It’s frustrating to see that people who should know better are still saying this. That the government bought for 80 something it could have bought for 50 that went to 100 does not mean it earned a profit. In other words, the government could have made just as much cash for a lower upfront investment if it bought its equity stake in Citigroup on the market. You might say that the government overpaying to capitalize a systematically important yet insolvent institution was a good idea, and you would very plausibly be right. But in that case you would be happy about the outcome even if the government lost some of its TARP money. Citigroup did not accept public capital at a high price because it wanted to be charitable to the government. It accepted public capital at a low price because no one else would make an offer nearly as good. No economist, journalist, or politician would have been happy with the terms of TARP if they were lending their own money. The government didn’t proft from TARP any more than I did from the game of Russian roullette I survived that I was paid to play the other day. 

Vox reports (but makes no editorial comment on) a Census Bureau chart showing a steep decline in middle class wealth between 2005 and 2011. This is a sensitive topic, and on the heels of Piketty, who advocates a global wealth tax, one that may fuel progressive criticism of increasing wealth inequality. While the economic malaise of the poor is something we need to address, thinking through the lens of wealth is the wrong way to go about it.

For one, median household wealth tells us less than a lot about living standards, inequality, or economic power. 


At least among OECD countries, non-income factors account for a majority of the variation in median wealth. (The relationship is stronger for the per capita counterpart, but that is skewed by a long, right tail.) Income does clearly determine a good bit of wealth, but no one would walk away convinced that the median Slovenian or Spaniard is actually richer than the American. That isn’t to say income per se is an effective measure of living standards either: wealth provides a sense of security and certainty for bad times, but that is surely of second order importance. 

But the more important point is, if there’s a measure in which a country like Israel is almost as rich as America, it’s a bad measure. At least to measure median economic prosperity. And the problem comes in measuring wealth. While we may think of it in its accounting reality, assets less liabilities, its better to think of trends through a more fundamental definition: that is a claim on future output. Wealth, after all, is the discounted present value of the future cash flows from your net position.

That makes a big difference. Not all wealth is created equal. A good amount of the returns from wealth sitting in the hands of the one percent will be taxed between 15 and 55%. A good amount of the returns from wealth sitting in the hands of everyone else will be taxed more or less at 0%. 

There’s a bigger angle to this as well. Healthcare is going to be a large part of future output, and that’s something we kinda sorta socialized between 2005 and 2011, supposedly the time period over which middle class wealth plummeted. And yet, as we each have a more equal claim on what will be a growing component of future output, implicit wealth inequality falls. Nor does this include social security and disability, which surely represent a big chunk of middle class wealth. 

Wealth, unlike income, is intertemporal. Measures of wealth inequality, unfortunately, are not as nuanced. I would venture to say, however, that anyone who thinks the utility of middle class consumption over the discountable future actually fell by 35% in absolute terms better prepare for armed revolution. 

Rather, implicit claims of more progressive taxes and even more progressive expenditures will probably keep the Bolsheviks at bay. For now. 

Dean Baker replies to my post:

I may give a longer response later, but just out of curiosity, would you support a system of complete open borders in the United States. If so, given that we have 12 million people who were willing to go through months of hell to get over the border, do you have idea as to how many immigrants the United States would see if anyone who wanted could come to the United States and had the same right to work as native born citizens? If that is not the policy you are supporting, then how would you restrict immigration?

My initial response was:

I sometimes have trouble reconciling my views on this. On the one hand I’m in complete principle support of ‘open borders’, on the other, I know within the current system that would lead to chaos. I think immigration without assimilation is bad for a country and society, largely what has created a cohesive “American” culture is rapid (by international standards) assimilation towards our culture. I think a path to citizenship is also critical for all immigrants. So I would limit immigration at the point where our bureaucracy (not political framework) can’t support the infrastructure necessary for such assimilation and/or process citizenship requests in a sane manner fast enough. At the margin, for reasons you note, I would always pick the ‘skilled’ over the ‘unskilled’.

Because of vast inequality, we may already be reaching that limit, I don’t know.

But it still left me thinking. I don’t like the idea of arbitrary guidelines (“5 million is okay, but 10 million isn’t”). We would all prefer some general principle on which restrictions can be designed.

After a bit of thought, I think I was pretty close on. I came across a Pew Study that notes that 61% of children of Asian and Hispanic immigrants think they are ‘typical Americans’:


The similarity between Asian and Hispanic children really struck me. Initially, I thought inequality was a big deal as far as assimilation is concerned, but maybe it isn’t. As I noted in my reply to Dean, when our social system can’t support immigration, protectionism might be valid. Systems that work to this end are highly accessible and robust public education systems, libraries, strong ESL programs, and interaction with ‘traditional’ customs.

Inequality erodes pretty much all those entities. Schools get bad, communities get segregated, and libraries get torn down. Asians are rich and latinos are poor, and both react very similarly, so I must have been wrong somewhere…

My gut tells me the long-term effect of today’s inequality has yet to be felt, especially as many Asians still live in the ‘poor man’ mentality (high savings rate, humble beginnings, etc.)

But every society has its breaking point. I don’t know what the number is, but if all of Africa suddenly came to the US well, then, there’s a problem.

I’d also like to know what Dean thinks about population density, in relation to land, but also in relation to overall natural resources. India is projected to have 1.5 billion people on land far smaller than the US. Doesn’t it make sense that some come over, it would seem to be more productive overall…

This is something I haven’t fully thought about, and expect to blog about soon; would love to hear opinions in the mean time.

In light of our most recent budget… my thoughts

Neither of India’s national political platforms can really support visionary thinking; the BJP falls prey to religious and social populism, while the National Congress does so to economic populism. However, urbanization will bring an end to the unfair grip rural India has on national politics. While neither leading candidate for premier, Rahul Gandhi or Narendra Modi, are likely to oversee the same level of liberalization as did the Narasimha Rao government, the defining moment of the next Union Cabinet will be the transition to an urban India. If it facilitates a strong city system, with independent mayors, competitive economic zones, and strong rule of law, the stage will be set for meaningful growth and reform.

Comments appreciated!

Dean Baker replies to Noah Smith regarding unskilled immigration reform:

As far as less-skilled immigration, I would want it sharply limited, except for family re-unification. The evidence is that this does lower wages, although most of the impact is on the wages of other immigrants because we have a highly segregated labor market. I don’t consider this to be a good thing. As I’ve written elsewhere, I don’t want policy to be structured to give professionals cheap help. I would be very happy with a world where no one could afford to hire nannies for their kids.

There are places in the world where jobs that are low-paying jobs here allow for a middle class standard of living. A retail clerk, custodian, or housekeeper can earn enough to support a family. We just need the right set of labor market conditions to make this possible.

I think I understand where Dean is coming from now. I was initially very skeptical at the idea that progressives, who just won a decisive victory with immigrant support, should become labor protectionists. However, I still am in favor of more flexible labor markets, for paupers and PhDs alike.

As I understand it, the crux of Dean’s argument is that an inflow of skilled professionals benefits our poor, whereas the inflow of menial laborers depresses their wages. He (rightly) argues that rigid labor markets place an undue burden on other marginal groups.

This is true. If the number of doctors, lawyers, and programmers suddenly doubled, the salaries of the top 5% may be hurt, but middle and low America would derive huge benefits from cheaper appointments, technology, and services.

Dean argues, though, that a large portion of consumer surplus derived through inflow of menial labor is allocated to the wealthy:

Of course, there is a story of labor shortages in this picture—in the sense that it will be difficult to find workers for the lowest-paying and least productive jobs. With a stagnant or declining labor force, workers will have their choice of jobs. It is unlikely that they will want to work as custodians or dishwashers for $7.25 an hour. They will either take jobs that offer higher pay or these jobs will have to substantially increase their pay in order to compete.

This means that the people who hire low-paid workers to clean their houses, serve their meals, or tend their lawns and gardens will likely have to pay higher wages. That prospect may sound like a disaster scenario for this small group of affluent people, but it sounds like great news for the tens of millions of people who hold these sorts of jobs. It should mean rapidly rising living standards for those who have been left behind over the last three decades.

And that is the basic story of fears over stagnant or declining populations. The people who hire help—the very same who also dominate economic policy debates—are terrified over the prospect that they will have to pay workers more in the future. But the rest of us can sit back and enjoy watching them sweat as ordinary workers may finally start to see their share of the gains of the economic growth of the last three decades.

This argument was made in context of shrinking populations epidemic across the rich world, but, can be extended to immigration as well. However, I have two qualms with this premise:

  1. This argument may actually be somewhat true for a poor country like India. That is, my lifestyle in India is rich because we have lots of people cooking for us, driving us around, tending the lawn, etc. Simply, wealth in India manifests in labor-intensive ways. However, while undoubtedly the increased consumption by wealthy Americans creates employment (heh), it is more capital-intensive and will continue to become more so.
  2. The rich will certainly take a disproportionate amount of the benefits from low-skilled laborers, sure. However, the decreased cost of menial labor will also benefit the poor. That is, most Americans buy the same food in similar grocery stores, and when there are more people processing food, the price of food will fall. Food eats a good portion of a poor man’s leftover salary, but isn’t even a consideration for the affluent. So, much of the financial surplus might go to the wealthy, but it will hardly change their lives, as it will that of the poor.

The idea that low-paying jobs provide a middle-class standard of living in some countries is true, but doesn’t apply for this argument. In my head, Dean’s argument sounds something like this: “If a Mexican field-hand comes and works in America, he’ll barely earn $20,000 a year. Gee, he’d be poor by American standards. But if he stayed in Mexico, that would get him a really middle-class lifestyle”. This is a pretty unfair caricature of his argument, but low end jobs in America, are low end jobs in Mexico. I don’t think there are any non-Western countries where “custodians” can live a middle-class lifestyle. Housekeepers, maybe, but for cultural reasons (i.e. maids that live in mansions).

Dean doesn’t buy Noah’s argument re: agglomeration effects:

On some more general points, Noah presents evidence that densely populated metropolitan areas have the highest productivity. I don’t have any quarrel with this or the economics of agglomeration that Noah cites, but there is a serious problem of untangling cause and effect. Certainly economically dynamic areas will attract lots of workers and workers are needed to sustain dynamism. But do we really think the benefits of a larger population increase without limit?

Mexico City’s metropolitan area has a population of more than 20 million people. Do we think the people in the area would be poorer on average if the population was just 10 million? I find that hard to believe, especially if we take into account the pollution and congestion rather than just a straight per capita GDP measure.

Because I’m working at the Santa Fe Institute on a project that is specifically concerned with socioeconomic scaling in cities, this was a really interesting point to me. And my answer is an emphatic YES! We would expect Mexico city, which is 100% larger than a city of 10 million, to be 115% richer. Of course, he’s absolutely right that pollution also increases superlinearly with population, but this isn’t as bad a thing (and will cease to be a problem with enough wealth and popular demand). The real concern for the future is water and carbon efficiency, which consistently scale sublinearly with population. The scaling laws hold true across America, Europe, and – based on some preliminary sleuthing – India as well. Cities are where ideas have sex, without birth control.

After reading this post, I’m a lot more sympathetic to the idea of labor protectionism. I’ve always been somewhat appreciative of the nativist viewpoint. Hey, I’m never going to be at the blue-collar margins, so it’s not me who has to face harder competition and maybe lower wages. But also, I’m allergic to the idea that we should prevent low-skilled laborers from entering the United States.

The poor in Mexico are surely more disempowered than those in America. Many go through months of hell to come up north, and I think it is slightly patriarchal to say “You’d have a better live in Mexico, you could be considered middle-class there”.

I found the tax treaty for skilled foreign labor a fascinating idea, though. This would not only be a great economic move, but would forge the way to much more robust relations with ‘source countries’.

Would also direct readers to Adam Ozimek’s thoughts on region-based visas. This is another idea that I’m against, but has changed at least some of my priors.

American and European agencies that regulate “organic” food, obviously, require said crops to be DDT-free. This makes a lot of sense.

There’s a big fight out in Uganda now between organic farmers making tons of cash on European supply chains and the real humanitarians that want to get rid of malaria (which decreases, as Jeffrey Sachs has demonstrated, GDP by 30% controlling for all other factors).

There are many ways to treat rid of malaria (bed nets being a prime example), however DDT is remarkably cost-effective. The organic farmers in Uganda have pretty much put a stop to all activities that would cripple malaria, thereby subjecting their countrymen to another generation of poverty, disease, and malnourishment – in hopes of meeting American and European standards.

This is just another example of how the well-intentioned crusaders for an all organic world ignore that for anyone that isn’t rich, organic food is irrelevant, and probably harmful (with second-order effects).

I’d bet every dollar of foreign aid (which is a mess by itself) that goes towards malaria relief has been counteracted by Greenpeace spreading exaggerations across the world. You don’t have to give any money to help those afflicted, just stop giving to various, “eco” groups that make the situation far worse than it is.


Addendum: I have nothing against real, substantive environmental policy. I’m a fan of high carbon tax rates, higher efficiency standards on air travel, awareness of depleting fossil fuels, etc. I’m just allergic to much of the crap that dominates “eco-talk”, like Greenpeace asserting Google and Cloud computing are a threat to the environment when video-cons reduce the need for carbon-intensive executives to be in Australia in the morn and DC in the eve. 

“Sound is the change in the specific condition of segregation of the material parts, and in the negation of this condition; merely an abstract or an ideal ideality, as it were, of that specification. But this change, accordingly, is itself immediately the negation of the material specific subsistence; which is, therefore, real ideality of specific gravity and cohesion, i.e.–heat. The heating up of the sounding bodies, just as of beaten and or rubbed ones, is the appearance of heat, originating conceptually together with sound.” -Hegel