Topic: International Economics and Development

Goose:Gander / Illegal Immigrants:Gun Owners

I’ve spent the last few months studying and writing about electronic employment eligibility verification. This is the idea of requiring every employer in the country to check the immigration status of employees against Department of Homeland Security and Social Security Administration databases. A nationwide EEV program, building on the current Basic Pilot/”E-Verify” program, was treated as a matter of near consensus at the beginning of this past summer’s immigration debate, and the Department of Homeland Security continues to promote it.

There are a lot of weaknesses in EEV. Foremost, such a system would be subject to a lot of document fraud, just like today’s Form I-9. Requiring employers to collect these forms and check the documentation of new employees doesn’t do much to control illegal immigration.

If this process were “strengthened” with a national EEV system, continuing document fraud would drive policymakers inexorably toward “strengthening” the identity cards used in the system. Indeed, the leading immigration bill this summer would have required every new hire in America to present a REAL ID-compliant national ID card. EEV requires a national ID.

This is fine by many people who are angered by illegal immigration. But the folks who want EEV and a national ID might want to be careful what they wish for.

A group called Mayors Against Illegal Guns recently sent a letter to all the major presidential candidates asking a detailed set of questions about their positions on gun control. Among them:

… Do you support a change in federal law to require that gun purchasers show Real ID-compliant identification by 2013?

I believe that REAL ID will not be implemented. In fact, the presence of REAL ID in the immigration bill is what killed it. But if EEV goes forward, it could bring REAL ID back from the dead.

With a national ID and a national infrastructure for regulating individual behavior in place, advocates will immediately seek to expand its uses - including to gun control. So it seems that those fervent opponents of illegal immigration who want a national EEV system have a choice: Will you give up your guns to get rid of illegal immigrants?

Does Jimmy Carter Really Speak for African Farmers?

Jimmy Carter’s grasp of economics apparently hasn’t sharpened in the 27 years since he imparted a wretched U.S. economy to his successor.  Or perhaps his poor-man-advocate bona fides should be scrutinized more closely.

In a Washington Post op-ed today, the former president rightly protests the egregious U.S. farm bill for its continuation of lavish subsidies to American commodities’ producers.  Carter explains how subsidies breed overproduction, which suppresses world commodity prices, thereby reducing the incomes of poor farmers in countries where commodities dominate the economy.

Carter favors proposed amendments to the current farm legislation that would replace subsidy programs with crop insurance programs to protect farmers against excessive loss, which is an improvement, though not a solution.

But, in the last paragraph of his article, Carter contradicts everything he writes before that, revealing himself to be no friend of poor farmers abroad or simply ignorant of economic processes.  He writes:

I am still a cotton farmer, and I have been in the fields in Mali, where all the work is done by families with small land holdings.  Cotton production costs 73 cents per pound in the United States and only 21 cents per pound in West Africa, so American farmers do need protection in the international marketplace.

Now wait a second.  This is a very curious statement.  If cotton production is so much cheaper in West Africa than in the United States, then more production should happen there and less should happen here.  If Carter is really interested in the well-being of West African farmers, “whose scant livelihood depends on cotton production,” he should advocate free trade in cotton.  Why instead does he advocate that U.S. farmers be protected in the international market place?  West African incomes will continue to suffer if U.S. subsidy programs are replaced by U.S. tariffs, which is what Carter seems to be advocating.  How does it help Malian farmers lift themselves out of poverty if they can’t effectively compete on their advantages?  Higher U.S. tariffs would only drive down the world price (as subsidies do) and likely compel other importer nations to raise tariffs to protect their own producers, shrinking the market further for Malian farmers.

Meanwhile, does Carter have any empathy for America’s lower income families?Apparently, not enough.  Protection of U.S. cotton farmers artificially raises the prices of textiles, which means that clothing and shoes are more expensive than they would be otherwise.  Expenditures on necessities, like clothing and food, account for a higher proportion of the budgets of lower income families.  Thus, artificially raising the prices of those products is akin to a regressive tax – it burdens those with less income disproportionately.

Perhaps Carter is not writing as the founder of the Carter Center, an international NGO, as the byline indicates, but as a small cotton farmer from Plains, Georgia, who believes the current subsidy system unfair because the big farms get most of the largesse.

Senate Farm Bill By the End of the Week?

The Senate re-commenced debating the farm bill on Friday, after Democrats and Republicans struck an agreement over the amendments process (see my earlier blog entry here). Senate leaders are hoping that they can get a bill passed by the holiday recess, and on to conference early in the new year.

Although President Bush has threatened to veto the bill that emerged from the Senate Agriculture Committee (the bill being debated now), as well as the House Farm Bill passed in July, powerful members of Congress don’t seem too rattled. According to a recent article, Colin Peterson (chair of the House Agriculture Committee) is fairly confident that he and President Bush can get together, just the two of them nice and cozy, and come to an agreement. The money quote:

…if we can get all of these other people out of this thing and just sit down and say, ‘Look, for the betterment of the country, hopefully we can work this out.’ That’s my plan.

By “all these other people”, Mr Peterson presumably means you and I, and anyone else who is unhappy with the current state of agriculture policy in America. So sit tight, everybody, and wait for the check (currently $288 billion worth).

Thomas Sorensen Avoids High Taxes

The International Herald Tribune does a great job describing tax competition in action in the European labor market.

Young Danes, often schooled abroad and inevitably fluent in English, are primed to quit Denmark for greener pastures. One reason is the income tax rate, which can reach 63 percent.

Denmark has fairly pro-market economic policies, ranking 15 in Economic Freedom of the World, and is enjoying solid economic growth. However, “success has given rise to an anxious search for talent among Danish companies, and focused attention on émigrés like Sorensen…The problem, employers and economists believe, has a lot to do with the 63 percent marginal tax rate paid by top earners in Denmark - a level that hits anyone making more than 360,000 Danish kroner, or about $70,000.”

The high taxes are driving out young and skilled Danes, many to London.

Danish taxes also contrast sharply with those in nearby London, often jokingly referred to among Danes as a Danish town, because so many of them live there. Lower taxes on high earners have been a centerpiece of the policy mix that has fed the rise of London as a global financial center since the 1980s.

Second Video Experiment

Many of you were kind enough to comment on the first video I narrated, which discussed the importance of a more competitive corporate tax system. Because of popular demand (perhaps a slight exaggeration), a second video has been released. This one discusses the vital role of tax competition as a constraint on government. Based in part on your suggestions, this new video was filmed in a real studio with professional equipment. And I even put on a coat and tie since a few people thought the casual look detracted from the message in the corporate tax video.

The message, of course, is what really matters in these videos. Regular readers of Cato-at-liberty surely have noticed that Chris Edwards and I regularly comment on the dramatic tax policy changes that are taking place all over the world. We would like to claim that this is because politicians are reading our papers, but a bigger factor is tax competition. Simply stated, because of globalization, it is much easier for the geese that lay golden eggs to fly across the border. This means governments are being forced to lower tax rates and reform tax systems.

This video, as well as a book that Chris and I are writing, explains this liberalizing process. But it’s not all good news; both the video and our future book warn that statist politicians want to curtail tax competition.

I would be very interested in receive feedback on this new video. Is the message compelling? Are footage and graphics being used effectively? Any thoughts or suggestions would be welcome.

More Tax Harmonization in Europe

In an unfortunate development, Luxembourg has finally surrendered to demands from other European governments and agreed that online retailers in the tiny duchy should be deputy tax collectors for other European nations. This means that shoppers in countries with high value-added taxes no longer will be able to buy goods and services and benefit from Luxembourg’s 15 percent VAT. This episode is illustrative of the anti-tax competition mentality in Europe, but America faces the same danger. Politicians from high-tax states want to impose a similar scheme (see here and here) in the United States. The International Herald Tribune has the sad details:

Plans to apply sales tax in the country in which services are consumed, rather than the location of the company that sells them, are the latest assault on Luxembourg’s ability to act as a tax haven. …With its low rates of sales tax, or value added tax, Luxembourg has attracted many of the biggest names in online sales, including companies like Amazon.com, Skype and PayPal. Luxembourg levies VAT at 15 percent, the minimum allowed under EU rules. But most EU countries have a higher rate, making the small but prosperous duchy an attractive location for companies offering electronic services. …Until Tuesday, Luxembourg had blocked proposals to levy sales tax at the place of consumption, saying the change would cost it €220 million, or $324 million, a year, equivalent to 1 percent of its economic activity. Taxation matters require unanimous agreement within the EU, but a country like Luxembourg - which has a population of only 429,000 - finds it difficult to withstand pressure from other countries if it isolated. …The deal was welcomed by larger countries, which stand to increase their revenue.

Peru May Become Latin America’s Next Success Story

The Senate passed the free trade agreement with Peru on Tuesday and it could not have come at a better time. That’s because Peru is increasingly distinguishing itself in the region as a successful market democracy. More than five years of sustained high growth (Peru grew 8 percent last year) are transforming the economy and spreading development to regions of the country that have traditionally benefited little from past progress. Unlike other countries in the region such as Argentina or Venezuela that are also experiencing rapid growth, Peru’s growth is characterized by widespread investment and wealth creation as opposed to redistribution or the mere effects of high world commodity prices.

Why is Peru succeeding? Again, unlike various other South American countries, it has sustained the far-reaching market reforms of the early to mid 1990s, has deepened some of them, and maintained sound macro-economic polices. The policies of openness and stability are paying off. Anybody who has been visiting Peru during the past 15 years as I have has noticed vast improvements in countless areas of national and everyday life, including notable progress in the past several years. The center of Lima, notoriously crime-ridden and dirty, has become safe and attractive. That kind of revitalization has occurred throughout the city and in major cities and towns of Peru. Consumer goods and services—cell phones, household appliances, and private education, for example—previously unavailable or in short supply have proliferated and serve all markets, rich and poor.

A change in values more oriented to a modern society may also slowly be taking place. The majority of Peruvians supported the FTA with the United States. The quality of service and attention to detail seems to have improved among Peruvian workers and management across a broad array of businesses. Peruvian writer Mario Vargas Llosa recently noted that he was now much more hopeful about Peru, not because of Peru’s positive economic indicators, but rather because “something profound seems to have changed in the culture of the country. One would have to be blind not to see that.”

In his excellent and new book, La Revolución Capitalista en el Perú (The Capitalist Revolution in Peru), leading Peruvian journalist Jaime de Althaus carefully details some of the changes in Peruvian society.

Traditional and non-traditional exports have boomed, with the latter experiencing higher growth. Peru has now become an exporter of software, to the tune of $20 million last year and growing at a rate of 25 percent.

The middle class is growing. The gap between the rich and the poor and between Lima and the rest of the country has also shrunk. Income gains have been proportionately greater for the poor than for the rich.

Peruvian companies—many of them new—have become successful nationally and internationally, not only exporting abroad, but setting up plants and offices abroad in areas as diverse as textiles, soft drinks, mining, milk products, clothing, banking and detergents. Some Peruvian companies have seen their businesses nationalized in Evo Morales’s Bolivia.

Vast areas of the Peruvian coast that have long been desert have turned green as a result of the “silent agroindustrial revolution” that has also taken place in some parts of the interior. Peru’s produce is now diverse, ranging from sugar cane to paprika to asparagus.

Personal credit as a share of total credit has tripled in the past ten years and now accounts for about 24 percent of total credit.

Department stores and other businesses now regularly cater to the “popular” classes. Enormous malls have been built and are now thriving in some of the poorest sections of Lima.

President Alan Garcia, whose first term in office during the second half of the 1980s was a disaster, is building on this progress and—I never thought I would say this—is so far turning out to be pretty good. In recent weeks he has written two articles in El Comercio, the country’s leading newspaper, in which he sets out a bold vision of promoting growth that has set off an intense national debate and spurred the leading news magazine, Caretas, to put “The Turn to the Right” on a recent cover.

Garcia has called for Peru to grow at Asian levels for years to come. He has accused bureaucrats, NGOs, environmentalists and special interests of blocking important policy changes that would increase growth and reduce poverty. He has made specific proposals to allow private investment in large parts of the jungle so as to export wood and to better protect the region from those who illegally log it; he has called on the private titling of large areas of land so that those with resources can exploit that land; he has called on dramatically increasing private investment in mining and other natural resources in Peru; he has called for allowing more private investment in the fishing industry; he has called for hydro-electric dams to built throughout Peru by private capital, rather than the state; he has called for the state to give up property that it does not use and give up functions that are better performed by others. And so on.

Peru is experiencing market success and may still see more of it. Thus also it has become an embarrassment for Hugo Chavez, who has neighboring Bolivia and Ecuador as client states and is pouring a lot of resources into the Peruvian countryside in a campaign to promote his anti-capitalist ideology. Peru has become a key country in Latin America’s ideological battle between the modernizers and the populists.

A lot still needs to be done in Peru before it can be declared a success story. For example, property and land still needs to be titled in the mountains, taxes are still very high, bureaucratic regulations remain onerous, labor laws are extremely rigid, the educational system is terrible. But the free trade agreement will help because it will give permanence to trade policy; and policy stability and competition have been key to Peru’s success thus far. If Alan Garcia can complete Peru’s unfinished agenda, he will have finally pushed the country into modernity and would go down not only as one of the greatest presidents of Peru, but also of Latin America at a critical time in the region’s history.