The Agenda

NRO’s domestic-policy blog, by Reihan Salam.

Immigration and Stinginess


Jim Pethokoukis draws our attention to an important new study from Michele Battisti, Gabriel Felbermayr, Giovanni Peri, and Panu Poutvaara on the effects of immigration on the native-born population in 20 countries. One of the co-authors, Giovanni Peri of UC Davis, is a widely-cited immigration scholar, who has, among other things, proposed rationalizing U.S. immigration policy by using an auction-based system to allocate temporary employment visas. The Economist summarizes the work of Battisti et al., and it highlights their intriguing finding that an increase in immigration levels is more beneficial in countries with welfare states that are relatively less generous to immigrants, like the United States, than those with welfare states that are relatively more generous towards them, like Belgium:

In America, a one-percentage point increase in the proportion of immigrants in the population made the native-born 0.05% better off. The opposite was true in some countries with generous or ill-designed welfare states, however. A one-point rise in immigration made the native-born slightly worse off in Austria, Belgium, Germany, Luxembourg, the Netherlands, Sweden and Switzerland. In Belgium, immigrants who lose jobs can receive almost two-thirds of their most recent wage in state benefits, which must make the hunt for a new job less urgent.

None of these effects was large, but the study undermines the claim that immigrants steal jobs from natives or drag down their wages. Many immigrants take jobs that Americans do not want, says Mr Peri. This “smooths” the labour market and ultimately creates more jobs for locals. Native-owned grocery stores do better business because there are immigrants to pick the fruit they sell. Indian boffins help American software firms expand. A previous study by Mr Peri found that because immigrants typically earn less than locals with similar skills, they boost corporate profits, prompting companies to grow and hire more locals.

This is an intriguing passage. It’s not obvious to me that corporate profits ought to be prioritized over the labor share of income, but we’ll leave that aside. Notice that Battisti et al. do not address the impact on immigrants currently residing in the countries in question. This is fair enough. Not everyone believes that previous immigrants should count in this kind of analysis. But Peri has found that increased immigration has a substantial negative impact on the wages of previous immigrants, and because the foreign-born share of the population in several of the countries Battisti et al. analyze is quite large, one wonders if this negative impact is large enough to significantly offset the (quite meager) benefits to the native population.

Moreover, as David Card observes in a 2009 literature review, the concentration of immigrants in the upper and lower tails of the skill distribution means that immigration contributes to wage inequality — he finds that immigration accounted for a modest 5 percent of the increase in overall wage inequality from 1980 to 2000. Though immigration is not one of the primary drivers of rising inequality, it is worth noting that rising inequality has been used as a justification for the expansion of the welfare state; so has the rising poverty level, which is in part a function of the fact that the U.S. foreign-born population is substantially poorer than the native-born population. The poverty of the unauthorized immigrant population has raised related concerns: because the earning power of unauthorized immigrants is so low, and because it would continue to be low even if unauthorized immigrants secured legal status, it is unlikely that they would be able to provide for the nutritional needs, let alone other needs, without substantial public assistance. It is true that low-skilled Mexican-born immigrants appear to improve the spatial allocation labor, as Brian Cadena and Brian Kovak have found. Essentially, because these immigrants are largely ineligible for unemployment benefits and many other forms of public assistance, they face severe deprivation if they don’t rapidly flee economically depressed regions, hence their responsiveness to changing conditions. It’s not obvious this threat of extreme deprivation is good news for the U.S.-born children of the Mexican-born, who will eventually become part of the U.S. workforce.

Overall, one gets the impression that countries with “stingy” welfare states for immigrants are “buying” the modest benefits of immigration for the native-born population at the expense of the children of immigrants. This suggests that an immigration policy that emphasizes skills, like those adopted by Australia, Canada, and Switzerland, might be preferable to one that does not. In Australia, Canada, and Switzerland, immigration tends to leave high-skilled native-born individuals slightly worse off, thus dampening inequality at the margin, yet the children of immigrants are far less likely to live in poverty and they are far more likely to enter the economic mainstream. My view is straightforward: there is a strong case for an immigration policy that is more selective about who gets in while also being more generous to those we allow in the country. Given the large supply of skilled workers eager to settle in the United States, this view is compatible with a high level of immigration. 

Today’s Policy Update: Can Startups Help Kill Pay-Day Loans?


The Fed is going to continue stimulus for the time being. Conservatives should be happy.

In the New York Times, Binyamin Appelbaum reports on Federal Reserve Chairman Janet Yellen’s testimony before Congress.

The decline in the unemployment rate, meanwhile, has exceeded expectations, reaching 6.1 percent in June, but Ms. Yellen maintained her view that the decline was overstating the progress of the labor market. Some people who stopped looking for work are likely to return as the economy improves, she said. Wage growth also remains weak, suggesting employers still find it easy to replace workers.

Ms. Yellen also spoke about the “serious psychological toll” of unemployment and its long-term costs, underscoring her commitment to the Fed’s efforts.

Inflation also remains sluggish, suggesting that the economy continues to operate below capacity, and allowing the Fed to extend its stimulus campaign.

Many inflation hawks are ready for monetary stimulus to end, and to their point, there may be finally be some signs that inflation could start to creep upwards soon. However, it seems that Yellen is correct that, first, the labor market is in much worse shape than the unemployment rate would suggest (this is, ironically, an issue conservatives often point out), that the monetary stimulus is helping heal the economy, and that inflation is well below our target of 2 percent over the longer run.

In fact, even if Yellen were to continue stimulus for too long, inflation a little over our target would probably be a good thing by reducing debt burdens and increasing business investment. Fighting joblessness should be the top priority for conservatives, and monetary stimulus is still one of our most important tools in the fight.

Exclusion from the mainstream financial system can prevent upward mobility — can startups change that?

In The Atlantic, Derek Thompson examines the poor’s interaction with the financial system:

Middle-class families falling on hard times and grappling outside the traditional banking system are alarmingly common. Approximately 70 million Americans don’t have a bank account or access to traditional financial services. That’s more people than live in California, New York, and Maryland combined. It’s more than the number who voted for Barack Obama (or Mitt Romney) in the 2012 election. 

Instead of direct deposit, many rely on physical pay stubs. Instead of checking accounts, they have to drive to check-cashing services, like Pay-O-Matic. Instead of automatic payments, they drive again across the suburbs to pay utility bills in person. In lieu of a credit history that qualifies them for bank loans, they have a history of cash that is disqualifying. Instead of low-interest loans, they rely on payday lenders whose services can ultimately cost three- or four-times the original loan. And so, replacing the services of a bank on your own becomes a second part-time job, an odyssey of stripmalls, check-cashing storefronts, money orders, prepaid cards, and miles and miles on the road.

Ron Brownstein has called it the “archipelago of alternative finance.”

As Megan McArdle discusses in her recent AEI “Vision Talk,” accumulating capital is essential and often near impossible for those near the bottom of the income distribution. Derek Thompson’s piece touches on one of the barriers to accumulating that capital – lack of access to traditional financial institutions that leads to a reliance on payday loans. This is particularly troublesome to conservatives, who care a great deal about inclusion and helping the disadvantaged to lift themselves up.

There are policy possibilities here, but the private sector can help too. One tech startup, LendUp,

uses technology to approve borrowers with damaged or thin credit files.  As customers establish a responsible borrowing history with LendUp, they move up the LendUp Ladder, giving them access to more money, at lower rates, for longer periods of time.  The top two levels of the Ladder report to credit bureaus, giving customers the chance to improve their credit and gain access to mainstream financial services products.

The breakthrough is the technological innovation enabling approval of questionable credit, but the firm also has aligned their incentives so they don’t benefit if a client becomes trapped in debt and has committed “to building credit through education, gamification and a transparent fee structure.” As someone who’s always more optimistic about bottom-up innovations from the private sector than massive government interventions, it’s exciting to see a young startup working to solve one of society’s most vexing problems.

Land-use regulations aren’t only unjust; they hurt economic growth.

Often discussed in this space is the way that excessive zoning regulations that restrict housing reduce economic mobility, and Chang-Tai Hsieh and Enrico Moretti have released a new NBER working paper that examines the broader effects of such regulations.

Incumbent homeowners in high wage cities have a private incentive to restrict housing supply. By doing so, these voters de facto limit the number of US workers who have access to the most productive of American cities. Our findings indicate that in general equilibrium, this lowers income and welfare of all US workers. In essence, this amounts to a large negative externality imposed by a minority of voters on the entire country.

By segregating workers and preventing some from being able to access jobs for which they’d be well-suited, the regulations imposed by NIMBYs to increase their own property values reduce growth throughout the entire economy. A fundamental principle of policymaking must be working to eliminate artificial weights government places on the economy.

These authors suggest the federal government should limit how much local governments can regulate and improve mass transit to mitigate the costs of the regulations. There are other ways to fight these regulations, too, like paying off incumbent residents through TILTs. But the most important thing is that both liberals, who don’t always trust free markets, and conservatives, who reflexively defend the rights of property owners, realize that zoning restrictions are some of the biggest barriers government has placed in the way of society’s growth and mobility. 


Today’s Policy Agenda: Should We Replace the VA with a Medicare Advantage-like System?


The private market may be the best way to give veterans the care they deserve

Navigant Healthcare’s Casey Quinn and Paul Keckley lay out the arguments for a private alternative to the VA in Forbes. They imagine a new system in which veterans’ plans are run like Medicare Advantage plans – the VA would contract with local providers to coordinate and manage veterans’ care.

Conceptually, the VA could create the Veterans Advantage program: it would play an oversight role in financing and regulating Veterans Advantage contracting with clinically integrated, high performing networks to manage enrollee health. The issue in the private sector may not be inpatient capacity—private hospitals operate at 63% average occupancy today. The private sector is innovating in improving access to primary care—a sticking point in the VA and private market—through innovative uses of self-care technologies, expansion of primary care training programs, increased coverage of retail clinics and expanded roles for nurse practitioners and pharmacists.

Recently, the shortcomings of the VA system have been highly publicized, and for good reason. Data shows that the quality of care veterans receive varies widely and can be awful: Patients in a Phoenix VA system are 32 percent more likely to die within 30 days than patients in the best VA hospitals and more than 1,000 veterans have died unnecessarily due to poor care.

Lawmakers are considering ways to offer veterans more access to private care, but that would merely act as an outlet if they can’t get a timely appointment in the existing fully socialized system. Evidence indicates that Medicare Advantage has notable positive effects on patient outcomes, so it may be time for the government to put veterans’ care in the capable hands of the private market. 

Does it matter that Latinos think Obama is doing a bad job?

Washington Post’s Aaron Blake discusses the implications of Obama’s waning approval rate among Latinos. Over half of Latinos disapprove of the president’s handling of the current child migrant crisis, but Blake says that’s not enough to get them to vote Republican.

Latinos haven’t just voted for Obama in recent years; they’re also increasingly identifying with Democrats. In fact, even as polls have shown Obama’s numbers with Latinos plummeting again, those same polls shows Latinos sticking with the Democratic Party in the upcoming midterm.

At first glance, one might think Obama’s shrinking approval rate among this demographic would fare well for Republicans, but it actually highlights the fact that Latino voters more strongly identify with the Democratic party. Even though only 48 percent of Hispanics approve of Obama overall, 63 percent are still likely to vote for Democrats. In fact, Latinos prefer still prefer a generic Democrat to a generic Republican two to one, so it doesn’t look like the Republicans will be winning the Latino vote anytime soon.  

The Social Security cliff just got closer

Jed Graham of Investor’s Business Daily argues that Obamacare is playing a role in the fact that the Social Security trust fund is dwindling even more quickly than expected. The program’s funds (set aside as U.S. Treasury bonds) are expected to run out one year earlier than was projected last year:

The CBO’s most recent long-term budget outlook, which Andrew wrote about yesterday, cites lower payroll tax revenues and changing economic baselines as one driving factor for the updated prediction. Obamacare’s work disincentives are one reason for the decreasing payroll revenues. Baby boomers may decide to retire earlier because they no longer need their jobs to maintain health insurance, and the law’s health insurance premium structure may discourage full-time employment.

Overall, it’s clear people will be doing less work because of Obamacare: The CBO estimated in February that the law will cause a decline into 2.5 million full-time jobs in the U.S. by 2024 — that translates into a lot of lost payroll-tax revenue.

Transportation and Jobs-to-Be-Done


One of the reasons I find calls for increased infrastructure investment so depressing is that we are on the cusp of major system-level breakthroughs in transport. The obvious reason to roll your eyes at infrastructure investment as panacea is that the United States is notoriously bad at transforming infrastructure dollars into financially productive infrastructure assets. The less obvious one is that the advent of self-driving vehicles and larger mobility-on-demand systems suggests that what we really need to do is rebuild our infrastructure for an era in which we’re able to deploy existing capital assets more efficiently, thanks to more advanced road pricing tools that can allow for variable pricing to help direct the flow of traffic and sharing economy tools that will allow for more efficient use of vehicles. In 2012, Josh Barro observed that the cost of roads represents a subset of the larger cost of driving:

That total cost includes not only public spending on roads but also a host of private purchases—of cars themselves, maintenance, gas, and insurance. The total cost of driving also includes public and private expenditures on parking. To get an apples-to-apples comparison with transit, you have to include all these costs. We’ve grown accustomed to a system in which transit agencies buy many items for straphangers that drivers buy for themselves, but that doesn’t mean that you can ignore those items when you’re comparing the total costs of the two modes of transportation.

It follows that if, as Barro reports, $1.08 trillion was spent on road travel in 2008 of which the public sector accounted for $181 billion, developments that greatly reduce private sector expenditures associated with owning and operating automobiles without compromising mobility are actually enormously important. Tyler Cowen points us to a new effort in Helsinki, the Finnish capital, to transform public transportation:

Subscribers would specify an origin and a destination, and perhaps a few preferences. The app would then function as both journey planner and universal payment platform, knitting everything from driverless cars and nimble little buses to shared bikes and ferries into a single, supple mesh of mobility. Imagine the popular transit planner Citymapper fused to a cycle hire service and a taxi app such as Uber, with only one payment required, and the whole thing run as a public utility, and you begin to understand the scale of ambition here. 

Moves in this direction in the U.S. will, I suspect, have to work around traditional mass transit agencies, which tend to resist cooperation with private sector paratransit services. The new Helsinki scheme brings to mind the “jobs-to-be-done” framework, popularized by the management theorist Clayton Christensen: 

Customers rarely make buying decisions around what the “average” customer in their category may do — but they often buy things because they find themselves with a problem they would like to solve. With an understanding of the “job” for which customers find themselves “hiring” a product or service, companies can more accurately develop and market products well-tailored to what customers are already trying to do. 

What exactly is the “job” that we hire a mass transit agency or an automobile or Uber to do for us? If the job is to have a perfectly private ride during which the wind is blowing in your hair and you’re left without distractions, a private automobile, preferably a fast convertible, is your best bet. If it is to get from Point A to Point B as cheaply as possible, other options might suit your purposes just as well. Transportation planners who fixate on, say, high-speed rail neglect the possibility that virtual “trains” of self-driving vehicles might be a better, more cost-effective way of achieving their goals. 

The Visible and the Invisible Effects of Immigration Policy


Ramesh Ponnuru raises an important question: in their recent op-ed weighing in on the immigration debate, Sheldon Adelson, Warren Buffett and Bill Gates devote far more attention to increasing high-skilled immigration, comparatively little to legalizing unauthorized immigrants, and none to increasing low-skilled immigration. This clearly suggests that the three billionaires, like many policymakers, believe that while the case for increasing low-skilled immigration is not entirely clear-cut, the case for increasing high-skilled immigration is quite strong. So why can’t Congress move ahead with a bill focused solely on increasing high-skilled immigration? 

[T]he reason nothing like that has happened is that advocates of “comprehensive immigration reform” have insisted on holding the issue of high-skilled immigration hostage to the resolution of other issues, such as legalization and the creation of a guest-worker program.

That strategy makes a certain kind of sense. Advocates of comprehensive reform know that if a high-skill bill passes, the coalition for their broader proposal loses a lot of support from, well, the likes of Adelson, Buffett and Gates. (And by “support” I mean campaign contributions and ads.) But the strategy works only if the hostages go along, and never demand that stand-alone vote or even acknowledge the truth of their situation.

One of the reasons the hostages go along, however, is that while a high-skilled-only bill would have the backing of the financial services and technology sectors, it would do little for agribusiness and hospitality and tourism, thus shrinking the coalition in favor. Democrats would tend to oppose the bill, as they are heavily invested in the idea of legalizing the unauthorized population, and they recognize that separating the high-skilled component from the rest will greatly weaken the political impetus to do so. This is why I suspect that the most realistic settlement consistent with the goal of limiting future low-skilled immigration as the labor market prospects of low-skilled workers continues to deteriorate would involve some form of legalization, such as Peter Skerry’s notion of normalization without citizenship.

A Reason-Rupe survey conducted last winter found that while Democrats and Republicans have broadly similar views about high-skilled and low-skilled legal immigration (large pluralities in favor of the status quo among Democrats and Republicans, with somewhat more support for increasing the caps than for decreasing them), Democrats are far more likely to support legalization for the unauthorized than Republicans. This could derive from the fact that, as the work of social psychologist Jonathan Haidt suggests, liberal voters tend to be more motivated by sympathy for the visible victims of misfortune while conservative voters tend to place a higher emphasis on proportionality, or procedural fairness. While the media outlets often tell emotionally moving stories about unauthorized immigrants threatened with deportation, it doesn’t tell such stories about, say, hard-working high-skilled foreigners who are eager to settle in the United States, yet who choose not to violate the law to do so. The harm to immigrants in the first category is more palpable than the harm to those in the latter category, yet individuals in the latter category are respecting the letter of America’s difficult-to-navigate immigration laws. 

The child-migrant crisis has elicited broadly parallel reactions. Among liberals, there is shock and horror at the harrowing circumstances in El Salvador, Guatemala, and Honduras that children are fleeing. Yet there is disinterest, and even disbelief, at the notion that that U.S. immigration policy has played a role in the destructive drama unfolding in Central America and along the border. As often happens, the focus is on the immediate humanitarian challenge rather than other questions, e.g., whether welcoming an influx of child migrants might encourage others to leave their families behind, often with the aid of violent gangs. that, as David Frum warns, will be enriched and strengthened in the process. 


Today’s Policy Update: Are Obamacare Enrollees Not Going to the Doctor?


High corporate tax rates are driving American health-care companies abroad, according to a report recently released by the Congressional Research Service (thanks to Jonathan Easley of Morning Consult for the pointer). Health-care mergers and acquisitions are rising globally, hitting an all-time high in 2014, with the year barely half over:

But, as the chart above notes and the CRS report found, this isn’t quite ordinary M&A activity: A lot of the deals are “tax inversions,” deals intended to move around corporate responsibility to avoid U.S. taxes and take advantage of low rates in countries like Ireland. Seven of eleven tax inversions being considered in 2014, according to the CRS, are health firms.

As Easley notes, health companies are under pressure to both maintain profit margins for investors and keep products affordable for customers. Once companies have exhausted other options for cutting costs in the manufacturing process, reducing taxes is one of the last ways to lower costs.

It’s probably only a matter of time before legislation or regulation makes these kinds of mergers illegal, and if they do, American consumers might well see see price increases for drugs, medical devices and supplies, and a number of other products from the health-care industry. Of course, as the CRS report notes, one way to fix this issue fundamentally would be to make the U.S. corporate-tax system more competitive.

Millions bought coverage in the exchanges, but they don’t seem to be going to the doctor much.

A new study from the Robert Wood Johnson Foundation on the impact of the Obamacare reports no overall increase in new patient visits to physicians in the first half of 2014:

More than 8 million people purchased insurance on the exchanges this year and the number of uninsured Americans does appear to have dropped noticeably – why haven’t new patient visits increased?

The authors of the study suggest that locating a physician and scheduling an appointment may be challenging for newly insured individuals, especially for those who purchased narrow-network plans. As a result, many newly insured individuals might continue to receive non-emergent care in emergency rooms. Another possible explanation is that most of the people on the exchanges were not in fact uninsured — we still don’t really know.

If either explanation is correct, the health exchanges hardly look like a success. If most enrollees aren’t newly insured or the newly insured enrollees are still using expensive emergency-room care (or both), then costs won’t decrease and access hasn’t been meaningfully improved. 

Why Wealth Taxes Could Be A Crony Capitalist’s Best Friend


Recently, Jim Manzi addressed Thomas Piketty’s argument that an 80 percent top marginal income-tax on incomes above $500,00 or $1 million would have no negative impact on economic impact, and indeed that it might have a beneficial impact. Piketty rests his argument on the notion that much of the surge in top incomes can be attributed to the bargaining power of top executives. Essentially, Piketty maintains that top executives use their leverage to stack their corporate boards with allies; compliant boards then allow these executives to seize more income from the large business enterprises they manage. Because this activity adds no economic value, the government can, by raising top marginal tax rates, discourage this damaging extractive behavior without reducing economic output. Manzi goes on to explain why he believes Piketty’s stylized “bargaining power model” is unsound:

I don’t believe that his asserted finding is credible, for three reasons. First, there just aren’t enough top managers of relevant companies to account for most of the growing incomes at the top. Second, executives of public companies represent a shrinking share of top incomes. And third, Piketty’s “bargaining power model” for executive compensation in public companies is extremely naïve.

Not surprisingly, I think Manzi gets the better of the argument. Moreover, as Wojciech Kopczuk and Allison Schrager recently argued in Foreign Affairs, the policy prescription Piketty sees as the antidote to extreme wealth concentration, a progressive wealth tax, might actually make matters worse:

A recent comprehensive study of best taxation practices, headed by the economics Nobel Prize­–winner James Mirrlees, explicitly favored taxing the income wealth generates — capital income — instead of wealth itself. This is because a tax on wealth automatically preferences the well positioned wealthy relative to others — and not just because the well-positioned wealthy can set up offshore tax havens.

Imagine that wealth earns a five percent nominal return. A 20 percent tax on income, then, would collect about the same amount of revenue as a one percent tax on wealth. But suppose you earn above the market rate, as wealthier people often do, because of their investment talents or ability to take advantage of opportunities not available to others. The wealth tax is forgiving –- it will tax these extraordinary returns at only one percent –- while a capital income tax would continue to tax them at 20 percent. Disguising labor earnings as capital income, for example, by relying on carried interest, compensation using equity stakes, or certain types of stock options would lead to a similar distortion. In a sense, taxing wealth rather than income gives a subsidy to anyone who earns above market returns either through skills, luck, or privileged market access. In other words, it does just the opposite of what champions of wealth taxation desire.

For now, there is limited evidence that wealth inequality has changed or that we are in a new gilded age. But even if we do get there someday, the proposed cure, taxing wealth, will make the disease worse. [Emphasis added]

That is, the bargaining power of the wealthiest, most well-connected individuals might pay even bigger dividends under a tax regime that includes a progressive wealth tax. 

The CBO Finds Medicare Looking a Little Healthier, Social Security Looking a Little Worse, and the Overall Budget a Mess


The Congressional Budget Office released their annual report on the long-term budget outlook today, and you’ll be forgiven for thinking you’ve heard this story before: The long-term debt picture is an unsustainable mess because of our health and retirement systems and accumulating interest payments.

There are a couple optimistic signs: The CBO foresees deficits continuing to be small in the next couple of years, and revised their Medicare cost growth estimates downward ever so slightly. Loren Adler of the Committee for a Responsible Federal Budget notes that estimate for the long-term growth rate in Medicare’s costs has dropped by 0.07 percentage compared with last year’s projection, thanks to slower health-care cost growth. That development gives the trust fund an additional four years of life in this CBO projection. But besides that, there’s not much good news here.

Under current law according to the CBO, debt will rise from 74 percent of GDP in 2014 to 80 percent of GDP by 2025, 108 percent by 2040, 147 percent by 2060, and 212 percent by 2085. These almost apocalyptic projections don’t even fully account for the scale of our predicament, as current law is held down by budgeting distortions, some benign and some gimmicky, like tax breaks that are projected to expire even though they’ll more than likely be extended and unrealistic cuts in Medicare reimbursement rates. As soon as 2039, the CBO anticipates a deficit of 6.4 percent of GDP.

A couple other points: Discretionary spending may be a favorite target of conservatives when they talk wasteful spending, and has been at the center of recent budget debates, but it’s already cratering. In fact, this report shows that non-health and old age spending will be by 2040 at its lowest point as a share of the economy since the late 1930s. The culprits of our future debt problems are Medicare, Medicaid, the ACA, and Social Security, and their massive increases will be caused by “the aging of the population, growth in per capita spending on health care, and an expansion of federal health care programs.”

Social Security is sometimes regarded as the easiest nut to crack of all of those issues, but its outlook is actually worsening substantially: As David Wessel of Brookings points out, this year’s report has revised the program’s long-term actuarial deficit upwards from 3.4 percent of the program’s entire tax base (payrolls) to 4 percent. One of the problems is lower projections for economic growth and payroll taxes in particular — probably due to a weaker labor market than had been projected — but it’s also because of lower projected interest rates, which means that the Social Security trust fund’s “investments” aren’t going to yield as much as expected. This is, in other words, a deterioration of the program’s financial state, but not necessarily a problem for the overall federal budget. Those concerned about the program’s sustainability, though, can’t exactly ignore the issue.

And, as seen in the following chart, is that the longer we wait to reform these programs, the more painful it’s going to be.  

Today’s Policy Update: The Federal Deficit Is Shrinking Rapidly, Does That Matter?


Unskilled workers are getting less and less of a return on work.

Myles Udland has an article in Business Insider that features the following chart:

This chart speaks to a part of the “inequality” debate that has serious implications for our society: the possibility of labor-market outcomes for unskilled workers deteriorating to the point that they flee from the world of work entirely, creating a permanent underclass.

The U.S. budget deficit is shrinking rapidly.

In the Wall Street Journal, Josh Mitchell looks into the state of the U.S. budget.

The U.S. budget deficit is falling sharply this year amid higher tax revenues and an improving economy. The federal government’s deficit from October through June totaled $366 billion, down 28% -from the same period a year earlier, the U.S. Treasury Department said Friday. The federal fiscal year began Oct. 1. The year-to-date deficit was the smallest since 2008, when the U.S. economy was in recession. The deficit hit its latest peak in 2009 but has since shrunk, due to a combination of a slowly improving economy, higher taxes and government spending cuts.

This reversal from the large deficits of just a few years should remind conservatives of what they might have forgotten in the heat of recent budget debates: When it comes to keeping the country solvent, recent deficits are somewhat insignificant compared to the massive future fiscal imbalance looming. Large deficits are going to be run during recessions, and international markets seemingly haven’t lost faith in our ability to repay our debts — but our long-term problems remain.

There are lots of alternatives to the gas tax, as state legislators know.

For the Washington Post, Niraj Chokshi has posted an interview with Oregon Republican state senator Bruce Starr about the alternatives to the gas tax pioneered in their state. (Congress is currently confrnted with the fact that the federal gas tax is now too low to support the current level of federal highway spending.) Starr told Chokshi:

We have a menu of options that folks can choose from.

One of them is really rudimentary. It’s a flat fee where they can just pay a flat amount and that’s it. They wouldn’t pay any per-mile road charge. Now that flat fee’s going to be pretty high because we don’t know how much people are actually going to drive if they use that.

The next step would be a low-tech kind of model where there’s no GPS component to it. So that would mean that you would potentially be charged for miles that you drove outside of the state of Oregon, but you would still be charged on a per-mile basis.

As we’ve discussed before, moving from a gas tax to a mileage-based user-fee system would have many benefits — it would mean a more stable tax base for infrastructure and market mechanisms that can reduce congestion. It might seem like an idea that looks better on a blackboard than it will in practice, but the Oregon experience proves that it can be successful and that a GPS system can avoid privacy concerns.

Corporate cronyism pays — but just for executives.

Russell Sobel and Rachel Grafe-Anderson have published a new study with the Mercatus Center on the effects of large lobbying operations.

The summary of our findings is that, despite such increased involvement by government in the marketplace, and greatly expanded political activities of firms, we find little evidence to support the idea that political activity undertaken by corporations leads to improved performance for firms and their shareholders at both the industry and firm level. We do however find a robust and significant positive relationship between political activity and executive compensation. Therefore, while industry and firm-level performance are not robustly related to “cronyism,” executive compensation is—suggesting that any benefits gained from corporate political activity are largely captured by firm executives.

In what would seem to be a classic principal–agent problem, this finding lends more ammo to the libertarian populists who seek to make taking on crony capitalism a bigger focus for the Right.

If large lobbying operations are nothing more than a pay day for executives, the entire process isn’t just an unjust practice that distorts the market — it’s a waste of resources for almost 

Taxi Medallions and Takings


Late last month, Peter Van Doren of the Cato Institute considered the question of whether the owners of taxi medallions should be compensated when the value of their asset declines due to the advent of new competition:

The medallions have value because the supply of rights to operate taxis, restricted by city regulation, is low relative to demand. The Post article presents data on the number of taxis per 100,000 residents. Washington D. C. licenses cabs, but does not restrict the number of cabs operating through a medallion requirement, and has almost 900 taxis per 100,000 residents. In contrast, Chicago and New York, which have medallion restrictions, only have approximately 230 to 250 taxis per 100,000 residents. The supply restrictions in Chicago and New York lead to excess profits, which reveal themselves in the bids for medallions in the secondary market. The present value of the profits from owning the “rights to cruise for passengers” relative to the profits of other investments is the market value of the medallions, which until recently ranged from $500,000 to a million dollars depending on the city and the severity of the medallion restrictions.

But what happens when supply restrictions are effectively circumvented by, for example, new entrants like Uber that offer taxi-like service, yet which have avoided classification as taxis for a variety of reasons? Medallion supply restrictions are effectively mooted, and the value of medallions declines. This raises the question of whether regulatory regimes that permit Uber-like technological innovations to undermine supply restrictions represent, in effect, a “taking” by the government that merits compensation. Van Doren dismisses this idea, drawing on research he conducted in the 1990s. Van Doren and his co-author, Richard Sansing, actually analyzed New York city’s taxi medallion market:

We analyzed data on lease versus purchase of tax medallions in New York City. If there were no risk, the purchase price of a medallion would reflect the present value of leasing in perpetuity. Unlike other assets the medallion’s only value is the entry restrictions created by government. At the time we conducted our analysis the present value of leasing in perpetuity at 5 percent interest was $240,000 whereas the sale price of medallions was only $100,000. That is the purchase price of a medallion at that time amortized the cash flows over a period of 20 years as if they would go to zero in year 21. Unlike other investments the only reason that cash flows might go to zero was the possibility of deregulation or reduction in enforcement of the entry restrictions. If policy change created any reduction in cash flows in years one through 19 investors made less than normal profits. Investors made “excess” profits if any reduction in cash flow occurred after year 20. Thus the medallion market was like a fairly priced lottery ticket that took into account the possibility of deregulation, even though at the time we did this calculation no change in taxi regulation had ever taken place since it was instituted in the late 1930s. We concluded that no compensation was required to preserve equity or fairness because the price for medallions reflected the risk investors faced from policy change.

Moreover, Van Doren and Sansing argue that the risk of taxi medallion deregulation that faces the owners of taxi medallions can be managed through asset diversification. 

Yet in a recent EconTalk interview with Russ Roberts, Michael Munger of Duke University offered a thought-provoking objection: while Van Doren and Sansing may well be right that the property right that is a taxi medallion is a contingent property right, and that investors must take into account regulatory risk, much the same can be said of all property rights. If the circumvention of taxi supply restrictions goes uncompensated, Munger suggests that Van Doren and Sansing’s rationale could apply to other modes of expropriation as well (“well, the price of buying this piece of land took into account the risk that your land would eventually be nationalized”). I tend to be more sympathetic to Van Doren’s argument, which Munger himself ultimately accepts, but Munger raises a possibility that sounds entirely plausible. 

There is, however, another wrinkle. While one could argue that Uber is doing little more than circumventing taxi supply restrictions, others believe that Uber is offering a meaningfully different service that does more than just increase the supply of taxis. Rather, as Neil Irwin reminds us, it aims to “reinvent the way people get around” by, among other things, reducing the need for private automobile ownership. If Uber and services like it lead to a more efficient allocation of transportation resources broadly understood, perhaps compensating medallion owners is (in the long-run) a small price to pay. 

Today’s Policy Update: Why Amtrak Is Like Medicaid


The costs of this year’s new federal regulations are staggering.

Sam Batkins of the American Action Forum looks into the estimated costs of the new regulations the Obama administration put in the Federal Register this year.

On the day before the nation celebrated its independence, the administration handed the country a regulatory bill worth more than $104 billion for just one half of 2014. At the current pace, regulatory costs will eclipse $200 billion, well above even AAF’s projection of $143 billion.

While the magnitude of all of the new regulations is striking, the graph Batkins used in his piece is most interesting. Two sectors to note are energy and education; energy because its new regulatory burden is so large and education because, in terms of hours needed to comply, it’s got new costs as large as any other sector.

Conservatives have sought deregulation in both fields for some time, and the chapters by Adam White and Rick Hess in Room to Grow describe how those sentiments could be spelled out practically, in expanding educational choice and enabling the growth of the natural-gas industry.

More good labor-market news: Jobless claims are low, and they just came in lower than expected.

Jonathan House summarizes the new claims for unemployment benefits data for the Wall Street Journal.

New applications for unemployment benefits fell last week, a sign the labor market continues to strengthen.

Initial claims for unemployment benefits decreased by 11,000 to a seasonally adjusted 304,000 in the week ended July 5, the Labor Department said Thursday. That matched the third-lowest reading this year and was lower than the 319,000 new claims forecast from a survey of economists by The Wall Street Journal.

The four-week moving average of claims, which smooths out weekly volatility, fell by 3,500 to 311,500. Claims for the week ending June 28 were unrevised at 315,000.

While there’s still troubling data to be found in the labor market — especially if you look at teenagers and the long-term unemployed or the labor-force-participation rate, this number combined with last week’s unemployment report are really encouraging news about the economy. However, despite the mostly positive recent findings, the persistent struggles of the long-term unemployed and insufficient churn continue to recommend policies to improve the labor market. 

Amtrak is a dumpster-fire.

For Wonkblog, Christopher Ingram details the total ineptitude of Amtrak, which belongs alongside the VA, the launch of, and the Postal Service as conservatives’ best examples of costly federal failures:

Swiss rail travel is actually affordable compared to the U.S. A weekend round trip between Geneva and Zurich costs about $189, or $0.53 per mile traveled. A weekend round-trip from D.C. to New York, on trains leaving at a reasonable hour (e.g., not in the middle of the night) will run you about twice that much, or $0.98 per mile. And if you were to take the Acela you’d be paying almost twice as much as that for the privilege of arriving 35 minutes earlier…

Eight of the 33 routes, including most of the long-distance cross-country lines, experienced on-time arrivals less than 50 percent of the time over the past 12 months. The Empire Builder, running from Chicago to Washington, ran on time only 21 percent of the time in the past year. Only one in three California Zephyr trains made their trips between Chicago and San Francisco on time . . .

There are two major forces behind Amtrak’s poor performance. The first is that Amtrak doesn’t own most of the track it runs on, but leases it from a panoply of freight rail companies. You might think that would be a perfect recipe for finger-pointing and buck-passing whenever a problem arises, and you’d be absolutely right! A byzantine system of regulations governs rights-of-way between freight and passenger trains running on these tracks, and Amtrak is usually all too happy to blame the freight operators whenever a problem arises . . . How could we make things better? For starters, it’s probably time to eliminate those costly, poorly-performing long-distance routes completely. According to a Brookings Institution study last year, few people ride them and they’re costing Amtrak (and taxpayers) hundreds of millions of dollars per year.

Obviously, this performance is embarrassing, and given the level of taxpayer support – over $40 billion since 1970 – serious reform is in order. Ending expensive and lightly used long-distance lines, as Ingram describes, seems like a reasonable first step.

But is there anything we can take from the experiences of Amtrak to broader policy debates, beyond the obvious conservative talking point of “government can’t do anything right”? When Ingram mentions that the main cause of Amtrak’s failure is a failed structure of shared responsibility between two entities, I think immediately of Medicaid. Medicaid is a state-federal partnership in which states ostensibly run their own programs but with heavy federal regulation and funding divided between the states and federal government. By giving neither party complete control of the operation, states are not incentivized to seek savings because of half of their savings go back to the federal government. And neither administration could really do much if it wanted, because neither has the power to actually implement a program that works.

As Lamar Alexander has argued in the past, swapping Medicaid and education so that states have complete control of schools while the federal government takes over Medicaid could help fix this problem. Or in the other direction, moving to a block-grant — not for the sake of just cutting budgets – could move us to a Medicaid program that actually improves the lives of those we want it to serve.

Congress passed a new job training program, and it’s not terrible!

For Politico, Maggie Severns discusses the bipartisan Workforce Investment and Opportunity Act, which passed Congress with overwhelming support:

The rewrite of workforce policy has roughly the same goals as the original: creating an adaptable system of “one-stop” job centers where someone looking for employment can go to for help finding work and, if needed, training. It would give businesses a bigger say in local workforce development, and it would give governors more flexibility with federal workforce funds.

These changes appear mundane, but it took years for members of Congress to hash out specifics — and gain enough steam — to reauthorize the bill. It was extensively pre-conferenced behind closed doors to smooth over issues that could derail the bill in either chamber by key members of the House and Senate education committees, including retiring Sen. Tom Harkin (D-Iowa) and Rep. George Miller (D-Calif.), as well as Kline and Sen. Lamar Alexander (R-Tenn.).

Not only is it encouraging to see lawmakers focus on something that could help the jobless, the new law seems to have embraced the conservative critique of the job-training program. As Danielle Kurtzleben explains for Vox, the new law consolidates and simplifies many of the duplicative and overlapping programs WIA had morphed into and gives businesses a bigger role in workforce development. The bill also includes new metrics that can be used to more effectively measure the success of the programs. All the lawmakers were quick to say the bill wasn’t perfect, but it does seem to be a step in the right direction on labor-market policy.

Are Narrow Networks a Good Way to Control Out-of-Control Health Spending?


Chattanooga, Tenn., has higher than average rates of obesity, smoking, and hypertension, yet on the Obamacare exchanges, the county has surprisingly low insurance rates. Relatively low, at least: One resident explained to The Atlantic that he’s paying only $187 a month for a silver plan, and others’ premiums were cut in half from what they were before the law. How?

Perhaps partly because the area’s health problems were going to push rates way up when the ACA was implemented, insurers in Chattanooga have designed plans that cover extremely limited networks of doctors and hospitals.

The practice of “narrow network” plans has become more common across the country since the ACA went into effect because new regulations leave limited options for cost containment. Before the ACA, insurers could reduce benefits, adjust risk pools, or increase rates to remain profitable. Now, narrowing networks is one of the few tools insurers have left to control costs. This may be why 70 percent of the silver plans offered on the Obamacare exchanges, on which individuals purchase insurance, are narrow-network plans, when a much smaller proportion of employer-provided plans have narrower networks.

But narrow networks have low premiums for a reason: They limit choice. Having limited options can be frustrating, especially if a doctor or hospital you like doesn’t end up in your network. However, evidence suggests that individuals who are currently uninsured and low-income individuals — the people most careful about pricing of insurance – say they’d rather have fewer choices and lower rates than pay more for a broader network.

Plenty of people have criticized Obamacare for causing the proliferation of narrow networks, but those who want more choices will still have the option to purchase broad-network plans. On the Obamacare exchanges, they report, McKinsey & Company explains:

Broad networks are available to close to 90 percent of the addressable population [while] narrowed networks are available to 92 percent of that population; they make up about half (48 percent) of all exchange networks across the U.S. and 60 percent of the networks in the largest city in each state.

But, with premiums having increased so dramatically under Obamacare, many people feel forced into narrower networks to avoid ruinous premium increases. The (relative) savings can be substantial, according to McKinsey:

Compared to plans with narrowed networks, products with broad networks have a median increase in premiums of 14 to 17 percent. . . . Across the country, close to 70 percent of the lowest price products are built around narrow, ultra narrow, or tiered networks.

Narrow networks limit choice, but don’t necessarily compromise access to care: The ACA lays out Qualified Health Plans (QHP) standards, which require plans to have a network large enough to deliver all services without excessive wait times and within a reasonable distance of the patient. Some states also have specific laws about minimum networks that regulate patient-to-provider ratios, waiting periods, and travel times.

When consumers pay less for their care, are they getting a lower-quality product? Not necessarily. McKinse compared broad and narrow networks using Centers for Medicare Services hospital metrics and found that both types of plans performed equally well in terms out outcomes and patient satisfaction. This might seem surprising on its face, since narrow-network plans basically reduce costs by contracting with only the least expensive providers and excluding more-expensive ones. But there is little evidence to show a positive correlation between high-cost medical services and quality, so having an insurer discriminate based on price won’t necessarily reduce quality.

In some cases, narrow networks can even provide better quality care. They may cover just one hospital system, so patients will receive all of their care within that system. This could improve outcomes by making medical records more accessible between doctors, increasing the likelihood that patients see the same physicians continuously, and reducing the amount of duplicative care and unnecessary procedures. (There are also signs of a similar effect within Medicare Advantage enrollees, who may fare better than regular Medicare because their care is constrained to a smaller network.)

If these types of networks become more prevalent — and it looks like they might — it’s likely that state will become more active in regulating narrow networks, as consumers seek lower prices but worry about access. Already, both California and New York have passed laws to limit the amount patients can be charged for using out-of-network hospitals.

Narrowing networks to decrease costs isn’t too popular among the majority of Americans (recall the outrage over one insurance executive telling the New York Times that consumers should learn to break their “choice habit”). But any measure that controls health costs without compromising access or quality could be a move in the right direction. Narrow networks remain one of the insurance market’s few remaining cost-control mechanisms — we’ll see how long regulators let them last.

My Ambivalent Case Against Stuyvesant


One of the qualities I value most is loyalty, and I’m sorry to say that I’ve just filed a profoundly disloyal column. At Slate, I make the (tentative) case for shutting down Stuyvesant High School, my alma mater. Critics of Stuyvesant, a selective exam school in New York city, have focused on the underrepresentation of black and Latino students relative to their share of New York city’s public school population. I argue that the dynamics behind the racial composition of Stuyvesant High School are poorly understood, that its hyper-competitive nature is not an ideal fit for students who need a supportive environment to flourish, and that most gifted and talented students would be better served by a diverse array of smaller, focused schools. Moreover, I maintain that it is Stuyvesant’s perceived “elite-ness” guarantees that its admissions policies will be politically contentious. My friend David Schleicher reminds me that I neglected to cite the work of Harvard economist Roland Fryer, which is very relevant. The following is drawn from Fryer’s abstract:

Publicly funded exam schools educate many of the world’s most talented students. These schools typically contain higher achieving peers, more rigorous instruction, and additional resources compared to regular public schools. This paper uses a sharp discontinuity in the admissions process at three prominent exam schools in New York City to provide the first causal estimate of the impact of attending an exam school in the United States on longer term academic outcomes. Attending an exam school increases the rigor of high school courses taken and the probability that a student graduates with an advanced high school degree. Surprisingly, however, attending an exam school has little impact on Scholastic Aptitude Test scores, college enrollment, or college graduation — casting doubt on their ultimate long term impact. [Emphasis added]

This suggests that Pedro Noguera is right to have argued that Stuyvesant’s “sink-or-swim” environment does not offer much to the black and Latino students who would be given a boost in the admissions process under the proposals advanced by New York Mayor Bill de Blasio and his allies in Albany. 

Today’s Policy Update: Obamacare ‘Funding Cliffs’ Loom for Some Programs


Contraceptives are not actually free for insurers.

Today at the New York Times’ Upshot, Austin Frakt looked into one element of the Burwell v Hobby Lobby opinion, the assertion that that covering contraception is cost-neutral for insurers:

Studies the departments cited are suggestive, but far from definitive. A fuller review of the literature on the cost and cost offsets of contraceptive coverage by Daniel Liebman, a colleague, finds that the evidence is thin that, from an insurer’s perspective, contraceptive coverage pays for itself in the long term. Moreover, it almost certainly does not in the short. The cost of contraceptive coverage is immediate, and the possible offsets (reduced pregnancies) are downstream, often years in the future.

Even the most expensive birth-control options cost much less than the cost of delivering and caring for a child, so how could birth control be a bad deal for insurers? Because the HHS mandate, for the most part, simply shifts costs of contraceptives from women who previously bought contraceptives on their own to their insurers, and the same amount of pregnancies are prevented. The only difference is insurers pick up the tab. As I wrote about here, there is little evidence that free contraceptives will even reduce the rate of unintended pregnancies in general. It turns out that the popular argument that contraceptives save everyone money may fall short.

667 million dollars later, people still don’t understand how to use 

Researchers at the University of Pennsylvania discovered that even highly educated young adults had a hard time navigating the federal government’s lavishly funded health-care exchange. They report on a study they conducted

Participants were challenged by poor understanding of health insurance terms that were inadequately explained. Although participants expressed their preferential benefits (for example, preventative care and dental coverage), they had difficulty matching plans with their preferences, partially because they perceived that the amount of information was overwhelming. Young adults qualifying for affordability provisions were confused by discount applications that made more-comprehensive plans (such as silver) cheaper than less comprehensive plans (such as catastrophic).

The website’s problems were numerous: The health-insurance terminology it used was too complicated, it wasn’t clear about what benefits plans would cover, and it didn’t properly explain how subsidies affect plans’ prices. Obamacare may have more or less reached its projected enrollment numbers, but Penn’s study suggests that almost anyone would have trouble buying a plan through the exchange. Unless the site becomes more user-friendly, the “navigators” hired to help sign people up for the exchanges may become a permanent fixture in the U.S. health-care system, in some sense replacing what private insurance brokers used to do.  While they may have helped make the exchanges functional, navigators are both expensive and sometimes problematic, as NRO’s Jillian Kay Melchior wrote about here.

Some of the subsidies crucial to making Obamacare work are expiring next year — will they be extended?

The Affordable Care Act has all kinds of federal subsidies in it, but some of them — to raise Medicaid payment rates, fund community health clinics, and insure children on CHIP to increase health-care access for low-income individuals — were designed as temporary measures to help boost access to care. As Jed Graham reports for Investor’s Business Daily, the subsidies are scheduled to shrink rapidly over the next couple years, with no replacement funds in sight:

Jed writes:

These funding cliffs weren’t driven by policy but by politics: Provide short-term funding to get ObamaCare off the ground, then cut it off — at least on paper — to make the budget forecasts look better over 10 years.

Now, with the money set to dry up next year, a push has begun to save funding for all three programs at an annual cost approaching $13 billion.

Time will tell whether Congress decides to plug the gaps, and increase Obamacare’s price tag.

Today’s Policy Agenda: Patent Trolls Really Do Slow Innovation


We all agree on improving teacher quality, but how should we do it?

In the Wall Street Journal, Jeffrey Sparshott discusses a new White House initiative to improve teacher quality.

The Obama administration on Monday announced an initiative to try to improve teacher quality at schools with high poverty rates and large minority populations, another effort to advance the White House’s agenda while broader programs remain stalled in Congress . . .

Under the initiative, states will be required to analyze data and submit plans to ensure students are taught by “effective educators,” the Department of Education said. The agency is setting aside $4.2 million to assist the effort and starting this fall will publish profiles of school districts, identifying schools that are falling short of standards as well as highlighting those that are recruiting and retaining effective educators. Mr. Obama said the pool of teachers is deep enough but many aren’t getting the training, professional development and support they need . . .

Mr. Duncan said he would consider linking performance with waivers from requirements under the No Child Left Behind education law. The White House says the law, passed under the previous administration, is broken though efforts to rewrite it haven’t advanced through Congress.

The president and Secretary Duncan are right that improving teacher quality is one of the most important things we can do to improve our education system and to enable upward mobility. Raj Chetty and others found that getting rid of the worst 5 percent of teachers and replacing them with merely average teachers would yield gains of $250,000 in lifetime income for the students in the affected classrooms.

However, the most obvious solutions do not include more federally prescribed professional development and would actually make the teachers’ unions even angrier at Arne Duncan, if that’s possible. First, as Andrew Biggs has argued on NRO, districts need to fire the worst teachers and focus less on class sizes that research suggests is overrated. Second, we should allow differential pay that could help attract and retain good teachers while pushing the worst out of the profession and encourage states to supplement the income of those who take jobs in the worst schools.

Patent trolls really do slow innovation.

Alberto Galasso and Mark Schankerman show in their new NBER working paper that while patents are useful for encouraging innovations in many contexts, they stifle it in many of our most dynamic industries. They write:

Patent rights block downstream innovation in computers, electronics and medical instruments, but not in drugs, chemicals or mechanical technologies. Moreover, the effect is entirely driven by invalidation of patents owned by large patentees that triggers more follow-on innovation by small firms.

Both anecdotal and now empirical evidence strengthen the case that our intellectual-property legal framework is slowing innovation and growth, as Jonathan Last describes in more detail in his new piece for The Weekly Standard. Taking on the rent-seeking behavior of patent trolls and large companies that indulge in troll-like behavior is something Republicans should prioritize — former House staffer Derek Khanna has detailed some of what such an agenda should look like.

Sherrod Brown wants to expand one of our worst poverty traps.

Lisa Ruhl has the story for the Washington Examiner.

Sen. Sherrod Brown, D-Ohio, is fighting for Social Security disability insurance for the millions of Americans who use it. He’s saying it’s not enough to protect the current model of how the insurance works: Now is the time to expand and grow the program…”We need to do more than defend the program and play defense,” Brown said at the Center for American Progress on Tuesday morning. “We need to play offense. We need to expand the program.”

The Social Security Disability Insurance Trust Fund is set to run out of money in 2016.

Of course, a just market economy will have a safety net that protects those who can’t work, but the Social Security Disability program has devolved into a permanent welfare program that makes no efforts to include its clients in the broader economy and virtually guarantees that those on its rolls will always be poor and will never work again. For a vivid picture of how this works, This American Life devoted an illuminating show to the SSDI poverty trap, its erosion of people and communities, and how over time it’s become possible for those with questionable ailments to enter the program.

The program desperately needs to be reformed, possibly in ways that make it more expensive or resting on a mandate that conservatives might not like. But to claim that SSDI is “one of the nation’s most successful insurance programs” and to call for its expansion is utter malpractice and ignores the perverse incentives and terrible consequences the program lays on our most helpless neighbors. 

Why Down Payment Subsidies Are Better Than Mortgage Guarantees


In his critique of the much-admired new book House of Debt, Jay Weiser warns that government mortgage guarantees have “undermined market discipline, encouraging risky borrowers to load up on artificially low-rate debt.” Might there be another, more constructive approach to helping U.S. households achieve sustainable homeownership? For the sake of argument, let’s leave aside the question of whether it’s appropriate for public policy to favor homeownership over renting. 

In 2010, O. Emre Ergungor of the Federal Reserve Bank of Cleveland argued that if our goal is to encourage sustainable homeownership, we ought to favor down-payment assistance over interest-rate subsidies, like the federal mortgage-interest tax deduction. In a similar vein, Joseph Gyourko of the Wharton School has called for replacing the Federal Housing Administration, which guarantees mortgages and which has been a financial failure, thanks in part to high default rates among the borrowers it backs, with a subsidized savings program that would match the savings of qualified households, thus helping them make 10 percent down payments on homes within their economic reach. 

Gyourko’s proposal is motivated by a number of concerns:

(1) the FHA has failed to discipline its risk-underwriting process, and he is skeptical that it will ever do so, due in part to political pressures. Starting from scratch makes sense if this is indeed the case.

(2) The FHA is undercapitalized, with a leverage ratio (as of last year) of over $40 in outstanding insurance guarantees to every $1 in what it calls total capital resources to pay off losses, a marked deterioration from the 12 to 1 ratio in fiscal year 2007. The mortgages the FHA insures belong to borrowers who are leveraged at 33 to 1 on average. As soon as housing prices fall, the FHA will find itself quickly overwhelmed and it is a safe bet that taxpayers will be left to pick up the pieces. 

(3) A subsidized savings program will address the equity shortfall, it won’t require a large bureaucracy capable of pricing complex mortgage guarantees and managing the foreclosure process, and the success of big mutual-fund companies demonstrates that such a program can be operated with low overhead, thus ensuring that taxpayers resources are directed to achieving the underlying goal of helping households accumulate wealth. 

(4) By focusing on borrowers, Gyourko’s proposed subsidized savings program is less likely to have its benefits siphoned off by realtors and homebuilders. Consider the distinction between Pell grants, which go to students from low-income households, and tuition tax credits, which benefit all students, including more affluent students. While Pell grants only increase the purchasing power of a discrete group of students below a certain income cutoff, tuition tax credits that benefit all, or almost all, students shift the entire demand curve. So while we wouldn’t expect Pell grants to contribute to tuition increases, universal aid would do so if supply is not terribly elastic. In a similar vein, the mortgage-interest tax deduction shifts the entire demand curve; in supply-constrained regions like coastal California and the northeastern United States, this shift contributes to higher home prices, as Gyourko and Edward Glaeser observe in Rethinking Federal Housing Policy. A narrowly-targeted subsidized savings program designed to help borrowers save up for a down payment would have a far more modest impact on home prices, even in capacity-constrained regions. 

(5) Unlike mortgage guarantees, which are notoriously difficult to price properly, a subsidized savings program would have highly visible costs. This is very much a feature in that it allows policymakers to more carefully weigh its costs and benefits. Yet it is a political liability, for obvious reasons. 

(6) The program would increase domestic savings and encourage financial discipline and long-term planning among borrowers. In contrast, the FHA subsidizes risky, highly-leveraged bets on the direction of the housing market that can leave the balance sheets of low- and middle-income households badly damaged when the housing market goes south. 

As for the cost of the program, Gyourko suggests that it would be far lower than that of putting the FHA on a sound financial footing. This seems like an excellent proposal for conservatives interested in fostering personal responsibility and who hope to avoid a future taxpayer bailout of the FHA, which looks all but inevitable in the absence of meaningful reform. 

Sharing the Leverage


Editor’s note: The following is a guest post by Jay Weiser, associate professor of law and real estate at Baruch College. In it, he addresses how policymakers should address consumer debt buildup – and, just as importantly, how they should not.

In their new book House of Debt, economists Atif Mian and Amir Sufi connect the vast increase in consumer debt with the Great Recession and slow-motion recovery. But rather than sing a requiem for a half-century of proxy Keynesianism, when borrowers leveraged up in pursuit of a government-defined American Dream, they shout hosannas for even more debt. They claim that compelling mortgage and student lenders to share equity risk with borrowers will reduce the severity of future financial crises by supporting consumer purchasing power. This is like saying that the overloaded Sewol ferry wouldn’t have capsized if the captain had added one more car in exactly the right place. Consumers and the financial system need less leverage and simpler loans.

Government guarantees and moral hazard

As the authors note, government incentives were a major cause of the consumer debt buildup. Without government backing, as guarantees or direct loans, lenders charge high rates for risky loans and expect high chargeoffs in an economic downturn – the reason why unsecured credit card debt, with its extortionate rates on unpaid balances, was not a systemic problem in the Great Recession. Express and implied mortgage and student loan guarantees undermined market discipline, encouraging risky borrowers to load up on artificially low-rate debt. 

Rather than eliminating government backing, whose benefit has gone mainly to the real estate and higher education industries rather than consumers, Mian and Sufi would add complexity by having lenders assume more of the risk of economic downturns. It’s unclear which lenders they’re talking about, since both student loan and residential mortgage debt have been effectively socialized.  Post-bust, the government backs 90 percent of residential mortgages and is the lender for 85 percent of student loans. If government guarantees remain in place for new loans, politicians will latch on to the supposed additional safety to pump even more loans to riskier borrowers.

Mian and Sufi claim at one point that consumer borrowers are not subject to moral hazard. But consumers have repeatedly leveraged to the max on subsidized loans and bet on good times later to pay them back. Bubble-era 100% loan-to-value home mortgages were premised on rising prices permitting cash-out refinancings. Relying on the exaggerated “college premium” for future earnings, student loans more than doubled from the start of the Great Recession in December 2007 to March 2014 ($1.26 trillion outstanding), notwithstanding a 14.7 percent three-year default rate for borrowers graduating in 2010. If borrowers know that their debt will be reduced during downturns, they will have even more incentive to borrow, bubbles will inflate further, and government losses in downturns will compound.

Doubling down on derivatives

If government guarantees disappear, Mian and Sufi’s risk-sharing requirement – reducing the amount owed when the unemployment rate rises (for student loans) or housing prices drop (for mortgages) drop will cause further distortions in the debt securities markets. Lenders already bear the risk of economic downturns, when defaults spike. If lenders are required to double their bet (by taking on the downturn risk currently borne by borrowers), they will cover the cost of this downturn insurance by raising interest rates. The authors confidently assert that lenders can price the risk based on past performance, but this reminds us that economics is the queen of the social sciences in the Ru Paul sense, offering vivid, but distorted, models. Lenders’ ability to predict the length and severity of downturns over the typical terms for student loans (ten years) and mortgages (30 years) is nil: as late as September 2008, the economists’ Consensus Forecast poll predicted that no country would be in recession by 2009. In the absence of the authors’ risk-sharing, borrowers with less ability to ride out a downturn wouldn’t borrow – reducing the default rate and financial instability when the inevitable downturn comes.

Perversely, the authors’ insurance scheme will force the massive use of derivatives not currently demanded by the market. Bond buyers are generally interested in a predictable fixed return. To provide this, the investment banks that securitize student loans and mortgages structure the securities into tranches (segments). Upper tranche buyers typically get relatively low interest rates that are comparable to Treasury or high-quality corporate bonds.  In exchange, they are the last to bear the risk of default on loans backing the bonds. 

Buyers of lower tranches (known as “B-pieces”) get higher interest rates (akin to junk bonds) in exchange for accepting equity-like risk: higher payments in a good economy but bearing the first losses when defaults rise in a downturn.  B-pieces are hard to value.  In past decades, they led to a series of investment bank blowups culminating in the Great Recession’s CDO conflagration. In response to Mian and Sufi’s structure, securitizers will dump the index risk into a speculative B-piece that will leave the incentives of upper tranche buyers untouched. 

Arbitraging indexes

The specific student loan and mortgage proposals have further problems. Mian and Sufi propose reducing student loan indebtedness when unemployment increases. There is little reason to subsidize groups such as recently graduated engineers, who command high starting salaries and have just 5 percent unemployment. There is even less reason to encourage borrowing by students who are unlikely to earn a college premium on graduation. Undergraduates have a six-year bachelors degree graduation rate of just 59 percent, and noncompleting students have a 59 percent incidence of student loan delinquency or default. Even among recent graduates who have completed their bachelors’ degrees, 56 percent are unemployed or work at jobs that do not require a college degree. Graduate student loans have exploded despite tiny wage premiums that make many degrees little more than cash cows for universities. Under the authors’ proposal, students will have even less incentive to limit their debt — and higher education institutions will have even less incentive to limit tuition. 

For home mortgages, Mian and Sufi propose reducing principal and payments when housing price indices drop, claiming that there are housing price indexes accurate down to the zip code level. But houses, even in a single zip code, are of multiple ages, sizes and quality. It took years to develop the data on repeat sales of the same houses that make the Case-Shiller index reliable — and Case-Shiller’s finest grained public indexes go down only to the metropolitan area level. Nor has economist Robert Shiller’s effort to promote housing index futures succeeded so far: as of July 3, the CME Group’s national S&P/Case-Shiller Home Price Index had all of 16 futures contracts outstanding.  

The more complex the reconciliation of the actual market price with the index value, the more litigation: commercial shared appreciation mortgages generated substantial litigation when they were popular in the 1970s and 1980s. Even without litigation over the amount of the writedown on sale, as of June 2013, it took an average 1,033 days to foreclose in New York and New Jersey, 907 days in Florida and 817 days in Illinois. 

With the loan principal reduced in a falling market and borrowers in control of the time of sale, borrowers will leverage up with even less concern for price than during the bubble, then strip the debt when the market falls. (Similar opportunism led to a prohibition on principal-stripping in Chapter 13 bankruptcy.) Nor will lenders be comforted by the authors’ proposal that, if prices go up, they get just 5 percent of the gain on sale, given that prices dropped by about a third nationally from peak to trough in the bust. (The authors offer student loan lenders no upside at all if the unemployment rate drops.)

The Soprano solution

Sufi’s University of Chicago colleague, Ronald Coase, won the 1991 Nobel Prize in Economics for demonstrating the importance of minimizing transaction costs. Coase recently died of natural causes at age 102, but given the authors’ treatment of his life’s work, it’s as if, Tony Soprano-style, they had smothered him with a pillow. Complex and opaque debt structures enable politicians and crony capitalists to disguise high leverage while spinning the predictable blowups as black swan events.

If a consumer debt hangover is hindering the economy, as Mian and Sufi plausibly argue, then the government should be encouraging writedowns in exchange for the elimination of future guarantees and other hidden debt subsidies. Borrowers and lenders, not taxpayers, should bear the risk.

Today’s Policy Agenda: Will Private Exchanges Be the Health Care of the Future?


 Obamacare provides doctor visits, eventually.

You may have to wait longer to see a physician in 2014, according to a report by health-care consulting firm Merritt Hawkins. Since 2009, wait times to see a general practitioner increased in two-thirds of the cities surveyed. While wait times to see a general practitioner only increased by a few days in some cities, others saw dramatic increases: Atlanta, Philadelphia, and Seattle all saw wait times increase by ten days or more.

Wait times are likely to keep increasing: Obamacare is adding millions of new patients to the already busy system via state Medicaid expansions and the health-care exchanges. Experts have long worried that the U.S. doesn’t have the doctors or facilities to meet new demand. The Association of American Medical College estimates that there will be a shortage of 45,000 general practitioners by 2020 (it has pushed for more government funding for medical education as a solution).

Long wait times will likely disproportionally affect low income patients because some physicians do not accept Medicaid or accept Medicaid patients at lower rates.

New York sees some of the worst rate shock of 2014.

New Yorkers may see premiums increase greatly in 2015: On average, insurers requested a rate increase of 13 percent relative to last year’s rates, according to the New York State Department of Financial Services. After many premiums in the state were reduced by the implementation of the law last year (New York had many costly regulations before Obamacare but no individual mandate), this large increase for 2015 premiums comes as an unwelcome shock.

Some New York state officials see no cause for concern, noting the availability of subsidies and the likelihood that proposed rate increases will be reduced. However, as Avik Roy explains here, new Yorkers likely still pay more than other Americans for insurance because New York already had a very unique — and very expensive — healthcare system before implementing Obamacare.

Official rates will be set in late August, around the time when other states will be finalizing their rates, too — a process sure to be of political interest for both parties in midterm season.

Will private exchanges offer the health care of the future? 

When one entrepreneur found that the options offered by District of Columbia’s federal run exchange were too expensive both for some employers and employees in the restaurant industry, she started her own exchange. Industree Exchange, started for an industry group by former private chef and meeting planner Alisia Kleinmann, features 15 full-coverage plans along with several lower-cost options that are especially attractive for young, typically healthy individuals – a common demographic in the restaurant industry.

“Every single option has been designed, negotiated and built specifically for the demographics of the restaurant industry,” Kleinmann said. “They keep you in compliance with Obamacare and they’re completely affordable.”

Private exchanges may reduce administrative burdens, lower costs for employers and employees, and offer more options tailored specifically to employees. In fact, some experts estimate that enrollment on private exchanges could be greater than enrollment on public exchanges by 2018. Private exchanges can complement public exchanges, as vehicles for individuals who have insurance through the public exchanges to purchase additional benefits through their employer, as Eric Grossman, a health-care consultant, explained to Paul Howard of Forbes in January. As the health-care market continues to change, mixing private and public options and exchanges may be one way people end up meeting their health-care needs.

It’s Much Easier to Be Socially Responsible In Some Businesses Than Others


This weekend, Ross Douthat wrote on Hobby Lobby as “a company liberals could love” in light of its insistence on paying full-time workers no less than $15 an hour, among other policies that tend to reduce turnover. Elsewhere in the New York Times, Jennifer Conlin profiles the Zingerman’s Community of Businesses (ZCoB), a network of for-profit firms in and around Ann Arbor, Michigan, that has pioneered a more collaborative approach to management, in which employees are encouraged to think of themselves as entrepreneurs invested in the health and growth of the larger enterprise. Zingerman’s is also committed to paying relatively high entry-level wages, and one of the founders of the business, has lobbied for an increase in the minimum wage. 

Far be it from me to criticize Hobby Lobby or the ZCoB, both of which strike me as creative, innovative businesses that deserve to be admired and emulated. But I was struck by one passage in Conlin’s profile that strikes me as relevant to the larger debate over wage floors:

“We get price questions a lot,” said Maddie LaKind, a recent University of Michigan graduate who worked part time in the deli during college and is now working and training full time at the deli, hoping for a career in food. “Customers might want to know, for instance, why our Italian submarine sandwich costs $15.50. I explain to them the value of the product. It has 11 different high-end ingredients. But we also happen to be paid and treated well.”

The ZCoB is devoted to selling premium products to customers who are willing to pay for them. This demands a level of commitment that at least some employees find less than suitable, as Conlin reports:

Former staff members talk about the frustrations of having to placate difficult customers, as well as the stress of being “Zingy” throughout a long shift. “It is exhausting to work somewhere where you feel like you have to improve what you do constantly,” said one former worker at Zingerman’s Roadhouse.

Essentially, the Zingerman’s business model relies on identifying conscientious employees, making them more conscientious through its rigorous, and expensive, training programs, and then retaining them by offering them opportunities for upward mobility within the organization, which requires that the organization grow steadily. It should be obvious that not all businesses can mimic this approach, as there are only so many workers who would choose to devote themselves so wholeheartedly to a corporate mission, and other employers will respond by crafting terms of employment that are a better fit for their needs (e.g., I might find it demoralizing to be constantly cheerful, and I’d be willing to accept a somewhat lower wage to avoid what I perceive to be this indignity); and not all business, particularly in retail, are capable of growing at such a rapid clip, for a variety of reasons, including the nature of the market being served. 

Yet in lobbying for an increase in the federal minimum wage, Zingerman’s co-founders have implicitly decided that other businesses, e.g., in which quick-service restaurants aim to serve low-income or cost-conscious consumers, who might need to outsource meal preparation in order to work longer hours, must either sharply increase their labor productivity, i.e., employ fewer workers, or pivot to serving a different kind of customer, a kind that doesn’t necessarily exist in every part of the country. 

And as for Hobby Lobby, a company that I’m inclined to think well of, like Douthat, I’m reminded of Megan McArdle excellent analysis of why Wal-Mart will never pay like Costco: while Costco is a place where relatively affluent consumers go to stock up on a small number of products in bulk, Wal-Mart serves virtually all of the shopping needs of a less affluent clientele; its business model is intrinsically more labor-intensive than Costco’s, and spending more to raise the quality of service would tend to raise prices, thus encouraging its price-sensitive customers to look elsewhere. Hobby Lobby is a specialty retailer that can carry a relatively limited array of products, and as such its business model lends itself to labor productivity. 

I absolutely agree with Douthat’s basic point about Hobby Lobby: the fact that its corporate leadership is influenced by an ethical and religious commitment contributes to the fact that its a great place to work. Something similar seems to hold for Zingerman’s. But it is no accident that both companies have flourished in niches that make it possible to avoid heavy reliance on low-wage, less-skilled labor. And given that low-wage, less-skilled jobs can, at their best, serve as the first rungs on the ladder to high-wage, skilled jobs, it’s not entirely clear to me that eschewing them entirely is such a good thing. 

Immigration Policy Is Not Binary


Immigration advocates have a frustrating tendency to insist that the immigration debate is binary. You are either for immigration or against it. They neglect the possibility that one might be for certain kinds of immigration and against others, and they routinely deploy data that fails to differentiate among immigrants by skill level or language proficiency. The reason, I suspect, is that many immigration advocates recognize that their arguments from global poverty alleviation fail to resonate with the broader public, and so they seek to yoke their case for less-skilled immigration to the much stronger case for skilled immigration by blurring the distinction between the two. 

Charles Kenny, a columnist for Bloomberg Businessweek and a proponent of large-scale less-skilled immigration, offers a comparative analysis of public opinion concerning immigration across several market democracies, drawing on 2013 data from the German Marshall Fund. Though I very much enjoy Kenny’s writing, his latest column obscures more than it reveals. 

The U.K. is the only country out of eight European countries and the U.S. surveyed by the German Marshall Fund where the majority of respondents thought there were too many immigrants in the country in 2013. Compare that with 41 percent in the U.S. and only 24 percent in Germany.

What Kenny does not mention is that when asked if there were “a lot but not too many” immigrants in the country, 39 percent of Americans, 55 percent of Germans, and 28 percent of Britons answered in the affirmative. One obvious possibility that Kenny neglects is that Germans might be reluctant to tell a pollster that there are “too many” immigrants residing in their country while Americans and Britons, who presumably don’t have the same anxieties about national chauvinism, are somewhat more inclined to do so. While Kenny cites the fact that only 24 percent of Germans will forthrightly say that there are too many immigrants in the country, he neglects to mention that 43 percent of Italians and 43 percent of the French say the same. The Swedes, like the Germans, are outliers in that only 23 percent report that there are too many immigrants in the country, yet Sweden is home to large numbers of migrants from neighboring countries like Finland (12.5 percent of all foreigners residing in Sweden), Denmark (6.8), and Norway (6) as well as countries like Iraq (9.3). A finer-grained question might ask respondents if there were “too many” immigrants from affluent market democracies or from the developing world.

Kenny’s column is, of course, about immigration, which is to say whether or not the citizens of market democracies should allow more immigrants to settle in their countries. The “too many” question is not the most obvious way to get at this particular concern. Ask Americans about illegal immigration and the German Marshall Fund finds that 61 percent are worried about it; 71 percent of Germans are worried about it, as are 80 percent of Britons. On legal immigration, only 25 percent of Americans are worried while the same is true of 29 percent of Germans and 41 percent of Britons. 

So why might Britons be so much more concerned than Germans? One hint comes from the World Bank, which finds that from 2009 to 2013, net migration to Germany has been 549,998 while net migration to Britain has been 900,000. This might sound like a relatively modest difference, but remember that Germany has a population of 82 million while Britain has a population of 62 million. Moreover, immigration to Britain has been concentrated in southeastern England while it has been somewhat more diffuse in Germany. 

In the U.S., more than two-thirds view immigration as a good thing for the country. And even in the outlier U.K., the percentage of people suggesting immigration has gone too far has been similar—and if anything a little higher—all the way back to the 1960s. The proportion of Britons who admit they are at least a little prejudiced against people of other races has fallen from 35 percent in 1980 to 30 percent in the latest survey. The downward trend looks set to continue: Opposition to immigration skews old, and young people are considerably more relaxed about migration and race. Thirty-seven percent of British people born before 1929 admit to being very or a little prejudiced against people of another race, compared with 25 percent of Generation Y.

First of all, to say that immigration is a good thing for the country is trivial, as it has no bearing on the kind of immigration policy a country ought to pursue. I would agree that immigration is a good thing for the United States; I also believe that a Canadian- or Australian-style immigration policy would be far superior to the status quo. Kenny’s findings concerning racial prejudice in Britain are not terribly surprising, considering that 14 percent of the UK population now belongs to visible minority communities, and it is expected to increase to 20-30 percent of the UK population by 2030. And of course Kenny is taking it for granted that opposition to immigration and racial prejudice are necessarily linked. British opposition to immigration has remained persistently high even as British society has grown more racially tolerant. 

The U.K. also demonstrates the disconnect between attitudes toward immigration and the scale of immigration itself. While rising concern in the U.K. over the past decade has followed an upswing in migration from new member states of the European Union, in 2012 U.K. net migration was at its lowest level since 2008. Prejudice is the least prevalent in the most racially diverse parts of the country. Inner London, perhaps the most diverse part of the U.K., sees only 16 percent willing to admit prejudice—about one half the national average. Similarly, animosity toward immigrants in the U.S. is concentrated in rural areas, according to Katherine Fennelly and Christopher M. Federico of the University of Minnesota. They suggest that might be because of “greater isolation and lesser contact with immigrants and minorities.”

What Kenny does not mention is that net migration has decreased from 2008 to 2012 in part because Britain’s Coalition government has sought to reduce net migration, and the share of Britons who believe that there are “too many” immigrants in the country has fallen from a peak of 59 percent in 2010 to 55 percent. That is, the Coalition appears to be reassuring some number of Britons that it is addressing anxieties about immigration.

Again and again, Kenny slides from a discussion of opposition to immigration to a discussion of racial prejudice, as if the two sentiments were indistinguishable. Leaving aside the fact that opposition to immigration and racial prejudice are not in fact indistinguishable, Kenny’s discussion of prejudice in inner London is curious, as only 45 percent of London’s population is white British; one assumes that white Britons who are prejudiced have over time migrated to other regions of the country.

Across Europe, the recent elections may reflect a growing animosity toward immigrants during a downturn, but the far right in Europe did better in countries that suffered comparatively little from the financial crisis. Decades of research suggest views about migration simply aren’t related to self-interested worries about the threat of losing jobs. In their survey (PDF) of public attitudes toward immigration, Jens Hainmueller and Daniel Hopkins suggest the idea has “repeatedly failed to find empirical support,” making it something of a “zombie theory.” At the same time, a cluster of attitudes toward race and nationalism alongside immigration are closely linked.

This all suggests attitudes toward migration are a cultural issue—like those toward guns or gay marriage. And cultural attitudes unmoored from immediate economic concerns can change fast—look at gay marriage, where popular backing for marriage equality increased from 27 percent to 55 percent over the past 18 years. 

Unfortunately, Kenny fails to take into account rising anti-immigration sentiment in Singapore, a racially diverse society with a large Chinese majority, where a large share of recent migration has come from China. Singapore has seen a dramatic increase (34 percent) in its population since 2000, and in the last general election, voters issued a stern rebuke to the ruling People’s Action Party, which has moved quickly to reduce reliance on foreign labor, which now represents a third of the workforce. The notion that Chinese Singaporeans are resisting Chinese immigration out of racial animus strains credulity, which is why Kenny is wise not to have invoked the (very salient) example of Singapore. Moreover, there is reliable evidence, from Gianmarco Ottaviano and Giovanni Peri, among others, that new immigration puts wage pressure on earlier immigrants, a fact that is worthy of note in societies like the U.S. where the foreign-born share of the workforce is above 15 percent. 

Or take another cultural question about employment: The World Values Survey in Germany in the late 1990s found more than one-fifth of the adult population thought that when jobs were scarce men had more right to a job than did women. That has fallen to 7 percent in the most recent survey. In Spain, that figure has dropped from 27 percent in the 1990s to 7 percent today. No major politician in Europe or America has come out with a proposal to shut women out of the workforce during the recent economic crisis. Hopefully, during the next economic crisis, the same will be true of migrants.

To be clear, Kenny is suggesting that the full inclusion of women in the workforce can meaningfully be compared to whether or not it is wise for a given country to increase net migration. This is a hard argument to take seriously. Reducing net migration may well lead to increased female labor force participation, thus further undermining patriarchal norms. 

Those politicians fostering “acceptable nativism” might want to look at long-term economic trends. A recent analysis by the U.K.’s National Institute of Economic and Social Research suggests that the long-term impact of reducing net migration by 50 percent—in line with the target proposed by Britain’s David Cameron—would reduce British income per capita by about 2.7 percent by 2060 and force income tax increases of about 2.2 percentage points. That’s largely because most migrants are young—and so populations skew older absent immigration. Lower net migration implies more retirees on pensions with heavy hospital bills and fewer working-age people paying taxes.

You can be the party of low taxes or of low immigration. You can’t be the party of both. Politicians on both sides of the Atlantic should consider that math next time they use immigrants as a convenient scapegoat come election time.

Kenny neglects the possibility — for good reason — that raising the average skill level of migrants could offset some of the cost associated with reducing net migration. While he frets over the difficulties of financing retirees on pensions with heavy hospital bills, he neglects the fact that migrants age and that retirees aren’t the only people who require labor-intensive services; so do low-income individuals in need of retraining, or the children of parents with low levels of educational attainment, who need supplementary instruction and other support services. Instead of admonishing politicians on both sides of the Atlantic to consider the math, Kenny should keep in mind that the math favors immigration policies that raise the average skill level over those that lower it. Lo and behold, it turns out that societies that select immigrants on the basis of skill are also less hostile to immigration.



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