Will Trump get his wall? A look at possible outcomes

Game theory is a useful tool for examining problems where there are two or more players and each player takes into consideration the reaction of the others.  I see three possible scenarios over the next 2.5 weeks before we hit President Trump's deadline for Congressional action.
1) Congress passes a bipartisan bill on border security with protection for dreamers and over $5.7b in spending for border security.  The language on barriers is kept sufficiently vague so that Democrats can say fence and Trump can say wall.  Trump vetos the bill because he fears the loss of support from his core supporters (no wall and amnesty, all in one package).
2) Congress is unable to pass a bill.  Trump shuts down the government again.
3) Congress is unable to pass a bill.  Trump declares a national emergency so he can reallocate funds to start work on a wall.

From a game theory perspective there are two players: Congress and Trump.  The obstacles of getting a bipartisan bill through a Democratic House and a Republican Senate (with 60 votes needed to bust a filibuster) are massive.  Assuming time-consistent behavior by Trump (he has already turned down the wall-for-dreamers trade multiple times), there will be little incentive to reach an agreement and vote in favor of it.  So I put the odds of a bipartisan bill being passed as extremely low.

With no bill, Trump has to decide whether to go through another shutdown.  Well five weeks of shutdown did not work, so does Trump really think another 5+ weeks will?  Despite Trump's apparent issues with impulse control, I have trouble seeing this happening as well.  As my fellow-Kentuckian Mitch McConnell said, there is no education in the second kick of a mule.

But the emergency is the perfect solution for both sides.  Not a single brick or girder will be put in place between now and the 2020 election because the emergency wall declaration will be tied up in the court system.  Trump looks decisive to his base and can blame the Democrats in Congress and Obama judges for his failure to deliver.  Democrats are happy because (1) Trump will lose some support from his Republican base for ignoring the Constitution and (2) there won't be a wall before the election.

You can take my advice and monetize it on the betting markets.

Perceptions and reality on immigration

I can understand public disagreement about the impact of immigration on the economy.  Most economic research finds that immigrants do not adversely affect native workers, but it is not hard to find studies that reach the opposite conclusion.  As a result the public sees economist A disagreeing with economist B and eyes glaze over.  

I would have thought there would be less misunderstanding about how many immigrants we have.   A recent NBER study by three Harvard economists says otherwise.  They asked native citizens in six countries to estimate what percentage of the population consisted of immigrants.  In the US the answer was 36 percent, well above the actual level of 10 percent.  

Americans are not alone in overestimating immigration levels.  British, French, Germans, Italians and Swedes were almost as far off.  

Americans also have inaccurate perceptions regarding where immigrants come from and how well they are doing economically.  Americans think 22 percent of immigrants are Muslim, well above the actual level of 10 percent.  We think 26 percent are unemployed and 35 percent live in poverty.  Think again.  The unemployment rate for immigrants is 5.5 percent and the poverty rate is 13.5 percent.  For further details see this article in Salon.  

Should an H-1B be free?

H-1B visas allow employers to hire skilled foreign workers in a limited set of specialized occupations that require a college degree.  The visa is good for three years and can be renewed for another three.  During this period visa holders have the option of applying for a Green Card for permanent residence.

In 2015 the eight largest H-1B employers were (in descending order) Cognizant, Infosys, Tata Consultancy Services, Accenture, Wipro, HCL, Tech Mahindra Americas, and IBM India.  All of these firms do IT outsourcing and rely on workers from India.

There are only 65,000 H-1B visas given each year, well below the number of requests.  The visas are allocated by a lottery system.

But maybe not for much longer.  WSJ reports that someone in the Trump administration has remembered some basic economics: price ceilings create shortages.  Why should the H-1Bs be free?  

One adjustment under consideration would be to allocate the visas to the firms that pay the highest salaries.   This means more foreigners in high wage occupations (e.g., surgeons) get admitted than those in relatively low wage gigs (e.g., most of today's IT consultants).  

Another approach would be to auction off the visas.  This would force firms to put their money where their mouth is regarding labor shortages.

Finally one could argue for more visas, but I do not think that argument is going to go very far for at least the next four years.

Immigrants making America great

If you want to understand why America has been the world leader for so many years in technology, you might want to pay some attention to the key role played by immigrants.  This report from the American Enterprise Institute (right-leaning DC think tank sure to supply many appointees to the Trump administration) shows that

1. Fifteen of the top 25 tech companies were founded by first or second generation immigrants
2. A fifth of the Inc. 500 firms are headed by immigrants

Legitimate disagreements can be had concerning illegal immigration and the number and mix of legal immigrants to the US.  As these discussions play out, everyone needs to be well aware of the vital role immigrant entrepreneurs play so that we avoid decisions that keep the father of the next Steve Jobs in Syria.  

Equal time for the Donald

There are too many Presidential candidates for me to pick on every policy proposal that is grounded on less than sound economic logic.  Because college loan debt is so poorly understood, I jumped on the Clinton proposal yesterday.  But I do not want anyone to think that the Democratic frontrunner has a monopoly on economic nonsense.  So let me quickly flag two items from the Republican frontrunner that came to my attention yesterday.

My gut tells me that Trump is the frontrunner because he has played the age-old "blame all of society's troubles on [fill in the blank: immigrants, religious minorities, ethnic minorities]" ploy very successfully.  In an era when the whole world is becoming more tightly connected because of declining costs of communication and transportation, Trump wants to turn the clock back 100 years.

Case 1: immigration.  Trump's position paper argues we should build a wall on the Mexican border, invest significantly more in border patrols and employment verification, and force employers to hire all the unemployed before any more green cards get issued.   The facts: more Mexicans are now leaving the US than entering.  Although most illegal immigrants come from Mexico, as many as 50 percent of all illegals from all sources get here by overstaying their visa.  Perhaps Trump will have the immigration office put chips on each visitor to the US, so we can trace them and escort them out if they stay too long?

Case 2: monetary policy.  Trump is a big fan of currency devaluation to enhance economic competitiveness.  As this WSJ column shows, there is a long history of countries trying this approach and it is a history of failure.  If currency devaluation were the road to riches, Argentines and Mexicans would be on top of the world.

Labor market impact of immigration exec order

Legal analyses of the President's executive order on immigration are a dime a dozen; economic analyses  are much rarer (this WSJ piece is the only one I have seen).  The courts and voters will ultimately work out the legal end, so what are the economic takeaways?

1) Most illegal immigrants face skill and language barriers in the labor market and end up taking relatively unskilled jobs.  The increased supply of such labor leads to lower wages for natives who compete in the same markets.  Most economic estimates find the wage impact is modest (a 10% increase supply leads to a 2-4% cut in wages for natives), but tell that to someone who is having trouble making ends meet.  

2) Do not be surprised to see the rate of illegal immigration accelerate since the order could be reversed on Inauguration Day 2017.  But wait, those who cross borders after the order aren't covered, right?  True, but perception is everything.  Do you seriously believe that someone in a dirt poor village in Guatemala thinks the odds of being deported have gone up?  What matters is what potential immigrants believe, not what the order actually says.  

3) To the extent that employers have used fear of deportation to keep illegals from quitting to find a better job, the order should open up some mobility options.  Illegals who have learned valuable skills and who speak/write decent English will now start competing with more skilled natives.  

4) The most critical immigration issue is making it easier for highly educated STEM students to stay in the US.  The President punted on this one.  

Economic effects of new immigration law

It is not a done deal by any means, but talk in Washington indicates a high probability of major changes in the nation's immigration laws.  Major provisions would include increased visas for graduates of US universities in STEM disciplines, temporary visas for certain types of workers (mainly agricultural), and steps toward legal status for those in the country illegally. 

This WSJ piece tries to sum up the overall impact.  Illegals become more likely to invest in themselves and their communities, so we should expect more spending on education and housing.  Their employment and salaries are unlikely to be immediately affected, because they are already here and employers accepted their fake IDs to begin with. Over time some will be able to shift from the cash only economy to regular employment. 

Government budgets will be affected, but it is hard to tell which way.  Illegals will have to pay an entrance fee and those formerly in the underground economy become more likely to pay taxes.  Simultaneously, illegals become eligible for a wide range of government benefits. 

Today's immigration news

President Obama announced today that the US would no longer deport illegal aliens age 30 who came to the country before they were 16, as long as they do not pose a security threat.  Republicans called it a political move, although you have to wonder where the votes are on this (unless I underestimate vote fraud).  Economically, the main impact will be to encourage young illegal aliens to make further investments in their own human capital, since they need not be as concerned about deportation.  But the odds of deportation now are not especially high, so the even lower odds are unlikely to be a game changer. 

Raleigh Chamber chimes in on immigration reform

Harvey Schmitt, CEO and president of the Raleigh Chamber, points out how not-so-smart immigration policies are hurting local tech firms.  In an N&O op-ed last Friday, Schmitt argues that limiting the number of foreign workers earning graduate degrees in science and technology is hurting the average American worker.  (I am not sure where he gets his 2.6 extra jobs for each new foreign grad student who decides to stay here.)  Local companies are having a hard time attracting an keeping tech workers.  For those interested in learning more about the issue, the Chamber is sponsoring a forum on immigration Monday at 8 a.m.

How Steve Jobs would have created jobs

Interesting tidbit earlier this week in WSJ about Steve Jobs' dinner with President Obama and a few other tech CEOs.  As part of the dinner conversation, Jobs told the President about the factories that Apple operates in China instead of the US because Apple cannot find the engineering talent needed here.  He and the other CEOs told the President that we needed to allow foreign students who major in engineering to obtain visas.  Jobs was very disappointed in the response he received: the President thought this question needed to be addressed in the broader context of immigration reform, which was not possible in the current political environment.  

"Jobs found this an annoying example of how politics can lead to paralysis," Mr. Isaacson writes. "The president is very smart, but he kept explaining to us reasons why things can't get done," Jobs said. "It infuriates me."

Fewer Mexicans immigrating to US

Yesterday's NYT reports that the wave of Mexican immigration to the US may have crested.  The incentives to immigrate depend on the difference between opportunities in the US and Mexico as well as the cost of making the move.  The cost has risen, thanks to increased border enforcement and the spread of gang activity along the border.  Opportunities in the US have stagnated, as we all know. 

The article highlights another critical factor that has not received much attention: increased opportunity for those who stay in Mexico.  Mexico has significantly upgraded its educational system, making high school and college more accessible.  Mexican fertility rates have fallen dramatically, close to US levels, cutting into what had been a perpetual excess supply of labor.  The article also notes that "democracy is better established, incomes have generally risen and poverty has declined."

Notice a pattern here?

Today's NYT column by Tom Friedman rehashes some familiar themes from his World is Flat opus, including the impact of technology and globalization on labor markets.  But his last paragraph is thought-provoking:

Last week, the 32 winners of Rhodes Scholarships for 2011 were announced — America’s top college grads. Here are half the names on that list: Mark Jia, Aakash Shah, Zujaja Tauqeer, Tracy Yang, William Zeng, Daniel Lage, Ye Jin Kang, Baltazar Zavala, Esther Uduehi, Prerna Nadathur, Priya Sury, Anna Alekeyeva, Fatima Sabar, Renugan Raidoo, Jennifer Lai, Varun Sivaram.

And we want to still make it hard with foreign nationals with advanced degrees from US universities to put down roots here? 

Would increased immigration help?

So argues NYT columnist and George Mason economist/blogger Tyler Cowen.  Cowen cites a new study by Gianmarco Ottaviano of Bocconi and Giovanni Peri of UC-Davis that argues an increased supply of immigrants here in the US (both high and low skill) reduces off-shoring and thereby helps the economy overall.  The key to their argument is whether low skill immigrants are complements for their domestic counterparts or substitutes.  As Cowen puts it, does the immigrant brick layer take the native brick layers job at a lower wage or fill in a gap as the native gets promoted to supervisor (and no natives are interested in being brick layers)?

I do not question the gain from high-skilled immigrants; economic research shows they help in many dimensions (including increasing competitive standards in our secondary schools; check out any list of valedictorians in any part of the country).  I am not so sure on the low-skill side of the equation.  Studies by my Harvard colleague George Borjas indicate that the availability of a wide range of income maintenance programs and public goods also can be drivers of immigration that end up being a drag on the economy.  Still, it is refreshing to see some positive-sum thinking on this thorny question.  If only we could get the real estate lobby to see the upside!

Global labor markets

Capital markets have been global for quite some time, given the ease at which funds can be moved across borders.  Over the last 20 years, countries in Asia and Latin America with trainable labor available at relatively low wages have been able to attract investment from global corporations.  This has started to make the labor market global as well. 

Two recent WSJ op-eds suggest ways in which the US can become more competitive in that global labor market.  One theme I have been emphasizing on this blog is immigration policy.  Although I realize some people get very worked up about illegal immigration, there also are serious issues concerning the way in which the US prioritizes which legal immigrants can enter.  The Brookings Institution's Darrell West argues that we should allocate more visas to scientists, engineers, and entrepreneurs in what he calls an "Einstein immigration policy."  Only 15% of visas are allocated to employment purposes, some of which are agricultural workers, whereas 64% are allocated to family reunification.  A change along these lines would make immigrants an engine of economic growth instead of a drain on existing resources. 

Economists Martin Baily, Matt Slaughter, and Laura Tyson did a study for McKinsey to focus on ways that the US can make itself more attractive to multinational firms.  Their key finding: "Today the US is in an era of global competition to attract, retain and grow the operations of multinational companies that it's never faced before."  Dozens of other countries are making policy changes and seeing the kind of economic growth that makes them more and more attractive to multinationals.  Among the major concerns cited in the article: tax policy and limits on skilled immigration. 

Making immigrants pay

The NYT Freakonomics website has caused quite a stir by linking to this interview with Nobel Laureate Gary Becker.  The interview covers a wide range of topics, but the one that has gone viral is the discussion of immigration.  Becker argues that the US charge potential immigrants for the opportunity to become citizens, perhaps as much as $50,000.  A fuller discussion of his views can be found at the University of Chicago website.  The advantages of Becker's approach are as follows: (1) immigrants would generate net resources rather than absorb them and (2) the fee would encourage immigration among those who are skilled and better able to fit into the labor market.  A loan program could be set up for those who do not have $50k; they could repay via higher income taxes. 

Current immigration policy emphasizes family reunification, where the term family is broadly defined to include parents and siblings.  MBA 505 graduates can compare and contrast the advantages of each approach. 

Jim Owens on economic policy

Today President Obama gave an update on the progress of his economic plan to the White House Business Council, chaired by Caterpillar CEO and NC State alum Jim Owens (Ph.D., economics, 1973).  Owens gave the President some unsolicited economic advice in a WSJ op-ed yesterday.  He made the following suggestions:

• Adopt transparent accounting in government (e.g., do not assume state retirement plans will get 8% returns)
• Simplify the tax code and reduce corporate tax rates
• Spend more on infrastructure (you have to say this if you are Cat's CEO)
• Promote free trade agreements
• Control health costs
• Reform immigration laws to allow those obtaining graduate degrees in the US to work here
• Keep the Federal Reserve independent

Nothing radical and mostly sensible.   The President talked mostly about improving K-12 education through Race to the Top, health care reform, and financial regulation.

Killing the golden goose

Great WSJ op-ed by MIT president Susan Hockfield on how our immigration policies are going to limit growth and innovation in the future. The majority of our new PhDs in the sciences and engineering are born overseas and increasingly they are returning to their home countries rather than staying in the US. A further problem: the US is losing its advantage in education to other countries (other countries are ramping up higher education, whereas US enrollments are stagnant). Hockfield supports policies that would encourage more Americans to get science and engineering PhDs while at the same time allowing more foreign graduates from our schools to stay here after they graduate.

True story: in the Czech Republic two years ago my wife and I had a cab driver who said he was being allowed to immigrate to the US because he had family in Chicago. Do we really have all of the scientists we need, but happen to be short on cab drivers?

Why is Houston growing and NYC isn't?

MBA 505 veteran Lea Chan sent me this link to an article by well-known Harvard economist Ed Glaeser about this question. Having visited both cities on multiple occasions, one might think at first glance that this is a simple case of "de gustibus not est disputandum. " Glaeser does a very nice analysis of all the economic factors that might lead a household to prefer to reside in one city or the other, including housing prices, commuting, wages and salaries, and taxes. Of course there are many other factors to consider: Houston has NYC beat bigtime on Mexican food and NYC has sports teams that actually win championships. As I said, de gustibus!

Notes on "The Class"

I recently saw "The Class," an autobiographical quasi-documentary about a year in the life of a French grammar class in a Parisian middle school. It is based on a book written by a teacher and the author actually plays the lead in the movie. The movie follows a group of about 30-35 students, all of whom were real students at the school. There was no formal script, instead the movie is based on improvs of certain situations described in the book. Just available via Netflix.

What I found fascinating was the depiction of the French school system and its students. In one scene the faculty is reviewing the academic performance of the students, subject by subject, at the end of the semester. Two students were seated in the room as observers. Although sworn to keep the discussion confidential, they share the discussion with all of their classmates. Certain students have "issues," as one would expect, but the system seems to do little more than shift the worst cases from one school to another.

Most striking was the composition of the class; a clear majority were either immigrants or children of immigrants, a large share of whom were from Africa or Islamic countries. (And this was a school in Paris itself; not one of the suburbs which have predominantly immigrant populations.) This movie shows us the face of France 20-30 years from now. My guess is that a film set in Denmark, Spain or almost any other European country would have the same message. These countries are going to be facing some big changes as their native populations decline and immigration continues apace. Economics can provide a useful framework for explaining employment, GDP, immigration patterns and the like, but I am not sure our profession will have a whole lot to say about the cultural consequences.