Archives: 01/2017

Questions for Wilbur Ross

Inside U.S. Trade reports that there may be a confirmation hearing for President-elect Trump’s pick for Commerce secretary, Wilbur Ross, “as early as next week.” Here are some questions I would ask him. Some of these are designed to poke him a bit on inconsistent statements he has made, but for others, I’m just curious to see what exactly the Trump administration has in mind for its trade policy.

Regional vs. Bilateral Trade Agreements

You have been critical of regional trade agreements, and supportive of bilateral ones, and in this regard you once said, “The problem with regional trade agreements is you get picked apart by the first country. Then you negotiate with the second you get picked apart. And you go with the third one. You get picked apart again.”

But you also praised the CAFTA-DR, a regional agreement, and criticized the bilateral US-Korea trade agreement. Doesn’t your praise for CAFTA-DR and criticism of the US-Korea agreement contradict your view that regional trade agreements are bad deals?

Also related to this point, other countries seem eager to negotiate regional deals. If they can engage in regional trade negotiations without getting picked apart, why can’t the U.S.?

And finally, with regard to your praise for CAFTA-DR and criticism of the US-Korea FTA, these two agreements are based on the same model, and have very similar provisions. In your view, what were the substantive differences between the two agreements that led to different results?

Renegotiating NAFTA

You have talked about a NAFTA renegotiation on Day 1 of a Trump Presidency. Can you tell us some of the specific provisions in NAFTA you don’t like and would want to see changed, and some of those you like and think should be maintained?

The TPP

In May of 2016, you said that you did not agree with Donald Trump on the TPP,  saying that you “like[d] the TPP.” But now you are opposed to it. What changed your mind?

A US-UK Trade Agreement 

There has been a lot of recent talk about a US-UK trade agreement. Do you support such an agreement? If so, would you hope to start these trade negotiations right away, or would they have to wait until after the UK completes its exit from the EU? 

Foreign Investment Treaties

Trade gets most of the attention, but foreign investment is important too. The U.S. and China have been negotiating an investment treaty for many years. Would you continue this effort? If so, what topics would you want to see included? What is your view of the investor-state dispute mechanism that is a key feature of U.S. investment treaties?

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Concerns about the”Border Adjustable” Tax Plan from the House GOP, Part I

The Republicans in the House of Representatives, led by Ways & Means Chairman Kevin Brady and Speaker Paul Ryan, have proposed a “Better Way” tax plan that has many very desirable features.

And there are many other provisions that would reduce penalties on work, saving, investment, and entrepreneurship. No, it’s not quite a flat tax, which is the gold standard of tax reform, but it is a very pro-growth initiative worthy of praise.

That being said, there is a feature of the plan that merits closer inspection. The plan would radically change the structure of business taxation by imposing a 20 percent tax on all imports and providing a special exemption for all export-related income. This approach, known as “border adjustability,” is part of the plan to create a “destination-based cash flow tax” (DBCFT).

When I spoke about the Better Way plan at the Heritage Foundation last month (my portion of the panel starts about 1:11:00 if you want to skip ahead), I highlighted the good features of the plan in the first few minutes of my brief remarks, but raised my concerns about the DBCFT in my final few minutes.

Allow me to elaborate on those comments with five specific worries about the proposal.

Lighthizer Completes Trump’s Protectionist Triumvirate

Former Reagan administration deputy U.S. trade representative and longtime trade-remedies attorney, Robert Lighthizer, is President-elect Trump’s choice for United States Trade Representative. Considered in conjunction with the appointments of Peter Navarro to head the newly-created National Trade Council at the White House (my take) and Wilbur Ross at the Commerce Department (my take), Lighthizer’s selection seems to confirm fears that U.S. trade policy is descending into darkness.  At the very least, it is reasonable to assume that for the foreseeable future trade policy will be overwhelmingly enforcement-oriented, while trade agreements and other forms of liberalization will be relegated to the doghouse.

For many years, Lighthizer has represented U.S. steel companies, America’s most trade-litigious industry, filing dozens of antidumping and countervailing duty petitions to keep foreign steel out of the United States. Some of the cases in which he was involved were brought before WTO dispute settlement, where the panels and Appellate Body ruled that the United States was administering its antidumping law in ways that violated U.S. commitments under the WTO Antidumping Agreement.

Perhaps, as a result of those experiences, Lighthizer has been a strident critic of the WTO’s dispute settlement body, which he accuses of overreach and usurpation of U.S. sovereignty. (Here is a debate from 10 years ago between Lighthizer and me on the merits of the WTO.) The fact is that there may be somewhat of a pro-complainant “bias” at the WTO because governments don’t bring cases to dispute settlement unless they are reasonably certain of victory.  There is a selection bias.  When the United States is the complainant, it wins most of the issues in most of the cases.  When the United States is the defendant, it loses most of the issues in most of the cases. It just so happens that the United States has had to defend its indefensible antidumping regime many times at the WTO, and in most cases it has lost.  Antidumping litigation is Lighthizer’s bread and butter.

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The Mariel Boatlift Raised the Wages of Low-Skilled Miamians

Harvard economist George Borjas recently published an important paper on how the unexpected surge of 125,000 Cubans (henceforth Marielitos) to Miami in 1980 lowered the wages of native-born male Miamians with less than a high-school degree. Because at least 60 percent of the Marielitos were high school dropouts, Borjas found that the negative wage effects were concentrated on Miamians with the same level of education.  

There are excellent criticisms of Borjas’ paper that show his results hinge on the control cities he chose, his exclusion of women, the age group of the workers, whether Hispanics are included, whether high-school-or-less or no-high-school-at-all are included, and whether datasets with the larger samples are used. For the sake of argument, supposing that Borjas made the correct methodological choices on every single point above, the Mariel Boatlift still raised the wages for low-skilled U.S. workers collectively due to wage complementarities. That’s because native-born Miamians with only a high school degree (no associate degree, no education after high school) experienced significant wage increases immediately after Mariel relative to workers with the same levels of education in the control groups, or placebos, of other cities. Borjas’ supporters ignore this finding but he does not. 

In his Mariel paper, Borjas reports the wage of high school dropouts relative to high school graduates in Figure 3(C) and the wage of Miami high school graduates across an all cities permutation in Figure 4(B), but he doesn’t have a dramatic graph like this that shows what happened to the relative wages of high school graduates after Mariel. 

Another working paper by Borjas and Monras on the wage effects of refugees also found that “the rate of wage growth for high school graduates, a group whose size was only increased modestly by the Marielitos, is noticeably higher in Miami than outside Miami.”  They go on to write that, “the predominantly low-skill Marielitos … raised the wage of workers with a high school education, and this effect is both numerically and statistically significant. The cross-wage elasticity is about +0.7 [compared to -0.9 for high school dropouts].”  They do not find any employment effects for high school dropouts but they did uncover positive and statistically significant employment gains for those with a high school degree. Furthermore, Figure 7.5 on page 148 of Borjas’ new book We Wanted Workers hints at a wage increase for high school graduates immediately after Mariel.              

My intern Cole Blondin and I followed Borjas’ methods to create graphs for the wages of high school graduates before and after the Boatlift. We used the March Current Population survey (March CPS) and combined the May Current Population Survey and the May Outgoing Rotation Group (May CPS-ORG) datasets. The only differences are that we present the figures in dollars rather than logs, we did not use three-year averages to smooth the data, and we did not recreate the synthetic control. One final note, the wage effect of the Marielitos must be compared to placebos because there was only one Miami in 1980 and we can’t actually observe what would have happened to that city had the Marielitos not arrived. We used the same sets of placebo cities as Borjas.

Even under Borjas’ assumptions, native-born male Miamians with a high school degree or less saw a ­net-wage increase after the Mariel Boatlift.    

A Proposed House Rule Could Lead to Good Constitutional Amendments

On Monday, House Republicans will vote on a possible addition to the House Rules proposed by Rep. Kevin Cramer (R-ND) and endorsed by Rep. Pete Sessions (R-TX), Chair of the House Rules Committee. The proposed “Tenth Amendment Rule” could incentivize states to propose useful, limited-government constitutional amendments without any fear of a “runaway convention” (not that such fears are justified, just prevalent and therefore worth a response). It could be the most important House rule change in a generation.

The proposed rule states in its entirety:

It shall not be in order to consider a bill, joint resolution, amendment, or conference report referring to the States for ratification under Article V of the Constitution of the United States any amendment to the Constitution which is proposed by a convention called by Congress pursuant to such Article unless the amendment is within the permitted scope of the convention, as authorized under each of the applications of the States calling for the convention or, if the resolution or other legislation enacted by Congress to call for the convention identified specific resolutions adopted by States to call for the convention, the amendment is within the permitted scope authorized by such resolutions.

In other words, the House cannot refer back to the states for ratification any constitutional amendment that wasn’t duly proposed by the states in the first place. No amendment convention would be able to go beyond its charge; states could limit such a convention to an up-or-down vote on a specific amendment. 

This proposed rule has been named after the Tenth Amendment because that provision reserves most power to the states and to the people – which suggests that the states and the people have the power to limit the scope of any Article V convention. James Madison indicated that states had that power when he wrote in Federalist 43: “It [the Constitution] equally enables the general and the State governments to originate the amendment of errors, as they may be pointed out by the experience on one side, or on the other.”

Since 1994, when the American people supposedly triggered a tectonic shift by ending 60 years of Democratic control of the House, efforts to restore the federal government to its limited, constitutional roots have either failed to win 60 votes in the Senate, been countermanded by the big-government aspects of the Bush administration, or been eviscerated by subsequent Democratic majorities. But in 2017, proponents of limited government have a new advantage: the legislatures of 33 states have Republican majorities looking to push back on Washington.

A coalition of congressional and state leaders could potentially persuade Congress to propose permanent constitutional limits on federal power and debt. There has never been a constitutional amendment enacted after a proposal by the states and then an Article V convention – because Congress has seen the writing on the wall and jumped ahead of any such actions by proposing its own amendment. Similarly now, if states, emboldened by the new House rule, start making calls for amendment conventions, Congress would almost certainly propose the very amendments the states want – and, again, refer only them for ratification.

What sorts of amendments are worthy of consideration? I wrote about one idea at the start of the new Congress four years ago, and no constitutional reform has become more evidently necessary than the rebalancing of federal power by requiring that Congress approve major new federal regulations. The House has already twice voted to do just that in the form of the REINS (Regulations from the Executive in Need of Scrutiny) Act. But a statute like the REINS Act could be challenged in court or repealed by a future Congress. A constitutional amendment would be permanent.

More than 900 state legislators, 6 governors (including Vice President-elect Mike Pence), a unanimous Republican National Committee, and resolutions passed by 19 state legislative chambers have already urged Congress to propose such an amendment – called the Regulation Freedom Amendment – and polls show 2-1 voter support for it.

Empowered by the 10th Amendment Rule, House Republicans could mobilize state allies to persuade Congress to move this sort of thing along, among other opportunities for lasting reform. It will be interesting to see how House Republicans react to this opportunity.

Workers Will Get a Raise Today — or Will They?

The legal minimum wage will increase in 20 states today. The Wall Street Journal news story on that fact starts out accurately enough:

Minimum wages will increase in 20 states at the start of the year, a shift that will lift pay for millions of individuals and shed light on a long-running debate about whether mandated pay increases at the bottom do more harm or good for workers.

But it quickly segues into the same error that afflicts most such stories:

In California, the minimum goes up 50 cents, to $10.50 an hour, boosting pay for 1.7 million individuals.

Wages are also going up in many Republican-led states, where politicians have traditionally been skeptical of the benefits of minimum-wage increases.

In Arizona, one out of every nine workers is slated to receive a wage increase….So will tens of thousands of workers in Arkansas, Michigan and Ohio….

In all, about 4.4 million low-wage workers across the country are slated to receive a raise because they earn less than the new minimum in their respective states.

Every one of those sentences assumes facts not in evidence. What these new laws do is ensure that no worker can be paid less than a statutory minimum. They cannot ensure that every worker with a minimum-wage job will still have one if his employer required to pay more. They won’t prevent employers from replacing labor with technology, such as these McDonald’s order-taking kiosks. McDonald's kiosk

The Journal isn’t alone, of course. Here’s the Associated Press lead:

It will be a happy New Year indeed for millions of the lowest-paid U.S. workers. 

And CBS:

Millions will ring in the new year – with a raise. The minimum wage is going up in 20 states and Washington, D.C. as well.

And a Washington Post headline:

There’s some really good news for low-wage workers this weekend

What all these chipper stories fail to take into account is the possibility that some low-wage workers will lose their jobs because their work just isn’t worth the new minimum wage or the employer can’t be profitable with higher costs. There’s abundant evidence that higher minimum wage laws reduce employment, especially among young and minority workers. If only Journal reporter Eric Morath had read this op-ed headline in the Journal a year ago:

The Evidence Is Piling Up That Higher Minimum Wages Kill Jobs

Economist David Neumark, perhaps the leading student of the effects of minimum wage laws, wrote:

Economists have written scores of papers on the topic dating back 100 years, and the vast majority of these studies point to job losses for the least-skilled. They are based on fundamental economic reasoning—that when you raise the price of something, in this case labor, less of it will be demanded, or in this case hired. 

Among the many studies supporting this conclusion is one completed earlier this year by Texas A&M’s Jonathan Meer and MIT’s Jeremy West, which reaffirmed that “the minimum wage reduces job growth over a period of several years” and that “industries that tend to have a higher concentration of low-wage jobs show more deleterious effects on job growth from higher minimum wages.”

The broader research confirms this. An extensive survey of decades of minimum-wage research, published by William Wascher of the Federal Reserve Board and me in a 2008 book titled “Minimum Wages,” generally found a 1% or 2% reduction for teenage or very low-skill employment for each 10% minimum-wage increase.

I hope these stories will prove accurate, that millions of low-wage workers will get higher wages and that the new minimum wage rates will not reduce the growth in jobs that Americans need. But I’d have to shut my eyes to economic theory and empirical evidence to believe that. In fact, you’d pretty much have to be an economics denier to believe that a mandated increase in the price of labor won’t reduce the amount of labor demanded.

 

NYT Misleads About School Choice Yet Again

Once again, the editors at the New York Times have allowed their bias against school choice to get in the way of reporting facts.

On Friday, the NYT ran a blog by Professor Susan Dynarski with the incredibly misleading headline (which, in fairness, she likely didn’t write): “Free Market for Education? Economists Generally Don’t Buy It.

Based on that description, you might think that a survey of economists found that most economists think a market in education wouldn’t work, or at least that there were more economists who thought it wouldn’t work than thought it would. Well, not quite. Dynarski writes:

But economists are far less optimistic about what an unfettered market can achieve in education. Only a third of economists on the Chicago panel agreed that students would be better off if they all had access to vouchers to use at any private (or public) school of their choice.

Follow the link to the 2011 IGM survey and you’ll find that 36% of surveyed economists agreed that school choice programs would be beneficial–but only 19% disagreed and 37% expressed uncertainty.

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Scott Alexander of the Slate Star Codex blog writes:

A more accurate way to summarize this graph is “About twice as many economists believe a voucher system would improve education as believe that it wouldn’t.”

By leaving it at “only a third of economists support vouchers”, the article implies that there is an economic consensus against the policy. Heck, it more than implies it – its title is “Free Market For Education: Economists Generally Don’t Buy It”. But its own source suggests that, of economists who have an opinion, a large majority are pro-voucher. […]

I think this is really poor journalistic practice and implies the opinion of the nation’s economists to be the opposite of what it really is. I hope the Times prints a correction.

Actually, it’s even worse than that. Oddly, Dynarski did not include the results from the more recent 2012 IGM survey, in which the level of support for school choice was higher (44%) and opposition was lower (5%), a nearly 9:1 ratio of support to opposition. When weighted for confidence, 54% thought school choice was beneficial only 6% disagreed.

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We should give Professor Dynarski the benefit of the doubt and assume that she didn’t know about the more recent results (though they pop right up on Google and the IGM search feature), but the NYT deserves no such benefit for its continuing pattern of misleading readers about the evidence for school choice.