Topic: Trade and Immigration

Congratulations Paul Krugman

Today, the Royal Swedish Academy of Sciences awarded Princeton University economist and New York Times columnist Paul Krugman the Nobel Memorial Prize in Economic Sciences “for his analysis of trade patterns and location of economic activity.”  

I recently debated Krugman on whether it’s a good idea for government to guarantee universal health insurance coverage.  But today I have nothing but congratulations for him.

On Krugman’s Nobel

The Swedish Academy of Sciences has awarded the 2008 Nobel Memorial Prize in Economic Sciences to Paul Krugman, in recognition of his contribution to trade theory and specifically for his work on the effect of economies of scale in international trade.

Although Prof. Krugman is perhaps better known these days for his columns in the New York Times and his strong criticism of the Bush administration, trade wonks are well aware of his scholarly contributions, which number in the hundreds of scholarly journal articles and tens of books (including, jointly with Maurice Obstfeld, my undergraduate trade textbook). He won the John Bates Clark medal in economics in 1991, an arguably tougher prize to win than the Nobel.

I have my concerns with Prof. Krugman’s later work and his tendency to allow his political views to trump economic good sense. As the Economist [$] wrote in 2003 “A glance through his past columns reveals a growing tendency to attribute all the world’s ills to George Bush…Even his economics is sometimes stretched…” He is generally considered to be a big-government liberal. But the prize was not awarded for his NYT columns or his opinions on economic or foreign policy.

The Nobel is much deserved, even if Prof. Krugman’s rants have led him to stray far from his admirable trade-theory roots.

How to Save E-Verify: Grow the Federal Government!

The Heritage Foundation’s Robert Rector has written a careful defense of the “E-Verify” program, the federal immigration background check system. Unfortunately, his prescriptions for rescuing the program would grow the government in several directions - cost and intrusiveness, to name two. At root, E-Verify and “internal enforcement” of immigration law are incompatible with life in a free country under a federal government of limited scope and power.

The paper starts with an important admission that I failed to address with sufficient force in my paper on E-Verify: Electronic Employment Eligibility Verification: Franz Kafka’s Solution to Illegal Immigration.

“Of the millions of illegal immigrants in this country,” Rector says, noting a trio of studies, “the best evidence suggests that some 50 percent to 60 percent of this employment occurs ‘on the books.’”

This means, of course, that 40 to 50 percent of illegal immigrants working in the country are “off the books.” Even a flawless E-Verify system would have no effect on their ability to work in the country. The “magnet” of working and living the United States would not even be weakened for them. Spending a billion dollars over the next four years to continue E-Verify would do about half what people think it would do.

(The $1 billion figure is Rector’s number, combining private sector and government costs. Government estimates put the five-year government cost of E-Verify at $572 million, and lost federal revenue from a similar proposed program at $178 billion over ten years.)

To make E-Verify work there would have to be more. “Additional government expenditures might be required to meet the costs of prosecuting employers,” Rector says. “[H]ow­ever, fines on such employers could offset some or all of this enforcement cost.”

Though he doesn’t say so outright - it is “generally felt that fines are too modest” - a fair reading is that Rector would increase penalties on employers. Thankfully, he shies away from the idea of imprisoning them. We need the productive sector more than ever.

But the productive sector would be less productive under his eleven-point plan for E-Verify, which I will review and critique ever-so-briefly:

  • Require universal employment verification. Taking E-Verify national would increase yet again, in yet another way, the burden on productive U.S. employers. It’s the kind of bureaucratic accretion that Republican revolutionaries in 1994 came to town to stop.
  • Reauthorize E-Verify and provide adequate funding for implementation. Spend that billion dollars (and get rid of those revenues).
  • Improve government data to further reduce erroneous tentative non-confirmations and provide opportunities for individuals to review the accuracy of their personal data in government files. Among other things, this is the idea that there could be a system in which people could use government-licensed contractors to check whether the information about them in government databases was correct. Perhaps “government-licensed contractors” would do a better job than the government itself of preventing identity fraudsters from checking the information of other people, but it’s not likely. At its core, a national E-Verify system requires a national biometric database to work well.
  • Penalize employers who continue to employ workers who have failed verification. These are those fines - luckily, not jail - for employers.
  • Facilitate information sharing between DHS and SSA. That’s dataveillance. There will be a lot more of it in the future. Real-time or near-real-time monitoring of your behavior through your data.
  • Increase penalties, in law and in practice, for unlawful hiring. More fines on employers and more money spent on enforcement.
  • Issue clarifying letters to employers regard­ing Social Security mismatch notifications. This sounds innocuous, but “clarifying” in this case creates the legal predicate for fining employers when they have failed to be good deputies of U.S. Immigration and Customs Enforcement.
  • Do not restrict state efforts to limit the em­ployment of illegal aliens. This doesn’t directly grow the federal bureaucracy. It suggests states should force employers to submit to federal bureaucracy.
  • Establish supplemental procedures to pre­vent employment by means of identity fraud. Again, a national ID is essentially required to implement a national system for adjudicating personal rights, but Rector proposes something less: a complex program where people would be notified if it appeared that their identities were being used by others in the employment sector. The logistical and data security issues with this are forbidding. It’s something like describing how to build the cathedral of Notre Dame by saying, “Well, you put up a church … .”
  • Establish supplemental procedures to reduce “off-the-books” employment by illegal aliens. More dataveillance and more penalizing of employers.
  • Incorporate the current new-hire data collec­tion for child support into E-Verify. Yet more dataveillance - rolling employment information about every American into federal government databases.

Last week at the Heartland Institute’s 24th Anniversary Dinner, Jacob Hornberger of the Future of Freedom Foundation debated immigration policy with Peter Brimelow of VDARE.com. Hornberger returned again and again to the theme that immigration law is a statist interference with the freedom of migrants and citizens alike.

He did not force the scales from the eyes of Brimelow or many of the other immigration opponents in the room, but people who appreciate freedom and limited government hope for the day when those scales do fall.

Fear of Sharia? Oh, Please.

Reviewing the new bills in Congress for my side-project WashingtonWatch.com, I come across some interesting stuff — and some dumb stuff.

Very dumb is how I would characterize a new bill introduced this week. H.R. 6975 would require aliens to attest that they will not advocate installing a Sharia law system in the United States as a condition of their admission to our country.

On the WashingtonWatch.com blog, I assessed it thusly:

First, there’s the simple bureaucratic nonsense of administering this thing: We’re going to ask every Christian, Catholic, Zen Buddhist, and Hindu not to advocate traditional Islamic law? What an utterly stupid waste of time. I don’t want a penny of my money going to pay for this.

But more importantly, a law like this communicates precisely the wrong thing to new immigrants and the world at large. It tells the world that we’re a weak, fearful country, and that we believe Sharia law is possible in the United States. It tells the world that we’ve come off our traditional moorings and that we no longer believe in free speech and tolerance of all opinions, no matter how wrong.

Let’s talk substance, just in case one or two of you out there are weak and fearful: There is no possibility — none — that Sharia law will be established in the United States. Not by any government body at any level. This country can stand to have Sharia advocated by whatever tiny minority might want to — without any risk. In fact, allowing such discussion will help dispel whatever small demand there could be for Sharia, because it would be so obviously incompatible with our way of life.

It’s embarassing that a strong, free country like ours would even consider an idea like this.

Five More Years of E-Verify: $572,000,000

More than half-a-billion dollars is the cost that the Congressional Budget Office estimates it will take to run “E-Verify,” the federal government’s immigration background-check system, for five more years. That’s about five dollars per U.S. family, according to WashingtonWatch.com’s net present value calculation. (Disclosure: I run that site.)

Think that’s not much? Take five dollars out of your wallet and tear it up. Then imagine every family in the country tearing up five dollars at the dinner table - before eating a meal made more expensive by the dearth of good workers in the United States to grow, harvest, process, ship, and vend their food.

E-Verify is about spending money to worsen our country’s economic situation. And if E-Verify were to go national, it would be used to give the federal government even more regulatory control over law-abiding Americans.

My paper on the topic is “Electronic Employment Eligibility Verification: Franz Kafka’s Solution to Illegal Immigration.”

Bipartisan Nonsense on “Energy Independence” and Trade

Sen. John McCain reinforced his bipartisan credentials Thursday evening by sounding as confused as the Democrats on the nation’s assumed need for “energy independence.”

In his acceptance speech at the GOP convention in St. Paul, McCain pledged federal support for alternative energy so the United States can reduce the amount of energy it imports from abroad. “When I’m president,” McCain told cheering delegates, “we’re going to embark on the most ambitious national project in decades. We are going to stop sending $700 billion a year to countries that don’t like us very much. We will attack the problem on every front.”

He then pledged his support for more offshore drilling, nuclear power plants, wind, tide, solar and natural gas.

Whoa! Before we embark on a project that could cost tens or hundreds of billions of dollars, let’s get the facts straight. Specifically, where did that $700 billion number come from?

That is far more than what we pay for imported energy. In 2007, Americans spent less than half that amount—$319 billion—for imported energy of all kinds, including oil and natural gas. Even with higher energy prices in 2008, our total bill for imported energy this year will be nowhere near $700 billion.

Contrary to popular perception, most of our oil imports come such friendly countries as Canada, Mexico, Colombia, Brazil, and the United Kingdom, or from more neutral suppliers such as Iraq, Kuwait, Nigeria, Angola, Chad and Congo (Brazzaville).  Only a third of our imported oil comes from the major problem countries of Saudi Arabia, Venezuela, Algeria, Ecuador and Russia. We don’t import any oil directly from Iran. [You can check out the latest Commerce Department figures here.]

The $700 billion that Sen. McCain probably had in mind is America’s total trade balance, known as the current account. Last year, Americans rolled up a $731 billion current account deficit with the rest of the world. That account includes not just energy but also manufactured goods, farm products, services, and income from foreign investments.

The current account deficit is not driven by energy imports but by the underlying level of savings and investment in the U.S. economy. We run a current account deficit because, year after year, more is invested in the American economy than Americans save to finance that investment. Foreign capital fills the gap, and the resulting net inflow of foreign investment more or less directly offsets the gap between what we import and what we export.

If the federal government dramatically increases spending on alternative energy, as Sen. McCain and his Democratic opponent both seem to want, the result will be a bigger federal budget deficit, a smaller pool of domestic savings, more foreign capital flowing into the United States, and an even larger current account deficit.

The Uncool Animal Farm Bill

Congress believes some Americans are more equal than others. How else could it have passed (by overwhelming margins and over a presidential veto) the 2008 Farm Bill, which amounts to about a $7 billion annual transfer from the pockets of American taxpayers to high-on-the-hog agribusinesses?

To leave no doubt that these “farmers” are the exalted class, Congress included a truly Orwellian set of requirements referred to euphemistically as “Country-of-Origin Labeling” (COOL) for agricultural products like beef, chicken, pork, lamb, vegetables, and fruit.

COOL is justified by its proponents as a means of helping consumers make informed decisions. But COOL is nothing more than a ploy to thrust the marketing costs of U.S. producers on processors, packers, wholesalers and retailers, while stimulating demand for U.S. beef, chicken, pork, vegetables and the like by raising the costs of handling imports. And with the supermarket industry operating at about one to two percent profit margins, there isn’t any doubt about who will be flipping the bill.

A story in today’s Wall Street Journal gets right to the bottom line in its opening paragraph: “Grocery bills, already surging because of higher commodities costs, will almost certainly rise as costs are passed along for implementing a new country-of-origin food-labeling law, the supermarket industry says.”

The Department of Agriculture estimates first year compliance costs for entities in the supply chain to be $2.52 billion. But USDA grossly underestimated the cost of implementing COOL for fish and shellfish in 2005: the actual costs were 6 to 11 times higher than estimates.

COOL provisions for agricultural products were originally included in the 2002 Farm Bill, but implementation (for all but fish and shellfish) was stopped by congressional moratorium, as a debate, in which proponents used fears of mad cow disease and other health concerns, raged on. In a 2004 Cato Institute paper on the topic, I wrote

Proponents argue that mandatory COOL is desired by both producers and consumers. A “made-in-the-USA” label, they contend, would help identify U.S. products for consumers who are otherwise unsure and who may be willing to pay a premium to know they are buying American food.

That sounds fair enough. But there’s more to the story. If, in fact, consumers are overwhelmingly in favor of country of origin labeling, then why haven’t domestic producers voluntarily obliged? After all, if there is demand for it, why does there need to be a law mandating it?

Proponents argue that the costs of implementing COOL are small, yet none of them has been willing to implement it voluntarily. Instead, they have been expending considerable time and money to force those requirements further down the supply chain. Processors, wholesalers, and retailers-firms that buy and sell both domestic and imported products-would incur the costs of segregating inventory, keeping records, constructing and maintaining compliance systems, and often physically labeling products. Burdensome compliance costs may induce those firms to limit their sources, in some cases to only domestic suppliers.

Although consumers may be interested in having country of origin information, it is a relatively unimportant determinant of the purchasing decision. If it were important, consumers would be willing to pay higher prices for products labeled with that information, and producers would supply that information voluntarily if the increase in revenues exceeded the increase in the costs of providing it. That such information is not provided voluntarily indicates that any preference for commodities of U.S. origin is marginal.

Mandatory labeling is nothing more than a scheme to pass on what should be the marketing costs of U.S. producers to other firms in the supply chain. It is also intended to drive up the costs and reduce the revenues of businesses that produce, process, distribute, and retail imports.

What was true in 2004 remains true today. Only this time Congress succeeded in doing the bidding of our “more equal” farmers.