"We focus on an unusual historical episode in 1859, which saw the forced imposition of an open trading regime on a Japanese economy that had long been in self-imposed conditions of ‘autarky’ or economic self-sufficiency.
In a series of studies, we have made use of this event as a natural experiment to examine the empirical validity of key predictions of the theory of comparative advantage and to quantify the gains from an open trading regime (Bernhofen and Brown, 2004, 2005 and 2016)."
"Consider a simple example. Assume the US is relatively abundant in arable land and relatively scarce in low-skilled labour compared with China. Now if wheat is relatively land-intensive and cloth is relatively labour-intensive, the economies’ relative market prices under autarky would reflect the relative costs of the resources – land and labour – used to produce these two goods. Relative to the price of cloth, the autarky price of wheat would be lower in the US than it would be in China.
Opening up both countries to trading with each other would provide an opportunity for the US to import cloth from China at a lower relative price than the price of domestically produced cloth. Importing cloth from China in exchange for exporting wheat would enable both the US and China to consume more of both goods relative to autarky.
Our US-China example illustrates the principle of comparative advantage for only two goods. In the case of many goods, the principle of comparative advantage can be generalized so that it still preserves the ‘spirit’ of the two-good formulation.
Following Alan Deardorff’s (1980) seminal formulation, the general law of comparative advantage implies an empirically falsifiable prediction: an economy should, on average, export goods with relatively low autarky prices and import goods with relatively high autarky prices."
"Market forces – Adam Smith’s notion of the invisible hand – will increase the potential for an economy to realise the benefits of trade by allocating an economy’s resources in the direction of comparative advantage. Hence, tests of these predictions can be viewed as tests of the efficacy of the market system.
All of these predictions require knowledge about market prices in a state of autarky, but such data generally do not exist. During the twentieth and twenty-first century, market economies have operated primarily with open trading regimes. Economies operating under conditions of autarky have been command or war economies. Nineteenth-century Japan offers an example of a market-based economy operating first under autarky and then under free trade."
"Japan’s opening to trade was involuntary and abrupt. Western military pressure and the British defeat of China in the First Opium War prompted Japan’s rulers to capitulate to western demands to open its markets."
"The treaties capped tariffs and export taxes at 5% of the value of goods and granted western merchants access to several ‘treaty’ ports"
"by the 1840s, Japan was a sophisticated market economy where primarily homogeneous products were produced under highly competitive conditions. Autarky price quotes from major commodity markets in Osaka and Tokyo supplemented with transactions-based price data from merchant, firm and farm account books and the records of the Dutch East India Company cover most of Japan’s traded goods."
"By 1869, the price of Japan’s main export – silk industry products – had doubled in real terms; many importables saw price declines of 30-75%."
"By the mid-1870s, the ratio of imports to GDP was almost 4%. Historians have shown that during our narrow time period of interest (1865-1876), traded goods were for the most part compatible with or substitutes for the goods produced during the late autarky period."
"the case of Japan fulfils all the critical assumptions and the condition that all other things remain equal needed for the comparison of autarky and free trade"
"in each trade year from 1868 to 1875, Japan exported products with relatively low prices during autarky and imported products that had relatively high autarky prices."
"for each year from 1865 through 1876 Japan was a net importer of its relatively scarce factor, such as land, and a net exporter of its relatively abundant factors, such as labour."
"Employing alternative assumptions from the historical literature about Japan’s GDP allows us to estimate the relative magnitude of these gains. For the early post-autarky period, we find that they were about 7% of GDP, which is higher than predicted by the new structural trade literature."
Thursday, August 31, 2017
Gains from trade: evidence from nineteenth century Japan
By Daniel M. Bernhofen (American University) & John C. Brown (Clark University). Excerpts:
The biodiversity cost of carbon sequestration in tropical savanna
From Science Advances.
"Abstract
Tropical savannas have been increasingly viewed as an opportunity for carbon sequestration through fire suppression and afforestation, but insufficient attention has been given to the consequences for biodiversity. To evaluate the biodiversity costs of increasing carbon sequestration, we quantified changes in ecosystem carbon stocks and the associated changes in communities of plants and ants resulting from fire suppression in savannas of the Brazilian Cerrado, a global biodiversity hotspot. Fire suppression resulted in increased carbon stocks of 1.2 Mg ha−1 year−1 since 1986 but was associated with acute species loss. In sites fully encroached by forest, plant species richness declined by 27%, and ant richness declined by 35%. Richness of savanna specialists, the species most at risk of local extinction due to forest encroachment, declined by 67% for plants and 86% for ants. This loss highlights the important role of fire in maintaining biodiversity in tropical savannas, a role that is not reflected in current policies of fire suppression throughout the Brazilian Cerrado. In tropical grasslands and savannas throughout the tropics, carbon mitigation programs that promote forest cover cannot be assumed to provide net benefits for conservation."
Will ECON 101 professors now have to issue ‘trigger warnings’ when discussing the economics of price controls? (more on price gouging after natural disasters)
From Mark Perry.
"Boy, people are easily triggered these days! Who would have thought that a columnist writing about basic principles of ECON 101 would cause such a triggered reaction to basic economic logic that an organization like Forbes would remove Tim Worstall’s article “Hurricane Harvey Is When We Need Price Gouging, Not Laws Against It” from its website. That original link above to the article was taken down by Forbes a day or two after it first appeared on Sunday, allegedly in response to a hurricane of triggered responses, but you can find a cached version here.
What did Worstall write that was so “offensive” to Forbes readers? Here’s a sample of his “triggering” analysis of ECON 101 and price controls (emphasis mine):
Hurricane Harvey has hit Texas and is doing a great deal of damage to both life and property. Which is exactly when we need, positively desire, there to be price gouging, instead of the laws we have against it. The basic underlying economics being that we want whatever scarce resources there are to be applied to their most valuable uses. Further, we want to encourage the provision of more supply of them–both of these being the things which the price system manages for us. That is, allowing prices to rise in the aftermath of a disaster does exactly what we want to happen.As Tim says, the economics of price controls following a hurricane are terribly, terribly simple, and also terribly, terribly non-controversial among economists and others who understand basic logic. And it’s not even a left-right political issue since left-leaning blogger/journalist Matt Yglesias wrote an article for Slate in 2012 following Hurricane Sandy (“The Case for Price Gouging: Trying to prevent merchants from hiking prices during disasters is futile and counterproductive“) saying basically what Worstall wrote in Forbes. Here’s Matt making the case for price gouging (emphasis added):
The economics of this is really terribly, terribly, simple. As a result of the disaster–of any disaster that is–some things are in short supply. Perhaps because some of the supply got damaged, or perhaps because people need to substitute. Floods could, for example, knock out the municipal water supply, leaving people needing bottled water. So relative to the available supply demand has risen. We now need some method of rationing that limited and scarce supply over that increased demand. Rationing by price is always the efficient way of doing this.
We also want something else to happen–we want supply to increase as fast as we can manage that. As we know from our basic Econ 101 supply and demand curves the way to increase supply is for the price to increase. We want, for example, people to start trucking bottled water from Louisiana to Texas. More money to be made by doing so will encourage people to do so. And as that extra supply arrives then prices will go down again as demand is met.
We want people to use less of the scarce resource, we want people to supply more of the scarce resource, allowing the price to rise is the one known way of achieving both those goals. So, why is it that we have these laws against it all? The answer is that we’re human, we are interested in both efficiency and equity and the people more interested in that equity are the ones who have written these laws. The balance, to my mind at least, going much too far toward that equity and against that efficiency.
My own version of dealing with price gougers would be to thank them for the good work they’re doing.
These [price gouging] laws are hideously misguided. Stopping price hikes during disasters may sound like a way to help people, but all it does is exacerbate shortages and complicate preparedness.So a defense of price gouging in 2012 from a left-leaning journalist in a left of center outlet is now too controversial and triggering for today’s readers of Forbes? Perhaps this calls for greater emphasis on economic education in the US so that adults won’t be so triggered by basic, simple, non-controversial economics! As evidence that the economics of price controls following disasters is really both terribly, terribly simple and non-controversial, here’s how it’s explained in a standard economics textbook, the one that I have used for 25 years, “
The basic imperative to allocate goods efficiently doesn’t vanish in a storm or other crisis. If anything, it becomes more important. And price controls in an emergency have the same results as they do any other time: They lead to shortages and overconsumption. Letting merchants raise prices if they think customers will be willing to pay more isn’t a concession to greed. Rather, it creates much-needed incentives for people to think harder about what they really need and appropriately rewards vendors who manage their inventories well.
Major hurricanes, such as Sandy (northeastern United States in 2012), Katrina (Gulf Coast in 2005), Andrew (south Florida in 1992), and Hugo (Charleston, South Carolina, in 1989), not only cause massive property damage and widespread power outages but also dramatically increase the local demand for items such as lumber, gasoline, ice, batteries, chain saws, and gasoline-powered generators. As a result, the prices of these items rise significantly in the wake of a hurricane. After Hurricane Hugo, for example, a bag of ice went up in price to as much as $10, the price of plywood rose to about $200 per sheet, chain saws soared to the $600 range, and gasoline sold for as much as $10.95 per gallon.MP: As you can see, the economic analysis of price ceilings and anti-price-gouging laws that students learn in the third week of an ECON 101 class is terribly, terribly simple and should be terribly, terribly non-controversial. Except of course to those who are “long on indignation and short on economics, ” as Thomas Sowell wrote in a column about price gouging in September 2004 following two major hurricanes in Florida, and featured on CD yesterday.
The higher prices play two important roles. First, they encourage suppliers to bring more of these items quickly to the disaster area. Second, they allocate the supplies to those deriving the greatest value from their use. The higher prices will begin to subside as additional quantities of critically needed supplies flow into the disaster area, but it is precisely these higher prices that encourage this response.
It is a natural reaction to think that the higher prices are unfair and that price controls should be imposed to prevent “price gouging.” State and local officials have often imposed price controls for precisely these reasons. After Hurricane Hugo, the mayor of Charleston signed emergency legislation making it a crime to sell goods in the city at prices higher than their pre-hurricane levels. Similarly, Mississippi’s attorney general announced a crackdown on price gouging after Hurricane Katrina and after Hurricane Sandy, Governor Chris Christie’s administration filed lawsuits alleging price gouging against more than 70 businesses, including hotels and gas stations that had raised prices; convictions are punishable by fines of $20,000 per transaction.
While price ceilings may be motivated by a desire to help consumers by keeping prices low, they exert secondary effects that retard the recovery process. At the lower mandated prices, consumer demand quickly outstrips the available supplies creating artificial shortages. The controls also slow the flow of goods into the area. Shipments that do arrive are greeted by long lines of consumers, many of whom end up without anything after waiting for hours.
The price controls result in serious misallocation of resources. Electric generators provide one of the best examples. The lack of electric power after a hurricane means that gasoline pumps, refrigerators, cash registers, ATMs, and other electrical equipment do not work. Grocery stores can’t open and thousands of dollars’ worth of food spoils. Although gas stations have gasoline in their underground storage tanks, it can’t be pumped out. ATMs and banks can’t operate without electricity, so people can’t get to their money, which is critical because almost all transactions in post-hurricane environments are made with cash.
Hardware stores that sell gasoline-powered electric generators typically have only a few in stock, but after a hurricane suddenly hundreds of businesses and residents want to buy them. In the absence of price controls, the price of these generators would rise and individual homeowners would generally be outbid by businesses, which can put the generators to use operating stores, gas stations, and ATMs. It is these uses that would yield enough revenue to cover the high price of the generators because they facilitate the provision of other goods and services that people desperately want. Given the large sums such businesses would be willing to pay, some with generators at home would even find it attractive to sell or lease them to buyers willing to pay attractive prices.
Market prices would allocate generators and other urgently needed supplies to those most willing to pay for them. Price ceilings keep this from happening. In the absence of price rationing people keep their generators at home, and it is commonplace for hardware store owners with a few generators on hand to take one home for their family and then sell the others to their close friends, neighbors, and relatives to run televisions and hair dryers. Moreover, the incentive of people to take action and bring generators in from other areas is slowed. For example, John Shepperson of Kentucky took time away from his normal job to buy 19 generators, rent a truck, and drive it 600 miles to the Katrina-damaged area of Mississippi. He thought he would be able to sell the generators at high enough prices to cover his cost and earn a profit. Instead his generators were confiscated, Shepperson was arrested for price gouging, held by police for four days, and the generators kept in police custody. They never made it to consumers with urgent needs who desperately wanted to buy them.
The dramatic change in conditions that often accompany a hurricane highlights the role prices play. It also illustrates how the secondary effects accompanying price controls can magnify the damage generated by hurricanes.
Q: Are we now in an era of such escalting indigation and emotional fragility that college professors will have to issue “trigger warnings” when we discuss basic economics principles of price controls in ECON 101? If the readers of a business magazine like Forbes are easily triggered by basic economics, what about today’s young college students? And if the economics of price controls is now too controversial for Forbes, what other terribly, terribly simple and terribly, terribly non-controversial topics will be next to be considered “too triggering to publish”?"
Wednesday, August 30, 2017
Private sector to the rescue in Texas: Never underestimate the power of the private sector to rise up to any challenge
From Mark Perry.
"Because of a hurricane of claims of price gouging in the wake of Hurricane Harvey, the private sector in Texas and Louisiana is getting slammed with lots of criticism for being greedy, uncompassionate, and focusing only on profits. For example, Texas Attorney General Ken Paxton told CNBC that his office as of yesterday has received more than 500 complaints of price gouging, mostly against businesses accused of selling cases of bottled water for $99, gasoline for $10 a gallon, and hotels charging prices triple or quadruple the normal room rates. But there’s a flip side to that story that includes many counter-examples of private sector businesses and private voluntary organizations ignoring profits and demonstrating great compassion following Hurricane Harvey, as was the case after previous disasters like Hurricane Katrina in 2005. Here are some examples:
1. From today’s Investor Business Daily (IBD) editorial “Harvey’s Wrath Reveals The Blessings Of Liberty”:
Over the weekend, dozens of people from Louisiana showed up in Houston as part of what’s become known as the Cajun Navy. This is an all-volunteer group formed during Hurricane Katrina that has grown in size since. Nobody ordered it, or organized it, or coordinated it, or directed it. Nobody’s getting paid. But their efforts are a big reason why the death rate from Harvey has been so low. It’s just one of many stories emerging from Houston that show how, in times of crisis, Americans come together, on their own, to help each other, save lives, and solve problems.2. Also from IBD, here are examples of compassionate activities from the private business sector:
3. Here’s more on “How Walmart Is Responding To Those Hurt by Hurricane Harvey“:
- Gallery Furniture, a Houston-based chain store, opened two of its nearby locations to residents seeking shelter.
- HEB Grocery, which has more than 150 stores in Texas, sent its mobile kitchens to Houston to provide meals, pharmacy services, and ATMs.
- Wal-Mart is delivering nearly 800 truckloads of supplies to the region. It says it plans to send another 1,700 next week.
- KL Outdoor in Michigan is paying the shipping costs to send 2,000 kayaks to the region. Bass Pro is providing 80 boats.
- Duracell is sending out free batteries to anyone impacted by the storm.
- Anheuser-Busch InBev has sent more than 155,000 cans of drinking water.
- Airbnb activated its disaster response program, called “Urgent Accommodations,” which lets evacuees find lodging, with all service fees waived. Those with rooms to spare can use Airbnb to offer their space for free.
- Mobile carriers are issuing waivers and credits to customers in the area.
- The owner of the Kansas-based Vapebar sent a truck load of diapers, nonperishable food, telling a local news channel that ” a lot of bad things are happening down there right now and we need to help them out.”
- Volunteer Houston launched the Virtual Volunteer Reception Center on Monday, which lets those who want to help get matched with relief organizations and agencies.
- A multitude of businesses are donating large sums of money for relief efforts, including Aetna, Amazon, Boeing, Caterpillar, Wells Fargo, Home Depot, Coca-Cola, Lowe’s.
- Waffle House has become an indicator of how bad a weather disaster is because the restaurant chain is so determined to keep operating in the worst conditions.
As floodwaters rise in Houston, Walmart Stores Inc. (WMT) executives, from their headquarters in Bentonville, Ark., are monitoring impacted stores and ensuring that employees are safe and store shelves are stocked as best as possible, Walmart spokesman Ragan Dickens told TheStreet.3. This Washington Post report “Wal-Mart at Forefront of Hurricane Relief” is from September 2005 following Katrina:
“It remains to be seen but this storm has the potential to have a greater impact than Katrina,” Dickens said. Hurricane Katrina hit the U.S. Gulf Coast in August 2005, displacing hundreds of thousands of people in Louisiana, Mississippi and Alabama and racking up more than $100 billion in damages. Dickens spoke to TheStreet midday on Tuesday from Walmart’s emergency operations center, which has been monitoring Harvey since several days before the now tropical storm made landfall near Corpus Christi, Texas, as a category 4 hurricane.
“The first stage is to prepare, the second is to recover and assess and the third is to start bringing stores back online,” Dickens said. On Tuesday morning, 101 Walmart and Sam’s Club locations were offline and within the last three hours that number has dropped to 86, he added.
In Corpus Christi, Dickens said stores are beginning to be reopened and stocked with necessities. Walmart has deployed 1,060 emergency trucks to Harvey-affected areas since the storm made landfall late on Friday, Aug. 24, with 937 of them carrying only crates of bottled water.
Over the next few days, Wal-Mart’s response to Katrina — an unrivaled $20 million in cash donations, 1,500 truckloads of free merchandise, food for 100,000 meals and the promise of a job for every one of its displaced workers — has turned the chain into an unexpected lifeline for much of the Southeast and earned it near-universal praise at a time when the company is struggling to burnish its image.4. From the conclusion of Steve Horwitz’s 2009 article “Wal-Mart to the Rescue: Private Enterprise’s Response to Hurricane Katrina“:
While state and federal officials have come under harsh criticism for their handling of the storm’s aftermath, Wal-Mart is being held up as a model for logistical efficiency and nimble disaster planning, which have allowed it to quickly deliver staples such as water, fuel and toilet paper to thousands of evacuees.
The chain’s huge scale is an advantage in providing disaster relief. The same sophisticated supply chain that has turned the company into a widely feared competitor is now viewed as exactly what the waterlogged Gulf Coast needs.
The Bentonville, Ark., company is rushing to set up mini-Wal-Marts in storm-ravaged areas, handing out clothing, diapers, baby wipes, toothbrushes and food. With police escorts, it delivered two truckloads of ice and water into New Orleans. It is shipping 150 Internet-ready computers to shelters caring for evacuees.
The tale of Hurricane Katrina as a massive failure of government at all levels is a widely accepted one… In contrast to the story of FEMA’s failures, the largely untold but indisputably true story of Wal-Mart’s success illustrates the advantages the private sector has in managing the logistical challenge of resource allocation during a natural disaster. The incentive provided by private ownership and the knowledge provided by market signals, such as prices and profits, all set in a competitive environment, create firms such as Wal-Mart that can respond with agility and improvisation to a crisis such as Katrina with results far superior to those achieved by government agencies.5. From the CNN Money article “Corporate America donates over $40 million to Harvey relief — so far”:
A political economy perspective on Wal-Mart’s heroic performance strongly challenges the belief that with more will or resources or expertise, government can respond effectively to a major disaster. The Katrina story has two parts: the government’s massive failures and the private sector’s notable successes. Disaster policymakers who ignore the latter half of the story do so not only at their own peril, but also at the peril of millions of Americans who may be the next victims of another disastrous government disaster-relief effort.
CNNMoney’s analysis found companies had pledged nearly $40.9 million by late Tuesday afternoon, and 23 companies have donated $1 million or more. Verizon alone contributed $10 million on Tuesday.MP: As much as we’ll continue to hear in the coming weeks from the attorneys general in Texas and Louisiana and the media about greedy price-gouging businesses taking advantage of desperate disaster victims in Texas and Louisiana, there will be a less publicized, but very important counter-story about corporate and private sector compassion and private voluntary rescue efforts from groups like the Cajun Navy.
Meanwhile, employee donation matching programs announced so far could bring in an additional $3.3 million. This figure will likely climb, as some companies left the amount they would match open-ended, while others are also accepting customer donations.
To be fair, some of the media have been reporting the story of corporate and voluntary citizen compassion. For example here’s what The Guardian said in the article “‘It is beautiful’: Volunteer army fans out to help communities flooded by Harvey” about private rescue volunteers in Texas:
Here was the America of the ideal: one nation, indivisible. A republic of citizens looking out for each other. No politics or polarisation. No fake news or social media bubbles. A crisis all could see, and a response all wanted to be part of.And here’s Investor Business Daily:
The nation’s moral character isn’t measured by the number of federal programs, or how big their budgets are, or how many bureaucrats are involved. It is measured in the willingness of its citizens to rally, organize and respond to a crisis all on their own, freely donating their time and resources, experience and know-how to help strangers in need. Too, often, these private efforts get lost in the relentless focus on what government is or isn’t doing.Amen to that. Never underestimate the infinite capacity of the human spirit, human action, and the private sector to rise up to any challenge, to any Category 4 or 5 Hurricane, with compassion, kind-heartedness and a selfless, charitable response that brings out the best of the American people."
For all the terrible news to come out of Houston, the response from individuals, communities and businesses around the country is a beautiful thing to behold.
The Minimum Wage Cut in St. Louis is Bad Politics, Good Policy
Despite the selective outrage from media and politicians, St. Louis workers will be better off without a higher minimum wage.
By Christian Britschgi of Reason.
By Christian Britschgi of Reason.
"Missouri's state minimum wage preemption law—which Reason covered when the state legislature passed it back in May—went into effect yesterday.
Plenty of states have these wage preemption laws. What makes Missouri's law different is that it actually reduces the wage rate in St. Louis from $10, which had been in effect for the past three months, to the state's current $7.70.
Local politicos and media voices have been quick to play up this "theft" by the legislature.
"St. Louis gave minimum-wage workers a raise. On Monday, it was taken away," the Los Angeles Times headline read. "Thousands in St. Louis likely to see wage drop with new law," wrote the Washington Post.
"They literally took money out of the pockets of individuals," State Senator Jamilah Nasheed (D – St. Louis) told ThinkProgress back in May.
The bill became law without the signature of Republican Gov. Eric Greitens, normally a critic of minimum wage increases, because he objected to its politically awkward timing. "I disapprove of the way politicians handled this. That's why I won't be signing my name to their bill," he said in a July statement.
It's hard to disagree with Greitens. The quick back and forth on the minimum wage left businesses in an awkward position, while providing labor unions and their political allies the opportunity of pushing a statewide increase.
A bit more puzzling is why politicians and the media are lavishing special attention on a bill that offers only the potential for worker wage reductions, when laws that certainly reduce their wages escape mention. These laws are called taxes, and most pass without nearly the kind of scrutiny from politicians or national media.
Neither the Washington Post nor the L.A. Times were so concerned about the paychecks of St. Louis workers when St. Louis County voters approved an April sales tax hike. And while Nasheed has fretted about families "smaller paychecks" on Twitter, she has consistently voted for increased taxes on everything from zoos to cigarettes.
The good senator even voted against a 2014 tax bill that increased the personal deduction for low income earners by $500, a tax cut the mainstream media, as far as I can tell, ignored. Tax cuts actually help workers and the economy by putting more money in their pockets.
Minimum wage increases meanwhile harm workers by encouraging employers to cut back on hours and job offerings. Seattle's $15 minimum wage is costing workers $125 a month in lost hours, and killing low wage job growth according to a University of Washington study.
After Washington D.C. shed some 1,400 restaurant jobs during the first six months of 2016 after raising its minimum wage to $10.50. Surrounding counties in Maryland and Virginia added 2,900 in the same period.
Similar examples abound across the country.
So, while Missouri's minimum wage law is bad politics, it is good policy. Government-mandated wage hikes harm the very workers they are designed to help.
Some St. Louis workers may see their wages go down. Others however will escape the joblessness and hours cuts that have plagued the other cities that have raised their minimum wage."
Tuesday, August 29, 2017
Why Houston Flooding Isn’t a Sign of Climate Change
By Roy W. Spence.
"In the context of climate change, is what we are seeing in Houston a new level of disaster which is becoming more common?
The flood disaster unfolding in Houston is certainly very unusual. But so are other natural weather disasters, which have always occurred and always will occur.
(By the way, making naturally-occurring severe weather seem unnatural is a favorite tactic of Al Gore, whose new movie & book An Inconvenient Sequel [ currently #21,168 in Kindle] is dismantled in my new e-book, An Inconvenient Deception [currently #399]).
Floods aren’t just due to weather
Major floods are difficult to compare throughout history because the ways in which we alter the landscape. For example, as cities like Houston expand over the years, soil is covered up by roads, parking lots, and buildings, with water rapidly draining off rather than soaking into the soil. The population of Houston is now ten times what it was in the 1920s. The Houston metroplex area has expanded greatly and the water drainage is basically in the direction of downtown Houston.
There have been many flood disasters in the Houston area, even dating to the mid-1800s when the population was very low. In December of 1935 a massive flood occurred in the downtown area as the water level height measured at Buffalo Bayou in Houston topped out at 54.4 feet.
By way of comparison, as of 6:30 a.m. this (Monday) morning, the water level in the same location is at 38 feet, which is still 16 feet lower than in 1935. I’m sure that will continue to rise.
Are the rainfall totals unprecedented?
Even that question is difficult to answer. The exact same tropical system moving at, say, 15 mph might have produced the same total amount of rain, but it would have been spread over a wide area, maybe many states, with no flooding disaster. This is usually what happens with landfalling hurricanes.
Instead, Harvey stalled after it came ashore and so all of the rain has been concentrated in a relatively small portion of Texas around the Houston area. In both cases, the atmosphere produced the same amount of rain, but where the rain lands is very different. People like those in the Houston area don’t want all of the rain to land on them.
There is no aspect of global warming theory that says rain systems are going to be moving slower, as we are seeing in Texas. This is just the luck of the draw. Sometimes weather systems stall, and that sucks if you are caught under one. The same is true of high pressure areas; when they stall, a drought results.
Even with the system stalling, the greatest multi-day rainfall total as of39 a.m. this Monday morning isjust over 3039.7 inches, with many locations recording over 20 inches. We should recall that Tropical Storm Claudette in 1979 (a much smaller and weaker system than Harvey) produced a 43 inch rainfall total in only 24 hours in Houston.
Was Harvey unprecedented in intensity?
In this case, we didn’t have just a tropical storm like Claudette, but a major hurricane, which covered a much larger area with heavy rain. Roger Pielke Jr. has pointed out that the U.S. has had only four Category 4 (or stronger) hurricane strikes since 1970, but in about the same number of years preceding 1970 there were 14 strikes. So we can’t say that we are experiencing more intense hurricanes in recent decades.
Going back even earlier, a Category 4 hurricane struck Galveston in 1900, killing between 6,000 and 12,000 people. That was the greatest natural disaster in U.S. history.
And don’t forget, we just went through an unprecedented length of time – almost 12 years – without a major hurricane (Cat 3 or stronger) making landfall in the U.S.
So what makes this event unprecedented?
The National Weather Service has termed the event unfolding in the Houston area as unprecedented. I’m not sure why. I suspect in terms of damage and number of people affected, that will be the case. But the primary reason won’t be because this was an unprecedented meteorological event.
If we are talking about the 100 years or so that we have rainfall records, then it might be that southeast Texas hasn’t seen this much total rain fall over a fairly wide area. At this point it doesn’t look like any rain gage locations will break the record for total 24 hour rainfall in Texas, or possibly even for storm total rainfall, but to have so large an area having over 20 inches is very unusual.
They will break records for their individual gage locations, but that’s the kind of record that is routinely broken somewhere anyway, like record high and low temperatures.
In any case, I’d be surprised if such a meteorological event didn’t happen in centuries past in this area, before we were measuring them.
And don’t pay attention to claims of 500 year flood events, which most hydrologists dislike because we don’t have enough measurements over time to determine such things, especially when they also depend on our altering of the landscape over time.
Bill Read, a former director of the National Hurricane Center was asked by a CNN news anchor whether he thought that Harvey was made worse because of global warming. Read’s response was basically, No.
“Unprecedented” doesn’t necessarily mean it represents a new normal. It can just be a rare combination of events. In 2005 the U.S. was struck by many strong hurricanes, and the NHC even ran out of names to give all of the tropical storms. Then we went almost 12 years without a major (Cat 3 or stronger) hurricane strike.
Weird stuff happens.
I remember many years ago in one of the NWS annual summaries of lightning deaths there was a golfer who was struck by lightning. While an ambulance transported the man to the hospital, the ambulance was stuck by lightning and it finished the poor fellow off.
There is coastal lake sediment evidence of catastrophic hurricanes which struck the Florida panhandle over 1,000 years ago, events which became less frequent in the most recent 1,000 years.
Weather disasters happen, with or without the help of humans."
Hurricane Harvey and the National Flood Insurance Fiasco
Don't build in flood plains, and especially don't rebuild in flood plains
By Ronald Bailey of Reason.
By Ronald Bailey of Reason.
"Texans, watch out. An aftershock is following behind the catastrophic flooding produced by Hurricane Harvey in coastal Texas: The National Flood Insurance Program (NFIP) is coming up for reauthorization.
The main lesson that the public and policymakers ought to learn from Harvey is: Don't build in flood plains, and especially don't rebuild in flood plains. Unfortunately, the flood insurance program teaches the exact opposite lesson, selling subsidized insurance whose premiums do not come close to covering the risks home and business owners in flood prone areas face.
As a result, the NFIP is currently $25 billion in debt.
Federally subsidized flood insurance represents a moral hazard, Kevin Starbuck, Assistant City Manager and former Emergency Management Coordinator for the City of Amarillo, argues, because it encourages people to take on more risk because taxpayers bear the cost of those hazards.
Federal Emergency Management Agency data shows that from 1978 through 2015, 3.8 percent of flood insurance policyholders have filed repetitively for losses that account for a disproportionate 35.5 percent of flood loss claims and 30.5 percent of claim payments, Starbuck says. Most of these properties were grandfathered in before the NFIP issued its flood insurance rate maps. The NFIP is not permitted to refuse them insurance or charge them rates based on the actual risks they face.
Clearly, taxpayers should not be required to subsidize people who choose to build and live on flood plains. When Congress reauthorizes the NFIP, it should initiate a phase-in of charging grandfathered properities premiums commensurate with their risks. This will likely lower the market values of affected homes and businesses and thus send a strong signal to others to avoid building and living in such risky areas.
To avoid the problem of moral hazard, folks who choose to live in flood prone areas should bear the costs of the risks they face. After Hurricane Ike hit Galveston and Houston in 2008 causing $29 billion in damages, business and government leaders suggested building the "Ike Dike" along the coast to protect against future hurricane storm surges. One estimate puts the cost of building the dike's sand-covered dunes with hardened cores at $5 billion. Of course, proponents expected the federal government would pay for most of the dike's construction costs.
Congress is unlikely to unravel the flood insurance mess by the end of next month, but there are some lessons from recent weather disasters that lawmakers should take into account. If cities like Houston and Galveston need new and better coastal and flood defenses, then their citizens should pay for them.
If Texans living in flood prone areas refuse to tax themselves enough to protect themselves and their property that means that it doesn't make economic sense to live and work there. One proof of the adequacy of their coastal and flood defenses would be the willingness of private insurers to offer flood policies to residents. The same logic applies to all coastal counties. Ultimately, ending flood insurance subsidies will reduce property losses put fewer lives at risk."
Monday, August 28, 2017
How The Government Hurts The Poor By Pusing Them To Buy Lottery Tickets
See Powerbull: The Lottery Loves Poverty: It’s bizarre: States push lotto tickets on the poor, earn $70 billion, and then put the buyers on welfare. By Arthur C. Brooks.
"What is America’s national antipoverty strategy? Apparently, the Powerball lottery. All across the country last week, millions of people lined up for hours to get their shot at a payout that would end their financial struggles. On Wednesday night, one ticketholder won a $759 million jackpot. That sounds like a lot until you hear the government’s take.
Powerball—the lottery shared by 44 states, the District of Columbia and two territories—is just one of the sweepstakes run by 47 jurisdictions in the U.S. These games produce nearly $70 billion a year in government revenue and enjoy profits of about 33%—much higher than margins in the private gambling industry.
Who are these lotteries’ most loyal customers? Poor people. Lots of folks buy the occasional ticket, but studies have long shown a steady association between poverty and lottery play. Many scholars report that the poorest third of Americans buy more than half of all lotto tickets, which is why states advertise so aggressively in poor neighborhoods.
Harmless entertainment, you may say, but poor people don’t see it that way. They tend to view lottery tickets as an investment. Duke University social scientists Charles Clotfelter and Philip Cook reported in a 1990 study that people earning less than $30,000 a year are 25% more likely to say they play the lottery for the money rather than the entertainment.
Hardly a surprise, since this is the idea that lottery advertising is selling. In California, the slogan is, “Imagine what a buck could do!” In New York? “Hey, you never know.” Scholars have dug up evidence that states intentionally direct such ads at vulnerable citizens. A marketing plan for Ohio’s lottery some years back recommended scheduling campaigns to coincide with the distribution of “government benefits, payroll and Social Security payments.”
These kinds of ads seduce poor people with the illusion of riches. Even if someone feels compelled to throw a financial “Hail Mary,” the lottery is a terrible choice. The odds of winning last week’s jackpot were about 1 in 292 million. And the average return from $1 spent on lottery tickets is 52 cents, according to a 2002 paper by Melissa Kearney, an economist now at the University of Maryland.
But this isn’t easy to see for those with low levels of education. My own analysis of survey data from the National Gambling Impact Study Commission suggests that someone who didn’t attend college may think the return on lottery tickets is 40% higher than the estimate given by a person of similar demographics who holds a degree.
Another common mistake is the “hot-hand fallacy.” The lottery is totally random, yet players are attracted to stores that previously sold winning tickets, as if they were lucky. A 2008 study by Ms. Kearney and Northwestern’s Jonathan Guryan showed that a winning ticket can boost a store’s lotto sales by 38% in the week after the announcement. This is especially true among populations with high proportions of high-school dropouts and households on welfare.
What’s the social cost of all this? Ms. Kearney says lottery players finance their tickets largely by cutting spending on necessities. After a state introduces the lotto, the bottom third of households shift about 3% of their food expenditures and 7% of their mortgage payments, rent and other bills. Effectively, the lottery works like a regressive tax.
It might strike you as bizarre that the government spends billions on nutrition and housing programs for the poor while simultaneously encouraging poor people to move their own money away from these necessities and toward the state’s gambling monopoly. In fact, that $70 billion in annual lottery revenues is strikingly close to what the government spends on food stamps. Is there any set of policies more contradictory than pushing lotto tickets on poor people, and then signing them up for welfare programs that make them financially dependent on the government?
Politicians who profess a desire to alleviate poverty often lament how few levers they have to pull. So here’s a novel idea: Stop selling poor people a mirage of the American dream at the end of a convenience-store line."
More on ‘Price-Gouging’
From Don Boudreaux.
"Suppose that on Monday I buy a full tank of propane from a nearby merchant for $50. When making this purchase, my plan was to use the propane over the course of the next several weekends to fuel my outdoor grill in order to cook hamburgers and hotdogs for myself and friends who drop by for a few evening meals. Suppose further that if someone on Tuesday offers to buy this propane from me for $55 I’d sell it to that person (my ease of acquiring a new tank of propane for $50 being quite high).
On Wednesday morning a devastating storm hits my neighborhood, obstructing many roads and knocking out supplies of electricity and natural gas for what promises to be at least a week, and perhaps much longer. On Wednesday night, after the storm passes, a stranger offers to buy my full tank of propane for $55. I decline the offer because now I know that I’ll need that propane to cook my daily meals. I know also that I’m unable easily to get to a store to buy another tank of propane.
“Well, how much do you want for the propane tank?” the persistent stranger asks. I think for a moment and say “$200.”
“That’s outrageous!” the impertinent stranger insists. “I know that you paid only $50 for that tank of propane, and that you would probably have sold it yesterday for as little as $55. I’m reporting you to the police, for we have in this town a prohibition on price-gouging!”
Have I here committed a ethical offense? If so, is it an offense that rises to the level of one that warrants intervention by the state? And if you’re a supporter of government prohibition of so-called ‘price-gouging,’ would you wish to see me prosecuted and convicted if my town does indeed have in place a statutory prohibition of ‘price-gouging’? If not – that is, if you’re unwilling to prevent me from charging whatever price I wish for my tank of propane – why are you willing to prevent other people – namely, merchants – from charging whatever prices they wish for whatever it is they own and might be persuaded to sell if they fetch attractive-enough prices?
I’m aware that not-implausible answers to this last question can be offered. But I wonder how persuasive those answers are when they are thought about long and hard, especially using the economic way of thinking."
Sunday, August 27, 2017
Unintended Consequences Of Restricting Fracking In The Northeast
Cuomo’s Natural Gas Blockade: New York’s Governor is raising energy costs for millions of Americans. WSJ editorial. Excerpt:
"Energy costs in the Northeast are already the highest in the nation outside of Alaska and Hawaii in part due to the shortage of natural gas. Northeast residents pay 29% more for natural gas and 44% more for electricity than the U.S. average, according to a recent study by the U.S. Chamber of Commerce. Industrial users in the Northeast pay twice as much for natural gas and 62% more for electricity.
Electricity and natural gas constitute many manufacturers’ biggest costs, which in part explains why so many are fleeing the Northeast. Since 2010 manufacturing economic output has increased by 1.5% in the Great Lakes region while shrinking 0.7% in New England and 2.4% in New York.
Inclement weather can cause energy costs to skyrocket. During the 2014 polar vortex, natural gas prices in New York City spiked to $120 per million Btu—about 25 times the Henry Hub spot price at the time. Natural-gas power plants in New York are required to burn oil during supply shortages. Due to pipeline constraints and the Jones Act—which requires that cargo transported between U.S. ports be carried by ships built in the U.S.—Boston imports liquefied natural gas during the winter from Trinidad. This is expensive and emits boatloads of carbon.
Speaking of which, about a quarter of households in New York, 45% in Vermont and 65% in Maine still burn heating oil—which is a third more expensive than natural gas and produces about 30% more carbon emissions per million Btu. Yet many can’t switch due to insufficient natural gas and pipeline infrastructure."
What Lighthizer Misses On NAFTA
See Lighthizer’s Economics Deficit. WSJ editorial. Excerpts:
"Total trilateral merchandise trade has grown to more than $1 trillion annually from less than $300 billion in 1993.
Enter Mr. Lighthizer’s trade-deficit preoccupation, which holds that unless Mexico buys the same dollar amount of wheat and corn from the U.S. that the U.S. buys in widgets from Mexico, Americans are losing out. This bizarre economics is dangerous to American prosperity.
One of Nafta’s many benefits to American global competitiveness is that it allows U.S. manufacturers to access low-priced intermediate goods from the neighbors, add value in the U.S., and then export the final product around the world. Consumers at home and abroad find these U.S. products attractive because they are well-made and competitively priced thanks to continental supply chains. Workers and wages have benefitted too. The growth of high-paying U.S. jobs in technology, innovation, design and marketing depend on this free-trade web of supply chains.
U.S. car and truck makers benefit in particular from intracontinental trade. Production facilities in all three Nafta countries ship unfinished products across borders, often multiple times, before completion. It is not an exaggeration to say that free-trade access to labor and capital across North America is largely responsible for the survival of the U.S. auto industry. John Bozzella, CEO of the Association of Global Automakers, told Reuters last week that U.S. auto production has increased by more than one million vehicles annually since Nafta and there has been a boom in exports. Whether the industry can survive Mr. Lighthizer is another matter."
"Mr. Lighthizer says he wants to restore jobs that have been lost since 1994 when Nafta was launched. But most of those jobs were lost to technology and higher labor productivity. New employment opportunities depend on new export markets and enhanced competitiveness. Step one is to let go of the obsession with Nafta trade deficits."
Saturday, August 26, 2017
The RAISE Act Would Hurt U.S. Taxpayers
By Alex Nowrasteh of Cato.
"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).
The Fiscal Net Present Value of Individual Low-Skilled Immigrants and Their Descendants
An immigrant’s education and age of immigration are the two most relevant characteristics used by the NAS to estimate his fiscal NPV. The more educated and younger the immigrant is, the more positive his fiscal impact. Table 8-14 in the NAS shows that age is very important—as almost every fiscal estimate looking at immigrants alone or immigrants plus their descendants has a positive fiscal NPV for those who immigrated between ages 0 and 24. However, all immigrants have a negative NPV if they entered at age 65 years or older, regardless of education. There is variation here, of course, as it is more fiscally positive for a high school graduate to immigrate at age 19 than age 17 as it will save taxpayers at least one year of public schooling, but those numbers are not reported in the averages for NAS’ broad age ranges.
Despite Rector’s first claim, the NAS does not have a 75-year fiscal projection that finds a fiscal NPV of -$142,000 per immigrant with a high school degree or below for the local, state, and federal governments. It is unclear how he calculated that figure based on the NAS findings.
My analysis uses the total impact results for immigrants and their descendants for the consolidated federal, state, and local governments in NAS table 8-14 that excludes public goods, just as Rector recommends, and adjusts for the age and eventual education of the new immigrants. The adjusted NAS 8-14 table is displayed here in Tables 1–3. This exercise is carried out under the same two budget scenarios provided by the Congressional Budget Office (CBO) and an additional unrealistic scenario that assumes that current budgets, benefits, and tax rates will continue with no adjustment despite the looming entitlement crisis.
Roughly 62 percent of immigrants with less than a high school education are younger than 18.
Tables 1–3 make two adjustments. First, they conservatively estimate that those under the age of 18 will eventually be as educated as older immigrants who arrived in the same years. Second, they adjust for the immigrant age of arrival based on 2013-2016 CPS data. Those two minor adjustments produce an average NPV of -$24,233 per dropout immigrant in the best CBO estimate (Table 1). Those adjustments mean that an immigrant with only a high school education has an NPV of +$14,988. According to this calculation, the fiscal NPV for the average immigrant with a high school degree or less is -$9,244—94 percent below Rector’s estimate of -$142,000.
Averaging results over the three different budget scenarios mentioned above barely worsens the outcomes. The average fiscal NPV of an individual immigrant falls to -$27,700 for dropouts and +$7,275 for high school-only graduates. The average fiscal NPV for dropouts and high school graduates across these three budget scenarios is -$20,426—86 percent below Rector’s estimate.
Table 1
NPV Fiscal Impact on Federal, State, and Local Government, CBO Long-Term Budget Outlook, by Age and Eventual Education at Arrival.
Sources: NAS Table 8-14, Current Population Survey, Author’s Calculations.
Total HS SomCol BA >BA Total Taxes HS SomCol BA >BA Total Benefits HS SomCol BA >BA Total
Table 2
NPV Fiscal Impact on Federal, State, and Local Governments, CBO Long-Term Budget Outlook with Deficit Reduction, by Age and Eventual Education at Arrival.
Sources: NAS Table 8-14, Current Population Survey, Author’s Calculations.
Total HS SomCol BA >BA Total Taxes HS SomCol BA >BA Total Benefits HS SomCol BA >BA Total
Table 3
NPV Fiscal Impact on Federal, State, and Local Government, No Budget Adjustment, by Age and Eventual Education at Arrival.
Sources: NAS Table 8-14, Current Population Survey, Author’s Calculations.
Total HS SomCol BA >BA Total Taxes HS SomCol BA >BA Total Benefits HS SomCol BA >BA Total
Cut Benefits for Immigrants
Robert Rector is famous for his work on America’s bloated means-tested welfare state. Although the benefits sections in Tables 1–3 include more than welfare, a mere 10 percent cut in the NPV of benefits for only immigrants (not for their descendants) slashes the average fiscal NPV for immigrant dropouts in Table 1 by 52 percent and increases the surplus by 80 percent for high school-only graduates. This 10 percent cut in the NPV of immigrant benefits adjusts the average fiscal NPV for each dropout and high school-only graduate is +$15,441—a whopping $157,441 more positive than Rector’s estimate.
The average fiscal NPV across all three budget scenarios for high school graduates and below when the NPV of immigrant benefits is cut by 10 percent is -$12,197—a mere 9 percent of Rector’s estimate. That number includes the wildly unrealistic assumption that government spending can continue at its present unsustainable growth rates for the next 75 years. Reducing government benefits for immigrants, or everybody for that matter has a large and immediate positive fiscal impact on the future flow and the stock of immigrants already living in the United States.
Fiscal Net Present Value of the Current Immigration System, the RAISE Act, and Increased Legal Immigration
My simple analysis in this blog post misses many details about the RAISE Act. For example, the RAISE Act would have a negative fiscal impact by shrinking the stock of skilled foreign workers by forcing at least 500,000 H-1B workers out of the current green card backlog and out of the country in its second year. H-1B workers can extend their work permit on an annual basis if they are currently in line for a green card. Since RAISE would boot them out of the green card line after a year, H-1B workers will be unable to extend their work visas on an annual basis and will be forced to leave. If they have enough points for a green card then they will have to wait overseas. Those 500,000 workers have about as many spouses and minor children who are likely to be either highly educated or to become so. Removing so many skilled workers on H-1B visas would have a large and immediate negative fiscal impact that is not captured in this simple model.
This section uses the NAS Table 8-14 CBO Long Term Budget Outlook for Immigrants and their descendants to look at the impact on budgets for the combined state, local, and federal governments for a single year of legal green card immigration. I make the same assumptions as in the above section for looking at the current immigration system, how the flow of immigrants would change under the RAISE Act, and under a hypothetical doubling of immigrants with at least a college degree combined with a 25 percent increase in immigrants with some college education or less. The last scenario is a skills-boosting legal immigration reform that provides an alternative policy point as a comparison. In those two scenarios, I assume that any shift in future immigration is proportional to the age ranges that are currently entering so that any percent shift in the number of immigrants under one scenario is applied proportionately across all ages in every other scenario. This section does not look at the stock of current immigrants as that would remain unchanged under each iteration.
Some of the following numbers may seem huge but they are actually small in comparison to the 75-year NPV of $320.3 trillion for local, state, and federal budgets, assuming a 1.5 percent growth rate in budgets at a 3 percent discount rate.
Current Immigration Policy
This section assumes a million green cards is the current policy. Although that number is not set in law, that is about the average over the last several years. The fiscal NPV of all immigrants that year is +$299.9 billion (Table 4).
Table 4
Current Immigration System, One Year, NPV Fiscal Impact on Federal, State, and Local Government, CBO Long-Term Budget Outlook, by Age and Eventual Education at Arrival.
Sources: NAS Table 8-14, Current Population Survey, Author’s Calculations.
Age HS SomCol BA >BA Total
RAISE Act
For future annual flows under the RAISE Act, I assume a proportional 50 percent increase in immigrants with at least a college education and a corresponding drop in those with a high school degree and below. Even with that, the number of new immigrants with at least a college education under RAISE would be more than 100,000 below what it is under the current system. Thus, the annual fiscal NPV for the RAISE Act is +$222.9 billion—$77.1 billion below the current system (Table 5). Any fiscal gains from decreasing the low-skilled immigrant flow would be overwhelmed by fiscal losses from the RAISE Act’s indirect decrease in the number of skilled immigrants from cutting family reunification.
The RAISE Act’s NPV of these annual flows is +$6.7 trillion over the next 75-years discounted at 3 percent—a staggering $2.3 trillion below the current system’s 75-year fiscal NPV of just over +$9 trillion.
Table 5
RAISE Act, One Year, NPV Fiscal Impact on Federal, State, and Local Government, CBO Long-Term Budget Outlook, by Age and Eventual Education at Arrival.
Sources: NAS Table 8-14, Current Population Survey, Author’s Calculations.
Age HS SomCol BA >BA Total
Double Skilled Immigration and 25 Percent Increase in Lower Skilled Immigration
Congress could also decide to increase legal immigration with a heavy emphasis on more skilled workers without cutting family reunification or other immigrant categories. Using the same tools and assumptions employed above, a 50 percent increase in the number of skilled immigrants and a 25 percent boost in the number of low-skilled immigrants produces the most positive fiscal effects: A one-year fiscal NPV of $574.2 billion (Table 6). The fiscal NPV in one year under this scenario is $274 billion above the current system and $351 billion above what would exist under the RAISE Act.
Table 6
Pro-Skill Immigration Increase, One Year, NPV Fiscal Impact on Federal, State, and Local Government, CBO Long-Term Budget Outlook, by Age and Eventual Education at Arrival
Sources: NAS Table 8-14, Current Population Survey, Author’s Calculations.
Age HS SomCol BA >BA Total
Wages
Another claim made in Rector’s piece is that “Low-skill immigration reduces the wages of similar U.S.-born workers. An immigration-induced increase in the low-skill labor force of 10 percent can reduce the wages of low-skill non-immigrant labor by 3 to 10 percent.” The last paper that found that a 10 percent increase in immigration reduces wages by about 10 percent is a working paper by George Borjas and Joan Monras. Much of that paper is an extension of Borjas’ other work on the wage-effect of the Mariel Boatlift.
In addition to the finding that Rector reported, Borjas and Monras also found cross-skill complementarities whereby a 10 percent increase in the number of dropout immigrants increased the relative wages of native high school-only graduates by 7 percent. Since high school graduates earn about $180 per week more than dropouts do and there are about three times more of them (9.4 percent to 28.6 percent), the net wage increase is actually positive—as I re-discovered when re-creating Borjas’ results. Immigrants have a net positive effect on native-born American wages—especially on Americans with more skills. Anything more than a back-of-the-envelope fiscal analysis should consider those wage effects.
Conclusion
The RAISE Act will increase the deficit relative to current immigration policy when updated CPS data on new arrivals are applied to the findings of the National Academy of Sciences. A doubling of skilled immigrants, even if it is accompanied by a modest 25 percent increase in the flow of lower-skilled immigrants, almost doubles the fiscal benefit. Small cuts in benefits received by immigrants increase the fiscal benefits by large amounts.
The federal government faces a severe budget crunch in the near future due to the cash shortfalls in Social Security and Medicare. Immigration has increased net-revenues but not by nearly enough to offset the cost of the looming entitlement crisis. Tinkering with immigration flows is not a serious way to address government debt as only fiscal reforms to means-tested welfare schemes, entitlement programs, and other government expenditures can do that. The RAISE Act would worsen the federal government’s fiscal position even without considering how removing 500,000 skilled immigrant workers on H-1B visas within two years of enactment would affect revenues.
Republicans control both Houses of Congress and the Presidency. If they are serious about reducing the budget deficit then they need to tackle spending head on rather than playing around with the future flow of foreign workers through complex RAISE Act-like schemes that will actually make things worse. Furthermore, it is more likely that Congress will be able to reduce these benefits than pass the RAISE Act. Conservatives should jump at the opportunity to use immigration as a reason to cut the welfare state rather than using welfare as a reason to cut immigration."
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