Friday, August 10, 2007

I'll keep my $125, Thank You Very Much!

The following headline appeared on page A.10 of today's New York Times: Bush Plans Immigration Crackdown. The summary explains that the crackdown will pertain mainly to illegal immigrants who are members of street gangs, but amendments to the bill chide the Administration to "demonstrate operational control" of the border, enforce existing immigration controls, and require employers to fire workers who are employed under false SSN's.

Perhaps sponsors of such amendments to elevate the level of border control (like Dr. Tom Coburn, R-OK) could answer a few key questions:

1. How many illegal entries is acceptable? Some estimate the net entry of illegal immigrants to be as high as 300-500,000 per year. For 2005, the Department of Homeland Security reported the number of voluntary departures to be 965,538 and the number of deportations to be 208,521 (Yearbook of Immigration Statistics), so that means between 1.4 and 1.7 million enter each year. There were about 14 million arrests nationally for all crimes in 2005. There were about 25 million total offenses reported. We know that we cannot reduce either of these number to zero without putting an undue strain on the private economy, so what will the benchmark for success be in the case of immigration?

2. What additional cost must society bear to hunt down and deport existing illegals? Most journalists cite about 12 million as the number of immigrants currently living in the U.S. We are already deporting over 200,000 immigrants each year, several thousand more are brought in, and leave by means other than deportation, and a handful are incarcerated for crimes they commit while they are here. About 300,000 illegals per year are removed from the workforce as a result of enforcement activities.

3. To what end will firms be expected to bear the cost burden of investigating the legitimacy of each and every applicant's citizenship and work eligibility documentation? According to Dr. Coburn's own website his "priorities in the Senate include reducing wasteful spending" and "balancing the budget."

4. What are the other economic costs to "enforcing" immigration laws in the way Dr. Coburn proposes? Suppose we remove all 12 million illegals. This number would represent about 8 percent of the total civilian labor force. The total unemployment rate has been pretty steadily between 5 and 6 percent of the labor force over the last 20 years. That means that the total unemployed work force could not feasibly replace all of the illegals working in the US, even if their skills were a good fit for the jobs vacated. That means that the impact of their departure would almost certainly affect the price level.

5. I saved this for last-- What is the net benefit/cost of immigration (legal, illegal, or otherwise)? Most studies have shown (a good reference is Heaven's Door by George Borjas) that the net impact of immigration on per capita incomes is positive and amounts to about 0.25%. So, the impact of immigration is positive, but small. These benefits tend to be latently observed in their impacts on prices, productivity, competition, etc., and economists try to use sophisticated empirical techniques to best sort them out. So, if you're a native earning $50,000 per year (about the median household income in the US) would you be willing to pay an additional $125 per year in addition to the administrative cost of enforcing the border and deporting illegals just to not have them here? That sounds silly to me, but Rock On, Middle America. Keep opposing immigration reform.

Wednesday, August 8, 2007

Ethanol and Land Prices

An article appeared Wednesday on Page A.1 of the New York Times titled, "Ethanol is Feeding Hot Market for Farmland." It caught my eye because living in the middle of Coal Country (and originally hailing from the Corn Belt), ethanol (and corn farmers in the midwest generally) gets blamed for economic ills of all types here. The Coal industry dislikes them for subsidies that keep the price of coal down and crowd them out of the alternative energy market, farmers simultaneously blame them for corn prices that are too high (when they purchase feed) and too low (when they wish to sell their own corn), and consumers are absolutely convinced that the corn farmers are conspiring to elevate the price of a steak.

Anyway, the article pertains to land prices. The fundamental that drives the price of land is its derived demand. In other words, given a fixed acreage of land in the world, to what alternative uses can I allocate this land, and what are the incomes or benefits that a prospective owner can derive from those uses? Real estate's demand can also be driven up by speculative demand. Corn is but one use for the land, but the impact of various government subsidies can have a profound impact on land use in the long run, even when the policies are carefully designed. Most agricultural subsidies are designed to be "decoupled" in a way that the amount of the subsidy is not directly tied to the quantity of output. These payments are meant to resemble what economists call "lump-sum" payments, which do not necessarily impact resource allocation in the short run. However, these subsidies have effects on wealth in the long-run, and therefore may lead to the entry of new producers to the market, thus slightly impacting allocation of land resources. But judging from previous studies, in terms of this impact on land's derived demand, this impact is not likely to cause the price of an acre to double or triple, as the Times suggests.

A study by Chavas and Holt (1990, American Journal of Agricultural Economics) showed the wealth elasticity of these subsidies to be in the range of 0.08% for corn and 0.27% for soybeans between 1954 and 1985, which translatesd to to an cumulative impact on acreage decisions to the tune of 180,000 to 570,000 acres nationally. Some of this acreage impact could arise in the form of new land being mobilized in the production of corn and soybeans or from the reallocation of existing cropland from uses for things like barley or flaxseed in favor of subsidized crops. But, even if the impact on acreage decisions has doubled since 1985, this impact is still a mere drop in the bucket compared to the 300 million acres that were planted for harvest, and over 900 million acres of total farmland according to the most recent Agriculture Census by the US Department of Agriculture.

The Times article cites astronomical land price incresases (around 14% in the last year, and up to 50 or 60 percent in the last 3-5 years in some places) and implies that most of this can be blamed on ethanol policies. It discounts the reality that real estate market has gone generally nuts over the last several years and a bubble similar to the one in residential and commercial real estate may easily be spilling over into the market for farmland. Remember that the price of land is related to the value or benefit received from the next-best of all of the alternative uses for land, but also to speculation. Residential and commercial development pushes up the price of land near the cities and towns where the rest of us live, and farmers will have to find ways to drive up their per-acre yields, increase the price of their output, or compete with other bidders to acquire new land profitably. This competitive bidding from alternative users of land currently used for farms will also inflate the price, and much of it probably reflects a change the speculative demand for land more than the true derived demand or the fundamentals. In other words, as stupid as the government is, sometimes marktets are equally so. Don't get me wrong-- ethanol subsidies are bad, and their impact on markets is injurious in a lot of ways, but let's not lose our heads with how much power the government really has in influencing behavior.

"'Greediest' Act in History"

On July 10, 1930 a headline on page 9 of the New York Times read "[Georgia Congressman Walter] George Says Tariff Hits Canada's Trade-- Our Exports are 'Strangled' by 'Greediest' Act in History, Senator Asserts" in reference to the Smoot-Hawley Tariff. At the time 1,028 economists signed a petition that was printed in the New York Times opposing the restrictions and warning that they would do serious damage to our National economy.

Last Wednesday, August 1, 2007, a full-page ad ran in the Wall Street Journal with the names of 1,028 professional economists who signed a petition to congress against proposed sanctions against China for what the Bush administration and members of Congress have called "unfair trade practices." The "unfair practices" in question basically amount to controlled under-valuation of the Yuan to make the dollar price of China's exports more attractive to American consumers, and thus gain an advantage and accumulate trade surpluses. Be that as it may, this is not necessarily a justification for harsh retaliation.

Most people understand that trade is good for the Global Economy. What most people fail to realize is that trade, generally speaking is good for all countries freely engaged in it; the more the better. Our openness to trade does not benefit China purely at our own expense, as it would in a zero-sum game. Our unilateral openness to trade provides positive aggregate economic gains to both China's economy and our own. (Note: the aggregate gains can mask some very serious distributional consequences. Although not explicitly described here, I'm aware of and concerned about them.) Similarly, the imposition of new barriers to trade (sanctions) hurts both economies and, more importantly, can lead to a trade war. So, not only do we hurt ourselves by unilaterally imposing sanctions, but by provoking further retaliation from China, they have an effect that is exactly the opposite of what we hoped to achieve-- an end to China's unfairly restrictive policies. It would be like a robber going into a bank and saying, "Stop or I'll shoot myself!"

Finally, I got a great follow up question on this: "How do we stop China from sending us dog food with rat poison it in?" The question is a bit of a non-sequitor, but valid in the sense that there are legitimate concerns about safety, etc. Here's my response: "Why not just inspect a sample of goods imported from other countries, in the same way we inspect US-made goods, instead of exaggerating the transgressions of Chinese dog food factories as a justification for policies that distort and injure our entire economy?" I gave the following analogy: "Problem-- UV rays from the sun cause skin cancer. Congressional Solution-- block out the sun. What they don't tell you-- Mr. Burns bribed Mayor Quimby so he could sell more electricity." (Note: Some of you will recognize this as a thinly-veiled reference to an episode of The Simpsons. It is also an oblique reference to "The Petition of the Candlemakers" one of the Economic Sophisms of Frederic Bastiat. Look it up.)

Tuesday, August 7, 2007

Flat on the Flat Tax

This Week, in the Republican debates in Iowa, candidates clammored to line up behind some version of a flat tax. Here is a brief overview of the progressive marginal system: The tax system in the United States is to progressivly increase the tax rate on marginal income earned as your income increases. The idea is to tax at a rate at which increases as one's ability to pay increases. Takehome income never goes down when you move into a higher marginal bracket. This is best illustrated by example: If the marginal tax is 10% on the first $ 20,000 earned and 20% on the income between $20,001 and $40,000, then someone earning $20,000 exactly pays $2,000 in taxes (and takes home $18,000). Someone earning $20,001 pays: 0.1*20,000 + 0.2*1 = $2,000.20 (and takes home $18,000.80). The reasons for this tax philosophy, and the debate over alternative tax systems comes down to a debate over what "fairness" means. A flat tax can be considered "fair" in the sense that everyone pays taxes in the same proportion to their earned income. There may be small gains in efficiency and growth depending on the net burden of the new flat tax rate on consumption and savings (taxes will decline for some, but may increase for others). But, a progressive tax is "fair" in the sense that it promotes a more equitable distribution of income on the "ability to pay" principle.

Senator Brownback, one this year's greatest advocates of the Flat Tax's proponents said, "It will create economic growth." "That's why 16 countries have already gone to a flat tax." While the merits of a flat tax can be debated, let's look at the "16 countries." They are: Albania, Estonia, Georgia, Guernsey, Kazakhstan, Iceland, Iraq, Kyrgyzstan, Latvia, Lithuania, Macedonia, Mongolia, Montenegro, Mauritius, Romania, Russia, Serbia, Slovakia, and Ukraine. (Note: there are 19 countries.) The underlying reason for moving to a flat tax for most of these countries was to obtain more revenue for the government and reduce the government's deficit. The reason that the flat tax was argued to be effective in achieving this end is that it was viewed that a simplification of the tax system and a reduction of the tax rate would invite the informal sector of the economy above ground, and lead to more accurate and complete reporting of income, not as an endorsement of Supply Side theories. In this regard, we should be skeptical of Mr. Brownback's motives and ask whether he supports a flat tax because he promotes pro-growth policies, or if he realizes the need to broaden the tax base to support bloated deficits, and that the most apt way to do this would be to shift the burden of taxation from the rich to the poor.