Country shopping

I suspect that the migrant tide surging into Europe in recent months, ultimately means the end of relaxed attitudes towards immigration and border control, and the beginning of a new politics of "immigration restriction". Trump in America, and Orban in Europe, are just the start. However, for now those forces are not in power (Orban rules in Hungary, but he's an outcast in Brussels), and their positions are shunned by an establishment which extends across politics, business, the media, and the academy.

One small feature of this intellectual landscape is the "open borders" movement. I find it hard to say whether these people are subliminally influential, or just ideologically notable for presenting the extreme position. In any case, the debate pro and con often takes the form of (pro) an open-borders advocate presenting a simple-minded economic argument that purports to demonstrate why unrestricted immigration is good for Gross National Product, and (con) an open-borders opponent fulminating about the replacement of a country's traditional race, religion, and culture by immigrants who will not assimilate.

It may be that the open borders opponents will win without constructing an economic counter-ideology - indeed, their position may be mostly negative and critical, that the kind of economics which supports open borders is biased, blind, and false. Anyway, I would certainly agree that the models used by the open borders advocates don't describe what is actually happening (nor are they supposed to; they are models of the better world where open borders is official policy); and I have not seen, say, a simple neoclassical model of what's going on in Europe. Until today, I wouldn't even have known where to begin in making such a model.

But now, thanks to two words seen in a blog comment, I do know where that academic work of modeling the European migration wave could start. The magic words are: country shopping. Let the microeconomic analysis begin!

Towards a history of the 21st century world economy

Building on the remark in the previous post, I can form a quick thesis about epochs in the world economy in the 21st century.

Back in the mid-00s, Brad Setser ran a blog tracking foreign currency reserves of the world's central banks. (After 2008, he disappeared into the Obama administration Treasury.) It was from that blog, I am sure, that I learned of what some were calling "Bretton Woods 2.0" - the original Bretton Woods being the system of exchange rates set up by the world powers after World War 2, one of many new global institutions created at that time, when the victorious US was fully half of the world economy...

"Bretton Woods 2.0" has had a number of meanings. Sometimes it refers to the new order which followed Nixon's abandonment of fixed exchange rates and the gold standard in 1971, in favor of a floating petrodollar. It was also bandied about in 2008 as a name for the financial new world order that the G20 would create, as it took over from the G8 as the chief locus of global economic governance. It never quite fulfilled that role, I think, but nonetheless we did end up with a distinctive new balance - more on that in a moment.

But back in the mid-00s, BW 2.0 referred to the situation in which China funded the US by buying Treasuries in vast quantities. That situation itself emerged, on the Chinese side, from a desire not to experience a currency crisis like the Asian export economies of 1998 did, and on the US side, from the post-9/11 economic strategy of low interest rates and a housing boom...

Setser and other commenters often remarked on the unsustainability of BW 2.0. In any case, when the global financial crisis ("the GFC", as we call it in Australia) hit in late 2008, we entered a new epoch in which the developed economies relied on ultra low interest rates and continued Chinese growth, to keep going.

The events of 2015 may be ending that regime, because China's own strategy of export-driven growth has reached its limit, and now they need to become an economy driven more by internal consumption. They're also putting those accumulated reserves to work geopolitically with schemes like the Belt-Road initiative and the new development banks (reminiscent of the post-WW2 construction of new global institutions; then America led, now it's China).

ZIRP in the long view

I just woke up to find out that the US Federal Reserve announces its interest rate at the end of the hour. Apparently this will affect the fates of a number of struggling economies, such as Brazil.

Anyway, the other day I ran across this remark, which puts the current epoch of Fed interest rates in perspective:

"The western world continues to depend on a life-support system, namely zero interest rates, combined with Chinese growth."