(What’s Left of) Our Economy: State of the Union Fakeonomics on Immigration

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demand, economics, free trade agreements, Gillian B. White, Goldman Sachs, illegal immigration, Immigration, Jan Hatzius, Jobs, Obama, offshoring, State of the Union, supply, The Atlantic, TPP, Trade, Trans-Pacific Partnership, wages, workers, {What's Left of) Our Economy

The more I go over the economic thinking behind President Obama’s final State of the Union address, and some of the commentary it’s generated, the weirder both get. Here are two especially noteworthy examples, and they both flow from the president’s claim that: “Immigrants aren’t the principal reason wages haven’t gone up; those decisions are made in the boardrooms that all too often put quarterly earnings over long-term returns.”

Actually, Mr. Obama’s starting point is a straw man. I don’t know of anyone whose views have attracted significant attention who solely blames immigrants for wage stagnation. I don’t even know anyone who blames illegal immigrants. I do know lots of folks who believe that the levels (too high) and mix (too many uneducated and unskilled) of legal and illegal immigration have contributed meaningfully to this problem. But I guess States of the Union are no place for nuance.

Even stranger about the president’s contention, though, was his defense of mass immigration’s role in the American employment picture was its contrast with his treatment of trade deals like his Trans-Pacific Partnership and their own destructive impact on jobs and pay. This issue went unmentioned.

No one blames these agreements and related policies for the entire wage problem, either. But does the president genuinely suppose that trade deals, and the job and production offshoring to very low-wage countries they’ve encouraged, have been totally unrelated to the pursuit of those “quarterly earnings over long-term returns,” and by extension to wage woes? In fact, can he or anyone else reasonably doubt that these same shortsighted boardroom denizens have lobbied so hard to push these deals through Congress precisely because they help maximize short-term earnings so effectively at American workers’ expense?

Just askin’.

The second example of State of the Union-related economic weirdness comes from an Atlantic post making the case for the president’s views on immigration and wages. It was perfectly conventional – to the point of predictability – for Atlantic staffer Gillian B. White to trot out the usual studies showing that most economists strongly deny any immigration responsibility for U.S. wage stagnation.

What was a lot less conventional was her neglect of the obvious immigration- (and trade-) related implications of this point from another leading economist that she quoted and then paraphrased:

“‘The weakness of wages and the resulting strength of profits are telling signs that the US labor market is still far from full employment’” Jan Hatzius, the chief U.S. economist at Goldman Sachs wrote in a 2014 research note. That’s because many companies have learned to be leaner, they hire fewer employees, and still benefit from continually growing productivity. And because the country is still not at full employment, they can keep paying workers less. All of this serves to boost the company’s bottom line, while workers are unable to participate in those benefits.”

It’s clear to any thinking person that Corporate America has gotten much leaner (although this greater efficiency isn’t showing up in the productivity data any more). And it should be equally clear, as Hatzius notes, that this development has increased the supply of labor more than the demand for workers (the ultimate reason full employment hasn’t been reached), and therefore reduced the price of labor (as over-supply will do for anything in a reasonably free market, human or otherwise, that’s in surplus).

Hatzius wasn’t quoted on the link between this labor market mismatch and American immigration flows, but White is confident that “Obama is right” (about immigration – not trade, which she also ignores) and that “the level of wage dampening that immigration is actually responsible for in the broader scope of the problem pales in comparison to the wage suppression that has occurred since multi-billion dollar companies decided to prioritize rewarding shareholders first and workers last.”

Indeed, she states, the immigration effects are so slight compared with the supposedly entirely separate corporate governance and strategy changes that discussing the former is “a bit beside the point.”

But by definition, if she’s right, here’s what’s a bit beside the point, too: At a time of subpar employment levels that themselves are undermining workers’ bargaining power, the United States keeps admitting roughly one million legal immigrants each year. Moreover, it has enforced its borders so poorly that the illegal population stands at more than 11 million.

In turn, White’s reasoning implies, significantly reducing either the illegal population, or the legal flow (or both), and accordingly improving the labor supply-demand balance, would leave the bargaining power and wages of current, legal workers virtually the same.

It sounds like White doesn’t really believe that the laws of supply and demand apply to labor markets at all, or at least not to those with significant immigrant participation rates. Same for that majority of economists she cites. Who’s to say “No”? After all, economics isn’t a real science. But if this is the case, couldn’t these analysts declare their heresy openly, or at least tell the rest of us where supply and demand still matters, where it doesn’t, and why? While they’re at it, of course, they could let the rest of us in on what other venerable maxims of economics they’ve now decided we can do without – and when.

(What’s Left of) Our Economy: Big New Signs of Re-Bubble-Ization

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2016 elections, Allison Schrager, auto loans, balance sheets, Ben Bernanke, Bloomberg, bubbles, bubbles Federal Reserve, credit, credit cards, debt, Financial Crisis, Fox Business Debate, Goldman Sachs, housing, interest rates, leverage, loans, Matt Phillips, mortgages, quantitative easing, Quartz, revolving credit, Tracy Alloway, zero interest rate policy, ZIRP, {What's Left of) Our Economy

One of the more praiseworthy features of the Fox Business Republican debate was the discussion of the last mega-financial crisis and how to prevent a repeat. Although at their debate on CNN the Democratic presidential candidates were quizzed on the bubble and its bursting and possible remedies, the Milwaukee event marked the first time these subjects came up for the Republicans.

Better late than never, but that’s pretty strange given that the last bubbles inflated and the crisis broke out on the GOP’s watch. In fact, it’s downright disturbing. For a new meltdown remains by far the greatest economic threat to America’s future due to the Federal Reserve’s overly easy money policies – despite the latest reassurances from former Fed Chair Ben Bernanke that such warnings are ludicrous. Maybe not so coincidentally, two important new signs of re-bubble-ization have just appeared.

The first was reported by Quartz’s Matt Phillips, who pointed out that the Federal Reserve’s latest figures on Americans’ borrowing behavior showed that consumers in September took out an all-time record $28.9 billion in new loans in September. In the process, they broke a record set 14 years ago, and increased their credit outstanding by the greatest percentage since 1943 – when these records started to be kept. And even if you adjust for inflation, household borrowing is at lofty levels historically.

Many economists view such increases as a bullish economic sign – signaling that Americans are so confident about their future prospects (and repayment potential) that they’re willing to take on more debt. That may be true, but the data on wages and incomes strongly indicate that this confidence is really overconfidence. And if interest rates really are going to be raised by the Federal Reserve, even gradually, this overconfidence may be tomfoolery.

Also not so bullish – the makeup of these new loans. As economist Allison Schrager has sagely pointed out, not all borrowing decisions are created equal, even for individuals with comparable incomes. Some, like student loans, are arguably sensible investments in one’s own human capital and potential (though signs of diminished returns from a college education seem to be popping up everywhere). Others, like mortgages, are arguably sensible investments in an asset that could well appreciate in value (though the inflation and bursting of the housing bubble should have taught everyone that real estate is no longer a sure thing). And still other loans simply finance consumption – which lacks any capacity to increase one’s wealth.

Unfortunately, much of the September surge in consumer borrowing was in auto and credit card debt – which won’t bring any financial benefits.

The second sign of reb-bubble-ization was reported by Bloomberg News’ Tracy Alloway, who covered a Goldman Sachs study showing that leverage levels in Corporate America are at their highest levels in a decade – during the bubble years. In other words, thanks largely to the super-easy monetary policy pursued by the Federal Reserve since the crisis peaked, even though corporate profits have surged to new records, American business has gone on such a frantic shopping spree that its debt load has grown much faster. Indeed, according to Goldman Sachs, these debts are now at twice the levels they hit in the pre-crisis era.

Just as with consumers, rising interest rates could wreak havoc with the balance sheets of U.S. companies. And just as with consumers, relatively little of this borrowing is being devoted to strengthening these firms in what might be called the old-fashioned way – i.e., through the development of new products and services. Instead, much of this new debt has been used to fund mergers and acquisitions, and stock buybacks.

The Fox Business debate, however, does deserve criticism in one sense. It followed an entirely conventional course in focusing on crisis-proofing American finance by improving Wall Street regulation. Certainly such improvement has been warranted. But the financial crisis was rooted in weaknesses in the real economy. Until presidential candidates start presenting realistic plans for fostering more good jobs and the incomes they generate, and for spurring more production and the earnings they generate – which would reduce the need for binge borrowing in the first place – a new financial crisis looks much more like a matter of “when,” not “if.”

Following Up: More on Delusions of Immigrants Saving the Economy

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amnesty, bubbles, executive amnesty, Following Up, Goldman Sachs, home ownership, housing, illegal immigration, Immigration, mortgages, Obama, Open Borders, The Wall Street Journal, Urban Institute

Since I’m kind of (understandably!) fast tracked and trade policy’d out, I thought I’d shift this afternoon to another way the U.S. bipartisan political establishment is shafting Main Street America: Open Borders- and amnesty-friendly immigration policies.

These policies’ leading edges – consisting of President Obama’s recent executive immigration orders – are of course presently stuck in the courts, similarly to how the offshoring-friendly trade strategies also backed by the White House and Congress’ Republican leaders are now stuck on Capitol Hill. But “stuck” is hardly the same as “dead,” and therefore ongoing vigilance is needed – especially since most of the president’s liberal Democratic critics on trade policy are wholeheartedly with him on immigration.

A stout pillar of the liberal case for boosting immigration levels and amnesty-ing the illegal population already in the country (or otherwise creating a “path to citizenship”) is the idea that the youth and energy of newcomers is crucial to American hopes to solving any number of major economic problems – from slow growth to the entitlements crisis. This post from last September presents a sample of these claims.

As I pointed out, liberals’ optimism regarding immigrants’ prospects for attaining the American Dream clashes violently with their decided pessimism that it’s within reach of anyone not to the manor born. And now The Wall Street Journal has reinforced the case for bearishness. Earlier this week, correspondent Nick Timiraos reported on this conclusion of a recent study on the likely future of American home ownership:

“Last decade’s housing crisis could give way to a new one in which many families lack the incomes or savings needed to buy homes, creating a surge of renters and a shortage of affordable housing….Demographics tell the story. Urban Institute researchers predict that more than 3 in 4 new households this decade, and 7 of 8 in the next, will be formed by minorities. These new households—nearly half of which will be Hispanic—have lower incomes, less wealth and lower homeownership rates than the U.S. average.”

Note in particular the timeframe: through “the next decade.” Also of interest is the attempt by some Goldman Sachs economists to find a silver lining in the numbers: “They noted in an April report that even though Hispanics, for example, have lower homeownership rates than non-Hispanic whites, those rates have been rising for the past four decades.”

This point is of interest because the reckless extension of mortgages to low-income Hispanics during the bubble decade was a major source of that period’s housing insanity. In other words, their rising home ownership rates were part of the problem with which the nation is still struggling.

The lesson remains the same. If you want to increase greatly the ranks of low-income Americans, and/or if you want new justifications (and new voters?) for more and bigger government welfare programs, you’ll keep favoring Open Borders-style immigration policies. If you want national prosperity to be built on a sustainable foundation, you’ll favor sensible restrictions.