Friday, April 29, 2016

Crime and Incarceration: Correlation, Causation, and Policy

Social scientists go to sleep every night muttering "correlation is not causation." The correlation between rates of crime and rates of incarceration offers a useful example. The Council of Economic Advisers lays out many of the relevant issues in its April 2016 report, "Economic Perspectives on Incarceration and the Criminal Justice System."  The report discusses in some detail how levels of police and rates of arrest haven't changed all that much, but the likelihood of arrest leading to a conviction and the length of prison sentence given a conviction are on the rise. There's also some discussion of how the rest of a community is affected by high incarceration rates. Here, I'll focus on what the report has to say about reducing crime.

There's clearly a correlation in the US between a falling rate of crime and a rising rate of incarceration during the last few decades. Using figures from the CEA report, here are the basic patterns.

But of course, if you take any two patterns that show a long-term trend, they will be either positively or negatively correlated with each other. The question of whether one factor caused the other is more difficult to answer. As a starting point, it's easy enough to note that incarceration rates are not the only longer-term patterns that affect levels of crime. As the report notes:
Demographic changes also likely play a part; the youth proportion of the U.S. population (ages 15-30) declined by 12 percent between 1980 and 2013, reducing the general propensity for criminal behavior which is more prevalent among young people. Improvements in police tactics and technology used in policing may have also played a role. Other potential explanations include declines in alcohol consumption, decreases in “crack” cocaine use, and a reduction in exposure to lead ...
In addition, the effects of incarceration on crime are governed--like so many other things--by a law of diminishing returns. When the incarceration rate starts rising, you will be (on average) locking up more of those who committed the most severe crimes and who look the most like career criminals. As the incarceration rate gets ever-higher, you will be (on average) locking up a greater share of those who committed relatively less severe crimes and who are relatively less likely to be career criminals. The CEA report puts in this way (citations and footnotes omitted):
"Researchers who study crime and incarceration believe that the true impact of incarceration on crime reduction is small, with a 10 percent increase in incarceration decreasing crime by just 2 percent or less ...  Additional incarceration may be particularly ineffective in reducing crime when incarceration rates are already high. When incarceration rates are high, further incarceration entails incapacitating offenders who are on average lower risk, which means that their incarceration will yield fewer public safety benefits. Thus, given the size of the U.S. incarcerated population, the aggregate crime-reducing impact of increasing incarceration rates is likely to be minimal."
Economists tend to look at crime, like so many other issues, as a matter of balancing costs and benefits. For example, most jurisdictions in the US have decided that a rigid enforcement of speed limits wouldn't provide benefits that would be worth the costs to the criminal justice system. The United States may well have reached that point at which costs exceed benefits with incarceration. Here's an example from the CEA report:
"Cost-benefit analyses of incarceration weigh the direct costs of incarcerating an individual against the social value of crimes that may have been averted due to incarceration. Lofstrom and Raphael (2013) examine a 2011 policy change in California that resulted in the realignment of 27,000 State prisoners to county jails or parole. They find that realignment had no impact on violent crime, but that an additional year of incarceration is associated with a decrease of 1 to 2 property crimes, with effects strongest for motor vehicle theft. Applying estimates of the societal cost of crime, the authors calculate that while the cost of a year of incarceration is $51,889 per prisoner in California, the societal value of the corresponding reduction in motor vehicle thefts is only $11,783, yielding a loss of $40,106 per prisoner. Notably, this net loss per prisoner would be larger if the study considered the additional costs of collateral consequences, such as lost earnings or potential increases in re-offending due to incarceration. These estimates highlight the fact that there are more cost-effective ways of reducing crime than incarceration, such as investing in law enforcement, education, and policies that expand economic opportunity."
When the report refers to alternative law enforcement efforts, one approach is more police. Here's the CEA:
"In contrast to studies of incarceration and sentencing, research shows that investments in police have high returns. In a study of the impact of a mass layoff of highway troopers in Oregon, DeAngelo and Hansen (2014) found that traffic fatalities and non-fatal injuries significantly increased, due to a greater prevalence of dangerous driving and drunk driving. The estimates in this paper suggest that the state trooper salary cost required to save a life is $309,000, which is very low compared to estimates of the statistical value of life, which range from $1 million to $10 million ..."
Indeed, the report offers a striking figure showing some international comparisons on police, judges, corrections officials, and prisoners across countries. Relative to the size of its population, the US compared to the rest of the world is light on police, but heavy corrections officers and prisoners.

Putting these various factors together:
"CEA conducted “back-of-the-envelope” cost-benefit tests ...
  • We find that a $10 billion dollar increase in incarceration spending would reduce crime by 1 to 4 percent (or 55,000 to 340,000 crimes) and have a net societal benefit of -$8 billion to $1 billion dollars.
  • At the same time, a $10 billion dollar investment in police hiring would decrease crime by 5 to 16 percent (440,000 to 1.5 million crimes) have a net societal benefit of $4 to $38 billion dollars."
A final step to reduce crime is to find ways to improve high school graduation rates. The CEA report puts it this way:
"Lochner and Moretti (2004) conduct a cost-benefit analysis of the effect of increasing the high school graduation rate on crime and arrest rates. Comparing costs and benefits in 1990, they estimate that while the yearly per pupil cost of secondary school is $6,000, the societal benefit from reducing crime is $1,170-$2,100 per additional male graduate, including reductions in victim costs, property damages, and incarceration costs. When these benefits are considered alongside an $8,040 increase in annual income from a high school degree, the benefits of an additional high school graduate are tremendous ... In aggregate, the authors calculate that a 1 percent increase in the total high school graduation rate generates a $1.4 billion benefit due to reductions in crime rates."
Crime is falling for lots of reasons over the last three decades. Rising incarceration may well have been a moderate contributor to the fall in crime back in the 1980s, when the incarceration rate was relatively low. But by the 2000s, when the incarceration rate had more than doubled, it had become a costly and not-very-powerful way of reducing crime. From that perspective, it's not a coincidence that California and other states have been scaling back on their incarceration rate in the last few years. As various states are recognizing, there are more cost-effective alternatives to keep the crime rate on a downward trend.

Thursday, April 28, 2016

Hyperinflation and the Venezuela Example

Everyone needs a few scary stories for telling around the campfire, and for economists, stories about hyperinflation are an obvious choice. Four years ago, "Hyperinflation and the Zimbabwe Example" (March 5, 2012) was a vivid story. But Venezuela is now providing a more current example. 

For up-to-date figures, a useful place to turn is the Troubled Currencies Project run by Steven Hanke.
The official exchange rate is 10 Venezuelan bolivars for $1 US. As inflation has hit and the value of the bolivar has plummeted, the black market exchange rate looks like this:

One can then infer an annual rate of inflation from these changes, which is shown by the blue line, with Venezuela's official inflation rate appearing in red: :

The facts emerging from Venezuela's hyperinflation are unsurprisingly grim. Annual inflation has run above 700% during some periods. According to summaries of the available data (like here and here), the IMF estimates that Venezuela's economy shrunk by 10% in 2015, and per capita GDP will be the same size in 2018 as it was back in 2000. Poverty rates, which fell from 60% to 30% with the rise of oil prices in the early 2000s, are now above 70% and rising. One estimate is that the cost of buying a basic basket of food for a month is eight times what would be earned at the minimum wage--always assuming a worker can find that minimum wage job in the first place.

On some dimensions, the bad news shades into black comedy, like the unavailability of basic consumer goods like aspirin or diapers or toilet paper. Venezuela, like many countries, does not print its own currency, but instead relies on outside firms like De La Rue. Of course, hyperinflation means a dramatically increased need for currency if the economy is to function at all. However, Andrew Rosatti at Bloomberg is reporting that the outside firms are worried about being paid for providing currency. He writes: "Venezuela, in other words, is now so broke that it may not have enough money to pay for its money." If memory serves, the hyperinflation in Bolivia back in the 1980s led to a similar problem, in which it was reported that for Bolivia, the cost of importing its own currency became for a time the country's third-largest import.

But the short-term problems of inflation are only part of its effect; indeed, one might argue that the curse of high inflation rates is that they encourage an extreme short-term focus throughout the economy. One of the most succinct explanations of inflation and short-termism that I know appeared in an essay written back in 1992 by V.S. Naipaul, called "Argentina and the Ghost of Eva Peron," in which Naipaul quoted "Jorge" on the situation of hyperinflation in Argentina. Here, I'm quoting from the essay as reprinted in the 2003 collection of Naipaul's travel writing, The Writer and the World.
"Another aspect of inflation is that you cease to worry about productivity and even technology. Now, that is the secret of all progress: productivity. But you really can get no more than 3 or 4 percent per annum improvement in productivity anywhere in the world. With inflation like ours you can get 10 per cent in one day, if you know when and where to invest. ... It is much more important to protect your working capital than to think about long-term things like technology and productivity--although you try to do both.  So capital investment in Argentina is not even covering wear and tear. In short, when the current plant reaches the end of its working life there won't be a provision built up to purchase new capital equipment. This is the inevitable result of inflation, which is the monetary disease. Your money is disintegrating. It's like cancer. You live day to day. That's all you can do when you have inflation of more than 1 per cent per day. You cease to plan, You're just happy to make it to the weekend."

Tuesday, April 26, 2016

Who's the Threat? Big Business, Big Labor, Big Government?

Here's a question that the Gallup Poll has been asking Americans every few years since the 1960s, most recently in December 2015 In your opinion, which of the following will be the biggest threat to the country -- big business, big labor, or big government? Not to keep you in suspense: Big government is winning, or perhaps it's more accurate to say losing, this contest.

Here are the answers going back to 1965. It makes sense that the share of those listing "big labor" has dropped over time, given the decline in the share of US workers belonging to a union. It's interesting that the share naming big business as the biggest threat is about the same now as in the Carter era of the late 1970s. Sure, there have been some spikes in viewing big business as the biggest threat, like a spike probably related to Enron and other corporate governance scandals in the early 2000s and a spike around 2009 in the aftermath of the corporate and financial bailouts. But there doesn't seem to be an overall trend upward. For big government, on the other hand, there does seem to be a long-term upward trend: that is, given the way the question is phrased, the shift away from seeing "big labor" as the leading issue has been counterbalanced by a swing toward naming "big government" instead.

Views of Biggest Threat to Future in U.S.

What's the political breakdown here? Here's the share naming big government as the biggest threat, broken down by party. It's no surprise that Republicans are most likely to name big government as the problem and Democrats are least likely, with Independents falling between. It's also perhaps expected that when Barack Obama was elected president in 2008, the share of Democrats naming "big government" as the biggest threat showed a big drop. But historically, it looks as if a little more than half of Democrats see "big government" as the biggest threat through the 1980s and 1990s, and in the December 2015 data as well.

Views of Big Government as Biggest Threat

Of course, it's worth noting (especially in an election year) that opposition to "big government" might not be a broad philosophical opposition to all big government, but  just be disappointment or opposition to the existing government--perhaps along with the evergreen belief that an alternative big government would perform better.

Monday, April 25, 2016

What Do We Know about Subsidized Employment Programs?

A subsidized employment program is when the government offers a subsidy to an employer (could be private sector or public sector) to hire those from a certain eligible group. The eligible group can be defined in many ways: for example, those who live in a certain set of neighborhoods, or those who have been unemployed for a certain time, or single mothers, or the disabled, or older workers, or those just emerging from jail or prison, or those who are already in some income-support program and trying to make a transition to work, or other groups. The basic idea of subsidized employment is that it's better to pay people to work than it is to support them while they aren't working--and further, there is a hope that subsidized work experience can be a transition to being hired by an employer who doesn't need a subsidy.

 Indivar Dutta-Gupta, Kali Grant, Matthew Eckel, and Peter Edelman provide a useful overview of the existing research in "Lessons Learned from 40 Years of Subsidized Employment Programs," published by the Georgetown Center on Poverty and Inequality in Spring 2016. The report calls subsidized employment a "promising strategy," which seems a fair judgement if one mentally adds "but not yet proven." There are two major federal government studies now underway involving subsidized employment. The "Subsidized and Transitional Employment Demonstration (STED), 2010-2017" being run by the US Department of Health and Human Services in seven cities and the Enhanced Transitional Jobs Demonstration study is being run in seven cities by the US Department of Labor. Results from these studies should become available over the next couple of years. 

It's easy to hypothesize about why subsidized employment programs might work, or not, but as we wait for these big new studies to be completed, what does the preexisting evidence say? As one might suspect, the reason that the government is doing the additional studies is that the existing evidence isn't as clear as one might like. 

For example, one of the biggest subsidized employment programs tried in the US was the Comprehensive Employment Training Act which ran from 1973-1982. It offered a combination of public service jobs, classroom training, subsidized on the job training and work experience. As of 1980, for example, there were more than 700,000 people participating in CETA. But as the report writes, CETA "was not rigorously evaluated." Modern studies are often set up with a big group of eligible participants who are then randomly assigned either to get the subsidized employment or not. Based on this study design, it's relatively straightforward to look at the difference in outcomes between two very similar groups--some of who are randomly in the program and some who are not. 

But CETA wasn't based on randomization. People decided whether to enroll, and presumably those who had more initiative or responsibility or better skills or fewer life problems were more likely to enroll. Economists tried to use statistical tools to sort out these factors, but while some factors are measureable (say, years of schooling or prior work experience), lots of factors like initiative or sense of responsibility aren't collected in data. So figuring out how much difference CETA made, as opposed to these other characteristics, was very hard. As the report says: "Little can be said with certainty about CETA ...  but non-experimental studies suggest sometimes contradictory findings, with one analysis suggesting positive effects only for women in classroom training, OJT [on-the-job training], and public service employment (not work experience), and another analysis of the impacts of training on men found large positive effects from classroom training and smaller, positive effects from OJT." It's also fair to point out that the labor market for lower-skilled labor has evolved considerably during the four decades or since CETA, so even if the evidence was a lot more clear-cut than it is, it seems hazardous to draw lessons for getting people jobs in 2016 based on evidence from the 1970s and early 1980s. 

Here's a table from the report summarizing results from "rigorously evaluated models," by which they mean models that involved in some way a randomized element in who was assigned to receive the subsidized employment. (You can click on the table to enlarge it.  In the final column, the results that appear in bold type are statistically significant.)


How you evaluate this kind of table may depend on what sort of mood you're in. Some of the studies are relatively old, like the 1970s and 1980s. Some show no effect, or no statistically significant effect. But some data is more recent, and some results are more positive. As the report summarizes: 
  • Subsidized employment programs have successfully raised earnings and employment. This effect is not universal across programs or target populations, but numerous rigorously evaluated interventions offer clear evidence that subsidized employment programs can achieve positivelabor market outcomes. Some of these effects derive from the compensation and employment provided by the subsidized job itself, but there also is evidence that well-designed programs can improve outcomes in the competitive labor market after a subsidized job has ended.
  • Subsidized employment programs have benefits beyond the labor market. Fundamentally, subsidized jobs and paid work experience programs provide a source of both income and work experience. A number of experimentally-evaluated subsidized employment programs have in turn reduced family public benefit receipt, raised school outcomes among the children of workers, boosted workers’ school completion, lowered criminal justice system involvement among both workers and their children, improved psychological well-being, and reduced longer-term poverty; there may be additional effects for some populations, such as increases in child support payment and improved health, which are being explored through ongoing experiments.
  • Subsidized employment programs can be socially cost-effective. Of the 15 rigorously evaluated (through experimental or quasi-experimental methods) models described in this report, seven have been subject to published cost-benefit analyses. Keeping in mind that more promising and effective models are more likely to lead to such analyses, all seven showed net benefits to society for some intervention sites (for models implemented at multiple sites) and some target populations. Four of these seven models were definitively or likely socially cost-effective overall.
Academic researchers are congenitally fond of ending their studies by saying "more research is needed." Isn't it always? But in this case, it seems a fair conclusion--and the good news is that the additional research has been underway for some years already and is fairly close to completion. Until then, this overview by Dutta-Gupta, Grant, Eckel, and Edelman is a solid summary and overview of the existing evidence.

Friday, April 22, 2016

The Spartan Doctrine of Laissez Faire vs. the Roman Doctrine of External Remedy

The Council of Economic Advisers, an office made up of rotating advisory group of economists and their staff within the White House administrative structure, was created 70 years ago by the Employment Act of 1946.  In its First Annual Report to the President,  published in December 1946, the CEA tried to lay out its overall vision of public policy and the US economy. (For those who pay close attention to their prepositions, this First Annual Report to the President is not the same document as the first Economic Report of the President, which was published in January 1947. That document is a nuts-and-bolts overview of the status of the US economy circa 1946.)

Remember that back in 1946, the US economy had just gone through an extraordinary array of stresses and dislocations, including the brutality of the Great Depression from 1929-1933, the steep and severe recession of 1937-38, the disruptions of wartime production, and a post-World War II recession from February to October 1945. Thus, it's interesting to me that the CEA overview of economic policy sought to strike a balance between two extremes that have remained recognizable in policy discussions ever since, which they named "The Spartan Doctrine of Laissez Faire," which had a somewhat fatalistic review that sometimes bad stuff just happens in the economy, and "The Roman Doctrine of an External Remedy," which held that well-conceived government action could pretty much always prevent bad economic outcomes. Here's how the 1946 report described the two views.

"THE SPARTAN DOCTRINE OF LAISSEZ FAIRE Early thinking about the general upswings and downswings of business were of a highly individualistic and essentially fatalistic character. Those who follow this line of thought—and some still do—accept the cycle as a result produced by causes deeply rooted in physical nature or in fundamental human behavior and following an intricate pattern of short-, medium-, and long-time swings. They do not claim that this pattern is precise as to timing or invariable as to magnitude, like the movement of the stars. But they do think in terms of essentially mechanical relationships rather than human institutions that can be modified by intelligent action in a republic, and human behavior that can be changed by wise leadership. ...
THE ROMAN DOCTRINE OF AN EXTERNAL REMEDY Unlike those whose belief in the external character of the cycle causes them to conclude that nothing can be done about it but to adapt one's business operations or exploit it for individual profit, a second group would master the cycle by a remedy equally external to the processes of private business—the power of government to spend and create a purchasing medium. There has arisen in recent years a widespread belief that, whatever the "cyclical" forces beating upon business in general or whatever adaptations to such forces may be spontaneously made by the dictates of private managerial understanding or prudence, the economy as a whole may be kept on a reasonably even keel merely through the intervention of central government in the monetary and fiscal area. According to this philosophy of external remedy, the essential phenomenon of a business depression is a too restricted volume of purchasing power being turned into the system, and this particularly in the form of capital expenditures. The obvious remedy, therefore, is for central government to measure the amount of this aggregate deficiency and restore the Nation's business to a satisfactory state of activity by injecting an appropriate amount of the purchasing medium.  ...
In discussing these polar extremes, the CEA report tried to stake out a middle ground, saying that "it is with the 100-percenters or the 90-percenters that we disagree."

"In contrast to the Spartan business theory and practice that carried a cult of individual self-reliance to the point of brutality and needless waste, we believe it is not fanciful to liken this doctrine of an overall offset to managerial maladjustment to the Roman system that swung to an extreme opposite to that of Sparta. Roman citizens were—for a time— relieved of the compulsion of relying on their own efforts to keep their economy as a desirable level. "Bread and circuses" were provided for all through the power of the state. Similarly, this theory relieves businessmen of the necessity of themselves making the business adjustments by which they would keep the system going at a satisfactory level. As we found in the Spartan school of thought, it is with the 100-percenters or perhaps the 90-percenters that we disagree. Extremists of the Roman doctrine says that we need not worry about any maladjustments in our enterprise system. Monopolistic price policies may curtail markets and cause unemployment. Excessive wage demands may drive costs up and paralyze profits, investments, and employment. We do not need to worry because we can always create full employment by pumping enough purchasing power into the system. If there is too much demand for labor and materials—that is inflation—we turn the faucet off and cause a contraction. Thus by manipulation of Government expenditures and taxation, continuing full employment is assured, and we do not need to worry about anything else in the economy.
"Although American thought has largely been of the Spartan pattern of self-reliance, not without some of the brutally wasteful accompaniments of laissez faire, and although the softer Roman philosophy of external salvation has been aggressively sponsored in recent years, we believe the great body of American thinking on economic matters runs toward a more balanced middle view. This view stresses the importance of having the specific wage-profit-investment-disbursement relationships soundly adjusted at the points where business is actually done, markets found, and jobs created. ...
"For the actual operation of the major forms of business, we need the intimately informed and flexible decision making of private individuals in their business relations and of executives of business organizations. But we must recognize also that the practically sound and individually efficient management of private farming, manufacturing, transportation, distribution, and banking in the practical situations in which the active managers must make their decisions will not, year in and year out, add up to a sustained and satisfactorily stabilized total utilization of the Nation's resources in producing the national well-being of which we are in fact capable. Hence experience and experimentation teach us that there is an important area of Government action in stimulating, facilitating, and complementing the enterprise of private business even if individually well managed.  This functional differentiation and cooperation between private enterprise and public enterprise is in our view something quite different from and much better suited to our situation and temperament than the nationalization of industries to which our English cousins have now resorted. Nor does it involve that regulation of actual business operation which would constitute bureaucratic "regimentation." 
Along with the more modern view of government macroeconomic policy that the report summarized as when government is either "pumping enough purchasing power into the system" or "we turn the faucet off," the CEA report also emphasized the importance of consultation and communication that between "the most thoughtful and responsible leaders" representing business, labor, consumers, and various levels of government. Such consultation sounds a little strange to my modern American ear: perhaps naive, or old-fashioned, or European, or all of those. But that doesn't mean we couldn't do with more of it. Here's the 1946 report:
We believe, therefore, that when the Congress instructed the Council of Economic Advisers to set up consultative relations "with such representatives of industry, agriculture, labor, and consumers, State and local governments, and other groups as it deems advisable," this outlines one of the major features of our work and one of the most important ways in which we may prove of aid in creating and maintaining conditions of maximum employment and the high standards of living that go with it. By consulting with the most thoughtful and responsible leaders of these groups with reference to conditions which would promote the welfare of the country as a whole, we believe that our counsel and advice on the national economic program will reflect a realistic grasp of the needs and difficulties of the several factors in the total economic process. We trust also that in the course of these consultations we may reflect back to the leaders of these groups something of the demands that successful operation of a total system make upon each of its component parts. In particular, we trust that we may translate objectively to the representatives of the various business, labor, and agricultural groups the purposes and methodology of the Government programs so that, instead of blind opposition which might arise through misunderstanding, there may always be constructive criticism, which will lead to useful adaptation.

Thursday, April 21, 2016

Foreigners Buy US Debt, US Investors Buy Foreign Equity

When it comes to international flows of debt and equity, the US economy as a whole has developed an interesting pattern: those from other countries are net buyers of US debt, while US investors and firms are net buyers of foreign companies--in the form of stock market equity investments and foreign direct investment. Pierre-Olivier Gourinchas discusses this pattern in "The Structure of the International Monetary System," an overview of recent research in this area appearing in the NBER Reporter (2016, Number 2, pp. 13-17).  He explains the pattern this way:
As financial globalization proceeded, U.S. investors concentrated their foreign holdings in risky and/or illiquid securities such as portfolio equity or direct investment, while foreign investors concentrated their U.S. asset purchases in portfolio debt, especially Treasuries and bonds issued by government-affiliated agencies in areas such as housing finance, and cross-border loans.
Here's a figure illustrating the pattern, with net debts owed from the US economy to the rest of the world at the bottom, and net portfolio equity and foreign direct investment by US investors in the rest of the world on top.

Gourinchas

Why does this matter? Here are a few of the consequences as Gourichas lays them out.

1) Essentially, the US economy has been able to borrow cheaply from the rest of the world, and then invest those funds in companies around the world. The average return on equity over sustained periods of time is higher than the return on debt. Gourinchas cites estimates that the gap has been between 2.0 and 3.8% per year since 1973.

2) "These large and growing U.S. excess returns have first-order implications for the sustainability of U.S. trade deficits and the interpretation of current account deficits. As an illustration of the orders of magnitude involved, suppose that the U.S. has a balanced net international investment position with gross assets and liabilities of 100 percent of GDP. An excess return of 2 percent per annum implies that, on average, the U.S. can run an annual trade deficit of 2 percent of GDP while leaving its net international investment position unchanged. More generally, since a large part of realized returns take the form of valuation gains due to changes in asset prices and exchange rates, the current account, which excludes non-produced income such as capital gains, will provide an increasingly distorted picture of the change in a country's external position."

3) "[A] deterioration of the U.S. trade balance or of its net international investment position is often followed by a predictable depreciation of the U.S. dollar against other currencies. This depreciation may subsequently improve the U.S. trade balance along the usual channels, but it also improves the return on U.S. financial assets held abroad, thereby making the U.S. relatively richer.Most other countries don't seem to enjoy a similar advantage."

4) Why has this pattern of "foreigners buy US debt, US investors buy foreign equity" emerged? Gourinchas argues that a main reason is that "it reflects a superior capacity of the U.S. to supply `safe' assets—assets that will deliver stable returns even in global downturns." As a result, the US economy can depend on an inflow of debt financing at low interest rates. On the other side, "[w]illingly or not, global suppliers of safe-haven assets must bear more exposure to global risks." When a global recession occurs as in 2008, US-based investors will tend to bear heavier losses because they are more exposed to equity risks everywhere in the world. "Lower funding costs come with a commensurate increase in the global exposure of their external balance sheet."

5) Finally, the US economy probably can't keep playing the role of providing such a disproportionately large share of safe assets for the entire global economy. Gourinchas argues: As the world economy grows faster than that of the U.S., so does the global demand for safe assets relative to their supply. This depresses global interest rates and could push the global economy into a persistent ZLB [zero lower bound] environment, a form of secular stagnation. ... Finally, a body of empirical evidence suggests that environments with low interest rates may fuel leverage boom and bust cycles. The vulnerability of emerging and advanced economies alike to these crises has been amply demonstrated in the past."

For a few decades now, "foreigners buy US debt, US investors buy foreign equity" has been a reasonable equilibrium in the global financial system and a benefit to the US economy But in years ahead, it may well become a cause of stress.

Wednesday, April 20, 2016

Mexico to the US: Border Apprehensions and Immigration Fall

The number of Mexicans apprehended at the US border is approaching a 50-year low, dropping back to levels last seen  in the 1960s. Most of the reason seems to be that immigration from Mexico dropped off several years ago, and has stayed low since then. Ana Gonzales-Barrera gives a quick overview of the evidence in "Apprehensions of Mexican migrants at U.S. borders reach near-historic low," published on April 14 by the Pew Research Center.

Here's the annual data from the US Border Patrol on apprehensions at the US-Mexico border over time.

Apprehensions of Mexicans at U.S. borders fall to near historic lows in 2015

The number of border apprehensions is often taken as a rough-and-ready measure of the number of people seeking to enter the US illegally. The decline strongly suggests that fewer Mexicans are trying to do so. Here's data from the Mexican government on the emigration rate from Mexico per 100,000 in the last decade. Notice that the big decline happens some years ago, even before the start of the Great Recession.
Mexican emigration rates stable for past five years

Data from the US side of the border on the Mexican immigrant population in the US actually shows a downturn in recent years.

 Gonzalez-Barrera provided a useful figure in a longer report she wrote last fall at the Pew website about "More Mexicans Leaving than Coming to the U.S." (November 19, 2015). 

Mexican Immigrant Population in the U.S. in Decline

These trends and the economic and demographic patterns behind them aren't new. I was blogging four years ago on the topic: "Net Immigration from Mexico Stops--or Turns Negative" (April 24, 2012). I wrote last year about "The Declining Number of Illegal Immigrants" (July 13, 2015) and about how "China and India Overtake Mexico for Inflow of US Foreign-Born Residents" (May 13, 2015).

How to limit or regulate the enormous inflow of immigrants from Mexico was a legitimate policy concern from the 1970s into the early 2000s. As Gonzalez-Barrera puts it, that migration was "one of the largest mass migrations in modern history." But now that flow has fallen substantially, and even reversed itself. The main issue now is be how we deal with the after-effects of that enormous mass migration and the immigrants who are already here--many of whom have been here for quite some time.