Archive for March, 2006

The Road to Dubai

March 31, 2006

PK talk
March 31, 2006

By: Paul Krugman

For now, at least, the immigration issue is mainly hurting the Republican Party, which is divided between those who want to expel immigrants and those who want to exploit them. The only thing the two factions seem to have in common is mean-spiritedness.

But immigration remains a difficult issue for liberals. Let me say a bit more about the subject of my last column, the uncomfortable economics of immigration, then turn to what really worries me: the political implications of a large nonvoting work force.

About the economics: the crucial divide isn't between legal and illegal immigration; it's between high-skilled and low-skilled immigrants. High-skilled immigrants — say, software engineers from South Asia — are, by any criterion I can think of, good for America. But the effects of low-skilled immigration are mixed at best.

True, there are large benefits for the low-skilled migrants, who may find even a minimum-wage U.S. job a big step up. Immigration also raises the total income of native-born Americans, although reasonable estimates suggest that these gains amount to no more than a fraction of 1 percent.

But low-skilled immigration depresses the wages of less-skilled native-born Americans. And immigrants increase the demand for public services, including health care and education. Estimates indicate that low-skilled immigrants don't pay enough in taxes to cover the cost of providing these services.

All of these effects, except for the gains for the immigrants themselves, are fairly small. Some of my friends say that's the point I should stress: immigration is a wonderful thing for the immigrants, and claims that immigrants are undermining American workers and taxpayers are hugely overblown — end of story.

But it's important to be intellectually honest, even when it hurts. Moreover, what really worries me isn't the narrow economics — it's the political economy, the effects of having a disenfranchised labor force.

Imagine, for a moment, a future in which America becomes like Kuwait or Dubai, a country where a large fraction of the work force consists of illegal immigrants or foreigners on temporary visas — and neither group has the right to vote. Surely this would be a betrayal of our democratic ideals, of government of the people, by the people. Moreover, a political system in which many workers don't count is likely to ignore workers' interests: it's likely to have a weak social safety net and to spend too little on services like health care and education.

This isn't idle speculation. Countries with high immigration tend, other things equal, to have less generous welfare states than those with low immigration. U.S. cities with ethnically diverse populations — often the result of immigration — tend to have worse public services than those with more homogeneous populations.

Of course, America isn't Dubai. But we're moving in that direction. As of 2002, according to the Urban Institute, 14 percent of U.S. workers, and 20 percent of low-wage workers, were immigrants. Only a third of these immigrant workers were naturalized citizens. So we already have a large disenfranchised work force, and it's growing rapidly. The goal of immigration reform should be to reverse that trend.

So what do I think of the Senate Judiciary Committee's proposal, which is derived from a plan sponsored by John McCain and Ted Kennedy? I'm all in favor of one provision: offering those already here a possible route to permanent residency and citizenship. Since we aren't going to deport more than 10 million people, we need to integrate those people into our society.

But I'm puzzled by the plan to create a permanent guest-worker program, one that would admit 400,000 more workers a year (and you know that business interests would immediately start lobbying for an increase in that number). Isn't institutionalizing a disenfranchised work force a big step away from democracy?

For a hard-line economic conservative like Mr. McCain, the advantages to employers of a cheap work force may be more important than the violation of democratic principles. But why would someone like Mr. Kennedy go along? Is the point to help potential immigrants, or is it to buy support from business interests?

Either way, it's a dangerous route to go down. America's political system is already a lot less democratic in practice than it is on paper, and creating a permanent nonvoting working class would make things worse. The road to Dubai may be paved with good intentions.

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North of the Border

March 27, 2006

PK2

March 27, 2006 

By: Paul Krugman 

"Give me your tired, your poor, your huddled masses yearning to
breathe free," wrote Emma Lazarus, in a poem that still puts a lump in
my throat. I'm proud of America's immigrant history, and grateful that
the door was open when my grandparents fled Russia.

In other words, I'm instinctively, emotionally pro-immigration. But
a review of serious, nonpartisan research reveals some uncomfortable
facts about the economics of modern immigration, and immigration from
Mexico in particular. If people like me are going to respond
effectively to anti-immigrant demagogues, we have to acknowledge those
facts.

First, the net benefits to the U.S. economy from immigration, aside
from the large gains to the immigrants themselves, are small. Realistic
estimates suggest that immigration since 1980 has raised the total
income of native-born Americans by no more than a fraction of 1
percent.

Second, while immigration may have raised overall income slightly,
many of the worst-off native-born Americans are hurt by immigration —
especially immigration from Mexico. Because Mexican immigrants have
much less education than the average U.S. worker, they increase the
supply of less-skilled labor, driving down the wages of the worst-paid
Americans. The most authoritative recent study of this effect, by
George Borjas and Lawrence Katz of Harvard, estimates that U.S. high
school dropouts would earn as much as 8 percent more if it weren't for
Mexican immigration.

That's why it's intellectually dishonest to say, as President Bush
does, that immigrants do "jobs that Americans will not do." The
willingness of Americans to do a job depends on how much that job pays
— and the reason some jobs pay too little to attract native-born
Americans is competition from poorly paid immigrants.

Finally, modern America is a welfare state, even if our social
safety net has more holes in it than it should — and low-skill
immigrants threaten to unravel that safety net.

Basic decency requires that we provide immigrants, once they're
here, with essential health care, education for their children, and
more. As the Swiss writer Max Frisch wrote about his own country's
experience with immigration, "We wanted a labor force, but human beings
came." Unfortunately, low-skill immigrants don't pay enough taxes to
cover the cost of the benefits they receive.

Worse yet, immigration penalizes governments that act humanely.
Immigrants are a much more serious fiscal problem in California than in
Texas, which treats the poor and unlucky harshly, regardless of where
they were born.

We shouldn't exaggerate these problems. Mexican immigration, says
the Borjas-Katz study, has played only a "modest role" in growing U.S.
inequality. And the political threat that low-skill immigration poses
to the welfare state is more serious than the fiscal threat: the
disastrous Medicare drug bill alone does far more to undermine the
finances of our social insurance system than the whole burden of
dealing with illegal immigrants.

But modest problems are still real problems, and immigration is
becoming a major political issue. What are we going to do about it?

Realistically, we'll need to reduce the inflow of low-skill
immigrants. Mainly that means better controls on illegal immigration.
But the harsh anti-immigration legislation passed by the House, which
has led to huge protests — legislation that would, among other things,
make it a criminal act to provide an illegal immigrant with medical
care — is simply immoral.

Meanwhile, Mr. Bush's plan for a "guest worker" program is clearly
designed by and for corporate interests, who'd love to have a low-wage
work force that couldn't vote. Not only is it deeply un-American; it
does nothing to reduce the adverse effect of immigration on wages. And
because guest workers would face the prospect of deportation after a
few years, they would have no incentive to become integrated into our
society.

What about a guest-worker program that includes a clearer route to
citizenship? I'd still be careful. Whatever the bill's intentions, it
could all too easily end up having the same effect as the Bush plan in
practice — that is, it could create a permanent underclass of
disenfranchised workers.

We need to do something about immigration, and soon. But I'd rather
see Congress fail to agree on anything this year than have it rush into
ill-considered legislation that betrays our moral and democratic
principles.

Letter to the Secretary

March 24, 2006

PK NY

March 24, 2006

By: Paul Krugman

Dear John Snow, secretary of the Treasury:

I’m glad that you’ve started talking about income inequality, which in recent years has reached levels not seen since before World War II. But if you want to be credible on the subject, you need to make some changes in your approach.

First, you shouldn’t claim, as you seemed to earlier this week, that there’s anything meaningful about the decline in some measures of inequality between 2000 and 2003. Every economist realizes that, as The Washington Post put it, “much of the decline in inequality during that period reflected the popping of the stock market bubble,” which led to a large but temporary fall in the incomes of the richest Americans.

We don’t have detailed data for more recent years yet, but the available indicators suggest that after 2003, incomes at the top and the overall level of inequality came roaring back. That surge in inequality explains why, despite your best efforts to talk up the economic numbers, most Americans are unhappy with the Bush economy.

I find it helpful to illustrate what’s going on with a hypothetical example: say 10 middle-class guys are sitting in a bar. Then the richest guy leaves, and Bill Gates walks in.

Because the richest guy in the bar is now much richer than before, the average income in the bar soars. But the income of the nine men who aren’t Bill Gates hasn’t increased, and no amount of repeating “But average income is up!” will convince them that they’re better off.

Now think about what happened in 2004 (the figures for 2005 aren’t in yet, but it was almost certainly more of the same). The economy grew reasonably fast in 2004, but most families saw little if any improvement in their financial situation.

Instead, a small fraction of the population got much, much richer. For example, Forbes tells us that the compensation of chief executives at the 500 largest corporations rose 54 percent in 2004. In effect, Bill Gates walked into the bar. Average income rose, but only because of rising incomes at the top.

Speaking of executive compensation, Mr. Snow, it hurts your credibility when you say, as you did in a recent interview, that soaring pay for top executives reflects their productivity and that we should “trust the marketplace.” Executive pay isn’t set in the marketplace; it’s set by boards that the executives themselves appoint. And executives’ pay often bears little relationship to their performance.

You yourself, as you must know, are often cited as an example. When you were appointed to your present job, Forbes pointed out that the performance of the company you had run, CSX, was “middling at best.” Nonetheless, you were “by far the highest-paid chief in the industry.”

And the business careers of other prominent members of the administration, including the president and vice president, seem to demonstrate the truth of the adage that it’s not what you know, it’s who you know. So my advice on the question of executive pay is: don’t go there.

Finally, you should stop denying that the Bush tax cuts favor the wealthy. I know that administration number-crunchers have produced calculations purporting to show that the tax cuts were tilted toward the middle class. But using the right measure — the effect of the tax cuts on after-tax income — the bias toward the haves and have-mores is unmistakable.

According to the nonpartisan Tax Policy Center, once the Bush tax cuts are fully phased in, they will raise the after-tax income of middle-income families by 2.3 percent. But they will raise the after-tax income of people like yourself, with incomes of more than $1 million, by 7.3 percent.

And those calculations don’t take into account the indirect effects of tax cuts. If the tax cuts are made permanent, they’ll eventually have to be offset by large spending cuts. In practical terms, that means cuts where the money is: in Social Security and Medicare benefits. Since middle-income Americans will feel the brunt of these cuts, yet received a relatively small tax break, they’ll end up worse off. But the wealthy will be left considerably wealthier.

Of course, my suggestions about how to improve your credibility would force you to stop repeating administration talking points. But you’re the secretary of the Treasury. Your job is to make economic policy, not to spout propaganda. Oh, wait.

Bogus Bush Bashing

March 20, 2006

PKHot

March 20, 2006

By: Paul Krugman

“The single word most frequently associated with George W. Bush today is ‘incompetent,’ and close behind are two other increasingly mentioned descriptors: ‘idiot’ and ‘liar.’ ” So says the Pew Research Center for the People and the Press, whose most recent poll found that only 33 percent of the public approves of the job President Bush is doing.

Mr. Bush, of course, bears primary responsibility for the state of his presidency. But there’s more going on here than his personal inadequacy; we’re looking at the failure of a movement as well as a man. As evidence, consider the fact that most of the conservatives now rushing to distance themselves from Mr. Bush still can’t bring themselves to criticize his actual policies. Instead, they accuse him of policy sins — in particular, of being a big spender on domestic programs — that he has not, in fact, committed.

Before I get to the bogus issue of domestic spending, let’s look at the policies the new wave of conservative Bush bashers refuses to criticize.

Mr. Bush’s new conservative critics don’t say much about the issue that most disturbs the public, the quagmire in Iraq. That’s not surprising. Commentators who acted as cheerleaders in the run-up to war, and in many cases questioned the patriotism of those of us who were skeptical, can’t criticize the decision to start this war without facing up to their own complicity in that decision.

Nor, after years of insisting that things were going well in Iraq and denouncing anyone who said otherwise, is it easy for them to criticize Mr. Bush’s almost surreal bungling of the war. (William Kristol of The Weekly Standard is the exception; he says that we never made a “serious effort” in Iraq, which will come as news to the soldiers.)

Meanwhile, the continuing allegiance of conservatives to tax cuts as the universal policy elixir prevents them from saying anything about the real sources of the federal budget deficit, in particular Mr. Bush’s unprecedented decision to cut taxes in the middle of a war. (My colleague Bob Herbert points out that the Iraq hawks chose to fight a war with other people’s children. They chose to fight it with other people’s money, too.)

They can’t even criticize Mr. Bush for the systematic dishonesty of his budgets. For one thing, that dishonesty has been apparent for five years. More than that, some prominent conservative commentators actually celebrated the administration’s dishonesty. In 2001 Time.com blogger Andrew Sullivan, writing in The New Republic, conceded that Mr. Bush wasn’t truthful about his economic policies. But Mr. Sullivan approved of the deception: “Bush has to obfuscate his real goals of reducing spending with the smokescreen of ‘compassionate conservatism.’ ” As Berkeley’s Brad DeLong puts it on his blog, conservatives knew that Mr. Bush was lying about the budget, but they thought they were in on the con.

So what’s left? Well, it’s safe for conservatives to criticize Mr. Bush for presiding over runaway growth in domestic spending, because that implies that he betrayed his conservative supporters. There’s only one problem with this criticism: it’s not true.

It’s true that federal spending as a percentage of G.D.P. rose between 2001 and 2005. But the great bulk of this increase was accounted for by increased spending on defense and homeland security, including the costs of the Iraq war, and by rising health care costs.

Conservatives aren’t criticizing Mr. Bush for his defense spending. Since the Medicare drug program didn’t start until 2006, the Bush administration can’t be blamed for the rise in health care costs before then. Whatever other fiscal excesses took place weren’t large enough to play more than a marginal role in spending growth.

So where does the notion of Bush the big spender come from? In a direct sense it comes largely from Brian Riedl of the Heritage Foundation, who issued a report last fall alleging that government spending was out of control. Mr. Riedl is very good at his job; his report shifts artfully back and forth among various measures of spending (nominal, real, total, domestic, discretionary, domestic discretionary), managing to convey the false impression that soaring spending on domestic social programs is a major cause of the federal budget deficit without literally lying.

But the reason conservatives fall for the Heritage spin is that it suits their purposes. They need to repudiate George W. Bush, but they can’t admit that when Mr. Bush made his key mistakes — starting an unnecessary war, and using dishonest numbers to justify tax cuts — they were cheering him on.

A Few Notes on Income Inequality

March 16, 2006

PK

March 13, 2006

By: Paul Krugman

I’ve written a couple of columns recently focusing on growing income inequality, and intend to write more. Until then, however, I thought readers might find a few further notes on the subject useful.

Personal history

Self-serving things first. Some readers have written in saying, in effect, “Oh, so now you’re worried about the middle class. Where were you until now?” The answer is that I’ve been worried about rising inequality for a long time now. In fact, my first popular book, “The Age of Diminished Expectations,” published in 1989, contained a chapter on growing income inequality — and that wasn’t easy to pull off. For complicated reasons, that book was initially a Washington Post project. And my editors at the Post tried to pressure me into taking the income distribution chapter out, saying that nobody cared about that issue.

The chapter stayed in. If you want a sense of what I had to say about income inequality back then, a 1992 article I wrote for The American Prospect titled “The Rich, The Right, and The Facts,” is available online. I think the piece holds up pretty well.

Globalization

Some people on both sides of the aisle think that if you care about inequality, you must be a protectionist. Although that’s false, it contains a grain of truth: both textbook economic theory and the evidence says that growing international trade, especially trade with labor-abundant countries like China and India, is a contributing factor to growing inequality in the United States. But there’s also clear evidence that while globalization contributes to inequality, it’s at best a supporting actor in the overall story

How do we know this? First, to the extent that globalization explains rising income inequality in the United States, it’s through the effect of international trade on the “skill premium”, the gap between the incomes of college-educated workers and those without a college degree. What we know, however, is that rising inequality isn’t mainly about the rising skill premium. Decomposing the sources of inequality involves calculations that don’t belong in a family newspaper, but basically it seems that only around a third of the rise in inequality over the past generation is associated with a rising premium for education.

And what accounts for the rising skill premium? Just about all economic estimates indicate that the widening of the skill premium itself is more a result of “skill-biased technological change”, a growing demand for highly educated workers due to the rising importance of information technology, than a result of globalization. An example is work by William Cline of the Institute for International Economics.

So growing international trade plays some role in growing inequality, but it is, literally, a fraction of a fraction of the story. That’s cold comfort for the factory worker whose plant has just been closed because it couldn’t compete with imports from China, or the software engineer whose job has just been outsourced to India – and unless we can do something to provide more economic security, protectionist forces will become unstoppable. But I still believe that we can increase economic security and reduce inequality without shutting down international trade.

The real winners

One of the truly strange features about discussions of inequality is the way people shy away from talking about the extent to which the gains from rising inequality have gone to a tiny, wealthy elite.

Here’s a mild example. A few days ago Steve Pearlstein of the Washington Post — a good guy, and sensible — wrote about income inequality. As I did in my column just a few days earlier, “Feeling No Pain,” he emphasized the “retrospective income” distribution data released by the I.R.S. (Paper at http://www.irs.gov/pub/irs-soi/04asastr.pdf. Tables at http://www.irs.gov/pub/irs-soi/04asastr.xls.)

As he pointed out, those data show that the share of income received by the top 10 percent of taxpayers rose from 33 percent in 1979 to 44 percent in 2003. And for his pains, he was smeared by someone at the Cato Institute who needs help — technical help. Hint to Alan Reynolds: check which table you’re looking at before claiming that Congressional Budget Office data refute a statement you don’t like.

But Pearlstein stops there, leaving the impression that everyone in the top 10 percent was a big winner. In fact, there was hardly any rise in the share of income going to people between the 90th and 95th percentiles: almost all the gain went to the top 5 percent. And most of the gain went to a very small elite. The income share of the top 1 percent went from 9.6 to 17.5 percent, accounting for more than 70 percent of the top decile’s gain. The income share of the top 0.25 percent went from 4.9 to 10.5, accounting for a bit more than half the total gain.

Why stop with data that convey the false impression that the winners from inequality are a fairly large group? Does talking about the reality that a very small elite has gotten the lion’s share of the gains sound too, um, shrill?

The Right’s Man

March 16, 2006

March 13, 2006

By: Paul Krugman

It’s time for some straight talk about John McCain. He isn’t a moderate. He’s much less of a maverick than you’d think. And he isn’t the straight talker he claims to be.

Mr. McCain’s reputation as a moderate may be based on his former opposition to the Bush tax cuts. In 2001 he declared, “I cannot in good conscience support a tax cut in which so many of the benefits go to the most fortunate among us.”

But now — at a time of huge budget deficits and an expensive war, when the case against tax cuts for the rich is even stronger — Mr. McCain is happy to shower benefits on the most fortunate. He recently voted to extend tax cuts on dividends and capital gains, an action that will worsen the budget deficit while mainly benefiting people with very high incomes.

When it comes to foreign policy, Mr. McCain was never moderate. During the 2000 campaign he called for a policy of “rogue state rollback,” anticipating the “Bush doctrine” of pre-emptive war unveiled two years later. Mr. McCain called for a systematic effort to overthrow nasty regimes even if they posed no imminent threat to the United States; he singled out Iraq, Libya and North Korea. Mr. McCain’s aggressive views on foreign policy, and his expressed willingness, almost eagerness, to commit U.S. ground forces overseas, explain why he, not George W. Bush, was the favored candidate of neoconservative pundits such as William Kristol of The Weekly Standard.

Would Mr. McCain, like Mr. Bush, have found some pretext for invading Iraq? We’ll never know. But Mr. McCain still thinks the war was a good idea, and he rejects any attempt to extricate ourselves from the quagmire. “If success requires an increase in American troop levels in 2006,” he wrote last year, “then we must increase our numbers there.” He didn’t explain where the overstretched U.S. military is supposed to find these troops.

When it comes to social issues, Mr. McCain, who once called Pat Robertson and Jerry Falwell “agents of intolerance,” met with Mr. Falwell late last year. Perhaps as a result, he is now taking positions friendly to the religious right. Most notably, Mr. McCain’s spokesperson says that he would have signed South Dakota’s extremist new anti-abortion law.

The spokesperson went on to say that the senator would have taken “the appropriate steps under state law” to ensure that cases of rape and incest were excluded. But that attempt at qualification makes no sense: the South Dakota law has produced national shockwaves precisely because it prohibits abortions even for victims of rape or incest.

The bottom line is that Mr. McCain isn’t a moderate; he’s a man of the hard right. How far right? A statistical analysis of Mr. McCain’s recent voting record, available at www.voteview.com, ranks him as the Senate’s third most conservative member.

What about Mr. McCain’s reputation as a maverick? This comes from the fact that every now and then he seems to declare his independence from the Bush administration, as he did in pushing through his anti-torture bill.

But a funny thing happened on the way to Guantánamo. President Bush, when signing the bill, appended a statement that in effect said that he was free to disregard the law whenever he chose. Mr. McCain protested, but there are apparently no hard feelings: at the recent Southern Republican Leadership Conference he effusively praised Mr. Bush.

And I’m sorry to say that this is typical of Mr. McCain. Every once in a while he makes headlines by apparently defying Mr. Bush, but he always returns to the fold, even if the abuses he railed against continue unabated.

So here’s what you need to know about John McCain.

He isn’t a straight talker. His flip-flopping on tax cuts, his call to send troops we don’t have to Iraq and his endorsement of the South Dakota anti-abortion legislation even while claiming that he would find a way around that legislation’s central provision show that he’s a politician as slippery and evasive as, well, George W. Bush.

He isn’t a moderate. Mr. McCain’s policy positions and Senate votes don’t just place him at the right end of America’s political spectrum; they place him in the right wing of the Republican Party.

And he isn’t a maverick, at least not when it counts. When the cameras are rolling, Mr. McCain can sometimes be seen striking a brave pose of opposition to the White House. But when it matters, when the Bush administration’s ability to do whatever it wants is at stake, Mr. McCain always toes the party line.

It’s worth recalling that during the 2000 election campaign George W. Bush was widely portrayed by the news media both as a moderate and as a straight-shooter. As Mr. Bush has said, “Fool me once, shame on — shame on you. Fool me — you can’t get fooled again.”