Topic: International Economics and Development

There is No Entitlement to a Government-Created Monopoly

Local governments routinely set up taxi cartels, limiting the number of cabs in order to boost profits of (and campaign contributions from) owners. As George Will explains in the Washington Post, one plucky immigrant, with help from the Institute for Justice, has managed to break the cartel in Minneapolis. In response, the cartel is claiming that the loss of their entitlement to monopoly profits is akin to a regulatory taking. Will concludes by stating it would be a good idea if the people who think that they have a right to use government coercion to obtain unearned wealth would leave the country as entrepreneurial immigrants arrive:

Paucar, 37, embodies the best qualities of American immigrants. He is a splendidly self-sufficient entrepreneur. And he is wielding American principles against some Americans who, in their decadent addiction to government assistance, are trying to litigate themselves to prosperity at the expense of Paucar and the public. …In 1937, New York City, full of liberalism’s itch to regulate everything, knew, just knew, how many taxicab permits there should be. For 70 years the number (about 12,000) has not been significantly changed, so rising prices have been powerless to create new suppliers of taxi services. Under this government-created scarcity, a permit (“medallion”) now costs about $500,000. Most people wealthy enough to buy medallions do not drive cabs, any more than plantation owners picked cotton. They lease their medallions at exorbitant rates to people like Paucar who drive, often for less than $15 an hour, for long days. … Paucar moved… Unfortunately, Minnesota has a “progressive,” meaning statist, tradition that can impede the progress of people like Paucar … 343 taxis were permitted. He wanted to launch a fleet of 15. That would have required him to find 15 incumbent license-holders willing to sell their licenses for up to $25,000 apiece. …[He] helped persuade the City Council members, liberals all (12 members of the Democratic Farmer-Labor Party, one member of the Green Party), to vote to allow 45 new cabs per year until 2010, at which point the cap will disappear. In response, the cartel is asking a federal court to say the cartel’s constitutional rights have been violated. It says the cap – a barrier to entry into the taxi business – constituted an entitlement to profits that now are being “taken” by government action. …By challenging his adopted country to honor its principles of economic liberty and limited government, Paucar, assisted by the local chapter of the libertarian Institute for Justice, is giving a timely demonstration of this fact: Some immigrants, with their acute understanding of why America beckons, refresh our national vigor. It would be wonderful if every time someone like Paucar comes to America, a native-born American rent-seeker who has been corrupted by today’s entitlement mentality would leave.

Immigration and American Exceptionalism

John Derbyshire has a post on immigration that perfectly captures the small-minded nativism that too often underlies opposition to immigration:

A nation has a distinctive culture. The U.S.A., which is much further than the world average from any other consequential country, and has endured several character-forming great national crises, has a culture more distinctive than most. Small boys in 1950s England could pick out an American at 200 yards. Our football (which we love) is nothing like the rest of the world’s soccer (which we find extremely boring, and which the rest of the world can keep, far as we’re concerned).

Most of the people of a nation are strongly attached to that nation and its culture. (This is called “patriotism.” Try the word out a few times. Stress on the firts syllable. It’s not that hard to spell.) They like their culture. They don’t want to see their culture transformed by uncontrolled mass immigration from places with utterly different cultures.

You may think it would be good for them to have their nation so transformed, but they don’t believe you. They like their culture. They’re attached to it. They don’t want to see it transformed in ways they do not approve, and have never voted for.

Derbyshire is right that America has a culture more distinctive than most. But the rest of this passage gets things completely backwards. What makes America exceptional is not a shared love for American football. We’re distinct because we’re the first nation explicitly founded on a set of political ideals. Patriotism, as the Founders understood it, was never about blind loyalty to our nation and its political leaders. Rather, the Founders believed that patriotism is about a commitment to the ideals they enunciated in the Declaration of Independence.

Derbyshire thinks that high levels of immigration are a threat to American exceptionalism, but the truth is the exact opposite. A big part of what makes American culture distinctive is our strong work ethic, our disrespect for authority, and our appetite for risk-taking. A big reasons for these traits is the fact that almost all of us are descended from people who valued liberty and opportunity enough to leave everything they knew behind and bear the tremendous costs and risks of crossing an ocean (or more recently, a desert) in search of freedom and opportunity. That steady stream of immigrants has always been an important source of cultural vitality. Whenever America’s elites became too complacent, a new crop of freshly minted Americans came along and challenge their dominance.

Derbyshire’s counterparts in the 19th Century no doubt warned that American culture would be “transformed by uncontrolled mass immigration from places with utterly different cultures” like Ireland, Italy, and Germany. And they were absolutely right. The details of American culture today are dramatically different from the WASP-y culture that dominated our elite institutions a century ago. It would have been unthinkable a hundred years ago to have a Catholic majority on the Supreme Court, for example.

But we’re a better country with a more distinctive culture thanks to the new cultural influences that previous waves of “uncontrolled mass immigration” brought with them. It’s important that we teach each new generation of immigrants about the values and ideals that make America distinctive, but there’s no reason to think that the current wave of mostly Hispanic immigrants will embrace these ideals any less enthusiastically than past waves did.

The real danger is that if we slam the door shut on new immigrants, our culture will gradually become stagnant and parochial like the countries most of our ancestors fled. In those countries, the defining cultural attributes center around things like what kind of clothes you wear, what kind of food you eat, and what sports you play. We’ll know that American culture has truly ceased to be distinctive when we start to define ourselves primarily by our shared love of American football.

OECD Admits That Tax Competition Leads to Better Tax Policy

The bureaucrats in Paris are a schizophrenic bunch. The OECD’s Committee on Fiscal Affairs seeks to thwart tax competition in order to prop up Europe’s uncompetitive welfare states, yet the professional economists in the organization frequently write about the benefits of lower tax rates and the liberalizing impact of tax competition – a division discussed in this article. Perhaps there is hope that the economists will triumph in this internal battle. A new report from the OECD notes how tax competition is lowering tax rats and creating more efficient tax systems. There is an unfortunate sentence expressing concern that tax competition could reduce income redistribution, though this may have been inserted to placate some of the European governments that dominate the OECD:

Globalisation, especially the increased mobility of capital and highly-skilled labour, fosters greater tax competition. While corporation tax is only one among many factors that shape firms’ location decisions, it has a significant impact. Most OECD countries have cut their corporate tax rates over the past decade, some by a considerable amount. Similarly, empirical evidence indicates that lower income tax rates can be attractive to highly skilled migrants. Many governments have also reduced the top marginal rate of income tax, which is an important determinant of the effective tax rate for highly skilled workers. On average across OECD countries, the top marginal income tax rate fell from 45% in 1995 to 37% in 2005. … Globalisation also encourages the pursuit of efficiency gains in tax systems. To the extent that globalisation encourages a move to less elastic tax bases, it should improve the efficiency of tax systems. … On the other hand, tax competition could potentially reduce the ability of the tax system to contribute to the achievement of income redistribution objectives.

The Wall Street Journal likes the new report, focusing on the evidence that lower corporate tax rates are generating a Laffer Curve effect. This editorial makes the key point that the goal of lower tax rates is not to increase government, but rather to increase growth and opportunity – which is why it calls for further rate reductions:

Globalization skeptics claim the world is locked in a tax-rate race to the bottom. Luckily, they’re right – taxes are falling. But this trend also makes government finances better, strengthens economies and creates jobs. In “Making the Most of Globalization,” released yesterday, the OECD draws a direct link between lower tax rates and fiscal well-being. Over the past decade, most OECD countries cut corporate taxes, some by a great chunk, and saw average state revenues go up – not just in absolute terms. …corporate-tax proceeds have also risen as a percentage of GDP. So there’s plenty of room to cut further. By scrapping tax exemptions and lowering headline rates, governments have attracted investment, boosted growth and corporate profits, and improved tax compliance. It’s a nice demonstration of the Laffer curve at work.

Bravo, Sarko

Some more disappointing rhetoric from the mouth of Nicolas Sarkozy, the new French president. Once lauded as the great hope for a new France, he has revealed his protectionist instincts in Brussels.

In an article today in the Financial Times, Sarkozy mounts what the FT calls a “passionate defence of French farmers,” apparently calling for the EU to be even tougher in its defense of European agriculture in world trade talks and to “protect” its citizens from globalization. I wonder how Europe’s citizens feel about being protected from lower prices for food?

In a stunning display of perverse priorities, Sarkozy was quoted as saying, “I’m not going to sell agriculture to get a better opening for services.” But a quick glance in my Economist Pocket World in Figures 2006 suggests that Sarkozy has it all wrong: the contribution to services in the French economy in 2003 was 71.4 percent of GDP, and 74 percent of employment. Agriculture’s contribution? Just 2.8 percent (and 2 percent of employment).

Certainly many services are by definition non-tradeable (ever flown to Paris to catch a taxi?), but according to the World Trade Organization, France was the world’s fourth largest exporter of commercial services in 2004. You’d think Mr Sarkozy would want to do everything in his power to promote their growth, non?

Senate Amendment Guts Immigration Reform

The Senate’s vote yesterday to cut the number of temporary worker visas in half knocks a big hole in the comprehensive immigration reform proposal now being debated in Congress. As I’ve written in a recent Free Trade Bulletin, allowing a sufficient number of foreign-born workers to enter the country legally to meet the obvious demand of our labor market is absolutely necessary if we want to reduce illegal immigration.

Ignoring our policy advice, the Senate voted 74-24 to adopt an amendment by Sen. Jeff Bingaman (D-N.M.) that would cut the number of annual temporary “Y visas” from 400,000 to 200,000. That number is almost certainly too low to provide the workers that our growing economy needs to fill jobs at the lower end the skill ladder for which there simply are not enough Americans available to fill them. The result, if the lower cap stands, will be continued illegal immigration.

The irony is that many of the senators voting to drastically reduce temporary visas are the same senators who warn that we should not repeat the mistake of the 1986 Immigration Reform and Control Act. That bill legalized 2.7 million illegal immigrants but was unable to stop more immigrants from entering the country illegally despite beefed-up enforcement. The real flaw of the 1986 law, however, was its complete lack of any temporary worker program to provide for future, legal workers.

By adopting the Bingaman amendment, a majority of senators have turned the current reform effort into something much more like the failed 1986 law. They have kicked the illegal immigration can down the road, leaving it to a future Congress to find a lasting solution.

Smoke on Your Pipe and Put That In!

Harvard economist George Borjas, perhaps the leading academic skeptic of increased immigration, has started a blog. In a West Side Story-themed post this morning, Borjas argues that the failure of Puerto Rico’s per capita GDP to converge fully with the United States’, despite the fact that the flow of people and capital between the two countries is completely unrestricted, challenges the idea that a liberal migration policy can make people in the developing world better off.

There are also no restrictions that hamper the flow of capital between the two places. Yet despite all these unrestricted labor and capital flows, there is still a sizable income differential between the United States and Puerto Rico. By 2003, price-adjusted per-capita GDP in Puerto Rico was still only two-thirds that of the United States (according to the Penn World Table). Whatever happened to the factor price equalization theorem? If 60 years is not the “long run,” maybe Keynes was right after all.

The fact that migration entails very high costs if an important–and often ignored–part of the economics of migration. The fact that wages don’t equalize even when a “country” loses a large chunk of its population and there are unrestricted capital flows is both interesting and important. It should give some food for thought to those who view migration as a policy tool that can help alleviate many of the developing world’s problems.

I think this is misleading. Mississippi, the U.S.’s poorest state, has a per capita gross state product of about $28,000 per person, which is not quite 2/3 of the overall U.S. per capita GDP, $43,500. The relevant comparison would seem to be the per capita GDP of Puerto Rico next to that of other Caribbean islands. Puerto Rico’s PPP-adjusted GDP per capita for 2006 was about $19,000.

First, it should be pointed out that the U.S. Virgin Islands, whose inhabitants have been U.S. citizens since 1927, does even less well, at about $14,500 per capita. (That’s a 2004 number, so it’s probably a bit higher than that.) But this isn’t a very good comparison, either; the Virgin Islands has a population slightly bigger than Davenport, Iowa, the economy basically runs on tourism, and the people who own the resorts don’t live there. Cuba, with a population about three times Puerto Rico’s, comes in with a GDP per capita of around $3900, less than a quarter of Puerto Rico’s. But we already knew that communism is terrible. The best comparison is probably the nearby Dominican Republic, which is neither a socialist dystopia nor a U.S. territory. GDP per capita in the Dominican Republic is $8000, less than half Puerto Rico’s.

But who cares about Puerto Rico, the territorial jurisidiction? How are Puerto Ricans doing? According to Wikipedia’s entry on Puerto Ricans in the United States, slightly more Puerto Ricans now live Stateside than on the island, and, “in 2002, the average individual income for Stateside Puerto Ricans was $33,927.”

I find it pretty hard to see this as anything less than a slam dunk for the humanitarian benefit of the freedom of movement.

On a more technical note, why would one really expect wages to fully equalize in the absence of the idealized conditions of the economic model? First, there’s the obvious fact that an island in the Caribbean is “off the grid” of the main U.S. trade infrastructure. Second, as Borjas points out, there is a high cost to immigration. Those able to foot the bill are likely the most productive workers with the greatest capacity to save. And those with higher levels of skill are likely to see a bigger relative returns from participation with U.S. labor markets, reinforcing the incentive for the more skilled to move. If that’s true, and Puerto Rico has lost disproportionately many higher-skilled workers to the U.S., then the fact that GDP per capita is still so high compared to neighboring democracies is really a slam dunk.

To drive the point home, a fun quotation from the the CIA World Factbook entry on the Dominican Republic:

Haitian migrants cross the porous border into the Dominican Republic to find work; illegal migrants from the Dominican Republic cross the Mona Passage each year to Puerto Rico to find better work.

And Puerto Ricans who can afford it “like to be in America.”

[Lyrics to Bernstein and Sondheim’s “America” here.]

European Unions Want to Impoverish Workers

Even socialist and Marxist economists acknowledge that capital formation is the key to long-run growth and higher living standards. To be sure, they mistakenly think government should do the saving and investing, but at least they understand one of the prerequisites for future growth. Unfortunately, the same can be said for today’s European unions. According to a story in the EU Observer, trade unions are trying to discourage hedge funds and private equity from investing in Europe. This self-destructive effort – presumably motivated by a desire to prop up industries with inefficient union workforces – ensures that Europe will become even less competitive. In the long run, this means lower pay for workers:

Trade unions across the EU are preparing themselves to go on the offensive against the “big beasts” of private equity and hedge funds, believing their profit-oriented drive is undermining the bloc’s social fabric. “No one wants just a single market, they want something else out of Europe – some security against the big beasts that are in the single market like private equity and hedge funds,” the head of the European Trade Union Confederation John Monks (ETUC) told EU Observer.…Referring to “casino capitalism,” he said venture capitalists were only interested in buying a company, boosting the share price and selling, “leaving companies weakened by big debt.” …Critics say they often operate beyond normal regulations and are not transparent. The issue first generally entered the public consciousness in 2005 when Franz Muntefering, now German vice-chancellor, referred to hedge funds - which borrow large sums to bet in financial markets – as “locusts” waiting to swoop in and strip German companies of their assets, causing major job losses.