Archives: September, 2013

Federal Spending and Debt, 1790 to 2050

As policymakers begin fighting over this year’s appropriations, the Congressional Budget Office has released a long-term projection that puts today’s budget battles in broader context. The federal government is in the most unique and dangerous fiscal situation that it has ever been in during peacetime.

Federal spending and debt as a share of GDP are being sustained at very high levels, and that is sapping the nation’s economic vitality. Spending and debt remove resources from the voluntary, productive, and innovative sector of the economy and put those resources in the hands of the coercive, mismanaged, and centrally planned sector. The more that spending and debt rise, the more of our freedom and prosperity are destroyed.

During brief periods to fight justified wars, it is reasonable to hand over more resources to the government. But the following two charts show that spending and debt are already at remarkably high levels for peacetime, and CBO projections to 2050 show the situation getting much worse.

Figure 1, below the jump, shows federal debt held by the public as a share of GDP from 1790 to 2050. The data for past years are from CBO analyses here and here. The projection is CBO’s new extended baseline.

Focus on Employment, Not Citizenship, to Reform Immigration

Immigration reform, once the top priority in Washington coming out of the 2012 presidential election, has stalled. This is unfortunate because the current system is a shambles. Some 11 million people live in the U.S. illegally. But attempting to fence off the country is no answer. 

Immigration benefits the United States. Many immigrants are natural entrepreneurs. Well-educated foreign workers are inventive and productive. Expanded work forces increase economic specialization and business flexibility. 

Immigration may depress some wages in the short-term; however, the work force is not fixed. Immigration makes a more innovative and productive economy, with new and better jobs. 

Nevertheless, the public is skeptical of immigration. To move forward, Congress should separate employment from citizenship. Legislators should expand work visas for individuals. Immigration auctions or tariffs would be innovative alternatives. Congress also should regularize the status of those currently in America illegally by granting residence and employment permits. However, Congress should set aside debate over turning illegal aliens into citizens. In fact, Rep. Bob Goodlatte (R-Va.), chairman of the House Judiciary Committee, asked: “Are there options that we should consider between the extremes of mass deportation and a pathway to citizenship?”

Some immigration opponents complain that this approach would reward illegal behavior. However, the undocumented broke the law to improve their lives and the lives of their families, not to hurt others. Their presence also benefits the rest of us. Moreover, most Americans won’t support rounding up millions of people who have become part of U.S. society. Additional employment controls and sanctions would undermine domestic liberties. 

Immigration supporters are also critical of this approach. A blogger harkened back to the slave era, writing that the immigrants’ “status would be akin to the freedmen who were denied citizenship under the notorious Supreme Court decision in Dred Scott.”  Cristina Jimenez of the organization United We Dream called the idea “un-American.” 

However, in Dred Scott the court ruled that people who had been kidnapped and brought to America were not citizens. In contrast, today’s undocumented came voluntarily without any expectation of becoming citizens. Moreover, there is nothing “un-American” about not allowing those who entered the country illegally to jump the citizenship queue. 

EPA Intervention Where None Is Needed

Falling back on tired scare tactics, U.S. Environmental Protection Agency administrator Gina McCarthy today announced carbon dioxide emissions limits for new power plants as part of the President Obama’s Climate Action Plan. From McCarthy:

The overwhelming judgment of science tells us that climate change is real, human activities are fueling that change, and we must take action to avoid the most devastating consequences. We know this is not just about melting glaciers. Climate change—caused by carbon pollution—is one of the most significant public health threats of our time. That’s why E.P.A. has been called to action. And that’s why today’s action is so important for us to talk about.

I humbly disagree both as to the “public health threat” of carbon dioxide emissions from human activities, as well as with the idea that the EPA can do anything to alleviate whatever climate change may result.

What the new emissions limits do is to basically force the administration’s preference for natural gas over coal as the fossil fuel source for our nation’s electricity production going forward, perpetuating the administration’s seeming “War on Coal.” It does this by setting the carbon dioxide emissions limits for new power plants such that they are impossible to meet by burning coal, but can be met readily by burning natural gas. The reason for this is simple chemistry: the act of burning coal releases nearly twice the amount of carbon dioxide as does burning natural gas per unit of energy released.

The funny thing is, the market was already moving in that direction. Cheap natural gas is displacing coal for generating electricity, which in turn is reducing our national carbon dioxide emissions.

An Unhappy Birthday: Keystone XL Application Turns 5

It has now been five years since TransCanada made its first permit application to the U.S. State Department to build the Keystone XL. Under the permit, the firm would construct a cross-border pipeline to carry about 830,000 barrels of Canada-produced oil per day down to refineries along the U.S. Gulf Coast. Most of that oil would be mined from the tar sands of Alberta.

No decision has been reached on the current permit application—or rather, no decision has been announced. It’s fate is still guarded by the State Department and President Obama.

In 2009, the U.S. permit for a similar pipeline, Enbridge’s Alberta Clipper, was issued just over two years after the initial application. Then (just four years ago), the State Department spoke in glowing terms of the project, praising it for advancing “strategic interests” and being a “positive economic signal” and further adding that “reduction of greenhouse gas emissions are best addressed through each country’s robust domestic policies.” Here is a taste of the State Department’s press release announcing the pipeline’s approval:

The Department found that the addition of crude oil pipeline capacity between Canada and the United States will advance a number of strategic interests of the United States. These included increasing the diversity of available supplies among the United States’ worldwide crude oil sources in a time of considerable political tension in other major oil producing countries and regions; shortening the transportation pathway for crude oil supplies; and increasing crude oil supplies from a major non-Organization of Petroleum Exporting Countries producer. Canada is a stable and reliable ally and trading partner of the United States, with which we have free trade agreements which augment the security of this energy supply.

Approval of the permit sends a positive economic signal, in a difficult economic period, about the future reliability and availability of a portion of United States’ energy imports, and in the immediate term, this shovel-ready project will provide construction jobs for workers in the United States.

The National Interest Determination took many factors into account, including greenhouse gas emissions. The administration believes the reduction of greenhouse gas emissions are best addressed through each country’s robust domestic policies and a strong international agreement.

Oh how times have changed. 

Well, actually, no.

Testifying to the Joint Economic Committee about “Debt Limit Brinksmanship”

As we get closer to the debt limit, the big spenders in Washington are becoming increasingly hysterical about the supposed possibility of default if politicians lose the ability to borrow more money.

I testified yesterday to the Joint Economic Committee on “The Economic Costs of Debt-Ceiling Brinkmanship” and I explained (reiterating points I made back in 2011) that there is zero chance of default.

Why? Because, as I outline beginning about the 3:10 mark of the video, annual interest payments are about $230 billion and annual tax collections are approaching $3 trillion.

I actually made five points in my testimony. The first three should be quite familiar to regular readers.

First, America’s main fiscal problem is that government is too big. That’s the disease. Deficits and debt are symptoms of that underlying problem.

Second, you achieve good fiscal policy by following “Mitchell’s Golden Rule” so that government grows slower than private sector economic output.

Third, we’ve made some progress in the last two years thanks to genuine fiscal restraint, and we can balance the budget in a very short period of time if lawmakers impose a very modest bit of spending discipline in the future.

The fourth point, which I already discussed above, is that there’s no risk of default - unless the Obama Administration deliberately wants that to happen. But that’s simply not a realistic possibility.

My fifth and final point deserves a bit of extra discussion. I explained that Greece is now suffering through a very deep recession, with record unemployment and harsh economic conditions. I asked the Committee a rhetorical question: Wouldn’t it have been preferable if there was some sort of mechanism, say, 15 years ago that would have enabled some lawmakers to throw sand in the gears so that the government couldn’t issue any more debt?

Debt limit jokesYes, there would have been some budgetary turmoil at the time, but it would have been trivial compared to the misery the Greek people currently are enduring.

I closed by drawing an analogy to the situation in Washington. We know we’re on an unsustainable path. Do we want to wait until we hit a crisis before we address the over-spending crisis? Or do we want to take prudent and modest steps today - such as genuine entitlement reform and spending caps - to ensure prosperity and long-run growth.

Seems like the answer should be simple…at least if you’re not trying to get reelected by bribing voters with their own money.

P.S. My argument for short-term fighting today to avoid fiscal crisis in the future was advanced in greater detail by a Wall Street expert back in 2011.

P.P.S. You can enjoy some good debt limit cartoons by clicking here and here.

Obama Administration Decrees Overtime for Home Health Companions

In a long dreaded move, the U.S. Department of Labor has issued a final rule requiring that time-and-a-half overtime be paid to at-home attendants who put in more than 40 hours a week caring for a disabled or elderly person. “Many home health aides provide live-in services, and overnight and weekend hours could result in their receiving substantial amounts of overtime pay,” notes Steve Miller at the Society for Human Resource Management. Families employing such attendants will also be required to keep records of time worked. There are a few narrow, hard-to-use exceptions. The rule also brings attendants under minimum wage laws, but it’s the overtime provision that has raised the most fear.

This is a terrible rule. The fear and anger it has stirred is coming not just from commercial employment agencies, as some careless media accounts might leave you to think, but above all from elderly and disabled persons and their families and loved ones, who know that home attendant services are often the only alternative to institutional or nursing home care. 

Even if you’ve followed this issue you probably had no idea that in April, ADAPT, a well-known disability-rights group, staged a demonstration in Washington, D.C. to protest the proposed overtime rule and even blocked all the entrances to the Department of Labor to make its point. That was hardly reported at all in the media; I learned about it through Prof. Samuel Bagenstos’s blog on disability rights law

Allow Renewals for Guest Worker Visas

Reforming low-skilled guest worker visas is a vitally important part of immigration reform. It will substantially reduce unauthorized immigration by providing a lawful pathway to enter and reenter the U.S. To that specific end, an effective guest worker visa has to be designed to address how migrant and guest workers actually behave. Allowing a guest worker visa to be renewed multiple times for each worker, assuming the worker follows the law when in the U.S., will decrease the incentives to migrate unlawfully. For each theory of migrant movement, allowing a guest worker visa to be renewed multiple times is compatible with migrant actions and will decrease unauthorized immigration. Here are the theories:

Target Income Theory

Under the target income theory, migrants come to the U.S. to meet a specific monetary or life goal, like starting a business or buying a house back home, that they would be unable to meet in their home country. Upon reaching the monetary threshold for that goal, they return home.  According to this theory, a recession in the U.S. would cause migrants to stay longer until they meet their targeted goal, while higher migrant wages or an economic boom would make them return sooner. 

If a migrant behaves according to this theory, he will work until the goal is met. Let’s say a guest worker visa allows a migrant to work in the U.S. for 10 years but no longer. If, at the end of that period, the migrant requires 2 more years of work to reach his income goal, the migrant will be tempted to overstay and work illegally until the goal is met. In this case, allowing the guest worker to legally stay longer and meet his goal will decrease the incentive to overstay on the visa. If the target income theory explains migrant behavior, allowing many visa renewals will help decrease unauthorized immigration. Renewable visas will allow immigrants to satisfy their income goal and return home.

Disappointment Theory

According to this theory, migrants return home if the economic conditions in the U.S. are less favorable than they imagined, or if the economic conditions in their home country improve. Migrants would prefer to return when conditions improve, at least temporarily, but many stay in the U.S. longer because it is difficult for them to reenter should they ever want to. The depth of migrant social networks in their home and destination countries greatly influence this effect.        

Guest worker visas that could be renewed multiple times will incentivize migrants to return home when conditions there improve because they will not fear being stuck there if they deteriorate. 

Circular Migration Theory

To distinguish circular migration from the disappointment theory above, migrants come to the U.S. for seasonal or yearly work but move back and forth as labor demand for their occupations changes. Beginning in 1986, this circular movement between Mexico and the U.S. was interrupted with expanded border security that increased the length of time that unauthorized migrants stayed here, which in turn increased the likelihood that they would settle permanently. Because migrants suddenly faced the possibility of being stuck in Mexico if they ever left, they decided to stay and work.    

If those migrants had a lawful way to cross the border, many would have returned to Mexico just as they did when the Bracero Program offered a visa to do just that. Renewable guest worker visas will allow some legal migrants to move back and forth for seasonal labor, lessening the incentive to illegally stay once here.

Conclusion

Migrants come for different reasons. Migrant actions might exhibit some or all of these theories, or enter the U.S. with one in mind and then switch to another during their stay. No matter which theory provides a better explanation of why migrants come, making the visa renewable as many times as possible will substantially decrease the incentive to migrate illegally or overstay a visa. 

Creating a guest worker visa that can be renewed multiple times will allow migrants to legally work in the U.S., leave while preserving the possibility of legal return, and thus reduce unlawful entry and visa overstays. A flexible and numerically large guest worker visa program will substantially reduce the supply of unauthorized immigrants by channeling them into the legal market. The more times that such a visa can be removed, the more effective it will be at decreasing unauthorized immigration.