Archives: 02/2018

Could CBO Be Underestimating GDP Growth by 1%? They’ve Done It Before

From 1983 to 1999, the CBO issued two-year forecasts that added up to a 2.7% growth rate, which would now be widely dismissed as a “rosy” forecast. Yet actual growth averaged 3.7% from 1983 to 1999 – a full percentage point higher – despite a recession in 1991. Today, the CBO forecasts that even 2.7% economic growth is impossible, and claims only 1.9% is within reach. 

The Administration thinks the economy can grow a percentage point faster. The 2019 Budget estimates the economy will grow by 2.9% a year for ten years. The Committee for a Responsible Budget (CFRB) argues that this “strains credulity, especially if interest rates and inflation also remain under control, as the budget predicts they will.” [This appears to suggest higher inflation would be good for growth.]

“Given population aging and other economic fundamentals,” says the CFRB, “the United States is likely to ultimately achieve growth of 2 percent per year or perhaps less – not 3 percent. The Federal Reserve projects long-term sustained growth of 1.8 percent per year [1.7–2.2%], and the Blue Chip average for sustained growth is only slightly higher at 2.1 percent. Prior to the tax deal, CBO projected a long-run growth rate of 1.9 percent.”

Is the OMB unrealistic to estimate the economy can grow by 2.9% a year or is the CBO unrealistic to assume it can’t grow faster than 1.9%?

An Ounce of Rescission is Worth a Pound of Cure: The Proper Treatment for Texas Payday Lending

As a native Texan, I make an effort to stay current on the latest happenings in my home state. And even though the announcement by the Consumer Financial Protection Bureau that it will reconsider new federal rules that would regulate payday lending is national in scope, the nature of the affected industry means that the particular impact will inevitably vary from state to state. Accordingly, the recently published editorial by the San Antonio Express-News addressing the topic calls for a state-specific response.

The Editorial Board must have viewed its argument as a common sense, self-evident proposal: in order to cure the payday malady, we need more laws! But the argument that “Texas lawmakers need to step up their game next session” in the event these federal regulations are rescinded gets it exactly backward; what Texas needs is not more fix-one-problem-while-causing-two-more statutes. Instead, an epinephrine injection of vigorously enforcing good laws should be combined with the surgical removal of bad ones.

Texas has gone down the “just pass another law and fix it” road before on this issue, and this approach has consistently made things worse, not better. After the passage of the federal Fair Credit Reporting Act in 1970, an industry offering “debt repair” services emerged. Unfortunately, many debt repair organizations engaged in disreputable practices and, in order to combat the excesses of this industry, the Texas Credit Services Organizations Act was enacted in 1987. But the organizations (“CSO’s”) created and defined under this Act not only included businesses paid to improve a consumer’s credit rating, but also those involved in “obtaining an extension of consumer credit for a consumer.” After the FDIC issued new guidelines on payday lending in 2005, Texas payday lenders sought to avoid these and other restrictions by registering and operating as CSO’s. And now, in an effort to fix the problem caused by the CSO statute, which itself was designed to fix a supposed problem in the Fair Credit Reporting Act, we are told that yet another statute must be passed. Who is actually gullible enough to think that this new “fix” will not again create at least as many new problems as it supposedly solves? It’s deja vu all over again.

A Free Trade Valentine

Today millions of Americans will celebrate Valentine’s Day by purchasing roses for their loved ones and, in so doing, will participate in one of the everyday miracles of capitalism which too often escape our notice. As a recent Washington Post article points out, these roses will most likely have been grown thousands of miles away in Colombia, flown to the United States aboard cargo jets, and then delivered to florists and other retailers at the cost of a mere $1.50 per stem. That this is possible is not only a tribute to the magical powers of capitalism, but—as the newspaper notes—free trade and a 2012 agreement between the United States and Colombia which permanently lifted U.S. import tariffs on Colombian flowers. Indeed, a close reading of the piece reveals some of the many advantages of free trade and the benefits it confers.

Among them: 

Imports save consumers money: One of the most straightforward benefits of free trade is the reduced cost to consumers for the goods they purchase as a result of reduced tariffs and the ability of businesses to develop more cost-effective supply chains. By importing flowers from Colombia, according to the article, the price of roses has been kept almost unchanged for decades with a dozen red roses often available this week for less than $20.

Imports create jobs: Unsurprisingly, the growth of Colombia’s flower industry has helped provide jobs in that country—to the tune of 130,000 according to The Washington Post (including, it seems, for thousands of Venezuelans fleeing from that country’s experiment in socialism). Often overlooked, however, is that imports also create new employment opportunities for Americans, both through the actual process of importation and as an intermediate good. The numerous planes full of flowers, for example, require logistics personnel to offload, store, and transport them to their final destination. Cheaper flowers, meanwhile, mean increased sales and more workers at the distributors and retailers which carry them. Indeed, the article cites the example of the USA Bouquet Company in Doral, Florida which employs 75 workers to put “imported red roses into vases and then carefully [pack] them in boxes for a Valentine’s shipment to Walgreens.”

Gains from specialization and comparative advantage: Free trade between countries allows for specialization and an increased focus on those areas in which each country enjoys a comparative advantage. In this example, Colombia enjoys a comparative advantage in the growing of roses and other flowers which, as the article points out, is a major factor behind the decline of U.S. rose production. Unmentioned, however, is that increased trade between the United States and Colombia—up 95 percent since 2006—has led to billions of dollars in exports in sectors where Americans enjoy a comparative advantage, such as agriculture, machinery, and computer software. In addition, competition from Colombian growers has forced American businesses to adapt and move higher up the value chain to areas where they might have a comparative advantage within the flower sector. As a result, the article notes that the price of U.S.-grown roses has “ticked up in recent years because U.S. growers have focused primarily on higher-end roses that are designed for weddings and special events.”

If heartache is to be found in this free trade valentine it is that the trade agreement signed with Colombia is the last to have been approved by Congress (along with free trade agreements with Panama and South Korea, all of which were passed on October 12, 2011). While President Trump has promised the conclusion of additional bilateral agreements, new negotiations have yet to be initiated. That’s unfortunate, and we should hope that 2018 will see a new push on this front. Colombian roses are but one beautiful example of the gains to be had from tariff-free access to the world’s offerings, and Americans deserve access to all of them.

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No, Mr. President, American Steel Protectionism Hasn’t “Worked” in the Past

Today, President Trump hosted several members of Congress to discuss his possible plans for imposing new restrictions on steel and aluminum imports under “Section 232” of US trade law. Amidst that discussion comes this nugget, via Politico Pro[$] (emphasis mine):

The president was equally dismissive when Sen. Lamar Alexander (R-Tenn.) brought up the negative consequences of former President George W. Bush’s decision to restrict steel imports in 2002.

“The effect was it raised the price of almost all steel in the United States,” leading to job losses in the auto-parts sector and among other manufacturers, Alexander said. “There are ten times as many people in the steel-using industry than steel-making.”

Trump shrugged off the complaint. “It didn’t work for Bush, but it worked for others,” he said. It was not clear, based on a pool report of the closed-door conversation, whether he explained that point.

I guess it was good of the President to acknowledge the widely-known costs that the Bush Administration’s 2002 steel safeguards imposed on American consumers and companies.  However, the President is sorely mistaken to assume that other instances of US steel protectionism turned out much better.  Indeed, as I wrote in my 2017 paper on the historical failures of American protectionism, the US steel industry has for decades gone to the government trough for new restrictions on its foreign competition, and the results these import measures are always the same: immense consumer costs and very few, if any benefits to the industry and its workers.

For example, multiple academic studies in the 1980s showed that efforts to restrict imports of various steel products annually cost American consumers between $200,000 and $2.3 million (2017 Dollars) for every US steel industry job protected:

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Cut HUD, Fix Housing

The Trump Administration FY 2019 budget was released yesterday. Among other reductions to spending, the Department of Housing and Urban Development (HUD) would be cut by more than 14 percent if Congress implements the administration’s recommendations.

That’s a very big “if” indeed. Congressional Republicans are not in the mood to make difficult budget cuts these days. Still, howls of anger have gone up across Washington, D.C. at the mere suggestion of a cut to HUD. Advocates maintain that HUD needs more money, certainly not less.

That’s because many housing activists misunderstand housing policy. In reality, “subsidize-your-way-to-affordability” has driven HUD’s approach to housing for decades and hasn’t meaningfully improved the housing affordability landscape. In fact, by HUD’s own measure the proportion of households spending more than 30 percent of household income (also called cost-burdened households) is rising over time.

Figure 1: U.S. share of cost-burdened households is not improving

figure 1

 

Worse yet, HUD’s subsidies have arguably actively undermined housing affordability and will continue to do so. That’s partly because subsidies don’t address root causes of the affordable housing shortage.

Zoning regulations contribute to housing shortages in major cities, and this drives up housing costs by an estimated 30-50 percent in some locales. But HUD rewards cities that have more restrictive zoning and land use regulations with greater housing subsidies. For example, HUD provides around 2x the housing subsidy dollars to the most restrictively zoned states as compared with the least restrictively zoned states.

Figure 2: Federal housing affordability spending is highest in the most-regulated states

figure 2

Source: “2017 Budget State-By-State Tables,” Office of Management and Budget, 2017. This pairs the author’s 2015 state rank with 2015 budget numbers. Dollar values include Section 8 housing vouchers, Public Housing Operating Fund, and Public Housing Capital Fund spending.

The Trump administration’s proposed cuts would reduce existing counterproductive incentives for states. As it stands, housing subsidies act as a convenient political distraction for local politicians. With reduced HUD subsidies, states and local municipalities will be forced to confront the natural consequences of restrictive local regulations. 

Nowrasteh on a DACA Fix That’s “Worse than Nothing”

In an op-ed published yesterday at The Hill, Alex Nowrasteh wrote about why a bill working its way through the U.S. House of Representatives may be one of the most anti-immigration bills in decades. With both chambers of Congress now looking to make good on promises to provide a legal framework for the roughly 700,000 DREAMers impacted by President Trump’s decision last year to rescind DACA, many House Republicans are pledging to support the Securing America’s Future (“SAF”) Act. 

Democrats may not support the SAF Act, but Nowrasteh notes that it will likely represent a line in the sand for many Republicans as negotiations proceed. The problem? “As a so-called DACA fix,” he writes, “the SAF Act barely measures up.”

It would provide DREAMers with temporary and renewable residency permits—in other words, short-term reprieves. And in return, DREAMers would face a new set of restrictions, including the requirement that they maintain an income 125 percent higher than the poverty line.

The SAF Act also makes major cuts to legal immigration categories:

[It] inexplicably cuts legal immigration, reducing the number of immigrants by as much as half after 10 years. Among the categories cut are the diversity green card, which is completely eliminated, as well as most family-sponsored immigrants. Asylum seekers will also get a significant chop under the bill.

Under the new SAF Act status quo, immigration would allow fewer skill-based immigrants, due to the move away from the green card system’s growing tendency to select educated workers. It also means that immigrants might risk separation from their family—the SAF Act would make it almost impossible for green card recipients to sponsor their spouse or children if their marriage or the child’s birth occur after the green card is conferred.

And as a cherry on top, the SAF Act allocates to border security approximately $124 billion over five years. This is dozens of times more money than Border Patrol spent last year, and at a time when illegal crossings at the border are at a nadir.

There’s no way to sugarcoat the SAF Act as any kind of concession or compromise. It is give and take, with an emphasis on take. 

As Nowrasteh concludes, there are better ways for Republicans in Congress to do something about the plight of DREAMers. Lawmakers should propose DACA fixes that don’t drastically reduce the number of legal immigrants.

You can read the full piece here.

Privatization in Trump’s Budget

President Trump’s new budget for 2019 proposes privatizing federal assets such as airports, air traffic control, and electricity facilities.

The budget’s infrastructure section suggests that Congress “Authorize Federal Divestiture of Assets that Would Be Better Managed by State, Local, or Private Entities.”

It continues:

The Federal Government owns and operates certain infrastructure that would be more appropriately owned by State, local, or private entities.

For example, the vast majority of the Nation’s electricity needs are met through for-profit investor-owned utilities. Federal ownership of these assets can result in sub-optimal investment decisions and create risk for taxpayers.

Providing Federal agencies authority to divest of Federal assets where the agencies can demonstrate an increase in value from the sale would optimize the taxpayer value for Federal assets. To utilize this authority, an agency would delineate how proceeds would be spent and identify appropriate conditions under which sales would be made. An agency also would conduct a study or analysis to show the increase in value from divestiture. Examples of assets for potential divestiture include—

  • Southwestern Power Administration’s transmission assets;
  • Western Area Power Administration’s transmission assets;
  • Ronald Reagan Washington National and Dulles International Airports;
  • George Washington and Baltimore Washington Parkways;
  • Tennessee Valley Authority transmission assets;
  • Bonneville Power Administration’s transmission assets; and
  • Washington Aqueduct.

These reform ideas are straight out of Cato’s playbook. The administration also renews its call to privatize the air traffic control system. That is, “shift the air traffic control function of the Federal Aviation Administration to a non-governmental, independent air traffic services cooperative.”

These studies provide background to the proposed reforms:

The budget also proposes reforms to allow for the “disposition of federal real property,” and you can read about that topic in this detailed study of federal privatization.

So regarding all those “sub-optimal investment decisions,” I say enough! We should move assets into the private sector and unleash entrepreneurs on America’s transportation challenges.