Thoughts on Immigration

Each summer for the last 20 years or so, I\’ve spent a few days at the Stanford Summer Economics Institute for High School Teachers, giving some of the lectures and talking pedagogy with the participants. This year, one of my talks was on \”The Economics of Immigration.\” Here are some of my favorite Powerpoint slides from the presentation (as always in a jpeg format so they are easy to copy for your own presentation, if you wish), along with a few thoughts.

Immigration–legal and illegal combined–is often measured by looking at the share of the U.S. population that is foreign-born, which is available through Census data. America\’s previous huge wave of immigration took the foreign-born share of the population up to around 14% for the later decades of the 19th century and the early 20th century. As the figure shows, the wave of immigration in recent decades hasn\’t topped that level yet, but is near 12% of population. It\’s worth remembering that America has long fluctuated between two views of immigration: one view represented by \”give me your tired, your poor\” written beside the Statue of Liberty, and the other represented by fierce restrictions on immigration, like effective ban on immigration from China starting in the 1880s, or the strict and limited quotas on immigration imposed in the 1920s. Both welcoming and opposing immigration are as American as apple pie.

The current wave of immigration is somewhat split by skill level. Immigrants from Mexico and central America typically have an education level considerably below the American average. However, immigrants from other regions of the world have an education level above the American average. The tables, based on data from a Congressional Budget Office Report in July 2010, also show that this difference is manifested in the sorts of jobs that migrants take. The relatively low-skilled immigrants from Mexico and Central America are more likely to end up in jobs like construction, building and grounds maintenance, and food preparation and service. The relatively high-skilled immigrants from the rest of the world are more likely to end up in jobs like health care practitioners, mathematics, or computer science.

The gains to immigrants coming to the U.S. from a low-income country are very large.Take someone with a given level of skill and work effort, move them from a low-income country to the United States, and their earnings are going to be much higher. Here are some illustrative numbers for building laborers and female factory workers from a 2009 report by UBS

The question of how much immigration affects wages of U.S. workers is highly controversial. The answer often seems to depend on whether one analyzes data from a cross-section of cities, which tends to find that more immigration helps wages of native-born workers of all skills, or if one analyzes a time series of immigration patterns over time, which often finds that immigration hurts the wages of low-skilled native-born workers. Another factor underlying these different answers are analysis of whether low-skill immigrant labor is a complement or a substitute for low-skill native-born labor. The figure contrasts findings from two studies with different approaches. It is intriguing that even the studies which find a negative effect of immigrants on the wages of some skill levels of native-born labor find an effect that is quite small–no more than a few percentage points.

Spending on border patrol enforcement has risen substantially in the last decade or so. In the aftermath of 9/11,  greater policing of the border was politically inevitable. But in the last few years, improvements in the work prospects in Mexico combined with the slowness of the U.S. economy has meant that flows of illegal immigrants have dramatically slowed, or even stopped. Thus, the U.S. is spending more money on the border patrol at a time when the need for doing so has diminished. As the figure shows, the result is that the cost per border apprehension has been rising sharply.

Moreover, it turns out that about half of those in the country without authorization arrived with a legal visa in hand, but then overstayed their visa. In a world of limited resources, there is a case to be made for stopping any increased spending on border enforcement and instead increasing the very limited spending on those who overstay their visas. There is also a case to be made for at long last ramping up the federal E-Verify program so that employers can more easily check whether potential hires are authorized to work in the U.S.

Finally, U.S. immigration policy is distinguished from most other countries both by the large numbers it admits, and also by its emphasis on handing out immigration slots based on family ties, rather than for work-related reasons. Here\’s a table from the Federal Reserve Bank of Dallas, based on OECD data, showing the difference. A group of experts convened in 2009 by the Brookings Institutions and the Kenen Institute for Ethics at Duke University estimated that if family preferences in immigration law were limited to spouses and children, and not extended to aunts, uncles, cousins, and the like, this change could free up 160,000 slots to be filled by skill-related immigrants. This change would roughly double the level of skill-related U.S. immigration.

Note: In an earlier version of this post, there was a typo in the second paragraph, where I referred to \”12% of GDP\” instead of \”12% of population.\” This version incorporates the correction. Thanks to sharp-eyed reader T.D. for calling this to my attention.

The FDIC Changes the Base for Deposit Insurance

I confess that since the federal funds interest rate fell to near-zero in late 2008, I haven\’t paid much attention to it. But Todd Clark and John Lindner of the Cleveland Fed (pp. 5-7) offer a quick overview of some factors that have affected that rate since late 2010. In particular, they discuss a change I  probably should have known about, but had not: apparently, the Federal Deposit Insurance Corporation no longer uses bank deposits as the base for deposit insurance premiums, but now uses the difference between bank assets and bank equity as the base for deposit insurance.

Clark and Lindner write: \”Historically, the federal funds rate has been the primary instrument of monetary policy. Daily federal funds rates since November 2010 fall loosely into a series of three trends, all of which can at least be partially explained by an event that has influenced market participants. In November, the Fed announced the second round of large-scale asset purchases, which consisted of the Fed buying $600 billion in Treasury securities through the end of June 2011. From early November there was a steady decline in the federal funds rate from about 20 basis points to 17 basis points. The purchases increased the supply of reserves in the federal funds market, which pushed down the price, the federal funds rate. Put another way, the increased supply forced cash investors to compete in the market at lower interest rates.\”

\”Similarly, the decision by the Treasury in early February 2011 to wind down its Supplemental Financing
Account balance inserted more reserves into the market for cash investors to place. Combined with the asset purchases, this move accelerated the decline in the federal funds rate. This acceleration was reflected in another 4 basis point decline, from 17 basis points to 13 basis points, over the following two months.\”

\”By far the most studied of the three events, however, has been the change in the FDIC assessment base for deposit insurance. Many observers have argued that this is the move that caused the dramatic
drop in the federal funds rate at the beginning of April, and it has also been credited for holding the
eff ective rate at a fairly constant level of 10 basis points.\”

\”With the new FDIC assessment policy, insured depository institutions will be charged an insurance premium not on their amount of deposits, but on the difference between their total assets and their equity. Broadly speaking, this equates to their liabilities, but there are some subtleties that we are going to skip over. Due to the change in the assessment base, depository institutions are now forced to pay an extra fee for any financed assets, including funds that they might borrow in the federal funds market. Since many of the funds available in the federal funds market are provided by nonbank institutions, the current primary purpose of borrowing these funds is to earn the interest on reserves (IOR) available at the Fed. So, banks are making the diff erence in the two rates (fed funds and IOR) as a profit. The new assessment implicitly increases the cost of the federal funds by adding that assessment rate onto the fed funds rate. As a result, some banks have exited the market, reducing overall demand for the funds dramatically. The fall in demand has reduced the funds rate.\”

The IMF on the U.S. Economy #2: This Recovery in Historical Context

In a previous  post, I passed along some of the comments that the IMF had to make about U.S. fiscal policy and how and when to reduce budget deficits in the annual IMF report on the U.S. economy.  Here, I\’ll look at an intriguing comparison that the IMF offers between the aftermath of the Great Recession and the previous nine U.S. business cycles. In particular, there is a considerable disjunction in the current recovery between a lot of the output and employment statistics, which look quite bad, and the health of the business and financial sector, which looks quite good.

In the table that follows, the last ten U.S. business cycles in reverse chronological order, with the most recent at the top, are the rows. The columns offer a list of various economic factors. Instead of a bunch of numbers, the statistics were ranked for each of the 10 recoveries, and then portrayed in this way: dark green means the strongest two recoveries in this category; light green means the 3rd and 4th strongest recoveries in this category; white means the 5th and 6th strongest recoveries; light red means the 7th and 8red strongest recoveries out of these ten; and dark red means the weakest two recoveries in each category.

By far the most striking pattern in the table is that the current recovery has a lot of red shading on the left, but a lot of green shading on the right. That is, the current recovery looks pretty bad compared with its predecessors on GDP, consumption, personal income, jobs, and unemployment. But it looks pretty good compared with its predecessors on financial and nonfinancial corporate profits, manufacturing orders, stock prices, and the health of banks. How can these factors be reconciled?

Part of the answer lies in the good picture for U.S exports, which are helping to drive manufacturing orders, production of equipment and software, and nonfinancial corporate profits. Part of the answer must be that after several years of making sure that the financial sector has easy access to cheap credit, banks are much better off than a few years ago.

But the disjunction remains. Firms have profits, but haven\’t yet started hiring. Banks and other financial institutions have become  much healthier, but in many areas haven\’t significantly boosted their lending. It\’s as if many U.S. financial and nonfinancial companies are all holding their breath, waiting for some high-pitched dog whistle that only they can hear before hiring and lending picks up.

The IMF on the U.S. Economy #1: What About the Budget Deficits?

The IMF has released its annual report on the U.S. economy, with a number of interesting figures, tables and insights. Here, I\’ll offer some IMF comments on the U.S. fiscal situation and  how the U.S. should address its federal deficit problems. In a follow-up post, I\’ll look at an intriguing comparison that the IMF offers between the aftermath of the Great Recession and the previous nine U.S. business cycles

\”Fiscal policy. Consolidation needs to proceed as debt dynamics are unsustainable and losing fiscal credibility would be extremely damaging. However, the pace and composition of adjustment should be attuned to the cycle. A politically-backed medium-term framework that raises revenues and addresses long-term expenditure pressures should be the cornerstone of fiscal stabilization. The official deficit reduction proposals could be too front-loaded given the cyclical weakness and, at the same time, insufficient to stabilize the debt by mid-decade.\” (p. 1)

\”Unfavorable fiscal outcomes. These could take the form of a sudden increase in interest rates and/or a sovereign downgrade if an agreement on medium term consolidation does not materialize or the debt ceiling is not raised soon enough. These risks would also have significant global repercussions, given the
central role of U.S. Treasury bonds in world financial markets. At the opposite extreme, an excessively large upfront fiscal adjustment could significantly weaken domestic demand …\” (p. 11)

 \”Short-term U.S. spillovers on growth abroad are uniquely large, mainly reflecting the pivotal role of U.S. markets in global asset price discovery. While U.S. trade is important, outside of close neighbors it is the global bellwether nature of U.S. bond and equity markets that generates the majority of spillovers.\” (p. 13)

\”The authorities have a number of options to achieve fiscal sustainability without large negative short term effects on activity. Social Security reform would help reduce long-term fiscal imbalances without undermining the ongoing recovery—measures such as increasing the retirement age while indexing it to longevity and trimming future benefits for upper-income retirees would have a minimal impact on current private spending. Identifying additional saving in health care and other mandatory spending categories would also be highly desirable, including through greater cost sharing with the beneficiaries, curbs to the tax exemption for employer-provided health care, and targeted savings identified by the President’s Fiscal Commission. Meanwhile, the tax system is riddled with loopholes and deductions worth over 7 percent of GDP. Gradually reducing these tax expenditures (including eventually the mortgage interest deduction which largely benefits upper-income taxpayers) would help raise needed revenue while enhancing efficiency. In the
longer term, consideration could also be given to introducing a national VAT or sales tax, as well as carbon

Endorsing Association 3E: Ethics, Excellence, Economics

I would like to take this opportunity to heartily endorse Association 3E: Ethics, Excellence, Economics.

I discovered this organization last weekend, when my wife and I were having a 20th anniversary child-free getaway weekend in the Napa Valley. While working my way through the tasting plates at the Wine Spectator Greystone Restaurant run by the Culinary Institute of America restaurant, I discovered: \”The mission of Association 3E is the advancement of excellence in extra virgin olive oil.\” Yes, Ethics, Excellence, Economics is the slogan for a group of producers of super-premium olive oils. I lay no claim to a sophisticated palate for super-premium olive oils. My unsophisticated, seat-of-the-pants opinion is YUM.

The "American Dream"

The pollster John Zogby writes on the Forbes blog about some of his recent results on what Americans are thinking about their ability to achieve the \”American dream.\” 

Zogby writes: \”In an interactive poll taken immediately after Obama’s 2008 election, 68% of adults said it is possible for them and their families to achieve the American Dream, and 18% said it did not exist. Almost as many (62%) agreed most middle class families could achieve it. Our poll taken a week ago showed 49.7% believing the dream was achievable for their families, 30% saying it did not exist and 44% agreeing it is achievable for most middle class families. … There was little change over three years in how people defined the American Dream. In 2008, 38% defined it as material goods and 43% said it was spiritual happiness. Now, 40% choose the material and 37% spiritual. Above I suggested our loss of national confidence is about more than just economic well-being. The reason is our finding that those who define the American Dream as material are only slightly more likely to say it doesn’t exist than are those who define it as spiritual happiness. It seems we have both an economic and psychological recession.\”
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But just what is the \”American Dream\”?  The phrase “the American Dream” was coined by a Pulitzer prize-winning historian named James Truslow Adams in his 1931 book The Epic of America. Truslow described the American Dream in this way (pp. 415-416) :

\”But there has been also the American dream, that dream of a land in  which life should be better and richer and fuller for every man, with opportunity for each according to his ability or achievement. It is a difficult dream for the European upper classes to interpret adequately, and too many of us ourselves have grown weary and mistrustful of it. It is not a dream of motor cars and high wages merely, but a dream of social order in which each man and each woman shall be able to attain to the fullest stature of which they are innately capable, and be recognized by others for what they are, regardless of the fortuitous circumstances of birth or position. I once had an intelligent young Frenchman as a guest in New York, and after a few days I asked him what struck him most among his new impressions. Without hesitation he replied, \”The way that everyone of every sort looks you right in the eye, without a thought if inequality.  Some time ago a foreigner who used to do some work for me, and who had picked up a very fair education, occasionally sat and chatted with me in my study after I had finished my work. One day he said that such a relationship was the great difference between America and his homeland. There, he said, \”I would do my work and might get a pleasant word, but I could never sit and talk like this. There is a difference there between social grades which cannot be got over. I would not talk to you there as man to man, but as my employer.\”\”

\”No, the American dream that has lured tens of millions of all nations to our shores in the past century has not been a dream of merely material plenty, though that has doubtless counted heavily. It has been much more than that. It has been a dream of being able to grow to fullest development as man and woman, unhampered by the barriers which had slowly been erected by older civilizations, unrepressed by social orders which had developed for the benefit of classes rather than just for the simple human being of any and every class. And that dream has been realized more fully in actual life here than anywhere else, though very imperfectly even among ourselves.\”

Adams puts this idea of the \”American dream\” at the center of his description of telling the American narrative and describing what it means to be an American (p. 174):

\”If Americanism in the above sense has been a dream, it has also been one of the great realities of American life. It has been a moving force as truly as wheat or gold. It is all that has distinguished American from a mere quantitative comparison in wealth or art or letters or power with the nations of old Europe. It is Americanism, and its shrine has been in the heart of the common man. He may not have done much for American culture in its narrower sense, but in its wider meaning it is he who almost alone has fought to hold fast to the American dream. This is what has made the common man a great figure in the American drama. This is the dominant motif in the American epic.\”

The Zogby poll tells us that more people are feeling discouraged in July 2011 than in November 2008, which isn\’t an enormous shock given the Great Recession and the Long Slump that has followed. I\’m dubious that the survey tells us much about the \”American dream\” in the broader sense of James Truslow Adams, which includes material well-being and personal happiness, but also includes some broader issues: opportunity to shape one\’s destiny;  when social order means less and individuals mean more; when social equality is a common presumption in a way that reaches beyond equal treatment before the law; and when the successes and failures of the country are judged by how they affect everyday people.

Where Will America\’s Future Jobs Come From?

Where will the U.S. jobs of the future come from? The McKinsey Global Institute offers some possibilities in its June 2011 report: \”An economy that works: Job Creation and America\’s Future.\”

McKinsey estimates that the U.S. economy needs 21 million additional jobs by 2020 if the U.S. economy is to have full employment that year. It argues that this goal is achievable if \”high-job-growth scenarios\” are met in six sectors: \”health care, business services, leisure and hospitality, construction, manufacturing, and retail. These sectors span a wide range of job types, skills, and growth dynamics. They account for 66 percent of employment today, and we project that they will account for up to 8 percent of new jobs created through the end of the decade.\”

What do these high-job-growth scenarios look like in each sector? Here are some comments from the McKinsey report, along with some of my own reactions. I also draw on some projections from the Bureau of Labor Statistics, published in the November 2009 Monthly Labor Review, predicting the \”Occupations with the largest job growth\” from 2008 to 2018. I\’ll say up front that while I\’m an admirer of both the BLS and the McKinsey Global Institute, projecting which kinds of jobs will grow in the future is a very uncertain business.
Forecasting the future is hard. But it can still be a useful tool for thinking about the future evolution of the U.S. economy.  

Health care

McKinsey writes: \”The health care sector has been the most reliable engine of job growth in the economy over the past decade, adding jobs even during the recession. Moreover, 71 percent of those employed in the sector have more than a high school education, compared with 62 percent economy-wide, and average wages are 10 percent higher than the national average for service-sector jobs. … Although one-third of health care jobs are in hospitals, the largest job growth over the past decade has been in nursing and residential care, social assistance, and home health care services.\” As McKinsey goes on to point out, with an aging population and expanding insurance coverage, more jobs in this area seem likely.

This makes a lot of sense to me. In the BLS projections, four of the top nine occupations for job growth are in this area: Registered nurses (#1), Home health aides (#2), Personal and home care aides (#5) and Nursing aides, orderlies, and attendants (#9). But a couple of reactions seem worth noting here.

First, the \”health care jobs\” are tending to move away from doctors in hospitals, and toward aides that help at home. I suspect that this trend will continue. A huge share of illness and health care costs are caused by chronic conditions. As the Centers for Disease Control puts it: \”Chronic diseases—such as heart disease, cancer, and diabetes—are the leading causes of death and disability in the United States. Chronic diseases account for 70% of all deaths in the U.S., which is 1.7 million each year. These diseases also cause major limitations in daily living for almost 1 out of 10 Americans ….\” Many chronic diseases share the general property that if they are well-managed every single day, with a combination of drugs, lifestyle, and certain kinds of monitoring of physical conditions, it is possible to reduce the need for enormously costly episodes of hospitalization. Using a mixture of information and communications technology, hooked into medical technology that can be used in the home and personal reminders when needed, seems like a possible win-win-win scenario in term of improving health, reducing health care costs, and developing a new type of industry.

Second, there may be a collision between some steps for cost-cutting in health care and job creation in this sector. In the Spring 2011 issue of my own Journal of Economic Perspectives, David M. Cutler and Dan P. Ly write of  \”The (Paper)Work of Medicine: Understanding International Medical Costs.\”  They emphasize the very large administrative costs in the U.S. healthcare system. They write (citations omitted):

\”For every office-based physician in the United States, there are 2.2 administrative workers. That exceeds the number of nurses, clinical assistants, and technical staff put together. One large physician group in the United States estimates that it spends 12 percent of revenue collected just collecting revenue. Canada, by contrast, has only half as many administrative workers per office based physician. The situation is no better in hospitals. In the United States, there are 1.5 administrative personnel per hospital bed, compared to 1.1 in Canada. Duke University Hospital, for example, has 900 hospital beds and 1,300 billing clerks. On top of this are the administrative workers in health insurance. Health insurance administration is 12 percent of premiums in the United States and less than half that in Canada. International comparisons of medical care occupations are difficult, but they suggest that the United States has more administrative personnel than other
countries do. Data from the Luxembourg Income Study indicate that the United States has 25 percent more healthcare administrators than the United Kingdom, 165 percent more than the Netherlands, and 215 percent more than Germany.\”

In short, vastly improved use and coordination of information technology in U.S. health care, which is desirable on a number of grounds like better coordination of care across providers, would also trim a large number of jobs in the U.S. health care system.

Business services

McKinsey writes: \”Nearly 17 million Americans are employed in business services, making it second only to the government sector in terms of total employment. … [E]mployment growth in the sector was essentially flat for the 2000-2010 decade … Business services include occupations ranging from administrative assistants and janitors to architects and research scientists. The vast majority of jobs fall into two broad subsectors of roughly 7.5 million each: administrative services, and professional, scientific, and technical services …\”
Three of the top eight job growth categories for 2018, according to the BLS, fall into this category:
Customer service representatives (#3), Office clerks, general (#7), and \”Accountants and auditors (#8).

However, McKinsey\’s high-job-growth scenario here depends on a pattern in which U.S. companies decide to do less offshoring of service jobs, and even move some back to the United States. \”In our interviews, companies say they are considering moving service jobs back to the United States, citing concerns over quality, reliability, high turnover, and rising wages abroad ..\” Fair enough. I\’ve read about cases where outsourcing didn\’t work well, too. But on the other side, I suspect that many possible ways of outsourcing business services jobs are only just being discovered. I\’m dubious of a scenario where the U.S. brings home more jobs than it increases outsourcing.

Leisure and Hospitality

McKinsey writes: \”[T]o reach the high-job-growth scenario, the United States needs to retake lost ground in global tourism. While international long-haul travel increased by 31 percent from 2000 to 2009, the number of visitors to the United States dropped. Foreign visits fell from 26 million in 2000 to 18 million in 2003, before recovering to 24 million in 2009. … In particular, the United States is not getting its share of tourism from a rising global middle class. More Chinese tourists visit France than the United States, for example. A weak dollar should help bring in tourists from China, Brazil, India, and other fast-growing economies …\”

By some measures, if one combines both both international and domestic tourism, tourism is the largest industry in the world. Many Americans tend to think of this country as a point of departure for U.S. tourists going elsewhere, not as a destination for the rest of the world. But in a globalizing world, with a rapidly expanding global middle class, we need to rethink the economic importance of tourism.Of course, international tourism is entangled with concerns about preventing terrorism; restrictions on tourism after 9/11 are a major reason for the drop in U.S. tourism from 2000 to 2003. But having people from around the world visit the U.S. is also one of the most powerful steps the United States can take to dispelling myths about this country and to showing how a free and open society functions. Expanding tourism strikes me as both an economic goal, and also an important part of America\’s broader international relations agenda.

Without tourism, this is a fairly low wage area of jobs in areas like food service. According to BLS,
\”Combined food preparation and serving workers, including fast food\” will be the fourth-largest job growth category from 2008 to 2018.


McKinsey\’s high-job-growth scenario here relies on housing starts returning to their long-term average by about 2014, on additional government incentives for energy efficiency retrofitting, and on expanded infrastructure spending. The BLS lists \”Construction laborers\” 11th among job categories with largest growth from 2008 to 2018. This particular scenario doesn\’t seem all that likely to me. Given very tight government budgets, I don\’t think we\’re going to see a wave of infrastructure spending, nor substantial government incentives for energy retrofitting. I\’m not confident that home-building will be resurrected three years from now.


McKinsey\’s The high-job growth scenario here is that if a low dollar encourages exports, and if some of the trend to outsourcing is reversed, then \”we can envision a scenario in which manufacturing job losses are much smaller or even stop in the decade ahead.\” This seems to me a fair statement of the optimistic view on manufacturing jobs, but it\’s hard to see a lot of reason for optimism.

There were about 18 million manufacturing jobs in the U.S. in the late 1960s. By the late 1970s, this had climbed to 19.4 million. But manufacturing jobs had dropped to 17.2 million by 2000, before plummetting to
fewer than 12 million in 2009 and 2010. Perhaps a modest bounce-back will occur, but it\’s hard for me to be more optimistic than that.


This high-job-growth scenario here is based on a revival of consumer spending as the Long Slump of the U.S. economy gradually turns into more of a real recovery. The BLS ranked \”Retail salespersons\” sixth among occupations for job growth from 2008 to 2018.

To me, the future of retail seems very muddled in world where can buy everything from books to a lawn mower to groceries on Amazon, along with any other number of on-line sellers. Businesses are still figuring out how best to integrate bricks-and-clicks, that is, the desire of many consumers to see and touch and talk about many objects before purchasing them, together with the efficiencies of ordering on-line and delivering from a warehouse. I\’m not at all sure how this will work out, but my suspicion is that there may end up being more new jobs in the process of delivering goods from warehouses to people\’s homes, or to a set of as-yet-undetermined safe locations near people\’s homes, than additional jobs in conventional retail positions.

What are other possible options for creating jobs? 

So that\’s the McKinsey list. What else is there? In particular, it\’s intriguing to brainstorm about certain kinds of jobs that are not extremely high on skills (not everyone is going to be a research scientist), but also aren\’t extreme low-wage jobs either. These would be jobs where people learn and develop skills and experience, and perhaps where they can leverage their skills by interacting with information and communications technology. In addition, they should be jobs that can\’t easily be outsourced, maybe because geographically tied to U.S. (like provision of support for chronic health conditions) or maybe because it is not the kind of routinized task where outsourcing works well.

Along with some of my suggestions above, here are three possibilities:

1) Jobs in energy production. I don\’t mean green energy here, which will depend on government subsidies for awhile yet, but rather exploiting oil and natural gas that is now available through technologies like fracking. Of course, there is a political dimension as to how fast this might proceed, or whether it will proceed at all. But there are significant number of fairly well-paid jobs in this industry–as North Dakota is already illustrating.

2) Consumer technology services. Many consumers have lives that are ever-more-full of interlocking technologies. Most of us are happy to use these technologies, but we have little intrinsic interest in hooking them up or debugging them when they go awry. Along with plumbers and carpenters and electricians, the \”home repair\” category may come to include people who can set up, interconnect, and do at least basis repairs on your gear.

3) The next big technology breakthrough. In the last few decades, productivity growth has been built in large part on the technological gains in information and communications technology, and in finding ways to apply those gains across the economy. This branch of technology growth still has a way to run, but it\’s worth thinking about what might come next. Materials science? Biotechnology? Nanotechnology? The key is to have a technology that makes continuing and rapid gains for a long period of time, in the way that electronics has done.

My crystal ball for predicting future job growth is all clouded up. Other suggestions welcome. The U.S. economy needs them. 

Will Emerging Economies Dominate the World Economy?

Start with the G-7 countries: that is, the United States, Japan, Germany, France, Italy, United Kingdom, and Canada. Now compare them with the largest 7 \”emerging\” economies: the E-7 would beChina, India, Brazil, Russia, Indonesia, Mexico and Turkey. A January 2011 report from pwc offers some projections comparing where these two groups are headed by 2050.

First, compare the total size of the G-7 and the E-7 economies, in 2009. At market exchange rates, the E-7 is about one-third of the G-7 in 2009. In purchasing power parity exchange rates (which help to account for the fact that money can often buy more of certain goods in low-income countries), the E-7 is about two-thirds of the G-7 in 2009. \”In our base case projections, the E7 economies will by 2050 be around 64% larger than the current G7 when measured in dollar terms at market exchange rates (MER), or around twice as large in PPP terms.\”

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This change represents a remarkable shuffling of the economies of the world. To get a sense of the change, compare the rank order of the economies of the world in 2009 and 2050.  In 2009, the U.S. is the world\’s largest economy. By 2050, U.S. economy will be about 2.5 times as large–and is projected to be in third place in absolute size, behind China and  India.  What other countries move up the rankings notably by 2050? Brazil, Mexico, Indonesia, Turkey, Nigeria, and Vietnam. To my 20th century mindset, some of those countries just don\’t seem like global economic heavyweights. Time to start adjusting my mind to the coming realities.

Of course, per capita GDP looks quite a bit different.  China and India have vastly larger populations than the United States. After 40 more years of rapid growth, per capita GDP in China will by 2050 roughly reach the U.S. per capita GDP in 2009. But by that time, U.S. per capita GDP will have more-or-less doubled. On a per capita GDP basis, China won\’t come close to catching any of the G-7 countries even by 2050–in fact, on these projections, China doesn\’t catch up to Mexico in per capita GDP by 2050.

In an earlier post, I discussed China\’s Will China catch up to the U.S. economy? 

The Persuasive Power of Opportunity Costs

Shane Frederick wrote a nice short article in the January-February 2011 issue of the Harvard Business Review on \”The Persuasive Power of Opportunity Costs.\” He points out that framing choices by making opportunity costs explicit can persuade people to make certain choice–especially because the opportunity costs can be chosen to appear large or small. Opportunity cost, of course, is one of the first concepts taught in any intro economics course.

Here\’s an example from Frederick where the explicit opportunity cost appears large:

\”While shopping for my first stereo, I spent an hour debating between a $1,000 Pioneer and a $700 Sony. Perhaps fearing that my indecision would cost him a sale, the salesman intervened with the comment \”Well, think of it this way–would you rather have the Pioneer, or the Sony and $300 worth of CDs?\”
Wow. The Sony–and by a large margin. Twenty new CDs were too great a sacrifice for the slightly more attractive Pioneer. Although I could subtract $700 from $1,000 and was capable–in principle–of recognizing that $300 could be used to buy $300 worth of CDs, I hadn\’t considered that until the salesman pointed it out.\”
Here\’s an example from Frederick where the opportunity cost is framed to sound small: 

\”[Here\’s a] strategy for those offering expensive products or policies: Cast the opportunities given up as something unattractive or unimportant. An ad by De Beers did this brilliantly. It depicted two large diamond earrings with the tagline \”Redo the kitchen next year.\” Clever. It implied that the cost of the diamonds was merely a slight delay in a renovation. In fact, if a consumer spent the money reserved for the kitchen on the diamonds, it might take him or her much more than a year to save that amount again.\”

And here\’s a political example of making opportunity costs explicit, from the 1953 \”Chance for Peace\” speech given by President Dwight Eisenhower, who said:

\”The cost of one modern heavy bomber is this: a modern brick school in more than 30 cities.…We pay for a single fighter with a half million bushels of wheat. We pay for a single destroyer with new homes that could have housed more than 8,000 people.\”

An Inequality Parade

I\’ve posted recently on How high is U.S. income inequality?  I followed up with posts on about Causes of Inequality: Supply and Demand for Skilled Workers and How the U.S. Has Come Back to the Pack in Higher Education. Here\’s one more metaphor on the subject. Back in its January 20, 2011 issue, the Economist magazine had one of its wonderfully readable surveys that touched on many issues of inequality, called \”A special report on global leaders: The rise and rise of the cognitive elite.\” The entire article is worth reading, but here is a striking way to visualize U.S. income inequality.

\”Jan Pen, a Dutch economist who died last year, came up with a striking way to picture inequality. Imagine people’s height being proportional to their income, so that someone with an average income is of average height. Now imagine that the entire adult population of America is walking past you in a single hour, in ascending order of income.\”

\”The first passers-by, the owners of loss-making businesses, are invisible: their heads are below ground. Then come the jobless and the working poor, who are midgets. After half an hour the strollers are still only waist-high, since America’s median income is only half the mean. It takes nearly 45 minutes before normal-sized people appear. But then, in the final minutes, giants thunder by. With six minutes to go they are 12 feet tall. When the 400 highest earners walk by, right at the end, each is more than two miles tall.\”