201807

July 31, 2018 4:43PM

Mexico Is Not Sending Its Murderers: Homicide Rates on the Mexican Border

President Trump tweeted this morning that, “One of the reasons we need Great Border Security is that Mexico’s murder rate in 2017 increased by 27% to 31,174 people killed, a record! The Democrats want Open Borders. I want Maximum Border Security and respect for ICE and our great Law Enforcement Professionals!”  He tweeted this because he’s spent the last few days stating that he would shut down the government if Congress did not adopt his proposed immigration reforms in the upcoming budget debate, especially the funding for the construction of a border wall.

Besides the political motivation for his tweet, President Trump seems to have assumed that crime in Mexico bleeds north into the United States, so more border security is required to prevent that from happening as murder rates begin to rise again in Mexico.  Although illegal immigrant incarceration rates are lower than they are for natives, illegal immigrant conviction rates in the border state of Texas are lower for almost every crime including homicide, and the vast majority of evidence indicates that illegal and legal immigrants are less crime-prone than natives, the President’s specific claim that murder rates spread from Mexico to the United States is different from most of the existing peer-reviewed literature. 

My colleague Andrew Forrester and I ran some simple regressions to test whether higher homicide rates in Mexican states that border the United States spread northward to U.S. states on the other side of the border.  It doesn’t make much sense to compare Mexican crime in the Yucatan Peninsula with that in Maine but, if President Trump’s theory is correct, then we should expect to see it cross from Baja California to California, for instance.  Homicide data for the Mexican border states come from the Mexican National Institute of Statistics and Geography.  American homicide data come from the Uniform Crime Reporting statistics at the FBI (files here).  Homicide rates in states in both countries are per 100,000 state residents which allows an apples-to-apples comparison.  We used data from 1997 through 2016 but were not able to include 2017 because U.S. crime data is still unavaiable for that year.  We decided to look exclusively at U.S. and Mexican border states because those are where we would expect crime to bleed over if such a thing happened. 

Figure 1 shows a negative relationship between homicide rates in U.S. border states and Mexican border states with a negative correlation coefficient of -0.46.  The coefficient is nearly identical when American homicide rates are lagged one year.  Although we did not include other controls, there is a negative relationship between homicides on the American side and the Mexican side.  In other words, when Mexican homicide rates go up then American rates tend to go down and vice versa.     

Figure 2 shows the same data but with years on the X-axis.  Mexican border state homicide rates vary considerably over time, especially when that government decided to try to crack down on drug cartels, but U.S. border state homicide rates trended slowly downward over the entire time.  There is a negative relationship between Mexican homicide rates and homicide rates in U.S. border states. 

Our figures and regressions above might not be capturing the whole picture.  Perhaps crime travels from Mexican border states and goes directly into the U.S. state that it is bordering.  That could be the source of President Trump’s worry.  We tested that in Figures 3-6 where we looked at how homicide rates in Mexican states contiguous to U.S. states are correlated with homicide rates there. 

Figure 3 shows homicide rates in the Mexican state of Baja California and in the American state of California.  There is a negative correlation coefficient of -0.66 between homicide rates in Baja California and in California, meaning that homicide rates move in the opposite directions in these two states.    

Figure 4 compares homicide rates in Arizona with those in Baja California and Sonora.  Homicide rates between Baja California and Arizona have a correlation coefficient of -0.69, meaning that homicide rates in Baja California and Arizona generally move in opposite directions.  Homicide rates in Arizona and Sonora have a correlation coefficient of +0.20, which means that they somewhat move in the same direction. 

It’s important to point out that the Sonoran homicide rate moves in roughly the same direction as Arizona’s homicide rate because Sonora’s rate mostly declines over the entire period and varies little by year just as Arizona’s rate does.  The Sonoran homicide rate will most closely track homicide rates in other American states for that reason but that does not show that Mexican murderers are crossing the border because Sonora is not as affected by the violent homicide swings that seem to dominate homicide rates in other Mexican states.  The Sonoran homicide rate comoves with Arizona’s homicide rate since they are both less volatile over time.

Figure 5 shows that homicide rates in New Mexico are positively correlated with those in Sonora at Chihuahua with coefficients of +0.40 and +0.05, respectively.  New Mexico’s homicide rate is more erratic and has a higher standard deviation than the other American states. 

Homicide rates in Texas are negatively correlated with homicide rates in the Mexican states of Coahuila, Nuevo Leon, and Tamaulipas with correlation coefficients of -0.79, -0.79, and -0.36, respectively.     

Correlation is not causation, especially in these simple regressions, but it would be very difficult to show that Mexican homicide rates are driving or at least influencing those in U.S. border states without at least finding a positive correlation.  The p-values in all of the above figures are all so high that the correlations are statistically insignificant in every case.  Researchers should dig into this data further to tease out more precise estimates or effects, but they are not significant or interesting enough for us to spend more time on them.  There are, of course, individual circumstances of Mexican criminals committing crimes in American states but that does not tell us how common those events are or whether President Trump’s proposed solutions would have any impact.  If the past events are any indication of the future, our work above allows us to confidently say that there is little reason to worry that homicide rates in Mexican border states will influence homicide rates in U.S. border states.  Whatever potential justifications there are for an expensive border wall, preventing the spread of homicide northward shouldn’t be one of them.      

Special thanks to Andrew Forrester for his help in writing this piece.

July 30, 2018 7:08PM

Why All Went Quiet on the Western Trade Front

Although many hailed last week’s “trade agreement” between President Trump and European Commission President Jean-Claude Juncker as an important achievement, it included no firm commitments to reduce tariffs, non-tariff barriers, or subsidies—or to do anything for that matter. The only agreement of substance was that new tariffs would not be imposed, while Washington and Brussels negotiated longer-term solutions to problems both real and imagined.

Those hungering for some good trade news might call that progress, but the only new tariffs that were under consideration (outside the exclusive domain of the president’s head) were those related to the Commerce Department’s investigation into the national security implications of automobile and auto parts imports. Of course, that investigation is still proceeding and there’s no reason to think Trump won’t leverage the threat of imposing auto tariffs to bend the outcome of those EU negotiations in his favor.

So what does Trump want? Trump seems committed to prosecuting a trade war with China and he expects the EU to have his back in that fight. Trump’s tariffs on $34 billion of Chinese products are scheduled to expand to $50 billion in early August and potentially to $250 billion in September. In a recent CNBC interview, Trump even threatened to subject all Chinese goods—more than $500 billion worth of imports in 2017—to additional tariffs.

For the first $34 billion, China has retaliated in kind, targeting mostly agricultural, aquaculture, and meat products. Beijing has pledged to go tit-for-tat throughout, even though its retaliation would have to take other forms—such as penalizing U.S. multinationals operating in China—because annual U.S. exports to China are in the neighborhood of only $130 billion.

The only real factor constraining Trump's trade war is the potential that workers in red states will abandon the cause and turn on him. But so far, even as domestic production and employment are threatened as a consequence of the tariffs and the retaliation, Trump’s base still seems to be supporting his unorthodox, zero-sum approach to trade. Last month, a worker at Wisconsin’s Harley-Davidson facility, which will be downsizing as the company shifts production to Europe as a result of the EU’s retaliatory tariffs, said of Trump: “He wouldn’t do it unless it needed to be done, he’s a very smart businessman.” That worker and many others agree that the United States should be throwing its weight around to obtain a larger slice of the pie—even if that process ends up reducing the overall size of the pie.

In a effort to fortify that support, last week the administration authorized $12 billion of emergency relief for U.S. farmers caught in China’s retaliatory fire. Plans for financial relief for other industries similarly imperiled by retaliation are likely in the works and Trump expects the EU to do its part by picking up the slack and purchasing more U.S. soya, natural gas, and other commodities and manufactures previously destined for China. 

That may seem presumptuous, given that Trump has hit Europe with steel and aluminum tariffs, threatens her with auto tariffs, and called Europe a foe on the eve of his Helsinki meeting with Putin. Why would the EU oblige? That would seem to only encourage more of Trump’s passive-aggressive behavior.

Well, first, the EU wants to avoid the auto tariffs, which threaten the global auto market and, second, it shares many of the same concerns about China’s trade practices. But there’s only so much Europe can do to absorb excess U.S. supply. Will Trump insist that Germany cancel its gas contracts with Russia?  That would be an interesting twist. Will it be enough? Or will Trump deem the EU ungrateful and kill the auto trade?

The best we can hope for, I think, is that Trump comes to realize that if he wants to apply effective pressure on Beijing to abandon its most objectionable policies and to open its markets without onerous conditions, he will need the support—not the ire—of the governments of the EU, Japan, Korea, Canada, and Mexico to compel China to play by the rules. That means ditching the steel and aluminum tariffs and making nice. Then, maybe Trump will recommit the United States to abiding by those rules, too.

 

 

July 30, 2018 3:16PM

There’s No Such Thing as a Trade Deficit

Concerned with how trade is commonly discussed, Greg Mankiw recently issued a plea to journalists to halt the use of subjective terms to describe trade flows. Rather than words such as “deteriorated” or “improved,” the Harvard economics professor (and noted textbook author) proposes that writers employ more objective language such as “the trade balance moved towards surplus.”

Mankiw’s plea is fine as far as it goes, but it probably doesn’t go far enough. The problem in the way trade is discussed lies not only in the descriptions applied, but the nouns themselves.

To speak of trade surpluses or deficits is utterly nonsensical, or at the very least a corruption of the term “trade” that incorrectly uses it as a synonym for “exports.” Trade, however, comprises both selling and buying, both exports and imports. The amount of trade between two countries (or any other group of entities) is the sum of their exports and imports. Given that both sides engage in the same amount of bilateral trade—that is to say, the same total of exporting and importing—a trade deficit is a mythical beast and logical impossibility. Perhaps we can speak of net exports or net imports, or export deficits and import surpluses as well as their reverse, but “trade deficit” should be regarded as a term devoid of real meaning.

Talk of a trade balance either being in surplus or deficit is problematic for similar reasons. Occasionally, one may encounter the descriptor “positive” applied to the trade balance if exports exceed imports and “negative” if the opposite occurs. But—as with trade deficits and surpluses—this is completely arbitrary. It makes no more sense to say this than to characterize a surplus of imports as positive or exports exceeding imports as negative.

This is no exercise in pedanticism. Precision of language is important. Terms matter, and the way in which trade is discussed influences how it is perceived. One can’t help but wonder how many people have an irrational fear of imports because they are said to contribute to a “trade deficit” or a “negative trade balance”—terms laden with unfavorable connotations. It’s not difficult to imagine that U.S. trade policy would be on a very different trajectory if President Trump spent his formative years in a world that did not speak of trade deficits and instead used more exact language and terms.

It may be too late for Trump, but a change in terminology could go a long way toward improving the conversation around trade and clearing the path for better policy.

July 30, 2018 10:06AM

Birthright Citizenship Slightly Boosts Immigrant Assimilation: What the Research Says

Former White House national security official and Hillsdale College lecturer Michael Anton wrote an op-ed recently in the Washington Post where he used falsified quotes, poor legal reasoning, and displayed ignorance of the history and debates surrounding the 14th amendment to argue that President Trump should unilaterally end birthright citizenship (here’s Anton’s poor response to the devastating criticisms). 

Few commentators discussed what the actual effects of removing birthright citizenship would be and instead focused on the comparatively unimportant legal questions.  As an exception, my piece for the American Conservative argued that such a move would diminish immigrant assimilation in the United States.  However, I neglected to mention any of the social science that backed up my assertion in the American Conservative.  Below is a short summary of the relevant literature of the evidence that birthright citizenship helps immigrant assimilation.   

There are more assertions that birthright citizenship helps immigrant assimilation and integration than there are individual research papers testing the claim.  The major measures of assimilation or integration, both internationally and domestically, consider citizenship important.  The National Academies of Sciences (NAS) mammoth literature survey on the integration and assimilation of immigrants in the United States mentions birthright citizenship but never cites research backing up assimilations claims.  “Birthright citizenship is one of the most powerful mechanisms of formal political and civic inclusion in the United States,” the report says without any supporting evidence.  Later, the authors state, “Birthright citizenship is one of the most powerful mechanisms of formal political and civic inclusion in the United States; without it, the citizenship status of 37.1 million second-generation Americans living in the country (about 12% of the country’s population), and perhaps many millions more in the third and higher generations, would be up for debate.”  Again, the report does not provide any support for how powerful a mechanism for assimilation birthright citizenship is except to show that many people born here would not be citizens. 

Perhaps the NAS report doesn’t report on how citizenship affects assimilation and integration because the United States has had birthright citizenship for a long time.  Because of that continuity of policy, there is no experiment to run in the United States to test the importance of birthright citizenship for assimilation.  However, there are three suggestive pieces or strands of literature in the American context.  The first is Immigrants Raising Citizens where the author, Hirokazu Yoshikawa, writes that citizenship confers enormous benefits on the children of immigrants but the non-citizen status of their parents limits their ability to help them succeed. 

The second piece is the academic literature (see ft. 9) that shows that earning legal immigration status through an amnesty or DACA, even if it results in a status less than citizenship, confers enormous assimilative and economic benefits on the beneficiaries.  DACA and amnesties are better experiments to test the importance of citizenship or legal status by itself rather than normal naturalization because studies of the former policies remove the endogeneity concern while studies of the latter variety are plagued by it.  That’s a concern because people who choose to naturalize are probably different than those choosing not to, and those differences probably explain assimilative or economic outcomes better than the actual grant of citizenship.

The third piece, a book chapter by Irene Bloemraad, has a section based on interviews with many U.S.-born children of immigrants and what they think it means to be an American.  A common answer is that being born in the United States makes them an American.  One respondent said “we are all 100 percent Americans, we were born here. No matter what people say, we are Americans.”   Another telling exchange went like this:

One Vietnamese American teen’s response was typical.  Asked why he thinks of himself as America, he seemed a bit puzzled and said, “Because I was born here.”  This sort of response – repeated among a fair number of the teens – did not involve discussion of civic principles of cultural habits.  U.S. birth was enough or this teen to feel like he was American.

The third sentence of that quote may worry some folks concerned about the assimilation of the children of immigrants, but I doubt almost any other American-born teen would have answered differently.  Compared to Real Americans and not to the Imagined Americans of nationalist lore, birthright citizenship appeared to have helped here. 

However, the United States is not a great place to study the effects of birthright citizenship because we have not had a shift or reinterpretation in those rules in over a century.  Some countries like Ireland, the Dominican Republic, and Germany, have recently changed their citizenship laws to restrict birthright citizenship, also known as jus soli, and provide a quasi-natural experiment to study these effects

Germany provides the best opportunity to study the effects of birthright citizenship on assimilation.  The German Citizenship and Nationality Law of 1913 only granted citizenship to those who had at least one parent who was a German citizen at the time of the child’s birth.  In 1999, the German parliament amended that law to create a birthright citizenship component for children born on January 1, 2000, or after if at least one parent had been ordinarily resident in the country for at least eight years.  The law also created a transition period for many children born from 1990 through 2000 to naturalize if they met the requirements of the new law. 

This change in German citizenship law prompted a flood of research on how the new law affected immigrant assimilation in Germany.  Economists Ciro Avitabile, Irma Clots-Figuera, and Paolo Masella looked at how the new German law affected parental integration in a peer-reviewed paper published in the prestigious Journal of Law and Economics.  Their paper used responses from the German Social Economic Panel Survey to see how immigrants whose children were affected by the new citizenship law changed their behavior relative to those unaffected by the change in the law.  It focused on measurements of interactions with Germans (visiting or being visited by a German in a social situation), speaking German, and reading German newspapers.  On all three metrics, the immigrant parents of children who could naturalize became more integrated. 

The effects were small but noticeable.  The percentage of immigrant parents who had interactions with Germans rose from 71 percent prior to the reform to 77 percent afterwards, spoken German ability rose from 65 percent prior to the reform to 69 percent afterwards, and reading of German newspapers increased from 2.6 to 2.9 on a five-point scale (1 is home country papers only and 5 is German papers only).  Importantly, the measure of speaking German doesn’t control for fluency.  They also found that the outcomes are larger for immigrants who came from a country that speaks an Indo-European language.  Importantly, Turkish is not an Indo-European language.  For those from a non-Indo-European language group, the reform had no effect on language but it increased their interactions with Germans to the same degree as for the Indo-European language users.  

Taking a wider view of the impact of this law in Germany, Ciro Avitabile, Irma Clots-Figuera, and Paolo Masella, the same economists mentioned above, published a peer-reviewed paper in the American Economic Journal: Applied Economics that looked at how child citizenship laws affected fertility decisions amongst immigrants.  Fertility is influenced by culture, so many social scientists and economists think it is an important indicator of immigrant assimilation.  Consistent with Gary Becker’s “quality-quantity” model of fertility, they found birthright citizenship reduced immigrant fertility and improved their health by reducing obesity and the social-emotional outcomes of the children affected.  Again, the effects are small but citizenship reform moved immigrants closer toward German fertility and health norms.

Gathman, Keller, and Monscheuer also looked at fertility and family structure.  They found that within 7.2 years of eligibility for citizenship, the immigrant-native fertility gap fell by 20 percent by raising the age of first births to immigrant mothers and reducing the likelihood of them having children.  The citizenship reform also narrowed the marriage gap between German and immigrant women by 45 percent and German and immigrant men by 50 percent.  Immigrant women were also more likely to marry men who were not from their own country of origin after the reform but the effect was small.

Felfe, Rainer, and Saurer found that immigrant parents enroll their children in preschool at a higher rate after the citizenship reform, closing the gap with native Germans.  They also enrolled them earlier in primary school and pushed their children into the university track at higher relative rates.  Further, reported “attention deficits” and “emotional problems” for the children of immigrants also decreased in schools relative to natives while there was no effect on reported “social problems,” “German language proficiency,” or “school readiness.”  Another working paper by Felfe, Kocher, Rainer, and Siedler found that the educational achievement gap between young immigrant men and their native peers nearly closes due to the reform.

The granting of citizenship to immigrant children also reduces return migration, increases the rate of mothers stay at home with their children among the parents whose children were affected, and reduces or almost closes the trust gap between immigrant children and native children in behavioral experiments – virtually eliminating in-group favoritism for immigrant boys.  

The relatively few cases of citizenship laws changing in countries with large numbers of immigrants limit the opportunity to study how immigrants and their children are affected by birthright citizenship.  The United States has not changed its policy on birthright citizenship in over a century so any attempt to study the impact of jus soli here would be constrained to cross-country comparisons.  However, legal changes in Germany provided a quasi-natural experiment with the result that birthright citizenship slightly improves immigrant assimilation and integration but it is not, by any means, a panacea.  The evidence from research on how birthright citizenship affects assimilation shows a generally positive impact and policymakers should assume that ending the practice in the United States will negatively affect assimilation here.   

July 27, 2018 12:16PM

New Lawsuit Would Increase Legal Immigration

A prominent law firm—Kurzban, Kurzban, Weinger, Tetzeli and Pratt, P.A.—filed a lawsuit Wednesday that has the potential to reshape legal immigration in a significant way. I submitted an expert affidavit in support of the lawsuit, which the lawyers cite in their motion for a preliminary injunction. The suit challenges the government’s unlawful practice of counting spouses and minor children against the green card limit for EB-5 investors—an issue I have written extensively about in prior posts.  

The EB-5 program allows almost 10,000 foreign nationals to receive permanent residence (i.e. a green card) if they invest up to $1 million in a new business that creates 10 jobs. In fiscal year 2014, the government announced that investors reached the annual quota for the first time, and a large backlog has developed. However, the government has chosen to reduce the quota by the number of spouses and children of the investors.

As Table 1 shows, 64.4 percent of those who received permanent residence under the program from 2014 to 2017 were the spouses and children of the investors. Thus, this practice has effectively reduced the quota for investors by almost two thirds.

Table 1: EB-5 Investors, Spouses, and Children Receiving Legal Permanent Residence


 

2014


2015


2016


2017


Totals

Spouses

2,521


2,424


2,229


2,296*


9,470

Share Spouses

23.5%


23.8%


22.6%


23.3%*


23.3%

Children

4,267


4,159


4,204


4,048*


16,678

Share Children

39.8%


40.8%


42.6%


41.1%*


41.1%

Derivatives

6,788


6,583


6,433


6,345*


26,149

Share Derivatives

63.3%


64.6%


65.2%


64.4%*


64.4%

Principals

3,935


3,605


3,430


3,510*


14,480

Share Principals

36.7%


35.4%


34.8%


35.6%*


35.6%

Total

10,723


10,188


9,863


9,855


40,629

Sources: I-526 Principals and derivatives from Department of Homeland Security, 2014, 2015, 2016, 2017; *2017 derivative-primary shares estimated based on the average during the prior three years

As outlined in the complaint and motion for a preliminary injunction, this practice has no basis in law. Subsection (b)(5) of section 203 of the Immigration and Nationality Act specifies:

Visas [i.e. green cards] shall be made available, in a number not to exceed 7.1 percent [i.e. 9,940] of such worldwide level [i.e. 140,000], to qualified immigrants seeking to enter the United States for the purpose of engaging in a new commercial enterprise….

Subsection (b)(5) provides no green cards whatsoever to spouses and children of investors. This means that all of those visas should be available to the investors themselves. Only later in a separate provision—subsection (d) of section 203—are green cards provided for spouses and minor children of those immigrants:

A spouse or child. . . shall, if not otherwise entitled to an immigrant status and the immediate issuance of a visa under subsection (a), (b), or (c), be entitled to the same status, and the same order of consideration provided in the respective subsection, if accompanying or following to join, the spouse or parent.

Nothing in this provision applies the EB-5 cap under subsection (b)(5) or any other cap to the spouses and minor children. The government cannot simply create a quota where Congress has not provided one. Indeed, as I’ve written before, members of Congress in 1990—when the EB-5 program was created—explicitly envisioned spouses and children not counting against the quota. They made exact predictions of how much investment would be made based on the belief that fully 10,000 investors would enter under the new law.

Not only that, but the requirement that spouses and children receive the “same order of consideration” requires that they not be subject to the cap. The law defines “order of consideration” as “immigrant visas made available under subsection (a) or (b) shall be issued to eligible immigrants in the order in which a petition on behalf each such immigrant is filed…” In other words, the line is entirely determined by the date when the principal applicants—the investors—file their petitions “under subsection (b)”. The derivatives—spouses and minor children—are not part of the “order” at all. They get the same spot in line as their spouse or parent.

Obviously, this lawsuit would be a big win for investors and their families if it succeeds. Based on my calculations in my affidavit, nearly half of those involved in this lawsuit alone will have children reach adulthood during this time and lose their eligibility. New applicants applying this year face nearly 16 years to wait if they applied this year, meaning that anyone with a child over the age of 5 will never be able to immigrate.

As importantly, this legal analysis applies with equal force to all the other major immigration categories—family-sponsored, employer-sponsored, and diversity lottery winners—so a good outcome in this case would set a precedent that immigrants in those categories could use to have their spouses and children excluded from the quotas as well. This outcome would immediately boost immigration levels by about 40 percent, and over time, as new immigrants enter and are able to sponsor their parents after becoming citizens, this share would grow even further.

July 27, 2018 9:08AM

About those EU Trade Concessions…

As Simon Lester noted, President Trump and European Commission President Jean-Claude Juncker caught the world by surprise Wednesday when they announced a step back from the rapidly escalating trade war between the United States and European Union.

In his statement, Trump added this bit of news:

And the European Union is going to start, almost immediately, to buy a lot of soybeans—they’re a tremendous market—buy a lot of soybeans from our farmers in the Midwest, primarily. So I thank you for that, Jean-Claude.

… Secondly, we agreed today to a strengthen and [sic] strengthening of our strategic cooperation with respect to energy. The European Union wants to import more liquefied natural gas—LNG—from the United States, and they’re going to be a very, very big buyer. We’re going to make it much easier for them, but they’re going to be a massive buyer of LNG, so they’ll be able to diversify their energy supply, which they want very much to do. And we have plenty of it.

Simon qualified that news in his post: “This was probably going to happen anyway because of market shifts and other factors.”

To say the least.

Concerning soybeans, a month ago Bloomberg explained that EU imports of the crop are set to rise dramatically as a result of another U.S. trade war, in this case with China. China has slapped retaliatory tariffs on U.S. soybeans, and Brazil is set to supplant the United States in that market. American farmers now have a surplus of soybeans—which the EU is happy to buy so long as the price is right.

This is reminiscent of the Arab oil embargo of the 1970s. In that case, the Arab states simply sold their oil to someone else and the United States bought its oil from someone else. (Well, we would have, if we hadn’t messed things up by putting a price cap on oil.)

Commodities like oil and soybeans move in world markets, and so if one particular buyer and one particular seller aren’t getting along, there are plenty of other buyers and sellers to step in, so long as someone’s willing to pay for the extra handling costs. (Don’t be surprised if Chinese consumers and U.S. farmers are the ones stuck with those costs for the soybeans.)

So the soybean “concession” is really just the EU doing what it was going to do anyway.

The same goes for LNG. Ever since the innovation of hydraulic fracturing dramatically increased U.S. natural gas supplies, producers have looked to sell the hydrocarbons on the world market using giant (and technologically amazing) LNG carrier ships.

Europe is a blossoming market for LNG. Its traditional natural gas source around the North Sea is beginning to tire, public opposition to fracking in Europe is strong (despite the continent’s enormous potential supplies), and though Russia is ramping up its pipeline exports to the continent, Europeans are understandably uneasy about becoming dependent on Russia. Also, the continent is trying to move away from coal and, in Germany, nuclear power as sources of energy, in favor of renewable sources. As Peter Van Doren explained earlier this week, renewables require a backup energy supply that can be dispatched quickly: natural gas is an ideal backup.

As a result, Europe has begun importing LNG from the United States. Lithuania and Poland—two nations that know well the games Russia can play—received their first shipments of American LNG last year. Expect more European nations to follow suit…

…if, of course, the economics work, which Juncker later noted:

"We are ready to invest in infrastructure, new terminals, which could welcome imports of LNG from the United States and elsewhere, but mainly from the United States, if the conditions were right and price is competitive,” he said in a speech at the Center for Strategic and International Studies later Wednesday.

So the LNG “concession” is also just the EU doing what it was going to do anyway.

Did Juncker pull one over on Trump? That’s doubtful. Even if the president is not aware of the world market trends in soybeans and LNG, his advisers certainly are.

Instead, Juncker probably helped Trump out, and in turn helped out both Americans and Europeans. Trump has been taking enormous heat for his ill-conceived trade wars. Much of that criticism is coming from the Midwest and farm country, which delivered him the presidency in 2016. He needed to find a way to back down from the trade war without looking like he was backing down. Some EU “concessions” that benefit the very regions Trump needs to soothe are exactly what he needed—and those concessions were costless for Juncker to deliver.

The question now is, will there soon be similar “concessions” from China?

July 26, 2018 4:22PM

Antitrust Articles In Regulation

The Department of Justice recently filed a notice to appeal a federal judge’s decision to permit an $85.4 billion merger between AT&T and Time Warner. Though the judge rejected the government’s argument that the merger will raise prices for consumers and limit competition, the decision to appeal sends a clear signal that the Justice Department plans to aggressively pursue antitrust cases.

The appeal also exemplifies a recent resurgence of antitrust activism. Along with the AT&T and Time Warner deal, over the past year there has been renewed interest in antitrust, particularly in regards to tech giants like Google and Facebook. This resurgence represents a shift away from the consensus that government should not intervene in firm concentration unless it is clear that consumers are being harmed, and towards the conception that “big is bad,” regardless of whether consumer harm can be demonstrated.

But, as University of Chicago law professor and later federal judge Frank Easterbrook outlined in a seminal 1984 paper, a key question at the core of antitrust cases is the impact of Type I (false positive) and Type II (false negative) errors. A Type I error is the incorrect finding that firm concentration is causing consumer harm while a Type II error is the opposite, the incorrect finding that firm concentration is not causing consumer harm. Easterbrook argued that Type II errors are less harmful—though a firm’s practices are causing harm, in a dynamic market competing firms will find ways to offset the harmful advantage. But the government intervention impelled by a Type I error is not as easily offset.  Thus antitrust policy should err on the side of allowing practices rather than declaring them illegal.

A conception of antitrust that expands the justifications for government action opens the door for more Type I errors and, thus, greater harms to consumers and the large firms that serve them. In the current issue, and going back to 2001, Regulation has published a series of articles discussing the underlying principles and impacts of antitrust law and policy:

  • Daniel Crane argues that the politics of antitrust does not fit into a traditional left/right conception. Instead, antitrust enforcement receives support from factions that exist on both the left and right; one that supports large government and large businesses to increase efficiency, on one hand, and a different faction that supports limiting the size of both government and businesses, on the other.
  • Alan Reynolds argues in favor of the consumer-welfare framework for antitrust and refutes recent arguments that government should intervene because “big is bad.”
  • David Evans and Richard Schmalensee discuss “network effects” and the idea that tech early movers, like Google and Facebook, are especially able to concentrate market power. The authors contend that the current fears of tech firms’ market power are the product of political slogans.
  • Ike Brannon recounts the Justice Department’s 2014 challenge of John Deere’s plan to purchase a small competitor and discusses how a market is defined and whether the antitrust enforcement stifles innovation.
  • Daniel Crane examines claims that a major cause of income inequality is lax antitrust enforcement. Looking at the history of U.S. antitrust, he contends that greater market power often results in higher wages for workers.  Thus, the use of antitrust to reduce income inequality has little intellectual foundation.
  • Timothy Sandefur argues against Parker immunity, the exemption by federal courts of cartels sanctioned by state law from federal antitrust laws, and contends that the courts should restrict immunity to cases where states have explicitly chosen to restrict competition for legitimate reasons.
  • Erwin Blackstone, Larry Darby, and Joseph Fuhr review theories of duopoly and oligopoly and examine the idea that concentrated industries are inherently monopolistic. The authors find that many duopolies are highly competitive and argue that industry structure alone is not enough to justify antitrust regulation.
  • In another article, Daniel Crane discusses the early antitrust agenda of the Obama administration and outlines the beginnings of the ideological shift away from the Chicago school’s antitrust perspective towards a more active antitrust regime.
  • Thomas Lambert examines the court’s rejection of an FTC challenge to a merger between Whole Foods and Wild Oats, and outlines four principles that regulators should use when investigating mergers: relying on econometric evidence instead of business documents, adhering to economic theories when deciding whether to define unique distribution channels as “markets,” accounting for business trends and economies of scale when determining whether a merger will harm consumers, and raising the standard of proof for injunctive relief to limit the advantages enjoyed by regulators.
  • Richard Epstein discusses the 2006 Wright Amendment Reform Act, which demolished several gates at Love Field Airport in Dallas and, in so doing, distributed market power to American Airlines and Southwest Airlines.  
  • Richard Epstein and Thomas Brown outline a continuous succession of antitrust lawsuits against credit card companies and contend that antitrust law works best when it concentrates on horizontal agreements like bid rigging and price fixing. They argue that, in this case, governments are attacking the business arrangements that make platform industries work.  
  • Johnathan Adler contends that antitrust enforcement against “conservation cartels,” which form to maximize the long-term productive use of natural resources, undermines the creation of ecologically valuable and socially beneficial arrangements among resource users.
  • Fred McChesney discusses the trend towards an economic view of antitrust’s role and away from political or social objectives, but highlights three developments that deleteriously separate antitrust from economics: antitrust suits that interfere with private attempts to manage the commons, increased involvement in antitrust enforcement by state and European regulators leading to harmful suits that make no economic sense, and the desire by foreign enforcers and state attorney generals to play a larger role on the global antitrust stage.
  • George Bittlingmayer makes the case that, though antitrust policy has improved since the 1960s and 70s, despite a consensus under the Clinton and Bush administrations there is still little compelling evidence that antitrust laws improve consumer welfare.
  • David Evans examines antitrust under the Clinton administration and discusses the challenges facing the then new Bush administration: to retain the Clinton administration’s antitrust regime in the name of policy continuity or to pursue a level of agency interventionism more in line with Bush’s business philosophy.
  • David Henderson reviews The Microsoft Case: Antitrust, High Technology, and Consumer Welfare and discusses the justification for the antitrust case against Microsoft and its legacy.

Furthermore, over the years I have also reviewed working papers on antitrust:

  • In my review of working papers by Daniel Crane and Joshua Wright on the FTC’s antitrust case against intel, I discuss Type I and Type II errors as defined by Frank Easterbrook and argue that the literature shows that the case against Intel cannot be justified under the error-correction framework.
  • I review Lawrence White’s paper on “Too Big to Fail” and outline his contention that Too Big to Fail financial firms have nothing to do with market power. Instead, the problems of the banks stem from subsidies and negative externalities and should be dealt with directly rather than through antitrust action.
  • And in the Spring 2018, issue of Regulation I review a paper by Ann Bradford, Robert Jackson, and Johnathon Zytnick that examines 5,000 proposed mergers in Europe between 1990 and 2014 and finds no effect on the incidence or intensity of merger challenges by the EU if the acquiring firm was non-EU.

The DOJ’s appeal and recent concerns about the market power of tech firms exemplify an ascendant conception of antitrust as a proactive tool to reduce market power. The past 17 years of articles and reviews in Regulation, however, support an antitrust policy that is invoked only because of unambiguous and demonstrated harms to consumer welfare. This notion, and the limits it imposes on costly and inflexible government action, offers the best outcomes for consumers and competition.

Written with research assistance from David Kemp.