Topic: Trade and Immigration

My 1991 Critique of Extended Unemployment Benefits

Some things never change. Another President Bush was ambushed with extended unemployment benefits shortly before another presidential campaign. Some data in this oldie are dated (though not wildly different from today), but the arguments seem worth another look:

The Cure for Unemployment
Alan Reynolds
The Wall Street Journal , October 3, 1991

Democratic Congressmen hope to make George Bush look like a hard-hearted villain because of his reluctance to spend an extra $6 billion to extend unemployment benefits beyond the usual six months. Yet the current job situation is scarcely an emergency. Unemployment was higher than it is today in all but two of the dozen years from 1975 through 1986. Today, the average spell of unemployment — 14 weeks — is still lower than it was even as recently as 1987. Half of the unemployed find new jobs in fewer than seven weeks.

The congressional push to extend unemployment benefits aims to help a relatively elite minority of the unemployed. Last year, only 39% of the unemployed collected any benefits at all. This was largely because about half of those unemployed did not lose their jobs. They either quit their jobs, were reentering the labor force after a prolonged absence or were young people who had not held jobs before. Another reason many unemployed do not qualify for benefits is that they already have another job lined up, and are just taking some extra time off between employers. Or, they find a new job within three weeks — the waiting period to qualify. And, of course, unemployed illegal immigrants are less than eager to register with government agencies.

Those who are not eligible for unemployment benefits rarely take six months or more to find a job. Conversely, those unemployed for long periods are usually among those who do receive benefits, and often receive supplemental union benefits that can approximate their usual after-tax wages (particularly with some casual labor “off the books”). Moreover, cyclical layoffs account for most of the long-term unemployed, who, because of their seniority, have good reason to wait to be recalled.

Robert Topel of the University of Chicago figures that unemployment benefits could be extended to an entire year without spending another dime. How is that possible? Simply make people wait four weeks rather than three before they qualify for their first check. There are so many more people who collect benefits for a few weeks than for a few months that the savings from that one week would cover the costs.

Regardless of how extended benefits are financed, though, the unemployment rate would surely be significantly higher than otherwise, simply because more people would be subsidized to remain unemployed for longer periods. Studies in the Monthly Labor Review have shown that those who have supposedly been “unable to find a job” in 26 weeks miraculously find one within a few weeks after their benefits run out. They either quit waiting to be rehired in cyclical industries, or accepted second-best jobs that required, for example, moving to a new city.

Giving people almost a year to search for the “right” job could nonetheless be justified, in theory, because it is not in society’s interest to have many people working below their ability. But too long a period of subsidized job search is likely to reduce the intensity with which people look for work, and to delay economically desirable relocation of workers away from areas of high unemployment to areas where they are needed.

Another negative effect of prolonged benefits is that it would further subsidize employers that frequently lay off workers at the expense of those that do not. The tax employers pay for unemployment benefits is already too high, in an actuarial sense, on firms that provide stable employment, and too low on firms that do not. If layoff-prone employers had to bear more of the cost of the dole, they would adopt less volatile strategies of hiring and firing.

Over the longer haul, the more serious problem is not a shortage of jobs, but a shortage of people willing to work at the after-tax wages offered. From 1980 to 1989, the percentage of working-age people who were either working or looking for work rose from 63.7% to 66.5%, as marginal tax rates fell. But labor force participation rates began to dip at the start of 1990, and have now fallen back to 66.2%.

Many wives with working husbands, young people living with parents, and people of early retirement age have simply dropped out of the job market since the 1990–91 increases in Social Security taxes and in marginal federal and state income tax rates. They are indeed “discouraged workers,” but they are discouraged because their added work brings little added after-tax income, not because they couldn’t find jobs if they tried. Leaving the labor force means not trying.

Considering that the economy emerged from recession only a few months ago, the percentage of the unemployed who have quit their jobs is quite high — over 12%, compared with fewer than 8% in 1982–83. And new jobseekers (graduates) account for an unusually small share of the unemployed — 8.4% at mid-year, compared with 13% in 1984. Like the decline in labor force participation, this suggests the problem is not simply a shortage of jobs, but insufficient incentive, after taxes, to accept job offers and stay on the job. Congress should be less concerned about subsidizing lengthy periods between jobs, and far more concerned about tax policies that are shrinking the labor force and the tax base.

Better Late Than Never

I was getting a little concerned about the portentous silence from the administration in response to the U.S. sugar industry’s proposal to manage trade in sugar between the United States and Mexico (more here and here). Like toddlers in another room, silence often means trouble when it comes to the government: they must be up to something.

A swift, clear rejection of the proposal might have instilled more confidence, but today’s statement by Secretary of Agriculture Ed Schafer and United States Trade Representative Susan Schwab rejecting the proposal was welcome all the same. The positive part:

[T]he Administration cannot support recent sugar policy recommendations and will oppose efforts to implement them through legislation.

And the ominous:

We believe we have the tools and the cooperative relationships with the Government of Mexico to ensure the further smooth integration of our sweetener markets.

The use of the phrases “cooperative relationships” and “smooth integration” are not encouraging.

Just How Much Is This Online Gambling Ban Costing Us?

My friend Radley Balko has a post over at Reason’s Hit & Run blog about a recent attempt to discover the terms of a trade deal reached in December between the United States and the European Union. The negotiations started because of America’s wish to withdraw its prior commitment to open its market to overseas gambling service providers. (WTO members are within their rights to do that, but they must offer compensatory market openings in other areas). Recall that the details of that deal were, to put it charitably, vague at the time it was announced.

In an effort to shed some light on the agreement, a fellow named Ed Brayton submitted a Freedom of Information Act request to the Office of the United States Trade Representative asking for the details. No joy – the USTR refused his request on the grounds that the “information…is properly classified in the interest of national security pursuant to Executive Order 12958.”

Presumably the USTR would need to publicly disclose the terms of the deal when (if?) it is ratified by the WTO, but in the meantime Mr Brayton is appealing. Also in the meantime, Antigua and Costa Rica have filed (separate) arbitration requests to the WTO over their compensation package (more here, and a warning – some of the ads on this site are possibly not safe for work).

I will be speaking at a panel event at the Institute for Economic Affairs in London on Tuesday on this very subject.

A Clear Division Among Candidates

So much of the presidential nominating process is issue-free posturing, it’s welcome to spot a clear division among candidates on a discrete issue.

Senators Barack Obama (D-IL) and Hillary Clinton (D-NY) disagree quite starkly on whether illegal immigrants should be licensed — or, more accurately, on whether driver licensing and proof of immigration status should be linked.

Senator Obama supports licensing without regard to immigration status, and recently received the endorsement of La Opinion, the nation’s largest Spanish language newspaper, largely for that reason. (His “Yes, we can”/”Si, se puede” rhetoric probably hasn’t hurt.)

On This Week With George Stephanopolous Sunday morning, Senator Clinton said (9:09), “[M]y position has been consistent. I don’t think we should be giving drivers’ licenses to people who are not documented.”

The right answer here isn’t obvious, but it is important.

Many people believe that illegal immigrants shouldn’t be “rewarded” with drivers’ licenses. Fair enough: the rule of law is important. There’s also a theory that denying illegal immigrants “benefits” like driver licensing will make the country inhospitable enough that they will leave. This has not borne out, however. Denying illegal immigrants licenses has merely caused unlicensed and untrained driving, with the hit-and-run accidents and higher insurance rates that flow from that.

The major reason, though, why I agree with Senator Obama is because the linking of driver licensing and immigration status is part of the move to convert the driver’s license into a national ID card. Mission-creep at the country’s DMVs is not just causing growth in one of the least-liked bureaucracies. It’s creating the infrastructure for direct regulatory control of individuals by the federal government.

Were immigration status and driver licensing solidly linked nationwide, the driver’s license would not just be a “benefit” of citizenship. It would then clearly be amenable to use as an immigration-control tool — as has already been proposed. Law-abiding, native-born citizens would more and more often be required to show ID. And it would be converted to additional uses. The federal government could condition our access to goods, services, and infrastructure on carrying and presenting a national ID, possession of which the government could make conditional on every regulatory whim that swept past.

We need to restore the driver’s license to its original role — as a license to drive. American citizens should not have to submit or prove their Social Security numbers in order to get licensed. If illegal immigrants “benefit” from that, so be it. It’s more important to protect U.S. citizens’ liberties now and for the future than to “go after” illegal immigrants while reform of our out-of-whack immigration laws languishes.

Stealth Taxation at the Border

For decades, some of America’s most regressive taxes have lurked in the shadows of
U.S. trade policy.  Now the Bureau of Customs and Border Patrol is proposing to make those taxes an even greater burden on lower-income Americans and workers and farmers in poorer countries.

For over 15 years, CBP has maintained a “first sale” valuation policy that allows imports to be valued on the basis of the price of the first sale between the foreign producer and a middleman in cases where there are multiple, arm’s length transactions in the distribution chain.  The price of the first sale is presumably closer to the value of the cost of goods sold, since at most it would differ by the expenses and markup of only one more entity.  But CBP wants to change its valuation method to a “last sale” basis, which would reflect the price of the last transaction before the merchandise was imported into the United States.  Obviously, the last sale price reflecting the expenses and profits of more entities will, in most cases, be higher than the first sale price.  Thus, valuations, import assessments, and ultimately consumer prices, will likely increase.

CBP claims it wants to align its valuation policy with the policies of most U.S. trade partners, and according to a recent interpretation of the WTO Valuation Agreement, it is a perfectly acceptable—and in fact proper—method of valuation.  But its simply bad policy..  Tariffs are regressive; they are most regressive on necessities, like clothing and food; most clothing on Americans’ backs is imported; first sale valuation methodology is common among importers of clothing, and; consumer prices have already increased significantly over the past year.  Do we need consumers devoting big chunks of their “stimulus rebates” to higher import taxes?

On average, the U.S. tariff system is quite open.  Based on an analysis of U.S. imports in 2005, nearly 70 percent of all merchandise imports entered the United States duty-free and the average rate of duty (calculated as total duties collected over total import value) was around 1.4 percent.  (I cite 2005 because I did a comprehensive analysis of those data for a paper in 2006 that I have not yet repeated for subsequent years. The numbers I cite for 2005 are unlikely to be much different from 2007.)  That rate is pretty modest.  But it’s also misleading.

As is often the case, averages obscure important facts.  In this case the important facts are that most of the $23.2 billion in duties collected by Customs were assessed on imported clothing, shoes, and food products.  In fact, while clothing and footwear comprised 5.1 percent of the total value of imports, duties collected on clothing and footwear accounted for 42.3 percent of all duties collected.  Though the average duty overall was 1.4 percent, it was 7 percent on milk, cheese, eggs and other dairy products.  Have you noticed the huge jump in prices of these products at the grocery store in recent months (Sallie James has)?

Lower-income Americans spend a higher portion of their incomes on these necessities (food and clothing and shelter – don’t forget longstanding restrictions on steel, lumber and cement trade), and many of the products imported are produced in developing countries.  The 1.4 percent average tariff didn’t mean much to exporters in Macau, Cambodia, Bangladesh, Sri Lanka, Pakistan, Uruguay and the other six developing countries with average ad valorem duties in the double digits.  Imports from Cambodia accounted for 0.1 percent of total U.S. import value, but duties on Cambodian imports accounted for 1.2 percent of all duties collected.

U.S. tariff policy is already skewed heavily against lower-income Americans and poor workers around the world.  CBP’s proposal would make matters worse, which hardly seems consistent with the broader objectives of the Department of Homeland Security. 

McCain Scores, Romney Punts on Trade Policy

Free trade has come under withering fire during this election season, with Lou Dobbs–style populism on the rise. The Democratic candidates have fallen over themselves to criticize NAFTA, trade with China, and the alleged harm trade has done to the U.S. economy. So it was refreshing this morning to read an unapologetic endorsement of trade expansion from one of the Republican presidential campaigns.

In an op-ed in today’s Wall Street Journal, one of Sen. John McCain’s senior policy advisers, Douglas Holtz-Eakin, offered this description of what kind of trade policy the Arizona Republican would pursue as president:

Mr. McCain will re-affirm American leadership in global trade. It is essential that American workers have access to the 95% of the world’s customers that are outside our borders. The U.S. should engage in multilateral, regional and bilateral efforts to reduce barriers to trade, level the global playing field and build effective enforcement of global trading rules. Opening new markets for trade in goods and services is an indispensable aspect of economic freedom, for entrepreneurs and workers, and a proven road to greater prosperity.

As a student of history, Mr. McCain rejects those who preach the false virtues of economic isolationism — those who urge the U.S. to bury its head in the sand. The world made the grave error of building walls against trade 75 years ago, which contributed to the Great Depression. Since then, the U.S. has been in the forefront of the fight for reduced barriers to trade. It has reaped the benefits of sustained growth in standards of living, an awesome display of innovation and technical advance, an explosion in the variety, quality and affordability of consumer goods, a rise in home ownership, and ascendancy to the position of world’s greatest economy.

Well said. Note that McCain’s adviser even touts the consumer benefits of import competition through more variety and quality and lower prices. Politicians almost never seem to care about whether consumers benefit from trade policy, preferring to carry water for the noisiest producers complaining about pesky foreign competition.

In contrast, a nearby op-ed by a supporter of Mitt Romney devoted only one sentence to trade, and the line was more ominous than optimistic: “Our jobs are being sought by new competitors from nations like China and India.”

That sentence on trade was sandwiched between a grim warning about “violent, radical jihadists” and our government’s spending binge — as though imported shoes and laptops from China and tech-support call centers in India were “challenges” to our nation on a par with al Qaeda and out-of-control federal spending.

My Cato colleague Mike Tanner has thoughtfully dissected the strengths and weaknesses of both McCain and Romney elsewhere on the Cato blog, but on trade policy, McCain’s team was the clear winner in today’s skirmish.

The New Secretary of Agriculture Plays Lucy

My American friends tell me that there is a recurring scene in the Peanuts comics whereby Lucy says she will hold the football for Charlie Brown to kick before she whips it away.

I was reminded of that yesterday when the new boy in school, newly conferred Secretary of Agriculture Ed Schafer, dashed the hopes of all American consumers, Lucy-style, by implying [$] that the long-awaited open trade in sugar between the United States and Mexico (one of the last NAFTA provisions to come into effect) could be delayed.

Two weeks ago, the Sugar Alliance circulated a proposal to lawmakers that would effectively divide up the United States and Mexico’s (combined) market into a protected cartel. That would significantly impede what was planned to be free trade in sugar between the two countries and downward pressures on the U.S. price of sugar: currently the U.S. price is about double the world price, although it has been up to triple the world price in previous years because of trade barriers to cheaper sugar (see more here).

Sec. Schafer, at least according to the article, was willing to listen to the producers’ plan to manage the sugar trade and was quoted thusly:

If producers in two countries can agree on an approach, that’s better than two governments…trade is all about the producer and providing opportunities and opening markets…

No mention of us consumers paying for it all. And quite why Sec. Schafer believes the market needs managing (either by producers or government) is not made clear.