Topic: Trade and Immigration

Farmers Starting to Resent Strings Attached to Subsidies

By
Sallie James

Earlier this week, farming and some conservation groups announced that they had come to a deal to link eligibility for crop insurance premium subsidies to compliance with conservation measures. In return, in one of the great sell-outs in modern times, the conservation groups agreed not to push for payment limits or means testing on farm subsidies.

But it seems that the new link between conservation and government support for crop insurance has angered the House Agriculture Committee Chairman, Frank Lucas. From the DTN Ag Policy Blog yesterday:

Lucas, a Republican from Oklahoma, told DTN off the House floor Wednesday that he has a philosophical problem with various lobby groups “tying strings to how farmers farm” and dictating terms to producers when the farm bill is supposed to be about raising food and fiber.

“My perspective has always been, very sincerely, if a farm bill is about raising food — and I know 80% of it now is about making sure people have enough to eat, helping them buy their food — but if it is about raising food, farmers should have the tools to raise the food and fiber,” Lucas said. “And if you engage in whole series of things, such as you can’t get crop insurance unless you plant in a certain way, on a certain day, in a certain direction, or you can’t access a variety of other programs, then we aren’t having a farm bill that helps farmers raise food and fiber, but we have a social tool here that’s used to direct how farmers use their lives and conduct their business.” [emphasis added]

You’ll excuse me if I am having trouble summoning much sympathy for your special interest friends, Mr Lucas. It’s just that I feel that having to accept inconvenient conditions should be expected when you suck at the government teat. The Farm Bill was designed as a social tool, and you and your colleagues over the years have added more “social tools” like food stamps, environmental programs and energy subsidies in order to secure sufficient votes for your pork. Complaining now that all these other people are ruining your party is, to say the least, a bit rich.

If farmers don’t want to be directed on “how [they] use their lives and conduct their business,” then I suggest they start sending their cheques back. Ending farm programs will truly Free the Farm.

Topics: 
Energy and Environment, Tax and Budget Policy, Trade and Immigration

Heritage Immigration Study and Government Spending

By
Chris Edwards

Conservative and libertarian scholars are clashing over the findings and political implications of the new Heritage Foundation immigration study. The study spans 92 pages and is jam-packed full of statistics and detailed calculations.

I’ll leave the immigration policy to my colleagues who are experts in that area. To me, the study provides a very useful exploration into how massive the American welfare state has become. Here are some highlights:

  • “There are over 80 of these [means-tested] programs which, at a cost of nearly $900 billion per year, provide cash, food, housing, medical, and other services to roughly 100 million low-income Americans.”
  • “The governmental system is highly redistributive … For example, in 2010, in the whole U.S. population, households with college-educated heads, on average, received $24,839 in government benefits while paying $54,089 in taxes … [and] households headed by persons without a high school degree, on average, received $46,582 in government benefits while paying only $11,469 in taxes.”
  • “Few lawmakers really understand the current size of government and the scope of redistribution. The fact that the average household gets $31,600 in government benefits each year is a shock.”

Total federal, state, and local government spending in 2010 was $5.4 trillion, or $44,932 per U.S. household. The figure of $31,600 in “benefits” is total spending less spending on public goods, interest, and government pensions.

A useful feature of the Heritage study is a breakdown of the $5.4 trillion in spending into six categories constructed by the authors. “Direct benefits” includes mainly Social Security and Medicare. “Pure public goods” includes programs such as defense and scientific research. “Population-based services” includes programs aimed at whole communities, such as police and highways. (Some of these also seem to be public goods). “Means-tested benefits” includes programs such as food stamps. Education includes both K-12 and college subsidies. “Interest and pensions” is the current costs of past spending, which includes servicing the debt and paying for government pensions. The chart shows spending in 2010.  

This spending breakdown is useful for thinking about the proper size of government. From a libertarian standpoint, governments ought to be spending only on public goods and population-based services, as a first cut. That would be $1.94 trillion, or just 36 percent of the current total of $5.4 trillion. As a percent of GDP in 2010, that would be spending of 14 percent, rather than current spending of 38 percent.

But some of the population-based services mentioned by the authors could be privatized, and spending on some of the public goods could be cut. So a good libertarian target might be less than 36 percent of current spending, or less than 14 percent of GDP.

The Heritage study is sparking a debate about what type of immigration reform the nation should have. But hopefully, it will also spur more discussion about the massive size of the American welfare state. Immigration is partly, or mainly, such a contentious issue because we have such a huge welfare state.

The study includes projections about how many trillions of dollars of government benefits will flow to immigrants and their children in the decades ahead. But conservatives and libertarians agree that we ought to cut trillions of dollars in benefits to immigrants and nonimmigrants alike.

So is there some common ground here? Can we work toward an immigration reform that cuts government dependency in general and downsizes the welfare state?

Topics: 
Government and Politics, Tax and Budget Policy, Trade and Immigration

Heritage’s Flawed Immigration Analysis

By
Alex Nowrasteh

In the Washington Post today, Jim DeMint and Robert Rector of the Heritage Foundation invoke the free-market pantheon in arguing their anti-immigration stance: “The economist Milton Friedman warned that the United States cannot have open borders and an extensive welfare state.”

They’re halfway right about that. What Friedman actually said was that immigration is “a good thing for the United States…so long as it’s illegal.” He meant that open immigration is highly beneficial to the economy, provided those productive but inexpensive laborers do not have access to welfare. Friedman later wrote that, “There is no doubt that free and open immigration is the right policy in a libertarian state.” Friedman’s problem was with the welfare state, not immigration. His remarks are fundamentally at odds with the position Heritage is trying to argue. 

It’s not the first time that I’ve questioned the free-market credentials of my friends at Heritage lately, and that’s making me sad.

On Monday, Heritage released a new study entitled “The Fiscal Cost of unlawful Immigrants and Amnesty to the U.S. Taxpayer” by Robert Rector and Jason Richwine, PhD.  I criticized an earlier version of this report in 2007, arguing that their methodology was so flawed that one cannot take their report’s conclusions seriously.  Unfortunately, their updated version differs little from their earlier one.

I’m joined in this view by a host of prominent free-marketeers. Jim Pethokoukis at AEI, Doug Holtz-Eakin at American Action Forum, Tim Kane at the Hudson Institute, and others have all denounced the fundamentals of the Heritage report.

The new Heritage report is still depressingly static, leading to a massive underestimation of the economic benefits of immigration and diminishing estimated tax revenue.  It explicitly refuses to consider the GDP growth and economic productivity gains from immigration reform—factors that increase native-born American incomes. An overlooked flaw is that the study doesn’t even score the specific immigration reform proposal in the Senate.  Its flawed methodology and lack of relevancy to the current immigration reform proposal relegate this study to irrelevancy. 

Even worse, the Heritage study recommends a “solution” to the fiscal problems it supposedly finds. It suggests:

Because the majority of unlawful immigrants come to the U.S. for jobs, serious enforcement of the ban on hiring unlawful labor would substan­tially reduce the employment of unlawful aliens and encourage many to leave the U.S. Reducing the number of unlawful immigrants in the nation and limiting the future flow of unlawful immigrants would also reduce future costs to the taxpayer.

Professor Raul Hinojosa-Ojeda of UCLA wrote a paper for Cato last year where he employed a dynamic model called the GMig2 to study comprehensive immigration reform’s impact on the U.S. economy. He found that immigration reform would increase U.S. GDP by $1.5 trillion in the ten years after enactment.

Professor Hinojosa-Ojeda then ran a simulation examining the economic impact of the policy favored by Heritage: the removal or exit of all unauthorized immigrants. The economic result would be a $2.6 trillion decrease in estimated GDP growth over the next decade. That confirms the common-sense observation that removing workers, consumers, investors, and entrepreneurs from America’s economy will make us poorer. 

Would decreasing economic growth by $2.6 trillion over the next ten years have a negative impact on the fiscal condition of the U.S.?  You betcha. 

Do the authors consider the fiscal impact of their preferred immigration policy?  Nope.

For those of us who “grew up” on the fine policy analysis long produced by Heritage, the immigration report is a supreme disappointment. No one has done more than Heritage to promote the importance of dynamic scoring, which is critical to understanding the true effects of government activity on the marketplace. For that organization to have seemingly abandoned its core principles for this important debate is a stinging blow to those of us who crave an honest, data-driven debate on the fiscal merits of policy.

Topics: 
Government and Politics, Political Philosophy, Trade and Immigration

Scoring Immigration Reform Correctly

By
Alex Nowrasteh

Word is our pro-free-market brethren at the Heritage Foundation will release a new study on the fiscal impact of immigration reform in time for the congressional debate. It will be an update to a 2007 study that played a key role in derailing immigration reform then.

While the 2007 study was influential, it was fatally flawed, as I detail here.  Hopefully Heritage’s updated version will correct for those criticisms and others, or else its analysis must be judged as lacking. 

The key flaw in Heritage’s 2007 study is its use of static fiscal scoring, rather than dynamic fiscal scoring, to evaluate that year’s immigration reform bill. “Scoring” a bill means predicting its impact on the U.S. budget in the future by estimating how it will affect future spending and tax revenue. A statically scored prediction assumes the bill will not affect the rest of the economy – which is highly unrealistic. 

A dynamically scored prediction, on the other hand, assumes that the bill will affect the rest of the economy, also changing tax revenue and government spending. Since increased immigration will increase the size of the economy, it will also increase tax revenue and some government spending. It’s important to factor those increases into any scoring model. Heritage’s 2007 study did not. 

The Congressional Budget Office (CBO) has adopted dynamic scoring for the coming immigration bill for reasons they explain here.  The best justification for using dynamic scoring comes from Ed Feulner, who only recently stepped down as head of the Heritage Foundation and retains an emeritus title there. He writes:

Indeed, some lawmakers are fighting a proposal that would require them to take real-world considerations into account. They prefer to keep ‘scoring’ each bill-estimating how it will affect the economy and the amount of taxes they take in-with the ‘static’ model used by the store owner’s friend. If, say, a 5 percent tax on something brings in $50 million, they assume a 10 percent tax will fetch $100 million.

Not surprisingly, this approach has caused lawmakers to come up with some wildly inaccurate assumptions over the years.

Feulner goes on to explain how numerous tax cuts actually produced more revenue despite static models predicting the opposite. 

Can you imagine any private business acting this way? Of course not. That’s why it’s time Congress switched to a method many business owners use-‘dynamic scoring’-which assumes that if you change the way you do business, customers will react in relatively predictable ways. Before they’ve hiked a price or changed a product, most companies have a pretty good idea of how many customers they’ll gain or lose.

Would ‘dynamic scoring’ always give lawmakers perfect estimates? No, but it surely would get much closer to the true cost than “static scoring” does. If doubts remain, put it to the test: Have Congress produce ‘static’ and ‘dynamic’ scores of various pieces of legislation for a few years and see which prove more accurate.

Using dynamic scoring to predict the effects of legislation is as relevant for immigration reform as it is for tax cuts. Allowing more legal immigration, and legalizing those here, will increase the number of workers and entrepreneurs in the U.S., necessarily growing the size of the economy. Capital accumulation and land improvements then catch up to the population growth. Those effects boost GDP, ergo tax revenue.

A common retort to the above is that many new immigrants will be low-skilled and, because of our progressive tax system, will not pay much in taxes.  Expanding the supply of laborers and entrepreneurs through immigration would increase profits, expand the production possibilities frontier, increase the return to capital, and raise incomes for most American workers who are complements.  Thus, even if most future immigrants are low-skilled—and they likely will be—their positive effect on the economy would increase tax revenues indirectly.   

Heritage’s former president supports dynamic scoring, and now so does the CBO, at least for immigration.  For the sake of an honest debate, I sure hope Heritage’s upcoming report does too.

Topics: 
General, Government and Politics, Trade and Immigration

The Myth of a Manufacturing Renaissance

By
Daniel J. Ikenson

Have you heard all the banter about a U.S. manufacturing renaissance? Numerous media reports in recent months have breathlessly described a return of manufacturing investment from foreign shores, mostly attributing the trend to rising wages in China and the natural gas boom in the United States, both of which have rendered manufacturing state-side more competitive. Today’s Washington Post includes a whole feature section titled “U.S. Manufacturing: A Special Report,” devoted entirely to the proposition that the manufacturing sector is back!

The myth of manufacturing decline begets the myth of manufacturing renaissance. This new mantra raises a question: How can there be a manufacturing renaissance if there was never a manufacturing “Dark Ages”?

Contrary to countless tales of its demise, U.S. manufacturing has always been strong relative to its own past and relative to other countries’ manufacturing sectors. With the exception of a handful of post-WWII recession years, U.S. manufacturing has achieved new records, year after year, with respect to output, value-added, revenues, return on investment, exports, imports, profits (usually), and numerous other metrics appropriate for evaluating the performance of the sector. The notion of U.S. manufacturing decline is simply one of the most pervasive economic myths of our time, sold to you by those who might benefit from manufacturing-friendly industrial policies with the abiding assistance of a media that sometimes struggles to distill fact from K Street speak.

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Topics: 
Regulatory Studies, Trade and Immigration

What to Do about OPEC?

By
Jerry Taylor

Cato hosted a policy forum last week (which you can watch in its entirety if you missed it the first time around) to discuss a new paper released by Security America’s Energy Future (SAFE).  The paper – written by long-time friends Andy Morriss and Roger Meiners – argues that there is a consensus among academics who have studied OPEC.  The consensus?  The cartel is responsible for less crude oil on the market than would otherwise be the case (which means higher prices than would otherwise be the case) and for the bulk of the price volatility we find in crude oil and, thus, gasoline markets.  “The international market for oil is not a free market” they conclude.  “The global oil market deviates in important ways from the competitive model and that these market anomalies have significant economic impacts and so are relevant for policy makers.”

While Morriss and Meiners would thus seem to invite politicians to act, they offered no agenda of their own.  That’s where SAFE comes in.  FedEx’s Fred Smith, who co-chairs SAFE’s Energy Security Leadership Council, argued at the forum that the federal government needs to respond to OPEC’s machinations by (1) achieving energy independence for North America (a goal I’ve been quite skeptical about in the past), (2) establishing tough energy efficiency standards for a whole host of goods, but most particularly, for U.S. automobiles via CAFÉ standards (an agenda that most economists would reject in favor of accurate price signals), and (3) subsidizing R&D in order to find alternatives to oil in transportation markets.  SAFE discusses this agenda more robustly in their “National Energy Strategy for Energy Security, 2013”.

SMU’s James Smith – one of the most prominent energy economists who works in this field – was on-hand to offer what I think was a compelling rebuttal to the central arguments forwarded by the Morriss and Meiners study.

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Topics: 
Energy and Environment, International Economics and Development, Trade and Immigration

Trade Pessimism Reigns Supreme

By
Simon Lester

The Economist magazine has an article worrying that the proposed US-EU trade talks – discussed in this Cato paper and at this recent event – are floundering.  They say, “[r]ight now, the pact is in trouble, beset by small-mindedness and mutual suspicion.”  All is not lost, though: “Time, then, for a big push on both sides; this pact can still be saved.”

Now, I can see why people get concerned about trade negotiations.  Many of them drag on for years, and the prospects for completing large-scale negotiations look dim these day.  But there’s something that should be kept in mind about the US-EU talks:  They haven’t even started yet!  The negotiations won’t start until July, and it’s still only April.  So everyone needs to relax a bit.

Having said that, I can see why people would express concern.  The pre-negotiation jockeying suggests there will be serious difficulties.  For example, France wants “cultural sectors,” like TV, radio and film, exempted.  On this point, the Economist notes:

European governments recently sent trade officials to Brussels to a first meeting on their offer to America. Led by the French, envoys from southern and eastern Europe called for a long list of red lines. These covered the usual stuff: agriculture, public services and “audio-visual” content (eg, bungs for French cinéastes, airtime quotas to keep Flemish hip-hop on the radio). That appals Team Obama, though not because Americans are blameless. From financial services to air passenger services, America maintains lots of barriers to trade. The real fear is that if Europe starts setting out red lines, trade sceptics in America will draw their own.

There is no doubt that this kind of economic nationalist thinking gets in the way of trade liberalization.  Instead of recognizing the benefits of opening the domestic market to imports, too many countries try to “protect” their economy from foreign competition.  The reality is that the economy benefits from this foreign competition, and governments should be fighting to see who can liberalize the most.

Unfortunately, based on what they see as rational domestic political calculations, governments do not think or act this way.  They try to use trade negotiations to open up export markets, while maintaining import protection.  Not surprisingly, this undermines the potential benefits of the negotiations, and makes it very hard to get deals done.

In order for the proposed US-EU pact to avoid stalling out, as some other trade negotiations have, some realism could be helpful.  We shouldn’t expect a trade deal to lead to complete and total free trade.  At best, it will simply make some progress towards more liberalization.  And if it can do that, that’s a good thing.

To make real progress, though, trade negotiators need to change their mindset.  Protection from foreign competition is not something to be maintained through special exceptions in trade deals; rather, protection is bad for the economy as a whole (despite any benefits to particular interest groups), making us all worse off.  If some day trade officials can recognize this basic economic truth, trade negotiations will become much easier!

Topics: 
International Economics and Development, Trade and Immigration

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