The Economic Power of Immigration

Immigration policy is a difficult issue, particularly for economists. A recent interview at Reason magazine with former World Bank researcher and current Harvard Professor, Lant Pritchett, highlights the potential of immigration as a source for help to developing countries. He cites that an 3% rise in labor forces in developed countries through legal immigration would have the same impact on developing economies as all of current foreign development aid combined. However, one question highlights the extreme difficulty of figuring out if such a policy is right.

Reason: You argue that it’s not morally permissible to discriminate on the basis of nationality. But at what point do you have to stop letting people in because the sheer numbers threaten institutions of wealth creation? What’s the limit?

Pritchett: To say it’s not morally permissible doesn’t create black and white. Right now all kinds of things that cause much smaller differences in human welfare get much more attention. If we say we are going to discriminate against ethnic Indians in Mexico vs. other citizens of Mexico, there would be a hue and cry across the world. But if we say we’re going to discriminate in favor of people of Mexican descent born in the United States vs. people of Mexican descent born in Mexico, this creates absolutely no moral outrage.

At the same time Pritchett acknowledges that those in a country should have the right to protect their existing citizens in their favor.

How we should address the tradeoff between the benefit of immigration to those in developing world and the developed world does not have an easy answer, but it is important to realize and study what the tradeoffs are so we can have a well informed debate.


h/t to Global Development Blog

There is No Such Thing as a Free Lunch or Airport Screening

Economists are fond of the phrase “there is no such thing as a free lunch.” For those of you did not take Econ 101. Here is an example: I had dinner the other night with a job candidate that Towson paid for, but I did not get to eat dinner with my wife. Although the meal had no direct cost to me I lost out on the opportunity to have dinner with my wife, that is the opportunity cost of dinner so no free lunch (or in this case dinner).

My favorite thing to do on the first day of Principles of Microeconomics is to ask the students what it costs them to stay in class today and should I end class early on the first day. Usually I find out that they pay an opportunity cost of lost sleep, later lunches, less facebook checking time, although I’m not sure about their suggestion if I ended class early they would study more as they claim.

If you travel on an airplane you also face opportunity costs. Particularly, if you have to arrive an hour and a half early in case of long security lines. So a newish product called “Clear” was created to help those with high opportunity costs. Those who pass a background check and purchase an identity card get to go through a quicker security line. What this means is they can now show up to the airport even closer to their flight, cutting down the opportunity cost of waiting in line.

So who purchases the “Clear” card. This amusing article suggests it is people who do not like to wait in line. They are also wealthier people who could be working more instead of being in line. It also is people who travel often who have to pay the opportunity cost a lot.

My Milkshake is Better Than Yours: The Impact of Protein Shakes on Child Nutrition

Things are a little hectic today around the office. First day of classes and we have job a candidate visiting. So I offer you a link and a quick thought:

This Salon article describes a program in Guatemala in the late 1960s and 70s that provided protein shakes to children. Now researchers are looking at how these children faired 30 years later (link to a paper). They utilize the set up of the program, which included a control group that received a shake with no protein. The impacts of the protein shake were found to be over an additional year of school and increase of one standard deviation in test scores. This was found by comparing the protein shake group with the non-protein shake group.

So what can we learn. Early child hood development can be impacted by a simple protein shake. Having control groups makes research easier.

All the Coffee You Can Drink for $1, not going to happen

Starbucks is currently testing a $1, 8 oz coffee with free refills in Seattle (article). As I rework my syllabus for Principle of Economics, here are some reasons to believe the price of Starbucks may start to fall.

1.McDonalds and Dunkin’ Doughnuts now offer better substitutes than in the past: lower priced substitutes lowers prices of Starbucks.
2.With the economy in a recession or headed there, if Starbucks is a normal good, then as income shrinks coffee purchase will shrink.

However, Starbucks must also consider people like me. I tend to go to coffee shops with my laptop and order a small cup of coffee and stay a while. Prices will probably remain higher, since unlike McD’s or Dunkin’ Doughnuts, Starbucks also provides a nice place to hang out. This is probably why Starbucks charges for internet to keep people like me out from taking up tables.

This got me thinking about my laptop and coffee rules. This is where I turn from economist to non-economist. These are just some rules I think everyone should follow to help smaller coffee shops.

1.Always order something if you hang out at a coffee shop.
2.What you order should increase by a pastry or bagel if you plan to stay several hours and the place is a non-chain. Also tip the barista if you stay a while.
3.Do not take up a table too long if all the tables are full, unless I have to wait some place.
4.Never stay at a coffee shop more than 3-4 hours, and only then if it is almost empty.

40% Decline in Indian and Chinese Economies!

When I teach Development Economics classes I ask my students, How is GDP calculated?

There are a lot of difficulties in comparing countries GDP. For example, if two people one in the US and one in India produce the same shoe, but the shoe costs $40 in the US and $10 in India, then that shoe would add more to US GDP than India. However, with GDP we want to figure out the size of all goods produced in the economy, so the US and Indian shoes should count the same, so we put the Indian shoe in US prices.

Anyone who has been to a developing country knows that often most things are cheaper. So to calculate GDP the World Bank or other organizations try to put that country’s production in US prices. That is they adjust GDP for purchasing power parity, PPP.

But how do they calculate the differences in prices for all these goods?

Apparently the World Bank is still working on its PPP, as Nancy Birdsall highlights in the Center for Global Development Blog. The World Bank had been using extrapolation from 1993 prices, but now that they have taken a new price survey the estimates of Indian and Chinese PPP adjusted GDP have fallen nearly 40% !

So how is GDP calculated? Very carefully, but perhaps not enough.

Posse Program: The Importance of Peer Effects

I wanted to talk a bit more about the Posse Program, a policy that I’m happy to report Grinnell College is taking part in. The program takes high school students from public-inner city schools and provides them scholarships to top small liberal arts schools across the country (see article). However, they don’t just leave it at that. Students are required to attend weekly sessions during their senior year of high school to create a bond with their “posse” of 10 students they will attend the same college with.

The program works too as around 90% of students who are awarded the scholarship graduate, similar to the graduation rate of all students at the schools mentioned.

This made me think about a research topic a friend of mine in graduate school was pursuing. The idea that student performance is tied to their peer group. That is that students do not want to perform too much above or below their peer group for fear of being ostracized. Akerlof and Kranton 2002 piece in the Journal of Economic Literature provides a good overview of the subject. Although so does Season Four of HBO’s series the Wire. The kids in that show in part did not study, because their peers did not. There was also an attempt to take the "corner kids" out of the class room, to improve the class room situation and possibly the peer group.

By creating a group of students and a peer group the Posse program allows students to work harder without fear of being ostracized.

Happy Birthday Grandpa!

This past weekend I was in Florida along with much of my extended family and my whole immediate family to celebrate my Grandfather’s 90 birthday. I thought I would dedicate a special blog entry to him, since he is one of my regular readers. So a few economic lessons I have learned from him as demonstrated over the weekend.

1.Insurance is good, but it should be there for major disasters not minor ones. When I arrived at the rental car counter they offered me insurance for the weekend for $20. I have a $250 deductible with my own auto-insurance company. I thought there was a less than 1/13 chance I would get in accident, so I declined it. Here is a decent article on when to get insurance for your car rental.

2.Over the long run the stock market will tend to go up. Even over a weekend where the market was way down, my Grandfather was thinking and researching about his next stock picks. He is still active in the market, but not a day trader.

3.Invest early and often and save more than you earn. My Grandfather has some good stories about preparing taxes and financial advising for some of the local “wealthy” people in his home town. Acting like you have a high income does not always indicate you are wealthy. You have to save early and often to take advantage of long term growth.

4. Personal Finance guru Dave Ramsey has a saying about how by saving you can change your family tree. My grandparents are a great example of that. They had saved enough to help put not only their four daughters, but also help their six grandchildren through college. By leaving college with zero debts and a decent savings, I will be better able to help my own children and grandchildren through college. So by saving I know my grandparents have helped their great-great grandchildren.

Happy Birthday Grandpa!

Update on Grinnell's Endowment

The first bit of press from this blog. A reporter from the Des Moines Registar contacted me based on my first post on Grinnell's endowment. I e-mailed my second post based on the topic of Grinnell's endowment based on her questions and the reporter quoted me.

I liked the article and thought it was well balanced, enjoy.

Sorry I Won’t Stimulate the Economy

President Bush is proposing a $800 per person tax rebate to stimulate the economy. The idea is that by giving people $800 they will go out and spend it, thus helping the economy overcome the likely impending recession. This article in Salon provides a good overview of what happened the last time the government did this in 2001, with $300 rebate checks.

The Salon article details research where economists have shown that the money in 2001was spent by the poor and middle class, but not by the wealthy. This would suggest to get the most bang for the buck in terms of a stimulus we should aim the rebate at people who are less wealthy. Another good possible outcome is that people might use that money to pay back debt, given the state of the mortgage and banking industry this may help the stock market recover.

If I get a rebate check I will probably split it among giving to charity, saving it for a house I’ll buy in a few years and my IRA. Don’t tell President Bush though, I still want the money.

More thoughts on giving to Grinnell

I want to start by saying I had a wonderful experience at Grinnell. I donate to the college about $100 a year along with my wife who is also an alumni. I will continue to contribute at least that much, but with a new job I have thought about increasing the contribution more.

As alumni, when I consider how much to give I do ask myself is the 1.6 billion dollar endowment too large? A few days ago I thought the answer is that it is large enough and has been since I first attended almost ten years ago to up the amount spent on financial aid.

However, after further research and thinking I'm not so sure. Grinnell's endowment is in part so large because of past decisions not to spend it. I think the decision on when to spend it is better made by the Grinnell College community than government policy as Senator Grassley is now proposing. After I took a closer look at Grinnell's
annual report I see that while the endowment has increased roughly 60%, adjusted for inflation using the consumer price index that increase is only 20% and even less when you make further adjustments for rising health care costs for faculty. Similarly tuition has increased, but I do not think it is all that out of line with inflation. Grinnell needs to work to communicate this to its alumni better, as it took me a while to figure this out.

I hope that Grinnell will follow the lead of Harvard and Yale and greatly increase financial aid particularly to those from low income families, I still think it has the resources to do that. If Grinnell does not I hope the alumni association will work to provide me and other interested alumni answers why it does not. Given my feelings instead of increasing my contribution to Grinnell this year my wife and I sent money to the Posse Program, which provides scholarships to students from urban public schools to go to Grinnell and similar schools.

I have decided to donate to four schools this year: Grinnell, Beloit, Ohio Wesleyan, and Towson. All school mean a lot to me, and I hope my own class can increase the number of people who give, but that we continue to ask questions about the future of the college.

My information on Grinnell's endowment and spending comes
from:

African Doctor Brain Drain: Perhaps We Should Not Prevent It?

In economics things are never as simple as they seem. Take for example the brain drain of African doctors. Michael Clemens of the Center for Global Development describes in his blog about a study he published on African doctors working abroad. He was concerned that his study, which as I see it was intended to measure the number of African medical professional working abroad was being used to show brain drain is a problem in Africa.

In light of this perceived problem England has decided not to pursue African trained doctors. However, that might be the right strategy as Clemens shows in another paper that being able to migrate actually increases the number of people who enter the medical profession in these countries. In other words if you increase the expected wage with the opportunity of foreign work, then more people train to be doctors.

As he also points out African health professionals can earn 5 to 10 times their salary abroad. If large remittances are being sent back home it is possible that the money sent back might do more good then the doctor could have in their own country.

Netflix Online!

My wife and I subscribe to Netflix, we have a two DVD at a time plan. Netflix announced yesterday that now subscribers could watch as many movies as they want online (article). The announcement came in response to Apple announcing it was starting a movie downloading services (competition lowers prices!) Similarly subscription costs fell when Blockbuster and Wall Mart entered the DVD mail service market.

I knew online movie viewing was possible through Netflix, but I had never gotten around to checking it out. Turns out I’m not alone as it seems few people watch movies on line. In part it is because the movies selection online is 6,000 movies compared to 90,000 by mail. It does include some decent TV shows including Law & Order, The Office, and 30 Rock.

So what will happen to the future price of movie rental? I’m not sure how much it costs for the bandwidth to deliver movies, but prices should continue to fall as content is moved online (assuming its cheaper to stream a movie then deliver it through mail). But prices are not likely to fall too much as shipping costs are only 41 cents per movie, meaning even heavy Netflix users only user only use a few dollars a month in shipping costs.

Update: It turns out the story about the German boss firing non-smoking workers was a hoax.

Tickets in Tiger Town

My favorite baseball team the Detroit Tigers has had quite the offseason trading for Miguel Cabrera, Dontrelle Willis, and Edgar Renteria. With these trades the Tigers are among the favorites with the Red Sox, Yankees, Angels, and Indians to win the American League. As part of this excitement there has been a huge surge in demand for tickets to Tigers games. The Detroit News reported that season tickets sales are up 25% from an already record high of 20,000 (full year season ticket equivalent). So before individual game tickets go on sale, the Tigers will have sold about 25 out of 41 thousands seats in their stadium. There are discussion of capping season ticket sales, in part because of the lack of potential playoff tickets that would go along with those tickets. With few individual game tickets, Tiger General Manager Dave Dombrowski, is suggesting Tiger fans buy their tickets early as they might not be there for long.

Yes, I’m excited about the Tigers, but from an economist point of view this poses an interesting question: Why not raise prices? First their prices were set before the trades were made, even with an expected increase in demand, the increase was a modest $2 per ticket (article). They could redo their prices, but that would probably be bad publicity.
Over longer periods the Red Sox who have sold out over two years worth of games with 388 straight sellouts, and are approaching the Indians record from the mid 90s of 455 games. The Red Soxs similarly raised their prices only 10% this year (article)

Why? Two guesses.
1.) Publicity to keep ticket prices within reach of some average fans.
2.) Long term fan base. Having a variety of people go to the ball park, might increase the fan base for lean years and the TV audience

Don't Wake a Sleeping Teen

Today’s New York Times has an article that suggests that high school start times should be moved later. The argument goes that teens’ bodies do not do well at learning before 8:00 am, but many high schools start at 7:30. Any professor or teacher who has taught at 8 am will not find this hard to believe. A few schools have changed school start times, to benefits of students (see the NY Times Article). Although these benefits come at the cost of increasing busing costs and at the expense of extra-circular activities.
Are the benefits worth the cost? The Sleep Foundation thinks so.
This article written by a researcher from the University of Minnesota is where most of these talking points are coming from.
Overall the argument seems reasonable. I’ll have to save a copy of the article, in case my department chair ever wants me to teach an 8am class.

Danke for Smoking

Nobel Prize winner Gary Becker’s theory on discrimination shows that not only does discrimination hurt those who are discriminated against, but also those doing the discrimination. As I remember the theory goes something like if companies discriminate against women, then those companies bid up the price of men’s wages.

Then if men and women are equally productive a non-discriminating firms could hire women cheaper and drive the discriminating firms out of the market.

Although not exactly discrimination, many companies are banning smoking at their work place. In a sense by not providing a place to smoke, they are a providing a lower wage. A company who wanted to attract smokers could offer lower salaries with a smoking area, and undercut the smoke banning firms. However, by banning smoking firms might attract non-smoking workers who want to work in a non-smoking environment.

So this may explain why a German boss fired all his non-smoking workers.

Happy Wedding Anniversary

So today is our 4th wedding anniversary. I’m one happily married economist!

Although I do not work directly with the economics of marriage, I do have a paper on household decision making in Nicaragua. Economists typically, look at marriage and households in one of two ways. Either the household is a single unit making one decision, or the two married members bargain based on their power to influence household decisions to get the household to move more resources to things they like. My wife and I have similar, but slightly different preferences. I think the key to a happy marriage is to try to convince yourself your household is a single unit, while going through the bargaining process.

Some other thoughts on marriage from a couple of Econ bloggers

From Greg Mankiw:“Economists David Blanchflower and Andrew Oswald have suggested that a lasting marriage produces as much happiness as an extra $100,000 a year in salary….”’

From Tyler Cowen Marginalrevolution.com:
“The secret to a good marriage, therefore is selective forgetfulness.”

Tim Harford from Slate“Joskow's explanation surely tells you something about when to be a freelancer—perhaps even when to stop playing the field and get married. Like East Coast coal mines, it can be attractive to be footloose and fancy-free as long as you always have alternatives and as long as you are not required to make serious investments that are specific to the relationship. My own marriage was swiftly followed by a relationship-specific investment. She's nearly 2 and a half.”

Hip Hop You Don't Stop

On Monday night I bottled my homebrew beer which is a clone of a 60 minute Dogfishhead IPA. Yesterdays, New York Times had an article on the growing trend of adding more and more hops to beer calling it extreme brewing. In fact Dogfishhead sells ingrendiant kits for their famous beer at a store called Xtreme brewing.

Hops are what make beer bitter. In the case of IPA, the 60 minutes referrers to adding hops for 60 minutes, Dogfishhead also makes 90 minute and 120 minute, with more hops. The 60 minute has twice as many hops as any beer I have ever brewed.

I love hops, maybe not 120 minutes worth of hops. But I have been hearing rumors of hop shortages and rising prices on the homebrew discussion board. The end of the article describes the trend well,

“….the brewing world is now facing an international hops shortage. No, it’s not because of the daunting amount of hops used in many extreme beers. It’s more a result of the normal cycle of supply and demand.

Overproduction of hops in the early 1990s resulted in excess supply and depressed prices, said Ralph Olson, a hops dealer based in Yakima, Wash. As a result, world hop acreage has fallen from about 234,000 in 1994 to 113,000 in 2006. It may take several years, Mr. Olson suggested, for hops production to be able to meet current demands.”

For a while I have wanted to grow my own hops, now I have even more reason to try it. Only I’m not sure they’ll grow in the apartment.

A Tale of Two Endowments: Why I Make Smaller Donations To Grinnell College

This past weekend I had dinner and drinks with a couple of college buddies. The buddies are on my class reunion committee and as part of the organization of the reunion they are suppose to try to get their fellow classmate to donate to our school, but they had a hard time justifying why we should give money to our school. In part because as you may know Grinnell College our school has an endowment of around 1.67 BILLION DOLLARS*, while Beloit College, where I taught last year, has an endowment of about 100 million dollars. Another way to think about it is Grinnell could put its endowment entirely in bonds and have a return each year of Beloit’s endowment.

As an economist I want to know what is the additional impact of an extra dollar given to each of these school? I think at this point the marginal impact of the first $1 to Grinnell is that it helps our US News and World Report ranking as it counts % of alumni contributing. After the first $1 what is the marginal impact for a school like Grinnell with nearly 1 million dollars per student. My guess is a $1 given to Beloit will do more good.

Grinnell’s endowment per student is surpassed only by a few schools. Currently congressional pressure is coming on Yale and Harvard from Iowa’s Senator Grassley to spend that endowment or lose their tax exempt status (article). Alumni are doubtful as Yale may not Get Ben Stein's money. Grinnell has rebuilt or is going to rebuild about every building on campus. They could increase financial aid.

Later today I will send this entry to the alumni association of both Beloit and Grinnell , and ask what is the marginal benefit of my dollar? The best response gets a $200 contribution from me.

*** Update. My father asks if I can make the same offer to Ohio Wesleyan. Yes. Any small liberal arts college whose Alumni Relations staff makes an appeal to me is eligible. Grinnell and Beloit to have an advantage as I factor in my feeling for the University

Outsourcing Pregnancy to India

The latest trend in outsourcing is using women as surrogate parents from developing countries. This article describes the basic tradeoffs that the surrogate mother’s face:

“Suman Dodia, a pregnant, baby-faced 26-year-old, said she will buy a house with the $4,500 she receives from the British couple whose child she's carrying. It would have taken her 15 years to earn that on her maid's monthly salary of $25.”

While it may be morally difficult to pay a woman in a developing country to be a surrogate parents, there is evidence that this type of payment could extremely improve the surrogate’s life.

However, the key will be if this program can be well run so that the women actually get what they were promised. In some cases regulations or bans might improve outcomes for women who would have participated in the program if they are coerced or not treated well. After reading an article on medical testing in the US in the New Yorker, where test subjects face similar tradeoffs and are not treated well, I’m less sure that the Indian surrogate programs will continue to work. In this case US, British and Indian government must try to make sure that the transaction proposed actually takes place.

The Garbage Man Can!

In a classic episode of the Simpsons, Homer becomes Sanitation Commissioner. Not suprisingly, Homer's management of the garbage pickup leads to a financial crises. To solve that financial crisis, Springfield starts taking in the nation's garbage.

In Naples, Italty instead of Homer Simpson the sanitation comission is controled by the Mafia. Which has been accepting trash from all over italy (as detalied in this article). Now the streets are so filled with trash that residents are setting them on fire (link).

Maybe Naples needs a new sanitation commissioner, may I suggest former Springfield comissioner Ray Patterson.

A New Business Plan for Gyms

Yesterday was January 2nd otherwise known as amateur day at the gym. The day when everyone who has made a new year's resolution tries to come for their first visit, see my friend Sarah’s blog Brood for a hilarious description.

With this in mind. I thought what if gyms tried the punishment strategy, I discussed yesterday. A gym could take your credit card information and if you did not go to the gym 100 days in a year, you get charged $500. It would be easier for the gym to monitor you then say your buddy. If this is an effective method, then people might sign up for that gym, if they are actually serious.

As this article on how gyms make money points out, a lot of money is made selling year long memberships from those amateurs. But a lot of other money is made from personal trainers. The more you have people at the gym the more people might use the personal trainers.

Maybe I need to find that kind of gym, I worked out yesterday but not today.

Free Parking for the Yankees

I’m generally against subsidies for ballparks. This article describes some studies on the economic impacts of sports on the local economy as the two featured economists, Brad Humphreys and Dennis Coates put it “Our conclusion, and that of nearly all academic economists studying this issue, is that professional sports generally have little, if any, positive effect on a city’s economy.”

So how likely is it that that the local economy will be helped by a free parking garage for Yankee VIPs funded by NY tax payers (article)?

One more reason to hate the Yankees.