Comparing the six measures of unemployment

Some two years ago, I wrote a post about comparing the six measures of unemployment the Bureau of Labor Statistics measures.  After I read Evan Soltas' post today about unemployment, and since it's been, well, two years, I thought I'd revisit the subject and add some sexy graphs to my original analysis.

Unemployment

Unemployment can be a sticky topic.  It seems simple enough at first blush: If you have a job, you're employed.  If you don't have a job, you're unemployed.  But when you start to think about it (as you do in your first semester of macro), you realize that you have to be a little bit more careful.  Should a three-year-old count as "unemployed"?  Perhaps in the broadest sense, but probably not for macroeconomic policy-makers.

What about people with college degrees who, say, could only find work at Kroger?  If I have a BS in physics and I'm swiping items at a cash register in a supermarket, I'm obviously not unemployed, but I'm not really employed, either.

What about people who lost their jobs, looked for a new job for two years, and then gave up?  They're not even looking for jobs, but if the economic situation brightened, perhaps they would start again -- do they count as unemployed?

To answer these questions, economists have developed the notion of the "labor force" and various measurements of unemployment.  The labor force is a rough measure of how many people the economy has available for work at any given time.  If you've looked for a job in the last four weeks, or you have a job, you're in the labor force.  Usually, the labor force comprises 60-70% of the country's population.  (Note that even the definition of the labor force can be debated: should someone who has stopped looking for work because of a downturn be counted as a member of the labor force?)

"The" unemployment rate, then, is a measure of what proportion of the labor force has a job.  I put "the" in scare quotes because, as we saw, there are many different, but related, ways of defining the notion of "unemployment."  There are, correspondingly, many ways different, but related, measures of unemployment.

The six measures of unemployment

The Bureau of Labor Statistics (BLS) maintains six different measurements of unemployment.  They are creatively named:

• U-1: The proportion of the labor force who have been unemployed for 15 weeks or longer.
• U-2: The proportion of the labor force who have lost jobs or done temp work.
• U-3: The official unemployment rate (this is the number you see in the headlines at the start of each month): The proportion of the labor force who have lost jobs.
• U-4: The proportion of workers who are in U-3, or who are not looking for a job because of economic conditions.  (These workers are called "discouraged workers.")
• U-5: The proportion of workers who are in U-4, or who would like to work and can work but are not seeking work.
• U-6: The proportion of workers who are in U-5, or who are employed part-time and would like full-time work, but cannot.

U-1, U-2, and U-3 operate in the labor force as I defined it above.  U-4, U-5, and U-6 all expand the labor force to include people who are "marginally attached" to the labor force: unemployed individuals who would like to participate in the labor force but are not currently looking for work.

Here is a graph of all six unemployment rates since 1994:


Observe that they all move more or less together.  This suggests that perhaps they all tell more or less the same story.  If I know the headline unemployment rate, just how much of the other unemployment rates can I figure out?

The BLS data are accessible from the link above.  In my previous post, I looked at the data (then, through 2010) and found the following:

\[U_1 = (0.76 \pm 0.01)U_3 − (2.31 \pm 0.07)\]
\[U_2 = (0.78 \pm 0.01)U_3 − (1.47 \pm 0.05)\]
\[U_4 = (1.066 \pm 0.003)U_3 − (0.09 \pm 0.01)\]
\[U_5 = (1.099 \pm 0.005)U_3 − (0.43 \pm 0.03)\]
\[U_6 = (1.70 \pm 0.07)U_3 − (0.3 \pm 0.1)\]

That is, if at any point between 1994 and 2010, you know the headline unemployment rate U-3 (currently \(8.3\)%), you can compute the other five unemployment rates with reasonably high precision.  For example, U-6 should be near 13.8%.  In fact, it is currently 15.0%.  

Graphs

I went back and grabbed the data again, but this time, instead of running regressions on them, I just made some pretty pictures.

Here is a graph of U-3 against U-1 since 1948 (which is how long the BLS has been measuring both of them):

Interesting patterns, eh?  There's definitely a positive correlation, just like you'd expect, but it does some wandering too.  I chalk that up to structural and demographic change.  What would happen on a shorter time scale?  Well, the BLS has only been measuring U-4, U-5, and U-6 since 1994.  To stay consistent, let's only consider U-1 and U-2 against U-3 from 1994.  Here is a graph measuring all five against U-3, 1994-2012:


Neat, isn't it?  You can see that there is a strong linear relationship between each of the other unemployment rates and the headline rate of unemployment.  To highlight that linear relationship, here's a graph of each of the five alternate timeseries divided by the headline rate:

Discussion

Let's refer back to the graph of all unemployment rates as well as to the graph of the ratios of the unemployment rates to U-3 and see if we can make some sense of them.

Several interesting things have happened since 2008.  First, U-1 has risen almost exactly to U-2.  Since both use the same definition of "labor force", it suggests that the proportion of the labor force which is long-term unemployed has risen.  We might perhaps think that U-1 and U-2 are measuring the same people, but we cannot conclude that from these data.

Second, U-4 has stayed exactly proportional to U-3.  This indicates that the labor force "breathes": change in the number of discouraged workers moves in direct proportion to the change in the number of unemployed workers.  This is all the more interesting because there has not been any measurable change in this during the 2008 recession.

Meanwhile, third, there has been a visible change in the proportion of U-5 and of U-6 to U-3.  This indicates that while workers become discouraged in proportion to becoming unemployed, during a recession workers become slightly more reluctant to move further from the labor force (or to become underemployed? or workers who move beyond discouraged actually become less than marginally attached?).  The same phenomenon is visible with U-6 during the 2001 recession, when it fell in proportion to U-3 and only slowly moved back up to levels it reached during the 1990s.  It fell again in 2008, and is inching back up as the economy slowly recovers.

Evan Soltas, in the post that inspired this one, pointed out that unemployment rates do not capture changes in the labor force participation rate.  He is probably correct in this - the unemployment rates can only indirectly see labor force participation rates by measuring the spread across different definitions of the labor force, and then only as in a mirror darkly.

Later he posited that perhaps the broader definitions of unemployment, U-4, U-5, and U-6, might better catch changes in labor force participation.  They won't; they move in close to lockstep with U-3 (especially U-4).  The only glimmer of changing labor force participation rates might be in the deviations of U-5/U-3 and U-6/U-3 over the course of the business cycle.

Conclusion

To answer the original question, since all six measures of unemployment are very tightly correlated, they all convey roughly the same information.  (This is not a vacuous statement! It is an observation about the behavior of the labor force, and working-age population in general, through the business cycle.)

By looking closely, we do see that the rates do convey information that differs in the details.  For instance, U-1 and U-2 do not track U-3 as closely as U-4 does.  Perhaps we can see underlying facts about demographics and labor force participation from these subtle differences.  But on the whole, any structural changes in the economy are only dimply reflected in these unemployment rates.  They do track each other closely!


Addendum: There is some question about whether U-3 should be "the" unemployment rate reported in headlines -- whether U-4, U-5, or U-6 more accurately captures what people mean when they informally discuss "unemployment" -- but that's not what I mean here.  What I mean to say is that if you know the relationships between the other Us and U-3, then when you hear the U-3 rate announced, you can get a good idea of what the spread of the unemployment rates looks like.

I also don't mean to imply that Evan is wrong in his assertion that the unemployment rate is incomplete information.  Declining labor force participation rates are very important pieces of information - in fact, the labor force participation rate (or the employment:population rate) should be announced in conjunction with the headline unemployment rate to indicate whether the cause of change in the rate is worker sentiment, a change in the rate of job creation, or both.

What about the Fed and automatic stabilizers?

Here are two potential objections to my previous post on discretionary fiscal stimulus.

If you're so skeptical of the ability of Congress to time fiscal stimulus, why aren't you skeptical of the Fed's ability to time monetary stimulus?

First, the Fed is a much smaller institution than the federal government.  Since it is (supposed to be) independent of Congress, it is not subject to intense political pressure from lobbyists and constituents.  Since it's smaller and has fewer forces pushing and pulling on it, the decision-making process is shorter and the Fed has greater discretion.

Weekly average federal funds rate (blue) and federal funds target (red)

Second, the Fed has actually demonstrated the ability to conduct discretionary operations on a daily basis.  The Fed's open market operations keep the fed funds rate in line with its target.  (Whether the Fed's operations in the loanable funds market are justified is a matter of discussion - but there's no question it can manipulate the market.)  When has Congress ever legislated anything on a daily basis?  Let alone consistently and cleanly produced the results it wants?

Nonetheless, I do agree that this point has some merit.  The Fed is not omniscient; while it can react on the order of days or weeks, conditions can deteriorate so rapidly the Fed can't respond in time - consider that it raised the fed funds target rate the day after Lehman Brothers collapsed (that little spike in the middle of the recession).

The Fed is also subject to some political pressure.  Its mandate requires it to balance full employment and price stability.  On the right, Ron Paul and other extreme Republicans insist that it should cease to exist and the economy should return to a gold standard (what a disaster that would be, I will discuss in later posts).

And evidence suggests that it often considers the American public's visceral fear of inflation as it balances employment and inflation.  Even though monetary indicators suggested a full-blown recession was underway during the summer of 2008, one read of the September price hike is that the commodities price spike spooked the Fed into making its rates decision based on headline inflation, rather than core inflation.

So using discretionary monetary policy against the business cycle is a better bet than using discretionary  fiscal policy, but it's still not a money shot.  The institution of the Fed is subject to some political pressure and may not respond quickly enough to changing conditions to counter at its discretion. Moreover, the "counter" here is discretionary, and we've seen what damage discretion can do.

So perhaps the key here is to remove discretion from countercyclical policy, whether monetary or fiscal, which brings me to counterpoint number two ...

What about automatic stabilizers?

Automatic stabilizers are programs like unemployment insurance and welfare which by their nature increase expenditure during a recession and decrease expenditure during a boom.  The easy response to this counterpoint is: If they're automatic, they're not discretionary!  So they don't count as "discretionary fiscal policy" - technically, this is a red herring.

But it's an interesting and useful subject to discuss.  As I said in my previous post about fiscal stimulus, good policies are good regardless of whether the economy is booming or busting; bad policies are bad regardless of whether the economy is booming or busting.  When we make policy, we should regard the policy as in place for the long run, not as a momentary response to the business cycle.

One implication is that the government should operate by rules, not discretion.  The larger the institution or its impact, the less discretion it should have (at least in response to the business cycle).  Moreover, rules whose impact correlates strongly and negatively to the business cycle stand a much better chance of providing countercyclical amelioration than discretionary policy.

Automatic stabilizers, in the form of tax cuts or welfare assistance to the needy, are one form of rule-based policy that acts countercyclically.  (Mind, this also implies that we don't discretionarily tinker with automatic stabilizers during the business cycle, such as extending unemployment benefits to be more generous than in some socialist countries.)

Since the safety net functions as an automatic stabilizer (and that's usually what people mean when they talk about automatic stabilizers), I do have concerns about the impact of the post-tax, post-benefit (PTPB) income curve on long-run incentives for behavior.  The withdrawal of means-tested programs, such as food stamps, can create very high effective marginal tax rates, punishing poor people for harder work instead of helping them out of poverty.

More broadly, in the US the PTPB curve is very flat at low incomes and does not begin to increase until one has reached the middle class.  This implies that poor people face approximately effective 100% marginal tax rates.  I don't need to mention how perverse this is, but I will anyway.  This outrage will be the subject of a different series of blog posts.  Nonetheless, it's a reasonable concern about automatic fiscal stabilizers.

There is similar scope for making a case for automatic policy on the part of the Fed.  Scott Sumner points out that there are no small recessions.  I'll have more to say on this at a later date, but for now let's take it for granted that the Fed's discretion can turn small recessions into big recessions.  In fact, the Fed's discretion is directly responsible for the five largest recessions in American history:

• The great decline of 1929-1933 (as the Fed at its own discretion chose not to stop the annihilation of a third of the monetary base), 
• The crash of 1937 (when the Fed at its own discretion raised reserve requirements prematurely), 
• The two recessions of 1980 and 1981 (when the Fed at its own discretion sharply contracted monetary policy to kill inflation expectations and shift price growth to a lower trajectory), and 
• The great recession of 2008 (when the Fed at its discretion stopped growth of the monetary base, contracted monetary policy, and then refused to engage in unconventional monetary policy in the face of the sharpest decline of nominal income since 1929-33).

Removing the Fed's discretion is not a new idea.  Milton Friedman proposed simply increasing the monetary base by some fixed percentage each year, regardless of the business cycle.  A different rule --- one I favor --- is to require the Fed to target nominal income growth at some fixed long-run percentage. The Fed would do this by either setting up a prediction market in which to conduct open-market operations, or by targeting its own internal forecasts.

The key here is to cut down the scope of the Fed's discretion, because abuse - passive or negligent - of that discretion leads to great harm.

Conclusions

Two criticisms of my skepticism of discretionary stimulus are, "If Congress can't do countercyclical stimulus, why would the Fed be able to?" and "Wouldn't automatic stabilizers play the role of countercyclical stimulus?"

The Fed is smaller, not subject to the same political and special-interest pressures, and has a demonstrated track record of successful economic manipulation.  It can make decisions in a matter of days or weeks, while Congress often takes months to make decisions --- it didn't pass its fiscal stimulus until the recession was two-thirds over, and that fiscal stimulus took effect just as the recession ended.

Meanwhile, yes, automatic stabilizers should play the role of countercyclical stimulus, precisely because they're not discretionary.  Since they require no decision-making time, an automatic stabilizer can be tightly and negatively correlated with the business cycle, whereas discretionary fiscal stimulus has significant built-in lag time.

Even the Fed's discretion is questionable; it's directly responsible for the five greatest recessions in living memory.  We should therefore be looking at replacing the Fed's discretion with an automatically stabilizing rule, such as monetary growth or a nominal income target.

Why I'm skeptical of fiscal stimulus

First, let me lay out a definition.  When I say "fiscal stimulus," I mean: discretionary countercyclical spending.  I don't mean: military spending; necessary infrastructure spending; welfare; sanitation; or any other function that government is expected to serve regardless of the economic climate.  I do mean: Tax cuts; make-work; the WPA; ARRA; extravagant (Japanese-style, bridge-to-nowhere) infrastructure spending; and other spending that occurs because the fiscal authority has identified that the economy is in the recessionary phase of the business cycle.  (Implicitly, when I say "discretionary fiscal stimulus," I really mean "expansive fiscal stimulus."  It is rare for a democratic government to engage in discretionary fiscal contraction.)

Here are two of the main reasons I'm skeptical of fiscal stimulus.

1: Timing 

The first, due to Friedman, is very nicely laid out in this Marginal Revolution post.  I reproduce the argument here.

Let's set up a simple model.  At time \(t\), represent total income by \(Z(t)\), income in the absence of fiscal policy by \(X(t)\), and the amount added to (or subtracted from) \(X(t)\) by all the history of fiscal policy denote by \(Y(t)\).  Here's the identity at the heart of the model:
\[ Z(t) = X(t) + Y(t). \]
Since we hope for our policy to be countercyclical -- that is, we hope for \(Y\) to reduce the fluctuations of \(X\) so that \(Z\) has low variance -- we want \(X\) and \(Y\) to be correlated.  The variance of a sum of correlated variables is
\[ V(Z) = V(X) + V(Y) + 2Cov(X,Y) = V(X) + V(Y) + 2r(X,Y)\sigma(X)\sigma(Y). \]
(Here \(\sigma\) is the standard deviation, \(\sigma^2 = V\), and \(r\) is the correlation of two random variables.)

Following Friedman and dividing both sides, we have
\[\frac{V(Z)}{V(X)} = 1 + \frac{V(Y)}{V(X)} + 2r(X,Y)\frac{\sigma(Y)}{\sigma(X)}.\]
Remember that \(X\) measures fluctuations in the economy absent any countercyclical policy.  If the left side of the equation is \(1\), then the countercyclical policy has no effect.  If it is less than \(1\), the countercyclical policy has some positive effect.  If it is greater than \(1\), the countercyclical policy has negative effect.

The key question here is, how closely does the cumulative effect of policy, \(Y\), need to track incomes, \(X\)?  This tracking is measured by the correlation \(r(X,Y)\); if \(Y\) is perfectly timed and opposite to income fluctuations, \(r(X,Y) = -1\); if \(Y\) is independent from \(X\), \(r = 0\); and if \(Y\) is perfectly harmful, so that policy is perfectly procyclical, \(r = 1\).  

Friedman goes on to show that policy is countercyclical if \(r(X,Y) < -\frac{1}{2}\frac{\sigma(Y)}{\sigma(X)}\), has no effect if \(r(X,Y) = -\frac{1}{2}\frac{\sigma(Y)}{\sigma(X)}\), and procyclical if \(r(X,Y) > -\frac{1}{2}\frac{\sigma(Y)}{\sigma(X)}\).

The first thing to note is that it is harder to conduct countercyclical policy than procyclical policy: to be effective, we need \(r(X,Y) = -\frac{1}{2}\frac{\sigma(Y)}{\sigma(X)} < 0\).  Why?  Note that if \(Y\) is independent from \(X\), then \(r = 0\), so \(V(Z) = V(X) + V(Y)\).  The variance of after-government income will be greater than the variance of the private economy's income because some of the time, spending will be procyclical, exacerbating the business cycle.

The next thing to note is that if policy were to attempt to mitigate, say, half the magnitude of the business cycle, one would need \(\frac{\sigma(Y)}{\sigma(X)} = \frac{1}{2}\) so that \(-1 \leq r(X,Y)\leq -\frac{1}{4}\).  The window of the target for effective business cycle amelioration narrows the more of the business cycle you want to eliminate.

The last thing to note is that for any correlative ability, there is an optimal level of countercyclical spending.  Using calculus to find \(\sigma(Y)\) maximizing \(\frac{V(Z)}{V(X)}\) for a fixed \(r(X,Y)\), one sees that this optimum occurs at
\[ \sigma(Y) = -r(X,Y)\sigma(X). \]
So to see the effectiveness of stabilization policy, assume the best \(\sigma(Y)\) can be found and substitute:
\[\frac{V(Z)}{V(X)} = 1 - r(X,Y)^2.\]
Boom.  Right there.  This is how difficult discretionary fiscal stimulus is.  For example, if we want to cut the standard deviation of the business cycle in half with discretionary spending, the cumulative effect of all discretionary spending must be pegged to within 70% of the business cycle.

You should read both the Marginal Revolution post and Friedman's article.

This is reason number one that I'm skeptical of discretionary fiscal stimulus.  If you want to positively mitigate the business cycle, you need to be able to target your fiscal response very precisely.  Your discretionary fiscal authority has to be able to do three things:

1. Correctly identify current income - what we've been calling \(X(t)\)
2. Determine what level of spending is appropriate (including correctly estimating secondary and tertiary effects) to mitigate some of the deviation of \(X(t)\) from its expected value
3. Enact that spending quickly enough to actually mitigate \(\sigma(X)\).

Even correctly identifying current income is tricky enough (the BEA didn't announce the US was in a recession until December 2008, an entire year after the recession began), estimating the appropriate level of spending is almost as tricky (quarterly real GDP figures from 2008 are still being revised), and enacting that spending quickly ... well, anybody who's been watching Congress knows how tough this is.

Even when Democrats controlled both houses and the White House, fiscal stimulus wasn't even signed into law until February 2009.  The worst of the economic contraction had passed by then, and the economy returned to growth well before the bulk of stimulus spending occurred (ARRA was authorized for two years, so it was in effect until August 2011).

2: The Sumner Critique

As Paul Krugman said in 1997:

If you want a simple model for predicting the unemployment rate in the United States over the next few years, here it is: It will be what Greenspan wants it to be, plus or minus a random error reflecting the fact that he is not quite God. 

How? I have a series of posts on the omnipotence of your local central bank coming up, so I'll save all the gory details until then. Instead, I'll just point out that the Fed controls aggregate demand by controlling the supply of money. The total amount of spending in the economy at any price level -- aggregate demand -- is a product of the Fed's policies.

If the Fed were to decide that spending was too low and needed to rise, it would increase the money supply, spending would rise, and -- depending on underlying real factors, such as unemployment, productivity, etc. -- some of that increased spending would cause an increase in output, while the rest of it would push up prices.

If the Fed were to decide that spending was too high and needed to fall, it would decrease the money supply, spending would fall, and both output and prices would fall.

(This discussion holds in the short run only; in the long run, as expectations adjust, output adjusts so that all monetary expansion and contraction translate into price changes.)

The Fed makes decisions about spending based on its assessment of monetary variables such as inflation, interest rates, unemployment.  It also (sadly) incorporates political assessments - would a policy decision hurt the independence and credibility of the Fed?

You can see where this is going.  If the government engages in discretionary fiscal policy, it also boosts total spending.  Ultimately, fiscal stimulus has the same short-run effect on total spending as monetary expansion, and hence the same short-run effects on unemployment and on inflation.

If the Fed has decided that it prefers current levels of unemployment and inflation, then it will initiate contractionary monetary policy when the government engages in discretionary fiscal stimulus and the fiscal stimulus will have no effect.  (To see the effects of this, look no further than our erstwhile Pacific protege).

If the Fed has decided that it does not prefer current levels of unemployment and inflation, then it will initiate expansionary monetary policy.  If the government engages in discretionary fiscal stimulus, the Fed will only loosen money to the extent that the fiscal stimulus does not meet the Fed's goals for unemployment and inflation.  In other words, discretionary fiscal stimulus is unnecessary: If it had not occurred, the Fed would just have instituted looser monetary policy.

This is the weakest form of the Sumner critique: one cannot measure the gains from fiscal stimulus without a counterfactual of central bank policy.  A stronger form is: the fiscal multiplier is always zero.  (The strongest form is: If the central bank targets nominal income, all macroeconomic effects are classical.)

Here's a little bit of play (inspired by these posts) using accounting identities to shore up the Sumner critique.  We know that income is consumption plus investment plus government spending plus net exports,
\[Y = C + I + G + NX,\]
and, by the equation of exchange,
\[Y = \frac{MV}{P}.\]
Therefore,
\[C + I + G+ NX = \frac{MV}{P}.\]
Claiming that discretionary fiscal stimulus works amounts to asserting that we can control \(G\), and therefore at our discretion we can affect \(Y\) by changing the right hand side of the last equation.  But the central bank exerts continuous and complete control over the right hand side of the equation.

If \(G\) rises but the central bank does not permit the money ratio \(\frac{MV}{P}\) to change, then necessarily the other components of \(Y\) fall.  On the other hand, if the central bank changes \(\frac{MV}{P}\), then the components of income will rise.

Conclusion

There are other, weaker reasons I'm skeptical of fiscal stimulus -- how do we know that the projects being undertaken are valuable investments of time and resources?  Is it really worthwhile to pay people to dig holes and fill them back in?  And so on.  They're not so hard to reasonably answer ("They're still better than leaving resources idle," "It's the same as printing money and handing it out, and they'll spend the money and incomes will rise,"), so I'll leave considering them to a future post.

These two reasons, however, seem damning to me.  There's just no way an institution like Congress can gather enough information on the state of the economy, identify projects to engage in or taxes to cut, craft legislation, trade all the horses, and pass a bill to counteract a downturn (or counteract an upturn, but let's not get into why Congress might not want to quench a booming economy) quickly enough to correlate the economy and the government's response tightly enough to make discretionary fiscal stimulus effective.

(This begs the question of why the Fed would be able to do so, which I will answer in future posts regarding the Fed's omnipotence.)  But the central bank does control the macroeconomy, which means that either discretionary fiscal policy will be offset by contractionary monetary policy or it can simply be replaced by expansive monetary policy.

The take-home lesson from all this is, the fiscal authority should not worry itself with the business cycle.  Instead, the fiscal authority should set the monetary authority on a rule that does its best to eliminate the business cycle, because recessions are everywhere and always monetary phenomena, and focus on long-run policies that correct market failures and optimize growth against humane considerations.

Whether a policy is good or bad doesn't depend on the condition of the economy.  If a policy is a good idea in a boom, then it's a good idea in a recession: it's a good idea, period.  If a policy is a bad idea in a recession, then it's a bad idea in a boom: it's a bad idea, period.

The free movement of labor

Why do we let dollars, but not people, chase opportunity across borders?

In our globalized economy, financial capital flows freely across national borders.  A dollar of American savings, after seeping through the morass that is our financial system, might find itself spent for a Chinese factory, or for boring an African well, or for a piece of equipment in an Indonesian mine.

This globalization, while it has had controversial consequences, has undoubtedly been beneficial: One need only look at the experience of Japan, or the other East Asian Tigers, or China, or (even) India.  Even the dark continent is benefiting.  Every where (nonmilitary) capital goes, it ends up improving the general lot of the populace.  People who scratched out a living in an overfarmed countryside move to the city to find higher-paying factory jobs.  Incomes rise as the workforce becomes more productive.  Rising incomes let governments invest in better education and public services -- countries electrify, sanitize, pave -- and this attracts more investment.  Local firms sprout up, incorporating the latest foreign technology and management techniques.  Centuries of economic growth happen in the course of a few decades, and at the end of it --- modern.

We can't say we first-worlders don't benefit, either.  As well as more wealthy people to buy our exports and more people to make things we want, our pension funds and retirement money go, in part, to pulling the third world out of poverty.  With success come higher returns to support us in our old age.

Capital is one of the factors of production. What of the other two? Land, we easily see, is completely endowed by national borders. When land flows over borders -- well, borders flow over land -- we may infer that the broader economy is suffering.

Labor - ah, now labor.  Capital flows easily across borders, labor is stuck.  For instance, Wikipedia claims the United States naturalized about million citizens in 2008, and that was more than all the other countries in the world combined.

Net immigration of about one third of one percent, when US median wage, roughly $45,000 per year, is roughly 40 times median world income, $1200 per year?  When being an American means that you are almost certainly among the wealthiest 40% of the world?  What's going on here?  People all across the world should be jumping at the chance to move here!  In fact, a recent Gallup survey shows that, worldwide, 640 million people (13% of all humans alive!) would jump at the chance to permanently relocate, and 150 million of them would like to come to the United States.

A little bit of poking at the State Department's website indicates that there are substantial barriers to moving here: You need to be sponsored by a current citizen or lawful resident who is also a family member, or be sponsored by an employer.  There's plenty of paperwork, you pay a fee for processing, and then you wait for an interview.  Then you take a medical examination and wait for the State Department to process your visa.  Lots of time, some money, and you have to have enough connections to get a sponsor who can start the ball rolling.

And that's not all.  This website, apparently run by a law firm in Los Angeles specializing in immigration law, suggests that the number of new immigration visas each year is limited to several hundred thousand.  There are some 140,000 new employment visas available at the State Department each year, so up to 140,000 of employment visa applications processed by the US Citizen and Immigration Services are okayed for visas.  This is more or less verified by the State Department's documents --- some three to four hundred thousand new visas were issued in 2008.

400,000 new visas each year.  150,000,000 people would love to permanently move to the United States.

I am led to believe, on top of this, that the United States has the world's loosest immigration laws!

Of course, this is not surprising: The residents of the world's wealthy countries have no desire to actually share their wealth with the poor of the world.  If the world's poor could better themselves by moving to wealthy countries and finding jobs that pay ten, fifteen, twenty times what they could have earned at home --- why, they would.  The added competition, though, would drive down wages, leaving the "poor" in the country receiving migrants relatively worse off.  (I put "poor" in scare quotes because the poor of the first world are wealthier by far than the poor migrants we're describing.)  Of course, reduced labor supply would also drive up wages in the country losing migrants --- immigration is a win-win deal for the poor of the world!

Since the wealthy countries of the world are democracies, and democracies frequently beholden to labor interests, they enact laws that slow immigration to a trickle.  If you don't want competition and you hold the keys, you lock the door.

Is this right?  Is this just?  Obviously - since I'm asking - I don't think so.  It is not right, and it is not just, to restrict the opportunities of hundreds of millions of people languishing in poverty.  Why do we allow money to flow so freely across borders, buying capital and investing in people's lives, and yet we restrict the movement of people?  After all, financial capital flows are digits on people's bank accounts --- labor flows are people's lives.  Restricting immigration as we do is wrong.  It amounts to locking the poorest people of the world in poverty.

Instead of limiting visas to a mere handful of lucky, connected, wealthy people, we should open the floodgates.  Give people across the world the options that they want.  Stop putting up barriers to the poor bettering themselves and making the most of their lives.

Let's cut all requirements for visas (except possibly "don't have a history of associating with al Qaida or other known terrorist groups" or "don't have bird flu").  You get a visa, and in six months you're eligible to take the naturalization test.  Once you pass naturalization, you get a social security number and you're good to go.

It's fair to say that we can't handle increasing the country's population by half immediately.  Obviously that wouldn't happen, but just to be safe let's increase the number of visas we issue by a factor of two every year for ten years, and then in 2025, let's just throw the borders open.

How would it work?  If you decide to come to the US, you should get a permanent visa and the option to naturalize and receive a social security number in six months.  That's it.  Welcome to the US - go start a business, go find gainful employment, go seek your fortune!

Not like the brazen giant of Greek fame,

With conquering limbs astride from land to land;

Here at our sea-washed, sunset gates shall stand

A mighty woman with a torch, whose flame

Is the imprisoned lightning, and her name

Mother of Exiles. From her beacon-hand

Glows world-wide welcome; her mild eyes command

The air-bridged harbor that twin cities frame.

"Keep, ancient lands, your storied pomp!" cries she

With silent lips.  "Give me your tired, your poor,

Your huddled masses yearning to breathe free,

The wretched refuse of your teeming shore.

Send these, the homeless, tempest-tost to me,

I lift my lamp beside the golden door!"

PS-  If we had kept a liberal immigration policy through the latter part of the twentieth century, wages would have fallen faster in the US, yes - but wages would have risen faster in the developing world.  Instead, we're dragging out the process of factor-price equalization.  Wages have stagnated everywhere in the first world, but most noticeably in the US, as jobs migrate to the developing world (instead of people migrating to the developed world).  But since labor competition is indirect, and the equalization is being caused by capital flows, gains are reaped by stockholders in the first world.  Labor chose to privilege capital in order to keep competition away, but they had to compete anyway, and in the process enriched the owners of financial capital.  Ironic, isn't it?

The economy on Ritalin

Dallas Fed governor Richard Fisher: "We keep applying what I call monetary Ritalin to the system.  We all know there's a risk of overprescribing, and we have to worry about the long-term consequences of what we do."

The Fed is indeed prescribing monetary Ritalin.  The economy's not exactly bouncing off the walls, is it?  There's some risk of overprescribing it, but the Fed seems to be doing an okay job since we haven't had monetary deflation.

Of course, Fisher meant Ritalin as a stimulant, rather than Ritalin as a cure for hyperactivity.  But - as Milton Friedman pointed out - a bloated monetary base and a low interest rate indicate constrictive, not expansive, monetary policy.

Monetary Ritalin has knocked millions of people out of jobs, and millions more out of the labor force.  It's kept inflation below the informal 2% target and unemployment above 8%.  It's neutered fiscal stimulus and annihilated millions of people's retirement savings.

It's time the Fed stop prescribing Ritalin and start the economy on a course of Prozac instead.

Science is like a crossword puzzle

This is one of my favorite analogies, because it illustrates how doing science --- or, more broadly, learning about a subject --- is like putting up a scaffolding: every part supports every other part.

When you start filling in words in a difficult crossword puzzle, you're not very certain about your guesses.  They're often far apart from each other.  Some of them are more tentative than others.  But once you take them, tentatively, for granted, you can start guessing harder, longer words.

Sometimes you just can't make sense of a longer word's clue with the words you have down.  This is evidence that some of the words you've chosen are wrong.  They don't work.  But sometimes, harder clues just answer themselves --- this is evidence in favor of the words that you've already put down.

It supports itself.  Each new word is evidence to evaluate earlier words.  As you continue to fill in words, your confidence in the earlier words grows.  You're never 100% certain that you've got them right (even after you're done -- what if you have stumbled upon a perfectly consistent but wrong solution to the clues?) but you're close enough that it's not worthwhile to waste time qualifying "I got the crossword!" with "(except in the the improbable, but not quite zero-chance, case that I happened upon a self-consistent solution to all of the clues which is not correct)."

Science is the same way.  New discoveries don't happen independently of old discoveries; they're assisted and informed by old discoveries.  We have to re-evaluate those old discoveries in light of the new discoveries, the old theories in light of new theories, and the old observations in light of the new observations.

A crossword puzzle is not a perfect analogy.  Scientifically, many observations (the "clues" in the puzzle) rely on existing theory ("words").  Imagine a crossword puzzle with almost all of the clues embedded in the puzzle itself, and you're getting somewhere.  But it's good enough to illustrate the point that science isn't many independent observations all pointing at some abstract "truth" - it's a series of interlocking theories, each of which is evaluated in light of each other.

Test of MathJax

Test of MathJax:

Offset equation:
\[ \int_{\partial M} \omega = \int_M d\omega \]
$$ df(v) = \langle \nabla f, v\rangle  $$

Inline equations: \( \|f\|_q = \int_M \langle q,*q\rangle = \int_M |q|^2 \).