The Federation for American Immigration Reform (FAIR) is devoted to reducing legal and illegal immigration. Its recent report, “The Fiscal Burden of Illegal Immigration on United States Taxpayers (2017)” by Matthew O’Brien, Spencer Raley, and Jack Martin, estimates that the net fiscal costs of illegal immigration to U.S. taxpayers is $116 billion. FAIR’s report reaches that conclusion by vastly overstating the costs of illegal immigration, undercounting the tax revenue they generate, inflating the number of illegal immigrants, counting millions of U.S. citizens as illegal immigrants, and by concocting a method of estimating the fiscal costs that is rejected by all economists who work on this subject.

FAIR’s Errors

Merely using the correct numbers when it comes to the actual size of the illegal immigrant population, the correct tax rates, and the effect of immigrants on property values lowers the net fiscal cost by 87 percent to 97 percent, down to $15.6 billion or $3.3 billion, respectively. Below is a list of FAIR’s errors and how the correct numbers affect the results:

1. FAIR assumes that there are 12.5 million illegal immigrants, over a million more than other organizations estimate (FAIR is inconsistent here as the number of illegal immigrants they report on page 34 is 12.6 million). Pew estimates there are 11.3 million illegal immigrants, the Center for Migration Studies (CMS) estimates that there are 11 million illegal immigrants, and the Center for Immigration Studies (CIS) estimates there are 11.43 million illegal immigrants. FAIR’s estimate of the number of illegal immigrants is more than a million more than that of their sister organization, the Center for Immigration Studies, that also shares their goal of reducing immigration. Using the average number of illegal immigrants as estimated by Pew, CMS, and CIS instead of FAIR’s number lowers their report’s estimated cost by $11.6 billion.

We hear a lot about book “banning,” especially when “we” maintain Cato’s Public Schooling Battle Map, but probably lots of other people hear it, too. Indeed, it just so happens that we are in Banned Books Week right now, an event that highlights challenges to books stocked by public libraries, including in public schools. But what is suddenly getting attention is not the Week, but a Cambridge, Massachusetts public school librarian rejecting a bunch of Dr. Seuss books that First Lady Melania Trump selected the district to win. Which raises two questions: Is it not just as much “banning” when public librarians choose not to stock books as when parents or citizens ask that those already stocked be removed? And isn’t it a threat to basic freedom to have librarians or anyone else decide for taxpayer-funded institutions—government institutions—what constitutes acceptable art or thought?

The first answer is of course it is just as much “banning” for public institutions to reject books in the first place as to remove them later on. The ultimate result is the same: not making a book available for the public to borrow. Of course, this is not really banning, which would be to prohibit people from reading a book at all—making it illegal to purchase or possess—not refusing to let people borrow it for free. But if people want to misapply the term, they should misapply it equally.

Which takes us to the root problem: Public institutions force all taxpayers to fund decisions by other people about what books are valuable, or age appropriate, or just plain morally upright. We are forcing them to fund someone else’s speech and opinions, even if they find that speech or those opinions offensive, or just wrong, and even if their views are rejected.

Look at the Cambridge situation. Librarian Liz Phipps Soeiro’s letter rejecting the haul of Seuss books was intensely political—itself a huge problem for someone speaking in an official capacity—but she also condemned the Seuss books themselves. “Another fact that many people are unaware of is that Dr. Seuss’s illustrations are steeped in racist propaganda, caricatures, and harmful stereotypes,” she wrote. “Open one of his books (If I Ran a Zoo or And to Think That I Saw It On Mulberry Street, for example), and you’ll see the racist mockery in his art.”

Perhaps this is a unanimous opinion among people in the Cambridge school district—we know it wouldn’t be if expanded to Springfield, MA—and if so, okay. But if there is just one taxpaying dissenter who does not believe that Seuss’s work is racist, or who believes that his or her kids should grapple with racist works, or who just thinks Seuss is good literature worth reading, this person has essentially been rendered unequal under the law. He or she is forced to pay, someone else decides what is moral or appropriate.

Of course, barring the invention of infinite shelf space—actually, we call that the “Internet”—someone has to decide what is or is not stocked in libraries. At least for education, that is a reason that school choice is essential, especially through tax credit programs in which people choose whether, and for whom, to fund scholarships. With such programs no one is forced to fund or be subject to other people’s decisions about what is moral or age appropriate. It ends the government gatekeeper role, and lets no one impose a “ban” on anyone. It is exactly what justice and freedom demand.

The Republican tax framework released yesterday was generally excellent. However, it appears to include a sneaky and invisible tax hike. The framework “envisions the use of a more accurate measure of inflation for purposes of indexing the tax brackets and other tax parameters.”

The individual income tax is indexed for inflation, meaning that the dollar split points between the rate brackets and other parameters are set to rise a bit each year. Without those adjustments, Americans would lose ground to the government over time, as more of their income would be taxed at higher rates due to the general rise in prices.

Current indexing is based on the Consumer Price Index (CPI). The CPI overstates inflation somewhat, so some analysts have suggested switching tax-code indexing to chained CPI, which produces a lower inflation measure.

If Republicans indexed the tax code to chained CPI, the government would receive an automatic tax increase relative to current law every year until the end of time. The Tax Foundation has a brief on the issue here.

Switching tax-code indexing to a lower measure of inflation is a bad idea for two reasons:

• It would generate a substantial tax increase over time, and it would be an invisible increase because there would be no tax-filing changes for people to notice.
• It would be an anti-growth tax increase because it would push people into higher brackets more quickly over time, subjecting them to higher marginal tax rates. The chained CPI proposal is essentially a proposal to slowly and steadily increase marginal tax rates.

Some economists may argue that the chained CPI proposal is a good idea because the tax code would more accurately reflect inflation, and it would. However, the tax code already contains a bias that pushes people into higher tax brackets over time, called “real bracket creep.” Real growth in the economy steadily moves taxpayers into higher rate brackets, since the tax code is indexed for inflation but not real growth.

Long-range projections from the Congressional Budget Office reflect substantial increases in taxes over time from real bracket creep. The agency notes:

… if current laws remained generally unchanged, real bracket creep would continue to gradually push up taxes relative to income over the next three decades. That phenomenon occurs because most income tax brackets, exemptions, and other tax thresholds are indexed only to inflation. If income grows faster than inflation, as generally occurs when the economy is growing, tax receipts grow faster than income.

So, I’ve got a better idea than indexing the tax code to a “more accurate measure of inflation,” as Republicans are suggesting: indexing the tax code to nominal GDP growth. That would adjust for the effects of both inflation and real economic growth on tax-code parameters, and it would prevent stealth tax-rate increases under our graduated income tax system.

More on tax reform here, here, here, here, here, and here.

The Economic Freedom of the World: 2017 Annual Report is out today. Co-published in the United States by the Fraser Institute (Canada) and the Cato Institute, it continues to find a strong relationship between economic freedom on the one hand, and prosperity and other indicators of human well-being on the other.

The United States ranks 11 out of 159 countries, indicating a slight improvement recently in its rating, but its economic freedom remains far below what it was in the year 2000, when it began a long decline. Since 1970, the index has typically ranked the United States among the top four countries. The top countries in this year’s report are Hong Kong, Singapore, New Zealand, Switzerland and Ireland. The least economically free countries are the Republic of Congo, the Central African Republic, and Venezuela.

There is an important innovation in this year’s report: it takes into account inequality in the economic freedoms enjoyed by men and women. Some countries don’t afford women the same level of such freedoms as men, so the index, for the first time, adjusts for these disparities. In her chapter, Rosemarie Fike explains the data and methodology that she used to create a gender disparity index, one that was then used to adjust the economic freedom ratings.

Most countries are only slightly affected (or are not at all affected) by the gender adjustment on the index. However, some 20 countries saw notable changes to their scores. Qatar, Bahrain, and the United Arab Emirates, for example, dropped significantly in the index. Over time, the world has seen shifts in the unequal economic freedoms of men and women. The overall level of gender disparity in economic freedom in the world has decreased since 1970. Women are enjoying more economic freedom than before. The locus of inequality has also changed. From 1970 to 1990, African countries dominated the list of nations with the worst gender disparity scores; since 1995, countries in the Middle East and North Africa now dominate that list. Another finding: the greater the level of economic freedom, the more likely that men and women will receive equal legal treatment.

Another chapter looks at the relationship between economic freedom and anti-immigrant populist parties. Although it is often asserted that globalization is causing much of that populist sentiment, authors Krishna Chaitanya Vadlamannati and Indra de Soysa find that countries with lower levels of economic freedom and higher levels of state welfare spending see more support for nativist, populist parties. It appears that some of the policies intended to provide social protection from the market might be encouraging populist politics.

Read about those and other findings in the new report here. 

The Merchant Marine Act of 1920, commonly known as the Jones Act, is impossible to defend with a straight face. The Act requires that all people and goods travelling from one U.S. port to another be carried on U.S. owned, flagged and crewed ships. The rationale usually offered these days in support of the Act is that it protects American jobs, and that our military needs to have a fleet of ships it can borrow in case of some sort of emergency. Neither can be taken seriously. For starters, the Jones Act probably costs us jobs. The high shipping costs engendered by the Jones Act encourage businesses to ship more things via rail or truck. Where that’s not possible (as with Puerto Rico), it incentivizes businesses to import goods, rather than buy from a domestic customer and pay the prohibitively expensive toll the Jones Act imposes. In either case, fewer jobs result. The Act makes it cheaper for U.S. livestock farmers to buy grain from overseas than from American sources, and forces states such as Maryland and Virginia to import their road salt rather than buy it from Ohio. The East Coast of the U.S. cannot afford to get lumber from the Pacific Northwest. And shipping oil from Texas to New England costs about three times as much as shipping it to Europe. The Jones Act survives because it’s hard for people to see what it costs them. As long as constituents aren’t complaining, politicians are happy with the status quo — especially since ship builders will write big checks to anyone willing to protect the Act. The recent relaxation of the Jones Act for Puerto Rico has the potential (albeit slight) to change this calculus, but since it is scheduled to only last for ten days, the residents of this island won’t see how much they could potentially save from not having this burden. And those savings would be immense: In a study I recently did with Russ Kashian, we estimated that U.S. consumers would save billions of dollars if we got rid of the Jones Act. And places like Puerto Rico, Hawaii and Alaska would benefit most of all, since they are overly dependent upon shipping prices. However, as those are only two low population states and a territory with no voting representation, their inconveniences won’t resonate much with Congress. 

After some sorely needed scrutiny, the Trump administration has just announced that it will temporarily suspend an ugly piece of corporate welfare in order to speed aid to hurricane-stricken Puerto Rico.

The Merchant Marine Act of 1920, better known as the Jones Act, requires that all people and goods transported by water between U.S. ports be transported on U.S.-built ships, with U.S. owners, registered and sailing under the U.S. flag, and crewed by U.S. citizens or permanent residents. The law originally was justified as ensuring a robust U.S. merchant marine in wartime, but it really is (and probably always has been) a cynical sop to American shipbuilders, shipping companies, and (ostensibly) their employees because it gives them market power that allows them to charge higher prices.

Policy analysts have long understood this; for instance, a 1991 Regulation article by Federal Maritime Commission member Rob Quartel chastised the law for creating “America’s Welfare Queen Fleet.”

Traditionally, Jones Act criticism has focused on its financial harm to American consumers. One recent estimate is the law results in higher prices totaling $1.9 billion a year, which is about $5.50 for each American man, woman, or child. But now there’s growing evidence that it also exacts a cost in human lives.


In the new issue of Regulation, North Carolina State University economist Thomas Grennes argues that because American-built vessels are significantly more expensive than comparable ships built elsewhere, American shipping companies operating under the Jones Act delay replacing their vessels. As a result, American-flagged vessels are nearly three times older on average than comparable foreign vessels. International data show that as ships age, they become more dangerous for their crew. Indeed, the 2015 sinking of the El Faro, a Jones Act vessel, raised troubling questions about the law’s role in the deaths of the ship’s 33-member crew.


Now, the Gulf hurricanes have shown another potentially deadly aspect of the Jones Act.


As President Trump recently noted, “you can’t just drive” truckloads of supplies and workers to Puerto Rico; they must be transported by plane and boat. Hence the Jones Act has long bedeviled the island; one estimate is that the prices of goods shipped from the U.S. mainland to Puerto Rico are twice as high as they would be without the law. But following Hurricane Maria, the law has transformed from a costly nuisance into a potentially deadly one; desperately needed relief has been dramatically slowed and made more expensive by the law’s artificial barrier on what ships can move supplies from the U.S. mainland to the stricken island—and what ships do carry those supplies must be diverted from other transport work between U.S. ports.


The White House previously temporarily suspended the Jones Act for emergency supplies heading to the hurricane-ravaged Gulf states, using a provision in the law that is intended for national defense purposes. Now that suspension has been extended to Puerto Rico.


But instead of temporarily suspending the law under a dubious “defense” claim, Congress and the White House could go further and repeal it. After all, pointless corporate welfare isn’t only a bad thing during emergencies. For a rough draft of repeal legislation, lawmakers could use Sen. John McCain’s unsuccessful 2015 bill.


Given congressional leaders’ oft-made statements of concern for American consumers and given the Trump White House’s vows to pare back unjustified regulations and “drain the swamp,” repeal of this harmful piece of corporate welfare should be a slam dunk. Unless, of course, lawmakers have different priorities than helping consumers, protecting sailors, and aiding people like those who desperately need aid in Puerto Rico and the Gulf states.

Dormant for a while, the debate over India’s demonetization program of last fall has been revived by new evidence. The new evidence on note returns and GDP vindicates the critics, and has the defenders in strategic retreat.

To recap: On November 8, 2016, India’s Prime Minister Narendra Modi shocked the nation by announcing the immediate “demonetization” of the two largest rupee currency notes (Rs 500, worth about $7.50, and Rs 1000, worth about $15). Noteholders would have only 50 days to turn them in for new Rs 500 and Rs 2000 notes. The move, Modi promised, would sharply penalize holders of unaccounted “black money,” namely tax evaders, bribe-takers, professional criminals, and terrorists. Their currency hoards would become worthless — a welcome one-time wealth loss — or they would expose themselves to detection by trying to swap or deposit large batches. Anyone depositing a large sum in old notes would face scrutiny by tax authorities.

In order to keep the move a surprise (the better to catch the black money holders), new notes to replace all the discontinued notes had not been printed in advance. The cancelled notes represented 86% of the currency in circulation, and more than half of M1 (currency plus checking deposits), India having a highly cash-intensive economy with half the population unbanked. As criminals were far from the main users of currency, the impact was unavoidably felt well beyond the black-money set. A serious currency shortage immediately arose, with predictable consequences. Honest wage laborers in the huge cash economy went unpaid, honest construction projects came to a standstill, honest shopkeepers saw sales dry up, and honest businesses failed. Honest people wasted billions of hours waiting in queues to exchange old notes for the trickle of new notes.

As Shruti Rajagopalan and I noted in November last year, there was also a fiscal angle: for every billion of old rupee notes not turned in (for fear of being scrutinized), the government could issue a replacement billion and pocket it as one-time seigniorage revenue. For example:

if 20% of the old notes are never turned in, the government’s revenue windfall is up to Rs 2.9 trillion ($42.5 billion).

The destruction of the private wealth of non-redeeming old-note holders, combined with the revenue windfall to the government, makes the currency policy effectively a large capital levy, a massive one-shot transfer of wealth from the private to the public sector.

We speculated: “The wealth transfer to government may help to explain Prime Minister Modi’s enthusiasm for the currency cancellation and re-issue, despite its likely ineffectuality against black money.”

Economically literate defenders of demonetization have been fewer than critics. The most prominent defenders have been the well-known trade economist Jagdish Bhagwati of Columbia University together with his former students Vivek Dehejia and Pravin Krishna, and with his Columbia colleague Suresh Sundaresan.

In a December 2017 piece in the prominent Times of India, Bhagwati, Krishna, and Sundaresan (hereafter BKS) praised the demonetization program as “a courageous and substantive economic reform that, despite the significant transition costs, has the potential to generate large future benefits.” BKS recognized that “the process is inconvenient, and subjects many households to hardships,” but thought it worthwhile for “potentially increasing transparency and expanding the tax base and revenues to the government from taxes and surcharges.” The fiscal angle was foremost: since “unaccounted deposits will be taxed, this will yield a windfall for the government permitting large increases in social expenditures.” In addition, it would promote a “switch into digital transactions” and “put a major dent in counterfeiting.”

In an Op-Ed published on December 27, Bhagwati, Dehejia, and Krishna (hereafter BDK) defended the demonetization program entirely on the grounds that it would impose an effective capital levy. It was, they wrote, “a policy designed, in effect, as a one-time tax on black money.” They noted that the government’s revenue gain would not come just from replacing unreturned notes. Under “voluntary disclosure” rules promulgated after the initial announcement, depositors of old notes who acknowledged their holdings as illegitimate would also pay: “deposits of unaccounted money will be taxed at 50% — with a further 25% taken by the government … as an interest-free loan for a period of four years.” Thus there would be a one-time fiscal gain to the government not only from notes never returned, but also from notes returned under such terms.

BDK proposed the size of the revenue gain as a sufficient criterion for judging the success of the program: “at least from the perspective of its effectiveness in dealing with the black money issue, success has to be measured by the sum of tax revenue generated [from the 50% tax on acknowledged black deposits] and black money destroyed [i.e. revenue from replacing unreturned notes].” For the sake of illustration, they supposed (calling it an “estimate”) “that one-third [Rs5 trillion] of the approximately Rs15 trillion in demonetised notes is black money.” Then if by the end of the turn-in period “Rs1 trillion is unreturned, as is believed, and we further assume that only half of the remaining Rs4 trillion of black money that is returned falls within the tax net, the net gain works out to Rs1 trillion of black money destroyed and 50% times 2 trillion = Rs1 trillion in tax revenue.” With such a total fiscal gain of Rs2 trillion, “the government could reasonably claim this as a successful outcome.”

In a commentary on the BDK piece, Rajagopalan and I pointed out that, from the economist’s point of view, the costs of any measure must be taken into account before judging it worthwhile or efficient. What matters is effectiveness per unit cost. Unlike the earlier BKS piece, BDK had simply neglected the costs incurred in collecting revenue or suppressing black money through demonetization. We noted a think tank’s estimate of Rs. 1.28 trillion in losses during the transitional period from expenses of printing new notes, lost income of those waiting in queues, additional costs to banks tied up with exchanging currency, and (the largest item) lost business sales due to the currency shortage. It was then too early to replace the estimate of lost business with measured effects on GDP, but we noted that one percentage point of lost annual growth equals Rs1.45 trillion. These costs need to be set against the revenue. Even if the revenue were as high as Rs2 trillion, collecting it at a deadweight cost of 64% or more would be a very bad bargain.

Doesn’t it matter that the transfer in this case is coming from bad actors whose welfare one may disregard? No. In the above reckoning, as in standard tax analysis, the pure wealth-transfer losses of taxpayers don’t figure in the deadweight loss calculation, which only counts the costs associated with extracting the transfer.

BDK had noted in passing the argument “that the short- to medium-run economic impact post 8 November will be contractionary” due to a “temporary liquidity shortage induced by an insufficiently fast replacement of old notes with new notes.” But they dismissed on theoretical grounds that “this is not necessarily the only outcome possible.” Government could avoid a currency shortage by promptly providing new notes, they reckoned. This was a very odd line to take seven weeks into demonetization, given that the government was not in fact providing new notes sufficiently fast, and when the evidence of currency shortage was plain to see. Alternatively, they proposed, hoarded currency could come out from under mattresses, be deposited in banks, and actually expand M1 “via the classical money multiplier.” This was an odd line to take given that expansion of deposits (even should it happen) would not remedy the currency shortage being suffered by the unbanked half of India’s population.

In March 2017, Bhagwati was quoted by the Indian newspaper Firstpost making the surprising claim in an email interview that demonetization had actually promoted economic growth: “On the effects of demonetisation on growth, I should say that I was the one economist who had argued (with my co-authors), from first principles, that demonetisation would increase, not diminish, growth. And that is exactly what appears to have happened.” The factual basis for saying that it appeared to have happened was not clear.

In a March 30 piece, BDK cited a new 2016Q4 GDP report as showing that GDP had suffered “only a modest dip … of roughly half of a percentage point” below pre-demonetization projections. This was not an increase in growth. But they counted it a victory compared to “the economic disaster that the critics had imagined.”

The debate over demonetization was revived this month (September 2017) after the Reserve Bank of India finally announced the count of returned currency. It announced that 99 percent of the discontinued notes, Rs 15.28 trillion out of Rs 15.44 trillion, had been returned. As Vivek Kaul has noted, “The conventional explanation for this is that most people who had black money found other people, who did not have black money, to deposit their savings into the banking system for them.”

The trivial size of unreturned currency of course obliterates BDK’s projection of a government seigniorage windfall.

What about BDK’s other projected source of revenue, the 50% tax on acknowledged black deposits? Whereas in BDK’s scenario, black currency holders would make Rs2 trillion in voluntary-disclosure deposits, which would yield Rs 1 trillion in revenue, the actual collections under the scheme were reported in April at Rs 23 billion, or 2.3% of the BDK-imagined sum. Such paltry revenues mean that demonetization, from the fiscal perspective, was all pain and no gain.

The accumulating evidence on economic growth, meanwhile, has become damning. Between July and September 2016, India’s GDP grew 7.53 percent. Between January and March 2017 it grew 5.72 percent. Former head of the Reserve Bank of India Raghuram Rajan, now returned to the University of Chicago, links the drop to demonetization: “Let us not mince words about it — GDP has suffered. The estimates I have seen range from 1 to 2 percentage points, and that’s a lot of money — over Rs2 lakh crore [i.e. trillion] and maybe approaching Rs2.5 lakh crore.” Kaul adds that GDP does not well capture the size of the informal cash sector, where the losses from demonetization were greatest.

In response to the RBI report and GDP data, and to their credit, BDK have substantially retreated from claims of success to what can be regarded as the claim that there is still a chance to break even. They have recently written:

First off, it must be conceded that if demonetisation is to be judged narrowly on the basis of the triple rationale originally advanced … , it would at best be unclear if it could be accounted a success. For, little black money was literally “destroyed” and there is scant evidence that the policy had much if any impact on counterfeiting or terror finance.

Although they acknowledge that they “overestimated the quantum of black money that would ultimately be unreturned” and thus overestimated the seigniorage gain, they still contend that the “money deposited into bank accounts can also generate fiscal gain, as these will invite the scrutiny of tax officials.” For about two-thirds of the deposits of old currency by value, even though no admission was made and thus no 50% tax was paid, the sums deposited were large and “are mostly open to scrutiny by tax officials.” Thus it is conceivable that tax investigators may eventually squeeze taxes and fines out of them, and it is premature to rule this out.

Conceivable, but unlikely. The investigatory capacity of the tax authority is finite and it already has its hands full, as Vivek Kaul spells out in detail.

BDK concede: “Should, however, the government fail in identifying and taxing black money deposits in any significant quantity, we can all conclude that demonetisation will have failed in achieving its primary goal.” Welcome as this reasonable concession is, the converse does not follow: whether even significant eventual revenue counts as success depends on how it compares to the sizable costs of demonetization. A deadweight burden of less than 100% seems highly unlikely.

BDK add an odd coda. They acknowledge transition costs in the program actually followed, but suggest that it could have been otherwise:

in principle, had demonetisation occurred without transition costs — for instance, if old notes could have been seamlessly converted or deposited within a few days after 8 November, or if demonetisation had been pre-announced to occur with a lag, allowing time for an orderly remonetisation — there could only have been largely upside gain without any downside cost.

It is hard to square this with BDK’s earlier statements that demonetization without secrecy would have been pointless because it would not have caught out the black money holders. Are BDK saying that if the aim had been merely to introduce new notes with better anti-counterfeiting features, the Modi government’s demonetization program was an unnecessarily costly way of doing it? Well yes, the critics have said that all along. High transition costs were a feature and not a bug of the dramatic scheme to penalize black money by surprise.

[Cross-posted from Alt‑M.org]