Tag: economics

They should have started with him

Ben Bernanke says financial executives should have been arrested and charged with crimes:

With publication of his memoir, The Courage to Act, on
Tuesday by W.W. Norton & Co., Bernanke has some thoughts about what
went right and what went wrong. For one thing, he says that more
corporate executives should have gone to jail for their misdeeds. The
Justice Department and other law-enforcement agencies focused on
indicting or threatening to indict financial firms, he notes, “but it
would have been my preference to have more investigation of individual
action, since obviously everything what went wrong or was illegal was
done by some individual, not by an abstract firm.”

He also offers a
detailed rebuttal to critics who argue the government could and should
have done more to rescue Lehman Brothers from bankruptcy in the worst
weekend of a tumultuous time. “We were very, very determined not to let
it collapse,” he says. “But we were out of bullets at that point.”

Still,
he does acknowledge some missteps by the Fed. Analysts were slow to
realize just how serious the economic downturn would become, and he
faults himself for not doing more to explain to Americans why it was in
their interests to rescue the financial firms that had helped cause it.

Needless to say, I will be reading and reviewing this book in the near future. And I will be very, very, very surprised if Mr. Bernanke manages to convince me that he is doing anything except whitewash his record. The idea that it was essential to rescue the financial firms that are still preying on the American economy and weighing it down is simply nonsensical. The Federal Reserve didn’t succeed in anything except kicking the can down the road and ensure that the next crisis will be even more severe.

Denying supply and demand

The US Employment-Population Ratio and Labor Force Participation Rate continue to fall:

A record 94,610,000 Americans were not in the American labor force last month — an increase of 579,000 from August — and the labor force participation rate reached its lowest point in 38 years, with 62.4 percent of the U.S. population either holding a job or actively seeking one.

The EPR is down to 59.2 percent. Imagine how many of those 94.6 million Americans could find jobs, and how much their wages would rise, if the 59 million post-1965 immigrants were repatriated.

You had ONE job

If the central banks eliminate cash, people will no longer need banks:

It has long been believed that when it comes to interest rates, zero is as low as you can go. Who would choose to keep their money in the bank if they had to pay for the privilege?

But for the people who control the world’s money, this idea has recently been thrown out of the window. Many central banks have pushed their rates into negative territory and yet the financial system has still to come to an abrupt end.

It is a discovery that flips on its head the conventional idea of how authorities could respond to future economic crises; and for central bankers, this has come as a relief.

Central bank policymakers had believed they had run out of room to support their respective economies, with their interest rates held close to the floor.

Traditionally, it was thought that if you wanted to boost the economy, the central bank would reduce its interest rates. Normally, the rates offered on savings accounts would follow, and people would choose to spend more, and save less.

But there’s a limit, what economists called the “zero lower bound”. Cut rates too deeply, and savers would end up facing negative returns. In that case, this could encourage people to take their savings out of the bank and hoard them in cash. This could slow, rather than boost, the economy.

What is happening now should not – according to conventional thinking – be possible.

As central bank rates have turned negative, the rates offered on bank deposits have followed. Yet rather than stuffing cash under mattresses, people have left their money in the bank or spent it.

Nowhere is the experiment with negative rates more obvious than among Nordic central banks. Sweden – the first to dabble with negative rates – is perhaps the prime candidate for such experimentation.

The country already has high savings rates, the third highest in the developed world according to the OECD and, despite growing at healthy rates, there appears to be plenty of slack left in the economy to prevent an overheat.

Unemployment is unusually high for an advanced economy at more than 7pc, still well above its pre-crisis levels of sub-6pc. Crucially, the Riksbank’s mandate suggests that such a radical experiment is necessary. Policymakers have battled with deflation since late 2012, and with inflation at minus 0.2pc in August, it remains well below the central bank’s 2pc target.

To a great extent, the Riksbank’s hand has been forced by the plight of the eurozone. A tepid recovery in the currency union has required the European Central Bank (ECB) to bring in ever-looser policy.

As the ECB’s actions have weakened the euro against Sweden’s krona, the cost of importing goods into Sweden has fallen, and weighed down on inflation. The Riksbank has had to cut its own rates in response in an attempt to avoid deep deflation.

Sweden’s flexible approach to monetary policy has won it the plaudits of leading credit ratings agency. Standard and Poor’s recently reaffirmed the country’s triple AAA sovereign rating, remarking on the benefits it derives from “ample monetary policy flexibility”.

Noting that the Riksbank had introduced both negative interest rates and quantitative easing, S&P said that “should inflation rates stay low or the krona appreciate materially, the central bank could lower the repo rate further”.

Many City analysts believe that the Riksbank will continue cutting, reducing its key interest rate to minus 0.5pc by the end of the year. Switzerland’s is already deeper still, at minus 0.75pc, while Denmark and the eurozone have joined them as members of the negative zone.

It shouldn’t surprise anyone that people are willing to accept low negative interest rates. After all, banks began as institutions that charged people to hold their gold for them. It wasn’t until they began creating money by handing out multiple certificates of ownership that they needed to start paying “interest” rather than receiving “fees”.

However, banning cash will go too far; the reason people use “money” is that it is less of an annoyance than barter. In their desperate attempt to remain profitable in a deflationary environment, banks are taking the risk of rendering themselves irrelevant.

One-quarter of a job

After reading the actual study that is being used to claim that immigration actually creates new jobs for native workers, I became so skeptical of their mathematical modeling, their theoretical justifications, and their cherry-picked data that I have reached the conclusion that even with the wind of the credit boom at their backs, I can disprove their conclusions on the basis of the same 1980-to-2000 period they used to make their claims.

First, however, I have to note some corrections that I have made to my previous post. Because I used the labor force and not the working-age population, my numbers were a little off. My conservative interpretation of the NBER model meant that the U.S. economy was 24,367,681 short of the number of jobs predicted by the model. And from 2000 to 2015, 16.4 million new immigrants have created a total of 5,832,319 new jobs, for an average jobs/immigrant ratio of 0.36, which is still considerably short of the 1.2 that had been claimed.

But the economists’ claims were actually more outrageous than I thought at first. You may recall that I was thinking perhaps the 1.2 job included the immigrant’s job, for a net benefit to a native worker of 0.2. But that was simply how the media characterized the study, which actually claimed the following:

“Consistent with our prediction, the impacts of immigration on employment growth have become greater as the estimates imply that each new immigrant is predicted to add 2.5 new jobs (1.9 for native workers) to a city in which he or she settles.”

So that is the prediction we will use for the 20-year period they used, 2.5 new jobs per immigrant. In 1980, the U.S. working age population was 142,520,008 and the employment population ratio was 60.0. That means there were 85,512,005 jobs in 1980.

From 1980 through 1999, there were 16,822,980 legal immigrants, not counting refugees or undocumented workers. According to the study, they created 42,057,450 new jobs, which means that there should have been 127,569,455 jobs in the United States in 2000.

Were there? In January 2000, the working age population of the United States was
178,259,050 and the Employment-Population Ratio was 64.6, meaning there
were 115,155,346 jobs, leaving 12,414,109 of the newly created jobs unaccounted for. In fact, 16.8 million immigrants created 29,643,341 jobs, or 1.76 per immigrant. That looks pretty good, with each immigrant not only finding work but adding three-quarters of a new job per native. Of course, a credit boom is going to make most economic statistics look good.

However, if we put the two periods together, what we see is that from 1980 to 2015, 33,180,780 legal immigrants have created a total of 35,475,660 new jobs, for a net rate of 1.07 new jobs per legal immigrant. If we then add the additional 12 million illegal immigrants estimated to be resident in the USA, this reduces the 35-year new jobs/immigrant ratio to 0.78, which means that each immigrant eliminates approximately one-quarter of an existing American’s job.

And if the number of undocumented workers is as high as 30 million, as Ann Coulter and Donald Trump have asserted, then the new job/immigrant rate is 0.56 and each immigrant eliminates nearly half of an existing American’s job.

Immigration and new job creation

This is why you can’t trust one single thing the media says about immigration. Or, for that matter, economics. First, consider the assertions made in a ThinkProgress article attacking Bernie Sanders’s moderate position on immigration. I’ve emphasized the two of interest.

Sanders’ position on immigration has been called “complicated” and he has been criticized by immigration activists for supporting the idea that immigrants coming to the U.S. are taking jobs and hurting the economy, a theory that has been proven incorrect. Both of his leading Democratic challengers, Hillary Clinton and Martin O’Malley, have recognized that new immigrants coming to the country actually boost the economy. But Sanders continues to align himself more closely with Democratic positions of the past.

“I frankly do not believe that we should be bringing in significant numbers of unskilled to workers to compete with [unemployed] kids,” Sanders said. “I want to see these kids get jobs.”

Studies have shown that immigrants actually create jobs for American workers. Researchers recently found that each new immigrant has produced about 1.2 new jobs in the U.S., most of which have gone to native-born workers. And according to the Atlantic, an influx in immigration can cause non-tradable professions — jobs like hospitality and construction that cannot be outsourced — to see a wage increase because the demand for goods and services grows with the expanding population.

Sounds pretty conclusive, doesn’t it? The “theory” that immigrants are taking jobs and hurting the economy has been “proven incorrect”. Not only that, but “studies have shown” that each and every new immigrant creates 1.2 new jobs!

Second, let’s go and look at the study that provided the basis for these assertions, “Are Immigrants a Shot in the Arm for the Local Economy?”, published in April 2015:

Most research on the effects of immigration focuses on the effects of immigrants as adding to the supply of labor. By contrast, this paper studies the effects of immigrants on local labor demand, due to the increase in consumer demand for local services created by immigrants. This effect can attenuate downward pressure from immigrants on non-immigrants’ wages, and also benefit non-immigrants by increasing the variety of local services available. For this reason, immigrants can raise native workers’ real wages, and each immigrant could create more than one job. Using US Census data from 1980 to 2000, we find considerable evidence for these effects: Each immigrant creates 1.2 local jobs for local workers, most of them going to native workers, and 62% of these jobs are in non-traded services. Immigrants appear to raise local non-tradables sector wages and to attract native-born workers from elsewhere in the country. Overall, it appears that local workers benefit from the arrival of more immigrants.

Now, to anyone who pays attention to economics, those dates should ring a bell. 1980 to 2000… just happens to closely coincide with the dates of one of the largest debt-funded economic expansions in world history. Not only that, but that period also precedes the U.S. interventions in Afghanistan and Iraq which led to the usual influx of “refugees” from those and other countries, such as Somalia, where U.S. forces were active. From 1980 to 2000, there were 841,149 annual immigrants, 23 percent fewer than the average in the subsequent 15 years.

Not counting undocumented workers, the U.S. has been “strengthened” by adding an average of 1,090,520 legal immigrants annually, which, when combined with the reports of the study, means that from 2000 to 2015, immigrants should have created 19.6 million new jobs for native workers in addition to supplying approximately 10.6 million new jobs themselves. (The latter must be the case due to the new jobs reportedly going to native workers and is a conservative estimate based on the EPR). This amounts to a total of 30.2 million new jobs created by immigration since 2000.

Now let’s look at the numbers from 2000 to 2015. In January 2000, the working age population of the United States was 178,259,050 and the Employment-Population Ratio was 64.6, meaning there were 115,155,346 jobs. Therefore, according to the NBER model, the beneficial effects of immigration are such that after 15 more years of it there should be 145,355,346 jobs in 2015.

In March 2015 the working age population had grown by nearly 15 million to 204,026,416, which is in line with the 10.6 million new immigrant workers, but population grew to nearly 320 million and the EPR fell to 59.3.That works out to 120,987,665 jobs, which is a mere 24,367,681 fewer jobs than the NBER model predicted. From 2000 to 2015, 16.4 million new immigrants have created a grand total of 5,832,319 new jobs, which means that either a) over 10 million native Americans have lost their jobs to immigrant labor or b) over two-thirds of the new immigrants are collecting welfare. Either way, these 16.4 million immigrants have not been a boost to the economy.

I should note that it would have been just as easy to use GDP and wage statistics to disprove some of the other assertions in the first article, but it should suffice to point out that the reason the Federal Reserve has maintained a zero interest rate policy for the last five years is to compensate for insufficient demand, thereby proving that the demand for goods and services has not grown in line with the expanding population.

The facts are absolutely clear: immigrants do NOT create new jobs for native workers and they do not boost the economy.

The migrant crisis is Greek revenge

Steve Sailer points out that the Greeks warned Germany that they would manufacture a migrant crisis for the EU if they did not get debt relief back in March:

Yes, the Greeks are shoveling the Muslim mob through Greece as fast as possible because they are humanitarians. The Greeks are sending the Muslim masses north toward Germany as a gift to express how grateful Greece is for Germany’s kindness during last summer’s Euro crisis negotiations. The Greeks would love to hang onto all this prime human capital themselves, but they want Germany to benefit from the Merkel Youth as payback for Ms. Merkel’s kindness over the last seven years toward Greece.

It’s the least the Greeks could do for the Germans after all they’ve done for the Greeks.

As the old saying goes, “Never beware of Greeks bearing gifts.”

UPDATE: Oh, wait, it turns out that the Greek government explicitly threatened to unleash Muslim migrants upon Germany if Ms. Merkel’s government insisted upon a hardline in the Euro debt negotiations. From the Daily Express, 3/9/2015:

The rising tensions between Greece and the eurozone came as Panos Kammenos, the Greek defence minister, warned that Europe will be hit with migrants that could include “some jihadists of the Islamic State” if Greece is forced out of the euro.

He said: “If they deal a blow to Greece, then they should know the the migrants will get papers to go to Berlin.

“If Europe leaves us in the crisis, we will flood it with migrants, and it will be even worse for Berlin if in that wave of millions of economic migrants there will be some jihadists of the Islamic State too.”

His comments came shortly after Nikos Kotzias, the Greek foreign minister, warned that “there will be tens of millions of immigrants and thousands of jihadists” if bailout negotiations fail.

In retaliation to Mr Kammenos’ comments, the spokeswoman for EU Migration Commissioner Dimitris Avramopoulos assured she had spoken to Greek authorities and had “received assurances from the Ministry of Interior that no measures to open up detention centres have been taken.”

History never “just happens”.  I can’t even imagine how hard Mr. Kammenos must be laughing after reading American columnists writing about how “hospitable” and “humanitarian” the Greeks are in comparison to those terrible, very bad, and quite possibly NAZI Hungarians. Greece doesn’t intend to keep any of the migrants, it is weaponizing them and sending them north as revenge upon the rest of the EU.

In defense of Ricardo

Clark responds to my critique of his endorsement of David Ricardo and Comparative Advantage. I will respond to it in detail soon, although the chief defects of his defense should be readily apparent to those with the eyes to see it.

Vox and I got in a disagreement on twitter about economics when I told someone “Read David Ricardo”. Vox replied that Ricardo was wrong on many things, and wrong about comparative advantage – at least when we take into account flows of population and capital.

Vox lays out his objections here

It’s true that I literally wrote the words “read Ricardo”, but the context makes it clear that I was using “Ricardo” as a metonym for the theory of comparative advantage.  Vox objected to several aspects of Ricardo’s writings, so let me take a quick detour and address some of Vox’s points.

Let’s set out the areas where Vox and I agree (or, at least, where I think we agree):

I do not back the labor theory of value.

I’ve considered labor theory of value a horrific joke since I first read Das Kapital decades ago. I disagree with Vox that Ricardo endorsed such a thing; I suggest that Ricardo merely said that a commodity will never be sold for less than its cost of production, which is absolutely true (if we talk only of steady states of markets in equilibrium, like corn being grown in England, and not weird cases like warehouses full of remaindered Apple Newtons).  Is there really anything objectionable in Ricardo’s sentence fragment “But suppose corn to rise in price because more labour is necessary to produce it”? I suggest not.  Additionally, it’s unfair to paint Ricardo, by lack of context, as some proto-Marxist, when in fact he was actually writing after Adam Smith, and in the same vein, helping to move us from a state of ignorance of the laws that govern the market to one of better understanding.  Do we criticize Newton for getting the rules of force and momentum mostly right, but failing to include a relativistic component in his equations?

I do not assert that unlimited immigration is a good idea.

Unlike the conservative stereotype of libertarians and free market economics as pie-in-the-sky dreamers who ignore cultural issues, I most certainly do NOT ignore such issues, and often debate such people, asking them “what do you think an America of 900 million people, 600 million of them being new immigrants, would be like?  How would it vote?”.

On what do Vox and I disagree?  I assert merely that comparative advantage is a real phenomena, and persists in being a real phenomena even in a world of mobile capital and mobile labor.  I’m not even 100% sure that Vox disagrees with this, because his post seems to conflate knock on effects of immigration with the core point of comparative advantage.

But assuming that we do disagree on the thesis “comparative advantage is a real phenomena, and persists in being a real phenomena even in a world of mobile capital and mobile labor”, I proceed.

Let us define our terms.  The law of comparative advantage is this:

1) various producers are variously capable of producing different outputs at different costs.

2) therefore, in pure economic terms, it is to each producer’s advantage to concentrate his effort in what he’s best at and trade for much else…even, in many cases, if the producer of X is better at Y in absolute terms than the person that they choose to engage to do that task for them.

Examples often include lawn mowing, for whatever reason.  E.g.:

Take a model who makes $10,000 a day modeling but who is also very efficient at mowing her large yard around her mansion. If she cuts her grass herself, she can do it in one day. Or she can hire a lawn service that takes 2 days to mow the lawn and charges $400. Thus, the model has an absolute advantage in both working as a model and mowing her own lawn, but, she would, nonetheless, still hire the lawn service, because if she mowed her own lawn, she would have to give up a day of modeling, which means her earnings would be $10,000 less. By hiring the lawn service, she earns $10,000 a day as a model and pays the lawn service $400, for a net gain of $9,600.

Let us look at Ricardo’s original quote in context. First he defines the sorts of things that influence the productivity of a given population: natural resources and distribution of skills:

    But in different stages of society, the proportions of the whole
    produce of the earth which will be allotted… depend[s] mainly on the
    actual fertility of the soil, on the accumulation of capital and
    population, and on the skill, ingenuity, and instruments employed in
    agriculture.

Note that Ricardo is speaking here of the case within a given nation: imagine a world without trade between nations.  Given a high-IQ, high-conscientiousness, high-technology Japan, we would expect that a relatively small proportion of its population would be devoted to fishing.  The “skill, ingenuity, and instruments” and the Japanese people ensure that: there is no need for a million Japanese to stand in bamboo junks and throw lines into the water.  Instead, we’d expect a few thousand clever Japanese engineers to build massive ships, nets, etc.

On the other hand, in this theoretical world without foreign trade, we’d expect that a larger percentage of the population of Kenya, would be devoted to fishing, because the “skill, ingenuity, and instruments” of the Kenyan nation would require more labor to achieve a similar result.

Ricardo also notes that the natural resources of a country play into the calculation: a country blessed with relevant abundant resources is ahead of the game, and can generate more outputs with the same labor:

The same remark may be made respecting two or more countries. In America and Poland, on the land last taken into cultivation, a year’s labour of any given number of men, will produce much more corn than on land similarly circumstanced in England.

I see nothing objectionable here: Spain, with its sunny climate, is naturally better suited to making wine than is England.  North America is better suited to making beef than is Japan.  Etc.

Ricardo takes these two points and derives the concept of specialization:

Under a system of perfectly free commerce, each country naturally devotes its capital and labour to such employments as are most beneficial to each. This pursuit of individual advantage is admirably connected with the universal good of the whole. By stimulating industry, by regarding ingenuity, and by using most efficaciously the peculiar powers bestowed by nature, it distributes labour most effectively and most economically

As we look around the actual world, this is largely what we see. Japan, blessed with an intelligent population and hampered by a lack of oil, specializes in exporting electronics and buys oil with the proceeds.  Saudi Arabia, blessed with oil, and not much else, exports oil and purchases electronics.

So, this, then, is Ricardo’s concept of comparative advantage.

Vox raises two objections: mobile capital and mobile labor.

Let us inject mobile capital into our model first. Picture Saudi Arabia in 1950.  It is oil-rich, but technology- and dollar-poor.  It learns that there is oil underneath its sands, but has neither the technology nor the wealth to build the infrastructure to get it out.

Who has the comparative advantage in both lending money and in building oil refineries?  The West.  And we see that it is the West that, indeed, lent the capital and the technology to get the oil out.

(By the way, there’s a line of attack on this argument that I sadly predict: “yeah, well, how did making Saudi Arabia an exporter of oil work out for us? Remember 9/11 !”.  And perhaps my hypothetical interlocutor is correct – perhaps we’d be better off in a world of less available oil and also a poorer Saudi Arabia – but that debate has absolutely nothing to do with comparative advantage.  In fact, I chose Saudi Arabia as the example here specifically to trigger and
then discard this objection).

Anyway, what does the addition of mobile capital do to concept of comparative advantage?  It acts only as a lubricant, to allow the gears to turn a little more freely, and make the inevitable – and mutually beneficial – specialization happen more quickly.  Saudi Arabia could have husbanded its resources in 1950, invested in one early well and refinery, used the profits from that too bootstrap a second well, and so forth, but there is no difference in the inevitable outcome.

Q.E.D.: comparative advantage exists, even with mobile capital.

Now let us look at Vox’s second objection: mobile labor.

Let us picture a Japanese sushi chef.  In Japan, he creates more value per unit of labor by making sushi than he does by, say, driving a bus. If he immigrates to the United States, it is likely that he continues to create more value per unit of labor by making sushi than he does by driving a bus.  In Japan his smart strategy is to sell his sushi-making labor and buy his transportation.  After immigrating to the US his strategy is likely still the same.

Let us consider a second example: a Mexican farmer.  Let us posit that he has skills tied to the particular climate of Mexican farms (agave cactus farming, let us say).  This his smart strategy is to work as a farmer, and hire relatively unskilled labor to mow his lawn or take out his garbage.

If the farmer immigrates to the US, perhaps, North Dakota, the utility of his agave expertise diminishes, and his comparative advantage is now perhaps in unskilled labor.  Perhaps the former farmer now carries trash for others, and uses the proceeds to buy agave, in an exact reversal of his former situation.

Q.E.D.: comparative advantage exists, even with mobile labor.

Because so many people who discuss Ricardo also carry water for legal and social policies that are repugnant to the alt-right, it’s easy to conflate the two, so let me by clear:

In this essay I have not demonstrated, not have I claimed, that:

  1. unchecked immigration is a good thing for the culture of the receiving country
  2. unchecked immigration is a good thing for the economy of the receiving country
  3. immigration of unskilled labor benefits unskilled natives
  4. unchecked importation of capital is good for the governance of the receiving country
  5. unchecked importation of capital is good for the economy of the receiving country

I believe that I have, however, demonstrated :

  1. that the law of comparative advantage exists
  2. that the law of comparative advantage continues to exist even with mobile capital
  3. that the law of comparative advantage continues to exist even with mobile labor

If Vox’s objection is only to one or more of the first five items, we have no quarrel.

If Vox’s objection is to one or more of the latter three items, I’d like to hear him explain – not how populations flows interact poorly with the modern anarcho-tyranical welfare states of the West – but how the law of comparative advantage qua the law of comparative advantage does not exist.

The illusion of knowledge

Now, I like Clark of PopeHat, but a challenge is a challenge. And one of the lures I find most irresistible is the cocksure breeziness of the man who thinks he knows what I know perfectly well he does not know. The fact is that no one who thinks “David Riccardo” is a reasonable response to a comment about immigration knows anything about economics. Or, for that matter, free trade.

James Thompson @JamesPsychol
Immigrants only benefit locals if they are better than the local average in ability and character, & make greater contributions

ClarkHat ‏@ClarkHat
The jury finds you guilty of economic ignorance and sentences you to read David Riccardo. 

Casher O’Neill @CasherONeill
@ClarkHat Do not invoke the sacred writings of Ricardo, that will get @voxday on your @@@ if he notices. 😀

ClarkHat ‏@ClarkHat
Vox can attack me on economics if he wants; I’ll fight back.

First, however, I will correct Mr. Thompson and observe that immigrants in sufficient numbers present a significant problem if even they are “better than the local average in ability and character”. Consider the British in India, for example. If immigrants are inferior, they drag the invaded nation down. If they are superior, they tend to set themselves up to rule over the natives in their own interest and at the natives’ expense.

Second, David Ricardo IS economic ignorance. Ricardo believed in a) the cost-of-production theory of value, which is a precursor of Marx’s Labor Theory of Value, b) the price-of-corn theory of profit, and c) the theory of comparative advantage, all of which are widely recognized by modern economists to be intrinsically false. His mode of argument was so hopelessly inept that Joseph Schumpeter even mocked it in his epic History of Economic Analysis.

His interest was in the clear-cut result
of direct, practical significance. In order to get this he cut that
general system to pieces, bundled up as large parts of it as
possible, and put them in cold storage – so that as many things as
possible should be frozen and ‘given’. He then piled one simplifying
assumption upon another until, having really settled everything by
these assumptions, he was left with only a few aggregative variables
between which, given these assumptions, he set up simple one-way
relations so that, in the end, the desired results emerged almost as
tautologies…. The habit of applying results of this character to
the solution of practical problems we shall call the Ricardian Vice.

Third, David Ricardo did not take immigration into account when he copied the concept from Robert Torrens, who introduced the theory of comparative advantage in An Essay on the External Corn Trade. As Ambrose Evans-Pritcher noted:

Ricardo described a world where free trade in goods was opening up, but labour markets remained largely closed. This is no longer the case. Globalisation bids up the wages of high-skilled engineers or software analysts towards international levels wherever they live.

Since Ricardo never took immigration into account, we shall do so on his behalf. I direct your attention to his original postulates from On the Principles of Political Economy and Taxation.

Unit Labor Costs

Britain 100 cloth 110 wine
Portugal 90 cloth 80 wine

In the absence of transportation costs, it is efficient for Britain to produce cloth, and Portugal to produce wine, since, assuming that the two goods trade at an equal price (1 unit of cloth for 1 unit of wine) Britain can then obtain wine at a cost of 100 labor units by producing cloth and trading, rather than 110 units by producing the wine itself, and Portugal can obtain cloth at a cost of 80 units by trade rather than 90 by production.

Now we introduce immigration into the equation and the free movement of labor. Obviously both wine and cloth laborers will move to Britain, since they believe they will receive an 11 percent raise and a 38 percent raise respectively. However, once they get there, the doubling of the labor supply in Britain this immigration causes will quickly cause the price of labor to fall. It will fall considerably.

This is great for Britain! It can now produce the same amount of cloth as before for price of only 47.5 units of labor and the same amount of wine for 47.5 labor units as well, thereby obtaining an equal quantity of both wine and cloth for less than what it used to cost to produce the wine alone. This will vastly increase profits in the British cloth and wine industries, as well as creating a windfall for the financial industry investing those profits! Granted, this is because wages have fallen by 50 percent; other consequences include how the newly unemployed British workers go on the dole and turn to crime, the new Portuguese immigrants are heavily inclined to vote for the Labour Party thereby imbalancing the British political system, and British women begin bearing half-Portuguese children and lower the average IQ of the next generation from 100 to 97.5, but those are mostly non-economic factors and therefore don’t count as far as economists are concerned.

They sound suspiciously familiar, though, don’t they?

In conclusion, we can see that open immigration and the free movement of labor is not only economically desirable, but is vastly preferable to comparative advantage by a factor of 105/200 and to autarky by a factor of 105/210. QED. What else can we conclude from this exercise of the Ricardian Vice?

  1. Ricardo implicitly postulated the immobility of labor.
  2. The mobility of labor not only fails to disprove comparative advantage, but actually strengthens the case for even freer trade… at least if you’re in the higher labor cost country and you only look at the labor costs.
  3. The mobility of labor will eliminate international trade since everyone will be living in Britain.
  4. The mobility of labor operates to the detriment of labor.
  5. Ricardo’s logic is remarkably stupid.

But my argument against free trade does not rest on David Ricardo’s intellectual corpse. It is not even, strictly speaking, economic in nature. This is the four-step Vox Day Argument Against Free Trade.

  1. Free trade, in its true, complete, and intellectually coherent
    form, is not limited to the free movement of goods, but includes the
    free movement of capital and labor as well. (The “invisible judicial line” doesn’t magically become visible simply because human bodies are involved.) 
  2. The difference between domestic economies and the global
    international economy is not trivial, but is substantive, material, and
    based on significant genetic, cultural, traditional, and legal
    differences between various self-identified peoples.
  3. Free trade is totally incompatible with national sovereignty,
    democracy, and self-determination, as well as the existence of
    independent nation-states with the right and ability to set their own
    laws according to the preferences of their nationals.
  4. Therefore, free trade must be opposed by every sovereign,
    democratic, or self-determined people, be they American, Chinese,
    German, or Zambian, who wish to preserve themselves as a free and
    distinct nation possessed of its own culture, traditions, and laws.

The Greek drama is far from over

Now there are stories about two alternative angles explored by the Greek government before they finally submitted to the Eurotroika:

In short, Varoufakis claims Tsipras had pre-approved the creation of secret accounts for every tax filer (which, knowing Greece, might have left Varoufakis short on accounts for quite a few citizens). Greeks would be made aware of the accounts’ existence in the event the banking system ceased to function altogether, and Athens would effectively facilitate payments through the new system in defiance of the EMU. Clearly, this would not have been well received by Brussels – especially the bit about hacking their software – but ultimately, because the new system would be entirely controlled by Varoufakis’ finance ministry, it could be converted to the drachma immediately.

Kathimerini goes on the quote Varoufakis as saying that German FinMin Wolfgang Schaeuble intended to use Grexit as leverage to force France into supporting a system that ceded fiscal decision making to Brussels (which would of course mean giving Berlin more say over EMU countries’ finances):

    “Schaeuble has a plan. The way he described it to me is very simple. He believes that the eurozone is not sustainable as it is. He believes there has to be some fiscal transfers, some degree of political union. He believes that for that political union to work without federation, without the legitimacy that a properly elected federal parliament can render, can bestow upon an executive, it will have to be done in a very disciplinary way. And he said explicitly to me that a Grexit is going to equip him with sufficient bargaining, sufficient terrorising power in order to impose upon the French that which Paris has been resisting. And what is that? A degree of transfer of budget making powers from Paris to Brussels.”

The new revelations raise serious concerns for Alexis Tsipras. The deep divisions within Syriza are by now well publicized, but reports of covert plans to establish parallel banking systems using tax filers’ IDs and the idea that elements within the ruling party plotted to seize billions in currency reserves and take control of the central bank have left some lawmakers demanding answers.

There is always considerably more to these things than meets the eye. But it is interesting, is it not, that a national referendum is so completely irrelevant to the events nominally happening around it? Why, it’s almost as if we’re living in a post-democratic age!

The one thing everyone seems to have in common is that no one wants to bite the bullet and deal with the economic realities. Debt that can’t be repaid will be defaulted. Everything else follows from that.

Is Grexit finally here?

The surprise call for a sudden referendum seems to indicate that Tsipras and Syriza want to make sure that the public shares the blame for Greece crashing out of the Euro.

In the aftermath of yesterday’s “nuclear option” announcement by Greece, when in a dramatic after-midnight speech Greek PM Tsipras announced that Greece would hold a referendum next Sunday, the day after the US independence day, the same Greek government made it very clear how it wants the Greeks to vote.

First, it was the Greek Energy Minister Panagiotis Lafazanis, head of the Left Platform movement of Syriza, who said in comments broadcast on state-run ERT TV that a no vote by the Greek people in July 5 referendum “will open the road for a new future for the country” adding that “the dilemma facing Greeks is “whether to live better or not. Greek people are aware of difficulties of a new starting point, they’re ready to support new national effort.”

Then the alternate health and social security minister Dimitris Stratoulis doubled down telling ERT-TV that Greeks are being given the opportunity to decide the way forward and “I’m optimistic” that they will give a “resounding” no to the “provocative” demands of the country’s creditors. The only issue is the question being put to the people in the referendum.” It got better when he said that “Greeks are being asked to vote whether the country should be a colony, or not, of creditors.”

Well, if that’s how the referendum question is indeed phrased then yes, it is clear how the Greeks will vote.

As was to be expected, the Greek opposition parties, except for the Nazi-inspired Golden Dawn, expressed horror at the referendum. Conservative main opposition leader Antonis Samaras accused Tsipras’ radical left government of advocating an exit from the eurozone and the European Union. “Mr Tsipras has led the country to an absolute impasse,” he said. “Between an unacceptable agreement and leaving Europe.”

Why? Because they know that despite the referendum move, which is clearly just a last ditch attempt by Tsipras to save his political career by punting the decision straight to the people, if there is a “Yes” vote to the proposed bailout, then Syriza is out and new elections have to follow.

As for the reason why Tsipras had to punt, it is a simple one: at the core of the ongoing Greek negotiation debacle is the inability of the local people to decide what they want: according to various recent polls 80% of Greeks want to stay in the Eurozone and keep the Euro currency, the problem is that 80% also want an end to austerity. Two conditions which are mutually exclusive. It is no surprise then that Tsipras had no clue how to proceed based on his mandate.

Getting out of the Euro and the EU is absolutely the right move for the Greeks, but they’re afraid to go ahead and do it. But given the unacceptable price of the status quo, which is unemployment levels higher than anything the USA saw in the Great Depression, it looks as if they may be forced to do the right thing.