g m g D e s i g n . c o m

Was the financial crisis (past ones & recent one) due to moral hazard, encouraged by our central government? Yes, in part, per this fascinating blog entry on a well-known econ site. Moral hazard due to previous bail-outs (which encourage excessive risk) as well as expansion of Fannie/Freddie led to the mortgage-backed meltdown, it seems.

Good summary (from link above):

The increased demand for housing resulting from Fanne and Freddie’s expansion pushed up the price of housing and helped make subprime attractive to banks. But the ultimate driver of destruction was leverage. Either lenders were irrationally exuberant or were lulled into that exuberance by the persistent rescues of the previous three decades.

On the subject of central government-backed screw-ups, I was intrigued to Tom Friedman’s quasi-recent editorial:  Startups, Not Bailouts. The title by itself is pithy enough that you don’t actually have to read the whole editorial. But if you do read the whole thing, you’ll see he also espouses immigration as a growth policy. Check it out:

But you cannot say this often enough: Good-paying jobs don’t come from bailouts. They come from start-ups. And where do start-ups come from? They come from smart, creative, inspired risk-takers. How do we get more of those? There are only two ways: grow more by improving our schools or import more by recruiting talented immigrants. Surely, we need to do both, and we need to start by breaking the deadlock in Congress over immigration, so we can develop a much more strategic approach to attracting more of the world’s creative risk-takers. “Roughly 25 percent of successful high-tech start-ups over the last decade were founded or co-founded by immigrants,” said Litan. Think Sergey Brin, the Russian-born co-founder of Google, or Vinod Khosla, the India-born co-founder of Sun Microsystems.

Immigration isn’t his main point, of course, but amidst the controversy over Arizona’s law, I thought I’d digress.

Implicitly, Friedman’s talking legal immigration, if for no other reason than for the fact that illegal immigrants typically “lay low,” and that means not starting the next Google.

From a purely economic standpoint, our entitlement/welfare programs necessitate bringing in immigrants (esp relatively young/healthy ones). If we’re not going to switch to, like, capitalism with our retirement/medical programs (referring to Social Security and Medicare/Medicaid), then we should be more receptive to a more liberal immigration policy, legal or otherwise.

Politically, it’s neither possible to truly reform the aforementioned Nanny State programs nor is it politically acceptable to legalize millions of people who didn’t wait their turn in the highly bureaucratic line. We’re stuck in between a rock and a hard place, not due to absence of feasible solutions, but in the fact that real long-term solutions aren’t politically feasible.

Great editorial by Tom Friedman, chastising Congress for restricting H1-Bs by companies that are getting bailout funds.

Bad signal [referring to anti-immigration protectionism]. In an age when attracting the first-round intellectual draft choices from around the world is the most important competitive advantage a knowledge economy can have, why would we add barriers against such brainpower — anywhere? That’s called “Old Europe.” That’s spelled: S-T-U-P-I-D.

Friedman cites interesting statistics, including that half (half!) of Silicon Valley startups are founded by immigrants (you know, those guys who are taking our jobs by starting companies and… creating jobs).

Newsweek had an essay this week that began: “Could Silicon Valley become another Detroit?” Well, yes, it could. When the best brains in the world are on sale, you don’t shut them out. You open your doors wider. We need to attack this financial crisis with green cards not just greenbacks, and with start-ups not just bailouts. One Detroit is enough.

Actually, one Detroit is more than enough, but you get the point.

I was reading a good blog entry on MarginalRevolution on this subject. What follows is not necessarily a summary of the blog entry, but my personal thoughts on the matter. For starters, there’s money to be had by the (local or domestic) business community in stifling free trade. Free trade means that consumers get free choice for additional sources of competition. Hence, there’s strong economic incentive against the business community advancing free trade (unless their business is dependent on it, which many are). If there’s good money in something, chances are there’s lobbying. Politicians can be bought, of course. But ordinary citizens can be convinced of the “danger” of free trade as well. Again, when there’s money to be had by convincing people for or against something, you’ll have an army of people who do just that.

Then there’s “irrational nativism,” of course. We see a lot of that with the illegal immigration debate here in the States. Don’t get me wrong, I’m not endorsing illegal entry into this country. But neither am I going into the sort of irrational and uncompassionate foaming-at-the-mouth rhetoric that some people get into on this subject. Immigrants have had an historical positive effect on this country, and while I don’t endorse illegal entry, I suspect that the illegal immigration “debate,” if one can call it that, isn’t so much about illegal immigrants but about immigration policy in general.

Protectionism and anti-immigrantism are not good for this country, or any country. Such sentiments aren’t good for our economy, our collective values, and our security (long argument on that one that I’ve expounded on in previous posts). But they’re good for businesses that want to restrict consumer freedom and choice; and there good for some politicians, who want to get elected and leave the electorate holding the bill.

UPDATE: just noticed blog entry on Thomas Barnett’s site on this subject. Related to globalization, Barnett summarizes 5 characteristics of growing economies:

1) Openness to global trade and FDI
2) Political stability but not necessarily democracy; a gov committed to growth
3) High savings
4) Sensible gov spending and inflation control
5) A willingness to let markets allocate resources

On point 1, “FDI” refers to foreign direct investment. On point 2, I’ll add that, as Barnett has pointed out elsewhere, free markets result in freedom in the broader sense, including politically. Point 5 has the obvious humanitarian advantage of greater prosperity (greater access to healthcare, food, etc).

Here’s what social conservatives should be thinking about immigration. The concluding paras are actually quite amusing:

If American culture is under assault today, it’s not from immigrants who aren’t assimilating but from liberal elites who reject the concept of assimilation. For multiculturalists, and particularly those in the academy, assimilation is a dirty word. A values-neutral belief system is embraced by some to avoid having to judge one culture as superior or inferior to another. Others reject the assimilationist paradigm outright on the grounds that the U.S. hasn’t always lived up to its ideals. America slaughtered Indians and enslaved blacks, goes the argument, and this wicked history means we have no right to impose a value system on others.

But social conservatives who want to seal the border in response to these left-wing elites are directing their wrath at the wrong people. The problem isn’t the immigrants. The problem is the militant multiculturalists who want to turn America into some loose federation of ethnic and racial groups. The political right should continue to push back against bilingual education advocates, anti-American Chicano Studies professors, Spanish-language ballots, ethnically gerrymandered voting districts, La Raza’s big-government agenda and all the rest. But these problems weren’t created by the women burping our babies and changing linen at our hotels, or by the men picking lettuce in Yuma and building homes in Iowa City.

Editorialist points out earlier in the commentary that immigrants–illegal or otherwise–are assimilating, notwithstanding the rhetoric to the contrary.

Not saying I “support illegals,” but I personally don’t like the hard-line stance that not only says “deport ‘em all,” but also says “not welcome.” It’s bad policy, bad economics, and bad moral judgment.