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!