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Brooks Wilson's Economics Blog: October 2011

Monday, October 24, 2011

Milton Friedman and Illegal Immigration

Circa 1976, Milton Friedman takes on the issue of illegal immigration and comes to the startling conclusion that it is good so long as it remains illegal.

As the debate has morfed over time, opponents to illegal immigration argue that these immigrants rely more heavily on government resources, particularly education and medical care, than the population as a whole.  The argument continues that the costs of illegal immigration dwarf the benefits.  If I could bring Milton down from the heavenly hosts, I would ask him to elaborate on these new arguments.

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Saturday, October 15, 2011

The Demise of Community Living Assistance Services and Supports

(HT Drudge Report) Ricardo Alonso-Zaldivar wrote a interesting article that describes how and why the Obama administration abandoned a part of health care reform that provides long-term nursing care including but not limited to nursing homes, home health aides for the disabled, etc.  The insurance plan (CLASS: Community Living Assistance Services and Supports) was to be open to working adults regardless of preexisting conditions. 

Insurance policies are inexpensive when the pool of insured consists a representative sample of society with the typical person facing a small probability of incurring the event such as a fire for a home, or an accident for a car that would result in a claim against the pool’s fund.  Those with the greatest probability of needing the insurance will try to populate the pool.  This problem is known as adverse selection.  One method that insurance companies use to protect their profits and the cost of insurance for others in the pool is by eliminating those with preexisting conditions like a bad driving record or ill health. 

The problem with CLASS was in the selection of the pool.  The program was intended resolve the catch-22 facing those in need of long-term nursing care.  They did not have the money to purchase the services and insurance companies would not provide funding for care of those with preexisting conditions.  The young and healthy were to fund the self-sustaining as young, health workers insured themselves against possible long-term care needs and paid for older workers who had those needs.  The Obama administration learned that eliminating people with preexisting conditions was not just a way to raise insurance company profits but a necessary means to establish an insurance pool.  It is a market mechanism for rationing goods and services. 

Health and Human Services Secretary Kathleen Sebelius acknowledged that the service cannot be provided with self-sustaining funding.  Alonso-Zaldivar quotes officials who estimate premiums from $235 to $391, with some estimates as high as $3,000 per month. 

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Friday, October 7, 2011

Economists' on Immigration

As best I can tell, economists favor increased immigration by a large margin. Nick Schulz, an author of "From Poverty to Prosperity” makes an economic pitch for immigration that illustrates typical economic thought in “Yes, There Is Such Thing As A Free Lunch: It’s Called Immigration.”
Kick open the nation’s doors to high-skilled immigrants. There isn’t a bigger no-brainer move than this…
Put aside concerns about low-skilled immigration for a moment. There is wide consensus among those who have studied the issue that skilled immigrants are a net positive for the receiving country.
As Barry Chiswick, the editor of “High-Skilled Immigration in a Global Labor Market” and one of America’s deans of immigration research, notes, “ High-skilled immigrants expand the productive potential of the economy in which they reside, thereby increasing the growth rate of total-factor productivity [technology for principles students]. High-skilled immigration to the United States, therefore, enhances the international competitiveness of the U.S. economy and attracts foreign capital to the country. High-skilled immigration adds workers to the labor force who tend to pay more in taxes than they receive in public benefits… As a result, they tend to have a positive net fiscal balance.”
Immigration of high-skilled labor can be depicted using a simple supply and demand model familiar to principles students.  The first graph depicts the supply and demand for laborers with a BA degree in genetics.  The normal disclaimer applies.  I have no idea how many geneticists with BA degrees are hired nor do I know their monthly salary.  Equilibrium occurs at a monthly salary of $3,600 with 89,760 geneticists employed.

The supply of geneticists is a function of the wage, the number of native born workers (N) and the number of foreign born workers (F) [Q=S(W, N, F)].  As immigration of foreign born geneticists increases, supply shifts outward (from S0 to S1 in the second graph), and the wage decreases to $3,500 per month. 

Many Americans fear that immigration will lower wages stop their analysis here, but this excludes perhaps the most important change, the change in demand.  The demand for geneticists is a function of the wage and technology, and, in turn, technology is a function of the number of native born and foreign born workers [Q=D(W, Tc(L(N, F))]. 
Technology advances with the interaction of high-skilled laborers, the more laborers, native or foreign born, the more interactions between these high valued workers, the greater the technological advance.  As technology advances, the demand curve for geneticists increases in the third graph.  The new equilibrium wage is $4,000.  Because the market is in equilibrium, any geneticist who wishes to work at $4,000 will be employed and the number of geneticists employed increases.  Firms hiring geneticists are better off as well because the burst of creativity achieved by the greater interaction between geneticists allows them to produced new and varied products.  Consumers are better off as well as they have a wider variety of products to buy. 
Students who wish to disagree with my analysis may want to examine the relative shifts in the supply and demand curves. 

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The Keystone XL Pipeline

Tim Devaney who writes for the Washington Times in “White House feels pressure on oil pipeline” describes an impasse at the White House on the construction of an oil pipeline from Alberta, Canada to Texas.

The State Department’s support of a controversial oil-pipeline project is putting pressure on the White House to move forward after three years, despite objections from environmentalists.

A series of public hearings concludes Friday on the Keystone XL pipeline, which would run from Canada’s oil sands in Alberta down through America’s midsection to the Texas Gulf Coast.

So far, the State Department has published reports in favor of the project, which is projected to create 20,000 jobs and reduce the nation’s dependence on overseas oil.

Still, it isn’t an easy decision for the Obama administration because it doesn’t want to disappoint its environmental supporters, who are opposed to the project. The president is expected to make a decision by the end of the year.

Students who comment on this article can take the State Department’s or environmentalists’ position.  The production possibilities frontier or supply and demand models could guide critical thinking.

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