Policy Paragraphs

Some brief musings on a few policies.

Government Debt

As I've discussed previously, the appropriate discount rate for Americans is probably around 2.4%. The real interest rate on federal government debt is literally negative now and has almost always been below 2.4% DFII10. Forget investment, the fact that interest rates are smaller than the discount rate suggests the government should be borrowing just to boost consumption.

However, absent a significant output gap, fiscal stimulus generates an increase in demand without generating much increase in production, which just means the stimulus generates a combination of inflation and imports. If we only cared about Americans, we could argue that the stimulus will only generate imports, which makes the above interest-rate argument works. However, (a) inflation is another consequence and (b) we care about everyone, which means deficit spending during times of full employment just reallocate consumption from present foreigners to present Americans and from future Americans to future foreigners. This is probably net-negative.

Moreover, this is all premised on the assumption that the government is run by intelligent and knowledgable utilitarian planners.

In practice, it's really unclear that marginal government spending is equal in value to marginal consumption. It's also really unclear that the government is competent enough to reign in deficits once interest rates exceed the discount rate. Both of these make it plausible that deficit spending should be generally discouraged.

In short, deficit spending during good economic times is neutral except for the cost created by increased risk of default (and the resulting economic mayhem). Deficit spending during bad economic times can be good (particularly if you have an imperfect central bank, since optimal monetary policy will offset the effects of fiscal policy Monetary offset is more mainstream than you think). Although the above reasoning is not completely mainstream, this conclusion is.

Climate Change

William Nordhaus won a Nobel prize for integrating climate change models into macroeconomic analysis William Nordhaus, so it seems reasonable to turn towards him for climate change analysis. In 2017, he estimated the social cost of carbon at around $34 per ton in 2015 Revisiting the social cost of carbon CPIAUCSL and grows by ~3% per year.

However, Nordhous assumes a relatively high pure-time discount rate. This is a relatively common by economists, and they justify it by saying that they're simply using the discount rate implied by human behavior - that is, they claim to be using the values we live by. The problem with this, of course, is that we don't always live by the values we have and humans not caring enough about the future is a well known cognitive bias.

We can correct for this bias by removing the pure-time discount rate and computing a new growth-corrected discount rate, which is just $\epsilon \cdot g$ where $\epsilon$ is the utility-income elasticity and $g$ is the expected real growth in global GDP per capita. The former, we've estimated to be about 0.35; the latter Nordhaus estimates at around 2% based on expert surveys. Together, they imply a growth-corrected discount rate of around 0.7%. Figure 3 from Nordhaus' paper suggests this makes the social cost of carb about 4.4 times higher, or about \$150 per ton.

Conversely, when accounting for the fact that the poor are less able to deal with climate change than the rich, Nordhaus assumes $\epsilon=0.45$ Scientific and Economic Background on DICE models, which means he is more (um) "economically left-leaning" than I am. I'm no expert, but it doesn't seem like the social cost of carbon is particularly sensitive to small changes in $\epsilon$. For instance, a study examined various models with $\epsilon=1$ and $\epsilon=1.2$; they found (Table 6 of Equity weighting and the marginal damage costs of climate change) that this tweak of 0.2 can cause the social cost of carbon to change by between -35% and +5%. So, it seems the most likely effect of tweaking $\epsilon$ down 0.1 would be to lower the social cost of carbon by ~13%.

In short, a ton of carbon dioxide probably has an externality of roughly \$130. Given that we emit around 5 billion tons of carbon dioxide per year, that's a total lost value of ~\$650 billion per year or about 3% of GDP.

The other study I found using zero pure time preference and accounting for economic inequality found significantly higher estimates (around ~\$400 per ton) despite assuming $\epsilon=0$ Azar. So, it seems more likely that our estimate of \$130 is low rather than high.

Minimum Wage

The federal minimum wage was set to \$7.25 in 2009, where it's been ever since. In 2013, most economists thought raising the minimum wage to \$9 was a good idea IGM Economic Experts Panel. (2013). Minimum Wage and they remain remarkably uncertain about how this or a \$15 minimum wage by 2020 would affect the labor supply IGM Economic Experts Panel. (2013). Minimum Wage IGM Economic Experts Panel. (2015). $15 Minimum Wage.

Meta-analyses generally find that minimum wage increases don't affect overall employment - though, some demographics (esp young people) suffer greater displacement from the labor force Chletsos (see pages 2-4 for a history of minimum wage meta-analyses).

The UK is fairly similar to the US culturally and economically. However, their minimum wage is equal to around 50% of their median income compared to about 25% in the US. For this reason, it seems reasonable to suppose that since minimum wage increases have minimal effect on labor supply in the UK Hafner, they should also have minimal effect in the US. (That being said, the minimum wage in the UK is different for those under 25 years old)

However, it has been proposed by some that employers will respond to minimum wage hikes by cutting back hours-per-employee rather than by cutting the number of employees. Unfortunately, there has been a dirth of studies examining this in the US Belman (see pg 124). That being said, there have been 7 studies examining young hourly works specifically and they found elasticities ranging from -0.03 to -0.77 (pg 121). The estimate for workers as a whole is likely smaller.

In short, then, it looks like raising the minimum wage in the US is generally good in that it reduces inequality with minimal distortions on the labor supply. This conclusion is made weaker by the dearth of studies on changes in hours worked; however, it is strengthened if you think we should be working fewer hours anyways. I'm generally in favor of increasing the minimum wage.

For a contrary perspective, see The Myopic Empiricism of the Minimum Wage and for a rebuttal see Bryan Caplan is wrong about the minimum wage. For possible reasons for the minimum effect of the minimum wage on employment see Schmitt.


Simple economic theory suggests that immigrants depress wages and increase unemployment in the short-run, but that in the long-run investment will follow human capital leading to no real effect on wages.

This is mostly confirmed by a literature review Okkerse, which found that

the probability that immigrants increase unemployment is low in the short run and zero in the long run. Most area analyses and time-series analyses fail to find a significant influence of immigration on (un)employment probabilities

That being said they did find that "immigration negatively affects wages of less-skilled labourers and earlier immigrants."

This is also the consensus among economists: that immigrants (both high- and low-skilled) are good for the average American IGM Economic Experts Panel. (2013). Low-Skilled Immigrants IGM Economic Experts Panel. (2013). High-Skilled Immigrants.

Moreover, even if immigration did have significant negative long-term negative effects on Americans, its still likely it'd be net-positive from a global perspective since there's still the large benefit to the immigrants themselves.

That being said, there's a strain of economic theory that claims immigrants either (1) cause institution-decreasing "brain drain" to their original countries and (2) cause institutional deterioration in their host countries. I don't know of any empirical work on this issue, but it could end up making immigration net-negative.

A third argument against immigration is related to (1): there are negative externalities when people move away from their hometowns. For example, when I moved away from Wisconsin, I (presumably) accounted for the value I'd lose from spending less time with friends but I (presumably) didn't properly account for the value they'd lose from spending less time with me.

Still, upon weighing the evidence, on one hand, we have a literature review, consensus of experts, and literally trillions of dollars in potential benefits Clemens Borjas. On the other hand, we have a couple academic argument without empirical support and which, if true, would mostly imply that immigration was net-neutral from a global welfare perspective.

In short, I support immigration. The more the merrier.

Board of Governors of the Federal Reserve System (US), 10-Year Treasury Inflation-Indexed Security, Constant Maturity [DFII10], retrieved from FRED, Federal Reserve Bank of St. Louis;, October 19, 2020. Sumner, S. (2019). Monetary offset is more mainstream than you think. Wikipedia contributors. (2020, October 4). William Nordhaus. In Wikipedia, The Free Encyclopedia. Retrieved 22:22, October 19, 2020, from Nordhaus, W. D. (2017). Revisiting the social cost of carbon. Proceedings of the National Academy of Sciences, 114(7), 1518-1523. U.S. Bureau of Labor Statistics, Consumer Price Index for All Urban Consumers: All Items in U.S. City Average [CPIAUCSL], retrieved from FRED, Federal Reserve Bank of St. Louis;, October 18, 2020. Nordhaus, W. (2020). Scientific and Economic Background on DICE models. Anthoff, D., Hepburn, C., & Tol, R. S. (2009). Equity weighting and the marginal damage costs of climate change. Ecological Economics, 68(3), 836-849. Azar, C., & Sterner, T. (1996). Discounting and distributional considerations in the context of global warming. Ecological Economics, 19(2), 169-184. IGM Economic Experts Panel. (2013). Minimum Wage. IGM Economic Experts Panel. (2015). $15 Minimum Wage. Chletsos, M., & Giotis, G. P. (2015). The employment effect of minimum wage using 77 international studies since 1992: A meta-analysis. Hafner, M., Taylor, J., Pankowska, P., Stepanek, M., Nataraj, S., & Van Stolk, C. (2017). The impact of the national minimum wage on employment: A meta-analysis. Belman, D., & Wolfson, P. J. (2014). What does the minimum wage do?. WE Upjohn Institute. IGM Economic Experts Panel. (2013). Low-Skilled Immigrants. IGM Economic Experts Panel. (2013). High-Skilled Immigrants. Okkerse, L. (2008). How to measure labour market effects of immigration: A review. Journal of Economic Surveys, 22(1), 1-30. Clemens, M. A. (2011). Economics and emigration: Trillion-dollar bills on the sidewalk?. Journal of Economic perspectives, 25(3), 83-106. Borjas, G. J. (2015). Immigration and globalization: A review essay. Journal of Economic Literature, 53(4), 961-74. Caplan, B. (2013). The Myopic Empiricism of the Minimum Wage. The Library of Economics and Liberty. Ashok. (2013). Bryan Caplan is wrong about the minimum wage. This is Ashok. Schmitt, J. (2013). Why does the minimum wage have no discernible effect on employment? (Vol. 4). Washington, DC: Center for Economic and Policy Research. Schmitt, J. (2013). Why does the minimum wage have no discernible effect on employment? (Vol. 4). Washington, DC: Center for Economic and Policy Research.