Tag: fiscal

Two Problems with the CBO’s Score of the DREAM Act and One Solution

The Congressional Budget Office (CBO) recently released a fiscal impact score for the DREAM Act.  It found that the DREAM Act would increase deficits by about $25.9 billion over the next decade.  There are at least two problems with this CBO score and a solution that should make fiscal conservatives and DREAM Act supporters happy.    

What is the Baseline?

The CBO’s black box fiscal estimates are frequently frustrating and this one is no exception.  The biggest difficulty is telling what their baseline is.  Their baseline could be that 700,000 DACA recipients continue to work legally, which is roughly the current situation but will continue to decline rapidly over the next few years as DACA disintegrates.  The baseline could also assume zero government costs incurred while identifying and deporting immigrants who would otherwise have been legalized, an unrealistic assumption given that this administration is building up an internal deportation apparatus. 

The American Action Forum (AAF) has estimated the federal government’s cost of deportation and indirect costs on GDP.  The AAF findings suggest that removing DACA recipients and DREAMers over the next decade will increase government expenditures by $70 billion to $103 billion and lower GDP growth by about $260 billion.  Both of those swamp and fiscal effects from the DREAM Act.  If the AAF estimates are the baseline, the DREAM Act would actually save hundreds of billions of dollars over the next decade.   

It is difficult to estimate what immigration enforcement will be like over the next decade but at least some of those large costs should be included as part of the baseline in any CBO fiscal cost analysis.  The choice of baseline matters in whether the DREAM Act will be scored as fiscally positive, negative, or neutral.

The CBO versus the National Academy of Sciences

The findings of the CBO report are inconsistent with the National Academy of Sciences (NAS) fiscal cost projection for first-generation immigrants.  The age and education of the immigrants are the two biggest factors that influence their net fiscal impact.  The greater the education and younger the age at arrivals (with some caveats), the more fiscally positive the immigration is.  In contrast, the less educated and older the age at arrival (same caveats), the less fiscally positive the immigrants is.  

Applying the age and education profiles of DACA recipients to NAS findings by age and education in table 8-21 reveals startlingly different results from that of the CBO (Figure 1).  Figure 1 shows the average net fiscal impact by DREAMers by year after legalization.  Just counting the 700,000 DACA recipients should produce a fiscally positive result over the next decade of about $1.6 billion using the NAS methods.  Expanding this to the roughly 2 million or so eligible DREAMers, assuming they have about the same education and age profiles, should produce about $4.6 billion in net positive tax revenues over the next decade.      

Figure 1: Average Fiscal Impact per DREAMers by Year

 

Sources: National Academy of Sciences, Migration Policy Institute, Pew Research, and Author’s Calculations.

This result comes from the age profile of DACA recipients and DREAMers, not from assuming that they will be highly educated.  For the CBO to find that legalization will turn a $1.6 to $4.6 billion dollar surplus into a $25.9 billion deficit requires an enormous increase in benefit usage or a tremendous drop in taxable income or both at exactly the age when benefit receipts drop and taxable income rises for immigrants (Figure 2). 

Figure 2: Taxes minus Benefits for Immigrants, by Age

 

Source: National Academy of Sciences.

Either the NAS is tremendously wrong in its widely praised fiscal cost analysis or the CBO made unrealistic projections and assumptions, perhaps having to do with a possible uptick in family-sponsored immigration after the DREAM Act.  Regardless, one cannot praise the NAS findings and believe the CBO’s.     

Hedging Our Fiscal Bets

Even if you assume that the CBO’s findings are closer to reality than those of the NAS’, there is an easy solution that Republicans should leap for: welfare reform.  As Cato scholars have written about in detail, it is easy, popular, and fiscally prudent to limit non-citizen access to means-tested welfare benefits.  As part of a DREAM Act, Congress could include stricter welfare rules denying all non-citizens access to means-tested welfare, tax credits, and health insurance subsidies.  Congress could then create a special green card for DACA recipients and DREAMers, call it the DLPR, which they cannot use to naturalize for 10 years.  In such a case, they work legally and pay taxes without access to benefits for a decade when they will then have a choice.  Permanently protecting a large population from deportation while also making this fiscal cost argument moot is a good deal and should be taken regardless of CBO findings.       

SUCCEED Act Will Diminish Deficits

Senators Tillis (R-NC), Lankford (R-OK), and Hatch (R-UT) today introduced the Solution for Undocumented Children through Careers, Employment, Education, and Defending our Nation (SUCCEED) Act to legalize some DREAMers. After analyzing this bill and performing a residual statistical analysis to isolate DREAMers in the American Community Survey (ACS), this blog estimates that SUCCEED would allow approximately 1.5 million unlawful immigrants eventually to earn citizenship. Our population estimates are close to those of the Migration Policy Institute.

SUCCEED allows DREAMers to legalize if they earn an associate’s degree or higher, enlist in the military, or work for a period. We assume that about half of those with a high school degree and below eventually earn citizenship. 

Using the National Academy of Sciences (NAS) Table 8-14 as a framework, we find that that SUCCEED will boost revenues by about $94.7 billion above expenditures, in net present value, relative to keeping the DREAMers in illegal status along with a steady rate of deportation. These extra revenues would accrue to the federal, state, and local governments. They are 75-year projections discounted at 3 percent as the NAS recommends. This long-term projection and discounting guarantees that the future fiscal costs of entitlements and the descendants of the DREAMers are included. Our estimate is similar to another conducted by the Niskanen Center.

Methods

This figure is calculated by weighting the findings in Table 8-14 of the NAS by the age of entry and eventual education level of DREAMers who would be legalized under SUCCEED. A general finding of the NAS is that the fiscal impact of an immigrant is more positive when he or she is more educated and younger. The NPV fiscal estimate in Table 8-14 is positive for immigrants who arrive between ages 0 and 24 regardless of eventual education level. All DREAMers must have entered the United States before their 16th birthday under the SUCCEED Act so they are fiscally positive. According to the NAS findings.

We estimated the eventual level of education for DREAMers using the ACS by assuming that all those under the age of 25 would eventually be as educated as those aged 25 years or older. This likely undercounts their eventual education level and, hence, their net contribution to the federal budget. We assumed that unlawful immigrants consumed 35.7 percent fewer benefits and paid 10 percent lower taxes than other workers of the same age until 40 years old, based on estimates from Figure 8-21 of the NAS. We picked age 40 as we assumed it would take 15 years for DREAMers to earn citizenship because their current average age is 25 according to our ACS sample.

Conclusion

There are many reasons to legalize the DREAMers. This is their home, they did not intentionally violate American immigration laws when they entered, and they are culturally American. But, the argument for economic self-interest is also compelling. Only a few commentators doubt that there is a positive economic effect from immigration in general. However, the welfare state could turn those economic benefits negative and actually cost Americans more than they gain in boosted income. Fortunately, the American welfare state is not so far gone and DREAMers came at young enough ages, earned enough education, and worked to an extent to make up for the expensive deficiencies of our bloated government. 

The RAISE Act Would Hurt U.S. Taxpayers

Robert Rector of the Heritage Foundation recently argued that the RAISE Act, a bill introduced by Senators Cotton (R-AR) and Perdue (R-GA), would save taxpayers billions by reducing lower-skilled immigration.  Below I will argue that the RAISE Act does no such thing mainly because it does not actually increase skilled immigration, does not much alter the current education level of immigrants in the United States, and would result in removing at least 500,000 H-1B visas within a year of passage.  Using the National Academy of Science (NAS) fiscal estimates, the RAISE Act is more likely to increase deficits over the next 75 years than to decrease them.

Rector makes two main claims in his post.  The first is that “[b]ased on the National Academy of Sciences’ estimates, the average low-skill immigrant (with a high school degree or less) who enters the country imposes a net present value on taxpayers of negative $142,000.”  A fiscal net present value (NPV) means that each immigrant in this education range would have to deposit $142,000 upon arrival that would earn 3 percent compounded annual interest to cover the full cost of social services that he or she will be expected to consume over the next 75 years.  The second claim is that the RAISE Act could save taxpayers at least $1 trillion by cutting the flow of immigrants with a high school degree or less.  The sections below will analyze these claims by using the National Academy of Sciences’ estimates and information from the Current Population Survey of the U.S. Census (CPS).

Europe: A Fiscal & Monetary Reality Check

Led by Alexis Tsipras, head of Greece’s newly-elected, left-wing coalition, some other leading political lights in Europe—Messrs. Hollande and Valls in France and Renzi in Italy—are raising a big stink about fiscal austerity. Yet they always fail to define austerity. Never mind. They don’t like it. The pols have plenty of company, too. Yes, they can trot out a host of economists—from Nobelist Paul Krugman on down—to carry their water.

But public expenditures in Greece, Italy and France are not only high, but growing as a proportion of the economy. One can only wonder where the austerity is. As the first chart shows, only five of 28 European Union countries now spend a smaller proportion of national income on government than they did before the current crisis. For example, Greece spent 47.5% of national output on government in 2007 and 58.5% in 2013, an increase of 11 percentage points. 

Government expenditures cut to the bone? You must be kidding. Even in the United States, where most agree that there is plenty of government largesse, the government (federal, plus state and local) still accounts for “only” 38.1% of GDP.

Dr. Krugman Meets Dr. Fox

Dr. Paul Krugman, the hyper-productive New York Times columnist and Nobel laureate, has produced a flood of fiscal factoids. He argues that the only way to put the major economies around the world back on track is to “stimulate” them via deficit-financed government spending.

Most recently, Dr. Krugman has weighed in repeatedly on Greece’s travails with his fiscalist snake oil. His column of January 26th, “Ending Greece’s Nightmare,” makes it clear that he thinks he can deliver an elixir.

Not so fast Doctor. A mountain of evidence shows that the elixir is a fiscal factoid. Never mind.

Margaret Thatcher and the Battle of the 364 Keynesians

With the death of Margaret Thatcher, and the ensuing profusion of commentary on her legacy, it is worth looking back at an overlooked chapter in the Thatcher story. I am referring to her 1981 showdown with the Keynesian establishment—a showdown that the Iron Lady won handily. Before getting caught up with the phony “austerity vs. fiscal stimulus” debate, the chattering classes should take note of how Mrs. Thatcher debunked the Keynesian “fiscal factoid.”

According to the Oxford English Dictionary, a factoid is “an item of unreliable information that is reported and repeated so often that it becomes accepted as fact.” The standard Keynesian fiscal policy prescription for the maintenance of non-inflationary full employment is a fiscal factoid. The chattering classes can repeat this factoid on cue: to stimulate the economy, expand the government’s deficit (or shrink its surplus); and to rein in an overheated economy, shrink the government’s deficit (or expand its surplus).

Even the economic oracles embrace the fiscal factoid. That, of course, is one reason that the Keynesians’ fiscal mantra has become a factoid. No less than Nobelist Paul Krugman repeats it ad nauseam. Now, the new secretary of the treasury, Jack Lew (who claims no economic expertise), is in Europe peddling the fiscal factoid.

Unfortunately, the grim reaper finally caught up with Margaret Thatcher—but not before she laid waste to 364 wrong-headed British Keynesians.

In 1981, Prime Minister Thatcher made a dash for confidence and growth via a fiscal squeeze. To restart the economy, Mrs. Thatcher instituted a fierce attack on the British fiscal deficit, coupled with an expansionary monetary policy. Her moves were immediately condemned by 364 distinguished economists. In a letter to The Times, they wrote a knee-jerk Keynesian response: “Present policies will deepen the depression, erode the industrial base of our economy and threaten its social and political stability.”

Mrs. Thatcher was quickly vindicated. No sooner had the 364 affixed their signatures to that letter than the economy boomed. Confidence in the British economy was restored, and Mrs. Thatcher was able to introduce a long series of deep, free-market reforms.

As for the 364 economists (who included seventy-six present or past professors, a majority of the Chief Economic Advisors to the Government in the post-WWII period, and the president, as well as nine present or past vice-presidents, and the secretary general of the Royal Economic Society), they were not only wrong, but also came to look ridiculous.

In the United States, the peddlers of the fiscal factoid have never suffered the intellectual humiliation of their British counterparts. In consequence, American Keynesians can continue to peddle snake oil with reckless abandon and continue to influence policy in Washington, D.C., and elsewhere.

Will the GOP Finally Cut Farm Subsidies?

With trillion dollar deficits and mounting federal debt, will Congress finally get serious about cutting farm subsidies? We’ve been disappointed before, but there are a few hopeful signs—like the front-page story in this morning’s Washington Post—that this Congress may be serious about cutting billions in payments to farmers. As the Post reports:

In their recent budget proposals, House Republicans and House Democrats targeted farm subsidies, a program long protected by members of both parties. The GOP plan includes a $30 billion cut to direct payments over 10 years, which would slash them by more than half. Those terms are being considered in the debt-reduction talks led by Vice President Biden, according to people familiar with the discussions.

The Post story profiles a freshman Republican from Kansas, Tim Huelskamp, a fifth-generation farmer himself, who has been traveling his sprawling district telling his farmer constituents that they can no longer be exempt from budget discipline. Many farmers in his district appear to agree.

It remains an open question whether the Republican freshman class will live up to Tea-Party principles of limited government when it comes to agricultural subsidies, as we have speculated ourselves (here, here, and here) at the trade center.

Farm subsidies have certainly been a weak spot of Republicans in the past. According to our online trade-vote feature, more than half of the GOP House caucus voted in May 2008 to override President Bush’s veto of the previous, subsidy laden farm bill. In July 2007, more than half the GOP caucus voted against any cuts in the sugar program, and more than two-thirds opposed any cuts in cotton subsidies. (Of course, Democrats were just as bad overall on farm subsidies.)

The next farm bill, due to be written by this Congress, will tell us a lot about whether the Republicans really believe what they’ve been saying about limiting government and reducing the debt.