Matt Nolan

Are nations just large labour unions?

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We generally allow capital and goods to flow freely between nations nowadays – which is a good thing. However, that leaves us in the situation where the whole purpose of a nation appears to be working for the benefit of labour in that country.

Now it may well seem like the best thing to do – if we didn’t do it we would undoubtedly have lower incomes. However, this would be because the people in abject poverty overseas now have more options and will be able to manage a higher living standard.

Often people blame globalisation for the abject poverty we see overseas. But it isn’t globalisation that is the problem – it is the lack of globalisation. Closed labour markets, which are effectively massive labour unions, are a large part of the reason why poor countries can’t pull themselves out of poverty.

Now we may value the welfare of local citizens more than we do foreign people – some people have said so here. But even in the case where loosening migration would lead to worse outcomes for locals (which is not always the case), we would have to discount “non-local” people quite substantially not to let them in. Remember that the human cost isn’t all on one side – when we close off migration we are implicitly falling the lives of people overseas as well.

How is this like a labour union? Well labour unions do all they can to increase workers wages, often at the cost of the unemployed (who are the competition of the employed). Unions thrive by hurting the unemployed through artificial barriers – and they inherently value employed people more than unemployed people. Change unemployed to “non-local” and employed to “local” and we have the same thing for nation states.

Matt Nolan

The lump of labour fallacy

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I have noticed that there is a belief out in New Zealand that there is a set “lump” of jobs – and if foriegn people come in they take them, and “New Zealander’s miss out”.

Now if this matters to us this may be concerning – however, we have been talking about migrants “creating work” and saying that they do “different jobs” than the New Zealand trained workers.

The idea that there is a fixed lump of jobs does not fit this description. However, the idea has a name: The lump of labour fallacy.

The confusion stems from a fundamental misunderstanding surround what labour is. Labour is an input to production. However, as people (who we value in society) get their income by acting as an input we sometimes view work as income. From this step – we end up saying that other people are “stealing our income” by doing this work.

However, what this argument ignores is that labour is an input to production – if you bring in more people, more stuff can be produced. If the addition person is really productive (skilled labour, or domestic poorly provided unskilled labour) then when they come in to society they quickly help everyone else.

As a result, policies to kick current skilled labour out of the country will be counter-productive. Even if we didn’t care about the welfare of foreign people (which of course we do – and really should equally, but oww well) we are effectively cutting off our nose to spite our face. Keep that in mind.

Matt Nolan

Jobs and production

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In the comments to the “Sigh” post, rainman raises the following reason for government action against currently employed temporary workers:

What then do the displaced workers like the welder in this story do? Go on the dole?

Now, the primary argument against this is that the “displaced workers” aren’t solely displaced. The immigrants are doing a job making things, and therefore this will “create work” for other people.

However, there is another, more fundamental argument against that. And it comes from the idea that we aren’t actually after “making work” (work is a cost after all) we are after making stuff and having a nice living standard for people.

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Matt Nolan

The failure of contemporary macroeconomic theory?

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Macroeconomics may have incentive problems, and there may be a lot of room for improvement or refocus, but I think saying that “contemporary macroeconomic theory has failed” is going too far.

Now, I’ve shown myself to be no fan of some of the economics that has, and will, be performed – I quoted approvingly when Dani Rodrik said that some economists had abused the theory. Similarly I nodded my head when Arnold Kling said the same thing. When Agoraphilia pointed out that the “rational expectations hypothesis” is constrictively narrow (namely in how it treats beliefs and expectations) I jumped around in an orgy of agreement.

However, I don’t think we can call contemporary macroeconomics on its predictive failures and then not attack the rest of the economics discipline on similar grounds.

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Matt Nolan

The one thing broken by this crisis …

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Update: Clive Crook has a better discussion of what is going on than I do (original here) – and how irritating it is – than I do. I’m embarrassed to say that I’m a few days behind on my blog reading, so I only saw this after writing my post 🙁

Even if nothing else is broken in the economy, there is one thing that has been irrevocably smashed.

My belief that academic economists in the US would be able to use the economic tools developed over the last 200 years to objectively frame issues during a crisis – and then transparently discuss the different value judgments they hold in order to inform policy.

Compare this belief I held to reality – where we have had ridiculously partisan arguments, where intelligent economists have just told everyone that other intelligent economists are morons (eg), and that their own conception of what is going on IS the truth (something economists don’t have the ability or knowledge to say).

Economists have a framework stemming from methodological individualism – a framework that frames problems. Even though “describing” and “predicting” are too value laden for us, my own view is that good economists will try to build inside this framework first before adding value judgments to get the “description” and “prescription”. Instead all we have seen is random conjecture based on ideological fervour. Saying that this disappoints me would be an understatement …

Matt Nolan

The issue of debt and government

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There has been a bunch of web ink spilt on a recent article by John Cochrane (both pro and anti, we do discuss a little here) – I plan to spill a little bit more, but on a slightly different issue.

In the article he suggests that current people won’t loan to individuals but they will loan to the government – he suggests that the government could loan the money out to individual firms and household in order to get the economy rolling again.

This reminded me of Ricardian equivalence.  In Ricardian equivalence households expect any cut in taxes, without a cut in spending, to lead to higher future taxes – so they increase savings.  In this case, if government started putting money into risky projects, wouldn’t it increase the rate of return that the investors would need in order to invest in Treasuries?  If this is the case, then the existence of the type of “roundabout” lending that Cochrane discussed does not really exist – although I’m not sure how comfortable I am about spreading risk around like that 😛

Then I remembered that, if the government loses money on loans it will just increase taxes on everyone – so if people think that buying Treasuries leads to risk being “spread around” from risky ventures they will be more willing to.  I wouldn’t say this is a good thing – but if this is why money is flooding into Treasuries at the moment it does give government “scope” to lend some of it out …