A defining characteristic of an individual income tax system is its degree of progressivity. The United States has a rather progressive income tax. This means that the average tax rate paid by an individual increases as...
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- The Wrong Way to Think about Migration
The Wrong Way to Think about Migration
In today’s New York Times, Paul Krugman has an op-ed on migration. This has been a popular topic for various New York Times writers recently, with the Upshot blog producing one of the more interesting tools to date for looking at migration matters. In his op-ed, Krugman criticizes a caricatured argument related to policy-motivated migration and argues Americans are “moving the wrong way.” Essentially, his argument is that people are leaving high productivity New York and California for low productivity (that is, lower average nominal income) Atlanta and Texas. He believes this migration is primarily due to very different housing costs, and rightly identifies municipal regulations as a key driver of those higher costs.
But from there on, the op-ed is simply backwards – as you might expect from a column that stands athwart the revealed preferences of millions of people. Krugman is right that people are moving to lower-wage states, but that’s partly because states with lower labor costs are attracting more business activity and thus more jobs, especially from foreign investors. Furthermore, while Krugman is right that high prices in urban areas encourage out-migration, he doesn’t consider prices when he claims that people move to low-income areas. In fact, once price changes are accounted for, the New York-Newark-Jersey City metro area had negative real wage growth from 2008 to 2012. Bureau of Economic Analysis data compiled by NPR furthermore shows that prices have a huge effect on re-ordering which cities are richer than others. For example, in real income terms, the median income in New York City is actually lower than that of Houston, Dallas, or Atlanta. As it turns out, people aren’t quite as crazy as Krugman suggests.
The key problem in Krugman’s argument is that it doesn’t take into account what people actually want from the economy. They don’t just want maximized nominal GDP, or some arbitrary distribution of income: people want to have a good standard of living. People moving to Georgia and Texas aren’t going the “wrong way,” they’re going where they can maximize their standard of living. Other people may be better off in New York, and prefer to stay there. People migrate for many reasons: family, weather, health, jobs, and other causes. But many people migrate for a chance at a better life, which for many people means a greater amount of total purchasing power, even if they have a lower nominal income. For people with jobs that are competitive in national or international markets (which could mean anyone from welders and truck drivers to bankers and doctors), purchasing power can often be maximized in states with low prices and low taxes.
Finally, Krugman basically mischaracterizes economic productivity. Consider Williston, North Dakota, for example. This city became famous recently for having $18 starting wages at Wal-Mart. Yet a Wal-Mart worker in North Dakota is selling the exact same product as one in Mississippi: why is the North Dakota worker paid more? The answer has much to do with the difficulty of living in Williston, which is located over the Bakken shale. The advances in the energy economy have created so many jobs that it has outpaced the production of new housing. The disequilibrium has resulted in high rents. Because of Williston’s remoteness and (temporarily) high rents, people have to be paid high wages to take jobs there. These sorts of high wages are merely a compensation for hardship, not evidence that the yet-to-be-hired workers at the Williston Wal-Mart are any better than workers at other Wal-Marts.
Williston’s disadvantages, though, are unlike New York City’s in that some of them are temporary. Eventually its housing market and population will equilibrate, and employers won’t have to offer a premium for relocation or for high rents. The same might not be true for New York City, where the drivers of high costs are deeply enmeshed in the political and geographic structures of the city.
Taxes may also be a driver of higher nominal wages without higher real wages. High, progressive taxes in an open economy (such as a state in a federal system) can enable workers with bargaining power to negotiate higher wages, in order to compensate them for the higher tax bill associated with the job. This isn’t extra production of goods or services, it’s just a compensation for a hardship. In states where individual income taxes are high, ostensibly-higher incomes may never translate into higher standards of living, and such tax-motivated wage negotiations may even impact inequality.
While Krugman writes that economic differences across regions are one of his favorite subjects, in this case the facts don’t support his argument. He argues that people are moving the “wrong way” because they move to places where nominal incomes may be lower, but people move for their own subjective reasons, not to maximize nominal incomes. The very fact that people keep moving the “wrong way” suggests that Paul Krugman’s measure of well-being isn’t the only important thing under the sun.
Read more on migration here.
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