Selling Work Visas: Auctions or a Tariff?
Yesterday Professor Giovanni Peri presented an immigration reform plan that would auction work visas to employers. As I wrote yesterday, Peri’s plan would diminish the misallocation of current visas but not do much to increase the quantity of work visas. Since the real problem with America’s immigration system is a lack of work visas and green cards, Peri’s plan seeks to solve a rather miniscule problem by comparison.
Proponents of selling visas either support auctioning a limited number of visas to the highest bidders or establishing a tariff that sets prices but allows the quantity to adjust. An immigration tariff is far superior to an auction of numerically limited work visas. You can read my proposal in more detail here or listen me explain it here.
Here are three reasons why an immigration tariff is better than an auction:
First, a tariff is the most market friendly way of restricting work visas. Limiting the government’s role to setting the price of work visas, allowing the purchased quantities to adjust, would make for a much more market-friendly and flexible system. A tariff would decrease immigration relative to open borders, but misallocation isn’t a big concern because immigrants with the most to gain would pay the tariff.
Second, an immigration tariff is more economically efficient because the quantity of work visas would adjust to market demand unlike an auction of numerically limited work visas. When there is economic growth more people would buy work visas to keep pace with labor demand. In slow economic times the number of visa purchases would automatically shrink. With an immigration tariff, there is no need for a government commission to somehow figure out how many are demanded. They can just set the price and let the market figure out the quantity.
Third, an auction system will not do much to diminish unauthorized immigration going forward. An immigration tariff allows immigrants, temporary workers, American businesses, and families to plan ahead, save, borrow, and pool resources to pay the tariff. Tariff prices will change, no doubt, but they won’t change all of the time as they would under Peri’s system. An auction would provide less price certainty, fewer guarantees of entering legally, and incentivize more unauthorized immigration than a tariff.
When Bipartisanship Is A Dirty Word
In a blog post I wrote about two years ago, I said “Usually when I hear that a policy proposal has bipartisan support, I instinctively check for my wallet.” At that time I was lauding a bipartisan proposal to shut the USDA’s market access program (although it seems that idea didn’t get much traction) under the heading “When Bipartisanship Is Good News.”
I should have trusted my instincts; i.e., that “bipartisanship” is code for either:
(a) “we’ve just renamed a post office”;
(b) “cough up, because we’ve agreed to spend more of your money”;
(c) “brace yourself, because we’ve agreed to violate more of your liberties”; or
(d) both b and c (see, e.g., the Department of Homeland Security).
Last night we were treated to an example of (b), when the U.S. Senate in a 78 to 20 vote elected to follow the House’s lead (330 to 93, in that case) to re-authorize, with a bigger budget, the Export-Import Bank of the United States until 2014. (Please do click on the previous two links to the roll-calls so you can see how your friendly Representative or Senator voted on this taxpayer-funded slush fund for the biggest corporations in America, by the way). The bill will now go to the President for his signature.
Allow me a few comments. First, this is incredibly disappointing. One would think that this is an excellent time to shut down the Ex-Im Bank, what with bailout-fatigue, trillion dollar deficits and all. But this bill “had the backing of business and labor groups,” as this Washington Post article makes clear, and despite all of the rhetoric from both sides, it seems that Congress and the President loves them some special interest group pleadings.
Second, the fairly easily debunked talking points of Ex-Im supporters obviously resonated. Ex-Im Bank president Fred Hochburg (who one can hardly expect to do anything other than protect his job) showed an excellent ear for PR when he said “there are no Democratic or Republican exports. There are exports that create jobs. Good, middle-class jobs.” Exports! Jobs! Middle class! What’s not to love? And in the interest of non-partisanship, here’s a quote from Senator Lindsey Graham (R-SC) in response to the arguments made by what the WaPo article called ”tea party conservatives”:
“I live in the real world and the real world is that these financing mechanisms have to be available to American manufacturers to have a share of the overseas market”
Actually, Senator, I’m glad you raised “the real world”. Because in “the real world” stuff costs money, money that isn’t manna from heaven but taken from other people. And in the real world, regulations or other market interventions distort the economy, reallocating resources from their most productive uses as identified by volunteers putting their own money at risk and towards uses directed by political entities, responding to lobbying and other features of public choice. In the real world, there is nothing special about manufacturing per se, with lots of middle class (or “upper class” jobs, if the class system is something that matters to you) created in the service sector. Also in the real world? Private finance. Lots of it, as you would know if you spoke with any of the folks producing the 98 percent of U.S. exports that don’t rely on Ex-Im.
Third, and this is somewhat parenthetical, not one — NOT ONE — Democrat in either chamber voted against corporate welfare. Interestingly, according to the roll call for the 2002 re-authorization of the Ex-Im Bank, 26 democrats voted against re-authorization 10 years ago. So there was some opposition back when President Bush was in charge, but now that President Obama (as opposed to Candidate ”The Ex-Im Bank is little more than corporate Welfare” Obama) is supportive, apparently taxpayer guarantees for big business are ok. The following Democratic members switched their vote from “Nay” in 2002 to “Yea” (or should that be “Yay!”?) in 2012: Andrews, Baldwin, Conyers, deFazio, Jackson (IL), Kaptur, Matheson, Nadler, Owens, Pallone, Peterson (MN), Stark, and Waters (with Kucinich not voting in 2012, but voted “Nay” in 2002). I’d be curious to hear about what caused the change of heart.
Looking at Austerity in Italy
The Italian economy contracted for a third quarter in a row, deepening the country’s recession and adding to the fire of the euro crisis. Italy is the third largest economy in the Eurozone, and many view it as the endgame of an eventual collapse of the common currency because it is too big to fail. Neither the EU nor the IMF have enough cash to rescue it. If the country defaults, that would probably spell the end of the euro.
Austerity is being blamed for Italy’s economic troubles. Chiara Corsa, an economist at UniCredit, wrote that “The key factor is austerity, which is weighing heavily on consumption and investment.” Recent local elections saw the rise of anti-austerity parties. Paul Krugman warned about this back in December when he described the austerity push of Prime Minister Mario Monti as “self-defeating” and “delusional.”
However, as is the case for Britain, France and Greece, commentators are unclear about what austerity means for Italy, although many seem to imply spending cuts. For example, if Krugman’s criticism about Italian austerity is consistent with his critiques about austerity elsewhere in Europe, we know he means spending cuts. So let’s take a look and see if there has been any:
* Using GDP deflator.
Source: European Commission, Economic and Financial Affairs.
Spending in nominal terms increased by a yearly average of 4.1% between 2000 and 2009, and then fell slightly the following year. In 2011 government spending was just 0.14% below its 2009 level. As for spending in real terms, there’s no cut whatsoever. And as a share of the economy, total spending reached a peak in 2009 at 51.6% of GDP, and it fell to 49.6% last year, a decline far from significant.
So what’s austerity all about in Italy so far? According to The Financial Times, the “government’s €30 billion austerity package, passed in December, was heavily oriented towards tax increases rather than spending cuts, an emphasis that is now widely recognized by ministers as having driven Italy deeper into recession.” The FT adds that the Monti administration is facing “intense pressure from business, politicians and the public to shift the burden of austerity away from heavy taxation towards cuts in public spending.” As a result, the Italian Prime Minister announced €4.2 billion in spending cuts starting in June, still less than 1% of total public spending. That doesn’t sound savage to me.
But it’s quite fascinating to see the hysteria surrounding non existent spending cuts and its supposedly negative impact on economic growth. For example, last December The Economist warned:
“But too great an emphasis on austerity in the short run risks sending the continent’s economy into a deep recession; the latest data on Italian industrial production showed an annual fall of 4.1% in October, even before budget cuts were introduced by the new government.”
Interestingly, according to The Economist, spending cuts were somehow responsible for a decline in economic output in Italy even before being implemented!
If austerity is to blame for Italy’s recession, we need to be clear that by austerity we mean mostly tax increases with almost no reduction in government spending.
Limit Access to Deposit Insurance Fund
The recent losses at JP Morgan have renewed calls to break up the banks and/or increase regulation of the banks. I’ve written elsewhere why I believe these losses do not justify more regulation, particularly of the Volcker rule variety. While I have some sympathy with the break them up view, and a number of people for whom I have great respect have argued for that position, I think that position is ultimately flawed beyond repair.
First any size limit would be arbitrary. I don’t know anyone who thought that Bear Stearns was too big to fail ex ante. I still don’t believe Bear was too big to fail. More importantly, when it comes to banking, small is not always safer. The most obvious example is the savings and loan crisis, which cost, on net, more than the TARP. That was all small institutions. And don’t forget over 300 small banks have failed this time around. There is also some research suggesting that the more concentrated your banking system is, the more stable it is. Just look at Canada for one example. There are several others, and again this finding holds up to empirical testing.
If the ultimate concern is risk to the taxpayer, due to the backing of the Federal Deposit Insurance Fund, then it would seem to be that the obvious answer, and easy to implement, is to limit the amount of insured deposits that can be held by any one bank. The previous limit was 10 percent of the insurance fund, although that could be breached by organic growth (rather than via merger). We should reduce the limit to 5 percent and make such a hard cap. If banks want to take uninsured deposits that’s fine, as long as we limit the risk to the FDIC. And we should also roll back the extensions of deposit insurance coverage in Dodd-Frank. Few households have $250,000 in deposits (and that is just per person, per account). Ultimately we should go back to the pre-1980′s level of about $40,000 and limit that to total coverage per person. If we want to reduce the taxpayers’ exposure, then the more effective way, in my view, is to limit the bank safety net or at least limit the extent that the safety backs any one bank.
Selling Work Visas
Professor Giovanni Peri today made an interesting proposal to auction work visas to the highest bidding employer. His reform is similar to an auction proposal made by Gary Becker, but more specific. His idea is innovative and deals with transitioning from the current maze of quotas, visa categories, and other barriers to a more open system that better allocates visas to the highest bidders.
The one problem with Peri’s proposal is that it does not meaningfully increase the number of work visas. The limited number of work visas, not the distribution, is the main problem with America’s immigration system. Instead, he calls for reallocating visas from families to the employment based category. He then wants American employers to bid for the limited quantity of work visas issued quarterly. A government commission would adjust the quantity and immigrants would be free to move between employers who purchase visas.
Economists like Becker and Peri are rightly concerned with how societies allocate scarce resources to different uses, but the scarcity of work visas is an artificial one created by the government, not one that results from a scarcity of the factors of production or other inputs. This is why there should be no numerical limits on the quantity of work visas issued even if they are priced. Charging for work visas is a substantial improvement over the current system, as I say here, here, here, and here. Most of the welfare gains come from allowing the quantity of visas to adjust to the price, not the other way around. An efficient visa selling process will operate more like a tariff than an auction.
For normal goods and services, a rising price incentivizes consumers to limit their consumption and producers to increase production. A government commission tasked with adjusting visa quantities would face political rather than market incentives and not increase visas in response to rising prices. Unless the incentives are carefully aligned, the result would probably be a more arbitrary and numerically limited immigration system.
Another problem with Peri’s proposal is that it only allows employers to bid for work visas. Immigrants should also be able to bid because they have the most to gain from migrating and have a better notion of their value on the labor market. Immigrants already pay to be smuggled into the United States—some Chinese pay $75,000 per person—so that money might as well be collected by the federal government instead of a coyote. If employers buy visas for specific immigrants, contracts or bonds can effectively guarantee compliance.
Peri’s proposal is a thoughtful and serious attempt to reform immigration but it does not address the main problem with our immigration system: too few work visas.
The States Are Already Getting Bailed Out
In today’s Wall Street Journal, Sen. Jim DeMint (R-SC) and Rep. Kevin Brady (R-TX) advise the states to get their fiscal houses in order instead of holding out hope for a bailout from federal taxpayers. That’s sound advice. However, the states already effectively get bailed out by federal taxpayers each and every year.
The first chart shows that the federal government has accounted for over a third of total state spending in recent years. The increase can be attributed to federal “stimulus” spending. The federal government’s share will retreat as the economy (hopefully) continues to strengthen and federal policymakers limit spending increases in the face of mounting debt. However, getting the federal government’s share of total state spending back to, say, 30 percent would be nothing to celebrate.
The post-stimulus decrease in Washington’s generosity to the states has state and local officials—and the special interests that ultimately benefit from the Beltway-to-State money laundering operation—concerned. Reporters typically relay these concerns to the public without adding any historical context. The following chart provides that context, and it indicates that the concern shouldn’t be that the states won’t be getting as much money; rather, the concern should be that the states have become dangerously reliant on federal money.
So here’s another suggestion for state and local officials. If you want to spend more money than Washington will give you, go out and tell your taxpayers that you want to increase their taxes to pay for it.
[See this Cato essay for more on why the federal government should cut aid to the states.]
Another Fairly Insane Cross-National Health Care Comparison
Yesterday, countless newspapers published a really disappointing story by Noam Levey that the Los Angeles Times ran under this title:
The article is little more than a puff piece for the hotly contested idea of universal coverage. It gives zero space to the competing strain of thought that the less the government does for the poor, the sick, and the vulnerable, the better off they will be.
It quotes “Dr. Julio Frenk, a former health minister in Mexico and dean of the Harvard School of Public Health” as saying, “As countries advance, they are realizing that creating universal healthcare systems is a necessity for long-term economic development.” A necessity? Gosh. It’s a wonder the United States ever became the world’s largest economy.
It speaks of such government guarantees as being popular, when what it really means to say is that people are dependent on the government for their health care and frightened to death that someone might take it away.
It laments the fact that the United States is an “outlier” because it fails to guarantee access to health care for all citizens, which “stands in stark contrast to America’s historic leadership in education…Long before most European countries, the United States ensured access to public schooling.” Yet it makes no mention of how U.S. students fare poorly in comparison to those in other advanced countries.
It devotes no time to the costs of such guarantees, other than to say that they are sometimes “more than twice what was expected.” But don’t worry, those costs are borne by the government. It does not say where governments get all that money. I guess we’ll never know.
Speaking of taxes, it makes no mention of how taxes suppress economic development. Evidently, unlike other taxes, those that support government-run health care systems do not incur the deadweight loss of taxation.
But the article was at its most ridiculous when it suggested that the health care sectors in poor countries like Rwanda and Ghana might possibly be ahead of the United States in any way whatsoever. As I have written about Rwanda:
The United States generates many of the HIV treatments currently fighting Rwanda’s AIDS epidemic, as well as other medical innovations saving lives there and around the world. More than any other nation, we create the wealth that purchases those and other treatments for Rwandans and other impoverished peoples. The United States is probably closer to providing universal access to medical care for its citizens — and, indeed, the whole world — than Rwanda. Rwanda’s “universal” system leaves 8 percent of its population uninsured. Though official estimates put the U.S. uninsured rate at 15.4 percent, the actual percentage is lower; and again, uninsured Americans typically have better access to care than insured Rwandans. The real paradox is here that Rwandan elites think the United States is doing something wrong.
Unfortunately, it’s not just the Rwandan elites. For my thoughts on how sensible people can make such insensible comparisons between the United States and other nations, read the rest of my post on Rwanda.
Caribbean Trade Dispute Gives the U.S. a Rum for Its Money
Rum subsidies in U.S. Caribbean islands have sparked an internal trade war and are inviting a World Trade Organization (WTO) challenge from ill-affected countries in the region. According to an envoy representing a number of Caribbean countries that recently came to Washington, the U.S. government is unwittingly funding industrial policy in the U.S. Virgin Islands and Puerto Rico by tying aid dollars to rum production in a way that is inconsistent with our trade obligations and may cause the destruction of the entire foreign Caribbean rum industry. Under current law, U.S. Caribbean islands receive money from the U.S. treasury based on how much rum they import to the mainland. In recent years, they’ve begun to use that money to increase the amount of rum they produce, so they can get even more money. Although the total amount of money involved is low enough to keep it under Congress’s (myopic) radar, the resulting subsidies are too high for independent Caribbean economies to compete against. Unless Congress places restrictions on how the money can be used, the United States could once again find itself in the embarrassing position of being taken before the WTO for accidentally ruining the economy of a small Caribbean island.
The antagonist in this saga is something known as the “rum cover-over” program. As it does with all distilled spirits, the federal government charges an excise tax of $13.50 per proof gallon of rum sold in the United States. This equates to roughly $2 per bottle. Under the cover-over program, almost all of that money is directly granted to the U.S. Virgin Islands and the Commonwealth of Puerto Rico using a complex formula so that each receives a share of the money based on how much rum it produces relative to the other. The tax is collected from sales of all rum imported to the mainland, even from other countries, and in 2010 the cover-over amounted to approximately $450 million—$100 million to the Virgin Islands and $350 million to Puerto Rico.
The industrial death spiral began when the government of the U.S. Virgin Islands cleverly discovered that, instead of using the money for infrastructure and welfare programs, it could use the bulk of the money to entice Captain Morgan producer Diageo to relocate there from Puerto Rico. Because the move will increase rum production in the U.S. Virgin Islands relative to Puerto Rico, the subsidy more than pays for itself by it helping the territory capture a larger share of cover-over funds.
Puerto Rico initially asked Congress for help. There is currently no rule on how the two entities can spend the cover-over funds, so Puerto Rico’s non-voting delegate to Congress, known as a Resident Commissioner, proposed legislation that would cap at 15 percent the portion of the funds that could be used to subsidize rum production. When that effort failed, the Puerto Rican government reportedly responded by ramping up its own subsidy programs. The result has been an expensive trade war over mainland consumer tax dollars granted in return for rum production. For perspective on how important this is for the players involved, it’s worth noting that the U.S. Virgin Islands government has an annual budget of just under $1 billion dollars and is hoping to increase its cover-over revenue from $100 million to $240 million.
The new twist on this saga comes from the detrimental effect this subsidy war has had on rum production in other parts of the Caribbean. Matched up against firms receiving U.S. subsidies reported to be close to or even to exceed production costs, producers in other Caribbean countries are unable to compete in the U.S. market on price. These economies generally rely on tourism and raw material exports and have precious few value-added industries. If the United States is interested in economic development in the region, the least it could do is refrain from crippling emerging industries with unfair subsidies. While the two U.S. Caribbean governments spend federal tax dollars to entice major rum brands to their islands in order to earn more federal tax dollars, the rest of the Caribbean is struggling just to stay afloat.
Live Tonight at 6: Brian Doherty and Rand Paul
Tonight at 6:00 pm ET, Brian Doherty will discuss his new book Ron Paul’s Revolution: The Man and the Movement He Inspired, with comments by Sen. Rand Paul, in Cato’s Hayek Auditorium.
You can, as always, watch it live at www.cato.org/live.
But if you prefer the old-fashioned, 20th-century technology of television, it appears that C-SPAN will broadcast the event live. And probably again later in the evening, as is their wont.
Television schedules always subject to change, of course.
New Paper Argues for Immediate, Practical Cuts in Military Spending
A new report published today by the Project on Defense Alternatives argues for $17-$20 billion in immediate savings to the Fiscal Year 2013 defense budget. I co-authored the report along with Benjamin Friedman of Cato, and PDA’s Carl Conetta, Charles Knight, and Ethan Rosenkranz. Those savings come from 18 line items—personnel, weapons systems, and programs—that could be implemented quickly. Adjustments to U.S. national security strategy are not a prerequisite for these options, which are relatively low-hanging fruit.
The 2013 defense authorization bill will move to the House floor this week. Many members are expected to offer amendments, some allowing savings in the defense budget. During the debates that are about to ensue,, it is important to keep in mind just how large the defense budget has become. As our paper notes, the national defense base budget constitutes 52 percent of discretionary spending, separate from the war account. Since 2000, it has risen by 90 percent in nominal terms and 42 percent in real terms. If Washington is serious about addressing the nation’s massive fiscal challenge, many programs will have to be cut or reformed. The Pentagon should not be expected to bear all of the costs; other departments and agencies will also have to contribute. But there has not yet been a significant decline in the Pentagon’s base budget, contrary to what some have claimed.
The Budget Control Act (BCA) of 2011 places an initial discretionary spending cap on National Defense for 2013 at $546 billion. Both President Obama’s request, and the House Republican’s budget exceed the BCA caps. In addition, the BCA requires $110 billion in spending cuts in January 2013 via sequestration, half of which need to come from DoD. Neither the White House nor Congress plans for that to occur; both sides hope to amend the law and achieve equal deficit reductions by other means. As it currently stands, though they disagree on how. Republicans want to cut other spending, Democrats to raise taxes. The options outlined in our paper could facilitate these negotiations, by revealing savings in the DoD budget that will not damage our national security.
The savings options in the report focus on reducing or curtailing:
- Assets and capabilities that mismatch or substantially exceed current and emerging military challenges;
- Assets and capabilities for which more cost-effective alternatives exist;
- Investments that are tied to the past, reflecting bureaucratic inertia or individual’s service interests, rather than current collective defense needs;
- Acquisition programs that exhibit serious, persistent cost overruns, while failing to deliver promised capability, and
- Acquisition programs that are based on immature or unproven technologies.
Further savings are possible if we rethink our strategy, missions, and national security commitments. Ben Friedman and I have long argued this point. Until then, the options presented in “Defense Sense” are limited in scope in an effort to pave the way toward responsibly balancing national security ends, ways, and means.
Although I encourage everyone to look at the report, here are just five of the 18 cuts that policymakers should immediately consider:
- Military personnel in Europe: Remove additional 10,000 military personnel by end of FY 2013; save $100 million in FY 2013 and $188 million per year once complete
- Active-component military personnel: Reduce end-strength by an additional 10,000 personnel; save $400 million in FY 2013 and $860 million recurring annual savings once complete
- Missile Defense: Focus on procurement and end-stage development on systems with proven, reliable, cost-effective capability (see report for details); save $2.5 billion in FY 2013
- F-35 Joint Strike Fighter: Cancel USMC variant; buy equivalent numbers F/A-18 E/F; save $1.8 billion in FY 2013
- Littoral Combat Ship (LCS): End procurement at 10 and seek alternative; save $2 billion in FY 2013
Universal Dependence or Universal Access?
There’s a rift within the U.S. school choice movement as to whether private school choice programs should cover every child or focus only on the poor. Fortunately, the cause of this disagreement is not so much that the two sides have different goals but that they have different assumptions about what will achieve those goals. And the nice thing about assumptions is that they can very often be tested against the real-world evidence. What actually works better: universal access to the education marketplace, or universal dependence on a government program? That’s the question I try to answer over at the RedefinEd blog today, in a post responding to veteran voucher campaigner Howard Fuller.
Stop Using Slippery-Slope Arguments? Where Would that End?
Richard Thaler writes in the New York Times:
Justice Scalia is arguing that if the court lets Congress create a mandate to buy health insurance, nothing could stop Congress from passing laws requiring everyone to buy broccoli and to join a gym…Can anyone imagine Congress passing a broccoli mandate law, much less the court allowing it to take effect?
Yes annnnd…yes. Next question.
Surely, the justices have the conceptual resources to draw a distinction between the health care market and the market for broccoli. And even if they don’t, then all the briefs, the zillions of blog posts and a generation’s worth of economic literature can help them.
If drawing a constitutionally meaningful distinction between the markets for health insurance and broccoli is child’s play for Thaler, he should school all the brief- and blog-post-writers who so far have failed. That would have been a more productive use of his thousand words than his build-up to this thesis:
If you are opposed to a policy, state your case based on the merits — not on the imagined risk of what else might happen down the road. The path of that road is so unpredictable that it may even produce a U-turn.
Good grief. Slippery-slope arguments are about principles. As in, “If you concede this principle because you don’t mind the result here, you will no longer have it to protect you against that bad result there.” Thaler’s thesis would lead, for example, to all manner of civil-liberties violations by the state because there simply isn’t enough political support to protect all the civil liberties of various minorities. But Thaler doesn’t want us to think about things like consequences or the future.
The potential for U-turns makes no more sense as an argument against invoking slippery slopes principles, because principled arguments can help generate the U-turn that opponents of, say, ObamaCare want to see.
I take silly arguments like this to be evidence that ObamaCare supporters are in complete panic mode.
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