Archives: 08/2017

Fresh Thinking on Occupational Licensing

Occupational licensing started with the idea that jobs with serious consequences – doctors being the prototypical example – require some sort of government certification and oversight. But that rather innocuous motivation has ballooned into a harmful and unsustainable state of affairs.

From laws requiring licenses to braid hair to ones requiring licenses for floral design and casket manufacturing, occupational licensure has put barriers in the way of people who wish to do non-dangerous jobs and has done little to protect consumers. Instead, it’s frequently used as a way for politically well-connected people and state licensing boards to freeze out their competition, a textbook example of regulatory capture. The end result makes it harder for people to find fruitful employment, particularly low-income workers who often don’t have the time or money to get licenses.

Fortunately, the Supreme Court has offered some hope for those who don’t want needless barriers thrown their way when they want to make a living. In 2014, the Court held in North Carolina State Board of Dental Examiners v. Federal Trade Commission that a licensing board that had banned non-dentists from offering teeth-whitening services had violated federal antitrust laws – and that all licensing boards do the same when they engage in anticompetitive practices. (This was incidentally the first and only case in which Cato filed a brief supporting the federal government.) The Court further clarified that licensing boards have antitrust immunity if they’re subject to “active supervision” by the state in question.

States can get around this requirement by simply rubber-stamping everything done by the licensing boards, undermining the intended procompetitive effects of the decision in the process. In addition, there are valid concerns that the decision undermined state sovereignty in light of the fact that under Parker v. Brown, 317 U. S. 341 (1943), the Sherman Antitrust Act doesn’t apply to state government agencies.

The Fed’s Inflation Dilemma

The Fed is embarked on a program of rate hikes, namely increases in the interest rates it pays on reserve balances and on reverse repos. Its justification is what it perceives to be a strong labor market and an expected rise in inflation. The two criteria are interconnected because in the economic model it employs, a strong labor market (as indicated by employment growth and a falling unemployment rate) will eventually result in a rise in the inflation rate. Thus far, the Fed has proved to be wrong.

The Fed in effect is targeting inflation at 2 percent, as measured by the personal-consumption expenditures (PCE). But actual inflation remains stubbornly below 2 percent. It was up 1.4 percent, year over year, in June. The core rate is running at 1.5 percent. Two percent is not in sight.

Fed officials appear committed to further rate hikes, though with less conviction. Why pursue a policy when the facts do not support it?

I believe there are two possible explanations. First, officials are willing to follow the predictions of a model even when it clearly has ceased to explain the economic facts (if it ever did). Second, there other unstated reasons for raising short-term interest rates. The first explanation is likely true for some Fed officials, especially so for Chair Yellen.

The second explanation likely drives policy for other officials. There is fear that unconventional monetary policy (a prolonged period of low interest rates) has generated asset bubbles. Those officials realize the Fed is in danger of repeating policy errors that led to the dotcom bubble and bust, and the housing boom and bust. It would be impolitic to say so, however. Code language is used, such as the need to return to “normal” monetary policy.

What prognosis is there for future rate hikes? The model points to higher interest rates, and reality to no further rate hikes. I opt for the latter, at least for the rest of this year.

Stephen Miller Doesn’t Understand the Economics of Immigration

Senior Trump administration aide Stephen Miller gave a press briefing yesterday defending the RAISE Act - a bill introduced by Sens. Cotton (R-AR) and Perdue (R-GA) that would slash the number of legal immigrants without increasing skilled or merit-based immigration.  The purpose of the RAISE Act is to restrict low-skilled immigration in order to raise the wages of American workers.      

When asked by a reporter for evidence that restricting low-skilled immigration would raise wages, Miller cited research by Harvard economist George Borjas on the Mariel Boatlift.  The Mariel Boatlift produced an unexpected surge of 125,000 Cubans (henceforth Marielitos) to Miami in 1980.  Because at least 60 percent of the Marielitos were high school dropouts, Borjas tested whether they lowered the wages of American dropouts. Since Borjas published his Mariel paper, there have been many rebuttals, criticisms, and additional research on it that should substantially diminish confidence in his findings.  Below I will briefly summarize these results.

The first such criticism is by economists Michael Clemens and Jennifer Hunt.  They conclude that the entirety of the wage decline observed by Borjas can be explained in how the wage survey in Miami increased the proportion of black workers surveyed, far in excess of their proportion of the population, when the Boatlift occurred (the CPS change was unrelated to the Boatlift).  Black American workers with less than a high school degree have lower wages than similarly skilled non-black Americans for myriad reasons that have nothing to do with immigration.  By including more of them in the survey at the same time the Marielitos were arriving made it look like there was a drastic wage decline when the observed effect was entirely due to shifting the demographics of the surveyed population.  That survey shift entirely explains the negative wage effect observed by Borjas.  Borjas’ response to Clemens and Hunt is weak.

The second criticism of Borjas’ Mariel Boatlift research is by economists Giovanni Peri and Vasil Yasenov.  They note that wages in Miami must be compared to wages in similar cities at the same time to measure how wages changed.  By selecting a set of comparison cities using the Synthetic Control Method, a different method than Borjas used, they found no statistically significant deviation in Miami’s wages compared to similar cities that did not absorb the Marielitos.  Furthermore, Borjas relied on smaller surveys with few relevant observations for Miami and other cities.  Peri and Yasenov used the larger to get even more data on wages.  Including the additional data also showed that the Marielitos did not lower wages.

Latest Voucher and Test Score Findings Are Not Negative

One might expect that a report with a title referring to “more findings about school vouchers and test scores” would include the latest studies. However, Mark Dynarski, a Senior Fellow at the Brookings Institution, and Austin Nichols, a Principal Associate of Social and Economic Policy at Abt Associates, recently argued that the new voucher evidence is negative, even though the two most recent studies in Louisiana and Indiana show null to positive effects on student achievement.

How did these researchers come to their counterintuitive conclusion?

It appears that the researchers did not include the two most recent evaluations of voucher programs in Figure 1 below, which is taken from their report. That would not be much of a problem if the title and body of the report did not indicate otherwise.

Figure 1: Findings from Four Current Studies of Vouchers and Eight Previous Studies

 

If the researchers simply used previous results, the article (and its title) should not indicate that the latest estimates from Indiana and Louisiana are used. Further, the forest plots should not indicate that multiple years of results are used.

So what does the experimental voucher research actually say?

Senators Propose Great Depression Era Legal Immigration Rates—Claim It’s the “Historical Norm”

Senators Tom Cotton (R-AR) and David Perdue (R-GA) are promoting their legislation titled “the RAISE Act” at the White House today. It would reduce immigration by 50 percent over 10 years by eliminating several categories of legal immigration. The legislation would reduce the per capita rate of immigration to the lowest amount since just after the Great Depression. Immigration would fall to a rate three times less than the historical average and 11 times less than the historical high.

Yet the senators claim that the RAISE Act would “restor[e] legal immigration levels to their historical norms.” This statement is so misleading that it borders on outright deception. The “level” is just the absolute number of immigrants each year. But this treats the number of immigrants in 1900 the same as the number of immigrants in 2017, despite the fact that the U.S. population quadrupled during that time. You have to control for the size of the country. It’s like saying a million immigrants to China is the same as a million immigrants to Estonia—despite the fact that China is 1,000 times more populous.

The figure below provides the true picture of the amount of immigration to the United States: the number of new legal permanent residents divided by the number of people in the United States (the per capita immigration rate). From 1820 to 2017, the immigration rate averaged 0.45 percent of the population annually. In 2017, that rate was 0.32 percent. In other words: 28 percent below the average historical rate. If the United States were to adopt the “historical norm,” it would need to raise immigration quotas by about the amount that RAISE lowers them: 411,000. By contrast, under the senators’ proposal, immigration would fall to 0.14 percent—more than three times less than the “historical norm.”

The figure below graphs the annual legal immigration rate from 1820—the first year that the U.S. recorded immigrant arrivals—to 2017. It assumes that the RAISE Act will actually be implemented in 2018 and uses the Census population projections to forecast the impact of the legislation through 2030. As it shows, the rate of immigration would dramatically drop in the first year and continue to fall until it reached a level not seen since just after World War II and far below the tradition of immigration prior to the progressive movement in the 1920s.

U.S. Per Capita Immigration Rates and Projected Rates Under the RAISE Act, 1820-2030

Foxconn’s Savvy Investment: Hedging against an Emerging Trade War

“Designed by Apple in California; Assembled in China” are the words engraved on the back of Apple’s ubiquitous iPods, iPads, and iPhones.  Might that soon change? 

Foxconn, the Taiwan-headquartered company that does Apple’s assembling in China, announced last week that it will invest up to $10 billion in production facilities in Wisconsin. That sounds like something to cheer. After all, investment is essential to economic growth and foreign direct investment tends to nourish the domestic commercial eco-system by bringing in companies with new ideas and better ways of doing things.

But Foxconn is in the business of contract manufacturing—producing, but mostly assembling, electronics products branded and owned by other companies. It’s not a high value-added operation requiring high-skilled workers. It’s the kind of supply chain operation better suited to economies with an abundance of low-skilled workers willing to work for much lower wages than Wisconsin’s work force expects to earn. Then again, economic considerations aren’t the only determinants of investment decisions.

Back in 2011 at a dinner in Silicon Valley, President Barack Obama asked Apple’s founder and CEO Steve Jobs why all of the production and assembly of the company’s products couldn’t be done in the United States. Jobs was a bit dismissive, responding that those kinds of jobs weren’t coming back. 

But the message wasn’t lost on other business executives, including GE’s Jeff Immelt, who was quick to announce repatriation of some operations that had recently been outsourced to China. The president was in a political jam and his reelection efforts might benefit if he were to show that U.S. companies were reshoring and bringing those manufacturing jobs back stateside.

Sens. Cotton and Perdue’s Bill to Cut Legal Immigration Won’t Work and Isn’t an Effective Bargaining Chip

Republican Senators Tom Cotton (AR) and David Perdue (GA) are unveiling a bill today at the White House that would slash the number of legal immigrants by about 50 percent over the next decade.  This bill will be very similar to the RAISE Act that both Senators introduced in February, which I criticized here.  Their new bill, if it is similar to RAISE, would cut legal immigration by about 50 percent by reducing family reunification, eliminating the diversity visa, and statutorily limiting refugees without increasing skilled-worker immigration.  So much for the talking point that immigration hawks are “only against illegal immigration.”

Cotton-Perdue Does NOT Create a Skills-Based Immigration System

Supporters are saying that this bill would create a “skills-based immigration” policy but nothing could be further from the truth.  Cotton-Perdue does not increase skilled immigration at all – it only cuts non-employment categories like families and the diversity visa while creating a points-based system for employment-based green cards that does not increase the numerical cap.  The new Cotton-Perdue bill would do nothing to boost skilled immigration and it will only increase the proportion of employment-based green cards by cutting other green cards.  Saying otherwise is grossly deceptive marketing.

President Trump stated that he wanted to create a merit or skills-based immigration system like in Canada or Australia, but the Cotton-Perdue bill would not come close to achieving that goal.  The immigration systems in Canada and Australia do emphasize skilled immigrants over family members but their immigration systems allow in far more immigrants, as a percentage of the population in both countries, than the United States.  It is important to control for the population of the destination country when comparing the relative openness of different immigration systems. 

New immigrants to Canada who arrived in 2013 were equal to 0.74 percent of that country’s population.  New immigrants to Australia in 2013 were equal to a whopping 1.1 percent of their population.  By contrast, immigrants to the United States in the same year equaled just 0.31 percent of our population.  The only OECD countries that allow in fewer immigrants relative to their populations than the United States are Portugal, Korea, Mexico, and Japan.  Seventeen other OECD countries allow in more immigrants than the United States as a percentage of their populations.

In 2013, the number of skilled-worker immigrants to Canada was equal to 0.18 percent of that country’s population.  If the Cotton-Perdue bill intended to copy Canada’s skills-based immigration system, then it would increase the number of annual employment-based green cards from the current level of about 75,000 to about 592,000 annually – a 7.9-fold increase in the number (Figure 1).  If the Cotton-Perdue bill wanted to copy Australia’s skills-based immigration system then it would have to increase employment-based immigration to about 852,000 annually – an 11.4-fold increase.