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The misleading short run
We sharply disagree with this dismal view of globalisation. Our recent research indicates that the gains from trade and migration are tremendous and that the world stands to benefit greatly from their further liberalisation (Desmet et al. 2016). The problem with virtually all quantitative and empirical evaluations of trade and migration is their static nature. They completely ignore the dynamic gains from globalisation. As we will later discuss, these dynamic gains quantitatively dwarf any short-run costs.
The dynamic argument in favour of trade is simple – innovation requires scale, and scale requires trade. The incentives of firms and individuals to invest effort, time, and resources in generating new ways of producing valuable goods and services are intrinsically related to their ability to use the resulting knowledge repeatedly. This replicability underlies the scale economies that form the basis of much of modern growth theory. At no point in history have these forces been more evident than now. Ideas generate products that are replicated millions, or even billions, of times in a matter of a few years, and companies can go from just a few programmers in a garage to a multi-billion dollar business in a decade. Clearly, the ability of firms to sell the goods and services they invent and improve depends on their capacity to reach their costumers cheaply and efficiently. The result is an obvious, and often tragically neglected, link between trade and growth. In a recent interview with the Financial Times, Bill Gates, founder of Microsoft, echoes this simple insight: “I wish for a week that we could shut down trade and then Boeing, Microsoft, Hollywood, pharma would resize [downsize] their R&D departments… people would go ‘Holy smokes, that was not a very good deal’.”
Society’s suspicion towards immigration is likewise distorted by a static, short-run view. When foreigners enter a country, they use up land and other fixed factors, and get access to public goods and services. The result is more congestion, as fixed resources have to be shared between more people. If immigrants do not fully pay for these fixed factors and public services, the autochthonous population loses. Even if the foreign residents are made to foot the bill, the citizens who do not own part of the fixed factors still suffer, as their marginal productivity gets eroded and their income declines. The basic economic logic of this argument is sound, but its premise is flawed – fixed factors are less fixed than they appear, and technology evolves endogenously, partly as a result of immigration.
Many fixed factors, such as land, are not fully utilised. The price of land anywhere in Montana is lower than in virtually every block of Manhattan. There is plenty of space in the US to create many more cities like New York. Hence, the lack of space, at least in the US, cannot be a fundamental factor limiting the productivity of migrants and other workers. As for technology, we know that innovation flourishes in dense locations, partly because of spillovers between workers and partly because of stronger local demand. If people can move to the more productive regions of the world, those areas will become denser, spurring more future innovation and growth. Though there might be some discussion in the short run about the adequate skill level of immigrants, in the long run this is a secondary concern – the human capital, savings, and investment decisions of the descendants will be shaped by the country where they live.
One thing is clear, measuring the static effect that immigrants have on the wages of other similarly skilled agents in the same location misses a tremendous number of effects. What if current residents move to other cities? What if they leave to the suburbs instead? What happens in neighbouring places, and in the immigrants’ regions of origin? How do the incentives to innovate in different cities and locations change? Locations within a country and across the world are linked via trade, migration, and production; when people migrate, the geographic distribution of production changes, affecting both trade flows and innovation in different locations. The static and partial equilibrium measurement and logic that treats locations as isolated islands is flawed, and will result in erroneous answers. In economics, it is unfortunately fairly common to focus on certain details and to forget about the big picture. In this context, such an approach is particularly perilous, as it runs the risk of shaping arguably the most important policy debate of our time.
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