Monday, January 03, 2005

Magnet economy 

I've been reading a few articles today about 2005 market predictions (I'll post mine tomorrow after I finish an estimation update tonight) but the articles that have caught my eye have been the cover of today's Barrons and Arthur Laffer's editorial in today's Wall Street Journal. Both links require subscriptions to WSJ, but Michelle Malkin has considerable excerpts from the Barrons piece. Malkin is concerned about the number of illegal immigrants in America and thinks the Barrons article describes the "devastating consequences of the failure to enforce our immigration laws." I have a different view of this, though, and it comes to play in Laffer's piece.

The only way the U.S. can have a trade deficit amounting to 5.6% of GDP is if foreigners invest that amount of their capital in the U.S. It's a matter of simple accounting. But once you realize that the trade deficit is, in fact, the capital surplus you would clearly rather have capital lined up on our borders trying to get into our country than trying to get out. Growth countries, like growth companies, borrow money, and the U.S. is the only growth country of all the developed countries. As a result, we're a capital magnet.

Take a look around. Germany hasn't had a growth spurt since the 1960s when Ludwig Erhard was Bundeskanzler. France still has a mandated maximum workweek of 35 hours, a maximum income tax rate of 58%, a 1.8% annual wealth tax and government spending as a share of GDP greater than 50%. Finland, for goodness sakes, fines speeders a percentage of the speeder's income. Sweden, Denmark and Germany also fine speeders a percentage of their income, only with caps. Japan has had a stock market down by over 70% from its high in 1989 and both company and government unfunded liabilities in Japan are out of sight. Canada's economic policies are kooky and investments in Latin America, the Middle East, Russia, Southeast Asia and Africa are about as safe as running drunk blindfolded across the "I-5" freeway at rush hour.

So what's not to like about the U.S.? Whether you're an American or a foreigner the U.S. is the choice destination for capital. That's why we have such a large trade deficit.

When we last had a trade deficit this large was during the Reagan years, and rather than a burden then it was symbolic of a boom. In an age where transportation is more readily available than ever, and at lower prices, it is not only physical capital that moves like quicksilver. People can move as well; it should come as no surprise that the U.S. economy is a magnet for human capital too, since it is most likely to have a high rate of return here.

Human capital travels with people attached to it; some of the people attracted may in fact seek government services for awhile and those costs can be large. But why the U.S. has an interest in denying that capital is beyond me. During its first 100 years the U.S. ran large trade deficits and had widespread immigration. It also grew.

The problem with the studies describe by Jim McTague in Barrons is that they are static studies. That is, they estimate current costs and benefits of granting amnesty to illegal immigrants. Static analysis is rather bound to find that immigration has net costs to the recipient economy. When one allows for a lifetime of observation on an immigrating family and its assimilation into the economy, the effects are ambiguous.

If you want to drive down illegal immigration you would need to drive down the after-tax real wage differential between the U.S. and the developing world. (See, for example, this article at NBER.) Ironically, that differential is beginning to reduce between us and Europe, as Laffer discusses:
As of late, foreign economic policies have improved. France is a lot better today than it was three years ago. And -- shock of shocks! -- Germany is even considering a real tax cut. Jean- Claude Trichet has shown himself to be a world-class governor of the European Central Bank, following on the heels of the incompetent Wim Duisenberg. Five new entrants to the EU -- Estonia, Latvia, Lithuania, Malta and Slovakia -- have low-rate flat taxes. Junichiro Koizumi of Japan is a lot better than the former prime minister, Yoshiro Mori. Investors on the margin should look more favorably to investments abroad.

As will immigrants. There are many things to commend one to McTague's article -- I found the thought on how we're overstating productivity gains because we don't count illegal immigrant labor input fascinating -- but as an argument against the Bush amnesty plan it fails to persuade.

Postscript: Hans Sennholz wrote a few years ago:
The foes of globalization, unfortunately, are missing an important effect of the rising volume of world trade: the improvement of living conditions in poor countries. Globalization actually reduces the pressures of migration to the United States. It especially reduces the flow of migrants from less-developed countries where the population comprises many different races and ethnic groups and where the migration pressure is greatest. It is ironic that the anti-globalists, wherever they are successful, effect the very opposite of what they mean to accomplish.

I encourage readers to also view this article by Jagdish Bhagwati, which borrows heavily from his chapter on this topic in his In Defense of Globalization.