Topic: Trade and Immigration

You Mean It Could Get Worse?

The House Agriculture Committee yesterday released its preliminary discussion draft of the commodity section of the Farm Bill (the section that deals with the subsidy programs). But the changes proposed by Rep. Colin Peterson (D, Minn.), House Agriculture Committee chairman, are precisely the wrong sort of changes needed to avoid legal challenges to its farm programs and inject life into the Doha round of global trade talks.

Chairman Peterson has suggested increasing most of the price-linked subsidies, and paying for the increase out of the money currently allocated for direct subsidies that farmers receive regardless of production or market prices.

When farmers are paid according to the amount they produce, this encourages overproduction and depresses world market prices. That infuriates our trade partners, and we can expect more of the type of legal challenge to U.S. farm programs as the cotton case (more here) and the new case against U.S. farm subsidies brought by Canada (background here).

While paying farmers “money for nothing” may be fiscally irresponsible, it is less market distorting than the types of subsidies that Chairman Peterson is proposing to increase. It makes no sense to increase the types of payments that are causing legal trouble. And if commodity prices fall from the current historic highs, then these subsidies would have a necessarily higher budgetary impact than the current setup.

My colleage Dan Griswold and I have proposed bribing farmers to let us scrap the whole thing altogether.

Bark Dwarfs Bite in China Currency Legislation

Yesterday, THE much-anticipated, passable-with-a-veto-proof-majority, WTO-consistent, legislative response to Chinese intransigence over its undervalued currency was introduced in the Senate.  As it turns out, “much-anticipated” and “legislative” appear to be the only apt adjectives.  It is unlikely to pass with a veto-proof majority, and my initial analysis leads me to conclude that its provisions would likely contravene U.S. WTO commitments. 

That being said, I am heartened by the bill because, despite all the hostile rhetoric and hand wringing on Capitol Hill, it seems to reflect a surprising degree of realism and rationality that I assumed was missing in Congress.  It quietly acknowledges that precipitous currency adjustment could be destabilizing and that U.S. WTO obligations are, in fact, worthy and worthwhile commitments to honor. 

On the continuum of prospective proposals under consideration ranging from innocuous to the nuclear 27.5% across-the-board-tariff, the “Currency Exchange Rate Oversight Reform Act of 2007” is relatively tame.  It has its problems and it is unnecessarily intrusive, but if this represents the final word of Congress on the matter, I’ll take it. 

Here is the gist of the bill. 

First, it makes “currency misalignment” instead of “currency manipulation” the trigger for action, which effectively lowers the threshold, and is thus not good.  Changing the designation effectively strips the Treasury Secretary of the discretion to determine whether currencies are manipulated intentionally for purposes of gaining a trade advantage.  Under the new rule, a formula will be used to determine automatically whether a conclusion of misalignment is rendered.  The precise formula is still a bit unclear to me, though. 

Depending on the degree of misalignment, countries will either be put on notice and consultations requested or priority action will be considered right away.  As far as I can tell, it would be a minimum of six months after the designation of misalignment before any punitive action can be taken against a priority country.   

Punitive action includes a cessation of U.S. government purchases of goods and services from the offending country; U.S. denial of support for multilateral institution or OPIC financing of projects in the offending country; U.S. denial of support for proposals and other items of interest to the “offending” country within multilateral institutions; adverse consideration of proposals to graduate the offending country from non-market economy status to market economy status for purposes of the antidumping law, and perhaps most significantly; adverse treatment of exchange rate conversions for purposes of calculating antidumping deposits and owings.  That would lead, inevitably, to higher dumping duties.  

Ultimately, if insufficient action is taken by the offending country to bring its currency into alignment, the
United States can lodge a formal complaint in the WTO (although it is unclear to me exactly what WTO provision the offending country would be violating). WTO-consistency was one of the driving considerations of this bill.  But I rather doubt that the antidumping provision would pass muster with a dispute panel, since Article 2.3 of the Antidumping Agreement seems to require that currency conversions be made using the exchange rate on the date of the U.S. sale.  The new legislation would allow the
U.S. authorities to substitute its estimate of the market-based exchange rate for the official exchange rate. Finally, and very importantly, as is the case with respect to Section 421 trade cases (the China-specific safeguard, agreed as part of China’s accession protocol), the president has the authority under this bill to reject any remedial/punitive measures on national economic security grounds.  That’s a very important safety net because the executive branch is typically much less willing to engage in the sort of punitive actions that Congress tends to demand reflexively. 

Thus, at the end of the day, even though the legislation is banal and unnecessary, something was going to materialize legislatively.  Congress talked itself into a corner with its continuous complaining about the administration’s failure to address “unfair” Chinese practices.  Congress promised to get tough if the administration continued to fiddle.  So it had to walk the walk.   

Despite some harsh provisions, it could have been worse.  Practically speaking, at the end of the day, there might not be much difference between this legislation and the gradual, negotiations approach to the Chinese currency issue that is favored by the administration, and to which this legislation is supposed to be an alternative.  Here’s why. 

By the time the bill introduced yesterday makes it through conference, passes both chambers of Congress, gets vetoed by the President, and then secures two-thirds majorities in both chambers to override the veto to become law, and then the new regulations are promulgated, it will likely be too late for the statutory September 15 Treasury report to be issued.  The earliest report that could identify Chinese currency misalignment would be the March 2008 report, and the earliest that countervailing action could take effect would be September 2008.  The Yuan has appreciated against the dollar by nearly 8.5 percent since July 2005.  Since the Chinese government allowed for a wider band of daily fluctuation and appreciation two months ago, the Yuan is now on a steeper trajectory of appreciation.  By then—15 months from now—the Yuan is likely to have appreciated considerably more.  It could very well have appreciated “between 15 and 40 percent,” which has been the estimate of undervaluation for the past few years.  If that is the case, there should be no need for action.  

But, finally, given the feature of executive override and precisely because sanctions are a long way off under this bill, I can’t see it passing Congress with a veto-proof majority.  But a more hostile, impose-sanctions-first-ask-questions-later bill is also unlikely to pass with a veto proof majority.   

Thus, the preferable and much wiser gradual approach it is, by default. 

Back to Square One on Immigration

Opponents of comprehensive immigration reform are undoubtedly congratulating themselves on the apparent demise yesterday of S. 1348. The bill failed to win enough votes in the Senate for cloture and a final vote. Leading the charge to defeat the bill were a group of Republicans opposed to just about any legalization or expansion of visas for low-skilled workers.

We’ve made the case at the Center for Trade Policy Studies for an immigration system that recognizes the need of our growing economy for more foreign-born workers and the benefits we would enjoy from more legal immigration. The only alternative offered by opponents of reform is to spend more on the same enforcement efforts that have failed in the past to stop illegal immigration. Conservatives who are normally skeptical of big government place all their hope in dramatic increases in spending for border enforcement, longer fences to nowhere, more raids on U.S. workplaces, and more red tape and national ID cards for American workers.

The bill before the Senate was flawed in many ways. The number of temporary worker visas was insufficient, its interior enforcement provisions too intrusive, the point system too convoluted. But the bill was at least pointing in the right direction.

The Republicans who brought the bill down have yet to put forward any practical and principled alternative.

House Subcommittee on Horticulture and Organic Agriculture Does Their Bit For Fiscal Responsibility

Following on from Chris’ post yesterday, the House Subcommittee on Horticulture and Organic Agriculture came up with some nifty recommendations for the programs under their jurisdiction yesterday. The press release is here.

Take particular notice of the operative words in the paragraph that outlines the proposals. The clauses begin with, respectively: expands, doubles, extends, requires, funds, expands, provides, establishes, authorizes, and establishes. Nary a “cuts,” “abolishes,” “ends,” or “repeals” in sight.

I have searched thoroughly through my pocket Constitution (available here) but I can’t find the basis for these (or, for that matter, many other) government programs anywhere.

Tony Blair’s Wise Warning against ‘Isolationism and Protectionism’

In an essay published this week by the Economist magazine, outgoing British Prime Minister Tony Blair shared “What I’ve Learned” during his decade in office. I’ll leave it to others to dissect what he said about the transatlantic alliance, the Iraq War and the National Health Service, but his words of wisdom on the importance of an open global economy are worth quoting.

Declaring that “‘Open v closed’ is as important today in politics as ‘left v right,’” Blair wrote:

Nations do best when they are prepared to be open to the world. This means open in their economies, eschewing protectionism, welcoming foreign investment, running flexible labour markets. It means also open to the benefit of controlled immigration. For all nations this is a hugely contentious area of policy. But I have no doubt London is stronger and more successful through the encouragement of targeted migration.

Isolationism and protectionism now cut across left and right boundaries. They are easy tunes to play but pointless in anything other than the very short-term.

I wish more members of the U.S. Congress would learn the same lessons.

Robert Reich, Wrong Again

President Clinton’s secretary of labor, Robert Reich, complains on Marketplace Radio that the new immigration bill may encourage immigration by high-skilled people. He argued:

A century ago, America’s immigration policy was best summarized in Emma Goldman’s famous lines on the Statue of Liberty: “Give me your tired, your poor, your huddled masses yearning to breathe free.”

It’s a lovely poem, and it’s true that America was the land of opportunity for millions of people. But as Julian Simon pointed out, on the whole immigrants in the 19th century were not tired, poor, huddled masses. He cites findings from economist P. J. Hill:

[I]mmigrants, instead of being an underpaid, exploited group, generally held an economic position that compared very favorably to that of the native born members of the society.

Reich is wrong again. But then, he’s notoriously loose with the facts.

Update: An alert reader points out that I was still half-asleep when I heard this commentary and cut-and-pasted Reich’s words. Of course it wasn’t the anarchist Emma Goldman who wrote the words on the Statue of Liberty, it was the New York City poet Emma Lazarus.

Good News on Income Mobility

Steven Pearlstein of the Washington Post takes a beating around here sometimes, so I want to draw attention to his dynamite column this week on the non-disappearance of the middle class. Drawing on a new book, Social Stratification in the United States by Stephen Rose, Pearlstein demonstrates that

rumors of the demise of the American middle class are greatly exaggerated. In fact, living standards for most Americans are improving. Not everyone is flipping hamburgers or working at Wal-Mart. To the degree that the middle class is shrinking, it is because more people are rising out of it than falling from it.

Pearlstein takes pains to note that Rose “is not your standard-issue conservative market apologist – far from it. He left medical school to get his PhD in economics, then alternated between teaching and community organizing. He served on the Democratic staff of the Joint Economic Committee and in the economics shop of the Clinton Labor Department.” So you can trust him – he worked for Clinton!

And Rose finds, as Pearlstein lays it out, that there’s a lot more good news than the “sky-is-falling rhetoric of the Democratic left” would lead you to believe. Pearlstein notes:

[I]t is often reported that the median household income in the United States is $44,500. Of course, that takes in households of varying size, from singles to the Brady Bunch. It also includes households headed by workers in the prime of their working years (29 to 59), as well as those just beginning or ending their careers, when earnings tend to be lower. So, to get a truer picture of economic well-being, Rose adjusts the data for household size and excludes those headed by people younger than 29 or older than 59. And when he does, it turns out that the median income for the “typical American family” jumps to $63,000, which in most parts of the country buys a pretty comfortable middle-class lifestyle.

This doesn’t mean the middle class isn’t shrinking. In fact, from 1979 to 2004, Rose calculates, the percentage of households in the “middle class” category – those with incomes of $30,000 to $90,000 – fell to 39 from 47 percent. But it would be hard to describe that as bad news when the proportion of well-off households – those with incomes of more than $90,000 – rose by nearly nine percentage points. During the same time frame, the percentage of households that were poor or near-poor remained about the same.

One of the favorite liberal story lines is that the only way middle class families have been able to maintain their standard of living is by forcing mom to work more hours. But that, too, turns out to be an exaggeration. By looking just at married couples at various points in the income ladder, Rose found that for all but the poorest households, inflation-adjusted income was higher in 2004 than in 1979 even after factoring out any increase in spousal work hours.

It is also a myth that the Great American Jobs Machine is producing mostly lousy, low-paying service jobs. Rose simplifies the government data by putting all jobs in three categories: “elite” jobs, encompassing managers and professionals; “good jobs,” such as those held by supervisors, skilled blue-collar workers, craft workers, police, firefighters and clerical workers; and “less skilled” jobs, such as those held by unskilled machine operators, laborers, sales clerks and waiters. Looking at it that way, it turns out that the number of lousy, low-skilled jobs has been on a long, steady decline since 1979, while the number of “elite” jobs has been growing steadily. The number of “good” jobs has declined marginally as skilled office work has replaced skilled factory work.

Rose is concerned, quite properly, about the condition of the poorest people in the American economy, though he and I would probably disagree on the best way to help them enter the economic mainstream.  But he’s also brought a healthy dose of reality to the debate over “the declining middle class.”

For more on these topics, see the recent posts by Brink Lindsey at his personal website and the award-winning Cato Institute book Cowboy Capitalism: European Myths, American Reality by Olaf Gersemann.