The new immigration?

I sincerely doubt that this bill will get any traction, given the overall political trend against immigration (and toward protectionism), but it seemed almost inevitable that something like this would come along.

The reeling housing market has come to this: To shore it up, two Senators are preparing to introduce a bipartisan bill Thursday that would give residence visas to foreigners who spend at least $500,000 to buy houses in the U.S.

The provision is part of a larger package of immigration measures, co-authored by Sens. Charles Schumer (D., N.Y.) and Mike Lee (R., Utah), designed to spur more foreign investment in the U.S.

Foreigners have accounted for a growing share of home purchases in South Florida, Southern California, Arizona and other hard-hit markets. Chinese and Canadian buyers, among others, are taking advantage not only of big declines in U.S. home prices and reduced competition from Americans but also of favorable foreign exchange rates.

To fuel this demand, the proposed measure would offer visas to any foreigner making a cash investment of at least $500,000 on residential real-estate—a single-family house, condo or townhouse. Applicants can spend the entire amount on one house or spend as little as $250,000 on a residence and invest the rest in other residential real estate, which can be rented out.

The measure would complement existing visa programs that allow foreigners to enter the U.S. if they invest in new businesses that create jobs. Backers believe the initiative would help soak up an excess supply of inventory when many would-be American home buyers are holding back because they're concerned about their jobs or because they would have to take a big loss to sell their current house.

This kind of bill would only speed up the dynamic that we've already begun to see in Texas, where the "new immigrant" is not a day laborer but an opportunistic investor. This shift may change the way we view immigration and immigrants in our country as we enter into a new century with new economic realities.

Either way, I'm always amused to see how far our politicians will go in their attempts to prop up old regimes. Here, they're basically willing to pull out all the stops in order to prevent a further deterioration in the housing market. Generally speaking, these sort of desperate attempts fail miserably, and serve only to create all manner of unintended consequences that we will later regret.

This kind of policy, when combined with ultra-low-interest-rate policy from the Fed (that serves to weaken the dollar against other currencies) will ensure that our primary "export" over the coming decades will not be any sort of product or service, but the very land that we live on. If more and more of our country is actually physically owned by foreigners, are we really even a country any more? And does it even matter?

Welcome to the 21st century, I guess--and welcome to the strange, existential questions that we never thought we'd have to ask ourselves.

[Wall Street Journal]

Changing living patterns in America: an update

Earlier this summer (side note: how is it almost September, what happened to my summer?), I ran a post discussing the rise in homes with dual master bedrooms in the U.S. The CNN article that inspired the post talked about dual masters being a solution to "mediocre marriages", but I took the rise to be indicative of a broader change in American living habits. I wrote then:

For one, the housing crash that precipitated the financial crisis of 2007-2008 has eroded a long-standing belief that housing is a stable investment and that home ownership is a laudable goal for all Americans. An increasing number of younger people (including well-regarded journalist and hedge fund manager James Altucher) have begun to question the wisdom of owning real estate at all, and have turned to renting instead. A dual master setup would seem to lend itself particularly well to a renting situation, where two people could share the rent on a house without having to share a bathroom or a primary living space.

Furthermore, economic realities affecting two important groups of people may force a trend toward co-habitation over the coming years. The first of these groups is the elderly--while they likely don't have to worry about suspensions of Social Security payments any time soon, it is clear that the Federal Reserve's low-interest rate policy has made life very difficult for "savers", those who rely on interest payments to generate income. Many of the elderly are of course in this category, and without a steady stream of income, they may be forced to move in with their children, as was commonplace in previous generations.

The second such group is on the other end of the spectrum, but no less impacted by the economic recession. With an ever-increasing number of college graduates unable to find adequate employment upon graduation--and many others accepting much lower-paying jobs out of necessity--young professionals may be forced to move back in with their parents on a semi-permanent basis as they try to whittle away at their mountains of student loan debt. This dynamic has of course already begun, and homebuilders may just be trying to get ahead of the curve.

Now, this article from Bloomberg seems to agree with me, and provides some statistics to lend my argument some weight--always a good thing.

The U.S. is experiencing a surge in the multigenerational households that were once a common feature of American life, and Hispanic and Asian families are driving the trend, according to U.S. Census Bureau data released this month. The number of such households, defined as those with three or more generations living under one roof, grew to almost 5.1 million in 2010, a 30 percent increase from 3.9 million in 2000, the data show.

They hit 2.9 million in 1950 and didn’t top that again until four decades later, according to the Washington-based Pew Research Center. At the 1980 low, multiple-generation homes represented just 2.9 percent of all U.S. households, down from 7.8 percent in 1900.

Although the term multigenerational invokes images of grandma churning butter on a pioneer farm or turn-of-the-century immigrants crammed into tenements, today’s extended families are more likely to live in suburbs. Among large cities, the one with the highest percentage of multigenerational households, at 16 percent, is Norwalk, California, a collection of largely single- family homes 15 miles (25 kilometers) south of Los Angeles.

“Many conservatives are locked into this 1950s paradigm of the nuclear family,” said Joel Kotkin, author of “The Next Hundred Million: America in 2050,” a book about demographics. “Boomers are aging in place. Immigrants move in with their cousins. The suburbs are changing.”

Job losses and the difficulty of purchasing a home make young people more likely to live with their parents, according to D’Vera Cohn, a senior writer with Pew who has studied the trend. Longer life spans and growth in the Hispanic and Asian populations keep older folks in the house.

So, in addition to the economic reasons I listed in my original post, you can now add a demographic argument to the list. If we continue to see the Mexican immigration and homebuying that we've seen in recent months, this shift could become even more pronounced.

Either way, the trend toward cohabitation and homes with dual master bedrooms is bad news for the overall housing market, especially new construction. But then, that's a market that's just about dead anyway, whether or not we'd like to admit it.

[Bloomberg]

The new immigration

I've discussed immigration (both legal and illegal) on here several times before, but this article in the Washington Post from the weekend puts a bit of a new angle on the issue.

For years, national security experts have warned that Mexico’s drug violence could send a wave of refugees fleeing to the United States. Now, the refugees are arriving — and they are driving BMWs and snapping up half-million-dollar homes.

Tens of thousands of well-off Mexicans have moved north of the border in a quiet exodus over the past few years, according to local officials, border experts and demographers. Unlike the much larger population of illegal immigrants, they are being warmly welcomed.

“It goes counter to the conventional wisdom about the Mexican presence in the United States,” San Antonio Mayor Julian Castro said. The influx “is positive, it is entrepreneurial . . . and one of the keys to a very successful growing city like San Antonio.”

Castro estimates that Mexicans own at least 50,000 of the approximately 500,000 homes and apartments in his city of 1.3 million, which has a vibrant Hispanic culture. Many are in gated communities that have sprung up in the city’s sun-baked northern hills. One neighborhood built around a country club has so many residents from the Mexican city of Monterrey that it has been dubbed “Sonterrey.”...

“All these businesses are Mexican,” said Alejandro Quiroz, a Mexican-born businessman, sitting outside a Starbucks in Sonterra and gesturing to a bank and gourmet Mexican take-out shop. Women in designer sunglasses and high-heeled shoes left the Starbucks, chatting in Spanish.

“Generally, people come with capital,” Quiroz said. “They buy houses, cars. And then they say, I want to invest in a business.”

Interestingly, as the article notes, illegal immigration from Mexico has been steadily declining in recent years ("due to the weak U.S. economy, border crime and more opportunities for young Mexicans at home", says the article), even while it has dominated the political conversation.

In its place has come this new influx of affluent Mexicans, a group that we Americans would do well not to discount. As San Antonio's mayor noted (and I first mentioned toward the end of this post), immigrants have a tendency to be among our most entrepreneurial workers, and often help to push our economy forward rather than let it stagnate.

I think that this is another interesting data point in the broader discussion on U.S. immigration policy, and no conversation about immigration (illegal or otherwise) is complete without recognizing this dynamic. But then, I bet you won't hear Rick Perry crediting Mexican immigrants for Texan job creation any time soon...

[Washington Post]

Immigration's untold stories

I don't do this often, but today I'm going to beg you all to read an article. This morning, NYTimes.com posted the fascinating autobiographical story (seemingly an online version of a Sunday Magazine piece) of Juan Antonio Vargas, a Pulitzer Prize-winning journalist who used the article to "come out" as an illegal immigrant. His story is long but absolutely mesmerizing, and I feel like it offers a rare window into the other side of a story that we don't often see or hear (or, frankly, even bother to think) about.

I won't spend too much time proselytizing or analyzing the Vargas story, because I think the piece is strong enough to stand on its own merits. But in the ongoing debate over immigrants both legal and illegal, I think that it is often easy to generalize and stereotype, ignoring the very personal stories that are the real face of immigration. A brief excerpt:

There are believed to be 11 million undocumented immigrants in the United States. We’re not always who you think we are. Some pick your strawberries or care for your children. Some are in high school or college. And some, it turns out, write news articles you might read. I grew up here. This is my home. Yet even though I think of myself as an American and consider America my country, my country doesn’t think of me as one of its own...

I did my best to steer clear of reporting on immigration policy but couldn’t always avoid it. On two occasions, I wrote about Hillary Clinton’s position on driver’s licenses for undocumented immigrants. I also wrote an article about Senator Mel Martinez of Florida, then thechairman of the Republican National Committee, who was defending his party’s stance toward Latinos after only one Republican presidential candidate — John McCain, the co-author of a failed immigration bill — agreed to participate in a debate sponsored by Univision, the Spanish-language network.

It was an odd sort of dance: I was trying to stand out in a highly competitive newsroom, yet I was terrified that if I stood out too much, I’d invite unwanted scrutiny. I tried to compartmentalize my fears, distract myself by reporting on the lives of other people, but there was no escaping the central conflict in my life. Maintaining a deception for so long distorts your sense of self. You start wondering who you’ve become, and why.

Seriously, take a few minutes and read the whole thing. Regardless of your personal politics and your views on immigration policy, I think that this story--while almost certainly unique--is an important data point in the debate on what America was, is, and wants to be in the coming centuries.

[NY Times]

A warning against tight borders (or, The hidden costs of the "War on Terror")

When I was coming back into the country from Jamaica back in April, I was struck by the number of menacing signs posted in the international arrivals terminal (at Charlotte/Douglas Airport), announcing our nation's policy of fingerprinting all foreign visitors upon their arrival on American soil. I didn't remember this having been policy in the past, and I guess I missed the announcement that we would be starting to do so.

Turns out, it's been our policy for the better part of the last decade, another initiative of the ever-growing Department of Homeland Security. From a news item announcing the policy change in early 2004:

Stringent new security regulations affecting most tourists have been introduced at US air and sea ports.

Everyone entering the United States with a visa will now have fingerprints and photographs taken and scrutinised...

Homeland Security Secretary Tom Ridge said the US aimed to be "open to visitors but closed to terrorists".

All 115 US airports that handle international flights and 14 major seaports are covered by the programme, under which customs officials can instantly check an immigrant or visitor's criminal background.

Of course, this is all part of a broader crackdown against immigration and foreign visitors, as visas for both travel--and perhaps more importantly, employment--purposes have become increasingly difficult to come by. Tom Ridge's assertion that the DHS wanted to be "open to visitors" is in fact laughable in the face of the ever-increasing restrictions, a point that a recent Time article picked up on.

Everyone should love Brazilian tourists. They spend more per capita than any other nationality. Worldwide, Brazilian tourists shell out an average of $43.3 million a day, dropping a gigantesco $1.4 billion last April alone, up 83% from the same period last year, according to the Brazil's Central Bank. In 2010, 1.2 million Brazilians visited the United States, injecting $5.9 billion into the U.S. economy...

Not that the U.S. has made it particularly easy for os turistas brasileiros to visit. Instead of rolling out the red carpet for the travelers from the increasingly wealthy South American nations, the U.S. makes Brazilians — and every other Latin American nationality — undergo a lengthy and expensive visa-application process that takes months of planning and can cost thousands of dollars in travel, lodging, food and other expenses — all before leaving the country...

In all of Brazil, a country larger than the continental United States, the U.S. has only four consular offices: in the capital Brasilia, Recife, Rio de Janeiro and São Paulo. That means a family living in Porto Alegre would have to spend hundreds of dollars on domestic airline tickets to fly everyone 700 miles to São Paulo, then drop hundreds more on hotel rooms, food and taxis, just to get a visa application interview, which costs an additional $140 each.

While the State Department claims the average international wait time for a visa interview is 30 days, in Brazil it can be as high as 141 days, according to Steve Joyce of the U.S. Travel Association. That's not due to bureaucratic laziness. The overworked consular staff in São Paulo is currently processing an average of 2,300 visas every day, more than any other U.S. consulate in the world. And they hope to nearly double their production level by next year to keep from falling farther behind. Brazil represents the fastest-growing non-immigrant visa demand in the world, up 234% over the past five years, eclipsing even China's 124% increase in U.S. visa issuances, according to the State Department.

Tourist industry officials say Brazil should be on the list of countries whose citizens do not need a visa to enter the U.S. There are currently 36 countries on Washington's visa waiver list, but none of them are in Latin America. Some argue it's hampering the U.S.' economic growth and global competitiveness. For example, Chilean tourism to the United States is down more than 30% from 10 years ago, while globally the number of Chileans traveling overseas to other countries is up 50%.

The article goes on to cite a U.S. Travel Association statistic that suggests that by hampering international tourism over the last decade, our nation has put itself at a competitive economic disadvantage.

The American tourism market has recovered slowly since 9-11, but it missed out on a decade of growth, according to Roger Dow, president of the U.S. Travel Association. "We call it the lost decade. If we had just stayed on pace with the rest of the world, we would have generated $606 billion more dollars and have 467,000 more jobs right now."

In an economy with millions of unemployed citizens that is struggling to generate 100,000 new jobs per month, that 467,000 jobs figure--while debatable--is no small nugget. Consider it one of the hidden costs of our dogmatic and amorphous "War on Terror".

I've of course written here before about the ill-advised tendency to crack down on immigration (and, by extension, foreign visitation) during a recession--in this recession, the long shadow of 9/11 merely exacerbated that tendency. There is a general feeling that protectionism can ensure that immigrants aren't "stealing" the jobs that rightfully belong to struggling American citizens, and theoretically that concept makes sense.

But realistically, immigrants are more likely to become entrepreneurs--spurring economic growth--and more likely to perform "complementary" work, work that enhances the value of other workers, like installing drywall or driving a taxi.

Unfortunately, the same policies that have eliminated many of those workers from contributing to the American economy are now also prohibiting foreign visitors from coming into our country and spending money as tourists, spurring the economies of the cities they visit. Maybe the benefits of keeping tight borders outweigh the costs, maybe they don't. I just don't think that most people realize how far-reaching the costs of our "War on Terror" really are.

[BBC]
[Time] (h/t Daily Reckoning)

How to save our economy by eliminating college cores

It's been a little while since I wrote about my favorite topic of education, though I did give it a passing mention at the end of my jobs rant yesterday. But this post from economist Robin Hanson over at Overcoming Bias piqued my interest, as I thought it dovetailed nicely with this Ken Robinson video, this post on the questionable future of the "liberal arts" education, and my own general feelings about the need for a new approach to education in order to save us from our current recession (hinted at in yesterday's rant).

In his post, Hanson cites a Washington Post article focusing on the debate over core curricula at colleges, and whether they are better or worse than more self-guided approaches such as is found at Johns Hopkins University. The Post article writes:

Students at Johns Hopkins - and many other prestigious colleges - choose classes the way a diner patron assembles a meal, selecting items from a vast menu. Broad distribution requirements ensure that students explore the academic universe outside their majors. But no one is required to study any particular field, let alone take a specific course. Shakespeare, Plato, Euclid - all are on the menu; none is required.

The American Council of Trustees and Alumni, a Washington-based advocacy group, handed out F grades in August to Hopkins and many of its peers, inviting debate on a basic question: What, if anything, should America's college students be required to learn?

The group faulted the schools, including Yale, Brown, Cornell, Amherst and the University of California at Berkeley, for failing to require students to take courses in more than one of seven core academic subjects: math, science, history, economics, foreign language, literature and composition.

"At Stanford, you can fulfill the American cultures requirement by taking a class on a Japanese drum," said Anne Neal, president of the trustees group.

"We're certainly not saying that Harvard or Hopkins or Yale are not good schools, or that their graduates are not smart kids," said Neal, who attended Harvard and Harvard Law. "What we're saying is that those schools don't do a good job at providing their students with a coherent core."

Some higher education leaders say Neal misses the mark. The point of a college education is to teach students to think, solve problems and change the world, they say, not to download a compendium of facts.

I pay particular attention to the final paragraph, which cuts to the core of the debate. We've focused for decades now on putting college degrees into more people's hands (we've succeeded), assuming that these degrees will turn them into more capable workers, more prepared to add value to the economy and world at large.

Lately--and especially since our current recession took hold--that assumption seems to be coming under more scrutiny. What we need now more than ever is for creativity and entrepreneurship to lead us out of our economic doldrums, instead of continuing to rely on our largest companies to hire more people.

Unfortunately, we've been educating against that need for decades. Instead of encouraging and inspiring creative thought and non-traditional teaching/learning methods, we've created a generation of worker bees with standardized skill sets--essentially, interchangeable parts within the mechanisms of our largest companies. Hanson writes (emphasis mine),

Whence this urge to make college students all take the same “core” classes? It might be paternalism re the intellectual health of the students. But if so, why only require this core of college students; why not make everyone take it? Why expect students to underestimate the benefit of core classes, even after they’ve heard your arguments for such classes? And why do advocates seem much less interested in which classes are in the core than that there be a common core?

Another theory is that students neglect being innovative because they don’t get all of its benefits, and people innovate more when they learn more than just one narrow field. But the usual breadth requirements seem sufficient for that purpose – people taking a variety of different breadth classes betters encourages finding unusual connections between fields. And we see little interest in encouraging people to know two fields in depth, which would seem to help cross-field connections the most.

A related theory is that a common core enables better communication between specialists in different areas. But again, this seems better encouraged by lots of diverse overlaps, and especially by people who know two fields in depth, than by everyone taking the same common core. Also, why not make non-college folks do this, and why don’t those who talk internalize gains from better communication?

An important clue here is that a burst of immigration coincided with an increased perceived need for a common core. So perhaps insiders wanted the core to create a stronger clearer contrast between “us” and “them.” One possibility is that people really wanted to push a certain package of “our” course content, in order to change immigrants from “them” into “us.” Under this theory, apparent advocate disinterest in core content is deceptive; they were confident that if we picked a standard core it would have the content they wanted.

Interesting stuff. Hanson does a good job of making it clear that "the issues" as they are presented by politicians and pundits are rarely independent and isolable. Immigration, education, and our economy are co-related problems, and cannot be solved piecemeal. Rather, we need a wholistic approach to our society (and its issues), and a recognition that our economy cannot be saved as long as we have incoherent policies on immigration and education--or worse, policies in these arenas that actually work at odds with each other.

I don't think that we'll be coming up with a coherent immigration policy any time soon (which upsets me), but I do think there's hope for fixing our education system. The first step will be recognizing that not all students need to be or should be educated in the same manner. Forcing students to study core curricula at the exclusion of other subjects that they are more interested in benefits nobody; pretending it does is foolhardy.

[Overcoming Bias]
[Washington Post]

Jobs and the participation rate

Last Friday's jobs report for the month of November was massively disappointing, with an uptick in the unemployment rate showing that we have much work left to do before we can declare this recession "over" (oh, I forgot, we already did... whoops).

Of course, this report was used by politicians as an excuse to push more stimulus, which was effectively done last night with the "temporary" extension of all Bush-era tax cuts combined with a further extension of unemployment benefits. Nobody seems to wonder or care how we will pay for the additional $700-$900 billion in deficits (depending on the estimate) that these policies promise to create over the next two years, but that's a topic for a different post.

The focus of today's post is to discuss the severe structural problem in our labor market, and why our effective unemployment rate is in fact much higher than even the latest 9.8% figure suggests. I've mentioned before, if briefly, that the effective unemployment rate has edged as high as 17%--a staggering figure by any definition. What accounts for the difference? This:

As our friends over at the Calculated Risk blog show us, the labor force participation rate has plummeted to an all-time low for the Male 25-54 demographic, a key group because it represents such a large portion of the overall labor force.

What does this mean? It means that for various reasons, discouragement or otherwise, a significant portion of our usually productive workers have been classified as "not looking for work", and therefore are not counted in our core unemployment rate--if you're not looking for a job, you're not officially unemployed. As a result, overall labor force participation has dropped from 66.2% in May 2008 to 64.5% now, the lowest rate since 1984.

There are two ways this can go from here, and neither is particularly good for the economy. Either these men stay unemployed forever, meaning that there will be fewer productive workers in our economy--and therefore fewer bodies feeding more mouths (think Social Security is insolvent now? Just wait)--or else they start looking for work at some point in the future, meaning that our unemployment rate (as reported by the government) will remain stubbornly high for some time.

In other words, the more jobs we create, the more jobs we will need to create in order to keep our unemployment rate constant, as more Americans "rejoin" the labor force. It's a simple but disturbing math problem, with a couple of moving variables. We certainly shouldn't wish for the labor participation rate to stay low (it's a baaaad sign for the economy if it does), but it's the only possible way to keep our reported unemployment rate low. We need to wise up and realize that the real unemployment rate is indeed much closer to the 17% number than the 9.8% number, and ask ourselves whether our ongoing "stimulus" is doing any stimulating at all. Because according to these charts, we've got a long and ugly road ahead of us.

That second chart, courtesy of Zero Hedge, projects that on our current stimulus-aided path, we won't recover our pre-recession unemployment levels for another 5 years. What's even worse is that this line assumes zero growth in the aforementioned labor force participation rate. A return to a more "normal" participation rate would extend the pain for another 50-60 months, meaning that pre-recession employment levels would not be met until some time in 2019. A lost decade, indeed.

I don't honestly know what the best way out of this mess is, but I am confident that continuing to play "extend and pretend" with unemployment benefits--while making Devil's bargains like last night's bipartisan "compromise"--will only prolong the inevitable. We need to revamp our education system and do whatever we can to encourage entrepreneurship and small business growth (no, not through tax incentives, we need to be much more creative and transformative than that), whether by citizens or by immigrants (yes, immigration policy is a part of this too, and no, not in the ways that the rhetoric would make you think).

We need to admit that we have a problem, and that blind government spending will not solve it, at least not quickly (see you in 2020) or without creating a host of other debt-related problems. We need to step up and create jobs for ourselves, which means taking a hard look at how we actually provide value for each other in our communities. Either that, or we can just all become farmers again, feeding ourselves with the fruits of our own labor. Whatever works.

[Calculated Risk]
[Calculated Risk]
[Zero Hedge]

Immigration is not the problem

I missed this piece in the New York Times over the weekend, but it's an important one to read as a counter-balance to the recent rhetoric regarding immigration and globalization policies. In it, economics professor Tyler Cowen writes (emphasis mine),

In the campaign season now drawing to a close, immigration and globalization have often been described as economic threats. The truth, however, is more complex. 

Over all, it turns out that the continuing arrival of immigrants to American shores is encouraging business activity here, thereby producing more jobs, according to a new study. Its authors argue that the easier it is to find cheap immigrant labor at home, the less likely that production will relocate offshore.

The study notes that when companies move production offshore, they pull away not only low-wage jobs but also many related jobs, which can include high-skilled managers, tech repairmen and others. But hiring immigrants even for low-wage jobs helps keep many kinds of jobs in the United States, the authors say. In fact, when immigration is rising as a share of employment in an economic sector, offshoring tends to be falling, and vice versa, the study found.

In other words, immigrants may be competing more with offshored workers than with other laborers in America...

As other papers by Professor Peri have shown, low-skilled immigrants usually fill gaps in American labor markets and generally enhance domestic business prospects rather than destroy jobs; this occurs because of an important phenomenon, the presence of what are known as “complementary” workers, namely those who add value to the work of others. An immigrant will often take a job as a construction worker, a drywall installer or a taxi driver, for example, while a native-born worker may end up being promoted to supervisor. And as immigrants succeed here, they help the United States develop strong business and social networks with the rest of the world, making it easier for us to do business with India, Brazil and most other countries, again creating more jobs.

For all the talk of the dangers of offshoring, there is a related trend that we might call in-shoring. Dell or Apple computers may be assembled overseas, for example, but those products aid many American businesses at home and allow them to expand here. A cheap call center in India can encourage a company to open up more branches to sell its products in the United States.

Cowen makes some important points, aiming toward a bigger-picture view of what encourages a business to hire an American worker. The reality is that few Americans are willing to take jobs as low-skilled workers, especially once they have a college degree (which more and more Americans now have). This is a phenomenon that was brought to light (humorously, but no less correctly) by Stephen Colbert in his congressional testimony.

Therefore, if we as Americans aren't willing to fill low-paying jobs (or, at least not willing to fill them at a reasonable wage that won't produce rampant inflation), we are faced with a choice between immigrant labor and overseas labor--immigration versus offshoring. In the case of immigration, we might still be able to work as the low-skilled laborers' supervisors; in the case of offshoring, all jobs go overseas.

This is an important point to understand. When wage levels at home are too high, or labor supply is too low, companies are forced to find other sources of labor. We can't simply shut off immigration and foreign trade and expect that all will be well in our domestic employment picture. It isn't the case.

Difficult economic times often require us to decide among several unpalatable outcomes. In this scenario, there are four basic choices:

1) Lower our wage expectations, begin accepting the low-skilled jobs that are currently going to immigrants and overseas
- This outcome is both unlikely to pass and somewhat undesirable; the wage paid by these jobs is insufficient to keep pace with the increase in living costs that has come as a result of government policy (both fiscal and monetary). This leads to...

2) Close off all avenues of immigration and offshoring; require companies to hire American workers at whatever rate they demand
- This option might seem to many as the most "fair", from an American worker perspective. Corporations are evil, they underpay their employees to pad their wallets, and they should just pay a fair wage to a good strong American worker.

This approach is also politically popular, and has gotten a lot of play since the recession began. Protectionist policies like these are easy to parrot when unemployment is high, and they therefore almost always show up. But there is a big problem in the analysis. The fact is, companies farm cheap labor because it helps them keep the price of their final product (charged to the consumer) down. If they are forced by policies to pay more for labor, the only certainty is that consumer prices will rise.

Inflation is ugly, and it hurts the poor the most, as I've mentioned here before (most notably in the text of my letter to my senators). Therefore, ironically, this option would provide incredibly fleeting gains to the newly employed. The end result would be little different from the end result of Option #1--poor Americans would be unable to pay their bills. 

3) Allow our jobs to be sent overseas
- As the study above mentions, this is likely a WORSE option than option #4... 

4) Allow immigration, accept that immigrants will take the low-skilled jobs
- This is simply the best among several somewhat unpalatable options. We can't have it all our way--there's no such thing as a free lunch. It'd be great if we could all work low-skilled jobs and get paid 6-figure salaries and somehow avoid inflation and a decrease in buying power. But it's mathematically impossible.

Immigration and outsourcing are the only things preventing our economy from rampant inflation--and an even more rapidly growing gap between rich and poor. That's irrefutable, no matter what the politicians in search of cheap points try to tell you. And if I had to choose between the two, I'd choose immigration every single time--not just for the economic benefits that the above study touts, but because it's consistent with the roots of our country.

No, I don't support illegal immigration, but I also don't think that illegal immigration is anything but a symptom of an already screwy immigration policy in our country. Fixing illegal immigration requires fixing our immigration policies more broadly, and fixing both will prove a boon to our economy.

Don't forget to vote today.


[New York Times]

Globalization issues heat up

Since my initial post on the unintended consequences of globalization, I've come across a significant number of articles and news items that add color to my original argument. Now, with the House Ways and Means Committee meeting on Friday to vote on legislation aimed at pressuring China to revalue its currency, some of the issues I raised seem to be reaching a boiling point.

With all due respect to the men and women on the Committee (and no, they haven't done much lately to earn that respect), pressuring China on currency is an absolutely ridiculous idea. The ostensible purpose of this "pressure" is to stimulate economic recovery in the United States. As UC Irvine professor Peter Navarro wrote in an op-ed for the Los Angeles Times,

China's grossly undervalued yuan gives Chinese exporters a huge economic advantage, allowing them to price Chinese-made goods far lower than those made in the United States. At the same time, the yuan's undervaluation imposes the equivalent of a heavy tax on U.S. exports to China. 

This currency manipulation, in concert with China's massive export subsidies, has resulted in chronic U.S. trade deficits, a severe weakening of our manufacturing base and the loss of as many as 20 million American jobs, even as China's economy has boomed.

All of this is completely true. Unfortunately, it's only half the story. The fact is, the relatively low labor rate in China has been a huge driver of economic growth and corporate profits in the United States for a generation. With our rapid debasement of the dollar through accommodative monetary policy (coupled with massive credit expansion), it is also one of the only factors that has prevented our country from a significant inflationary event.

Furthermore, with China owning a significant portion of our outstanding national debt (about 20%, the largest foreign holder), it is simply bad policy to instigate a trade conflict with the same people who have enabled our government's profligate ways. True, their ownership of our debt is partially their problem--as the old (Keynesian?) saying goes, if you owe somebody thousands of dollars, that's your problem; if you owe somebody millions, that's their problem--but not entirely.

Remember, a significant (though shrinking) portion of our national debt is short-term debt, meaning that it needs to be rolled over (re-borrowed) frequently--unless, of course, we start to retire or shrink our national debt, which uh, isn't happening. Therefore, any policy that has the effect of thumbing its nose at one of our largest enablers represents a very dangerous game. The fewer people who are willing to buy our debt, the higher our interest expense goes, and the more insolvent our government becomes.

 

But, sadly, the debt issue is not the most important reason to avoid a trade conflict with China. The fact is, the supposed economic gains from a "properly valued" yuan are simply fantasy. As former Secretary of Labor Robert Reich writes (I don't always agree with Mr. Reich, but this particular piece is a must-read),

Even if China did allow its currency to rise against the dollar, there’s no reason to think this would automatically generate lots more American jobs.

American exports would become cheaper to Chinese consumers. But Japan, Germany, and other major exporters would also demand a piece of the action. Unemployment is high in all developed nations, and every government is under pressure to create more jobs.

Meanwhile, Chinese manufacturers – whose goods would suddenly become more expensive to American consumers – could simply shift their production to other nations with lower currencies. Indeed, as Chinese wages have begun to rise, Chinese manufacturers have already started to shift production to Vietnam, Indonesia, and other low-wage outposts of Southeast Asia.

In other words, we've lost manufacturing jobs not because China's yuan is undervalued, but because the American worker is overpriced. Remove Chinese labor from the equation, and U.S. corporations will simply find new places to farm cheap labor. No amount of trade sanctions against China can revive our beaten-up manufacturing industry, as I mentioned in my previous post.

If there were reasonably priced manufacturing laborers here in the U.S. just waiting to work, they'd have jobs by now. But we don't (as this link demonstrates) and probably won't any time soon. So in the short term, forcing China to revalue its currency will only serve to cost our corporations money, which will make it even more unlikely for them to begin hiring domestic workers. As this piece at Zero Hedge points out, a revalued yuan might in fact hurt the U.S. consumer more than it helps them. In other words, be careful what you wish for.

I argued in my previous piece on globalization that all of these issues are an inevitable (if unintended) consequence of the expansion of global trade. Motivations of all trading partners must be aligned for these situations to be sustainable, and that is rarely a fair expectation when dealing with rapidly developing global economies. With U.S. unemployment remaining stubbornly high, it seems that there is a growing trend toward protectionism in Washington. The consequences of this trend on our economy could be significant, both in the short-term and the long-term.

With a confluence of factors (trade conflicts among them) making it unlikely that large corporations will increase their hiring any time soon, it is becoming increasingly clear that our only way out of this economic recession is via ingenuity and entrepreneurship. Ironically, what has historically been the greatest source of entrepreneurship--immigration--is also under attack as protectionist feelings take hold. As Joel Kotkin wrote for Forbes (emphasis mine),

Between one-third and one-half all students at Stanford, MIT, University of Pennsylvania, University of Chicago and UC Berkeley come from abroad. These schools are training camps for immigrants transitioning into careers as American entrepreneurs.

Equally important, immigrant commerce also thrives at the grassroots level. It manifests most visibly in the proliferation of small stores, restaurants, food-processing businesses, garment factories and trucking lines. Overall, immigrants are 60% more likely to start a new business than native-born Americans. The number of self-employed immigrants has grown even in New York City, where the number of self-employed among the native-born has dropped.

My take-home lesson? While globalization may indeed have unintended consequences, and our current unemployment rate has its roots in our trade policy over the last two decades, protectionism is not the answer. Thumbing our nose at China, closing our doors to immigrants, or even simply taxing firms who outsource jobs might seem like good policy in the short run--and make for good election-year soundbites--but will all prove to be self-defeating behavior in the long run, which you know I hate.

I do hope that these lessons will be remembered when future debate arises over globalization and free trade (and immigration policy), but I'm not particularly confident. Recessions always bring out protectionist fervor, and well-reasoned debate is hard to find. Hopefully our friends in the Ways and Means Committee can buck that trend.

[Los Angeles Times]
[RobertReich.org]
[Forbes.com]