Friday, February 19, 2010

A Funny View of Wealth

Two on immigration and the benefit or otherwise to the UK economy

a) our (former) man in Warsaw, Charles Crawford, tells all about the 13,000 Poles that turned into a million-odd :

What happened was this.

Parts of the Blair government were very nervous about a tidal wave of Poles and other Eastern Europeans washing over the UK once we opened our Labour markets unconditionally.

Or rather they were nervous about the Conservatives making a big row about it after Jack Straw announced the policy in 2003. The more so since most other EU countries in a show of noisy EU anti-solidarity made clear that they would not open their labour markets unconditionally.

Which meant that whatever tendency there was for millions of Poles and Czechs and Slovaks and the rest to storm out from their respective homelands to look for jobs would be funnelled mainly in our direction, making the tidal wave even more fast, big and scary.

So intense consultations took place round Whitehall - should the UK row back on this commitment?

PM Blair took a breezy decision. Let it rip.

Previous experience with Portugal and Spain suggested that there would be a surge of interest (and people) but in due course it would all calm down without too many problems. But he threw a small bone to anti-immigration fears by setting up a 'registration scheme' for new arrivals with a view to at least having some sort of numbers to use in subsequent debates on the issue. Other administrative devices were used to try to stop people coming over to UK and promptly claiming benefits.

Thus it transpired that I as Ambassador had to go along to the then Polish Interior Minister Jozef Oleksy to break the official news of our keenly awaited decision. Oleksy previously had been Polish Prime Minister, but had an unerring knack of attracting controversy and scandals - a droll and unconventional figure by most former communist standards.

I pompously told Oleksy that I had the honour to inform the Polish Government that HMG had taken an important decision concerning the UK labour market after Poland's EU accession in May 2004, namely:

  • The labour market would be opened unconditionally with immediate effect on 1 May 2004.
  • Any Poles who wished to travel to the UK to live or work could do so with out a visa.
  • Moreover, an effective amnesty would be given to all Poles who had been living in the UK and working illegally (my emboldening - LT. I don't remember anyone pointing that out.)
  • All Poles seeking to work in the UK would be expected to register under a new scheme, but registration was not a condition for getting a job.

Oleksy looked at me in amazement and said in Polish: "Gdzie tkwi haczyk?" What's the catch?

"No haczyk," I replied. "It's as simple as that."

Oleksy simply did not believe me.

b) a long, nay, massive chunk pinched from a new discovery, Cynicus Economicus, who was recommended in the Alphaville comments. I do hope he doesn't mind and recommend that you read the whole thing.

From his mighty economic overview "A Funny View of Wealth", his take on the oft-expressed view that immigration is good for the economy :

Immigration and the UK economy

Immigration is a matter that is discussed with extreme care because of the potential for the issue to become entwined with racism. This sensitivity has developed to such an extent that it has become, in polite circles, almost impossible to discuss anything but the positive impacts of immigration. This has stunted debate, and prevented a rational analysis of the economics of immigration. This section will look at immigration with no such constraints, and will try to examine immigration from an economic point of view.

Sources of Immigration

Immigration into the UK is, in principle, controlled by the government but the government is heavily constrained in the actions that it can take to limit immigration. International treaties such as 1951 United Nations Convention on the Status of Refugees, The European Convention on Human Rights, EU Regulation 1612/68 on the freedom of workers are just some of the constraints on government action.

The aim in this section is not, however, to review how people immigrate into the UK, but to try to understand the impact of immigration when it occurs.

Before looking at immigration it is worth noting that, as is pointed out elsewhere there is a major controversy over the statistics for immigration. For the purposes of this section we will note that the immigrants into the UK are from the New and Old Commonwealth, and the recent EU accession countries[8]. This means that many of the immigrants are coming to the UK from countries that are less economically developed than the UK, and that presumably they are coming to the UK (at least in part) to enjoy better economic opportunities. As such, this section includes an assumption that many of the inward migrants come with limited financial resources, and this particularly applies to migrant temporary workers from the EU accession countries.

Immigration and Wages

There are some people who argue that immigration does not have an impact on wages. This argument may have some validity if the scale of immigration does not lead to any significant increase in supply of labour in any particular labour market, such that the increase in overall numbers is negligible. However, in the case of mass immigration, as has occurred in the UK in the last few years, this argument does not have any foundation in logic whatsoever.

It seems faintly absurd that this needs to be explained at all. Any reasonable grasp of economics will indicate that, all things being equal, an increase in supply relative to demand will lead to downward pressure on prices. A decrease in supply relative to demand will lead to upward pressure in prices. Few would argue that, if the supply of steel increases relative to demand that there will be no downward price pressure, and few would argue that if steel supply decreases relative to demand that there will be upward pressure on prices (all things being equal). These are widely accepted principles in economics but, despite this, some people still argue that increasing the supply of labour has no negative effect on the price of labour. Apparently, when the word immigration is mentioned, the laws of economics are abandoned, and economists scrabble around trying to redefine the laws for this special case.

One of the reasons for such a fallacy is that some studies have shown what appears to be large scale immigration into a particular area whilst seeing no fall in wages. This suggests that immigration does not have a depressive effect on wages. The only trouble with such a suggestion is that it ignores the possibility of an upward pressure on wages due to supply constraints. The influx of labour may not make wages fall, but it may prevent them from rising. In this case, the increase in supply has a negative impact on the workers who would otherwise be wealthier as a result of wage increases.

In the UK labour market ‘all things are not equal’, as there is a minimum wage system. This means that, at the bottom end of the labour market, there is a level below which wages can not legally drop. It could be argued that this prevents downward pressure on wages but, once again, this does not allow for the idea of upward pressure on wages due to insufficient supply of labour. Furthermore, if an immigrant is illegal, then the constraint of the minimum wage may be ignored by employers in the knowledge that the worker is unlikely to complain about being underpaid. Even for a legal immigrant there is greater potential for them to be paid less than the minimum wage as they may be unaware of the minimum wage, or be ill equipped to complain about not being paid the minimum wage if they are denied it. In these circumstances the employer might take on a migrant labourer in preference to a native labourer, thereby having the effect on the native workers wages of ‘no wages’.

One of the arguments for immigrant labour is that it is addressing shortfalls in the UK labour market. At the very least this is a problematic idea when viewing the unskilled labour market, when there are large numbers of unemployed and economically inactive people in the UK. The numbers of such economically inactive are highly contentious so that a figure will not be given here, but there are certainly large numbers of individuals within the UK who could, at the very least, take the unskilled jobs such as building workers, fruit packers and so on. It would be very hard to argue that there is a skills shortage for this kind of work, as much of it requires minimal training.

Economists such as David Card point out that, in the US labour market for example, there are many more immigrants than unemployed, and therefore the immigrants can not be taking the jobs of the unemployed. They are taking jobs that would otherwise not get done, and are therefore beneficial to the economy[9]. The first question to be asked here is, how is that there are so many unemployed in the first place? The second question is, even if there are more immigrants than unemployed, then is it nor reasonable to say that some of the unemployed are in this situation as a direct result of labour competition from migrants? The final question to ask is what all of the additional immigrants are actually doing, and ask whether they make a net contribution to the economy overall? This last question is complex and statistics are used by varying points of view to justify their positions. However, as will be seen later, they are often forgetting some key considerations that need to be accounted for in measuring the immigrants contribution to an economy.

In the UK, as in the US, there is one other critical question that needs to be addressed and this is the question as to why UK employers are hiring people from other countries? As mentioned before, all things in the UK are not equal due to the minimum wage, but also because the UK employer needs to compete for labour with the UK benefits system (which is an indirect minimum wage that applies to anyone entitled to social welfare benefits). This system allows an individual to remain economically inactive, or to choose an option of accepting a low paid job for very little real remuneration despite a major increase in the expenditure of their labour. In such cases the value of the labour expended is far below the minimum wage as it needs to be calculated as the weekly pay minus the benefits, to give an actual wage for the work done. The rational person in this situation might reasonably ask whether the loss of their free time to work is worthwhile for what will often be little financial incentive as, in this situation, the UK worker is often working for extremely low wages[10]. By contrast, at least initially, the migrant worker may not be entitled to such benefits[11] and is therefore happy to accept the wages that the UK worker will not accept. In accepting such wages the immigrant removes the need for UK employers to raise wages to a sufficient level to give an incentive to the UK worker to choose labour instead of benefits. In short, the immigrant worker is depressing wages to a degree that the dependence on benefits by UK labour continues, despite apparent labour shortages. The result of this is that the inactive UK workers remain as a drain on the state, and a drain on the economy overall.

If we accept that hiring an immigrant worker can lead to a British worker remaining economically inactive, the calculation to the cost of the economy of the migrant labourer might be expressed as the weekly cost of benefits minus the tax input of the migrant labourer who has been substituted for the British worker. In nearly all imaginable and realistic cases the tax will be insufficient to cover the benefits given to the British worker leading to a net loss to the state, and therefore a very substantial net loss to the economy.

What of the skilled immigrant worker? How does this worker impact on wages? Here the argument is similar to the unskilled labourer in that, if there is an increase in supply, there will be a negative impact upon wages for native workers, with a likelihood of reduction in wage levels, or a reduction in the rate of increase in wages. However, in this case, it may be that there is a genuine shortage such that organisations are completely unable to satisfy their requirement for skilled labour, regardless of the wages that they are willing to provide, and there may be a time lag in training new workers that will prevent current demand being met. This could have a negative impact on certain sectors of the economy where the labour is needed, leading to an overall negative effect on the health of the economy overall. In this case the jobs that are undertaken by the skilled migrant labourer would simply not be done without the migrant. It might also be argued that the skills are provided very cheaply, as the immigrants already have the necessary skills with no need to invest in training.

To consider the impact of immigrant skilled workers it is worth considering one of the most discussed examples, the shortage of plumbers that has been resolved with the immigration of large numbers of Polish plumbers. Prior to the arrival of the Polish plumbers the problem had become so severe that the subject was becoming a matter of (at least middle class) humour. Whilst the shortage was leading to expense and inconvenience for consumers, it was also probably more than a matter of inconvenience for industry, where plumbing problems were no doubt going unresolved, systems not being built, or being built late, built to poor standards amongst many other problems. This might lead to the conclusion that the introduction of Polish plumbers brought a real benefit to the economy by filling a very real skills shortage, and a skills shortage that was having a negative impact on the well being of the economy overall.

It would be difficult to argue against the idea that, in the short term, the Polish plumbers offered real economic benefits. However, it is in the long term that the fabled Polish plumber looks a less attractive a proposition for the economy. In order to see why this is the case it is necessary to view the situation prior to the arrival of the Polish plumbers. The cost of plumbing was (inevitably) rising due to the shortage of skilled workers, and the competition for skilled workers was leading to increases in the wages of plumbers. The rising wage levels meant that plumbing was becoming an increasingly attractive area of work, and was attracting new entrants to the trade[12]. This suggests that, given sufficient time, supply and demand would have resolved the plumber shortage without any intervention, or any need for external labour. When considering the impact of migrant labour on plumbing, it is possible to suggest that the introduction of immigrant plumbers provided an alternative to this solution, by the substitution of labour from another market.

This substitution of migrant labour for training native labour has the self evident effect of removing the demand for native labour to be trained, and therefore has the potential for a situation in which a labour market can become dependent on immigrant labour. In a case where the migrant labour is temporary, this might be considered a serious problem on the grounds that it is quite possible that the problem will re-emerge some time in the future, once the immigrants return to their home countries. The alternative is to have a continuous flow of immigrant plumbers into the market place, thus the dependence.

Perhaps the most important point, when considering the case of the plumber shortage, is that plumbing is an area of work that, had the financial incentives continued growing, might have provided sufficient incentive to motivate the economically inactive to have chosen work over benefits. By introducing the immigrant labour wages ceased to rise, or dropped, and the result was that the incentives for entry into the trade were reduced, thereby helping to maintain people in economic inactivity.

This is not to ignore the problem that, had it not been for Polish plumbers, there would have been a shortage of plumbers for several years, whilst sufficient entrants to the plumbing labour force were trained in the necessary skills. However, if designing a better ‘plumber policy’, one free from constraints, this shortage might have been addressed by a transitional arrangement where the immigrant plumbers were permitted to remain in the UK for a fixed period of time, with a period of phasing out the immigration. Such an arrangement would need a clear end date to ensure that the market was prepared, by commencing training ‘native’ plumbers. Of course, the reality is that such a scheme would not be enforceable under today’s immigration constraints, and can only be a hypothetical solution to skills shortages.

Having dealt with skilled workers it is also necessary to look at the impact of highly skilled immigrants on the labour market. If we take the example of an immigrant working as a merchant banker in the city of London, surely here is an example of immigrant labour providing clear benefits by bringing in skills that are of great value in the economy as a whole, and creating real gains for the economy. One argument is that, in recruiting such highly skilled immigrants into the UK, there is a substantial benefit from acquiring the skills without the expense of having to train/educate the people in their skills[13]. As they arrive they are already in the position of being productive workers, with no need for investment by the state or employers.

In addition to the immediate financial benefit of ‘high skills at low cost’, these highly skilled workers may be able to add significant value in the sectors in which they work in other ways, such as their ability to introduce new ideas, new methods, and a host of other benefits, which are related to the combination of high levels of skill in conjunction with their experience of their own home country systems. Furthermore, just increasing the level of high skills, for example taking the case of scientists, will have potential to increase the potential for improvements in technology, process, and other economic enhancements through the sheer presence of numbers. More highly skilled people, increases the prospects of more innovation, more new companies and so on[14].

There is a simple initial attractiveness to this argument but the situation is very much like that of the plumbers, but with considerably longer time scales to develop the necessary skills. However, the case of skilled workers differs from plumbers in one respect; it is an area in which the immigrants are not a substitute for the economically inactive, as very few of the economically inactive would have the qualifications or potential to undertake this kind of labour. As such it would be difficult to argue that there should be restrictions on such highly skilled workers coming to the UK as the benefits are often quite clear.

There is a more worrying underlying question to ask, as follows; ‘Why it is necessary to import such talent in the first place?’ This will inevitably lead to the follow on question of what it is in the infrastructure of the UK that is lacking, such that it is failing to produce such talent internally? Is the requirement for highly skilled immigrants just a sticking plaster that hides a deep wound in the infrastructure of the UK?

The upward pressure on wages resulting from immigration

Whilst supply and demand tells us that immigrants will inevitably have a negative impact on wages in the job market in which the immigrants are working, there is the possibility that immigration may create an upward pressure on wages elsewhere. This will occur in situations where a company can lower the wages of workers, and therefore cut costs of their business as a result. In these cases the company or organisation will free up more cash, and some of that cash may be channelled into the remuneration of other people within the organisation, such as senior managers or business owners. A good example of a formal route for such a process would be in the provision for bonuses based upon profitability.

Whilst such an increase in remuneration may be a positive for those in receipt of them, it is unlikely that this has any positive benefit to the economy overall, as the increase in remuneration is a transfer of money from non-immigrant workers to the recipients, rather than the generation of ‘new’ money through, for example, more efficient production methods. In short it is a case of an increase in wealth differentials between managers/owners and workers, rather than the generation of new wealth.

Remittances and Repatriation of Funds - the Missing Argument

The issue of remittances and repatriation of funds is not heard in discussion of immigration, and yet may be one of the critical factors in considering the economic benefit of immigration. It is not clear whether this is not mentioned because of ongoing sensitivity about the subject of immigration, or whether it is because economists have just simply not considered the issue. As a consequence there is little solid evidence that can be provided and this section is therefore even more speculative than other areas of this discussion, relying on a combination of reason and guesswork.

Note 1: I define ‘remittances’ here as money which is sent by the immigrant to their country of origin to help their family or friends with financial support, and ‘repatriation of funds’ as the situation in which the immigrant returns to their country of origin taking with them their savings and investments that have been accumulated as an immigrant worker.

Note 2: I have written to the ONS to request information on the way that they collect information on migrant transfers (these show up in the balance of payments statistics). Their first answer they gave suggests that no account is taken of remittances whatsoever, and that inwards and outward flows of money of inward and outward migration are based upon the passenger surveys at landing/departure points. This method of calculation requires accurate numbers for migrants (non-existent) and the co-operation of migrants who need to volunteer their financial affairs at the time of embarkation/disembarkation. At first sight this appears to be a poor method of calculation, and my follow on questions to my initial enquiry to the ONS remain unanswered. My suspicion is that they are painfully aware that their methods are probably not much better than wild guesses.

Temporary Workers

These can be anything from a City of London financier, through to a waitress in a bar. In all cases they share the characteristic that they intend to remain in the UK for a finite length of time, whether that is the length of a contract, whether they will leave when they have achieved x value of savings, or until they go home to get married and so forth.

The important aspect of temporary workers is that, on leaving the UK, they will eventually take their accumulated savings with them, and this may have a very negative effect upon the UK economy, if we consider the immigrant’s net contribution.

If we return to the example of the Polish plumber discussed earlier, we can make some ‘back of a cigarette packet’ calculations for the temporary worker. We might surmise that the Polish plumber has decided to work in the UK for two years and has an aim of saving one third of their take home pay to take with them when they return to Poland. In this case we can make a guess that the worker will be saving at least £5000 per year, and this means that the Polish worker will take a cash lump sum of £10,000 when they leave the UK. In real terms this is the equivalent of importing a medium size family car into the UK.

If we take the case of a skilled financier earning £150,000 per year in the city, it is very likely that after a two year contract in London they will be taking at least £50,000 out of the country in a cash lump sum.

Permanent Immigrant Workers

For immigrant workers coming from developing economies, one of the attractions of working in a developed country is the ability of the migrant to earn enough money to help support their family in their home country. One example of this is the Philippines, where remittances provide vital foreign currency for the country’s economy.

There may be many kind of remittances, from fixed monthly payments to the family, or providing one off payments to educate a relative, or to help a family member start a new business. The key point to consider in all cases is that this is cash leaving the UK economy with no return for the UK economy. This is different from investment where the money is sent to another country with a view to gaining a return on the investment. It is a cash gift.

No speculative figures are supplied here as such figures would be even more speculative than the example given in the case of the temporary workers. However, it is possible to assume that the numbers, when viewed over the immigrants lifetime, might be very large indeed, in particular in the case of immigrants who are successful and therefore earn large amounts of money.

Close ties with country of origin

In addition to taking cash sums out of the economy, there is also the possibility that immigrants will be more likely to have a negative impact in other ways, when compared to a person of equal economic status who is a native worker.

One obvious example is that of return visits to the home country. This can be seen as being equivalent to a native worker taking a holiday in another country. Cross border tourism is an industry that sees large amounts of cash being transferred from one economy to another, and is therefore an equivalent to an import of a good. The question that is raised with the immigrant worker is whether the frequency, cost and duration of their trips is greater than that of a native worker who is of equivalent economic status. In this case it might be reasonable to suppose that the immigrant worker (including temporary workers) is more likely to travel out of the country, thereby removing greater cash sums from the economy.

Another area which might see a negative impact is in the purchase of goods and services. There may be a tendency for immigrants to prefer to purchase products and services that originate in their county of origin, for cultural reasons and for reasons of familiarity. An obvious example of this is the introduction of Polish products into supermarkets based in areas with large numbers of Polish immigrants, or the many Asian supermarkets that largely stock products from the Asian sub-continent.

Once again, the impact of this skew towards buying goods from the country of origin is not measured, and therefore the real value of the resultant rise in imports is unknown and uncalculated. It would, however, be reasonable to speculate that an immigrant, when compared to a native of the same economic status, is more likely to purchase greater numbers of imported goods, with the negative impact this has on the balance of payments.

So what do remittances and repatriation of funds mean for the UK economy?

It is here that the question becomes very blurry, as the figures are not known. However, if we were to take the example of Central European temporary immigrant workers and make some assumptions, the figures become rather disturbing.

If we imagine that there are 500,000 Central European temporary workers, and we assume that they will be staying in the UK for an average of two years, with an average savings rate of £4000 per year, we can then say that each immigrant will repatriate £8000. If we then multiply this by 500,000 we can say that, over a period of two years, there will be a cash loss to the UK economy of £20,000,000,000. This is a significant amount of cash lost to the UK economy.

However, when we look at this loss, it is even more severe than it first appears. When a person earns money and spends the money in the country in which it is earned, the money recycles through the economy. Even when a person uses some of their cash to buy an imported good, such as a television, a substantial proportion of the money remains in the economy. In the case of the television there is the UK internal distribution of the television, the promotional costs, the shop that sells the television and so on. At each of these stages UK based companies, and workers, are involved in the transaction, and part of the money paid when the purchase is made pays these companies and workers, who in turn spend their money and recycle the money to others. In the case of repatriation of funds, compared with buying an imported good or service, the loss is greater because it is an absolute loss of that money to the economy.

In the case of remittances, it is far more difficult to make a calculation of the impact upon the UK economy, as there are far too many unknowns to even start to make guesses. However, it would be safe to assume that remittances from immigrants would, in total, add up to significant sums of money.

The Pensions Argument

The UK, as for many Western economies, has a potential problem with the demography of the native population. In short, the population is ageing and this means that the number of retired people, when compared to the number of working people, is going to increase dramatically in the coming years. At the heart of the problem is declining birth rates, and increases in longevity. The problem arises when considering how pensioners will be supported in their old age by the state, as the number of economically active people needed to pay the taxes of retired people is set to decline in proportion to the number of pensioners. The result of this is that there will be less economically active people to support each pensioner.

One of the arguments for immigration is that immigrants add to the labour force, and often immigrate when they are young. This influx of younger workers is seen as a solution as it will maintain the young population at a higher level than would otherwise occur, thereby ameliorating or solving the problem. Furthermore, some studies show that immigrants have larger numbers of children, thereby raising the birth rate and counterbalancing the decline of the birth rate of native people.

The first problem with this argument is to return to the argument about economically inactive native workers. If the cost of immigration is the retention of these workers in inactivity, then the immigration is just substitution, and substitution at great cost.

In the case of skilled workers who are immigrating permanently this is a different argument, and a case may be made for such workers, provided that, after remittances and other factors, they present a net gain for the economy. However, even in this case there is a fundamental problem in the infrastructure (and society) that is being solved by the immigrants from other countries. The first problem needing to be answered is why individual UK workers are not making provision for their own retirement, and the second question is why is the birth rate falling. Whilst highly skilled immigrants might help in this situation, the reality is that immigration is covering more fundamental problems that might be addressed more effectively, and economically, in other ways.

Cheaper Goods and Services

It could be argued that the downward pressure on wages results in cheaper goods and services. For example, if you have low cost fruit pickers, this will make a kilo of strawberries cheaper, thereby offering a real benefit to all of the people who eat strawberries. This appears to be an economic benefit offered to the UK population.

However, if you consider that the immigrant labourer is helping to keep an economically inactive person inactive, then the situation looks rather different. This is because, what the person saves in the price of strawberries, they will pay in taxes to support the economically inactive person, and the higher tax will outstrip the cheaper strawberries creating a ‘dis-benefit’.

In addition, if wages are negatively impacted by an immigrant, the consumer of a good or service that utilises the immigrant labour may feel the benefits of the cheaper good or service, but the benefit is a transfer from the native worker whose earnings are lower than they would otherwise be, to the consumer. There is no net gain but a transfer.

Outward Migration (Emigration)

In viewing outward migration, once again, we encounter the problem of the lack of accurate statistics and we therefore will again need to speculate and reason in place of using research. Whilst passenger surveys may give an indication of numbers and financial information, they are also likely to be very inaccurate. Lacking any other statistics we will at least use the recent ONS statistics for the outflow, a number of just over 200,000 individuals in the last year, and 800,000 have people have left and not returned since 1997[15].

Who are these people that are leaving the UK? One group is that of people moving to Southern Europe, Thailand and other countries for retirement. These individuals will take with them their accumulated wealth and will spend that wealth in another country. This represents a significant outflow of wealth, and an outflow that will continue as these individuals draw on their pensions, and other assets (such as through the sale of their house) to finance their new life abroad. On the positive side, they will also not be using the NHS and other services in the UK economy on a regular basis, though some will still probably return to the UK for severe health problems. Whilst each individual case will be different, the probability is that this outflow is a negative for the economy.

Another group that are emigrating are highly skilled UK workers, who are going to countries such as New Zealand, Canada, the US and Australia. To give a snapshot, over 15,000 people from the UK emigrated to New Zealand in 2004/5[16] and just over 23,000 individuals to Australia in 2006/7[17].

The systems for these ‘immigration’ countries are heavily biased towards immigrants who are graduates and postgraduates, and also heavily biased towards people with experience in careers with specialist and ‘in demand’ skills. If we look at the example of New Zealand the majority of UK immigrants were in the skilled and business categories. These are just the kind of people that would normally be adding value to the UK economy by contributing their combination of education, training and skills. They are also people who will have probably accumulated savings and, in light of the property boom in the UK, will have considerable equity in their UK property. Once settled in their new country, these assets will inevitably be transferred to the new country, once again with a commensurate outflow of wealth from the UK. If we imagine a fairly typical immigrant profile, we will see a 25-35 year old graduate working in a good occupation, living in their own home, and having saved enough money provide some security when they arrive in their destination country. In this case we might make a reasonable guess that, at a minimum, most emigrants will leave the UK with at least £30,000 in cash and assets. If we use the figures for Australia and New Zealand for one year, we can see that this is very large outflow of wealth from the UK Economy representing £1,140,000,000 for just these two countries, and this is using a very conservative estimate of the assets that they are withdrawing. Perhaps more importantly, in addition to taking cash out of the UK economy, these immigrants will also be taking out the investment in their education and training, and their potential to add value to the UK economy.

The final category of emigrant to consider are the entrepreneurial business people, a category that would be impossible to quantify or identify. For this there are no statistics, and no way of determining the numbers or any sense of value of the loss. However, a visit to South East Asia will quickly show that there are large numbers of just such individuals, who can often be found in cities such as Bangkok, Shanghai, or Manila. Strike up a conversation and they will probably tell you how they have given up on the UK, and moved all of their business interests to their new country to avoid stifling regulation in the UK economy, the inflexibility of workers, and how they benefit from the low taxation and quality of life in their new home country. What is the loss to the UK economy of such individuals? It is impossible to say, but it is certainly a significant loss. In one recent case in Bangkok I met an individual who had withdrawn ‘several million’ from the UK economy, and who now just maintained a tiny presence in the UK economy.


There is one category of immigrant into the UK that certainly add wealth to the UK economy, the very wealthy ‘non-domiciles’ who have chosen to live in the UK for a limited period of each year. The UK tax system, in conjunction with the many attractions for wealthy people in London, have attracted large numbers of these individuals. They often bring sizeable amounts of capital, as well as significant spending power, into the UK. It is certainly one of the elements that contributes to the wealthy feel of London, visible through private banking, luxury shopping and entertainments. However, there has recently been a political backlash against the tax concessions granted to these individuals, and the long term future for this category of immigrant is starting to be questioned as a result. Whether these individuals choose to remain is not yet certain, but changes in their tax status may have a negative impact on numbers in the medium to long term. Only time will tell whether the attractions of London will be sufficient to retain these providers of wealth into the UK economy.


The first thing to conclude from this review is that there are some aspects of immigration that need to be studied as a matter of urgency. Without more information the economic consequences of immigration will remain unknown.

The second conclusion is that the immigration of all types of unskilled workers is almost certainly going to have a significant negative effect on the economy. We can also view the case of the skilled worker as a negative in general, but an occasional necessity for a short duration. With regards to the permanent immigration of skilled workers, this is likely to be a negative, in particular due to the negative impact of remittances and the particular skew of the spending. However, this would need to be looked at further in more detail to draw any firm conclusions.

As for highly skilled immigrants, short term immigration may be necessary for a period, though for longer periods than skilled workers. However, if this is necessary question need to be asked about why the UK infrastructure is failing to provide such skilled individuals. For permanent highly skilled immigrants, it is likely that they will have a greater positive overall impact on the economy over their lifetime, than negative. They may also make negative contributions through remittances, and more import orientated purchasing, but it is likely that these impacts will be counterbalanced by the positives that they bring.

For UK citizens emigrating out of the UK, it is likely that the loss to the economy will be substantial in the short term, and even more serious in the long term. The majority of emigrants will be the very people that the UK should be retaining, as they are the people who are most likely to make positive contributions to the economy.

The last point to make is that, even if the negative economic impacts of migration are understood, there is little that can be done to reverse the current patterns of migration without significant changes to the structure of UK immigration rules. As such the best that policy can achieve is to try to ameliorate the negative impacts, though no easy solutions or ideas come to mind.

[8] Emigration from the UK reaches 400,000 in 2006, National Statistics, 15 November 2007, retrieved from on 7 December 2007

[9] Lowenstein, R: The Immigration Equation, 9 July 2006, The New York Times, retrieved from on 18 November 2007.

[10] If we imagine a person who is on a hypothetical benefit of £100 a week, and they accept a full time job paying £140 per week, their hourly rate of pay then becomes £40 divided by 39. There are many forms of benefits and therefore many different scenarios that could be explored. I have chosen a hypothetical example as this is the simplest way of explaining the principle. It is also worth noting that, even if not actively calculating their real wage, people facing the benefits or work choice will be very likely to have a sense of what the relative rewards are in each case.

[11] If they are entitled to benefits and they utilise this facility, very few people would (I hope) argue that they are anything but a negative for the UK economy.

[12] I seem to remember a newspaper publishing the story of a lecturer from a college of higher education giving up lecturing to go into plumbing as the wages were so much better.

[13] It should be added that there is a significant risk in investment in people, as they do not all succeed in their training, some will die or be incapacitated, some will not follow the career direction their training suggests, and others may immigrate into another country. In all of these cases the investment of the state, or other institutions, into their education is a waste.

[14] The same arguments might be made for unskilled and skilled migrants. However, there is an assumption that, rightly or wrongly, that more skilled people are more likely to have far higher potential for positive impacts. It is an assumption that seems perfectly reasonable, as highly skilled people are more likely to intelligent and hard working (as highly skilled people are likely to be where they are through either significant effort, greater intelligence, or a combination of both - notwithstanding that some highly intelligent people do not have opportunities to excel).In addition they already have skills that will allow them potential to utilise their strengths. In short they are more probable candidates to add significantly to economic well being, whereas the unskilled, and skilled are far less probable. This is clearly an area where that could produce significant debate, but I agree with the assumption that highly skilled workers are more likely to generate wider economic benefits for the reasons outlined, as this seem to me to be entirely rational .

[15] Emigration Soars, The Telegraph, 16 November 2007, Retrieved on 7 December 2007 from

[16] Immigration Trends 2004/5, New Zealand Immigration, retrieved from on 7 December 2007

[17] Settler Arrivals 1996/7 to 2006/7, Australian Government Department of Immigration and Citizenship, retrieved from on 7 December 2007

Education and Self-Esteem

from a fascinating Atlantic piece by Don Peck, on the economic crisis and a potential lost generation. Lots of stuff there, it's just this section on education changes that struck me. I imagine the parallels with the UK are pretty close.

Many of today’s young adults seem temperamentally unprepared for the circumstances in which they now find themselves. Jean Twenge, an associate professor of psychology at San Diego State University, has carefully compared the attitudes of today’s young adults to those of previous generations when they were the same age. Using national survey data, she’s found that to an unprecedented degree, people who graduated from high school in the 2000s dislike the idea of work for work’s sake, and expect jobs and career to be tailored to their interests and lifestyle. Yet they also have much higher material expectations than previous generations, and believe financial success is extremely important. “There’s this idea that, ‘Yeah, I don’t want to work, but I’m still going to get all the stuff I want,’” Twenge told me. “It’s a generation in which every kid has been told, ‘You can be anything you want. You’re special.’”

In her 2006 book, Generation Me, Twenge notes that self-esteem in children began rising sharply around 1980, and hasn’t stopped since. By 1999, according to one survey, 91 percent of teens described themselves as responsible, 74 percent as physically attractive, and 79 percent as very intelligent. (More than 40 percent of teens also expected that they would be earning $75,000 a year or more by age 30; the median salary made by a 30-year-old was $27,000 that year.) Twenge attributes the shift to broad changes in parenting styles and teaching methods, in response to the growing belief that children should always feel good about themselves, no matter what. As the years have passed, efforts to boost self-esteem—and to decouple it from performance—have become widespread.

These efforts have succeeded in making today’s youth more confident and individualistic. But that may not benefit them in adulthood, particularly in this economic environment. Twenge writes that “self-esteem without basis encourages laziness rather than hard work,” and that “the ability to persevere and keep going” is “a much better predictor of life outcomes than self-esteem.” She worries that many young people might be inclined to simply give up in this job market. “You’d think if people are more individualistic, they’d be more independent,” she told me. “But it’s not really true. There’s an element of entitlement—they expect people to figure things out for them.”

Ron Alsop, a former reporter for The Wall Street Journal and the author of The Trophy Kids Grow Up: How the Millennial Generation Is Shaking Up the Workplace, says a combination of entitlement and highly structured childhood has resulted in a lack of independence and entrepreneurialism in many 20-somethings. They’re used to checklists, he says, and “don’t excel at leadership or independent problem solving.” Alsop interviewed dozens of employers for his book, and concluded that unlike previous generations, Millennials, as a group, “need almost constant direction” in the workplace. “Many flounder without precise guidelines but thrive in structured situations that provide clearly defined rules.”

All of these characteristics are worrisome, given a harsh economic environment that requires perseverance, adaptability, humility, and entrepreneurialism. Perhaps most worrisome, though, is the fatalism and lack of agency that both Twenge and Alsop discern in today’s young adults. Trained throughout childhood to disconnect performance from reward, and told repeatedly that they are destined for great things, many are quick to place blame elsewhere when something goes wrong, and inclined to believe that bad situations will sort themselves out—or will be sorted out by parents or other helpers.

"Trained throughout childhood to disconnect performance from reward" - or, as Melanie Phillips put it, "All Must Have Prizes".

A Few Snowflakes On The Curate's Hat

We're doomed : Jeremy Warner on our knacked economy and inflation. I myself am of the opinion that Brown's 'low inflation' economy was based on Chinese productivity keeping goods prices down and mass immigration keeping service wages (and prices) down - while inflation in housing roared ahead. What's this 'spare capacity' going to produce ?

Much of the present City debate around inflation therefore seems to me to be too simplistic and somewhat wide of the mark. The standard view, reflected by the Bank of England, is that once the present spike in inflation is over, abundant spare capacity in the economy will force prices back down again, allowing the persistence of very low interest rates into the indefinite future. This in turn will underpin house and other asset prices, including shares.

I'm not sure that either of these assumptions is correct. In the old days of largely closed domestic economies it might indeed have been true that a collapse in output would cause price and wage pressures to abate.

Unfortunately, the inflationary pressures of the future are quite unlikely to come from domestic demand. Instead, they will come from emerging markets, where fast growing consumption is already causing prices to rise sharply. After decades of exporting disinflation to the West, these markets could soon be exporting quite serious inflation.

The implications for monetary policy are alarming. During the Great Moderation, disinflationary pressures from China and Eastern Europe allowed UK interest rates to be lower than otherwise, which in turn helped cause upward pressure on asset prices and a bubble in credit.

There is now every chance of the reverse phenomenon occurring; interest rates might have to be higher than warranted by domestic demand to keep inflation at bay. That in turn will be bad news for growth, employment and asset prices – unless, of course, the Government wants to opt for a higher inflation target ...

I've been saying for a year or more that they won't be able to resist keeping the tap turned on and inflating their way out of one trouble and into a different sort. What would a Cameron/Osborne administration do ? Anyone know ? I can't make head nor tail of most of their pronouncements.

Two recent Alphaville posts raise the spectre of the press. I like this comment :

No, they'll say "the recovery is faltering and the economic situation worse than we thought, so more QE is required to safeguard recovery".

What they won't say is "we used QE to defer enormous amounts of economic pain and it also helpfully assisted the government in financing the deficit, but the trade-off is that all that deferred pain will descend like the wrath of god if we stop, because none of our structural problems, such as an unaffordable public sector and levels of household leverage, have been tackled, so we'll keep trying to defer the pain in the hope things get better on their own somehow. But they won't."
And this one :

'Just one more hit... I need it I just need it... I will quit tomorrow. I can quit. I will turn my life around...'

Oh Dear.

Can Pay, Won't Pay - Paul Kedrosky quoting an unnamed Greek banker on the debt crisis :

Once upon a time, Greece was a model small democracy. An extremely frugal government ran tight budgets and provided an extremely basic safety net, and truly threadbare services for a very low cost: Tax collected was minimal.

While tax rates may have been high, collection was virtually nil. A small oligarchy was the only source of capital and had the acumen, education and experience to deploy it as the country developed. Old families controlled the steel, cement, foodstuffs and construction companies that rebuilt Greece after the war. As recently as 1980, debt/GDP was at 30% and it would have been much lower were it not for the high costs of defense. When Greece joined the EU in 1980, all that changed. It was party time. Money that was sent to build the Greek infrastructure was funneled pretty much directly into the pockets of the oligarchy as well as the new Socialist oligarchy that emerged.

This was not chump change. It was 6% of GDP for 30 years. With the exception of farmers, who did extremely well off of the Common Agricultural Policy, the rest of the money went pretty much straight to Swiss bank accounts. As an example, Greece has paid 250% over list for F16's and Mirage fighters and has spent EUR 750 million for an airport that was built by the same company that originally bid EUR 220 million for the project. No prizes for guessing what happened there. Once the addiction to easy money set in, the government of Greece was transformed from a lean provider of defense, basic health, basic education, a basic road network and extremely basic pensions to an auctioneer of projects to the oligarchy.

The families who control business in Greece used a system of bribes the government was happy to accept and set up a newspaper each to deliver threats its members would rather not. Sticks and carrots, and lots of Euros. And once the system was established, there was no need to stick to the money that was coming from the EU. ERM entry cost our politicians the printing press, but thanks to low EUR rates, the government could now service previously unthinkable amounts of debt with impunity. A residual part of that money may have ended up in useful projects, but the bulk ended up in the pockets of the twenty families who run Greek business.

A big chunk of that money, in turn, has been invested by these families in bringing to Greece every foreign franchise from Starbucks and Pizza Hut to IKEA and Stanley Kaplan, driving existing companies out of business in the process. In summary, EU funds have done to Greece what oil did to Nigeria, while low EUR rates have allowed the government of Greece to be able to service a debt of 100% of GDP, most of which has gone straight to the pockets of the oligarchy. Man on the street, with the exception of the farmers, has not benefited one jot. This does not make all Greeks poor. Shipowners do very well, and a natural resource called the sun is very helpful to our 165,000 hoteliers. Man on the street never saw the benefit of the 250 billion the government has borrowed. Ergo, support for austerity now that the bill has come is zero. You won't see anybody accept an Irish solution in Greece.

The notion that Brussels will dictate to Greece terms on public sector wages and impose a May deadline are, frankly, comical.

Thursday, February 18, 2010

Important Personal Qualities For Other People

I've been reading Normblog for seven long years now, and the years haven't actually seemed that long - whether that's Norm's writing or the phenomenon he noted here I'm unsure.

His profiles are always interesting and occasionally raise a wry smile when noble theory and human practice are closely juxtaposed. Here's writer Alis Hawkins :

Do you think you could ever be married to, or in a long-term relationship with, someone with radically different political views from your own? > No.

What do you consider the most important personal quality? > Tolerance.

Wednesday, February 17, 2010