Im-Politic: A Surprising Source (Unwittingly) Explains Need to Keep Tight Immigration Curbs

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Im-Politic, immigrants, Immigration, labor costs, labor shortages, productivity, Ryan Avent, technology, The Economist

I’ve long argued that one of the main reasons for Americans to oppose mass immigration policies (including sweeping forms of amnesty for the current illegal population) is the devastating impact such labor inflows are likely to have on productivity growth. (Just FYI, here’s my latest take.) One of my main reasons? The relative scarcity of labor throughout American history deserves considerable credit for the nation’s emergence as a global productivity and technology leader. And since robustly improving productivity is a major key to boosting national living standards on a sustainable basis, that’s always struck me as a pretty strong argument to keep labor in short supply by limiting immigration – which of course brings in more workers. 

As a result, imagine my surprise to see that this view has just been supported by a leading writer for the British magazine The Economist – which has long loudly advocated for wider Open Borders.

The case for immigration as a productivity growth killer is solidly grounded in conventional economics. In that 2006 Congressional testimony linked above, I noted “When businesses conclude that the price of scarce labor has become excessive, powerful incentives emerge for them to substitute capital and technology for labor. And that means innovation.”

I then pointed out that “Our country owes much of its longstanding world leadership in most technology areas to this genuinely chronic scarcity and thus relatively high price of labor. Preventing shortages with immigration policy could weaken this proven spur to technological progress and all the benefits it brings.”

If you’re skeptical, here’s a link to the leading scholarly work connecting outstanding U.S. productivity performance and a chronically inadequate American labor supply. In fairness, not everyone agrees. Here’s a link to the most prominent rebuttal.

But I was understandably heartened to see the importance of scarce labor to productivity growth supported in this post by Ryan Avent, a senior editor and economics columnist for The Economist. According to Avent:

“Economic historians often explain divergences in patterns of industrialisation by pointing to differences in labour costs. British workers were expensive relative to workers on the continent and relative to British energy. British firms therefore had an incentive to develop and deploy new technologies that economised on labour and used a lot of energy: industrialisation! There’s more to the story than that, but that’s a pretty big component. Later something similar happened in America, where workers were even more expensive and resources even more abundant, and where the phenomenally productive ‘American system’ of manufacturing therefore emerged.”

Avent doesn’t explicitly make the immigration policy connection. But it’s glaringly obvious to all except the ideologically blinkered (or the hired guns of the American cheap labor lobby). Needless to say, I’ll be awaiting his next offering on the immigration policy debate with more than the usual interest. You should, too.

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(What’s Left of) Our Economy: US Manufacturing Renaissance Claims Look More Imaginary Than Ever

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China, labor costs, manufacturing, manufacturing renaissance, reshoring, {What's Left of) Our Economy

Eduardo Porter’s New York Times column from yesterday is worth a quick read mainly for two reasons. Not because it sheds much light on its title question of whether globalization is in retreat. Instead, it’s noteworthy because of two valuable contributions to the U.S. manufacturing renaissance debate.

First, Porter joins the tiny band of analysts – including yours truly – who understands the conceptual weakness of claims that soaring labor costs will fatally undercut Chinese industrial competitiveness and become a continually growing bonanza for American factory owners and workers. China’s response, notes Porter, will surely be to “move up the value-added ladder to make more sophisticated stuff. “ The only problem with this statement, as I’ve noted, is that this climb is well underway.

Much more original is Porter’s second contribution. He evidently spoke with two MIT researchers who have looked closely at the corporate announcements of job and production reshoring that have been swallowed by the American media for years. Their conclusions regarding some 50 American companies that are ostensibly joining the reshoring bandwagon, including Apple and GE? “Most have yet to make any move.”

Thus the case looks stronger than ever: If wishful thinking mattered, a U.S. manufacturing renaissance, especially one spurred largely by reshoring and Chinese industrial decline, would already be an undeniable reality. In a fundamentals- and fact-driven world, it’s still a fairy tale.

(What’s Left of) Our Economy: Don’t Play Taps for China Just Yet

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China, competitiveness, import prices, labor costs, manufacturing, Trade, trade deficit, trade surplus, {What's Left of) Our Economy

It’s getting to be a familiar pattern: Western analysts add to the mountain of predictions that China is cruising toward a major economic bruising. And data from China at the least sends a dramatically different message.

The China bear meme of the moment has been generated by two Asia-based Merrill Lynch analysts, who argue that the People’s Republic “may be entering an asset-deflation phase” and therefore is in danger of falling into the deflationary trap from which post-bubble Japan has been struggling to escape for two decades. No less than BusinessWeek and TIME have picked up the study.

These claims come on the heels of years’ worth of proclamations that China is rapidly losing its manufacturing competitiveness, largely because its labor costs are rising so fast.

All of this may be true. Certainly, China has its share of big economic problems – and consequently big political, environmental, and social problems, too. But talk about bad timing! The Merrill Lynch report was written up just before the release of new data from Beijing showing that, in August, China’s monthly trade surplus hit its second new record high in a row.

The $49.8 billion excess of imports over exports brought the PRC’s year-to-date surplus to $199.61 – 28.24 percent higher than last year’s comparable total. And although there’s ample reason to be skeptical of all Chinese economic data, China’s July surplus of $47.3 billion tracks well with Census Bureau statistics showing that China ran a record $30.08 billion trade surplus with the United States that month. (The August U.S. figures will be out Oct. 3.)

The second piece of evidence undercutting “whither China” speculation was released today, in the form of U.S. figures on import prices. These Labor Department statistics showed that between July and August, Chinese goods (overwhelmingly manufactures) bought by Americans got cheaper faster (falling in price by 0.1 percent) than all manufactures imports (down 0.09 percent). And year on year, prices of Chinese imports have been rising at only about half the rate (0.19 percent) than manufacturing import prices overall (0.35 percent).

Years of recent official and policy establishment bullishness about the U.S. economy haven’t prevented the current recovery from remaining historically lousy. Don’t count on similar bearishness about China to have significantly greater effects.