Browsing the blog archives for January, 2013.

The Economics of Immigration

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The immigration issue has resurfaced, and the most recent “bipartisan” proposal sounds a lot like the last one. The pathway to citizenship for those who violated U.S. law and crossed the border is proffered as a practical solution for the 11 million (or more) illegal immigrants, mostly from Mexico and other parts of Latin America. The idea that they would pay a fine (what if they don’t have the money?) and back taxes (who can figure out what they owe?) is mere window dressing meant to position the proposal as a balanced approach, to use one of Obama’s favorite terms to describe leftist ideas couched in common sense rhetoric. The proposal also assures us that those with criminal records will be deported, without mentioning why this isn’t already occurring or why those with such records would register with the government under such a threat anyway. This is clearly about politics and demographics. I’d like to focus on a key issue, the type of immigrants we should welcome.

The proposal increases the number of visas provided to individuals skills in certain high-demand professions. This is an excellent idea and can easily be addressed without “comprehensive” reform. American firms face intense competitive pressure from rivals in other nations for a number of reasons, one of them being the shortage of workers in scientific and other technical areas. Such highly trained immigrants are well educated, usually speak fluent English, and offer an immediate contribution to the U.S. economy. They will pay taxes from the start. They represent a net economic benefit, not a cost.

In contrast, most of the “undocumented” immigrants currently in question are not part of this group. Because they tend to be less educated and do not speak fluent English, they immediately extract benefits from the system. Many firms are lobbying for various forms of amnesty because these immigrants are willing to do the jobs other Americans won’t, at least not for the wages they are offered. The social costs associated with individuals in this group–including schools for their children, medical care, and even incarceration–are much greater than the savings to business (see Robert Rector’s exhaustive study for a detailed look at the numbers). Put another way, a typical CEO is more concerned about the dollar saved by hiring an immigrant than the several dollars in costs shifted to society as part of the deal. This viewpoint doesn’t necessarily make the CEO a bad person, but we need to see the big picture and reject the idea because it only exacerbates the redistribution of wealth and increased debt.

Those who favor an amnesty solution comprise an interesting lot. In addition to the aforementioned business argument, others argue that illegals will not be deported anyway, so we might as well find a way to get them on the tax roles. Of course, this group would pay little if any net taxes anyway. Many Republicans see a political advantage in resolving the problem in a bipartisan way, although unskilled immigrant voters will always lean heavily to the party that provides the most entitlements. Still others have a soft heart for many of the immigrants who leave their home country just to find a minimum wage job. I share this sentiment, but I also recognize the irrationality of sharing public resources–those financed by other people’s taxes–exclusively with those in other countries who choose to violate U.S. sovereignty by crossing the border. If helping the downtrodden is really our objective, shouldn’t we be more interested in helping those who have respected our laws and haven’t come to the U.S.?

Admittedly, this is a complex issue. However, there is no reason why it cannot be addressed one point at a time. Securing the border, deporting criminals, and providing more visas for highly skilled workers need not be a part of a “comprehensive solution.” These measures can and should be passed immediately. Amnesty can be rejected if we are willing to get serious about deportation and prosecute companies that knowingly hire illegal immigrants. This is not the easy road to travel, but it is by far the best road over the long term.

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Nearing the End of Government Motors

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After selling 200 million shares of GM stock in December, the U.S. government owns only 19% in the carmaker and plans to sell the remaining 300 million shares by early 2014.

This shouldn’t come as a surprise to those who’ve followed the GM saga. The December sale cemented a loss to taxpayers of around $12-13 billion, but it was certain to happen after the election. The story isn’t receiving a lot press, however, and the exit will no doubt be hailed as a triumph of government intervention when all is said and done. The remaining sale will quietly cost us another ~$15-20 billion–depending on the stock price–and will be completed well before the midterms. While I strongly favor the government’s liquidation of GM shares, anyone who thinks the process was coincidentally nestled between the 2012 and 2014 election cycles fails to understand the political nature of the bailout.

The sale of GM shares will mark the end of a costly and unnecessary infusion of politics in the private sector. Supporters will argue that millions of jobs were saved, but this analysis remains both convenient and illogical. They will never provide a convincing calculation for the number of “saved jobs.” They will continue to incorrectly assume that GM would have dissolved without a government bailout. They will fail to recognize the costs associated with the bailout and the ongoing support for the carmaker, including such measures as the $7500 subsidy for purchases of the Chevy Volt. And they will never see the jobs that might have replaced those at GM and the products those workers might have produced if GM had downsized through a normal bankruptcy.

Unfortunately, the real costs extend far beyond the GM bailout. Rather than focus on satisfying customers in a highly competitive marketplace, executives have learned that political partnerships can have a lot more to do with long term survival if you’re too big too fail. And while we’ve been told that bailouts won’t happen again, they can and will whenever the political winds blow in the right direction.

The irony here is that free enterprise always takes a hit when Washington takes sides in the private sector. We are told that capitalist greed and mismanagement wreak havoc on the middle class, and government must step in to save the day. Yet, many overlook the political corruption and regulations that dictate business activity in the first place. Whether its auto production or the banking sector, firms are not entirely free to make their own hiring and production decisions anyway. In other words, Washington often intervenes to solve the very problems it creates, at a net cost to taxpayers. This is a more difficult case to make than the emotion-laden “save American jobs” pitch, but it is the one that must be made going forward if we are to produce the kind of productivity and growth needed to save our economy over the long term.

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Cronyism & Capitalism

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I had the opportunity to spend last week at a conference in South Africa. The people there generally like Americans, but this was a conference with diverse representation from the US, Europe, Africa, and a few from Asia and Australia. Discussions were global in nature, with an emphasis on development of the African continent.

The most intriguing comment I heard (publically stated) was a version of an old familiar one: “Take a look at the world. Look at what American capitalism has done to it.” The speaker continued, calling for what a “global transformation that charts a different course…not based on greed.” A number of people nodded in agreement and I engaged two of them later, but the conversation was a little different than I expected.

Their argument can be summarized as follows: Capitalism has created income disparities between the rich and poor, and crony capitalism is corrupt and immoral. A new world order was needed to resolve the problems, including greater power for the UN, a global wealth tax to redistribute capitalism’s illicit gains to poorer nations, intense global regulation to halt the ravages of industry-induced global warming. Business schools can play a role by rejecting the supremacy of capitalism and self-interest as the driver of economic activity.

They were genuinely confused when I agreed with their assessment of the problem but offered an entirely different vision for resolving it. Indeed, capitalism has created income disparities; on average, the wage gap between top and bottom earners is greatest in high growth societies. For various reasons, some individuals in capitalistic societies become great producers and generate substantial wealth for themselves as part of the process. They are simply responding to the incentive system embedded in capitalism and profiting by meeting the needs of others. In a (genuinely) capitalist system, the rich who are so frequently derided obtain their wealth only when others voluntarily transact business with them. Put another way, those at the top of the economic ladder can only get there by serving the needs of society. The simplest way to avoid the “income gap” is the eliminate capitalism, thereby making everyone equally poor, but those really concerned with the poor should focus on their prospects, not the high producers.

They accepted my explanation—more or less—and moved on to their presumed trump card, “crony capitalism.” Doesn’t “raw capitalism” produce wealth for the cronies? Isn’t big government necessary to save society from cronyism? I don’t have the space to reproduce the entire dialogue, but suffice to say that they were surprised to hear that I—a staunch defender of capitalism—share their contempt for the collusion between government and large corporations often called crony capitalism. This is not capitalism, but rather a product of the type of government control they propose to solve it. When corporations engage in back room deals with government, both sides are to blame. Why not pursue real capitalism, a system devoid of bailouts and other forms of government intrusion that immorally redistribute private wealth? They didn’t completely accept my argument, but it was obvious that they had never heard it pitched that way before.

There’s a key take-home point here. The best way to engage a leftist is to start with common ground. Cronyism is a serious problem and has become capitalism’s greatest perceived liability. The problem, however, is that cronyism is really more about fascism and socialism than about capitalism. It flows from a system that allows government to trample the rights of some to advance the interest of others in the name of the common good. As defenders of liberty, we need to attack it as well. Real capitalism is the solution, not the problem.

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The way out

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The proverbial can has been kicked down the road again. We have officially averted the so-called fiscal cliff by raising taxes. Any spending cuts in the deal are meaningless and will be forgotten when the next stimulus bill is proposed. The next “crisis” on the docket is raising the debt ceiling so we can continue this insanity unabated.

This was a bad experience for the Republicans, who seemed unable to articulate a clear fiscal vision for the country. Obama certainly controls the mainstream media spin, but the political opposition can do much better. The way out of this mess is not easy but involves 3 steps.

  1. Acknowledge the problem. This should be a no-brainer with a $16 trillion national debt and a trillion-plus added each year.  Many Americans actually believe that the income tax hike in the tax bill will produce enough revenue to make a difference (assuming that the net effect is positive). They believe in the gurus and magicians at the Fed who appear to keep the money flowing in the face of economy calamity. My guess is that a little less than half of us understand that something is seriously wrong. We need a strong majority in this camp before we can move to #2.
  2. Promote a radical tax overhaul until it passes. I like the Fair Tax option, but a flat tax is easier to achieve. The current approach is wrong in two key respects. (1) Economically, the current system is massively inefficient, requiring a huge federal bureaucracy to interpret and enforce, and billions in compliance costs for individuals and businesses. Instead of doing what is in our best economic interest, we make choices that minimize our tax burden. (2) Morally, the current tax maze exists to redistribute income and buy votes, all in the name of equality and social justice.
  3. Cut spending. Overspending is the real cause of the current crisis, but addressing it will be very difficult. As one example—setting the privatization argument aside for the time being—raising the eligibility age for Social Security benefits and modifying the system used (currently the CPI-W) to calculate annual increases would represent a move in the right direction. Declawing regulators is part of the solution as well. Government spending should be Constitutional, nothing more and nothing less.

Politically, the Republicans in Washington have given lip service to #1, but have failed to articulate a serious solution, #2 and #3. As a group, they seem content to talk about bipartisan negotiations designed to tweak the system rather than overhaul it. The problem is beyond tweaking, however, and many Americans don’t see the clear demarcation between Republican action and Obama’s rhetoric for a “balanced approach.” Whenever conservatives lack clarity, they lose.

The inconvenient truth is that the range of spending cuts required in #3 will be painful. Many Americans have become unnecessarily dependent on federal programs, and the majority of us receive indirect short-term benefits from Washington’s overspending. For example, expansions in WIC programs create business for grocers and food producers. Agricultural subsidies are inefficient, but certain good prices are lower as a result. Various housing programs create bubbles down the road, but can reduce today’s mortgage payment. I believe a majority of Americans—if properly informed—will be willing to accept the pain necessary to get our house in order, as long as the approach is sweeping, comprehensive, and makes a difference. The operative phrase here is “properly informed.” We have a lot of work ahead of us.

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