Why do people oppose immigration?

My Buzzfeed post on immigration generated a bit of traffic yesterday and a bit of disagreement, too. The most common objection to our approach to immigration is that it’s one-dimensional—OK, we might be right about the economics, but c’mon, who really cares? It’s culture that matters. This point was made to me a few times yesterday and there’s definitely something to it.

My first response is that I think people underestimate the public’s ignorance of the economics, and hence the public’s fears about immigration. This poll by Ipsos MORI (I love those guys) asked opponents of immigration what they were worried about—as you can see, their concerns are overwhelmingly about job losses and the like:

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The top five concerns are all basically to do with economics, with the highest-ranking cultural/social concern getting a measly 4%.

Obviously this isn’t the whole story. People might be lying to avoid seeming “racist”, for example. But in other polls people seem less reserved—last year 27% of young people surveyed said that they don’t trust MuslimsLess than 73% of the population say they’d be quite or totally comfortable with someone of another race becoming Prime Minister, and less than 71% say they’d be quite or totally comfortable with their child marrying someone of a different race. So the ‘embarrassment effect’ of seeming a bit racist can’t be that strong, and clearly the ceiling is higher than 4%.

I reckon it’s more likely that people have a bunch of concerns, of which the economic ones seem more salient. Once they’ve mentioned them, they don’t need to add the cultural concerns to the pile. Either that, or we just believe people in the absence of evidence to the contrary.

That’s why I think it’s legitimate to focus on the economics of immigration, even if we concede that the cultural questions are important (and tougher for open borders advocates to answer). Persuading some people that their economic fears are misguided should move the average opinion in the direction of looser controls on the borders.

If we could put the economic arguments to bed we might be able to have a more productive discussion about immigration. If culture’s your problem, then let’s talk about that, but remember that the controls we put on immigrants to protect British culture come with a price tag. Maybe we’d decide that more immigration was culturally manageable if we ditched ideas like multiculturalism and fostered stronger social norms that pressurised immigrants into assimilating into their new country’s culture. I don’t know. (Let’s leave aside my libertarian dislike of using the state to try to shape national culture.)

The point, for me, is this: the economics of immigration does matter a lot to people. Immigration is not either/or—we can take steps towards more open borders without having totally open borders. At the margin, then, persuading people about the economics of immigration should move us in the direction of more open borders. And that, in my view, makes the world a better place.

In which we take to Buzzfeed to bang the drum for open borders

Over at Buzzfeed I’ve written the ASI’s first ‘community post’, with nine reasons people should favour more open borders:

2. Immigrants don’t steal native jobs, they create them

When immigrants take jobs, that’s all some people see. What they don’t see is that immigrants spend the money they earn too. That means that for every job taken by an immigrant worker, she will create another one by buying goods and services with the money she earns. Study after study has found that immigrants don’t ‘steal’ jobs.

The idea that immigrants steal jobs is sometimes called the ‘lump of labour fallacy’, because it mistakenly assumes that there is fixed amount of work to go around. If that were true, women entering the workforce in the mid-20th Century should have created mass unemployment. It didn’t.

It’s quite a fun format, and I was able to include the obligatory Mean Girls gif, so hopefully it’ll get a bit of attention. Now I want to think of other subjects to cover – Which era of Hayekian political philosophy are you?; 10 reasons to privatise the NHS; The Great Recession in 13 kitten gifs. Suggestions in the comments, please…

Nominal GDP targeting for dummies

Nominal Gross Domestic Targeting (GDP) targeting is a type of monetary policy that people like me think would give us a more stable economy than we currently have. It would replace the Bank of England’s current monetary policy, inflation targeting.

Nominal GDP can be understood as sum of all spending in the economy. Total spending can increase either because of price rises (inflation) or because there’s more stuff to go around (economic growth). If this year inflation is 2% and we have 2% economic growth, nominal spending (nominal GDP) will have risen by 4%.

The current policy of inflation targeting means that the Bank of England tries to control the money supply so that prices rise, on average, by 2% every year. If prices rise by more or less than this, the Bank is judged to have failed in its job.

Nominal GDP targeting would mean that the Bank of England would stop trying to target price rises, and instead try to target the total amount of nominal spending that takes place in the economy. That means that if economic growth was lower than usual, the Bank would have to try to make inflation higher than usual. If economic growth was higher than usual, inflation would be lower than usual.

This system is appealing because it is often the total amount of spending in the economy that matters, rather than inflation per se. Wages are usually set in nominal terms, which means that they do not automatically adjust upwards and downwards according to inflation.

Because of this, a drop in the amount of spending going on can lead to a mismatch between all the wage demands in the economy and the amount of money available to pay them. In other words, there is not enough money in the economy to pay everyone. This has two possible outcomes: either wages can be cut to meet the new level of spending, or people will have to be fired.

Empirically, it seems as if firms prefer to fire some workers than to cut wages across the board. In fact, firms really hate cutting wages, for some reason, and unemployed people are often reluctant to take the same job that they once had for a lower wage. Economists refer to this phenomenon as “sticky wages”.

So the outcome of a fall in total spending is usually unemployment. This is an example of a nominal change having a real effect, and destroys wealth that need not be destroyed, because the previously-profitable relationship between the worker and the firm has now been undone.

When this happens across the economy it can affect economic growth. In fact, this seems to be a very important factor in recessions – when there is a steady level spending taking place, the market is pretty good at finding new ways of using unemployed workers fairly quickly. When there just isn’t enough spending going on, we have to wait for workers and firms to cut wages enough to hire them again, which can take a long time.

Under nominal GDP targeting, the Bank of England would commit to keep the spending level growing even if economic growth dipped. As I’ve said, that would mean more inflation in times of slow growth and less inflation in times of quick growth.

Because inflation is being used to offset the changes in economic growth, negative economic ‘shocks’ like oil crises will translate into higher prices, prompting the market to adjust to take account of new realities, but never creating the domino effect of mass unemployment that we sometimes currently experience. The real economy would still adjust to real shifts in supply and demand, but we’d avoid the chaos that unstable monetary environments can create.

The key is that almost all contracts in the modern economy are set in nominal terms. That means that money that is managed in the wrong way can create a lot of unnecessary destruction of wealth. Nominal GDP targeting would probably give us the most neutral monetary system possible with the government, with the monetary environment kept stable so the real economy can do its work in allocating resources.

Money matters. The 2008 crisis happened because expectations of inflation, and hence nominal spending levels, dropped sharply, causing the ‘musical chairs’ problem of too little money to fulfil all the existing contracts and wage demands, which led to widespread bankruptcies and job losses. Today, the UK and the US have begun to get their spending levels growing at a healthy rate again, and their real economies have begun to grow healthily again too.

The Eurozone is the saddest story. The European Central Bank has been obsessed with fighting inflation (possibly because Germany has not suffered much, and Germans have bad memories of hyperinflation during the 1920s), and as a result nominal spending has grown very slowly indeed. The consequences are easy to see: in the weaker European economies, like Greece, Spain and Italy, unemployment is at historically high levels. It seems likely to stay there for many years.

Many people, myself included, believe that a system where private banks could issue their own notes without a central bank at all would be the best system. This is known as ‘free banking’. One of the best arguments for free banking is that it would keep nominal spending levels steady, because banks would issue more notes during periods of slow growth and fewer notes during periods of high growth. This should sound familiar – nominal GDP targeting is probably the closest we can get to ‘stateless’ money while having a central bank.

Nominal GDP targeting would not prevent all recessions or guarantee growth. The real economy is what determines things like that. But badly-managed money can destroy growth, create recessions by itself, and turn small ‘real’ recessions into extremely bad depressions, as happened in the 1930s and 2000s. Nominal GDP targeting would give us stable, neutral money that avoids these things. We would have been better off with it in 2008, and we would be better off with it today.

Are the markets wrong about CEO pay and the recovery?

CEO pay has risen by 937% since 1978 in the US, compared to a rise of just 10.2% for the average American worker, according to a centre-left American think tank. That feels like markets must be wrong, but as Scott Sumner points out, when market decisions and our intuitions clash, we’re often the ones at fault:

CEO pay has been controversial for two reasons. It has risen very rapidly in recent years, and it often seems unlinked to performance. But pay is very closely linked to expected performance, which matters when contracts are signed. A few months ago Steve Ballmer resigned as CEO of Microsoft and the stock rose by billions of dollars. More recently, Larry Ellison (sort of) stepped aside from Oracle, and the stock plunged by billions of dollars. This shows that CEOs have a huge impact of stock valuations. Whether the market is rational in believing that is a trickier question, but it’s the job of corporate boards to put people in place that will maximize shareholder value. That means they need to at least try to get the very best, even if it costs a lot of money in terms of higher salary. If they aren’t paying obscene salaries then the board of directors isn’t doing its job.

Back in the 1960s, corporate decisions were much easier. You allocated capital to new auto factories, steel mills, appliance makers, and churned out product for which you knew consumers were waiting. Even IBM was fairly predictable for a time. In contrast, a modern CEO at a high tech firm might find the company quickly destroyed by new technology if he doesn’t keep on his or her toes. Think how much Sony would have benefited in the past 10 years if it had had the Samsung management team. Perhaps an extra $100 billion in shareholder wealth? And that’s also why the finance sector is so much more important today, decisions over where to allocate capital are both more difficult and much more important.

In other words, CEO pay may have risen a lot because CEOs matter a lot more, relative to the average worker, than they did in 1978. You could just deny this, because nobody is ‘worth more’ than others, and so on, but that’s an emotionally biased response. In terms of cold, hard cash, people are worth different amounts.

The market’s valuation of CEOs might turn out to be wrong, of course – markets misjudged the future returns of a lot of assets in the run-up to 2008, but then, so did virtually everyone else. The question is what, in a world where anyone can be wrong, we can look to as the least-bad way of collecting and judging existent information.

Pundits on Twitter and in the media can make a living by being wrong. Look at, say, the Guardian’s editorial writers or, if you tend to agree with them, the Telegraph’s. Or look at any think tank – except us, of course. Or financial advisors. Pundits don’t really suffer if they add ‘noise’ (a nice word for bullshit) to the sum of information that’s out there, so it’s hard to know if the pundit you’re listening to is telling you what you want to hear, or what’s actually true.

Markets – the people who make financial decisions that are aggregated in stock exchanges and the like – do. If you have a ‘false belief’ as a trader or business owner, you’ll lose money; if you have enough false beliefs, you’ll go bankrupt. And markets are utterly brutal in bankrupting people with false beliefs. We might have a good reason to ignore markets if we know something that they don’t, but if that’s the case, we should be making money from that private knowledge. Doing so will add that knowledge to the sum total of the market’s knowledge.

This is why I’m an optimist. Lots of my friends and people I agree with on nine out of ten issues think that the markets are wrong and that some economic catastrophe is coming. If they’re right, markets are wrong and they should be in line to make a lot of money (he said sarcastically).

So how can I judge? I look at who has more to lose, and who has a better track record. Through that lens, markets come out top – and my doomsaying friends sound just as biased as their opponents who just can’t imagine why a CEO would be worth paying a lot.

Two cheers for technocracy

Who needs experts? The minimum wage was once an example of the triumph of technocracy, where decisions are delegated to experts to depoliticise them.

The Low Pay Commission was set up to balance competing priorities – increasing wages without creating too much unemployment. If you were a moderate who thought the minimum wage was a good way of boosting low wages, but recognised that it might also create unemployment, the LPC gave you a middle ground position. (For what it’s worth, I’m an extremist.)

That technocratic settlement also allowed politicians to, basically, safeguard against an ignorant public. By delegating decisions like this to experts, bad but politically popular policies could be avoided. Relatively well-informed politicians could avoid having to propose bad policies by depoliticising them.

Other examples of this include NICE’s responsibility for deciding which drugs the NHS should and shouldn’t provide, and the Browne Review that recommended student fees, which had cross-bench support. The old idea that “you can’t talk about immigration” comes from an informal version of this – everyone in power knew that people’s fears about the economics of immigration were bogus, so they were basically ignored.

But that technocratic settlement now looks dead. Labour has now made a specified increase to the minimum wage part of its electoral platform, following George Osborne’s lead earlier this year. That means that voters will have to choose not just between two rival theories about the minimum wage, but two competing sets of evidence about whether £7/hour or £8/hour is better, given a wage/unemployment trade-off.

Whether voters are self-interested or altruistic doesn’t really matter. A self-interested low wage worker would still need to know if a minimum wage increase would threaten her job; an altruistic voter would similarly need to know a lot about the economics of the minimum wage and the UK’s labour market to make a judgement about what level it should be.

And of course the minimum wage is just one of dozens, if not hundreds, of questions that political parties offer different answers to that voters have to make a judgement about.

In practice this does not happen. Voters are very uninformed about basic facts of politics, and are almost entirely ignorant about economics, which almost everyone would agree would be necessary to make the correct judgement about something like what the minimum wage level should be (even if they didn’t agree on which theories and evidence was relevant). Even the use of rules-of-thumb such as listening to a particular newspaper or think tank (ha) will suffer from the same problems.

Voters, then, face a nearly impossible task. Assuming they are bright, well-intentioned, and believed that it was important for them to cast their vote for the party that would have the best policies, they would have to amass an enormous amount of information to make the right decision on all the questions they, in voting, have to answer.

So voters are trapped. They cannot know what minimum wage rate is best any more than they can know what drugs the NHS should pay for. They are, empirically, very unaware of basic facts, but they would find it hard to overcome that even if they wanted to.

Does democracy make us free? Maybe, but it’s the freedom of a deaf-blind man – we can choose whatever policy we want, without any idea about what those policies will actually do. So, if the alternative is more direct democracy like this, maybe technocracy isn’t so bad.