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The economics of open borders

December 21st, 2016

A colleague recently sent me a paper on the economics of open borders, by John Kennan, which I hadn’t known of before, though it came out in 2013.
Kennan’s conclusion is striking

Liberal immigration policies are politically unpopular. To a large extent, this is because the beneficiaries of these policies are not allowed to vote. It is also true, however, that the enormous benefits associated with open borders have not received much attention in the economics literature.20 Economists are generally enthusiastic about free trade. But if free movement of goods is important, then surely free movement of people is even more important.
One conclusion of this paper is that open borders could yield huge welfare gains: more than $10,000 a year for a randomly selected worker from a less-developed country (including non-migrants). Another is that these gains are associated with a relatively small reduction in the real wage in developed countries, and even this effect disappears as the capital–labor ratio adjusts over time; indeed if immigration restrictions are relaxed gradually, allowing time for investment in physical capital to keep pace, there is no implied reduction in real wages.

So, is Kennan right about the benefits of open borders? And if so, is there a way of transferring some of those benefits to already-resident wage earners who would otherwise lose, or at least not gain, from expanded migration?

On the first question, I’ll offer a bold Maybe. Kennan’s core assumption is that immigrant workers with a given level of education and (I think) experience will have the same productivity as already resident workers. So a move from a low productivity country to a high productivity country produces a big increase in their effective labor capacity. That benefits those workers, but also produces a shift in global income from labor to capital since the supply of labor has increased.

There’s room to debate this assumption, and there are special cases where it clearly doesn’t apply, such as that of professionals whose qualifications aren’t recognised in their new country. But Kennan makes a good case that it isn’t far from the truth.

Moreover, in a world where more than a billion people travel internationally each year, it’s inevitable that vast numbers of people are going to have close relationships of all kinds with citizens of other countries. Restrictions on movements across borders impose costs on all those people ranging from minor to calamitous.

Supposing that Kennan is right about the economics, what can be done to spread the benefits of open (or less tightly closed) borders more broadly and thereby, potentially, get increased political support. Since owners of capital benefit from open borders, an obvious possibility would be to increase the rate of tax on capital income and redistribute the income to labor. That seems neat enough in the abstract, but there’s no obvious (to me) way of putting it together as a political package.

The other way to spread the gains would be to tax, or otherwise capture, some of the benefits gained by immigrant workers. For example, new immigrants could be obligated to make a contribution, say through a tax surcharge, to a fund representing their share of the existing infrastructure of the destination country. Again, it seems neat enough in the abstract, but there are obvious difficulties. In particular, migrants who could have entered anyway would be significantly worse off.

Still, it seems unlikely that support for the migration policy status quo, let alone an expansion of existing flows, will be an adequate response to the rise of rightwing identity politics (what I’ve previously called tribalism), in which opposition to migration is a central feature. The more people who see freer movement as benefitting them and their families, the better will be the chances of mobilising support for a diverse and tolerant society.

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  1. GrueBleen
    December 21st, 2016 at 20:23 | #1

    Is the ‘open borders’ thing a matter of economics, or a matter of cultural (non)appropriation.

    If there were genuinely open borders, how many people would move into America in the first ten years ? And then perhaps into China in the next ten ?

    Open borders was probably a great idea back 50 or so years ago when the world population was maybe 1/3rd of what it is now but … How well is the great ‘open borders’ migration into the EU, and particularly into Germany going ? Is that improving the economies of the EU countries that it’s happening to ? And what about when the next wave of 5 million turn up ?

  2. jrkrideau
    December 22nd, 2016 at 00:07 | #2

    @GrueBleen
    Given continued global warming we are going to be seeing huge numbers of climate refugees heading for either wealthier nations or high ground (or both). We may have open borders or mad dog border defenses in a few years.

    The Americans will have to extend the Mexican Wall to keep out the fleeing Floridians too.

    Capturing economic benefits is likely not to be the main concern and over the short term, let’s say 15–20 years, you are likely right, after that all bets are off. We can probably expect refugees to select their best alternative but any port in a storm is the likely scenario.

  3. D
    December 22nd, 2016 at 00:50 | #3

    Burning down your neighbour’s house and then complaining about them wanting to camp in your back-yard is psychopathic.

  4. QuentinR
    December 22nd, 2016 at 07:23 | #4

    You (JQ) suggest: ” …to tax, or otherwise capture, some of the benefits gained by immigrant workers.” We already have a system of paying superannuation into complying fund accounts which are run and managed by locals [Australians, … I think – or can a complying fund be based overseas?]

    If the standard contributions are seen as insufficient, new immigrants could agree to increase their contributions to … (?) say double the rate that “ordinary” Australians pay (so 19% instead of the current 9.5%), then more money will flow to the people managing their super accounts.

    Could that be seen as spreading the gains?

  5. Ikonoclast
    December 22nd, 2016 at 07:51 | #5

    Would open borders just increase Australia’s already bad unemployment problem?

    Roy Morgan Research asserts “Australian real unemployment jumps to 10.5% (up 0.9%) in July (2016) during post-election uncertainty”.

    Gary Morgan, Executive Chairman, Roy Morgan Research, says:

    “In July Australia’s real unemployment was 10.5% (1.365 million people looking for work, 266,000 more than a year ago) and under-employment was 9.0% (1,171,000, up 194,000 in a year) – a total of 19.5% (2.536 million) Australians looking for work or looking for more work.

    “Although overall employment has increased over the past year – now at 11,642,000 (up 66,000 from a year ago), this increase was entirely the result of a large increase in part-time employment – now at 3,959,000 (up 283,000) while full-time employment fell 217,000 to 7,683,000. The increasing size of the Australian workforce over the past year – up 334,000 to 13,007,000 was too quick for the economy which wasn’t able to produce enough new jobs to lower unemployment.

    “Australia’s slow employment market was largely ignored by the major parties in the Federal Election campaign. Newly re-elected Prime Minister Malcolm Turnbull must take the opportunity presented by a renewed electoral mandate to make the necessary reforms to industrial relations to increase productivity in an Australian economy which is still feeling the impact of the end of the mining boom.

    In July Australia’s real unemployment was 10.5% (1.365 million people looking for work, 266,000 more than a year ago) and under-employment was 9.0% (1,171,000, up 194,000 in a year) – a total of 19.5% (2.536 million) Australians looking for work or looking for more work.

    “Although overall employment has increased over the past year – now at 11,642,000 (up 66,000 from a year ago), this increase was entirely the result of a large increase in part-time employment – now at 3,959,000 (up 283,000) while full-time employment fell 217,000 to 7,683,000. The increasing size of the Australian workforce over the past year – up 334,000 to 13,007,000 was too quick for the economy which wasn’t able to produce enough new jobs to lower unemployment.

    “Australia’s slow employment market was largely ignored by the major parties in the Federal Election campaign. Newly re-elected Prime Minister Malcolm Turnbull must take the opportunity presented by a renewed electoral mandate to make the necessary reforms to industrial relations to increase productivity in an Australian economy which is still feeling the impact of the end of the mining boom.

    “In addition to reducing the ‘red tape’ and regulations – including the excessive weekend penalty rates that prevent businesses from opening – and providing further employment opportunities, and tackling the huge Australian ‘cash economy’ that undermines legitimate businesses by unfair competition, the Government must find a way to ensure RBA interest rate cuts are passed on in full to businesses.”

    I don’t agree with the blurb about “‘red tape’ and regulations – including the excessive weekend penalty rates that prevent businesses from opening”. That is standard neoliberal, pro-cyclical austerity which only leads to further economic contraction.

  6. Smith
    December 22nd, 2016 at 08:00 | #6

    There are good arguments against high immigrstion numbers that are not right wing. To the extent that immigration contributes to high population growth, and that growth is concentrated in a couple of cities, both true in Australia, the result is transport congestion, ever higher housing costs, crowded schools and hospitals and environmental degradation. In theory infrastructure and services could grow to match the higher population. In practice they don’t, or do so only with much delay. And there are real diseconomies of scale in infrastructure provision in big cities so it becomes more expensive per capita.

    This is purely about the numbers of migrants. The right wing identity politics on immigration are about where they come from, a completely different argument. The two should not be confused.

  7. rog
    December 22nd, 2016 at 08:11 | #7

    The politics of using tax as leveller have proved to be too hard, as per the ill fated backpacker tax. I don’t expect anything new on taxation until the govt has a change of heart on budgetary policy, whenever that may be.

  8. GrueBleen
    December 22nd, 2016 at 08:15 | #8

    @Ikonoclast

    make the necessary reforms to industrial relations to increase productivity in an Australian economy which is still feeling the impact of the end of the mining boom.

    Do you have any idea whatsoever what on earth that is supposed to mean, Ikono ? What is Australia short of that we must “increase productivity” to mitigate – other than decent full time jobs, of course.

    And what is the real – as opposed to neoliberal mythopoeic – ” impact of the end of the mining boom“.

  9. GrueBleen
    December 22nd, 2016 at 08:29 | #9

    @jrkrideau

    Well I think we might see “huge numbers of climate refugees” trying very hard to head for wealthier nations or high ground, but how exactly are they going to do it ? How would a bunch of Pacific Islanders head for NZ or Aus ? Not that it matters much since there isn’t a lot of them – but maybe we and the NZedders would send boats for them so they don’t drown on the way.

    Of course we have seen a few mass migrations in history – the Goths and Vandals in the first century CE being a prime case – but they didn’t have to housed, clothed, fed or educated when they arrived – they had to fend for themselves until they could get meaningful employment fighting either for, or against, Rome – or both at the same time.

    But what about nowadays ? What are the 163.8 million Bangladeshis (a mere 2.19% of the world’s population) going to do ? Catch boats to Australia and end up on Nauru (until Nauru sinks beneath the Pacific anyway).

    Fact is, humanity has left it way too late, with way to many people, for any kind of ‘open border’ thing – voluntary or forced – to work.

  10. Troy Prideaux
    December 22nd, 2016 at 09:59 | #10

    Advocates of high immigration will generally base their arguments around economics and the economic benefits it can provide. Critics will focus more on social cohesion, integration and security more recently or of course, plain old racism.
    Personally, I’m concerned. I live in an area that has been overrun with Chinese. I have no problem with Chinese people and I’ve benefited quite well financially from it via the sale of my former residence, but when I walk down the main street in Glen Waverley, I do get frustrated when the majority of communication seems to be in Mandarin and not English anymore. The need or attempt to integrate appears to be diminishing relic of the past (like me I guess).
    Thing is, when I speak to English speaking Chinese locals that have embraced integration about these concerns, 100% totally agree with me (passionately expressed too).

  11. J-D
    December 22nd, 2016 at 10:32 | #11

    Would open borders just increase Australia’s already bad unemployment problem?

    A somewhat interesting question.

    Let’s consider three possibilities.

    A. Countries with larger populations generally tend to have higher unemployment rates than countries with smaller populations; therefore, an increase in population is likely to result in an increase in the unemployment rate.
    B. Countries with larger populations generally tend to have lower unemployment rates than countries with smaller populations; therefore, an increase in population is likely to result in a decrease in the unemployment rate.
    C. There is no general correlation between population size and unemployment rate; therefore, there is no particular reason to expect any effect on the unemployment rate from an increase in population.

    C seems most plausible to me, but I haven’t checked.

    To the extent that immigration contributes to high population growth, and that growth is concentrated in a couple of cities, both true in Australia, the result is transport congestion, ever higher housing costs, crowded schools and hospitals and environmental degradation.

    If an increase in the population of a city results in transport congestion, increased housing costs, crowded schools and hospitals, and environmental degradation, it’s not evident that it makes any difference whether the increase in population results from net migration to the city from outside the country, net migration to the city from within the country, or excess of natality over mortality.

    I do get frustrated when the majority of communication seems to be in Mandarin and not English anymore.

    If eavesdropping is not emotionally important to you, I don’t understand what difference it makes to you what language other people are talking. I often overhear snippets of other people’s conversations in English and don’t understand what they’re about, but I remind myself that those conversations are other people’s conversations and that they’re having them for their own purposes, not for my sake.

  12. Ernestine Gross
    December 22nd, 2016 at 19:55 | #12

    There are huge number of variables involved in this debate. I’ll try a relatively easy one – easy for I am unencumbered by knowledge of sociology and psychology and politics .

    Conditions at a particular time or short period in a particular place or regions matter. Take for example Troy’s point about language vs J-D’s counter argument. Consider two ‘social conditions’: 1) There is peace everywhere and no crime.
    2) There wars and there is a lot of crime, including attacks on groups of people.

    I imagine a lot of people would be quite happy with J-D’s argument if condition 1 applies but would agree with Troy’s point if condition 2 applies. Why? My intuition is that not understanding the language spoken by people around an individual is experienced by this individual as losing one faculty for interpreting linguistic signals used in risk assessment (personal safety). My intuition rests on my personal experience in countries outside the Latin-Germanic language groups where I understand not a word. I tend to be much more vigilant in such places, less at ease, even though official statistics on crime may indicate I am in a safer place.

    At least in my case, it is similar with behaviour with the added dimension of concern that my behaviour may be interpreted differently – the opposite to what I understand as ‘normal’. The potential for misunderstandings is higher. The social environment is more complex.

    Condition 1 is empirically false for most if not all of the history of mankind as far as I know. Similarly, condition 2 is not true for the entire world. On the practical plane, we are talking about ‘more’ or ‘less’ than in the recent past – amounting to changes in ‘more like 1’ to ‘more like 2’ and vice versa. Is it then surprising that a period of relative openness toward ‘foreigners’ or ‘strangers’ are followed by a period where the opposite holds sway?

  13. Ernestine Gross
    December 22nd, 2016 at 20:01 | #13

    Turning to the more difficult (because I know a little more about the subject), I have to thoroughly read John Kennan’s paper first before commenting. This may not happen this year.

  14. J-D
    December 22nd, 2016 at 21:09 | #14

    @Ernestine Gross

    1. Do you think people are good judges of how prevalent crime is? Why or why not?
    https colon doubleslash www dot youtube dot com slash watch?v=YMvMb90hem8
    ‘Zombies are at an all-time low level, but fear of zombies might be at an all-time high’

    2. If you rest your intution on your personal experience, I set my personal experience against yours. On a recent trip I was no more vigilant in Paris than I was in London or Dublin, and felt no less safe.

  15. jrkrideau
    December 23rd, 2016 at 00:03 | #15

    @GrueBleen
    Well I think we might see “huge numbers of climate refugees” trying very hard to head for wealthier nations or high ground, but how exactly are they going to do it ?

    Any way they can?
    Walk?
    Highjack ships?
    Seize planes and, if necessary, crash land them on any available runway?
    Seize planes and, if necessary, crash land them on any available runway in a better country.
    Build rafts for short sea trips?
    Hot air balloons?

    Or in other words, any way that looks even vaguely feasible?

    The container ships that should be bringing our winter gloves to Canada will be loaded with refugees—possibly an exaggeration but I doubt it.

    The European refugee crisis seems to indicate it’s not that difficult to get to another place. Fifteen or twenty years ago, did you really expect to have hordes (well really small horde) from Gambia or Senegal invading Europe? Or mobs of desperate Syrians and so on?

    Of course we have seen a few mass migrations in history – the Goths and Vandals in the first century CE being a prime case – but they didn’t have to housed, clothed, fed or educated when they arrived

    And why would you assume a mass migration today would be any different?

    The refugees trying to reach Europe and Australia and the USA have so far been playing by the rules. Given real desperation, that is, home is now under two metres of water or a desert that makes the Rub’ al Khali look like the Garden of Eden and there is no reason to play nice.

    Refugees would have no incentive not to bring along and use any weapon handy. And thanks to years of dedicated Western military aid to many countries we just might find a lot of trained military types in among the refugees (See ISIS).

    And don’t forget, if we get to this stage the currently richer and often more stable countries of the world will be in crisis albeit probably in most cases, nothing like some place like Bangladesh or parts of sub-Saharan Africa but current supply and logistics lines around the world will be collapsing.

  16. GrueBleen
    December 23rd, 2016 at 01:37 | #16

    @jrkrideau

    And why would you assume a mass migration today would be any different?

    Probably because I expected that refugees indeed would “play by the rules” and that us privileged folk would not want to see them dying in doves in the streets from starvation. And that is how I think it’s likely to start.

    But you could be right – maybe they will come as armed invading hordes: more your modern-day Attila than just a bunch of itinerant wanderers. And of course, Canada has land borders so lots of them can walk there.

    For those places with only sea borders, maybe even the armed invaders will have a tough time getting here.

  17. Ernestine Gross
    December 23rd, 2016 at 08:54 | #17

    @J-D

    1. No, according to the widely and often reported divergence between survey reports and statistical data. But this is irrelevant to the point I am trying to make and apparently failed to do so (language and knowledge of behavioural norms)

    And how did the 9 guys get on in Malaysia with their budgie smugglers with the Malaysian flag on their bums? Not a thought given to how their ‘normal’ behaviour might be interpreted by non-English speakers on their turf?

    2. No your personal experience is not a counter example of my personal experience because the two countries you mentioned belong to the Latin or Germanic based language groups (French and English). I am not more vigilant in Paris than in London either.

  18. J-D
    December 23rd, 2016 at 09:48 | #18

    @Ernestine Gross
    ‘No your personal experience is not a counter example of my personal experience because the two countries you mentioned belong to the Latin or Germanic based language groups (French and English).’
    What does that have to do with it? I don’t speak French — or not enough to understand snatches of other people’s conversations. Walking around London and Dublin I understood what I heard people saying; walking around Paris I didn’t.

    Okay, although it’s longer ago and my memories correspondingly less fresh, I’ve also spent time in Israel, and I was no more vigilant there, where, again, I couldn’t understand what I heard people saying as I walked around, and Hebrew’s certainly not Latin or Gemarnic based if that does make any difference.

  19. hc
    December 23rd, 2016 at 10:50 | #19

    It is not an issue of supporting diversity and tolerance. There are good environmental reasons for opposing current levels of immigration that will lead to 8 million people in Sydney and Melbourne by 2050. Most gains from immigration go to the migrants themselves not to the original residents. With capital mobile internationally the gains to local capitalists tends to be low also. Wages fall with high immigration (oh yes I don’t believe the labour market studies suggesting the demand for labour is not downward-sloping) capital rushes in so workers get less in Australia, capitalists about the same rate of return- all gains to the newcomers. It is not opposition to diversity per se (though that is not a totally crazy argument) but an argument against seeking an ever larger population. We want to have Australian megacities? Not me.

  20. Ikonoclast
    December 23rd, 2016 at 13:09 | #20

    @hc

    I agree that there are good environmental reasons for opposing excessive immigration into Australia. It is possible to maintain this position and be a consistent leftist.

    1. Australia needs a population policy. We need to recognise that there will be a maximum reasonable sustainable population allowing for natural ecological values and sites to be retained.

    2. This maximum might be surprisingly low if current ecological footprint analysis is reasonably accurate. Estimates vary a lot. The most credible high-side estimates suggest a maximum sustainable population of 30 million for Australia. We would be wise to decelerate growth so that we can assess our position well before 30 million, say at 25 million. If we slow down early and things assess out as sustainable at 30 million we can always roll on gently to 30 million. If we slow down late and things start to look bad sooner than expected than slamming on the population brakes harder and later is a more difficult and disrupting exercise.

    3. In a global population crisis it will be of negative long run value and indeed more damaging both regionally and globally to encourage or permit “sloshing” (crude word I know but the concept is valid in flow and capacity issues). By “sloshing” I mean allowing the population to flow, actually overflow, to certain places in crisis mode and then create new crises where people once again feel the pressure to panic-migrate once again to the next supposed safe-haven. By a certain stage there will be no “safe-havens” that are not already strained to capacity.

  21. GrueBleen
    December 23rd, 2016 at 15:22 | #21

    @Ikonoclast

    we can assess our position well before 30 million, say at 25 million.

    Well the Australian population – not counting backpackers, 457 visa holders and thr army of “visa overstayers” then we are at 24.17 million even as we speak. So when do you expect to do the assessment – in 2018 ?

  22. Luke Elford
    December 23rd, 2016 at 16:29 | #22

    @hc

    Your argument is internally inconsistent. Why would wages fall unless labour is becoming more abundant relative to other factors?

    Within the context of constant returns to scale production, the benefit that the host country gains from immigration is directly proportional to the fall in wages—it is the benefit that accrues to factors other than labour as they become relatively scarcer. This benefit necessarily outweighs the cost to existing workers from falling wages.

    Thus, you can argue that wages will fall and there will be gains to capital and/or land, and to the host country overall, and you can argue that wages will not fall and there will be no benefits to the host country, but you cannot argue that there will be a fall in wages whilst insisting that all of the benefits of immigration accrue to the immigrants themselves.

    “…levels of immigration that will lead to 8 million people in Sydney and Melbourne by 2050…We want to have Australian megacities? Not me.”

    Why do many Americans live in cities such as Chicago, Dallas, and the San Francisco Bay area (all metropolitan areas with populations in the 6-10 million range) when they could easily live in smaller places instead?

    The answer is that such cities generate benefits (chiefly higher wages) that offset the costs (chiefly higher housing costs) of living there. In addition, these places generate benefits for land owners, which could readily be taxed and socialised.

    There are plenty of places to live in Australia; as I’ve pointed out in the past, big cities will only continue to grow as long as they offer a comparable living standard to that available in other locations.

  23. Luke Elford
    December 23rd, 2016 at 16:31 | #23

    More generally, I think the framework adopted in the paper—factor price equalisation through trade and capital mobility, with residual benefits from labour mobility as a result of productivity differences—is the most useful for thinking about the benefits and distributional consequences of migration.

    The idea that we “can’t afford” to pay immigrants much more than they earned where they came from—which is sometimes advanced as an excuse for indentured labour—is obvious nonsense given the large productivity differences that exist between countries.

    The most obvious shortcoming of the paper is the failure to take into account the fixed stock of land/natural resources. Presumably, the effect of limited natural resources mirrors the effect of a fixed short-run capital stock—reducing real wages as natural resources become scarcer relative to the effective labour supply, but providing an additional set of beneficiaries who could be taxed.

  24. hc
    December 23rd, 2016 at 19:30 | #24

    @Luke Elford . Not inconsistent at all once you admit capital mobility. The standard story is that returns to prexisting residents increase net because wage reductions are more than offset by boosted incomes to other inputs – primarily capital. By capital mobility means that the redfuction in labour costs attracts foreign capital which restores the return to capital to international levels. All the gains to capital accrue to foreigners.

    You may wish to live in a city with 8-10 million but I don’t. Already congestion issues are substantial. The government shows no willingness to price congestion and, even if it did, the immigrants (as JQ points out) free ride on publicly-provided infrastructure that was delivered before their arrival.

    What the proclivity of the left to destroy our beautiful city environments? Melbourne has often been voted the most livable city on earth. Would it be with double its current population? Let other countries sort out the problems that stem from them breeding excessively. Admitting excess populations from other over-populated parts of the world removes the obvious constraint that these nations themselves should learn to deal with ecologically unsustainable population growth rates. Don’t shove the problem onto us. We live well.

  25. hc
    December 23rd, 2016 at 20:06 | #25

    @Luke Elford . (with spelling corrections, sorry my reading eyesight terrible)

    Not inconsistent at all once you admit capital mobility. The standard story is that returns to pre-existing residents increase net because wage reductions are more than offset by boosted incomes to other inputs – primarily capital. But capital mobility means that the reduction in labour costs attracts foreign capital which restores the return to capital to international levels. All the gains to capital accrue to foreigner capitalists.

    You may wish to live in a city with 8-10 million but I don’t. Already congestion issues are substantial. The government shows no willingness to price congestion and, even if it did, the immigrants (as JQ points out) free ride on publicly-provided infrastructure that was delivered before their arrival. Again this could, in principle, be tacked via entry fees, but pressure groups will not allow this.

    Why the proclivity of the left to destroy our beautiful city environments? Melbourne has often been voted the “most livable” city on earth. Would it be with double its current population? Let other countries sort out the problems that stem from them excessive breeding. Admitting excess populations from other over-populated parts of the world removes an obvious constraint that these nations themselves should learn to deal with ecologically unsustainable population growth rates. Don’t shove the problem onto us. We live well and wish to continue to do so. .

  26. hc
    December 23rd, 2016 at 20:14 | #26

    The quote that John provides is out of touch with much immigration/trade literature. There is an extensive literature (e.g. Ramaswami) that deals with the form of mobility societies should choose. Free trade, open borders, free capita; movements. It is by no means clear that supporting one of these positions implies support for the others.

    Trade liberalization has big advantages over free labour mobility and thev intake of huge numbers of unskilled. lEss social security payouts and fewer pressures on low wage, unskilled locals. But my main feeling is that I don’t want international environmental conditions to be equalised. I don’t want to live like Indians or Chinese but happy tpo trade with you guys in ways that make both parties better off.

    Selfish? You bet..

  27. Luke Elford
    December 23rd, 2016 at 22:36 | #27

    @hc

    You initially wrote:

    “Wages fall with high immigration (oh yes I don’t believe the labour market studies suggesting the demand for labour is not downward-sloping) capital rushes in so workers get less in Australia, capitalists about the same rate of return- all gains to the newcomers.”

    An increase in the labour supply induced by immigration would lower the capital-labour ratio, increasing the interest rate and lowering the wage rate. If the supply of capital is perfectly elastic, capital inflows will return the capital-labour ratio, and hence the interest rate, to its original level. This will also return the wage rate to its original level. There will be no fall in the wage rate.

    http://isites.harvard.edu/fs/docs/icb.topic803549.files/Week%205-October%206/borjas_economic.pdf

    “…suppose that immigrants increase both the size of the labor force and the capital stock by 100 percent…Because the production function has constant returns to scale, this type of immigration would not change the factor prices r and w. As a result, immigration would have no impact on the national income accruing to natives. As long as immigrants replicate the existing economy, therefore, immigrants get the total returns from their product, and the immigration surplus is zero.”

  28. Luke Elford
    December 23rd, 2016 at 22:39 | #28

    @hc

    What’s with the proclivity of right-wing economists to be NIMBYs?

    The Economist Intelligence Unit’s liveable cities rankings, along with others of their ilk, are attention-seeking trash. Serious economists use market prices to determine high quality of life locations as those that people are prepared to accept a lower real income to live in. The Economist Intelligence Unit uses subjective scores for arbitrarily chosen and arbitrarily weighted variables and isn’t very transparent about its approach, which is neither intelligent nor economist-like [1].

    Research relating quality of life to city size isn’t terribly conclusive, but it’s certainly not unknown for a positive relationship to be found. Bigger markets allow for the provision of highly specialised services and more variety and choice.

    Whether congestion induced by population growth makes residents worse off depends on whether lower travel speeds are offset by reductions in the distances that need to be travelled to access a given array of jobs, services or social opportunities. Commuting times tend to increase with city size, but only very slightly.

    None of this changes the fact that big cities can only exist because they offer the same living standards as smaller cities, nor the fact that much of the cost associated with big cities represents a return to land, which can be taxed.

    [1] Some details about their “methodology” can be found here: http://www.statisticsviews.com/details/news/9860951/Whats-the-methodology-behind-Liveability-Ranking.html.

  29. hc
    December 23rd, 2016 at 22:47 | #29

    @Luke Elford

    I agree 100%. With capital mobility the return on capital is fixed, wages are restored to pre-migration equilibrium levels and the only gains from immigration fgo to the immigrants. That is what I said – and what I have published.

  30. hc
    December 23rd, 2016 at 22:55 | #30

    “Whether congestion induced by population growth makes residents worse off depends on whether lower travel speeds are offset by reductions in the distances that need to be travelled to access a given array of jobs, services or social opportunities. Commuting times tend to increase with city size, but only very slightly.”

    Maybe you are a lot younger than me but this claim is rekjected by the experience of both Sydney and Melbourne.

    Increased congestion is not a problem if roads are owned by pre-existing residents and are efficiently priced. Then the gains to the original residents are just those that reflect increased demands for a service they provide. But that isn’t true. Roads are not owned by individuals – for the most part they are provided as public goods. Where roads are priced it is to recover costs and unrelated to the extent of congestion.

    I dispute the claim I am a right-wing economist. I am an economist. Why am I am NIMBY? Because I am selfish and want to continue to enjoy the quality of life I do in Melbourne. On an altruistic note: I also want my kids to enjoy not living in a polluted, congested metropolis.

  31. Ernestine Gross
    December 23rd, 2016 at 23:02 | #31

    @J-D

    I doubt you could understand everybody’s conversation in public places in London and in Paris even if you would be fluent in French because both mega-cities have large population segments whose native tongue is not English or French respectively. In other words, situations as described by Troy, are quite common, except that other languages are involved.

    Why choose Israel rather than Russia, Hungary, , Japan? Many Israelis speak more than one language and English is one of them. Not all Jewish people can understand Hebrew sufficiently to follow all conversations. Obviously, if a person speaks only Greek and ends up in the company of Japanese people who only speak Japanese then there is a problem – no?

    There is a limit on human’s computational abilities and language abilities. Mine happens to be such that languages not related to Latin or Germanic language groups are inaccessible – at least at this stage of my life. Do you want me to pretend otherwise for the sake of avoiding your fishing expedition? If Finland hadn’t been colonised by the Swedes, I wouldn’t be able to remember street names either – like in Hungary. As is stands, the street names in Helsinki are subtitled in Swedish; this helps.

    Why bother with languages if they have no role in individuals’ daily life, including personal risk assessment? Take this as a rhetorical question.

  32. Ikonoclast
    December 24th, 2016 at 06:39 | #32

    @GrueBleen

    Indeed, we need a population policy and we need it now. As with every other issue, our political parties are puppets at the wheel controlled by corporate capitalist money. Australia’s economy has become immigration driven. That is what props up our property prices and these in turn prop up the rest of the economy. We are not so much an economy as just a big property bubble. This can only end in a bad crash sooner or later. I’ve posted elsewhere on how we are failing to upgrade out infrastructure to keep up with our population growth. Others in these threads have noted how we have little or no manufacturing industry left. Our economy is a high-wire act now, meaning there is little holding it up.

  33. GrueBleen
    December 24th, 2016 at 08:15 | #33

    @Ikonoclast

    we need a population policy

    Well the only enforceable “population policy” that I know of was the Chinese ‘One Child’ policy. And it sort of worked. But the Australian Government – aka the rich bastards that Ikono and J_D think rule the nation with an iron fist – just don’t have iron enough fists to make a “population policy” work.

    But I grant that having an “immigration policy” might work – for a while, anyway, until the millions of climate refugees start arriving. Do Bangladeshis do BBQs and play Aussie Rules, d’ya reckon ? We know they play cricket so they’re most of the way there.

    But as to our ‘infrastructure’, well we’ve been saving money – with which to pay my luxurious pension – for many decades. It’s like our moneyed masters just didn’t – and don’t – recognise that as Melbourne went from 1 million to over 4 million inhabitants, something might need to be done. But then, hey, Melbourne is “the world’s most livable city”, so what could possibly be the problem.

    Strangely, a Victorian ex-Premier, by name Jeff Kennett, posted an article in the Melbourne Herald-Sun a month or so ago (he’s a regular columnist), proposing that Victoria should borrow $100 billion (yes, that’s Billion) to build a London-style ‘Underground rail system’ for Melbourne. As you can imagine, the result was that he was completely ignored and he hasn’t ventured on this or any related topic since. Can’t sacrifice that AAA just to run the country properly, can we. (Not, I hasten to add that specifically spending on a London Underground for Melbourne is actually running the country properly – but borrowing for infrastructure just might be).

  34. J-D
    December 24th, 2016 at 10:17 | #34

    @Ernestine Gross

    Troy Prideaux wrote (and this is what I responded to): ‘I do get frustrated when the majority of communication seems to be in Mandarin and not English anymore.’

    Not ‘I do get anxious’ or ‘I do feel more threatened’ or ‘I do become more vigilant’ but ‘I do get frustrated’.

    Troy Prideaux has not returned to this exchange to give more explanation of this frustration, but it’s not usual for people to say or write ‘I get frustrated’ to describe an experience where they felt in danger. So I don’t think what you’ve been discussing is the same as what Troy Prideaux was referring to (whatever that was).

    Taking up your points again: it should be more important to shaping public policy to determine what is actually the case than to determine what people think is the case; in this context, specifically, it’s more important to determine whether people are actually in greater danger when the majority of communication around them is in an unfamiliar language than it is to determine whether people feel as if they’re in more danger when the majority of communication around them is in an unfamiliar language.

  35. Nicholas
    December 25th, 2016 at 09:27 | #35

    Large businesses love high immigration because it is a lazy way to improve their profits without having to deliver higher quality products and/or at lower cost. Politicians love high immigration because it is a lazy way to increase nominal economic growth without increasing real per capita output, without increasing environmental sustainability and resilience, without addressing infrastructure and service needs, and without increasing the amount and quality of jobs relative to the desires of job-seekers. There are excellent left-wing reasons to aim to stabilize Australia’s population at or somewhat below its current level. Ethical concerns for the needs of foreigners are best addressed by skewing our immigration intake towards refugee and humanitarian visas, and cutting the skilled intake (which we don’t need in great quantities because we can and should be training skilled people locally).

    How about a total immigration intake of no more than 100,000 people per year, and 70,000 of those would be refugee or humanitarian visas, and 30,000 would be a combination of skilled visas and family reunion visas?

  36. Ernestine Gross
    December 25th, 2016 at 09:58 | #36

    @J-D

    Troy is obviously smarter than I am. I shall try to avoid repeating the mistake of getting myself entangled with your posts. All good. I wish you a Merry Christmas.

  37. Ikonoclast
    December 25th, 2016 at 11:33 | #37

    @Nicholas

    I agree. That sums up the entire case very well. I would simply add that our net immigration should be zero. Make intake closely approximate emigration with a one year lag. Skew intakes to refugee and humanitarian visas as you say. I would make some changes to citizenship. To become an Australian citizen, people should be required to renounce all other citizenship(s). For this renunciation would come an absolute guarantee against, indeed the legal impossibility of any deportation.

  38. Collin Street
    December 25th, 2016 at 12:05 | #38

    Strangely, a Victorian ex-Premier, by name Jeff Kennett, posted an article in the Melbourne Herald-Sun a month or so ago (he’s a regular columnist), proposing that Victoria should borrow $100 billion (yes, that’s Billion) to build a London-style ‘Underground rail system’ for Melbourne.

    This would be daft, btw. You build a “metro” when you can’t use the mainline / long-distance railways for commuter service; this pretty much limits them to situations where
    + the city was already big when the long-haul railways were installed,
    + a few cases of cities that grew quickly in the post-war period when people weren’t installing suburban railways and your streets weren’t built wide enough to run light rail [cities that were built before the war usually have rail alignments, even if they’re abandoned: see los angeles]

    Anything else you only need piecemeal upgrades of your preexisting suburban rail lines. Like the Metro Rail Tunnel, or the level crossing removal project, or the Eastern Suburbs line in Sydney.

  39. GrueBleen
    December 25th, 2016 at 13:13 | #39

    @Collin Street

    This would be daft, btw.

    Of course it’s daft and that is an enduring, and endearing, property of Jeff Kennett.

    It wasn’t the object of Jeff’s proposition but the fact of a proposition like that at all: a right wing guy proposing that an Australian government should actually go into considerable debt to build infrastructure. Can’t “balance the budget” that way, doncha know.

    But I think perhaps Kennett was just imitating one of his earlier predecessors, Henry Bolte – longest run Premier of Victoria and a politician of great reverence to the right. And here, courtesy of Wikipedia, is what Bolte did:

    “Bolte used state debt to provide a wide range of state infrastructure and he was very successful at winning overseas investment for the state. Some of his large projects were increased coal production and power generation in the Latrobe Valley, new offshore oil and gas fields in Gippsland, the West Gate Bridge over the lower Yarra River, a new international airport for Melbourne at Tullamarine and two new universities (Monash University and La Trobe University). Bolte was easily re-elected at the 1958, 1961 and 1964 state elections.”

    Amazing, eh. A right-wing politician actually using state debt constructively – it’ll never happen again, of course.

  40. GrueBleen
    December 26th, 2016 at 14:48 | #40

    Talking about ‘open borders and free movement of people’, I had an enlightening experience this afternoon riding a bus.

    I took a Melbourne bus from a location in suburban Burwood which was travelling to the Chadstone Shopping Mall (a roughly 20 minute trip on normal days). By the time the bus got to Chadstone it was moderately crowded (basically standing room only) and of the 40 or so passengers only 6 (including me and partner) were not ‘Chinese’ (ie of Chinese-like Asian appearance). In short, roughly 90% of the passengers were Asian.

    When we got to Chadstone, my gut-feel estimate was that at least 60% of the shoppers’ were Asian. Ok, I know that Chadstone Mall is a home-from-home for many Asians, but stiil it surely illustrates something – whether ‘open borders’ or not, I can’t quite say.

  41. December 26th, 2016 at 16:16 | #41

    David Attenborough and the late Judith Wright (1915-2000) and other environmentalists oppose population growth and high immigration into Australia. They oppose population growth because the urban sprawl and the other environmental resource extraction, necessary to support larger numbers, harms our life support system including our native fauna and flora.

    As was explained by Kelvin Thomson, the Federal Labor member for Wills until 2016, further increases in population add to the per-capita cost of infrastructure. As numbers increase, the amount of infrastructure and services – roads, public transport, electricity, medical care, bureaucracy, etc. – necessary to meet the needs of each citizen, increases.

    As our population increases further it is becoming ever harder for governments to balance budgets. Consequently the taxes we have to pay, as a proportion of our income, have been increasing.

    Former Queensland Labor Premiers Anna Bligh and Peter Beattie are two Australian government leaders who claimed that they were privatising[1] in an attempt to overcome budget deficits (produced by population growth that the both helped to cause).

    Other effects of population growth include: higher housing costs and higher living costs in general, fewer people able to live in detached housing and ever larger numbers forced to live in caravan parks or congested, energy-inefficient high-rises – if they have shelter at all, greater traffic congestion, fewer and fewer households able to survive on a single income, more overtime (both paid and unpaid) worked to make ends meet.

    Footnote[s]

    [1] As a result of these privatisations,the Labor Party lost 44 of it 51 seats in the election of 24 March 2012. Only 7 seats, in the 89 seats the Queensland Legislative House of Assembly, remained Labor. As far as I am aware, this is the harshest repudiation of any government by voters in the history of Australia.

  42. Luke Elford
    December 27th, 2016 at 11:48 | #42

    @hc

    “Maybe you are a lot younger than me but this claim is rekjected by the experience of both Sydney and Melbourne.”

    The Centre for International Economics’ report ‘The benefits and costs of alternative growth paths for Sydney’ includes modelling by the NSW government on the transport impacts of a 31 per cent population increase between 2011 and 2036. Incorporating only transport projects that were to be funded over the first ten years, the modelling considers one scenario which closely matches current development patterns, and has 30% of growth occurring in greenfield areas, with the remaining 70% contained within the existing urban area.

    Assuming that greenfield densities are equal to the average for the existing urban area (a plausible assumption given recent increases in greenfield development densities), the increase in the density of the urban area would be 20% (1.31/(1 + 0.31*0.3) = 1.31/1.093 = 1.20). The corresponding reduction in distances to a given range of shops, services or people would be 8.7% (sqrt(1/1.20) = 0.913).

    The modelling indicates that trip times per km would increase by 7% as a result of greater congestion. The net result would be a decrease in travel times of 2.3% (0.913*1.07 = 0.977). It’s useful to live near other people!

    Of course, for some purposes (e.g. work or leisure trips to the CBD) people would continue to travel long distances and benefit from larger markets rather than reducing trip distances in line with population density.

    In the US, the elasticity of car commute time with respect to city size is about 0.10, so a doubling of city population from 4 million to 8 million would increase commutes by 7.2% (2^0.10 = 1.07), or 2.2 minutes for a 30 minute commute. For comparison, a few years ago average commute times (all modes) were 34 minutes in Sydney and 32 minutes in Brisbane (Sydney is a little over twice the size of Brisbane).

  43. Luke Elford
    December 27th, 2016 at 11:49 | #43

    Of course it would be best if all of the externalities were internalised through efficient pricing, but it cuts both ways. There’s no basis for ignoring the external benefits of immigration or assuming that they are outweighed by external costs.

    A reasonable estimate of the elasticity of wages (controlling for worker characteristics) with respect to city size is 0.06. This implies that each new resident provides an external benefit to existing city residents equal to 0.06 times average wage income.

    The elasticity of commute time with respect to city size is 0.10, as noted above. Take a worker who works a 40 hour week, makes ten 30 minute commutes each week, values commuting time at half the wage rate and for whom the time value of travel represents 80% of total variable travel costs. Then, average commuting costs are 10*0.5/40/2/0.8 = 0.078125 times average wage income. The negative externality, and hence efficient tax, for each new resident is equal 0.10*0.078125 = 0.0078125 times average wage income.

    The net external benefit is 0.06-0.0078125 = 0.0521875 time average wage income.

    The figures I’ve seen imply that the nation’s infrastructure stock is valued at about 85% of GDP. Assuming a labour income share of 55%, full funding of the infrastructure costs of immigrants by existing residents would be worthwhile simply given the net external benefits if the borrowing cost is less than 0.0521875*0.55/0.85*100 = 3.4%. If costs were higher, the difference could be made up with development infrastructure charges.

    There are of course other external benefits and costs, but these are reasonable ballpark figures.

  44. GrueBleen
    December 27th, 2016 at 13:27 | #44

    @Luke Elford

    There are of course other external benefits and costs, but these are reasonable ballpark figures.

    Then why dodn’t we in Australia take on 1 million, or 2 million or even 5 million immigrants per year and get all those magnificent benefits magnified ?

    a worker who works a 40 hour week, makes ten 30 minute commutes each week

    Oh yes, and what part of inner city paradise does that “worker” live in ?

  45. Luke Elford
    December 27th, 2016 at 14:14 | #45

    @GrueBleen

    I have a preceding comment awaiting moderation which gives average commute times for Sydney and Brisbane, which are a little over 30 minutes.

  46. hc
    December 27th, 2016 at 17:03 | #46

    @Luke Elford

    Appreciate yout attempts to provide order of magnitude empirical estimates but:

    These are the agglomeration economies?

    “A reasonable estimate of the elasticity of wages (controlling for worker characteristics) with respect to city size is 0.06. This implies that each new resident provides an external benefit to existing city residents equal to 0.06 times average wage income”.

    And average congestion costs are less than 1/6th of these? Don’t believe it. The agglomeration economies estimate is a pure guess. It implies there should be no congestion pricving and – instead – a subsidy for more people without pricing.

    A better way of thinking about it might be to consider how people might live if Sydney and Melbourne had double their current populations by 2050 as forecasts of current population trends have it by 2050. The congestiom costs in each city are ALREADY over $3b annually.

  47. Nick
    December 27th, 2016 at 19:24 | #47

    “The congestiom costs in each city are ALREADY over $3b annually.”

    That’s interesting, hc. Because traffic congestion costs the entire UK only £4.3bn per year.

    And as bad as traffic might be in Melbourne and Sydney, it’s hardly a patch on London, which has a population of both cities combined, and roughly twice the average commute time.

    Given the bulk of the costs in both cases are attributed to time = money, not increased operating costs and air pollution, which country’s economists are wildly off in their assumptions?

  48. Nick
    December 27th, 2016 at 19:29 | #48

    And why did the very same UK economists change those assumptions two years later in 2014 to report a figure an order of magnitude higher? Is it a coincidence that ‘urgent need for road-building’ was back on the Cameron government’s table? And that both BITRE reports 2007 and 2015 were carried out under federal Liberal governments?

  49. Nick
    December 27th, 2016 at 19:32 | #49

    And not to put too fine a point on it, but why does the head of BITRE regularly appear at conferences featuring House of Lies style management-consultant types who boast of overseeing ‘the largest PPP transactions ever in the world’?

  50. hc
    December 27th, 2016 at 19:44 | #50

    @Nick

    Estimates I quote are prepared by the Productivity Commission of the deadweight losses due to congestion in Sydney and Melbourne. Actually these figures are now quite old – the numbers would be much higher now. London has a cordon pricing scheme (which reduces congestion) but the figure you cite for the UK seems much too low.

    Not sure what the later UK figures measure. Sometimes people use estimates of the value of the extra travel time from free flow conditions which is definitely not the correct way of measuring congestion costs. Should merasure the DWLs.

    Obviously the case for road building is exaggerated if an attempt is made to deliver good road services when these are provided as a free good, The correct procedure is to price roads efficiently and then to expand them if, assuming constant returns, they make a profit. A great benefiit of efficient congestion pricing is that it enables sound (non-political grandstanding) road supply decisions.

  51. Nick
    December 27th, 2016 at 20:47 | #51

    Productivity Commission estimates are based on the BITRE reports:

    https://bitre.gov.au/publications/2015/files/is_074.pdf

    and:

    ~/publications/2007/files/wp_071.pdf

  52. Ikonoclast
    December 27th, 2016 at 20:51 | #52

    Coogee beach had “open borders” in a sense.

    http://www.abc.net.au/news/2016-12-27/coogee-beach-booze-ban-after-disgraceful-christmas-day/8149670

    Open borders means some people see a good place, come in, exploit it, trash it and leave it. Without a real stake in a place, a proportion of people act like this. I mean a proportion of all peoples so this is not a racist statement. This proportion (of all peoples) does not have to be all that large percentage-wise to be very damaging. Open borders would be an exercise in extreme naivety. Of course, the capitalists, neoliberals and glibertarians want open borders. This would allow them to destroy all lands and all peoples comprehensively, solely for the private profit motive.

  53. Julie Thomas
    December 28th, 2016 at 07:59 | #53

    @GrueBleen

    “my gut-feel estimate was that at least 60% of the shoppers’ were Asian. Ok, I know that Chadstone Mall is a home-from-home for many Asians, but stiil it surely illustrates something – whether ‘open borders’ or not, I can’t quite say.”

    Work on understanding that gut feeling and you might understand something about how your gut works to influence your brain.

    When I go to the post office or the pub in my right wing nut job electorate I know from looking at the way they vote that 90% of the people I see there are not like me even if most of them are not Asians. We do have one Asian family in town though.

  54. GrueBleen
    December 28th, 2016 at 08:09 | #54

    @Luke Elford

    I have a preceding comment awaiting moderation which gives average commute times for Sydney and Brisbane

    Hmm, well either I have finally gone BDS* or it hasn’t arrived yet. So in the meantime I did the requisite Google and read a few “studies” that indeed appear to support your number. I say (and emphasize) “appear” because they struck me as very poor studies.

    For starters, all we got was the “average” commute time – which as we all know is an ambiguous name, sometimes meaning ‘arithmetic mean’, sometimes ‘geometric mean’ and sometimes even ‘median’. So t’riffic analysis guys. Didn’t give us those usually vital numbers: median and standard deviation (I think the modal value is probably less useful here).

    Secondly, there was no indication of the kinds of travel being undertaken: once upon a time, for instance, almost all ‘office work’ jobs – and a sizable chunk of retail – were CBD based, though less so now. So once upon a time most of the travel would have been from suburbs to centre – plus some travel to manufacturing/trades centres. Now less so.

    Thirdly, there was no indication of ‘time of day’ factors – eg when ‘flexitime working’ became more accepted (back nearly 40 years ago) the commute time was shortened by spreading out the ‘peak time’ – a longer, but less intensive, peak, hence shorter travel times. Nowadays, that’s much less of a moderating factor because ‘peak’ just lasts a lot longer.

    Fourthly, it seems most of the studies – with one apparent exception – gathered their data from commuter testimony from memory: a notoriously inaccurate measure. The exception used a single day ‘diary’ which basically has two problems: one is the accuracy of filling out the diary (and as we know from ‘viewer diary’ measures of tv show popularity, that can be very misleading). The other is ‘single day’: I used to occasionally commute approximately 17km to the Melbourne CBD by car and it could take me anywhere from 35 to 55 minutes (and occasionally much longer) depending on the day – and it wasn’t simply predictable either, eg Friday could be either good or bad without apparent reason.

    But I more often commuted by rail and that was 53 to 63 minutes: 15 minutes drive to station, find parking and wait for train, 30 – 40 minutes (normal variance) train travel (approx 15km), 8 minutes walk from station to front door of the office building (which adds another issue – was the commute time door to door or carpark (ie home driveway) to destination carpark).

    I continue to await your figures and I’ll be interested to see how many of the above issues are clarified by them.

    *BDS = Blind, Deaf and Stupid.

  55. GrueBleen
    December 28th, 2016 at 08:13 | #55

    @Julie Thomas

    you might understand something about how your gut works to influence your brain

    But I already know how my gut influences my brain, Julie: it tells me when I am hungry.

    What does your gut tell you ?

  56. Luke Elford
    December 28th, 2016 at 11:31 | #56

    To be clear, my analysis is meant to apply to cities generally (and, at a larger scale of analysis, to regions, since similar relationships exist between wages and the population density of regions). It’s not all about Melbourne, Melbourne people!

    The 0.06 elasticity is not a “pure guess”; it is a midpoint value from the literature.

    If the effects of increasing transport costs dominated the effects of wage increases, people would be prepared to pay less to live in cities (and cities would barely exist).

    To that end, we can use the capitalisation of net agglomeration economies and diseconomies (available given typical infrastructure investments) into housing prices as an alternative way of estimating the net external benefits of immigration. In the US, the elasticity of the median price of owner-occupied housing with respect to city size is 0.13. If households spend 20-25% of their income on housing, this implies a benefit of 2.6-3.25% of income. This is similar to my earlier estimate of 0.0522*55% = 2.87%.

    GrueBleen, whatever the shortcomings of travel surveys, I very much doubt that they bias the results in a way that materially affects my analysis. If you’re hoping my preceding comment would include a treatise on the points in your comment, you’re going to be disappointed.

  57. J-D
    December 28th, 2016 at 12:28 | #57

    @Ikonoclast

    Open borders means some people see a good place, come in, exploit it, trash it and leave it. Without a real stake in a place, a proportion of people act like this. I mean a proportion of all peoples so this is not a racist statement. This proportion (of all peoples) does not have to be all that large percentage-wise to be very damaging. Open borders would be an exercise in extreme naivety.

    There is no immediately apparent reason why this argument should be evaluated differently in relation to the borders between Australia and the rest of the world, the borders between New South Wales and the rest of Australia, the borders between Sydney and the rest of New South Wales, the borders between Randwick City and the rest of Sydney, the borders between Coogee and the rest of Randwick City, or the borders between Coogee Beach and the rest of Coogee. If you’ve got a good argument there that open borders between Australia and the rest of the world are a bad idea, it would seem to be an equally good argument that open borders at all those other levels are also a bad idea.

    Perhaps they are. Perhaps if there were border controls between Coogee Beach and the rest of Coogee they would have prevented the destruction on Christmas Day, although that’s not the plan the council’s going with.

  58. GrueBleen
    December 28th, 2016 at 14:49 | #58

    @Luke Elford

    If you’re hoping my preceding comment would include a treatise on the points in your comment, you’re going to be disappointed.

    I rather thought I would be, Luke. But thank you for not trying, it saves me wasting any more time.

  59. Ernestine Gross
    December 29th, 2016 at 22:41 | #59

    Today I had a chance to read John Kennan’s paper. A few comments:
    1) Methodology:

    a. Use of duality theory. See Diewert’s review paper [1] regarding technical conditions and issues even when applied in micro-economics on the level of a ‘firm’ or ‘individual’.
    b. Macro-economic ‘general equilibrium’ model, applied to ‘international trade’, using quantity data of imports and exports. Setting aside issues arising from duality theory on the micro-economic level and assumptions such as no transport costs, the aggregation problems on the macro-level are, IMHO severe; intractable.
    c. To illustrate the remoteness of this model from the so-called real world (defined as the world we live in), I’ll pick on one assumption, namely ‘preferences of consumers are assumed to be identical in all ‘countries’. This means people in Alaska have the same relative desire for a sombrero as people in Mexico. (I just won’t buy this level of simplification.)
    d. As far as I could detect, there is no dynamic specified in this paper; it is comparative statics. What happens to prices of non-traded commodities when there is ‘free labour’ movement? Think of real estate prices. Even if nominal wage rates do not decline, the purchasing power of workers in the immigrant ‘countries’ would decline due to rising rent costs. (The model is not a full general equilibrium model.)
    e. The approach is akin to that advocated by Milton Friedman – simple model and see how it fits the data.
    2) It seems to me Kennan should test his model on US data. There is ‘free labour movement’ across States. How have prices of various types of human services (‘labour’), real estate, machines, … (physical ‘capital’), garden plots, agricultural land, backyards, ….. (‘land’) converged within the USA? How did the relatively poor in various States benefitted from free labour mobility? Data from the post-unification era of Germany might also provide a test of Friedman’s methodology.
    3) IMHO, one cannot base policy on this paper. It is not the politics, which is the problem but the economic modelling.
    4) There is clearly an asymmetry in the treatment of borders for financial (and some physical) capital and labour in the international institutional arrangements. One may as well argue that ‘free capital movements’ and the belief in Samuelson’s factor-price equalisation theorem have served some ‘countries’ well but have not helped to reduce income and wealth inequalities across countries while allowing income and wealth concentration to grow in those ‘countries’ which, in the aggregate, benefited, using simple time series and cross-section data instead of rows of equations which in the end result in comparing import and export quantities across countries.

    http://econ.sites.olt.ubc.ca/files/2014/02/pdf_course_erwin-diewert-ECON581Ch4.pdf

  60. BilB
    December 30th, 2016 at 07:14 | #60

    That was a brave effort, Ernestine.

    Not that I really understood the outcome of that paper, what I saw was an attempt to examine real world situations through restrictive formulae each of which only operate with specific data within specific ranges, with the duality principle being used to “stitch” together the fragments in order to achieve some kind of unified result. Your conclusion that the outcome was flawed is no surprise to me.

    Decades ago a friend (an economist) consulting to a lease finance house was able to defeat all of the major institutions in lease finance deals that eventually ran into the billions of dollars by using an iterative approach to complex calculations with as many as 26 variables and large numbers of exceptional events. Some years later I used his approach to demonstrate that “All of Life” insurance policies could achieve at best a yield 2% above inflation (based on the yield tables offered). ie it does not require enormous mathematical prowess to make useful evaluations of real world situations, more useful is a degree of progamming skill and a commonsense approach.

    I remember reading a quote in Life magazine (back in the late fifites) that the future will require not great simplifiers (the formulaic approach) but great complexifiers (the iterative approach). Who ever it was who made the quote was spot on, epitomised in the complexity of the middle east conflicts which I see as the natural outcome of applied Libertarianism.

  61. Ikonoclast
    December 30th, 2016 at 09:18 | #61

    Ernestine basically refuted the paper in economic terms. I need not paraphrase E. I would only muddy the waters if I attempted a paraphrase.

    Open borders are open to a sociopolitical refutation too. Essentially, national polities, especially democratic ones, need control of national borders (a level of control making the border semi-permeable to people attempting movement in both directions). Without this control, a national polity loses national control and in a very real sense ceases to be a nation.

    The basic question is do we (Australia) want to be a nation? While we are democratic and some polities are not, the answer is yes we do want to remain a nation. While corporations and capitalism challenge democracy, the answer is yes we do want to remain a democratic nation state with a representative democratic government (flawed and distorted as it is) as a bulwark against capitalism and corporatism.

    Until and if socialism and workplace democracy triumph everywhere, globally, we do not want open borders (if we are wise). Open borders are another trojan horse for corporate capitalism to destroy democracy, such as it remains, at the present time. First socialism, then open borders, that is the only way to go. Under capitalism, open borders are a disaster for many polities except perhaps for the most powerful ones which are largely ruled by corporations and oligarchs. Even for these nations only the elites and their functionaries will benefit. The majority of the population will be harmed economically and socially.

  62. BilB
    December 30th, 2016 at 11:02 | #62

    So true, Ikonoclast. Australia’s open everything experiment was with Murdoch and his media ambitions. Government after government caved in to his arguments (and possibly threats) to the extent that he was able to amalgamate media across the nation, and then across borders to eventually be one global voice, his (IMHO). Definitely not an outcome that served the interests of most Australian’s. Putin is now deploying an open border cyber policy with similar effect to that of Murdoch. I really don’t think that we need to go into the economics of this to measure the negative outcomes.

  63. Nick
    December 31st, 2016 at 01:57 | #63

    Ikon: “Essentially, national polities, especially democratic ones, need control of national borders. Without this control, a national polity loses national control and in a very real sense ceases to be a nation.”

    Great Britain wasn’t a nation before the Aliens Act of 1905? Not trying to be pithy Ikon. I’m very much agnostic on open borders. I can think of just as many good reasons for them as against – and in any case, I’m under no illusion a majority would ever support the idea until at least the end of the oil age. But worth adding some historical context:

    http://people.mpim-bonn.mpg.de/geordie/Zweig.html

    Indeed, nothing makes us more sensible of the immense relapse into which the world fell after the first World War than the restrictions on man’s freedom of movement and the diminution of his civil rights. Before 1914 the earth had belonged to all. People went where they wished and stayed as long as they pleased. There were no permits, no visas, and it always gives me pleasure to astonish the young by telling them that before 1914 I travelled from Europe to India and to America without passport and without ever having seen one. One embarked and alighted without questioning or being questioned, one did not have to fill out a single one of the many papers which are required today. The frontiers which, with their customs officers, police and militia, have become wire barriers thanks to the pathological suspicion of everybody against everybody else, were nothing by symbolic lines which one crossed with as little thought as one crosses the Meridian of Greenwich. Nationalism emerged to agitate the world only after the war, and the first visible phenomenon which this intellectual epidemic of our century bought about was xenophobia; morbid dislike of the foreigner, or at least fear of the foreigner. The world was on the defensive against strangers, everywhere they got short shrift. The humiliations which once had been devised with criminals alone in mind now were imposed upon the traveller, before and during every journey. There had to be photographs from right and left, in profile and full face, one’s hair had to be cropped sufficiently to make the ears visible; fingerprints were taken, at first only the thumb but later all ten fingers; furthermore, certificates of health, of vaccination, police certificates of good standing, had to be shown; letters of recommendation were required, invitations to visit a country had to be produced; they asked for the addresses of relatives, for moral and financial guarantees, questionnaires, and forms in triplicate and quadruplicate needed to be filled out, and if only one of this sheaf of papers was missing one was lost.

  64. Nick
    December 31st, 2016 at 02:16 | #64

    (Excuse all the errors in that version, I didn’t read it before copying and pasting…)

  65. Ernestine Gross
    December 31st, 2016 at 10:56 | #65

    Nick’s quote is from text by Stefan Zweig.

    Stefan Zweig’s problem was that he didn’t realise the freedom he enjoyed was not available to the great majority of people even in Europe, not because of borders and passport requirements but because of the extreme income and wealth inequality at the time.

    Laissez faire worked well for a few.

  66. Nick
    December 31st, 2016 at 12:29 | #66

    Indeed, Ernestine. Keynes states as much in the first couple of chapters here:

    http://www.gutenberg.org/files/15776/15776-h/15776-h.htm

    My point, however, was that ‘open borders’ is not just some utopian libertarian goal that we’ve never seen before. It was the default condition for most of human history. And while I really like Ikon, his reasoning is perfectly valid, and I’m certainly not accusing him of anything – I’d be very careful how we start defining ‘national essence’, and the ‘importance of the nation’ in the next few years…

    It’s ironic isn’t it, that cheap modern travel was supposed to be one of the great emancipators, but of course nobody likes when ‘too many poor people’ start turning up on their doorstep. Especially, as you said, if they look and sound different. The speed at which just about every European country has been erecting border fences the last two years makes Trump’s Mexican wall seem positively tame. It’s not going to be pretty this next few decades, I can assure you that. People are being very short-sighted when they assert things like ‘Luxembourg was way off in her predictions’…

    To my ‘end of the oil age’ remark, I’d add ‘end of worldwide gun proliferation’, and ‘beginning of world population decline’. Thanks to increased urbanisation and access to contraception and abortion, we’re well on our way to latter. The world is currently experiencing dramatic population degrowth. Personally, I don’t see the people becoming less selfish and possessive in their thinking until we turn that corner – and slowly but surely there’s more of the world to share around again. I think that moment, when it arrives, will change human thought and perception about the world very much for the better.

    Re. gun proliferation, I don’t see much changing until America is ready to take the lead – and I dread the scale of massacres we’re going to have to witness before that actually happens.

  67. Ernestine Gross
    December 31st, 2016 at 13:44 | #67

    @Nick

    You sort of integrated me into some story in which I have no part when you write: “Especially, as you said, if they look and sound different.” I didn’t say this!

  68. Nick
    December 31st, 2016 at 13:56 | #68

    Sorry Ernestine! I was loosely referring to your comments to J_D back @ 12, regarding spoken language. The ‘look different’ bit probably refers to some other comments on this thread I skipped over.

  69. Ikonoclast
    January 1st, 2017 at 05:53 | #69

    @Nick

    I did not say or imply that we had a ‘national essence’. I did however attribute an importance to the nation (rather than of the nation) if it was a ‘democratic’ nation. I noted our democracy was limited but still operative to some extent.

    Why do I attribute such importance to the ‘nation’ at this juncture in history?

    (1) Realism – Nations really exist and their government decisions have real effects.

    (2) Only site of effective democracy currently (in some nations to some extent). – Only national governments of at least middle to greater nations have the power to make decisions in the interests of the masses and to resist the special interests of the rich and the corporations.

    Moves which weaken democratic government and democratic nations, by minimizing government and weakening their integrity with policies like open borders while at the same time granting capital and corporations ever greater power, will weaken the power of ordinary people.

    This does not mean I think nations are or should historically eternal. Though, I notice just about every advocate of capitalism thinks capitalism will be and should be eternal. Not until workplaces are made democratic and workers own the production system, and this applies predominantly as the global norm, as global socialism, would it be remotely safe to move to open borders in the social and economic senses. Not until the power of oligarchic capitalists and corporations is broken would it be remotely safe to move to open borders.

  70. Ernestine Gross
    January 1st, 2017 at 16:14 | #70

    Open borders and congestion (traffic) and ‘congestion pricing’.

    Nick # 51 referenced a 2015 paper by the Department of Infrastructure and Regional Development, Australia (DIRD).

    I found this paper useful and thorough. In particular, I liked the author(s) putting into perspective their methodology of using highly aggregated data by pointing out that detailed network analysis needs to be done for specific cities or regions and town planning principles and measures matter, too . (Thanks, Nick, for the reference. You may have noticed by now I am interested in technical matters.)

    Open borders for people. There is useful information in the DIRD paper, which is directly relevant to the topic of this thread. The paper suggests, supported by plausible arguments and empirical data, a ‘satiation level of km travel/per capita’ is possible (likely, depending on how one reads the data) in the medium term. That is, at ‘satiation’, the km travel/per capita remains constant thereafter. One possible scenario considered is a decline in this statistic due to changed preferences. (The notion of satiation is well defined and understood in economics.) Further increase in km travel/per capita (all of Australia) would be due to immigration. [hc’s point, I think]

    Congestion pricing is currently a popular topic [eg hc but not limited to hc]. IMHO, it is not necessarily a solution to ‘congestion’ (even though it has been introduced in London). It depends. If the income distribution is rather flat (not necessarily equal income but such that the minimum wealth condition is fulfilled), then congestion pricing could be introduced without making other problems predictably worse. In the absence of alternative travel modes, alternative workplace-residential options,…, childcare-residential options (ie ceteris paribus) such a congestion tax would be simply a relative price change for more of less everybody with some tax revenue increase for the relevant governments.

    What happens if we take the hypothetical alternative to the theory, namely a bit of reality? Globally, there are many hypotheticals, London being one of them. In general one would have to get location (city) specific data, including data on the geographical income distribution, cross classified by work related demand for km travel, childcare, ….., housing, alternative modes of transport, to name a few obviously relevant variables. As for Sydney I am confident in saying, based on published information, a congestion tax would be non-trivially regressive. How regressive by sub-location in the metropolitan area is a matter that needs a more thorough analysis.

    Open borders for goods and services. Prior to tariff reductions, cars were very expensive in Australia, relative to income or relative to a staple food item, such as meat or even housing in Sydney. (Data: direct observations). In line with the partial equilibrium-cum duality theory approach so prevalent in applied economics, imported cars became cheaper and, eventually, car production in Australia stopped (or is about to stop). Under the very plausible assumptions of consumer demand theory, cheaper cars leads to more road traffic, which leads to more road congestion (not a factor in textbook consumer demand theory). Now the people who lost their income due to the demise of the car industry are supposed to pay a congestion tax (to allow those ‘consumers’, who benefit from cheaper cars to save travel time)? Not a Pareto improvement in my books. Automobile industry workers are also ‘consumers’.

  71. Nick
    January 2nd, 2017 at 15:06 | #71

    Ernestine, I like the technical matters too.

    Can you compare Table 1 from the 2015 report with Table 2.1 from the 2007 report, and tell me what you see? Also, the daily VKT profiles in the 2015 report (Figure 11) appear to be taken directly from the 2007 report. That strikes me as odd, so let’s dig a bit deeper.

    Hmm, the report authors weren’t kidding – these really are dubious assumptions. Is my 3-year-old daughter’s time really considered to be worth the same as an “average Australian full-time employee in 2010” every time she rides in the car with me? It’s lucky we don’t have 3 kids. That would make our family’s “social costs of congestion” hideously expensive 😉

    Do you see from this how they’ve structured the entire equation backwards – by always calculating ‘ride sharing’ as a multiplier, instead of a divisor? For example, if I had to travel for an hour by myself just to go to the beach for 2-3 hours, I would seriously reconsider it – to my mind, the time and petrol spent would clearly outweigh the benefits. If it were a family outing, on the other hand…

    It’s no different with ‘work ride sharing’, or any ‘ride sharing’. People are willing to travel further, and tolerate more delays, with another person in the car – not the other way around.* It’s the entire point of ‘ride sharing’. To share the time and costs and inconvenience, not multiply them. To travel somewhere together in a single car. Instead, the report quite literally treats ‘ride sharing’ as the timevalue-equivalent of having 2-4 more cars on the road! Even if it’s just children in the backseat.

    Come to think of it – try to find a single reference to ‘children’ anywhere in either report? It’s like they just. don’t. exist. Even though we can safely assume many of them get driven to and from school every single weekday, in and around peak hour, in cars and school buses. That’s 3,750,973 schoolchildren (ABS 2015), minus the amount who walk, ride, catch trains, or live rurally/regionally. They might not travel as far as commuters do – but many would take ‘local roads’ and at least one ‘arterial’, which are easily 85-90% of the VKTs (Figure 2.25b). It all adds up, and it all contributes to peak congestion. And all of them were “aggregated” at the same rate as an “average Australian full-time employee in 2010”. eg. A bus of 20 schoolchildren is considered to be a bus of 20 full-time wage earners.

    Ditto for any uni student who happens to drive. They all earn $80k a year too according to the report.

    So let’s dig deeper again. Where are the missing “vehicle occupancy surveys”? Ok, it turns out we’ll need this:

    https://ngtsmguidelines.files.wordpress.com/2014/08/agpe04-12.pdf

    Yikes. $52.80 to read a PDF from a quasi-public company? Lucky someone left a copy online. Hmm, still not seeing them. Ok, here they are, I think, referenced in the footnotes. Can you tell me who “Arup Transportation Planning” is? Because I still can’t for the life of me find those “vehicle occupancy surveys”. And without public access to them, the 2015 report is completely indecipherable. Interesting, don’t you think?

    In addition, their dollar per barrel oil projections were way out, their GDP projections were way out (understandable enough), to the extent that basing every passenger’s time on full-time wage earners income is at all appropriate, they use average wage, not median, they base it on gross income, not after tax etc.

    And in the end, they discover and conclude exactly what they set out to discover and conclude. That the answer to all these multi-billion dollar “social costs” = regressive road-pricing/congestion charges (see the 2007 conclusions). Except of course, they’re not regressive because as Joe Hockey infamously reminded us – poor people don’t drive cars…

    * Again, this is to my mind. I can’t assume everyone thinks the same way as I do. But of course, that’s what the report implicitly assumes in the opposite direction…

  72. Ernestine Gross
    January 2nd, 2017 at 16:06 | #72

    Nick, while I am also interested in ‘technical’ measurement and valuation issues of the type you raise, I do believe these questions are well outside the topic area of this thread. If JQ puts on another ‘sandpit’ and you re-post the relevant material on it, I may reply. I say may because I am not always on the key-board.

  73. Nick
    January 2nd, 2017 at 22:03 | #73

    Ha. I didn’t get into any ‘technical’ matters, did I. Sorry for using you as a sounding board, Ernestine. I’m sure their econometrics are superb, and exceedingly thorough. But it’s their assumptions I’m interested in. I’d be very happy to be shown I’m incorrect on these.

    It’s possible I was wrong on the vehicle occupancy surveys, and that they weren’t sourced from Austroads/Arup …other candidates would be sources like the Victorian Integrated Survey of Travel and Activity (VISTA). What makes it difficult is they don’t even refer to them in the 2015 report – though they’re clearly a critical input. If I find them, I can try to post them in a sandpit down the track.

  74. Ernestine Gross
    January 3rd, 2017 at 15:03 | #74

    Assumptions are part of ‘technical valuation’ matters, which in the case in question, are outside the topic of this thread. Sandpit down the track.

  75. Mercurial
    January 4th, 2017 at 08:32 | #75

    @GrueBleen

    Conversely, GB #1, do you have any evidence that “unrestricted” borders causes actual damage (other than that generated by fear in the response)?

  76. Ikonoclast
    January 4th, 2017 at 10:17 | #76

    “Open borders” is another one of those mythic constructs like “free markets”. Neither phrase makes any logical or technical sense when you analyze it. These phrases are political catchcries not firm or technical definitions in any way. These phrases make no sense in philosophy, nor in logic, nor in science, nor in economics. And I place these items in order of importance. Economics is the least important discipline of the four. If we don’t analyze matters first and properly at the philosophical, logical and scientific levels (with these disciplines informing each other) then our economics will be sheer nonsense; that is to say it will be sheer ideology.

    No market is perfectly free and no border is perfectly open. Indeed, the term “open border” is an oxymoron. If a border or boundary is perfectly open in every sense then it is not a border or boundary in any sense. It is non-existent.

    No market is perfectly free. We can easily see this. Every market exists in an institutional setting of society, culture, government, law, common law and custom. Every market is also regulated to a greater or less degree. For example, there are restrictions and even bans on trading many dangerous and illegal goods. Those categories overlap but are not identical.

    With borders, the correct way to look at such matters is to view them through the lens of complex system thinking. A nation is a system. A border is a boundary and a boundary is one of the defining characteristics of a system.

    “A system is a set of interacting or interdependent component parts forming a complex or intricate whole. Every system is delineated by its spatial and temporal boundaries, surrounded and influenced by its environment, described by its structure and purpose and expressed in its functioning.” – Wikipedia.

    To highlight the boundary issue: “Systems are a complex of interacting parts and processes which are interrelated in such a way that interactions between them sustain a boundary-maintaining entity. (Adapted from Laszlo.)

    If you fully abolished its boundaries, if that were possible, then a nation would cease to be a nation. Whether a national border is the only boundary a nation has is an interesting question. The answer is almost certainly no, but boundaries thus will be found to be implicit in many other ways. Immigration border control could be abolished while maintaining the “border of law”. You would be free to come into Australia but once you passed the border, Australian law would apply to you and indeed would apply to certain crimes committed abroad (and recognised by Australian and international law). The “open border” is thus not truly open in every sense.

    While capitalism exists, less controlled borders will favor capitalists over all other people on average and by a considerable margin. Free movement of capital clearly favors owners of capital the most. A free system, an unregulated system, always favors those with the most capacity. Just as an open buffet favours large-stomached gluttons, an unregulated capital system favors those with the most capital.

    Some poor workers can get a benefit from less controlled borders for humans, but most workers globally will be forced into a further race to the bottom under a de-regulated capitalist system. Where capital holds the whip-hand (almost everywhere now under neoliberalism), poor people moving to well-developed areas will force wages down and lift unemployment there (unless there is an absolute labor shortage there, a situation which pertains almost nowhere in the world now). There will be no concomitant increase in wages in the areas they left. The labor glut is global under conditions of advanced industrialization. Global labor arbitrage will ensure industry and jobs still move to the places with the poorest wages, the weakest regulations and the weakest environmental protections. The global average labor share of income will fall. This is the real world experience under neoliberalism or late stage capitalisism; call it what you will.

    See “The Global Decline of the Labor Share” –
    Loukas Karabarbounis
    University of Chicago and NBER
    Brent Neiman
    University of Chicago and NBER
    June 2013

    Abstract

    The stability of the labor share of income is a key foundation in macroeconomic models. We document, however, that the global labor share has significantly declined since the early 1980s, with the decline occurring within the large majority of countries and industries. We show that the decrease in the relative price of investment goods, often attributed to advances in information technology and the computer age, induced firms to shift away from labor and toward capital. The lower price of investment goods explains roughly half of the observed decline in the labor share, even when we allow for other mechanisms influencing factor shares such as increasing profits, capital-augmenting technology growth, and the changing skill composition of the labor force. We highlight the implications of this explanation for welfare and macroeconomic dynamics.”

    http://piketty.pse.ens.fr/files/KarabarbounisNeiman13.pdf

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