Wednesday, 29 June 2016

Does migration reduce inequality?

In his defence of the EU the Oxford economist Simon Wren-Lewis recently made a number of interesting claims that directly relate to the general debate on the benefits, or otherwise, of immigration, globalisation and free trade. One that stands out is this in response to Kate Hoey's claim that migration has been used to suppress the wages of the low paid:

"She seems to be arguing that free movement in the EU is a means of keeping down the wages of the low paid. The first point to make is if labour mobility keeps wages down in the destination country, it should increase wages and/or reduce unemployment in the country the migrant came from. As migrants move from lower to higher wage countries, then migration tends to equalise incomes. This should normally count as a plus from a left wing perspective."

Well it is certainly true that migration reduces unemployment in the country of origin. It is also true that migrants tend to repatriate a portion of their earnings to their country of origin and so help to  increase its GDP per capita and thus increase its overall prosperity. In theory this should help to close the gap in inequality between rich countries and poor ones, and thereby "equalise incomes".
 One could also then argue that once the poorer countries have attained a sufficient level of income, they will also be able to trade with richer countries as equals, in effect increasing the size of the market accessible to firms in both countries. This is the essence of current globalisation policy and is one reason for the EU's policy of continued expansion. It is therefore certainly true that it could be claimed to be "a plus from a left wing perspective" in that it raises living standards and reduces inequality in the poorer country. As such it probably does the same globally as well. The problem is that it doesn't do so in the richer country.

In the richer country most of the immigration will be into low paid jobs, and much of the earned income that results will leave the country. This will have two negative effects on aggregate demand in the rich country. Firstly, it will force down wages of the low paid through increased competition; secondly, the additional economic activity that results from the immigrant workers will be exported and so will not be used to stimulate extra demand (a multiplier effect) to replace that lost through job losses and earnings reductions of the existing low paid workers. On top of that the population will have increased so GDP per capita will be reduced.

Now it is probably true that once the economies of the two countries have equalised both countries will benefit fully and equally from the larger market available to them.  The question, though, is how long will this take? As Keynes famously put it, "In the long run we are all dead." The point he was making when he said it was that time is not infinite and people are not immortal. After a recession or depression the economy will inevitably recover eventually. The argument of classical economists is that, if the economy is going to recover anyway, then it doesn't need any government intervention to help it along. The argument Keynes was making was that ordinary people can't wait that long and therefore the recovery needs to be brought about as soon as possible through active interventionism, rather than arriving at some unspecified later date because of passive liberalism. That same statement can also be applied to the effect of immigration on the poor in developed countries. How long must they wait for the benefits of migration to bear fruit? Until after they are all dead?

The reality is migration is just another manifestation of globalisation policy and both have been exploited and abused to suppress wages in developed countries because that is how western governments have managed to deliver economies that simultaneously have low inflation and low interest rates. That is why living standards in most developed countries have stagnated for the bottom 50% over the last 30 years. In which case I would argue that Kate Hoey is correct in her viewpoint and Professor Wren-Lewis is wrong. Moreover, I would argue that an economic policy is only beneficial and equitable if those that sacrifice the most in the short term also benefit the most in the long term. That after all is one reason why most on the left reject austerity. But if migration hurts the poor in the UK and benefits the rich, how is this "a plus from a left wing perspective"? And of course the adverse side effect of all this of course is massive wage inequality in the rich countries, excess savings by the rich, low investment and asset price booms. Ultimately that is why we are in the mess we are in now.

But the above is not the only point of contention I find with the views of Professor Wren-Lewis. In the same blog post he then went on to say:

"Migrants tend to be young, healthy and working. They provide more in terms of resources than they take out by using public services. I remember having a conversation about this with someone who lived in Spain. He said if anyone should be angry about free movement it is Spain, in having to take lots [of] non-productive British pensioners who will be a burden on Spain’s health service."

This argument also contains a number of major flaws in its reasoning. Firstly, it neglects to take into account the fact that most of the UK pensioners that have moved to Spain have done so on large pensions. These pensions are paid out in the UK by insurance companies and the government but spent in Spain. Therefore not only does this constitute a massive export of capital from this country, it also leads to an equally massive loss of both consumption and taxation in the UK. This loss of government revenue far exceeds any burden those pensioners would place on the NHS if they were to return to the UK. The UK therefore loses from this arrangement and Spain gains.

Secondly, the argument fails to take account of my previous point, that migrants tend to repatriate a large portion of their earnings to their country of origin. As a result any increase in economic activity that results from the immigrant workers will be exported and so will not be used to generate extra demand in the UK. In short there will be no multiplier effect that would create additional jobs to compensate for the immediate effects of immigration.

What this shows is that it is not just inward migration that can hurt the UK economy, but also outward migration. Both have negative effects on our budget deficit and our trade deficit. And as I have argued previously, both therefore represent an existential threat to the solvency of the national government and therefore ultimately to the democracy of the UK, because if a Labour government cannot fund its programmes, then there can be no Labour government. In short we end up like Greece.

But if you still think unlimited immigration is a good thing then consider this from Social Democracy for the 21st Century:

"Corbyn is also delusional if he thinks effective Keynesian fiscal policy will be possible in Britain with an open border policy, for the more prosperous a country becomes, the more it will simply become a magnet for mass immigration from Europe, which in the process will defeat the whole purpose of fiscal policies to create full employment."

In other words full employment is impossible if you have an open borders policy. And what is the point of a Labour Party that doesn't believe in full employment?

Thursday, 23 June 2016

Lies, damned lies, and EU statistics

According to virtually every major economics organisation (IMF, OECD, IFS, BoE, The Treasury) the EU is such an enormous benefit to the UK economy that leaving would amount to economic suicide. Yet despite 95% of mainstream economists supporting the Remain campaign the public is unimpressed. Why? Well perhaps the reason is this: there is no definitive data to support their claim.

One of the arguments against Brexit from economists such as Simon Wren-Lewis is that it would make it more difficult for us to trade with countries next to us and that would hurt our economy. It is the classic neoliberal free-trade argument even though Wren-Lewis claims to be a New Keynesian. But no-one who supports Brexit is arguing that leaving the EU is for the purpose of reducing trade with Europe. Nor can any rational and informed thinker possibly believe that a reduction trade with the EU would be the end result. The lobbying power of the multinationals would ensure that. This then is a spurious argument. The fact that it relies on a contentious, unproven and ideological belief in the universal benefit of free trade makes it even worse.

Another argument put forward is that because 40% of our overseas trade is with the EU then our future economic growth will be greater inside the EU than outside. This is the argument put forward by George Osborne. In addition he and David Cameron have claimed that leaving the EU would result in a massive recession and a third world war (or both), while our membership of the EU has delivered greater economic growth than would otherwise have happened. The problem is that claim is untestable because the alternative scenario is counterfactual. That said, we can attempt to test it simply by going back in time.

If we assume that leaving the EU represents the converse process to joining, then leaving should deliver the converse results of joining. So the question then becomes: what was the economic consequence of joining the EU? Well the graph below shows the growth rate in real GDP in the UK over the last sixty years.


If joining the EEC was the economic boon that the Pro-Europeans claim then there should have been a significant increase in the growth rate after 1973, yet according to the graph above there was none. Moreover, after the signing of the Maastricht Treaty in 1992 there should have been a second boost. Again none is detectable. What there is instead is a clear decrease in the amplitude of the fluctuations in growth rate, possibly in part due to a decrease in the inflation rate over the period in question. To analyse the above data more clearly it is perhaps better to present it as a plot of real GDP per capita versus time (rather than growth rate versus time) and calculate the compound growth rate. This is shown below for the period 1960-1973 covering the period immediately prior to the UK joining the EEC.


The above data shows that real GDP per capita rose by a factor of 53% over this period. This equates to an average growth rate of 3.3% per annum. Now if we look at the period immediately after joining the EEC we see a different behaviour.


Over the period 1973 to 1992 real GDP per capita rose by 38%. This equates to only 1.7% per annum.


Finally, if we look at the period after the Maastricht Treaty was signed real GDP per capita grew by 42% equating to an annual growth rate of only 1.6% per annum.

What all this clearly demonstrates is that there was no spurt in economic growth after joining the EEC, or after signing the Maastricht Treaty. In fact in both cases the growth rate went down. So this appears to torpedo the principal claim of the Remain camp that EU membership boosts growth. The reasons of course are easy to understand.

Firstly, over much of the last thirty years the EU has been obsessed with enlargement, and most of the new member states have been economically underdeveloped. It therefore follows that any process of economic convergence must have involved a transfer of economic growth from the old member states to the new ones. This will inevitably have had a negative impact on growth rates in the developed countries. In effect at each level of increasing EU integration the developed countries have effectively exported an increased amount of their economic growth to other countries in the EU.

Secondly, migration has had negative impacts on wages, tax receipts and investment. According to Simon Wren-Lewis:

"Migrants tend to be young, healthy and working. They provide more in terms of resources than they take out by using public services."

Well the first part of this may be true but the second is most definitely not. What Professor Wren-Lewis has conveniently omitted from his thesis is that most migrants pay little or no tax because most of them are seasonal workers, and under EU rules, if you work in a country for less than 6 months you are exempt from income taxes. In addition, most migrants are net savers and they spend those savings in their country of origin, not here, so there is no multiplier effect. The result is that they do not create as many new jobs as they take away. The best migration is permanent migration because it is more likely to involve people with tradable skills, in high income professions who invest all their earnings in this country thereby creating as many, if not more, jobs than they take away. On top of this, migration also has a negative impact on investment because employers don't need to train or retrain their existing workers if they can source the necessary skills from elsewhere at zero cost. 

The analysis above all seems to have passed by the economics establishment. The big question is why?

Saturday, 4 June 2016

The Labour case for Brexit

You would be hard pressed to deduce this from the current political mood music but, like the Conservatives, the Labour Party has always had a pretty ambivalent attitude to the EU. That much is at least self evident if one looks back at the history of the party and how it split over the 1975 EEC referendum. The main difference though between the two parties is that the things Labour likes about the EU (the Social Chapter, protection of human rights etc.) tend to be the things the Tories hate, and vice versa. What is therefore surprising is that there is not the same debate about the EU in the Labour Party this time around as there was in 1975. My view is that there should be because the potential threats posed to our democracy and to the viability and effectiveness of any future Labour government by the EU (at least in its current form and with its current direction of travel) are now much greater than they have ever been.

These threats I believe are two-fold. The first is economic, the second democratic. The economic threat comes from the increasingly unviable state of national finances and taxation frameworks and the negative impact on both of these posed by the single market. For a government to function effectively it needs to be able to borrow what it needs when it needs, and it needs to be able to tax who and what it needs in a similar vein. This is because taxation is not just a means of raising revenue to fund services: it is also a macroeconomic tool that should be used in conjunction with borrowing to correct imbalances within the economy and thereby promote economic stability. Yet even outside the euro this will become increasingly hard as the EU becomes more integrated and the single market becomes all-powerful and all-consuming.

This is because at the heart of the new EU is the single market. The single market is everything. The single market is sacrosanct. Nothing will be allowed to interfere with the single market. That means all government policies will be tested against this question: do they distort the single market? If so then they will be deemed to be illegal. We have already seen the start of this trend with the decision of the European Court of Justice (ECJ) to vote against minimum pricing of alcohol in Scotland. Next it will be differences in excise duty that come under the spotlight, then VAT. After that it will be corporation tax on companies, and possibly even income tax. But you don't need the single market or the ECJ to bring about harmonisation of tax rates: that will happen automatically if we continue to allow the freedom of movement of people.

The freedom of movement of people or workers is one of the four pillars of the single market, the other three being the freedom of movement of capital, goods and services. Implicit in these is a fifth freedom, the freedom of movement of jobs. Most criticism of the first of these, the freedom of movement of people, has concentrated on its effect of immigration. However, there is a secondary impact. If you allow people to move country then you effectively allow them to choose which taxation regime they wish to work under. In other words they are able to exercise consumer choice to choose their tax rate by selecting a country of residence with as low a tax rate as possible.

We have already seen the effect of this when President Hollande raised the top rate of income tax in France to 75%. Many of the wealthy moved to London or across the border into Belgium, Luxembourg, Germany or Switzerland, and then commuted back to France for their work if they needed to. Of course if your income tax was dictated by your nationality and not your country of residence (as is the case for US citizens) such movements would not be financially beneficial, but of course EU rules and the single market prevent this.

The impact of all this will be two-fold. Firstly it will undermine democracy because it will effectively allow some voters to circumvent the democratic outcome of national elections. If you don't like the result then you can just move somewhere else. If your fellow countrymen vote for a socialist government with better public services and higher taxes on the wealthy, then the wealthy can just move to a country with lower taxes. The rich get to have their cake and eat it.

The second impact is a direct consequence of the first. If the voters can move from country to country in search of the best tax deal, then countries will be forced to compete for income. This competition will force them to outbid each other in terms of tax cuts. The net result will be an inevitable race to the bottom in terms of tax rates. As a consequence the tax gap that governments currently suffer from will widen, revenues will fall, spending will decline, and services will worsen, whether these are in social security, healthcare or education.

The one great virtue of the EU in the eyes of Labour voters and trades unionists has always been the Social Chapter of the Maastricht Treaty. This encapsulated the core ideal that the EU should be for the benefit of workers, and not the owners of capital, by setting common standards for working rights and conditions that multinational corporations in particular operating in the EU would have to abide by. The rationale was that individual member states were too small and powerless to implement these standards unilaterally because multinationals could effectively force nations to compete against each other for the jobs those multinationals could provide. The irony now is that it is competition within the single market that is the great threat, not to wages but to government finances. Once you allow freedom of movement of labour then you undermine the fiscal sovereignty of individual states. Eventually they become financially non-viable with only the EU itself being able to levy income tax across the EU and across national borders. The result will be a push towards introducing a federal income tax and a federal budget with more loss of sovereignty and democracy at national level.

The result of all this is that it will become virtually impossible to elect a left wing government because a left wing government by definition is one that will always want to intervene in the market, either to prevent economic crisis or to stabilise an economy that is already in crisis, or to reduce the impact of inequality. All these interventions will necessarily result in a distortion of the market, and even though the market is imperfect and may be in crisis, this will be deemed to be against the rules of the single market. So while you may still be able to vote for a left wing government, that government will not be allowed to implement anything that resembles a socialist platform. It will be like voting for a Labour local council but finding that they still have to implement the same austerity-driven cuts as would have happened under a Tory administration. And of course the Greeks have already discovered this. They elected Syriza (twice) and still ended up with their economy being run by Dr. Strangelove in Berlin.

To put this into perspective imagine some of the policies that a future Labour government might wish to implement to raise extra taxes and tackle wealth inequality: the mansion tax; a citizen's income, support of key industries (e.g. steel) in times of external shocks; taxes and controls on intellectual property. All of these could be at risk from EU rules and regulation. The citizen's income (or basic universal income) in particular is one idea that is gaining support across the continent. The Swiss are currently voting in a referendum on this issue, but one concern is that the freedom of movement of people would make it unworkable whereas if eligibility were based on nationality then immigration would have little or no negative impact. But under EU rules countries are not allowed to "discriminate" on grounds of nationality.

The worrying thing is that the current Labour hierarchy seem oblivious to most of these potential pitfalls of EU membership. Moreover, by hitching his wagon (and by association most of the Labour Party) to the Remain campaign, Jeremy Corbyn has made a massive tactical miscalculation. If the electorate votes to leave them he will have made Labour unelectable for a generation as no-one will trust the party in government to keep the UK out of the EU. After all who is going to vote for a pro-EU party and prime minister if the country is negotiating to leave the EU? At least if a significant number of senior Labour figures (other than the commendable Frank Field and Gisela Stewart) had signed up to the Leave campaign then there would be sufficient alternative leadership candidates, or cabinet members who could be entrusted to lead future negotiations. And even if the public votes to stay in the EU the Labour party will likely lose significant votes to UKIP in future elections as a result. It is an outcome Frank Field has warned about but no-one seems to be listening.