Scott Sumner  

Nick Rowe on fiscal policy (and reply to Caplan)

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Keynesians often say that it's "obvious" that more government spending will boost GDP. I love this reply by Nick Rowe:

The average reader of the New York Times probably thinks he knows about fiscal policy. "We know that Y=C+I+G+NX, so we can see that higher G increases Y. And monetary policy works because lower interest rates increase I, if we can cut interest rates. And Nick Rowe is just obfuscating, no doubt for political reasons, by ignoring that simple obvious mechanism."

We also know that Y=C+S+T. And we can equally well "see" that higher taxes will increase Y. And higher interest rates, if it encourages more saving, will work too.

We also know that Y=gG, where G is goats sacrificed, and g is real output per goat sacrificed. That will work too.

Those are all just accounting identities; all three are equally true, and equally useless.


I see that I am getting increasingly far behind in my responses to Bryan Caplan, so let me make a few comments on immigration:

1. I'm not at all certain that open borders would make the average American worse off. I think the policy would have been desirable 100 years ago, and will probably be desirable 100 years from now. But right now I think it fairly likely that the average American would be made worse off by completely open borders, for three reasons; crowding, rapid cultural change, and (in some cases) labor market effects.

I'd rather explain this problem using Switzerland, as it will be easier to make my point. Switzerland has 8 million people living in a small mountainous country. The built up environment is very neat and tidy, and indeed often quite beautiful. It's safe. I once accidentally left a wallet with lots of cash clearly visible on a ledge in a Geneva train station. When I came back later it was still there, with the cash. That doesn't happen in lots of other countries. With open borders Switzerland might attract tens of millions of immigrants. It would no longer be a "land of the Swiss." It would be much more crowded, much poorer, less well-educated, more crime-ridden, etc. Culturally it might become more like Kyrgyzstan, another small mountainous country. The Swiss greatly value the neat and orderly characteristics of their country. I find it quite plausible that they would feel worse off.

There are some counterarguments. Perhaps the Swiss would require all immigrants to first have a place to live. In other words, not allow immigrants to be homeless, living on the streets. Zoning rules could prevent shantytowns. Maybe they could make it work. A counterargument for the US is that it's already quite diverse--we could handle the cultural change more easily. It's much bigger. Many of the immigrants would move into places like California's Inland Empire, where they would not be an obvious presence for affluent whites and Asians on the West Side of LA, or average Americans in cities in Iowa. In conclusion, the Swiss thought experiment makes me think that open immigration might be bad for domestic residents, but I am less certain that this applies to the US.

Of course there are also some difficult economic issues. Would it lead the US to cut back sharply on the welfare state? And if so, doesn't that hurt the poor in America? What about the impact on the low-skilled labor market?

2. Then Bryan asks this question:

What's noteworthy, rather, is that for once, Scott is vocally forgiving of non-utilitarians. Instead of ridiculing opponents of open borders for their cognitive illusions, Scott suggests that utilitarianism asks too much.

My question for Scott: Why is open borders the one issue where you seem to opt for moral leniency? (Perhaps this reflects a change of heart?)


First of all, I shouldn't be "ridiculing" people for cognitive illusions. I should be criticizing them. In every single case, I have the exact same cognitive illusion; it's just that I am also aware of alternative perspectives that I believe are more valid.

Bryan is asking why open borders is the one area where I don't insist on the utilitarian position. This may well be a case where I suffer from cognitive illusion, as I discussed on the post he links to. I am generally tough on policymakers because I feel their gains for adopting the wrong policy are trivial compared to the social cost. Now I suppose one could argue that's also true in the hypothetical Swiss case, the pain of a somewhat messier Switzerland is trivial compared to the gains to desperately poor migrants. But in the policy questions I look at the disproportion is an order of magnitude greater. A policymaker might hurt millions of people in exchange for a campaign contribution, or a slightly greater chance of winning an election. That's morally unacceptable. Perhaps the aversion of average people to open borders is also morally unacceptable, but the case seems less outrageous.

And I refuse to accept deterministic political models based on self-interest that cannot account for the difference between Iraq and Denmark. I expect all politicians to behave at least as well as Danish politicians, i.e. to be at least as utilitarian.

I'd vote for open borders. Perhaps Bryan is right and I should expect more from average citizens. I'll keep an open mind on the issue. The earlier post of mine that he links to is slightly more pro-immigration than this one, and also better.



COMMENTS (19 to date)
Mr. Econotarian writes:

A friend of mine was "bump" pickpocketed in Geneva down by the Rhône.

Vagabundus writes:

Wasn't the federal government formed to provide for the common defense, like preventing invaders from using force to take our stuff?
With open borders and a welfare state, can't foreigners come and take our stuff by using the force of our own government? What is the difference in the final result?

ChrisA writes:

While not a utilitarian I am more of a supporter of open borders than you Scott. In terms of negative effects of immigration, I think these are often overblown. In fact we just had a rather nice experiment in the UK where immigration restrictions were lifted on Romanian and Bulgarian immigrants at the beginning of this year. Romanian GDP/head on PPP basis is about $14k per year versus the UK GDP/head PPP is about $40k. So there is huge incentive, one would think, for Bulgarians and Romanians to come to the UK for increased wages.But what actually happened? The number of Bulgarians and Romanians working in the UK actually fell in 1Q2014. (http://www.bbc.com/news/uk-politics-21523319). This should not be too surprising, after-all within countries there is generally large differences between regions, cities and rural areas. But everyone doesn't automatically move to where the highest paid jobs are. Why, well living costs generally are much higher in higher paid areas, high paid jobs require specialist skills and are not easy to come by and people like actually to stay if they can with their friends and families. So the negative effects of immigration are likely to be much less than critics of immigration portray.

CMA (@CmaMonetary) writes:

Wouldnt the identity be better like this:

Y=C+I+G-T+NX

Nick Rowe writes:

Scott: your Swiss example is very good.

I imagined 10 million Brits, like me, moving to live in Quebec, as I did. Those who were born here really wouldn't like it, because it wouldn't feel like home any more, even if their incomes rose, even if there is no shortage of space, and they get rich from building us new houses.

But your Swiss example is more realistic.

Lorenzo from Oz did a good post on this too. The open borders people have a very "thin" concept of what a country means.

CMA: No. We divide all goods sold into 4 categories: those sold to households, those sold to firms, those sold to governments, and those sold to foreigners. If we subtract T it wouldn't work. We could divide them up many other ways, of course. Red goods, green goods, etc.

Philo writes:

In the course of Switzerland's being transformed into a Kyrgyzstan, under the pressure of open immigration, the country would become less and less attractive to immigrants, and the "flood" would gradually be reduced to a trickle. The transformation would not go all the way through to completion; it would be arrested somewhere between present-day Swiss conditions and those in Kyrgyzstan.

On the other hand, under existing political arrangements admitting immigrants to one's country is granting them political power over oneself: my fellow citizens have political power over me that foreigners do not possess. This political aspect of immigration is a cause for concern, which has not been completely allayed by advocates of open borders such as Bryan Caplan.

Lorenzo from Oz writes:

Thanks Nick! The post is here:

Daniel Kuehn writes:

Nice statement from Rowe except for this I think:

"Those are all just accounting identities; all three are equally true, and equally useless."

They're not equally useless because it's much easier to combine Y=C+I+G+NX with a few other things to get something useful than it is to combine Y=gG with other things to make it useful.

eric writes:

[Comment removed for irrelevance and rudeness. Email the webmaster@econlib.org to request restoring your future comment privileges.--Econlib Ed.]

Nick Rowe writes:

Daniel: fair point. You are right. What I should have said was: they are all equally useless *by themselves*.

But I suspect you of having a hidden agenda, and being part of that nefarious "Save the Goats!" conspiracy.

Scott Sumner writes:

Vagabundus, Yes, the welfare state issue does create problems for open borders.

Chris, I do favor open borders, but the example you cite for Britain has no bearing on effects of open borders.

No one in their right mind would suggest open borders within Europe would create the situation I describe for Switzerland. I was talking about immigration from desperately poor countries.

I should clarify that I favor open borders for the US. If I lived in Switzerland I'd probably be opposed. But I also believe it would make Americans worse off.

Nick, Good point.

Philo, Good point.

Daniel, I agree, and I see Nick does too.

Patrick R. Sullivan writes:

[Comment removed for irrelevance. Email the webmaster@econlib.org to request restoring your comment privileges.--Econlib Ed.]

R Boggs writes:

Scott has odd viewpoint. It is desirable to change Swiss society by letting a in large number of immigrants from say Kyrgyzstan, It is desirable to completely change Swiss society, to make it poorer and more dangerous. Too oppress the native Swiss. The 10% of Kyrgyzstan that move to Switzerland will have their lives much improved. The 90% of Kyrgyzstan that can not or will not leave are still oppressed. Why are you indifferent to the remaining people of Kyrgyzstan? You are willing to oppress the native Swiss by force if necessary but will stand by and watch disasters happen across the world. Why do you hate the native Swiss so much but love the regime in Kyrgyzstan and other places so much? Is it he belief in sovereignty of states. So the Kyrgyzstan of the world can keep their regime but the Swiss must change for the worst. This seems to be a program for world disaster. The free , safe and productive parts of the word must be preserved or else we will all in up like Russia or Egypt. There is hope, China and India have change the politics and economy so that the lives their people are mush better. The internal changes are what is important. Scott where is the virtue in your ideas? I can see none.

BC writes:

"Perhaps the Swiss would require all immigrants to first have a place to live. In other words, not allow immigrants to be homeless, living on the streets. Zoning rules could prevent shantytowns. Maybe they could make it work."

"Maybe" should probably be changed to "probably" or "most likely", at least in the case of the US. We already have open borders between the poorest, most crime-ridden, urban warzones and the nicest, most wonderful neighborhoods. Yet, despite such open "domestic immigration", the nice, wonderful neighborhoods continue to exist. And, before anyone says, "Well, that's why the affluent support more immigration: because they know the negative effects of immigration will fall on the lower income neighborhoods," we also already have open borders between the poorest, most crime-ridden, urban warzones and the nice, modest but liveable working class neighborhoods, and those nice working class neighborhoods also continue to exist. Somehow, markets are able to address the demand for housing in nice neighborhoods despite open borders.

Arguments against immigration are ultimately arguments against markets. Yet, arguments for immigration restrictions rarely begin by identifying the purported market failure that such restrictions are supposed to address.

Aaron Zierman writes:

Scott, thank you for some well reasoned discussion of open borders. Sometimes I feel that Bryan pushes it a little too hard. Not everything about it is so clear cut and simple. I understand the economic net benefits of the idea but hesitate to believe that implementation would happen without any issues. There is no crystal ball. We can only make educated guesses as to what might or might not occur under true open borders.

I doubt that we will see open borders policy implemented any time soon. What I don't understand is why it's biggest proponents don't push harder for more open borders. Meaning try to simply increase immigration and loosen restrictions. It seems to me to be a more realistic approach.

BC writes:

"What I don't understand is why it's biggest proponents don't push harder for more open borders. Meaning try to simply increase immigration and loosen restrictions."

As far as I know, open borders proponents don't oppose loosening immigration restrictions. As far as I can tell, loosening immigration restrictions in no way conflicts with open borders' goals.

There is a connection, though, to Art Carden's recent post on the rhetoric of rights and permission [http://econlog.econlib.org/archives/2014/07/the_rhetoric_of.html]. I think Caplan would argue that we should start with a presumption that, in general, we shouldn't impose criminal penalties on those that hire immigrants or impose deportation on immigrants that come here to work and raise families. There may be reasons to deviate from that general rule --- for example, restricting immigration of those with criminal records or those without ability to support themselves financially --- but the burden falls on those that want to create exceptions to justify those exceptions. So, if "issues" do arise from immigration, we handle them with narrowly tailored policies to address those issues.

Instead, our current formulation is backwards: immigration and hiring of immigrants is illegal by default although we "allow" it in certain exceptional cases. Loosening immigration restrictions retains this formulation: we allow slightly more exceptions, provided proponents can justify those exceptions.

The open borders formulation is the one that derives from a presumption of freedom: we start with freedom and impose the minimal restrictions deemed necessary. The restrictionist formulation starts from the opposite direction: we start by denying freedom and "allow" the minimum freedom we think we can get away with.

John T. Kennedy writes:

Scott,

" But right now I think it fairly likely that the average American would be made worse off by completely open borders, for three reasons; crowding, rapid cultural change, and (in some cases) labor market effects."

You're not count the new Americans (the immigrants) in that average, are you?

Scott Sumner writes:

Boggs, If I was Swiss I'd vote against open borders. How about you?

BC, Good points.

Thanks Aaron.

John, No I'm not counting the new Americans, and that's one reason I favor open borders for the US. But I don't think it's a realistic political goal right now, because neither I nor new Americans have political power. Existing Americans have political power.


Aaron Zierman writes:

@ BC

I am talking more about goals of the movement. The Open Borders crowd seems less concerned about practicality and more focused on their ideology. They seem to alienate those who hold any questions about issues open borders might cause.

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