The Employment Situation

This question has been of great interest to me although my knowledge of economics is very limited. Does the President of this country have any really productive choices given political reality? Repubilcans tend to offer tax cuts and also don’t control spending accordingly (Regan, Bush II) and the economy certainly responds to all that stimulus. But of course the cost is debt through deficit spending. Democrats will choose to increase spending and keep taxes where they are or even raise them. Both methods produce some form of stimulus but it’s always through deficit spending which hurts the economy in the long run. My question is: do leaders have any other choice? Can they go before the public and say things like “We can wait this out, jobs will return when the economy revives naturally” or are they forced to do something because if they don’t, they will seem to not care about the unemployed?

Anyone think that Bush’s new open borders policy is going to help native born employment?

If you do, I’ve got a bridge to sell you.

I seem to remember 8 years averaging 250,000 new jobs/month. Call it what you want, but I call that “better than what we’ve got”.

I’d really like it if Arnold would post something about this new immigration policy. It has the potential to flood our already-flooded labor market with millions of people who are willing to work for peanuts and drag our fragile wage recovery back into a wage recession.

I’m all for Bush’s plan to throw open the borders, just get rid of H1B while doing it. What they are going to do is start allowing a flood of immigrants WITHOUT ridding the country of a would-be-illegal business subsidy called H1B where workers are not allowed to quit and find higher wages.

Get rid of H1B and I’ll be happy with the proposal.

Eric–

Here’s how the new proposal works:

Employers post jobs on a website
If the employers are unable to “Fill” the position with a legal resident within x days, they can import somebody from offshore/nearshore
The new “legal” immigrant gets to work for 3 year, renuable terms

What happens if they quit or get fired? Deportation? Probably not. Free health care and welfare payments? Likely
What happens when employers start putting $5.75/hour jobs out there for, say, construction worker positions and are unable to “fill” them with residents?
At the very least, this proposal might cause more minimum wage positions to be created at the expense of possibly high-end jobs, and certanly might raise wages for low-wage day laborers who make far less than min wage.

This thing will NEVER pass congress.

This is from National Review, Steve. See, not all Republicans are lapdogs for business interests.

…As well-meaning as such efforts may be, the basic assumption is false — there is simply no economic reason to import foreign workers.

If the supply of foreign workers were to dry up (say, through actually enforcing the immigration law, for starters), employers would respond to this new, tighter, labor market in two ways. One, they would offer higher wages, increased benefits, and improved working conditions, so as to recruit and retain people from the remaining pool of workers. At the same time, the same employers would look for ways to eliminate some of the jobs they now are having trouble filling. The result would be a new equilibrium, with blue-collar workers making somewhat better money, but each one of those workers being more productive.

Many people fear the first part of such a response, claiming that prices for fruits and vegetables would skyrocket, fueling inflation. But since all unskilled labor — from Americans and foreigners, in all industries — accounts for such a small part of our economy, perhaps four percent of GDP, we can tighten the labor market without any fear of sparking meaningful inflation. Agricultural economist Philip Martin has pointed out that labor accounts for only about ten percent of the retail price of a head of lettuce, for instance, so even doubling the wages of pickers would have little noticeable effect on consumers.

But it’s the second part of the response to a tighter labor market that people just don’t get. By holding down natural wage growth in labor-intensive industries, immigration serves as a subsidy for low-wage, low-productivity ways of doing business, retarding technological progress and productivity growth.

That this is so should not be a surprise. Julian Simon, in his 1981 classic, The Ultimate Resource, wrote about how scarcity leads to innovation:

It is important to recognize that discoveries of improved methods and of substitute products are not just luck. They happen in response to “scarcity” — an increase in cost. Even after a discovery is made, there is a good chance that it will not be put into operation until there is need for it due to rising cost. This point is important: Scarcity and technological advance are not two unrelated competitors in a race; rather, each influences the other.
As it is for copper or oil, this fact is true also for labor; as wages have risen over time, innovators have devised ways of substituting capital for labor, increasing productivity to the benefit of all. The converse, of course, is also true; the artificial superabundance of a resource will tend to remove much of the incentive for innovation.

Stagnating innovation caused by excessive immigration is perhaps most apparent in the most immigrant-dependent activity — the harvest of fresh fruit and vegetables. The period from 1960 to 1975 (roughly from the end of the “Bracero” program, which imported Mexican farmworkers, to the beginning of the mass illegal immigration we are still experiencing today) was a period of considerable agricultural mechanization. But a continuing increase in the acreage and number of crops harvested mechanically did not materialize as expected, in large part because the supply of workers remained artificially large due to the growing illegal immigration we were politically unwilling to stop.

An example of a productivity improvement that “will not be put into operation until there is need for it due to rising cost,” as Simon said, is in raisin grapes]. The production of raisins in California’s Central Valley is one of the most labor-intensive activities in North America. Conventional methods require bunches of grapes to be cut by hand, manually placed in a tray for drying, manually turned, manually collected.

But starting in the 1950s in Australia (where there was no large supply of foreign farm labor), farmers were compelled by circumstances to develop a laborsaving method called “dried-on-the-vine” (DOV) production. This involves growing the grapevines on trellises, then, when the grapes are ready, cutting the base of the vine instead of cutting each bunch of grapes individually. This new method radically reduces labor demand at harvest time and increases yield per acre by up to 200 percent. But this high-productivity, innovative method of production has spread very slowly in the United States because the mass availability of foreign workers has served as a disincentive to farmers to make the necessary capital investment.

But perhaps immigration’s role in retarding economic modernization is confined to agriculture, which, after all, is very different from the rest of the economy. Nope. Manufacturing sees the same phenomenon of a scarcity of low-skilled labor yielding innovation while a surfeit yields stagnation. An example of the latter: A 1995 report on southern California’s apparel industry, prepared by Southern California Edison, warned of the danger to the industry of reliance on low-cost foreign labor:

In southern California, apparel productivity gains have been made through slow-growth in wages. While a large, low-cost labor pool has been a boon to apparel production in the past, overreliance on relatively low-cost sources of labor may now cost the industry dearly. The fact is, southern California has fallen behind both domestic and international competitors, even some of its lowest-labor-cost competitors, in applying the array of production and communications technologies available to the industry (such as computer aided design and electronic data interchange).” (Emphasis in original)
Conversely, home builders, who are still less reliant on foreign workers than some other industries, have begun to modernize construction techniques. The higher cost of labor means that “In the long run, we’ll see a move toward homes built in factories,” as Gopal Ahluwalia, director of research at the National Association of Home Builders, told the Washington Post several years ago. But as immigrants increasingly move into this industry, we can expect such innovation to spread much more slowly than it would otherwise.

But surely immigration is needed fill jobs in the service industry? After all, without immigrants, who will pump our gas? Oh, wait — we never imported immigrants for that and so now we pump our own gas, aided by technology that lets us pay at the pump — thus we have fewer attendants but more gas stations and get in and out faster than we used to when we trusted our car to the man who wore the Texaco star.

Other innovations suggest how, despite the protestations of employers, a tight low-skilled labor market can spur modernization even in the service sector: Automated switches have replaced most telephone operators, continuous-batch washing machines reduce labor demand for hotels, buffet-style restaurants need much less staff that full-service ones. As unlikely as it might seem, many VA hospitals are now using mobile robots to ferry medicines from their pharmacies to various nurse’s stations, eliminating the need for a worker to perform that task. And devices like automatic vacuum cleaners, lawn mowers, and pool cleaners are increasingly available to consumers. Keeping down low-skilled labor costs through the president’s vast new guestworker plan would stifle this ongoing modernization process.

The idea that a modern society like ours requires the ministrations of foreign workers, because there is no other way to do get these jobs done, smacks of the apocryphal quote from a 19th-century patent commissioner: “Everything that can be invented has been invented.”

Steve, the productivity argument against immigration is one that I’ve thought about before. I wonder why more economists don’t make it.

People bitch and bitch about inequality in this country. But if you don’t count immigrants, there is very little inequality. And if you could somehow limit the number of immigrants, there would be NO inequality (immigrants, especially Mexicans, are largely competing with African Americans for low wage jobs).

And the same people who decry inequality are the ones who are pro-immigration. Go figure.

From a fiscal policy standpoint, Dubya has done everything he could possibly do to jack up employment. But his inability or unwillingness to address illegal immigration has really hurt him when it comes to unemployment. 57,000 jobs created in the month of November would be plenty if those 80,000 immigrants per month weren’t here looking for work.

I change my opinion on immigration from minute to minute, it seems. Here I am arguing against immgration, but at the same time I’m having a garage built with Mexican labor.

I just don’t know what to think. Part of the problem is that all arguments are based on anecdotal information. The real cost and benefits of immigration don’t seem to be well known.

Well Steve, certainly you sound a bit selfish with your apparent desire to keep foreigners poor.

“57,000 jobs created in the month of November would be plenty if those 80,000 immigrants per month weren’t here looking for work.”

Except that first of all it’s hardly the case that the same number of jobs would have been created without immigration. Without immigration, outsourcing would have occurred more quickly, and the economy would be in general less efficient, as well as having less demand. You can’t fairly make the claim you’re making. Would you rather all the immigrants have the same jobs they have now, but in their home countries?

The economic cycle would operate with or without immigration. It only takes a brief look at Japan or many European countries to illustrate this. It’s incorrect to ascribe the low points in the economic cycle to immigration.

The world is not a utopia. There’s not a fixed number of jobs and work that can be done, and it’s not a zero sum game. The reason economists ignore your opinions is that they’re based on the same ancient economic fallacies that have been refuted time and again. Every time the business cycle turns, the same fallacies, just like socialism, rear their ugly head.

Without immigration, the average native born citizen in the US would be poorer.

Another point:

Just because something is an innovation doesn’t mean its more efficient. Take those robots that ferry drugs to nurses’ stations in hospitals. How much do those things cost? I’d be surprised if they cost less than $150K. Think about it, the hospital has to buy the hardware, have its layout programmed into the system, the robots have to be maintained and so on. There’s probably a hefty license fee each year even after all this is paid for.

Is this really more efficient for the economy? Suppose the hospital was able to hire two or three low wage runners to do this job for a total payroll of $75K per year.

1. At least $75K ($150K-$75K) would be freed up for other uses…such as buying diagnostic equipment, R&D etc.

2. Considering that many hospitals are located near inner cities, the low skilled employment could open up a career path for someone with a disadvantaged background….possibly even giving them the direction to go onto a higher skilled job in healthcare.

Is it really so obvious now that the hospital and economy is better off having ‘innovated’ away the low skilled job with a system of robots?

“BULL. There is not an infinite amount of work to do, therefore there IS maximum amount of jobs available. If there was an infinte amount of work to go around, we’d have no unemployment problems.”

This is sometimes called the ‘lump of work’ fallacy. The idea is that there is some finite amount of work the economy needs and if its only enough to divide between 90% of the population the unemployment rate will be 10%.

The way to think of it is in terms of output. Suppose you were making cakes. YOu need bakers, flour, eggs, icing, ovens, etc. If you have a certain amount of flour, eggs, icing etc. but you had a huge number of bakers you may discover some of your bakers will have nothing to do (unemployment). But in an economy the game is output (cakes). If the price of one input falls (say flour) then that allows you to bake more cakes. If the price of an input increases then you can bake fewer cakes. There’s nothing stopping you from having an infinite amount of cakes provided you can secure an infinite amount of inputs.

>>Without immigration, the average native born citizen in the US would be poorer.

Prove it. With all due respect, I don’t think that you can. Not that I can prove the contrary, but that’s my point: no one has added up the costs and benefits to determine if immigration is a net benefit. Some days I think that it is, some days I don’t.

I think that the argument that, if immigrants didn’t do the job here it would be done somewhere else, is simply not true for the majority of the jobs that immigrants do. Immigrants can’t cut my lawn if they’re not in this country. They can’t cook my food, or wait my table. They can’t watch my kids, or perform day labor.

And even for those jobs that do move offshore, perhaps it is better that they do so. It is expensive to live in the US. It is much cheaper to live in India or Mexico or whatever, so low wages are more compatible with those countries’ lifestyle.

This is no joke. I raise money for a local health clinic whose clientel is entirely Mexicans. We put together “hygene kits” consisting of soap, toothpase, etc. that are given out at the clinic and that go like hotcakes. How can immigration be a net good if the immigrants can’t even afford toothpaste?

Not just India. China, India, Brazil, Russia, and all other countries that are mercantille states. Get it straight.

Steve,

I don’t discount demand, but demand can be created whenever it is needed. If your a Keynesian you believe it can be done thru fiscal policy, monatarists believe it can be done thru printing money and classicalists believe it takes care of itself. Not matter what your flavor of economic theory, increasing supply can be meet with an increase in demand. The argument is simply over whether this increase is more or less automatic or if it has to be managed by pro-demand gov’t policies.

Given the choice between a lower supply versus a higher one, the higher one is better. It provides for a higher standard of living which is what this is all about. Therefore policies that increase supply should be welcomed even if you are a 100000% Keynesian demand sider.

Eric:

Here’s how to prove immigrants have raised all American’s income:

“But you still have that number floating out there: 80,000 jobs per month needed just to absorb all the immigrants that come here. It isn’t easy to overcome that number in a recession.”

Think of the analogy with baking cakes. Suppose the flour company tells you they are giving you an extra 80 pounds per week because you won a contest. Does this help or hurt your ability to bake more cakes? Would any cake company in their right mind turn down this gift because they are worried about how to find a use for all 80 pounds of flour?

No Steve, you would be the baker in this analogy. You aren’t ‘purchased to be eaten’, you want to eat as much as you can and that means we need lots of cake (or we want to enjoy goods & services which means we must produce as many as possible).

Your argument is that demand may not be able to meet supply. This is valid but has nothing to do with the goal of achieving the best supply possible. If demand is slack then it should be increased by the proper policies. Limiting your supply (which is what labor restricting policies do) would not resolve such a problem.

How on Earth is restricting immigration going to limit supply of anything other than labor?

>>How on Earth is restricting immigration going to limit supply of anything other than labor?

Well, you’re going to have to mow your own lawn. Which, Americans being as fat as we are, we probably should be doing anyway!

I don’t know whether to agree with PK or not. Can’t remember 20 years ago my parents being scared night and day about whether their job was going to be exported this year or not. Surely they didn’t worry about it for 3 straight years. Surely they haven’t been forced into job-hopping to avoid the flood of offshoring.

Perhaps it’s the worst job market in 20 years because even us snooty white-collar folks are getting shown the door in record numbers?

On the fiscal side, Bush’s tax cuts were highly inefficient as demand boosters. Most of the tax savings would be realized years later (thereby dulling the incentive to increase demand immediately) with only minor tax savings to be achieved recently. Worse, the tax cuts basically reset expected future budgets to be endless deficits as far as the eye can see. This probably hurt demand for investment goods since it raised long term rates higher than what they otherwise would have been.

If Bush had been interested in boosting demand, there were plenty of real policies that could have been proposed such as a 6 month payroll tax holiday.

>>Perhaps it’s the worst job market in 20 years because even us snooty white-collar folks are getting shown the door in record numbers?

Nah. There is always panic of this sort at the end of a recession. I remeber back in ’93, people were saying that Gen X would be the first generation in US history to be poorer than its parents.

Economics of an alternate universe

http://www.econopundit.com/archive/2003_12_01_econopundit_archive.html#107062941223362794

Read it, B!

So in 1995, the CBO was projecting deficits as far as the eye could see. In 1999 it was projecting surpluses as far as the eye could see. And in 2003, it’s back to deficits.

Maybe the should switch to the FAIR model! Their forcasting STINKS!!!

The burden is on the model to prove itself accurate, not on me to show why it has yet to earn my trust. Even with a good model that is no substitute for thinking about the situation.

Yes I do.

Ah…Demand side stimulus…music to my ears….

Why did I vote for Bush? What was I thinking?

1. Eric, I spouted no numbers regarding CBO estimates of future deficits. The fact is that the trend is now towards ever increasing deficits in the future. I know it, you know it and the bond market certainly knows it. Is this guaranteed? No, tomorrow a metorite of solid gold may land in Washington DC and allow the gov’t to pay off its entire debt.

2. As I stated before, if deficits are not a problem then you have discovered a free lunch. You should explain to us what mechanism allows this to exist.

3. Like I said, the obligation is on the model to prove itself…not for me to justify my skepticism. Do you have any evidence that FAIR works well beyond 3-5 years?

>>The fact is that the trend is now towards ever increasing deficits in the future. I know it, you know it and the bond market certainly knows it.

Which was the same trend as in 1995. But then the economy hit overdrive and blew those predictions out of the water.

I think that it is 1995 all over again. We are at the precipice of a huge expansion (I say this because it appears that the entire world economy is going into economic growth mode. Remember, the late 1990s were not a good time for the Asian or Latin American economies).

Anyway, the point is that long term budget forcasts are not worth the paper they are printed on. We are NOT going to see deficits as far as the eye can see, because the economy is improving and at some point there will be political will to get spending under control (you don’t cut spending in a recession, but you also don’t run 600 billion dollar deficits in a boom).

“Which was the same trend as in 1995. But then the economy hit overdrive and blew those predictions out of the water.”

Actually the trend in ’95 was for the deficit to either shrink or remain stable as far as the eye can see. Especially in terms of % of GDP which is a more meaningful measure of gov’t borrowing.

“This amounts to saying something like “a policy that gives everyone free health care at no cost to anyone anywhere in the economy.” It would be nice, yes. But it ain’t possible.”

Steve’s just wrong about this. Take a policy of no tax cuts and no major spending increases except for 9/11 & the war (which are one time expenditures). This would be equal to accepting short term deficits due to recession & war but keeping the long term prospects for a stable deficit or surplus.

The model is clearly useless for long run predictions as Steve admitted. If anything after 2007 is as good as guessing then what do you make of the fact that budgets are often presented for 5 years? That alone means that FAIR is good only as a very short term model. Fine if your only concerned about making it to the next election.

“I didn’t “discover” anything. I am just regurgitating a historical fact. Very large deficits in the 1980s had very little negative impact to the US economy. The deficits were not the end of the world, as PK would have you believe.”

Unless you want to assert that the US was suffering from a persistant demand deficiency (hard to believe considering the amount of consumer spending we do and how low our savings rate supposedly is) then the deficits of the 80’s did cost us in the 90’s (as well as today). Likewise the reduction of the deficit in the 90’s boosted investment that would have otherwise been crowded out.

The fact that you didn’t see the US fall off the Earth into a vat of boiling oil in 1989 doesn’t mean you’ve discovered a ‘free lunch’ whose mechanism is simply unknown. Engineers, I’m sure, know that perpetural motion machines do not exist…

>>The fact that you didn’t see the US fall off the Earth into a vat of boiling oil in 1989 doesn’t mean you’ve discovered a ‘free lunch’ whose mechanism is simply unknown. Engineers, I’m sure, know that perpetural motion machines do not exist…

Maybe if the deficit got to Italian or Japanese proportions of GDP I would be concerned. At the levels they are now, and that they are projected to be, they simply can not do what you and PK say that they will do.

From http://www.econopundit.com

Nothing but the presidential election will really answer this question. In the meantime, Bartlett subjects the question to reasoned logic:

Leaving aside the details of the Bush tax cuts, which did in fact benefit the middle class substantially, there are still two good reasons why a voter might support tax cuts (and oppose tax increases) even if they would have no change in their tax liability either way. First, one can believe that tax cuts (increases) will increase (reduce) economic growth and job creation. This will benefit even those who pay no taxes at all.

Second, one can view tax cuts as a restraint on the growth of government. In other words, tax policy is a very accurate measure of a party’s political and economic philosophy. Grover Norquist calls this a party’s brand identity and must be protected for the same reason corporations protect their brands. That is why it often makes sense to propose tax cuts even when it may not necessarily make economic sense to do so, just as companies sometimes put their best-sellers on sale. It reminds voters and consumers about the brand and helps protect against competitors.

I have found indirect but overwhelming evidence of public support for the tax cuts. The evidence is right before us and we have missed it because it is disguised as a negative economic statistic. Evidence of voter support for the Bush tax cuts can be found in the unemployment rate.

We’ll explain, but first a bit of background.

From its murky beginnings last June, the weblog has been obsessed with employment and the unemployment rate. One of our first posts described the sinking sense of nausea one can experience when trying to explain how changes in the size of the labor force can influence the unemployment rate. Some loyal Econopunditistas have taken up the challenge of this issue, attempting to address the issue in their own terms.

More recently, in a bored sort of way we’ve briefly mentioned the ten-thousandth rediscovery of the discouraged worker effect, without tracking the many and even many more discussions of Paul Krugman’s rediscovery of same.

Every day there’s a negative story on the “jobless recovery.” Postive ones like this — ones which look below the simplest numbers — are few and far between

Now ask yourself as you look over these stories: what’s at stake here? How many jobs make the difference between a negative story and a positive one? Between a story and no story at all? The numerical answer is from about 50,000 up-or-down on a monthly basis, or, alternately, about 3 million when viewed annually — the number of jobs supposedly “lost” by the Bush administration.

We have persuasive quantitative evidence from 500,000 to one million US residents have been sufficiently affected by the Bush tax cuts to significantly change their behavior — in a positive direction and in a manner strongly suggesting support for the tax cuts.

These people are either employed or looking for work whereas, in the absence of the tax cut, they would not be part of the labor force.

The evidence was obtained very simply: by running Yale University’s FAIRMODEL under the counterfactual assumption of no tax cut, and comparing the results with the same model’s conclusions given the presence of the tax cut. The model shows a growing “extra” component of the labor force — by now a number approaching one million — responding to all the supply-side incentives offered by higher take home pay.

Some may object or even sneer, claiming the tax cut impact on take home pay must be too small to make a difference.

We can think of three responses. (1) The reliability of FAIRMODEL is a matter of public record. (2) One’s own intuitive response to a change in incentives is a poor indicator of how other people may respond. (3) Finally, the numbers say exactly what the numbers say.

Soon EconoPundit will post a tutorial on how to run FAIRMODEL so you can verify these results for yourself.

Meanwhile, keep thinking positively. An “extra” one million employed or seeking work is only a negative if you think the economy’s in the business of producing not goods, but “bads.”
Link posted by Steve Antler : 10:54 AM