U.S. Trade Policy Agenda in 2019? Fixing What’s Been Breaking Since January 20, 2017

Upon taking office in 2017, President Trump accused trade partners of underhandedness, demonized U.S. companies with foreign supply chains, and perpetuated the false narrative that trade is a zero-sum game requiring an “America First” agenda. He withdrew the United States from the Trans-Pacific Partnership, threatened to pull out of North American Free Trade Agreement and the Korea-U.S. Free Trade Agreement, and initiated a war of attrition against the World Trade Organization by refusing to endorse any new Appellate Body judges until his unspecified demands were met. Yet, those were still the halcyon days of trade.

In 2018, straining all credulity, the Trump administration dusted off a seldom-used law (Section 232 of the Trade Expansion Act of 1962) to impose tariffs on imported steel and aluminum from most countries on the basis that national security is threatened by U.S. dependence on foreign sources of these widely available commodities.

Later in the year, invoking another controversial U.S. trade statute (Section 301 of the Trade Act of 1974), which is widely considered an act of vigilantism under WTO rules, the administration announced tariffs on $50 billion worth of imports from China for alleged unfair practices, such as forced technology transfer and intellectual property theft. When Beijing retaliated with tariffs on U.S. agricultural products, Trump announced that he would hit another $200 billion of imports from China with tariffs. Once again, Beijing responded by broadening its list of targeted U.S. products and the president subsequently threatened to apply U.S. levies to all imports from China (over $500 billion in 2017).

To be fair, U.S. trade policy in 2018 wasn’t only rancor, hostage-taking, and trade war. Juxtaposed against this contentious, grievance-based, enforcement-oriented U.S. posture was some “trade liberalization.” Instead of withdrawing from NAFTA and KORUS, the Trump administration renegotiated both. Both included some liberalizing provisions, but also some lamentable, protectionist retrogression, which wasn’t totally unexpected given that, in both cases, U.S. insistence on renegotiation was motivated less by an interest in updating, expanding, and modernizing the agreements than by a desire to revise provisions that would—at least nominally—tilt the playing field in favor of U.S. workers and certain manufacturers.

As 2019 begins, five major issues cast long shadows over the trade policy landscape. First is whether and how the U.S.-China trade war will be contained, scaled back, and ultimately ended. Second is the looming possibility that the Trump administration will invoke national security to impose sweeping new tariffs on automobile imports. Third is the question of whether and when Congress will pass the implementing legislation for the new NAFTA (the United States-Mexico-Canada Agreement or USMCA). Fourth is whether, when, and how the crisis at the WTO will be resolved. And fifth concerns whether the Trump administration has the wherewithal to make good on its stated intentions of negotiating new trade agreements with Japan, the European Union, the Philippines, possibly the United Kingdom, and other countries. With much of the rest of the world moving forward with a slew of new trade agreements and the United States stuck on revamping old deals, the real and opportunity costs to U.S. businesses, consumers, and taxpayers continue to mount.

Throughout the year ahead, these major issues will be the predominant focus of the research and writing of the Cato Institute’s Herbert A. Stiefel Center for Trade Policy Studies.

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Illegal Immigrant Conviction Rates Are Low, Even When Factoring in Recidivism

 Over the last two years, Cato has published three Immigration Research and Policy Briefs on illegal immigrant criminality.  In each one, we found that illegal immigrants have lower criminal conviction rates in the state of Texas and lower nationwide incarceration rates relative to native-born Americans.  Although nobody has criticized our methods or the data, we answer other criticisms that arise.

The best recent criticism is that illegal immigrant conviction rates are low because they are deported after they serve their sentences, which reduces their recidivism rates relative to native-born Americans who cannot be deported after being released from prison.  Thus, the illegal immigrant incarceration or conviction rates are lower than those of native-born Americans because it is more difficult for them to recidivate as they would have to enter the country illegally again to do so.  This has been a difficult criticism to address as data limitations are severe, but we attempted to do so after making some assumptions.  We focused on comparing first-time criminal conviction rates.

We estimate that native-born Texans had a first-time criminal conviction rate of 683 per 100,000 natives in 2016.  In the same year, we estimate that illegal immigrants had a first-time criminal conviction rate of 462 per 100,000 illegal immigrants – 32 percent below that of native-born Americans.  Thus, about 36 percent of the gap that we observed in criminal conviction rates between illegal immigrants and native-born Americans can be explained by lower illegal immigrant recidivism that is likely due to their deportation. 

This question could have been easily resolved by comparing the immigration statuses of first-time offenders.  Of course, such data do not exist.  Regardless, this is still an important question even if our estimate results from a back of the envelope estimate.  You can judge for yourself how we came to this estimate.  This is how we did it. 

First, we used the Arizona state prison data from 2016 for those admitted to state prison that year.  Of U.S. citizens sent to prison that year, 58 percent had previously been to prison at some point since 1984.  The subpopulation of deportable non-citizens, which includes illegal immigrants but is not limited to them, had a recidivism rate of 47 percent – below those of U.S. citizens, but not that much below. 

Some Questions for the Democrats on Trade

Presidents have the power to set the agenda and drive policy debates, and President Trump has put trade policy front and center. While President Obama moved slowly on trade policy during his first term (he picked up the pace during his second term), and candidate Hillary Clinton called for a “pause” on trade policy during her campaign, Trump has made an activist (and protectionist) trade policy one of his signature issues. Among other things, he has imposed tariffs under a number of trade statutes, accused many other countries of cheating on trade, renegotiated some existing trade agreements, and challenged the functioning of World Trade Organization by blocking the appointment of appeals court judges.

This flurry of trade policy activity has brought a wide-ranging debate over the foundations of trade economics, trade law, and trade politics. Ultimately, this debate might be productive, and it has provided an opportunity to explain these issues to the broader public. In the short-term, however, it has led to a chaotic and economically harmful U.S. approach to trade policy.

With trade policy making headlines, the current group of actual and aspiring Democratic leaders may be forced to make some tough choices on trade. It is not so much whether they are “for it or against it,” but rather, what exactly are they for?

In the short-term, this question is for the House Democrats, who have a great deal of power over Trump’s trade agenda. The administration has negotiated a new NAFTA (called the U.S.-Mexico-Canada Agreement, or USMCA), and Congressional ratification will require support from at least some House Democrats. But do they like the agreement Trump negotiated? And do they want to give Trump a political win? So far, many of them seem skeptical about supporting it in its current form.

But the more interesting question is the longer-term trade agenda of the Democratic party. We just hit 2019, but 2020 Democratic presidential candidates are coming forward already, and with trade policy making daily headlines they will almost certainly be offering their views on trade. Senator Elizabeth Warren has already announced that she would form an “exploratory committee,” and has said a few things about trade. Her statements so far have hints of traditional economic nationalism, but leave room for maneuver, and many questions remain. Here are a few questions I would like to see reporters ask her:

- Does she think the tariffs on Chinese imports are working, and would she keep them in place or remove them? What alternative strategies would she consider to address China’s trade practices?

- Would she maintain the steel and aluminum tariffs imposed for what are said to be “national security” purposes?

- Would she support Congressional ratification of the USMCA (subject to certain changes), or would she wait and try to renegotiate NAFTA herself if elected? How exactly would her vision of trade agreements differ from the existing model?

- With which countries, if any, would she negotiate new trade agreements?

- Would she end the Trump administration’s tactic of blocking appointments to the World Trade Organization’s appeals court?

Prior to 2016, it was difficult to imagine so much focus on the details of trade policy. Many politicians were content to proclaim vaguely that they were for “free and fair trade” and leave it at that. But now we have a number of specific actions on the table, and it is worth asking presidential candidates what they think of each one.

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The Government Doesn’t Understand Its Own Immigration and Crime Data

On March 6, 2017, President Trump issued Executive Order 13780.  The order was mostly concerned with reducing the number of immigrants and travelers from certain countries that his administration thought could pose a terror risk.  One portion of that Executive Order called for the Department of Justice (DOJ) and the Department of Homeland Security (DHS) to investigate the number of terrorist threats and, little noticed at the time, “information regarding the number and types of acts of gender-based violence against women, including so-called ‘honor killings,’ in the United States by foreign nationals.” 

The DOJ-DHS released their report in January 2018 and almost everybody focused on the terrorism portion – including myself and my colleagues here at Cato.  However, thanks to a brilliant lawsuit that uncovered how shoddy the report was, it is now clear that it made an absolutely false statement about the number of foreign-born people arrested for sex offenses.  The DOJ-DHS report says:

Regarding sex offenses, the Government Accountability Office (GAO) in 2011 produced an estimate regarding the population of criminal aliens incarcerated in state prisons and local jails from fiscal years 2003 through 2009. In that report, GAO estimated that over that period, aliens were convicted for 69,929 sex offenses—which, although not explicitly stated in the report, in most instances constitutes gender-based violence against women.

The DOJ-DHS authors of the report made two errors that others have made in interpreting that exact GAO report, many of whom I’ve criticized

First, 69,929 is the number of arrests for sex offenses where the arrestees were criminal aliens, not the number of sex offenses for which criminal aliens were convicted as the DOJ-DHSclaimed.

Second, those arrests occurred from 1955 through 2010, not from 2003 through 2009.

At least the DOJ-DHS have admitted they misinterpreted the GAO report – further vindication that Peter Kirsanow made numerous errors when he was given three full minutes to monologue on it last August on the Tucker Carlson Show.  Kirsanow wouldn’t appear with me on the show after that segment to debate me – I’ll let you guess the reason why.

The biggest problem here isn’t that the DOJ-DHS authors of that report didn’t read the fine print, although that is worrying, or that they likely let their political bias cloud their research findings.  The biggest problem here is that the GAO report misleads more than it illuminates and provides a legitimate looking citation for erroneous claims that are difficult to check.  The GAO is a more professional and less political department than the DOJ or DHS, at least when it comes to investigating and publishing the results of empirical research.  The GAO should retract the report and the later 2018 version that have both been so misinterpreted, rewrite them so that they are crystal clear, re-release them with a list of corrections from the previous editions, and include an FAQ section with answers.   If current government bureaucrats at the DOJ and DHS as well as former bureaucrats like Peter Kirsanow have trouble understanding the GAO report, then clearly the GAO needs to fix the problem and try to prevent it from occurring in the future.  Otherwise, what is the point of the GAO?

 

On Behavioral Economics

Scott Sumner had a wonderful post on Econlog last week. He was responding to an Atlantic article lamenting behavioral economics not taking a prominent role in introductory economics courses.

Scott’s key point was that many insights in behavioral economics are intuitive, while important economic concepts are not. In a world in which there is so much misunderstanding about trade, migration, the price mechanism and much else, the real value added of introductory economics comes in giving students the toolkit to “think like an economist.” Hence, it makes sense to spend more time teaching standard micro over human heuristics and biases.

I couldn’t agree more. But there is perhaps another point Scott could have made.

Though behavioral economics is interesting and can have beneficial applications to our own life and in policy areas where clear defaults must be set, leaning so heavily on human irrationality in introductory courses risks behavioral economics becoming a kind of “Market Failure version 2.”

What I mean by that is that, absent a thorough treatment in courses with applications about trade-offs, unintended consequences, or case studies, the risk of throwing out basic economics so early in favor of declaring “humans are irrational” is that policy debates become even more heavily weighted towards unthinking intervention to “correct” for our supposed biases.

As with market failure, the undercurrent of lots of behavioral economic contributions – the throwaway implications – are that government intervention is needed to fix the biases of behavioral consumers. Intervention is often thought implicitly pareto improving over non-intervention (helping behavioral consumers without harming others.) But there are at least six reasons why this may not be the case (even if we see what we consider evidence of behavioralism):

1)      Behavioral consumers (BCs) might themselves respond “behaviorally” to interventions or nudges designed to help them, potentially leaving them worse off (e.g. drug prohibition, payday loan restrictions, some smart disclosures on credit costs).

2)      Seemingly behavioral decision-makers may, in fact, be acting rationally, especially given the costs associated with accessing information or switching (e.g. in credit card markets and in relation to fuel economy).

3)      Interventions to correct for irrational decision-making by BCs may impose substantial costs on others, maybe even failing a reasonable overall welfare evaluation (e.g. autoenrollment often comes with lower default savings rates, caps on payday loan interest rates can reduce services for non-BCs too).

4)      Developing policies to correct the biases of BCs may distract attention from policy approaches that are welfare-improving for all groups (e.g. opt-out organ donation vs. organ markets, environmental behavioral approaches vs. more direct tax incentives).

5)      Interventions can increase the complexity of economic decision making or worsen inaccurate perceptions of risk (e.g. disclosure laws, overdraft protection).

6)      Interventions can undermine the “ecological rationality” of the market, dampening incentives to learn from mistakes or for entrepreneurs to deliver new protections for BCs.

Yes, behavioral economics is an important body of economic knowledge. But putting irrationality front and center of very introductory economic courses would both constrain time from teaching more difficult economic concepts, and worsen economic policy debates absent teaching the difficulties associated with correcting perceived biases through interventions or nudges.

Which States Provide High Quality Schools at Low Cost?

If you pay state and local taxes or have kids in public schools, you will want to check out this recent Cato study on education spending and education results. Looking across the states, the study by Stan Liebowitz and Matthew Kelly found no significant relationship between per-pupil spending and student performance when you adjust for state cost of living.

The starting point is the National Assessment of Education Progress (NAEP) scores, which measure student knowledge of various subjects in grades 4, 8, and 12. The scores are used in various media articles on school quality, such as those by U.S. News and World Report.

Liebowitz and Kelly argue that the basic NAEP results are flawed as a measure for comparing public schools across states because they are not adjusted for state demographic differences. So, for example, Texas ranks 35th on aggregated NAEP data and Iowa ranks 17th, but the demographics of the two states are quite different. As it turns out, generally, white children in Texas score higher than white children in Iowa, Hispanic children in Texas score higher than Hispanic children in Iowa, and so on for other groups.

The authors adjust for state demographic differences and produce their own school quality scores. Using these scores, Texas moves up to 6th place and Iowa moves down to 32nd.

The chart shows the authors’ quality score on the vertical axis and per-pupil spending in nominal dollars on the horizontal axis. Consider that students in many states score higher than students in New York yet those states only spend half of what New York does. Compare Florida, Texas, and Virginia to New York, for example.

Further analysis by the authors looks at spending adjusted for state cost of living.

Are Anti-Airbnb Laws Unconstitutional?

Maybe:

A federal judge on Thursday blocked a recent New York City law intended to crack down on Airbnb and other online home-sharing sites that city officials say have essentially turned residential apartments into illegal hotels and have aggravated the city’s housing shortage.

The law, which was enacted last summer and was to go into effect next month, would have required online home-sharing services like Airbnb to disclose to the city on a monthly basis detailed information about tens of thousands of listings, and the identities and addresses of their hosts.

But the judge, Paul A. Engelmayer of United States District Court in Manhattan, granted a request for a preliminary injunction by Airbnb and another firm, HomeAway. He wrote the companies were likely to prevail on their claim that the ordinance violated the guarantee against illegal searches and seizures in the Fourth Amendment.

And, while I am no constitutional scholar, I would have thought such laws are also takings that violate the Fifth Amendment. 

In any case, such laws are inane as a matter of economic policy, as Cato’s Peter Van Doren explains here.