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Milton Friedman is regarded as one of the most prominent economists of the twentieth century, contributing to both economic theory and policy. 31st July is his birthday, and this year marks 10 years since his death, and 40 years since he won the Nobel Prize for Economics for his contributions to consumption analysis and to monetary theory and history.

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In many scholarly and activist circles, the International Monetary Fund (IMF, or ‘the Fund’) has a reputation as a global bully. The phrase ‘Washington consensus’ has come to invoke a rigid orthodoxy of austerity and liberalization which the Fund, along with its cousins the World Bank and the US Treasury, imposes on developing countries. As an organization, the IMF is seemingly monolithic, drawing comparison to the Vatican even amongst its own staff.

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The way most economists organize their ideas about the development of macroeconomics says that 1968 was a crucial year in the demise of old-fashioned Keynesianism. That was the year of the publication of Milton Friedman’s Presidential Address for the American Economic Association. Friedman argued that if policymakers caused a bit of inflation, this would temporarily reduce unemployment, but the effect would only be temporary, so that in due course, unemployment would return to its previous level and the inflation would remain. The reason he gave was that wage-bargainers’ expectations would adjust to the occurrence of inflation, they would incorporate their expectations into their bargain, and inflation would consequently lose its beneficial effect.

I am always surprised anyone believes that. The argument itself amounts to saying that expectations adjust to reality. Well, yes. But how could it be that economists did not know that until 1968?

That, though, is only the beginning, because Friedman’s supposed innovation is the beginning of a story about a whole revolution of thought in macroeconomics. Supposedly, up to 1968, policymakers had believed that a policy of inflation would be effective in lowering unemployment – an idea often labelled ‘the Phillips curve trade-off.’ After 1968, apparently, they had to rethink this.

That again, supposedly, led to a great debate at the end of the 1960s and into the 1970s about whether Friedman was right. In due course, says the story, with inflation seeming to rise ever higher, Friedman’s side was seen to have won that debate. This was a great intellectual victory of ‘monetarism’ and a defeat for ‘Keynesianism’. All these things can easily be found in undergraduate textbooks of macroeconomics, and make pretty frequent appearances in bulletins of central banks as well.

It sounds like an important story, and makes Friedman’s Address a key moment in the history of economics. But it sounds like an unlikely story as well. Not only did no one think of expectations adjusting until 1968, but when it was suggested, apparently they denied it. What else was that great debate about?

There is an interesting resolution. The argument Friedman made was very old news in 1968. Everyone already knew it. There a number of earlier statements, plenty of them by prominent authors in highly visible places. Moreover, Friedman’s own statement gave it no fanfare at all; he stated it just as if it were a well known argument. But more than that, Friedman himself had already made the argument on four previous occasions, the first of them a decade before the supposedly crucial lecture.

People write that Edmund Phelps had the same argument in print before Friedman. But that was in 1967, so it hardly makes a difference. There are two much more interesting things than that though. One is that Phelps did not even use the argument – as Friedman did – to say that inflationary policy was a bad idea. He was just using it – mathematical-economics-style – to work out how quickly inflation should gradually be raised to bring the biggest benefit. But the other interesting thing is this: he even said the argument was not original, naming some of those who had made it before. For some reason, that fact has made no impact at all on all the authors who quote him as joint-originator of the argument.

The fact that the Friedman/Phelps argument was so well-known is the first clue that the rest of the story about the Phillips curve is all wrong as well. The idea that policymakers thought that a policy of inflation would reduce unemployment is a long way from the truth. The idea that there was any argument about whether expectations would adjust to reality has almost nothing going for it – of course they do. On the other hand, there were arguments that the association of slow inflation with lower unemployment had nothing to do with mistaken expectations, but rather everything to do with overcoming various sorts of frictions. The same thing is widely believed today, so it was certainly not the subject of any revolution started by Friedman. The debate in the 1970s was about other, much more interesting matters entirely.

Not only have we all been teaching a story about the Phillips curve which just is not true, but we have been teaching one which makes economists look very foolish as well. It is a strange thing what a bit of actual reading of old arguments in economics can turn up.

Headline image: Saturn envy by woodleywonderworks. CC BY 2.0 via Flickr

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Immigration policies in the US and UK look very different right now. Barack Obama is painting immigration as part of the American dream, and forcing executive action to protect five million unauthorized immigrants from deportation. Meanwhile, David Cameron’s government is treating immigration “like a disease”, vowing to cut net migration “to the tens of thousands” and sending around posters saying “go home”. US immigration policies appear radically open while UK policies appear radically closed.

But beneath appearances there is a strikingly symmetrical gap between talk and action in both places. While courageously defying Congress to protect Mexico’s huddled masses, Obama is also presiding over a “formidable immigration enforcement machinery”, which consumes more federal dollars than all other law enforcement agencies combined, detains more unauthorized immigrants than inmates in all federal prisons, and has already deported millions.

While talking tough, the UK government remains even more open to immigration than most classic settler societies: it switched from open Imperial borders to open EU borders without evolving a modern migration management system in the interim. Net migration is beyond government control because emigration and EU migration cannot be hindered, family migrants can appeal to the courts, and foreign workers and students are economically needed.

So these debates are mirror images: the US is talking open while acting closed; the UK is talking closed but acting open. What explains this pattern? The different talk is no mystery: Obama’s Democrats lean Left while Cameron’s Conservatives lean Right. But this cannot explain the gaps between talk and action. These are related to another political division that cuts across the left-right spectrum: the division between “Open and Closed”.

Different party factions have different reasons for being open or closed to immigration. On the Left, the Liberal Intelligentsia is culturally open, valuing diversity and minority rights, while the Labour Movement is economically closed, fearing immigration will undermine wages and working conditions. On the Right, the Business Elite is economically open to cheap and pliable migrant labour, while the Nationalist Right is culturally closed to immigration, fearing it dilutes national identity. Left and Right were once the markers of class, but now your education, accent and address only indicate whether you’re Open or Closed.

Sympathetic talk can often satisfy culturally motivated supporters, but economic interest groups demand more concrete action in the opposite direction. So, a right-leaning leader may talk tough to appease the Nationalist Right, but keep actual policies more open to please the Business Elite. A left-leaning leader may talk open to arouse the Liberal Intelligentsia, but act more closed so as to soothe the Labour Movement. These two-track strategies can unite party factions, and even appeal to “strange bedfellows” across the aisle.

US and UK immigration debates illustrate this pattern. The UK government always knew it would miss its net migration target: its own 2011 impact assessments predicted making about half the promised reductions. This must have reassured Business Elites, who monitor such signals. Meanwhile for the Nationalist Right it’s enough to have “a governing party committed to reducing net migration” as “a longer term objective”. It’s the thought that counts for these easygoing fellows.

So, the Conservatives’ net migration targets are failing rather successfully. The clearest beneficiary is UKIP – a more natural Tory sidekick than the Lib Dems, and one which, by straddling the Closed end of the spectrum, siphons substantial support from the Labour Movement. Almost half the UK electorate supports the Tories or UKIP; together they easily dominate the divided Left which, by aping the old Tory One Nation slogan, offers nothing concrete to the Labour Movement, and disappoints the Liberal Intelligentsia, who ask, ‘Why doesn’t a man with Miliband’s refugee background stand up for what’s right?’

Maybe Miliband should have followed Barack Obama instead of David Cameron. Obama knows that the thought also counts for America’s Liberal Intelligentsia. For example, Paul Krugman writes, “Today’s immigrants are the same, in aspiration and behavior, as my grandparents were — people seeking a better life, and by and large finding it. That’s why I enthusiastically support President Obama’s new immigration initiative. It’s a simple matter of human decency.”

It’s also a simple matter of political pragmatism. Hispanics will comprise 30% of all Americans by 2050; many of those protected today are their parents. Both parties know this but the Democrats are more motivated by it. They have won amongst Hispanic voters in every presidential election in living memory, often with 60-80% majorities: losing Hispanic voters would be game changing. But the Republicans just can’t bring themselves to let Obama win by passing comprehensive immigration reform. Just spite the face now: worry about sewing the nose back on later.

Obama’s actions secure the Hispanic vote, but more importantly they pacify the Labour Movement. Milton Friedman once argued that immigration benefits America’s economy as long as it’s illegal. For ‘economy’ read ‘employers’, who want workers they can hire and fire at will without paying for costly minimum wages or working conditions. In other words, Friedman liked unauthorized immigration because he thought it undermined everything the Labour Movement believes in. No wonder the unions hated him: he was a red flag to a bull.

Luckily Obama’s actions don’t protect ‘illegal immigrants’. Those protected have not migrated for over five years, long enough for someone to become a full citizen in most countries, the US included. They are not immigrants anymore, but unauthorized residents. And once they’re authorized, they’ll just be plain old workers: no longer enemies of the Labour Movement, but souls ripe for conversion to it. For the real immigrants, the velvet glove comes off, and an iron-fisted border force instills mortal dread in anyone whose dreams of being exploited in the First World might threaten US health and safety procedures. To be clear, Obama’s actions protect the resident labour force from unauthorized immigration.

So, Obama’s talk-open-act-closed strategy is working quite nicely for the Democrats, throwing a bone to the Labour Movement while massaging the conscience of the Liberal Intelligentsia – and even courting the Business Elite, who would rather not break the law just by giving jobs to people who want them. So even if they don’t revive Obama’s standing, the executive orders are a shot in the arm for the Democrats. It’s Hillary’s race to lose in 2016 (although come to think of it, that’s what The Economist said during the 2007 primaries…).

In sum: the politics of international migration reveal a new political landscape that cannot be captured by the old categories of Left and Right. Governments on both sides of the Atlantic are talking one way on immigration but acting another, so as to satisfy conflicting demands from Open and Closed party factions while wooing their opponents’ supporters.

So are Left and Right parties dinosaurs? Not necessarily. Things may look different in countries with more parties, but I suspect that the four factions outlined above will crop up even in countries led by multi-party coalitions. We need more studies to know – if this framework works in your country, I’d be interested to hear. Another interesting challenge is to understand how these patterns relate to the rise of anti-immigrant sentiment – a question touched on by a recent special issue of Migration Studies.

To commemorate International Migrants Day this year, OUP have compiled scholarly papers examining human migration in all its manifestations, from across our law and social science journals. The highly topical articles featured in this collection are freely available for a limited time.

Featured image credit: Immigration at Ellis Island, 1900. By the Brown Brothers, Department of the Treasury. Records of the Public Health Service. Public domain via Wikimedia Commons.

The post Why do politicians break their promises on migration? appeared first on OUPblog.

        

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Elvin Lim is Assistant Professor of Government at Wesleyan University and author of The Anti-intellectual Presidency, which draws on interviews with more than 40 presidential speechwriters to investigate this relentless qualitative decline, over the course of 200 years, in our presidents’ ability to communicate with the public. He also blogs at www.elvinlim.com. In the article below he looks at Obama’s stimulus package. Read his previous OUPblogs here.

President-elect Obama’s big stimulus package is getting bulkier and more complex by the day. No longer confident that the Congress would be able to move quickly to deliver legislation for the newly sworn in president to sign, Senate Majority Leader Harry Reid has tampered expectations by rejecting a “false deadline” for such a delivery.

As is always the case in Washington, we are scheduled for a clash of ideologies even as we seek a solution to our current economic woes. The Republicans want deliberation (or delay) and fiscal restraint and the Democrats want, well, big government. Cognizant of this, Senate Minority Leader Mitch McConnell has already registered his wariness of “very big systemic changes” proposed in the stimulus package. Republican leaders have taken to calling the proposed $800 billion stimulus package a “trillion dollar” package even though about 40% of it will pay for tax cuts all sides agree on.

But Democrats are likely to prevail in this battle not only because of their store of electoral goodwill locked into congressional majorities, but also because economic history is presently on their side. Traditional monetary policy becomes increasingly ineffective as interest rates fall (because rates cannot fall below zero). The fact is that the banks are still not lending enough. Just in the last three months, cash holdings in banks have tripled to over 1 trillion dollars, according to the Federal Reserve. Other drivers of growth are also unavailable to us this time round. Inventory rebuilding was a powerful engine of growth in 1976, as was residential construction 1992, while consumer spending helped in 2002 (recall President Bush’s invitation for Americans to go out and shop after Sep. 11). The private sector in 2009 is moribund.

This is why Fed officials and economists have come out in support of a fiscal stimulus package. “If ever, in my professional career, there was a time for active, discretionary fiscal stimulus, it is now,” said Janet Yellen, San Francisco Fed president. According to Allen Sinai, chief global economist at Decision Economics in New York, “When we do recover, the engine will be government spending, not home building or the consumer.” John Maynard Keynes, not Milton Friedman, is the dead economist du jour.

Since the September 2008 Wall Street crash, the S.& P. has moved more than 5 percent in either direction on 18 days. There were only 17 such days in the previous 53 years, according to calculations by Howard Silverblatt, an index analyst at S.& P. If the invisible hand of the market cannot calm its own nerves, then government must.