I – and I believe many of my fellow economics professors – seek not to get our introductory students to learn specific facts or techniques but to begin to “think like an economist.”
I want them to abandon wishful thinking, good vs. evil analogies, just-so-stories and general ad hocery, in favor of treating human behavior as if it stemmed from some (perhaps unknown or even unknowable) set of systematic principles. In particular we are big on the notion that people respond to incentives.
Students it turns out are people. While “thinking like an economist” is often a bitter pill, this semester it went down much easier – and I think I see why. No less than half of the final papers were written on either immigration in general or the DREAM act in particular. A typical paragraph
Immigrants not only join the circular flow of the economy as labor, but also as consumers. They spend money on goods and services which results in firms having more revenue. Higher revenues tend to increase firm production to meet the higher demand of consumers. This increased production most likely would result in more jobs as firms expand to meet the needs of consumers. On a very basic level, this explains why immigration would only serve to expand the economy.
Unlike our discussions of taxes, rent control and the minimum wage “thinking like an economist” gives them in edge in an argument they already want to make: that the US should be more welcoming to immigrants.
While it is encouraging to see the tools taken up so easily, it is a warning that we cannot be sure students or the public generally has abandoned ad hocery when the systematic explanation does in fact suit their immediate needs.
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Thursday ~ December 16th, 2010 at 2:50 pm
MorallyBankrupt
I hate to make you work on your time-off, but one of my my pro-immigration stances (disclosure: I was a citizen of Mexico until last year after moving to the US in ’96) is that immigrants usually have little or no debt.
If Koo’s balance-sheet recession theory is right, then we do not necessarily have to use the government as a borrower of last resort. There is comparatively under-leveraged actors in the economy that could drive credit expansion too, namely immigrants who had no access to consumer and mortgage credit markets because of dubious legal status. These immigrants may have income that allows them for purchase of durables and other consumer goods on credit–the housing market would be more difficult because of a lack of history.
Individual immigrant households and newly-legitimized businesses would respond to interest-rate incentives. They might not amount to a huge segment of the economy, but it seems like transferring excess credit capacity to those who want it and benefit from it most would be a winning proposition to me. Then again, I was a C- student.
Friday ~ December 17th, 2010 at 12:14 am
Karl Smith
That is a reasonable hypothesis
Thursday ~ December 16th, 2010 at 2:52 pm
jazzbumpa
I guess ad-hocery is where you find it. Your student’s one-side analysis reads like something from a Chamber of Commerce training manual, and the last sentence smacks of brain-washing.
I would have written that paragraph as follows. Would you give me a failing grade? Why or why not?
Immigrants not only join the circular flow of the economy as consumers, but also as labor. The supply and demand result is that firms have lower labor expenses, which translates directly into higher profits, while the already unemployed have to compete for fewer job openings at lower wages. Immigrants also spend money on goods and services which results in higher profits for corporations. As an aside, they might have purchased some of these items while still in their home counties, which would have improved our balance of payments situation.
The net result is a gain for employers, and a loss for the general population, aka labor, and potentially for the general economy. This contributes to even further wealth disparity between the rent-seeking and labor classes of society. The most successful corporations are then able to spend their earnings buying out their competitors – a trend that has already been distorting the U.S. economy by removing competition for several decades. This ultimately gives a small number of corporations relative monopoly power on the supply side, and monopsony power regarding labor demand. While immigration is not a main driver in corporate consolidation, it does contribute to it in this subtle way. Even more troubling is the growth of international corporations which have these powers across nations and continents, and owe loyalty to nobody.
Relating this to the current situation, in a depressed economy, higher corporate revenues do not tend to increase firm production, since the demand of consumers is low, because they do not have the ability to pay due to unemployment, low wages, and/or excessive debt. Henry Ford understood the importance of a living wage 100 years ago in the age of anti-trust fervor, but that bit of knowledge has become the bunkum of history to modern CEOs.
It’s interesting to note that, despite the current depressed economy, corporations have recently seen the greatest gains in profitability ever attained over any 18 month period in history. This has not led to more jobs. By a bitterly ironic coincidence, U6 has hovered near 17% for that very same 18 months, as firms sit like misers on piles of retained earnings. On a very basic level, this suggests why immigration in a time of high unemployment has mixed and difficult to predict effects on the economy which might well net out to a negative.
Cheers!
JzB
Friday ~ December 17th, 2010 at 12:13 am
Karl Smith
I would have remarked:
Is this how the economy works generally or is this a special case. If generally how do we explain that rising population does not typically lead to rising unemployment?
If a special case what makes this period different?
Friday ~ December 17th, 2010 at 4:31 pm
sardonic_sob
You have to watch out about special cases. Most of the visible mass of the universe is plasma, a state of matter quite unlike anything within the normal human experience. From the universe’s point of view all the physical phenomena we experience and depend upon are special cases. Some “special cases” are way more important than alleged “basic level” rules. The application to the example given as well as attempts to manage economies by mathematics are left as an exercise for the student.
Friday ~ December 17th, 2010 at 11:12 pm
jazzbumpa
Along Bob’s line of thinking, Newtonian mechanics, which is relevant to about 99.999% of human experience, is a special case of relativistic mechanics.
The basic generalities of economics were developed in the time of Say and Smith. To whatever extent that they were valid then, they were in the context where a large company might have a dozen employees, barriers to entry were not huge, and there was no great opportunity for monopoly.
Contrast today, when the economic landscape is controlled by gigantic trans-national corporations, and energy is controlled by cartels. Which is the special case?
What about booms and busts? What about wars and the aftermath of wars? What span of American history would represent the general case?
To answer your question, population and the economy generally (if I may now use that word) grow together. The fact that GDP/capita has had an approximately constant growth rate over spans of decades is real world evidence that population growth does not lead to rising unemployment. So, one can reasonably surmise that immigration need not directly cause unemployment. If there were a labor shortage, then pretty clearly immigration could help the economy expand.
So, on balance, and despite my protestations, I was talking about something other than what looks like the usual general case over the last hundred years. Whether this constitutes a special case, or one of many possible more-or-less usual cases remains unanswered for lack of a sufficiently broad and detailed historical data base.
My main point was – and remains – that generalities are dangerous, the real world is messy, and dogmatic statements the reflect an absolutist view of economics that is highly questionable if you simply look out your window on any particular Thursday morning, ought not to be held up as examples of clear thinking and an appropriate way of viewing the world.
‘Cuz it seems a bit ad hoc.
Cheers!
JzB
Saturday ~ December 18th, 2010 at 11:52 am
jazzbumpa
And what makes this case different is the liquidity trap at the 0-interest bound, and the aggregate demand shortfall due in part to private deleveraging that causes the unwillingness of corporations to invest in either equipment or employees, compounded by the unwillingness of banks to lend at any level of risk when then can get an absolutely risk-free 0.25% on excess reserves from the Fed. Whether the collapse of the M1 multiplier is cause or effect remains a mystery to me.
We are hovering at the edge of a deflationary spiral, similar to the situation in 1929;l but austerity rules the day, almost world wide. I am deeply pessimistic about this turning around any time soon – or even over the next several years. The incoming Repug majority in the House will only make it worse.
Sadly,
JzB
Friday ~ December 17th, 2010 at 1:37 pm
jazzbumpa
That is a good and thoughtful reply.
I’ll have to give it some good thought.
But first, I have to note that your student’s absolutist statement does not recognize the existence of special cases, or even different realms in the economic landscape. I’m not anti-immigration. OTOH, I do think you have to pick your spots and react to current realities, not base an economic philosophy on abstractions that can eality degenerate into platitudes.
Thanx!
JzB