bank’s official claim that its monetary policy during  its first decade of operation was not interested in and did not monitor bank credit, economic growth nor even inflation in individual Eurozone countries, but was solely focused on  the aggregate Eurozone inflation target of 2%. When asked at a public meeting whether the ECB would thus consider its  monetary policy successful if half of the Eurozone countries  experienced 52% inflation (a disaster), while the other half experienced 50% deflation (an even bigger disaster), resulting in an aggregate inflation rate of 2%, the ECB’s spokesperson responded with a clear ‘Yes’.

Tuesday, 16 May 2017

Random charts - No.23

Text in pink on the charts below was added by me.

Monday, 15 May 2017

Where will the money come from, minister?


Simon Wren-Lewis (Oxford economics prof) asks whether politicians should have to explain where they’ll get £X from if they propose spending £X extra.

A popular answer to that question is that since a proportion of the money in most years for government spending comes from the deficit (i.e. the money comes from thin air, so to speak), a politician does not need to explain where ALL OF the money will come from for the above £X of public spending.

My answer to that is that the fact of increasing the proportion of GDP devoted to public spending DOES NOT mean that the deficit should increase. I.e. if a politician, speaking just on behalf of his own government department or speaking for government as a whole proposes an £X increase in public spending, then he or she needs to explain where they’ll get £X extra tax from.

Of course I’m glossing over the fact that the stimulatory effect of £X public spending exactly counteracts the deflationary effect of £X of extra tax. But for the purposes of this argument, that bit of “glossing” can perhaps be overlooked.

Hopefully I’ve answered SW-L’s question, but I’m not 100% confident I’ve done so..:-)

Sunday, 14 May 2017

We don’t need to save in order to fund investment?

Michael Kumhof and Zolt├ín Jakab wrote an article, published by the IMF, a year or so ago entitled “The Truth about Banks”.  The article included the following paragraph, which leaves room for improvement.

“Many policy prescriptions aim to encourage physical investment by promoting saving, which is believed to finance investment. The problem with this idea is that saving does not finance investment, financing and money creation do. Bank financing of investment projects does not require prior saving, but the creation of new purchasing power so that investors can buy new plants and equipment. Once purchases have been made and sellers (or those farther down the chain of transactions) deposit the money, they become savers in the national accounts statistics, but this saving is an accounting consequence—not an economic cause—of lending and investment. To argue otherwise is to confuse the respective macroeconomic roles of real resources (saving) and debt-based money (financing). Again, this point is not new; it goes back at least to Keynes (Keynes, 2012). But it seems to have been forgotten by many economists, and as a result is overlooked in many policy debates.”

The truth is actually as follows.

If extra spending is to take place, assuming the economy is already at capacity, then some reduction in spending must take place to balance that increase, else demand and inflation will become excessive. One possible form of “reduction in spending” is extra saving. Thus, contrary to the suggestion in the above IMF article, saving can fund investment.

However there is no absolute need for the saving to precede the investment spending – by one day, or month or any other relatively short period of time. For example if the entity doing the investment just goes ahead with it, after borrowing money from a bank, and subsequently, a reduction in aggregate spending is brought about somehow or other, e.g. via an increase in interest rates, or increased VAT, that would do equally well.

To summarise, extra spending in the form of extra investment requires reduced spending, i.e. extra saving in some other part of the economy. But whether the extra saving takes place just before or just after the investment spending does not matter.

Saturday, 13 May 2017

Random charts - No.22.

I'm getting tired of Roman numerals, and have changed to Arabic numerals for the titles of this series.
Text in pink in the charts below is added by me.