The Euro Crisis for Poets

It occurred to me recently that I hadn’t seen an explanation of the euro crisis that (1) my sister could understand and (2) was thorough (i.e., actually an explanation). So I’m going to attempt to make one here.

So, first, what is the euro crisis? Simply put, it’s a sovereign-debt crisis. Sovereign debt is the debt issued by sovereign countries, like the U.S., Greece, etc. Right now, several European countries are having trouble meeting their obligations to their own citizens (i.e., paying pensions) and foreign investors (i.e., paying interest and principal on debt). Normally, they could just issue more debt (i.e., roll the debt over) to meet these obligations. But now, investors are getting nervous that they’ll ever pay what they owe back. So they’re charging higher interest rates, which itself is compounding the problem of the countries’ indebtedness—and so on and so forth in a vicious cycle. This is a sovereign-debt crisis. So that’s what that is. But the euro crisis has some unique features. And to understand them, we need to understand the euro itself.

The first concept we need to understand is the concept of exchange rates. What’s an exchange rate? By definition, it’s the price of one currency in terms of another. You surely know how at the Toronto airport, there are various kiosks offering you 1 Canadian dollar for $1.25 US, and so on and so forth — those are all exchange rates.

Next question: What determines exchange rates? Well, today we have ‘floating’ exchange rate internationally, which means simply that we have a free market in currencies — i.e., everybody can buy and sell currencies freely at whatever price they can get. And that means, in turn, that the ‘price’ of any currency — its exchange rate — is determined by supply and demand. So, then, what determines the supply of and demand for a currency? Well, let’s imagine a world with just two currencies — the dollar and the euro. The ‘demand’ for the euro (which in practice means people trying to buy euros on foreign exchange markets) comes from Americans, who use dollars for all their normal domestic transactions, who want to buy goods from euro-zone countries. Firms in the Eurozone all, of course, pay their employees and creditors in euros, and so you need to give them euros if you want to buy their goods. In turn, the ‘supply’ of the euro (which in practice means people trying to sell the euro on foreign exchange markets) must necessarily come from residents of the euro-zone who are selling their euros in exchange for dollars. I.e., the supply of euros is another term for the demand for dollars, and it is driven by people who want to get dollars to buy American goods.

So, now remember the basics of supply and demand. As the demand for any good increases, its price must increase, too. More people desiring more of a good means that the sellers can get away with raising their prices — and if they don’t, there’ll be a shortage of the good. An increase in the supply of a good, in turn, lowers its price, as the suppliers all compete to undercut each other in order to sell off their excess inventories.

So now, put those two previous paragraphs together: If Americans desire more goods from euro-zone countries, they will go to foreign exchange markets to buy more euros, and bid up the price of euros in terms of dollars — the euro will appreciate, which means (in this two-currency world) the dollar will depreciate. If euro-zoners desire more goods form the U.S., they will go to foreign exchange markets and demand more dollars, bidding up the price of dollars in terms of euros — the dollar will appreciate and the euro will depreciate.

So next question: What could cause Americans to desire more goods from euro-zone countries (or vice versa)? Well, theoretically, it could be some weird, random cultural thing — i.e., France’s cultural soft-power increases, and Americans suddenly develop a new taste for authentic French goods. But in practice, the major determinant here is the relative productivity of the trading countries. Put very simply, if Germany is really good at producing high-quality goods relatively cheaply (which is the English-language definition of ‘productivity’), then lots of foreigners are going to want to buy those goods. If America goes through a horrible economic turmoil that consequently reduces its ability to produce desirable goods that can compete in global markets (i.e., its ‘productivity’ decreases), then fewer people are going to want to buy American, which means they’ll have less need to buy dollars, and more interest in selling dollars to buy other currencies, which will cause the dollar to depreciate.

And as you might sense, there’s a cool, important balancing function provided by markets here: If a country gets awesomely productive, such that everybody else wants to buy its goods, then the demand for its goods and its currency will increase, causing its currency to appreciate. In other words, its currency will get more expensive for everybody else, which means that its goods will get more expensive for everybody else, too. It will also mean members of that country will be able to buy other countries’ goods more cheaply. So that will counterbalance things — increasing the newly-successful country’s imports and reducing its exports. As a result, the floating exchange rates keep countries in a sort of equilibrium — exporting and importing approximately the same amount, such that no country permanently runs enormous ‘current-account’ surpluses or deficits, and no one country completely dominates global export markets.

So that’s how exchange rates work. And in these few paragraphs we basically have all the theory we need to understand the monetary side of the euro crisis, and the tradeoffs involved in a ‘currency union.’ Now we just need to put the pieces of the puzzle together.

So: In 2002, a bunch of the countries of the European Union, which had previously had their own, individual sovereign currencies, decided to come together under a single ‘currency union’ — the euro, which was to be issued by a single central bank, the ECB. It was adopted for some pretty obvious advantages: the Eurozone is tightly economically integrated, meaning lots of trade happens over national borders, but doing currency conversions was a hassle for ordinary businesses; a single, convenient currency could also help promote tourist travel across those borders, which is an economic good; and there was a symbolic value to bringing further unity to a continent that had seen so much devastating war and genocide during the 20th century.

But the very curious and troubling thing about the Eurozone is that it integrated under a single monetary regime countries with very different national characters and, hence, very different underlying real economies. Specifically, Germany is a much more productive country than Greece. But now, under the euro, they share the same currency, issued by the same central bank, whose value is determined by the same foreign-exchange markets. The fact that Germany and Greece have distinct local economies – and also, which we’ll get to later, distinct sovereign governments with distinct fiscal policies – means that the natural, equilibrating role of exchange rates that we discussed above gets completely neutered.

Think of it this way: As Germany gets more and more productive, the value of Greece’s currency increases, regardless of any changes in the Greek economy, because Greece and Germany share the same currency. The result is that countries end up with a currency that is out of sync with their real economies. Today, Germany has a currency that is weaker than the mark would have been in an alternative universe; and Greece has a currency that is stronger than the drachma would have been in an alternative universe. That’s because the value of the euro for each country is affected by economic conditions in the Eurozone as a whole, rather than economic conditions in its own domestic economy.

Now, you probably sense that this brings some instability, because it screws up the balancing function we talked about above. But it also brings some temporarily nice advantages. Germans, with their artificially weak currency, can persistently dominate export markets (i.e., because the weakness of other Eurozone countries prevents the value of the euro from rising to the point where it would make German manufactures uncompetitive in international markets) which brings it lots of growth, and high wages even in its manufacturing sector. Without the euro, such dominance would cause Germany’s currency to appreciate until its exports were only of average competitiveness in international markets.  And Greeks got to live the high life for a bit, enjoying nice foreign vacations, importing expensive wines, etc., because the euros they now carry are more valuable than the drachmas they would have carried otherwise.

And this is all pretty fine and well, for all parties, until some serious instability throws things off – in fact, in practice, the fun party lasted about 7 years.

So, what went wrong? How did the euro go from being a fun party to the thing in crisis, every day in the business section of every newspaper, for the past two years? Well, it’s actually very straightforward. In brief, there was that financial crisis you may have heard something about. As you know, this crisis caused a lot of turmoil and instability in financial markets, which then extended into the real economy via a credit crunch, causing many economies to slow their growth and suffer widespread unemployment. It also forced some governments to bail out major financial institutions. So combine all these factors: European governments’ expenditures go way up (due to bailouts, and social welfare and unemployment payouts), while its revenues go down (as the economy shrinks, the taxable portion of it shrinks as well). What do you get? Massive amounts of new debt (combined with few signs that the economy will bounce back quickly). Lots of debt. So much debt, in fact, that the international bond markets are unsure that these governments will ever be able to make good on their promises to pay the debt back. So what do international bond markets do? In order to compensate for the perceived risk that certain Eurozone governments will default on their obligations, investors demand higher interest rates on their loans. These higher interest rates, in turn, make the government debt burdens even worse, which makes investors even more nervous, etc., etc.

So the ‘Eurozone crisis’ is fundamentally just a regular sovereign-debt crisis – a downward spiral based on investors’ belief that a country won’t be able to pay what it owes. Debt crises used to be the domain of politically backwards Latin American countries. Now they are the purview of the first world.

What does this have to do with the Eurozone? Well, honestly, the problems of the euro itself – the currency union – are only tangentially related to how the euro crisis started. There’s a plausible argument to be made that the strength of the euro allowed weaker countries, such as Greece, to borrow more than they really should have, in the run-up to the crisis. Greece’s basic problem now is that it has to face up to the reality that it made pensions and benefits promises to public-sector workers that it simply can’t keep. Theoretically, being part of the currency union may have helped it make those false promises. But these are sort of tangential.

Rather, the real relevancy of all the monetary-union theory that we discussed above is that explains why this sovereign-debt crisis is peculiarly hard to get out of.

Normally, if your economy goes to hell, such that you risk a sovereign-debt crisis and other problems, there are a couple of things that will happen. First there’s a natural balancing: As your economy gets weaker, foreigners will be less interested in buying things from you, both because a weak economy means (tautologically) that your firms are less productive, and also because your financial assets will all look riskier. They’ll be less interested in what you’re selling and will try to sell off your currency. This looks bad at first, but it brings a blessing: Your currency depreciates, which suddenly allows your goods to be more competitive in international markets, giving a huge boon to your export-oriented industries; this also helps attract more tourists eager to take advantage of  Your Country on the Cheap. As your currency inflates and depreciates, the real value of your outstanding public debts decreases – which make them easier to pay off. And hopefully the boon to your export industries helps start a nice virtuous circle that can drag you out of your debt crisis. That’s all supposed to happen naturally for countries with separate currencies.

Beyond relying on this natural process, you can also use human artifice, via public policy. Your central bank can provide some monetary stimulus to your country or your government can do some fiscal stimulus. This is how it is supposed to work for sovereign countries.

But the Eurozone screws this up. Nobody can inflate and depreciate the currency for Greece, because the currency for Greece is also the currency for Germany, a country which is still really strong. The European Central Bank has to have a policy that makes sense for the Eurozone as a whole, rather than for the specific, idiosyncratic conditions of specific, idiosyncratic nations. So, today, Greece is saddled with enormous public debt, and has a strong need and justification for currency devaluation and monetary stimulus, but no ability to effect it. Greece has a limited ability to effect fiscal stimulus, too, because it has so much debt, and investors are unwilling to lend it even more money at an acceptable rate (which is the definition of a sovereign-debt crisis).

And this, dear readers, explains all the seemingly-contradictory commentary  we read in the newspapers—i.e., why half of writers are convinced the Eurozone needs to break up entirely, and half are convinced that they need further unification, with greater fiscal and political co-dependence.

The reason for this polarization is that both sides of the debate are taking different responses to a single truth—you cannot have a monetary union without a fiscal union. Insofar as you place distinct, idiosyncratic economies under a single currency union, you are depriving each of them of the ability to climb out of crises using monetary stimulus and currency devaluation. But crises happen, and countries must climb out of them. So if you’re going to have a monetary union, you have to make sure there is a way for suffering countries to get some fiscal stimulus. But those countries can’t do it on their own when they suffer a sovereign-debt crisis. So you need your currency zone to also be fiscally and politically unified, so that weaker countries can get funding for stimulus projects using the good credit of the stronger countries.

In a sense, there are two defensible equilibria: (1) a world of sovereign states with sovereign currencies and (2) a currency union with near-total political and fiscal unity. Half and half doesn’t work.


Here’s a helpful way to look at things: In a sense, the U.S. is like the proposed New Eurozone with fiscal and political unity. We have some really productive states—in the northeast corridor, California, the and Midwestern metropolitan areas. And we have some really unproductive states—Alabama, Mississippi, Louisiana, etc.. But because we have a single currency, and a single central bank (the Federal Reserve), the poor, unproductive states can’t simply devalue and inflate their currencies in order to help themselves out. Instead, they get artificial fiscal stimulus in the form of transfer payments and spending paid for by the federal government, hence by the country as a whole. New York pays relatively more money in taxes to the federal government; and Alabama takes relatively more money out through Medicare payments, infrastructure spending, military salaries, etc. So the U.S. is like what the Eurozone would be if Germany were to constantly and willingly make transfer payments to subsidize Greece.

Why do Americans from richer states put up with this? A few reasons: (1) Because we’re a political union, a lot of these transfer payments are concealed, such that voters don’t know about them (i.e., military spending, in practice, is a lot like a big transfer payment to the South, but we don’t think of it that way—we think of it as spending for The military); (2) Politicians don’t like to publicly beat up on the poorer, less well-educated parts of the country; and (3) Americans from richer states might actually just be okay with the transfer payments, since we conceive of ourselves as a nation – a single people.

And those three facts point to why turning the Eurozone into a political and fiscal union as well looks so unlikely: The transfers wouldn’t be quite so concealed. And people wouldn’t be happy about them. Rich Americans can be persuaded to feel good about paying out to poor Americans. It’s harder to sell rich Germans on the idea of paying out to “lazy Greeks.” Alas, even in the digitized, cosmopolitan 21st century, national cultural identities persist.


So where do I stand?

Well, I wish the euro never came into being in the first place. I’m pretty skeptical of the efficacy of fiscal stimulus (though this is, admittedly, a politicized opinion). Expenditures that are intended to be a short-term stimulus end up creating permanent constituencies, and are hard to be rid of. Consistently relying on fiscal stimulus leads to a host of long-term problems from a burgeoning state that becomes more and more entwined with business. Monetary stimulus is much better; but it requires that distinct economies have distinct currencies and central banks. Besides, over the past decades, financial innovation has radically lowered the transaction costs associated with doing business and travel across borders with distinct currencies. And so I’m skeptical of the idea that, in the 21st century, the euro zone’s currency convenience  is really bringing huge benefits. But it brings obvious costs. On the whole then, I think the world today would be a better place without the euro.

But even though the euro was a bad idea in the first place, now that it exists, the costs of exiting might be greater than the costs of staying. Germany might just have to accept that, in return for the benefits it gets from having a nice artificial boost to its export industries, it will need to more or less permanently subsidize Greece, just as New York today subsidizes Alabama. Unwinding the Eurozone could cause instability and uncertainty that would be more costly than the costs of this subsidy.

A final, radical note: I’ll go further than just saying that Europe would be better off without the Euro. Indeed, our comparison to the U.S. still holds: I’m not sure it’s obvious that America wouldn’t be better off with multiple currencies. Right now, we have a situation in the U.S. in which richer, coastal and heavily urbanized, states are doing a lot to fiscally subsidize the economically dysfunctional South. This monetary union and fiscal subsidy has arguably deprived the South of the opportunity to develop an economic niche in low-cost, export-oriented industries. It has also subsidized sclerosis, and arguably postponed the South’s dynamic transition to a 21st century economy. Maybe America would be better off today with separate currency regions. The idea of a ‘dollar-zone’ breakup is, of course, wildly implausible—never going to happen. But I think it’s pretty illuminating that this might theoretically be the best thing to do.

Fixing Libor and Fixing It

Here’s what the LIBOR scandal is all about. The London Interbank Overnight Rate is, theoretically, just that — the interest rate that London’s major banks charge each other for overnight loans. Because this is theoretically a common, relatively risk-free transaction, this interest rate provides a good metric for overall market sentiment. I.e., if Barclay’s is willing to lend to HSBC at an annualized interest rate of 2.0% for a simple, overnight loan, that’s a good indication that they weren’t able to find many relatively risk-free opportunities for an interest rate much higher than that. If Barclay’s demands an interest rate of 3.5% for that transaction, even though it’s risk-free, that’s a good indication that the market is driving yields in general higher.

So the LIBOR is used as a proxy for the “risk-free” rate of financial theory, like Treasuries are in the U.S. And so lots of other interest rates, on riskier assets (such as your mortgage) are set as “LIBOR + X.”

Which explains both (1) why banks in London tried to ‘fix’ Libor and (2) why this is a problem. In brief: Because so many other interest rates are set as “LIBOR + X,” the values of many, many other financial assets (estimated in the trillions of dollars) move with the LIBOR. Suppose that mortgages are being offered for “LIBOR + 2.5%.” Suppose also that LIBOR was very low when one portfolio of those mortgages was issued. Now, if LIBOR goes up, then interest rates on new issues of mortgages will be higher; this will mean that the value of the old portfolio of mortgages will go down, because you (an investor in mortgage portfolios) could now get a higher return for the same risk. To generalize this insight: an increase in interest rates decreases the value of portfolios of fixed-income assets that were issued at earlier, lower interest rates. So, if you are in any position to “short” the old portfolio of mortgages (or fixed-income portfolios more generally), you stand to benefit from an increase in LIBOR. But, of course, if you’re just an ordinary middle-class person who wants to get a mortgage at a decent rate, you stand to be hurt by this. (In truth, most of the LIBOR manipulation wasn’t done to change the value of mortgage portfolios, but that of complex derivatives contracts — the same basic ideas apply, they would just be harder to express in a quick blogpost.)

So clearly, LIBOR manipulation can pit the interests of bankers and traders against those of society as a whole. Which is both why it’s a serious problem, and something that bankers and traders had a predictable incentive to do.

The thing that’s puzzled me, as I’ve read about the LIBOR scandal, was that this was very predictable and was made incredibly, unbelievably easy for bankers and traders to pull off. The question you may have been wondering about, as I described LIBOR above was, “How do they measure this?” And the answer is: “Very naively.” The official LIBOR figure is issued by a private association, and is based off of simply surveying banks, asking them, essentially, “At what rate could you get an overnight, uncollateralized loan today?” I.e., it’s based off of self-report, which is really easy to manipulate, obviously.

And manipulate they did. Traders who stood to benefit from a higher (lower) official LIBOR rate emailed people both within their own banks and others requesting that that they report higher (lower) numbers. There was also a second category of LIBOR fixing that’s getting talked about: During the financial crisis, banks apparently colluded — possibly with their own regulators — to issue low numbers. The reasons for this are perhaps more understandable. Having a high “overnight rate” is a sign of distress, and lack of market confidence, in your bank. So banks issued lower numbers during the crisis (again, with some evidence that London regulators knowingly went along), to prevent a downward spiral of disappearing confidence begetting disappearing access to financing begetting more disappearing confidence, etc.


So how do we fix this, and stop this fixing? Well, the problems with LIBOR entirely lie in the problems with inaccurate, manipulated reporting. The basic, theoretical function of the LIBOR number — to serve as a proxy for the “risk-free rate,” to which other assets can be tied — is necessary and good. So we just need to fix the reporting. Here are three pretty obvious, pretty easy solutions: First, rely on actual measured market rates, instead of banks’ self-reports. In other words, rather than just asking banks what rate they could get for an overnight loans, actually look at the overnight loans on their books, and audit the reported rate. Second, if the market is really thin, such that the banks don’t really have overnight loans recorded on their books, meaning that we have no other option than to rely on hypothetical reports, then ask banks two questions instead of one: Ask both, “At what rate could you get a loan?” and “At what rate would you lend to others?” and cross-check them. Third, maybe have an official, publicly accountable regulatory body report LIBOR, rather than a private association that is arguably so close to financial elites that it purposefully overlooked their collusion.

Workplace Rules: Some Theory

When I woke up this morning, I discovered that the Econ blogosphere had erupted into a debate over workplace rules. I won’t ruin your social life by linking to all of these blog posts and asking you to read them. Nor do I have something utterly novel to contribute to this debate. But I do want to use this eruption as an opportunity to do the two things I like to do on this blog: (1.) articulate some basic economic concepts and (2.) try to persuade my progressive peers that, often, progressive-sounding policies are not as good as they sound and evil-sounding laissez-faire policies are not as evil as they sound.

So: What are workplace rules? Well, they’re just that–the rules you are contractually obligated to abide by in your workplace. But when we talk about ‘workplace rules,’ we are, of course, actually talking about the workplace rules worth talking about, meaning the controversial ones. What workplace rules are controversial? In short: the ones that seem humiliating, overbearing, or otherwise sucky. We’re all okay with employers saying, “You cannot drink on the job.” What’s controversial is when they say, “You cannot pee more than thrice today,” or “You must submit to be searched before you leave, so we can be sure you are not stealing merchandise.”

When compassionate people hear about rules like these, they naturally get upset and want to do something. Often, they want their legislatures to pass laws restricting employers’ ability to impose these rules. Are these laws a good idea? What compassionate person could oppose them?

Let’s step back and do a little theory, here. First, why do employers impose sucky workplace rules? Well, in theory, some of them might just be horrible people who get a kick out of humiliating their subordinates. But really, few people are naturally that awful. More, even if they were, competitive markets punish employers for being awful just for the sake of being awful. Think about it: if you impose unnecessarily onerous and humiliating work rules that don’t bring any extra benefits on your employees, then your workers will be demoralized, they’ll be more inclined to take their skills elsewhere, and — once word gets around — you’ll have a hard time hiring new employees. Being a needlessly shitty, evil employer is costly, so if you’re a rational, ruthless profit-seeker, you’ll do otherwise.

So, again, why do employers impose sucky workplace rules? Well, a rational employer will only enforce workplace rules that boost the company’s profit. I.e., only when there is some real, tangible benefit from the rules, like making workers more productive, preventing thefts, etc.

Now, let’s imagine what economists call a ‘perfectly competitive market.’ The ‘perfectly competitive market’ is an imaginary thing that doesn’t exist in reality. But it’s a very useful imaginary thing, so let’s work with it for now. If markets are perfectly competitive, then you, a worker, must earn the value of what you produce. Think about it this way: if you produce, every hour, goods or services worth $20, but you only get paid $18 an hour, then some other employer, eager to make an extra dollar of profit per hour, will offer to pay you $19 an hour for that work…and so forth. So, in this imaginary perfectly competitive market, your compensation should be equal to what economists call your “marginal productivity” — your actual value-add.

Now suppose that you had been worth $20 an hour, but suddenly there have been a bunch of thefts at your firm. Every week, 10% of the value of what you produce has been stolen away by somebody — presumably some other employees. Now, the value to your firm of what you produce is only $18 an hour. Now, because your firm is in a perfectly competitive market, it can’t survive if it continues to pay you $20 an hour, when its weekly revenues have just been cut down by 10%. Your firm has two options: It can cut your pay to $18 an hour. Or, it can impose a new workplace rule that all employees must be searched before leaving work, to ensure that no merchandise is stolen. Furthermore, actually, all the other firms in your industry are facing the same problem. And they’ve roughly divided in half–half of them are still paying $20 an hour, but searching employees; the other half are not searching employees but are paying only $18 an hour. (To generalize this insight: in a perfectly competitive market, the costs and benefits of workplace regulations get passed on to employees.)

What do you do? Well, in a free and competitive market, it’s up to you what you do. If you’re the kind of person for whom an extra $16 a day is worth the humiliation of being searched, then you’ll go with the higher-paying firm. If it’s not worth it to you, then you’ll go with the firm without the search. If every employee in the world prefers the extra pay, then every firm will naturally offer the extra pay (with more workplace rules) in order to attract those workers. If every employee in the world thinks it’s not worth the extra pay, then employers will maximize their profits by letting the thefts slide and lowering workers’ pay. AND (and here’s the really interesting and important part) if different employees have diverse preferences, then different employers will work to meet those diverse preferences. Some firms will occupy the niche of hiring employees who put relatively more value on autonomy rather than pay, and other firms will occupy the niche that is vice versa, and workers as a whole will be better off for it. In other words, in a perfectly competitive market, the only sucky workplace rules that will be imposed upon employees are those rules that are worth the economic benefits they bring to the employees themselves.

And, in this world, laws limiting employers’ ability to impose workplace rules will, consequently, all be either harmful or redundant. If the government imposes rules saying that firms can’t search their employees, then all firms in our example above will end up paying $18 an hour and not searching. This doesn’t change the situation for those employees who chose those firms, but it does hurt the other employees, who themselves chose to opt into firms that paid an extra $2 an hour and searched employees. In other words, the employees at those firms had already voted with their feet, revealing that the workplace rule was worth the extra pay to them–and what right does the government have to contravene their preferences here?

So this is one of those things where the counterintuitive logic of economics suggests that the compassionate and humanitarian thing to do may not be what it initially seems.


But everything I wrote above is in the world of highly abstract theory. And I’m not actually opposing all limitations on workplace rules on the basis of this theory. In the real world, markets are not perfectly competitive. People are myopic, signing into long-term contracts without thinking about what they’ll actually feel in the future, or without being fully aware of other alternatives elsewhere. Many labor markets are dominated by a relatively small number of very large firms, and many sectors of the labor market have high unemployment — this means that in these markets, employers have way more bargaining power than their employees. People are social animals, who are attached to people and social groups in particular geographical areas, etc., which adds “frictions” that mean that labor markets are not perfectly competitive. And to the extent that labor markets are not perfectly competitive, there are gaps between our theory and the reality — and in those gaps there can be space for the government to improve human welfare by sometimes limiting employers’ power/freedom.

But theory is useful because it allows us to get a little closer to tracing cause and effect in the world. And the theory tell us that, in a theoretically perfect market, government-imposed restrictions on workplace rules would be either unnecessary or harmful, because employers would only impose rules that were ‘worth it’ to their employees. And so this theory does provide some useful takeaway ideas. (1) Insofar as the world does conform to the theory, many legal restrictions on workplace rules can be harmful and unnecessary, because market competition should pressure firms to only impose those rules that are ‘worth it’ to their employees, while government regulations can permanently and universally forbid rules that are ‘worth it’ to at least some employees. And (2) insofar as the world does not conform to the theory, one major cause of the problems employees face is imperfectly competitive labor markets, and so one way to dampen the problem of unnecessarily onerous and burdensome workplace rules is to make our labor markets more competitive, dynamic, and liquid.

Religion in the Public Square

Debates about religion in the public square traditionally go something like this:

Secularists argue: “We live in a democracy based on the separation of church and state. No religious group has the right to impose its morals on others. Rather, we must base our policies in universal — hence, secular — principles. This requires us to leave behind our particularist, subjective religious views when we enter the public sphere.”

Religious politicos argue: “Our moral values are based in our religious beliefs. We cannot separate our identities and our values from our religion. If you try to exclude religion from the public square, then you will be excluding us.”

I’ll offer my own heterodox take, which doesn’t really fit into either side: At the most abstract plane, I think the secularist position is philosophically problematic. Can we really draw a clear demarcating line between secular moral beliefs and religious moral beliefs? Does a person who is now secular, but whose moral intuitions were initially informed by the hymns she heard on her mother’s lap as a child, have religious values? What about Jews who are secular, but who have taken their ethical views from Jewish intellectual traditions that draw their inspiration from the Talmud? Are these people bringing religion into the public sphere when they advocate policies that are grounded in these values? On the spectrum from, on one end, a Catholic who accepts all church Doctrine, to, on the other end, a now-atheist whose moral intuitions were formed by flirtations with Christianity and Buddhism, where is the dividing line between secular and religious value? The line between religious and non-religious moral beliefs, it seems to me, is fuzzy. Stepping back even further: Is this distinction even a valid one? From a logical positivist perspective, all moral values are subjective — i.e., they are not physical things in the world that we can discover through scientific methods, hence they are products of human subjectivity. For the logical positivist, then, secular ethics are no more universal than religious ethics.

Given this, don’t the religious have a valid philosophical point? If their identities, and the whole bases of their ethics, are grounded in religion, then can we really expect them to give these up when entering the public sphere? Aren’t they right that barring their values from the public sphere would in fact bar their selves? And isn’t this unacceptable in a Democracy? It seems reasonable for secularists to say to religious believers, “We do not think your religion is true.” But it does not seem reasonable to say, “To participate in our Democracy, you must leave behind what you believe to be truth.”

So I see the expectation that religious believers undergo a sort of secular hygiene before entering the public sphere as seriously problematic on a theoretical, philosophical level.

HOWEVER, in practice — on the more practical plane — I think the actual manifestations of religious belief in the public sphere are often problematic and unhelpful. And this is, very simply, because I doubt that ancient religions (I do not use the term derisively) really have much to say about setting policy in our incredibly socially, technologically, and politically complex and interconnected 21st century. The core of the Abrahamic faiths, it seems to me, is the idea that man is made in the image of God, and that we must thus love and respect and value every human being as an end in and of herself. This is an enormously important, serious, good, wonderful belief, and we would all do well to better heed it in our daily lives. But in the 21st century, we almost all agree on the surefire applications of this moral dictum — i.e, we all agree that brutal oppression and hatreds are bad and that we’ should to promote general welfare and opportunity. The things we’re still debating are the issues where it is not clear how best to achieve the goal of lovingly providing for all human beings, or how to trade off  conflicting obligations to different people. For example, advocates of greater social welfare policies want to help the poor, but so do detractors of these programs, who fret that the programs could have perverse, unintended consequences. Proponents of school choice hope to give better opportunities to talented and ambitious, but underprivileged students; opponents of school choice worry that such a policy will make the worst schools and students even worse. The best advocates of both sides believe they are defending human dignity. So I’m not sure any rabbi or priest or imam can actually claim authority on these issues, even among her/his own followers. The Abrahamic faiths can remind us to take our moral obligations here seriously — but they can’t actually tell us what are the best policy tools with which to meet those ethical goals.

So how should we deal with religion in the public sphere?  The answer is that we should all, as ever, just be more democratic and inclusive and tolerant and conversant, and less prickly and chauvinistic and closed and assertive. Religious leaders shouldn’t presume to think that their faith, however deeply felt, gives them a special insight into policy — they shouldn’t try to claim religious authority for questions that hinge on open social-scientific questions. Nor can they, I think, claim religious authority to, for example, oppose same-sex marriage on the basis of their religions’ traditional sexual morality — because this is clearly an issue in which traditional religious sexual morality is coming into conflict with the religious goal of acknowledging every person as an image of God, and it’s not clear that religion itself compels choosing the former value in that tradeoff. And secularists shouldn’t feel threatened or get hot and bothered. Instead of saying, essentially, “Take your religious hat off while you are here,” they should say things like, “But are you sure that this policy is the right application of your ethics? I think it’s quite complicated,” and, “Can you really claim the authority of your religion for this? But some of your co-religionists, over there, disagree.” And both sides should say, “We’re married together, in this democracy, so we’ll both give and take to make this marriage work.”

My readers and peers presumably think mostly of the religious Right when they read this. But I also think of the nuns and the Georgetown faculty who, for example, protested recent Republican budget proposals because they cut programs that had been intended to help the poor. I trust the nuns and faculty are excellent people, who understand Catholic moral theology better than I do. But I doubt they can claim its authority. After all, Paul Ryan proposed his budget in the belief that smaller, less onerous government, and a more secure fiscal future,  would promote economic growth that would expand employment opportunities for the poor. Now, that idea is certainly debatable — and that’s just the point. Given that we continue to debate how the best policy tools to help the poor, the nuns can’t claim that Catholic moral theology itself gives us the right answer.


The priming for this post, by the way, is that I was reading up on Turkey for a new research project. Prime Minister Erdogan has definitely made mistakes in his term. But I think some of his efforts to give more space for the public representation of the Turkish population’s Islamic character have not been entirely misguided. Indeed, that space could actually protect against backlashes that could nurture dangerous radicalism. I hope to have more thoughts on this in the future…

Skill Composition and Immigration

The purpose of this post is not to advance a policy idea, but to articulate what is at stake. Immigration is one of the most difficulty policy issues to talk about, because it overlaps so much with touchy issues of identity politics and race. But, particularly in light of President Obama’s recent order to halt the deportation of some categories of undocumented immigrants, I think it’s important to step back and take a look at immigration through more abstract economic and ethical lenses, in the hopes that this will help us have smarter and fairer conversations in the future. The way I want to come at this is first by reviewing the conventional wisdom, and then looking at how that conventional wisdom is being challenged by my favorite policy writers of the heterodox center-left and the heterodox center-right (Matthew Yglesias and Reihan Salam, respectively).

So, first, the conventional wisdom: Almost everybody in the policy world seems to agree that high-skill immigration is an unqualified good — a no-brainer. High-skilled immigrants — let’s define them as those with advanced professional degrees, or with STEM degrees, or who own their own companies — help drive technological and business innovation that makes the country as a whole more prosperous. We want to keep them here, in the U.S., so that American workers will have job opportunities at their firms, so that American companies can own their patents, so American governments can get more revenues generated therein, etc. A rising tide lifts all boats, and since high-skilled immigrants help make the American economy bustle, they make working Americans better off. The only group of people who could conceivably be hurt by high-skilled immigration is high-skilled Americans, who would, in the short run, face a more competitive market for their skills. But we high-skilled Americans are literally the most privileged and pampered class of people in human history, so it seems fair to expect us to fend for ourselves. So everyone agrees that high-skilled immigration = good.

The other half of the conventional wisdom is that the other half of immigration — that is, low-skill immigration — is, at the very least, a little bit more complicated. The thinking here is that low-skilled immigrants aren’t likely to invent great new things or make discoveries or start companies. They’re more likely to just accept very low wages for service jobs, which should push down the wages for, and contract the employment opportunities of, native-born low-skilled American workers. Now, plenty of intellectuals still advocate for low-skilled immigration — sometimes on the cosmopolitan ethical grounds that there’s no moral reason to privilege the economic needs of human beings who happen to be native citizens over the more dire economic needs of human beings who could potentially be citizens in the future. But this position isn’t considered politically palatable (American voters are, after all, theoretically already American citizens). This is why both parties try to stick to advocating high-skilled immigration, staying away from the trickier issue. Focusing on high-skilled immigration, as Matt Yglesias notes with some derision, has thus become the fashionable thing to do.

So now let’s complicate this conventional wisdom. From the center-left, Matt Yglesias provides some evidence that, actually, the idea that low-skilled immigration lowers the wages of low-skilled native-born Americans is false. In fact, the Economic Policy Institute (which is labor-funded, hence not exactly a neo-liberal shill group), has actually found that it tends to raise wages. How could this be? What’s the theory here? Well, in truth, the “low-skilled labor market” is not just a single, fixed, homogenous thing. This is because (#1) the low-skilled labor market itself divides into several relatively distinct tiers, and (#2) markets are dynamic over the long run. (#1) means that low-skilled immigrants in practice mostly occupy the most low-level service jobs, e.g, dishwashing, which employ relatively few native-born Americans — so low-skilled immigrants in this tier are mostly competing against other immigrants, and limiting immigration on those grounds, Yglesias notes, seems a bit perverse. And (#2) means that having more immigrants in these jobs, i.e., having more bodies to meet our economy’s demand in these domains, is good for the economy as a whole, over the long run, which lifts all other boats. In other words, over the long run, bringing more people into this very-low-skill labor markets benefits all other workers, because these labor markets are “complementary.” If a local restaurant can suddenly survive because it can get lots of cheap dishwashers, this could mean it would employ relatively high-skilled business managers and lawyers, etc. So increasing the labor supply in any particular employment tier benefits all the others. Got it? Okay. So, let’s, for now, accept the EPI’s empirical analysis and Yglesias’s theoretical explanation. (I note in passing the irony that, according to Yglesias’s analysis, the only people who have economic grounds to oppose low-skilled immigration are low-skilled immigrants. This is, of course, not how the debate plays out in politics, which shows how identity politics matter more than economic considerations in our policy debates…)

Now, from the heterodox center-right, Reihan Salam objects. He doesn’t contest Yglesias’ short-run analysis, but argues that we need to do a “multigenerational analysis,” i.e., thinking about “how the future will unfold in a realistic, unsentimental way.” He points to research suggesting that the children and grandchildren of immigrants from south of the border are not closing the skills-gap with native-born workers. Now, I think this research could be contested and critiqued from a variety of angles, but let’s, again, accept it for now, so we can think analytically about the issues at stake. If the children of immigrants from SOTB aren’t gaining the skills of the children of the native-born population, why would this be the case? Well, one possibility is that there are vicious cycles here — because they work low-wage jobs, low-skilled immigrants end up residing in downscale neighborhoods and school districts, where their children are less likely to acquire the cultural capital, education, ambitions, bourgeois-workplace mores, future-orientation, etc., needed to succeed in higher-skill professions. So low-skilled immigrants can get their families into intergenerationl ruts, so to speak. Another possibility is that there are deeply ingrained cultural factors at play here — the fact that the children of Chinese immigrants are more well represented in elite universities and professions than the children of Mexican immigrants, though the latter compose a larger portion of the American population, suggests that we may need to seriously consider these factors. But whatever the explanation, the implication is the same: large-scale immigration from south of the border could lead to a long-term decrease in the “skill composition” of the American population as a whole. And that would actually be bad for everyone. The reason why both high-skilled software engineers and low-skilled barbers in Israel make more money than their equivalents in Guatemala is that there are large, very good, very positive “network effects” from having a population that is, in high proportion, high-skilled. Having a higher concentration of smart, skillful people makes your economy as a whole more prosperous — heck, it even makes your block parties better.

The implication, then, is that if it is true that certain immigration patterns could lead to a long-term reduction in the skills of the American workforce as a whole, then those particular immigration patterns could be bad for America as a whole, bad for America’s place and influence in the world in the future, and bad even for future generations of aspiring immigrants in America. This could be particularly problematic, as Reihan notes, in light of ongoing technological changes that are increasing the wages for high-skilled workers, while displacing the employment opportunities for lower-skilled workers. This picture becomes seriously problematic when you couple it with America’s growing debt and burdened welfare state. Notably, immigrants are not, today, net drains on the the American welfare state (that is, current evidence suggests they pay out more in taxes than they receive in benefits). But, if low-skilled immigrants largely get sucked into communities with “vicious cycles” of underperformance, and technological changes further erode their employment opportunities, they could, in the future, become drags on the fisc.

Now, let me step back for a bit. I wanted to articulate Reihan’s argument because I think it deserves very serious consideration, particularly from readers who are inclined to suspect that objections to immigration can only be based on an underlying prejudice. But I’m not sure I accept that this line of thinking provides a strong argument for imposing greater limits of immigration. Here are a couple things that come to my mind: (1) As a matter of basic moral theory, it does not seem to me that America’s fiscal position, or even America’s national prosperity or greatness as a whole, should be our single, overarching ethical metric. Suppose we accept that more low-skilled immigration will hurt America’s long-term prosperity. Well, my landlady’s plans to live and collect Social Security checks until she is 105, also erode America’s fiscal position. Her desire for a long life is pit against my interests as a young person who hates paying taxes. But, despite this, I don’t hope she dies soon, because I love her. Loving our fellow human beings as ends in themselves — which is what taking morality seriously requires — means that we do what we can to meet their urgent needs (such as by allowing them to migrate to our prosperous, stable country), even if it could, over the long run, hurt the American per-capita GDP figure. (2) To a large extent, Reihan’s argument, as he himself notes, implicates other policy issues, most notably education and residential segregation, as they relate to social mobility. If it were true that the children and grandchildren of low-skilled immigrants became as highly skilled as those of native-born Americans, then there would be no strong argument against large-scale immigration. So improving education for the poor, such as through more extensive vouchers and experimentation with charter schools, ought to be the highest priority. More broadly, Reihan and I both believe that broad market-based reforms, and a reduction in the American welfare bureaucracy, could help produce broad-based prosperity and employment opportunities that could reduce welfare dependency, nulling concerns about the intergenerational fiscal impact of immigration. This, I think, shows how many of our policy issues really can’t be considered in isolation — they’re all bound together.

So let me close this with a few relatively modest claims that we can take forward into future immigration debates: (1) Figuring out what is the most rational immigration policy hinges on a lot of open empirical questions: i.e., how are current immigration patterns influencing the skill composition of the population as a whole, and what power do we have, through both education and immigration policy, to change that? (2) There are also open ethical questions. If, indeed, some immigration patterns are reducing the skill composition of the U.S. in ways that could hurt the country’s long-term prosperity, we need to talk seriously about ethical questions that aren’t always taken seriously in the technocratic/economics-oriented policy world — i.e., do we have a humanitarian obligation to weigh the interests and needs of all human beings equally? Or do we have a nationalist obligation to privilege the interests of American nationals? Is there an ethical reason to privilege the interests of undocumented immigrants who are already within American borders over prospective immigrants who are currently in, say, Nigeria or Bangladesh? And (3) we should be wary of allowing the issue of immigration in the U.S. to be transformed into a matter of ethnic identity politics. There are both humanitarian/cosmopolitan ethical grounds and practical/economic reasons (as Reihan and Yglesias both agree in their posts) to think that a larger portion of immigration slots should be allotted to more diverse groups of migrants from the poor parts of all of the continents of the world.