Wednesday, December 12, 2018

Economic Effects of Islam

Timur Kuran "critically evaluates the analytic literature concerned with causal connections between Islam and economic performance" in his essay "Islam and Economic Performance: Historical and Contemporary Links," published in the most recent issue of the Journal of Economic Literature (December 2018, 56:4, pp. 1292–1359). He is not interested in sweeping generalizations, but rather in discussing work published in the the last two decades in the professional economics literature. From the abstract:
"Among the findings are the following: Ramadan fasting by pregnant women harms prenatal development; Islamic charities mainly benefit the middle class; Islam affects educational outcomes less through Islamic schooling than through structural factors that handicap learning as a whole; Islamic finance has a negligible effect on Muslim financial behavior; and low generalized trust depresses Muslim trade. The last feature reflects the Muslim world’s delay in transitioning from personal to impersonal exchange. The delay resulted from the persistent simplicity of the private enterprises formed under Islamic law. Weak property rights reinforced the private sector’s stagnation by driving capital from commerce to rigid waqfs. Waqfs limited economic development through their inflexibility and democratization by keeping civil society embryonic. Parts of the Muslim world conquered by Arab armies are especially undemocratic, which suggests that early Islamic institutions were particularly critical to the persistence of authoritarian patterns of governance. States have contributed to the persistence of authoritarianism by treating Islam as an instrument of governance. As the world started to industrialize, non-Muslim subjects of Muslim-governed states pulled ahead of their Muslim neighbors, partly by exercising the choice of law they enjoyed under Islamic law in favor of a Western legal system."
(Side note: The Journal of Economic Literature is published by the American Economic Association, which also publishes the Journal of Economic Perspectives where I work as Managing Editor. JEL is not freely available online, but many readers will have access through library subscriptions.)

Here's some additional detail on a few of these points, but Kuran's article has a wealth of greater detail on history, institutions, and economic studies:

Ramadan fasting by pregnant women
"The timing of Ramadan is based on lunar cycles rather than the solar year. Because lunar months are shorter than solar months, it moves about ten days backwards every year, relative to the solar- based Gregorian calendar. The length of the daily dawn-to-dusk fast also varies, in this case because of interactions between latitude and the time of year when Ramadan falls. Exploiting the variations in time of year and length of fast, researchers have identified both immediate and long- term negative effects on growth.
"Based on cross- country comparisons, Campante and Yanagizawa-Drott (2015) find that longer fasting depresses production and thus economic growth. Several other studies (Almond and Mazumder 2011; van Ewijk 2011; Majid 2015; Almond, Mazumder, and van Ewijk 2015) use intertemporal variations in particular countries to identify how fasting during early pregnancy affects the offspring’s prenatal development, physical attributes, educational achievement, and economic success. Their analyses show that individuals whose mothers fasted while they were in utero have shorter lives, worse health, less mental acuity, lower educational achievement, and weaker performance in the labor market. The magnitudes in question are substantial. Majid’s study shows that adults exposed to the fast while in utero work 4.5 fewer hours per week. The Almond and Mazumder study finds that mental disabilities stemming from exposure to the fast during month one in utero accounts for 15 percent of all mental disabilities among Muslims. The evidence is overwhelming that the fasting ritual, as currently practiced, depresses the global economic competitiveness."  
Islamic finance
"Islamic finance refers to a class of financial transactions that are ostensibly free of interest and compatible with Islamic teachings. It encompasses Islamic banking, asset- backed Islamic bonds known as sukuk, Islamic insurance known as takaful, along with Islamic credit cards, mutual funds, stock indexes, mortgages, and microfinance. The Islamic finance market was estimated to hold assets around $2 trillion in 2016 (Islamic Financial Services Board 2016). The figure represented 1 percent of the global finance market of around $200 trillion. The global share of Islamic finance pales in comparison to the 24 percent share of Muslims within the global population ... Evidently, only a small share of the financial transactions by or among Muslims follows a self-consciously Islamic template. Nevertheless, in the Muslim world and even beyond, the rise of Islamic finance represents a challenge to conventional finance. ...
"Scholarship on Islamic banking focuses on whether its actual operations differ in any fundamental way from conventional banking, which deals in interest openly and without apology. In practice, various researchers have shown, the returns of Islamic banks are statistically indistinguishable from those of the conventional banks with which they compete. They generally set their “profit shares” in advance through procedures that make simple transactions look complex. Hence, their returns amount to what most economists call interest. The reason why Islamic banks resort to interest is not for lack of commitment to their charter. Rather, like profit- maximizing conventional banks, they consider interest advantageous under conditions of asymmetric information ..."
Islamic charities
"Self-consciously Islamic charities tend to outperform governments in providing social services. But the same is true of private secular charities. Evidently, the successes of Islamic charities stem from superior organization, rather than Islam itself. Indeed, from an organizational standpoint, today’s Islamic charities harken more to the charities of advanced modern societies than to anything found in seventh-century Arabia. Although Islamic charities generally tout their services to the poor, by and large their beneficiaries belong to the middle class."
If you would like more Kuran, a starting point would be his two earlier articles in the Journal of Economic Perspectives touching on some of these same themes.

Tuesday, December 11, 2018

The Diminution of Welfare as an Anti-Poverty Tool

"Welfare" was a common label for what used to be Aid to Families with Dependent Children (AFDC), which in the 1996 "welfare reform" legislation morphed into Temporary Assistance to Needy Families (TANF). A common concern at the time was that too many welfare recipients were capable of holding jobs--especially in the relatively healthy labor market of that time. Thus, the welfare reform legislation created a requirement that there was a time limit for  how long welfare could be received, and that recipients had to be looking for work or getting training. In addition, federal support for the TANF program was turned into a block grant that states had considerable discretion in how to spend, as long as the ultimate goal was helping needy families.

The experience in the few years immediately after the welfare reform legislation of 1996 in some ways validated these concerns. The number of welfare recipients dropped substantially, suggesting that with a push, a number of welfare recipients could find jobs. But now it's 22 years later, and the evolution of welfare--by which I specifically mean the TANF program--has had steadily less effect in its core purpose of providing temporary assistance to needy families. A group of researchers at the Center on Budget & Policy Priorities, including Ife Floyd, Ashley Burnside, and Liz Schott, have been detailing this issue in a series of reports in 2018.

For examaple, ,Ife Floyd, Ashley Burnside, and Liz Schott discuss  "TANF Reaching Few Poor Families" )November 28, 2018). The graph shows the share of families with children in poverty that received AFDC benefits before 1996 or TANF benefits since then. Back in 1996, about 2/3 of families with children in poverry received TANF benefits; now it's less than 1/4,

TANF's Reach Declined Significantly Over Time
There is enormous variation across states. There are about 15 states where fewer than 10% of the families with children in poverty receive TANF benefits.

Few Poor Families with Children Received TANF, 2017

One issue here is that the actual amount spent on TANF has been falling in real dollars (that is, after adjusting for inflation) since its creation in 1996. Liz Schott, Ife Floyd, and Ashley Burnside lay out the overall pattern in at "How States Use Funds Under the TANF Block Grant" (April 2, 2018). They write:
Under TANF, the federal government gives states a fixed block grant totaling $16.5 billion each year. This annual amount has not increased for inflation over the past two decades and now is worth over one-third less than when TANF was created. Under the law’s maintenance-of-effort (MOE) requirement, states must maintain a certain level of state TANF spending, based on a state’s spending for AFDC and related programs prior to TANF’s creation in 1996. (States are required to maintain 80 percent, or in some cases 75 percent, of their historical spending level.) This minimum state spending threshold has also declined by one-third in value due to inflation. States may also qualify for federal “Contingency Funds”; roughly 20 states have done so for the last several years. In 2016, states spent $30.9 billion in combined federal TANF ($15.9 billion) and state MOE ($15 billion) funds.

What's happening here is that states have considerable flexibility in how to spent TANF funds, and they are using the money in a range of ways. Here a figure showing the national distribution of how states spend the federal and state TANF money. 
How States Spent Federal and State TANF Funds in 2016
With TANF money going to this array of programs, the size of actual TANF benefits received by families in most states has fallen since 1996. Ashley Burnside and Ife Floyd lay this out in "TANF Benefits Remain Low Despite Recent Increases in Some States" (October 25, 2018). In 36 states, the value of TANF benefits is at least 20% less now than back in 1996. 

TANF Benefits in Most States Have Declined in Inflation-Adjusted Terms Since 1996

Of course, it's always important to remember that there is a portfolio of anti-poverty programs. There is sometimes a tendency to think of welfare as the main government program providing assistance for those with low incomes. But that hasn't been true for awhile now. For example, the Supplemental Nutrition Assistance Program (SNAP), commonly known as food stamps, has spending of about $70 billion per year. The Earned Income Tax Credit is roughly another $70 billion per year. In turn, these are dwarfed by Medicaid spending at $581 billion in 2017.  Low income people may also benefit from a range of other programs, including Supplemental Security Income (SSI), Social Security, disability insurance, unemployment insurance, housing assistance, and others.

But whatever the arguments over welfare reform back in 1996, the TANF program as it has emerged more than two decades later is providing substantially less assistance to low-income families. Some of the poor and near-poor have found their way into employment, but the number of families with children in extreme poverty seems to have risen.  The most recent of the studies cited here notes:
Researchers H. Luke Shaefer and Kathryn Edin found that the number of U.S. households living in extreme poverty in any given month more than doubled between 1996 and 2011, from 636,000 to 1.46 million; the number of children living in such households also doubled, from 1.4 million to 2.8 million. These households are “concentrated among those groups who were most affected by welfare reform,” they explained.

For some previous posts looking back on how welfare reform has evolved from when it used to be  see ...

Monday, December 10, 2018

US Health and Healthcare Spending in the Last 25 Years: Gains and Costs

As an overall pattern over the decades, spending in the US health care has been rising, both on a per person basis and as a share of GDP, and a number of health outcomes have improved. Are the benefits worth the costs?

Jeffrey Selberg, Bradley Sawyer, Cynthia Cox, Marco Ramirez, Gary Claxton and Larry Levitt tackle the question "A generation of healthcare in the United States: Has value improved in the last 25 years?" in a short essay published by the Peterson Center on Healthcare and the Kaiser Family Foundation (December 6, 2018).

In terms of health care costs: "In 1991, the GDP attributable to healthcare was 12.8% or $788 billion. In 2016, healthcare consumed 17.9% of GDP or $3.3 Trillion."

In terms of health care status: " Between 1991 and 2016, life expectancy increased by 3.1 years to 78.6, representing a 4% improvement. In the same time, disease burden (as measured by the total number of disability adjusted life years, or DALYs) improved by 12%.

Disease burden is comprised of two factors: years of life lost to premature death, which improved by 22%, and years living with disability, which worsened by 2%. The improvement in overall years of life lost was driven by a remarkable 36% reduction in years lost due to premature death from diseases of the circulatory system. At the same time, the worsening of years living in disability was led largely by an increase in substance use disorders. Moreover, substance use is one of the primary contributors to the slight decline in life expectancy in 2015 and 2016, the first time life expectancy has dropped two years in a row in several decades. Another critical outlier where outcomes have worsened in the U.S. (and not other comparable countries) is maternal mortality, which has gone up significantly from 14 deaths per 100,000 live births in 1991 to nearly 31 in 2016."

Again, are the benefits worth the costs of health care spending? There are at least three ways to tackle this question, none of them fully satisfactory.

1) One approach is to put a monetary value on the extending life expectancy by a healthy year (mid-range estimate run about $100,000) and on the value of a human life (about $9 million, for reasons given here). These authors decide not to take this approach. They write: "Much more analysis and discussion, beyond the scope of this paper, would be necessary to make such a judgement."  In a way, that's fair enough. As if the problems of putting monetary values on health outcomes were not enough, a deeper issue with this approach is that many factors affect health outcomes other than health care spending, so a basic comparison of changes in health spending with changes in overall health outcomes wouldn't make sense. The economist in me would like to see the results of such an analysis, even just a back-of-the-envelope calculation. But I readily confess that, for example, thinking about how to measure the benefits of US has health care spending against a changing health issues like the opioid epidemic or the rise in maternal mortality mentioned above raises some difficult issues.

2) An alternative approach is to do an international comparison. How do the changes in US health care spending and US health outcomes compare with other high-income countries? The overall pattern is that in the last 25 years, other countries have seen about the same rise in per capita  health care spending as in the US (although at a lower overall levels), while achieving higher gains in health. The authors write: " Over the past 25 years, similarly sizable and wealthy nations generated an average increase in life expectancy of 5.2 years, or 7%, compared to the U.S.’s 3.1 years, or 4% improvement. In these countries, disease burden improved by 22%, compared to the U.S.’s 12%.  ... On average, comparable countries spend under two thirds (60%) of what the U.S. spends on healthcare relative to GDP, while the per capita spending growth has been similar over the last three decades."

3) However, international comparisons also raise raise the question: Are health care problems in the US in some ways worse than in other countries, so that US health care spending is higher in part because it is facing bigger challenges? In the comparison with other high-income countries, the authors write: "The disease burden in the U.S. is appreciably higher at 24,235 versus 18,605 disability adjusted life years per 100,000 population—a difference of 30%. ... The 2016 U.S. rate of obesity is over twice that of other high-income countries (40% versus 17%).":

4) There are two possible goals for society to consider: improving health, and making sure that people have health insurance so that they are not overly exposed to high health care costs. These goals overlap, but they aren't the same. If the goal is to improve health outcomes, it might make sense for the US to spend less on health care, and instead to spend more on the social determinants of health like better housing. In their international comparisons, the authors note:
"According to the OECD’s 2016 measure of poverty (which can be applied across countries more easily than the U.S. federal poverty level), 18% of people in the US are living below poverty, versus 10% in comparable OECD countries. When combined, public and private spending on social services and healthcare is fairly similar across these countries (30.5%) and the U.S. (32.6%), but the distribution is very different in the U.S., where we spent much more than average on health (16.3% vs 10.5% of GDP) and less than average on public social services (16.3% vs 20.0% of GDP) in 2013, the most recent year of available data on social services spending internationally."
In general, I'm a supporter of programs that expand health insurance coverage, like Medicaid and the changes in the 2010 Patient Protection and Affordable Care Act. But it's worth remembering that when we commit substantial resources to making health insurance available, the main effect may be to reduce financial stress rather than to improve physical health outcomes. Medicaid costs thousands of dollars per person. The 2010 Patient Protection and Affordable Care Act expanded health insurance coverage to about 22 million more people at an annual cost to the federal government of about $110 billion--so about $5,000 per person. If the goal is to improve people's physical health, then alternative ways of spending that money might well have a larger effect: say, steps focused on reducing the opioid epidemic, or reducing maternal mortality, or broader improvements in the living conditions of the poor and near-poor.

Tuesday, December 4, 2018

US Not the Source of China's Growth, China Not the Source of America's Problems

A sizeable portion of the US discussions about economic policy toward China seem to me based on two conceptual mistakes. One mistake is that China's rapid economic growth fundamentally depends on trade with the US. The other mistake is that the bulk of US economic problems depend in some fundamental way on trade with China.  

The inexhaustibly interesting Larry Summers puts the point this way in his Financial Times column yesterday ("Washington may bluster but cannot stifle the Chinese economy,' December 3, 2018, soon to be available at his website). Summers writes: 
At the heart of the problem in defining an economic strategy toward China is the following awkward fact: Suppose China had been fully compliant with every trade and investment rule and had been as open to the world as the most open countries at its income level. China might have grown faster because it reformed more rapidly, or it might have grown more slowly because of reduced subsidies or more foreign competition. But it is highly unlikely that its growth rate would have been altered by as much as 1 percent.
Equally, while some U.S. companies might earn more profits operating in China, and some job displacement in American manufacturing because of Chinese state subsidies may have occurred, it cannot be argued seriously that unfair Chinese trade practices have affected U.S. growth by even 0.1 percent a year.
This is not to say that China is not a threat to the international order. It is a seismic event for the United States to be overtaken after a century as the world’s largest economy.
It's worth spelling out the underlying logic here a bit. The formula for economic growth is to invest in human capital, physical capital, and technology, in an economic environment that provides incentives for hard work, efficiency, and innovation. China has made dramatic changes in all of these areas, and they are the main drivers behind China's extraordinary economic growth in the last four decades, and its expectation of above-global-average growth heading into the future.

Looking specifically at trade, China's exports of goods and services were 19.7% of GDP in 2017, and its imports of goods and services were 18% of GDP. China's economy has been growing at 6-7% per year, so the overwhelming majority of that growth has been economic production in China for domestic consumption. No matter your views of China's trade surplus, there's no sensible economic theory which suggests that China's trade surplus, which as a share of GDP is relatively small, is a major driver of China's growth.

Yes, there was a "China shock" after China entered the World Trade Organization in 2001, when China's exports suddenly soared from 20.3% of GDP in 2000 to 36% of GDP in 2006. The size of this shock was not predicted by China or others, and it's fair to argue that neither the US nor others in the world economy did a good job of reacting to that shock at the time. But again, China's exports are now down to 19.7% of GDP in 2017--a lower proportion of China's economy than in 2000. To put it differently, China's exports have been growing more slowly than the rest of its economy since 2006.

Conversely, the US economy has not done a great job of investing in the fundamentals of economic growth. The US once led the world in share of workers with higher education, but now it's middle-of-the-pack. The US is a low-saving economy, with low rates of investment in both private and public capital. US spending on research and development has been stagnant for years, while other countries have been expanding. Rates of business start-ups have been declining.  Mobility of US workers is downEconomic mobility between generations in the US is not high. Further, the US has made little progress--and little effort--to address ongoing issues like the projections of large and growing budget deficits, or rising health care costs, or a much higher level of income inequality than a few decades ago.

These US economic issues and others are in any substantial part not the result of trade with China, or the result of international trade at all. Lasting solutions will not be found in trade squabbles, either. 

The world economy is indeed shifting in a dramatic way. As I've noted in the past, it used to be true that the national economies of the largest size were also the national economies with quite high levels of per capita GDP. However, we are headed toward a world economy where the largest national economies are countries with large populations and only medium levels of per capita GDP. 

This isn't just an issue about China. Some common projections (like these) suggest that by 205, the seven largest economies in the world, in order, will be China, India, the US, Indonesia, Brazil, Russia, and Mexico--then followed in size by Japan, Germany, and the UK.

I lack the geopolitical imagination to see how this shift will play out. But at a small scale, you can see it at the movies, when you see a rising number of roles for Chinese actors and settings in China. It tells you that the international market for movies is becoming ever-more important. At a larger scale, The rest of the world used to complain that it was always having to hear about US products like Coca Cola, Levi's. big American cars, and the like. But US domestic car production is now about 7% of the global totalUS companies are producing around the world: for example, General Motors makes more cars in China than in the US, and US producers make and sell twice as much inside China as they export to China. 

But in 21st century, when it comes a wide array of decisions--international trade talks, decisions of the the International Monetary Fund and the World Bank, who leads the way during global financial crises, who dominates the flows of international investment capital and foreign aid, who has the power to impose trade or financial sanctions, and what kind of military threats are most credible--the shifts in the global economy suggest that the high-income countries of the world will not dominate as they did during most of the 20th century. Instead, countries with the world's largest economies, but much lower standard of living for their populations, will play a central role in setting the rules. 

Monday, December 3, 2018

Excavating Layers of the Tax Cuts and Jobs Act of 2017

"The 2017 Tax Act, sometimes called the Tax Cuts & Jobs Act, has been heralded by some as historic reform and by others as Armageddon. This Collection analyzes the Act, exploring the process by which it was passed, the values that undergird its policies, and how specific provisions will affect the structure of the U.S. and global economy moving forward." Thus begins a five-paper "Forum: Reflections on the 2017 Tax Act" from the Yale Law Journal (dated October 25, 2018)

Michael J. Graetz writes the "Foreword—The 2017 Tax Cuts: How Polarized Politics Produced Precarious Policy." He touches on a number of the themes mentioned in the two papers by Joel Slemrod and Alan Auerbach in the"Symposium on the Tax Cuts and Jobs Act" that appeared in the Fall 2018 issue of the Journal of Economic Perspectives: yes, the US corporate taxation needed both lower rates and more sensible treatment of multinational companies, but in many ways the new tax bill created a muddle--and a muddle that will lead to substantially higher budget deficits. Here's a flavor of Graetz (footnotes omitted throughout): 

"The Democrats’ complaints about the law’s reduction in the corporate tax rate from 35% to 21% ring hollow. Democrats themselves had long realized that the U.S.’s exceptionally high corporate tax rate in today’s global economy—with highly mobile capital and intellectual property income—invited both U.S. and foreign multinational companies to locate their deductions, especially for interest and royalties, in the United States, and to locate their income in low- or zero-tax countries. This is obviously not a recipe for economic success. Both before and after the legislation, Democrats urged a corporate tax rate of 25% to 28%; meanwhile, Donald Trump asked for a 15% rate.So, even if Democrats had been involved in the legislative process, the 21% rate that we ended up with would be in the realm of a reasonable compromise. ... [A] significantly lower corporate rate has been long overdue, and raising it would be a mistake. If Democrats are unhappy with the distributional consequence that a corporate tax cut will benefit high-income shareholders, the appropriate remedy––given the mobility of business capital, businesses’ ability to shift mobile intellectual property and financial income to low-tax jurisdictions, and the challenges of intercompany transfer pricing––is to increase taxes at the shareholder level, not to increase corporate tax rates. ...
Congress’s greatest challenge in crafting this tax legislation was figuring out what to do about the international tax rules. ... Congress confronted daunting challenges when deciding what rules would replace our failed foreign-tax-credit-with-deferral regime. There were essentially two options: (1) strengthen the source-base taxation of U.S. business activities and allow foreign business earnings of U.S. multinationals to go untaxed; or (2) tax the worldwide business income of U.S. multinationals on a current basis when earned with a credit for all or part of the foreign income taxes imposed on that income. Faced with the choice between these two very different regimes for taxing the foreign income of the U.S. multinationals, Congress chose both. ...
No doubt analysts can find provisions to praise and others to lament in this expansive legislation, but we should not overlook its most important shortcoming: its effect on federal deficits and debt.  ...
Under the 2017 tax law, the federal debt held by the public is estimated to rise to more than 96% of GDP by 2028, and this does not count the omnibus spending bill signed in 2018 by President Trump. ... If the current policy levels of taxes and spending are maintained, total deficits over the next decade will approach $16 trillion, with deficits greater than 5% of GDP beginning in 2020. By 2028, current fiscal policy will produce deficits of more than 7% of GDP annually. This is unsustainable. ... The budget legislation of the 1990s, along with the economic growth unleashed by the information technology revolution of the late 1990s, completely eliminated the projected deficits by the year 2000 and produced a federal surplus for the first time since 1969. Indeed, the budget surpluses projected by the Congressional Budget Office at the beginning of this century were so large that, in March 2001, Chairman of the Federal Reserve Alan Greenspan told Congress that the federal government would soon pay off all of the national debt and would have to begin investing its surplus revenues in corporate stocks, a prospect he abhorred. The good news is that this problem has been solved. 

I was also struck by the essay by Linda Sugin, "The Social Meaning of the Tax Cuts and Jobs Act." Sugin describes the social values that seem to underlie the provisions of the TCJA. She writes:
This Essay discusses five American priorities and values revealed by the TCJA:

1. The traditional family is best;
2. Individuals have greater entitlement to their capital than to their labor;
3. People are autonomous individuals;
4. Charity is for the rich; and
5. Physical things are important.
The TCJA’s distributional effects dovetail with these values. ... First, traditional families with a single working spouse and a stay-at-home spouse are disproportionately prosperous, so subsidizing that family model reduces progressivity. Second, access to capital increases with affluence, so a greater entitlement to investment income favors taxpayers who enjoy that affluence. Third, valuing individual autonomy is consistent with robust individual property rights, and less consistent with high levels of taxation for shared community purposes. Fourth, favoring the charitable giving of the rich allows them tax reductions not available to others, and sends the message that philanthropy substitutes for tax paid. Fifth, prioritizing physical assets favors individuals are able to invest in such assets and underrates the important value that workers contribute to prosperity. Critics of the legislation concerned about the law’s reallocation of tax burdens down the income scale and its projected budgetary deficits must focus more on these embedded priorities.

Of the other three papers, two papers dig into details of the changes in the international corporate tax regime, while the other argues that the Tax Cuts and Jobs Act will push firms away from the use of debt financing--and thus toward alternative types of financing--with implications that are not yet clear.

Rebecca M. Kysar discusses "Critiquing (and Repairing) the New International Tax Regime."
"In this Essay, I address three serious problems created—or left unaddressed—by the new U.S. international tax regime. First, the new international rules aimed at intangible income incentivize offshoring and do not sufficiently deter profit shifting. Second, the new patent box regime is unlikely to increase innovation, can be easily gamed, and will create difficulties for the United States at the World Trade Organization. Third, the new inbound regime has too generous of thresholds and can be readily circumvented. There are ways, however, to improve upon many of these shortcomings through modest and achievable legislative changes, eventually paving the way for more ambitious reform. These recommendations, which I explore in detail below, include moving to a per-country minimum tax, eliminating the patent box, and strengthening the new inbound regime. Even if Congress were to enact these possible legislative fixes, however, it would be a grave mistake for the United States to become complacent in the international tax area. In addition to the issues mentioned above, the challenges of the modern global economy will continue to demand dramatic revisions to the tax system."
Susan C. Morse raises implications about International Cooperation and the 2017 Tax Act.
"Some have criticized the 2017 Tax Act for lowering the corporate tax rate. This Essay argues instead that Congress deserves credit for bringing the U.S. rate in line with other OECD countries, potentially saving the corporate tax by establishing a minimum global rate. ... There is a silver lining for the corporate income tax in the Tax Cuts and Jobs Act of 2017. This is because the Act’s international provisions contain not only competitive but also cooperative elements. The Act adopts a lower, dual-rate structure that pursues a competitiveness strategy and taxes regular corporate income at 21% and foreign-derived intangible income at 13.125%. But the Act also supports the continued existence of the corporate income tax globally, thus favoring cooperation among members of the Organisation for Economic Cooperation and Development (OECD). Its cooperative provisions feature the minimum tax on global intangible low-taxed income, or GILTI, earned by non-U.S. subsidiaries. Another cooperative provision is the base erosion and anti-abuse tax, or BEAT. The impact of the Act on global corporate income tax policy will depend on how the U.S. implements the law and on how other nations respond to it."
Robert E. Holo, Jasmine N. Hay and William J. Smolinski discuss issues of corporate leverage in "Not So Fast: 163(j), 245A, and Leverage in the Post-TCJA World."
"The Tax Cuts and Jobs Act will require large multinational corporations to reevaluate the use of debt in their acquisition and corporate structures. Changes to the Tax Code brought about by the Act have reduced incentives to use debt in these contexts. These changes may require practitioners to identify new approaches to financing acquisitions and will necessitate reevaluation of current capital structures used by large multinational entities. ...
"In other words, is it a good idea to dampen the worldwide preference for debt in capital structures? Is there a problematic preference for debt that needs fixing in the first place? It is likely too early to make that call given the potential number of unintended consequences that my result under the new law. ... By changing the rules of the game, the IRS has effectively changed the inputs to that modeling exercise. It remains a complicated question whether, holistically, business entities carry excess debt relative to equity; but it is certainly the case that a new set of rules which, on their face, appear to favor equity over debt, may very well cause those modeling exercises to produce an output that suggests a shift in debt-equity preferences is in order."

Friday, November 30, 2018

Unauthorized Immigrants to US Continues to Decline

The total number of unauthorized immigrants in the US climbed very rapidly in the 1990s and early 2000, but peaked around 2007, and has declined since then. Jeffrey S. Passel and D’Vera Cohn report details in "U.S. Unauthorized Immigrant Total Dips to Lowest Level in a Decade," just published by the Pew Research Center (November 28, 2018).

Here's an illustrative figure. The number of unauthorized immigrants more than doubled in the 1990s from 3.5 million in 1990 to 8.6 million, and then kept rising up to 12.2 million in 2007, but has declined since then.

I've noted this decline and discussed some of the reasons for this drop in the number of unauthorized immigrants in earlier posts (see here and here): for example, the Great Recession in the US from 2007-2009, improved growth prospects for Mexico's economy in the last couple of decades, fewer children per women and an overall aging of Mexico's workforce, and stepped-up border enforcement.

The report from Passel and Cohn breaks down the estimates of unauthorized immigrants in a variety of ways: by location, age, occupation, parental status, and so on. Here, I'd like to emphasize two points.

First, back in the 1990s it was generally true that the number of unauthorized migrants who had been in the US for less than five years and the number who had been here for more than 10 years was about the same. But with the passage of time since the 1990s, and the dropoff in recent unauthorized immigration, we have moved to a situation where about two-thirds of the unauthorized immigrants have now been here for more than 10 years, and only 18% have been here for less than five years. "By 2016, an unauthorized immigrant adult had typically lived in the U.S. for 14.8 years, compared with a median 8.6 years in 2007."
To put differently, one can argue that a main policy problem of the 1990s and early 2000s was to limit additional unauthorized immigration, and that both the Clinton and Bush administrations failed to do so. But the main immigration enforcement problem at present is not to block growing numbers of unauthorized migrants: it is how we address the issue of about 7 million unauthorized immigrants who have been here more than a decade, and who have put down roots in their communities. For example, about 43% of the unauthorized immigrants live in households that include a total of about 5 million US-born, American-citizen children.

The other main point is that the situations of the United States and the European Union are quite different when it comes to migration. Indeed, one can make a case that the unauthorized immigration situation currently faced by the European Union is similar, or perhaps more extreme, than the situation the US faced in the 1980s and 1990s. Fundamental drivers of unauthorized immigration are large differences in birthrates and in economic prospects. In the 1980s and 1990s, these factors drove unauthorized immigration from Mexico to the United States. Now, those factors are driving unauthorized immigration from Africa to the European Union.

A couple of years ago, I wrote about an article by Gordon Hanson and Craig McIntosh called "Is the Mediterranean the New Rio Grande? US and EU Immigration Pressures in the Long Run," which appeared in the Fall 2016 issue of the Journal of Economic Perspectives. They wrote:
The European immigration context today looks much like the United States did three decades ago. In Europe, which long ago made its demographic transition to low birth rates, declines in fertility in the 1970s and 1980s set the stage for a situation in which the number of working-age residents is in absolute decline. Countries in the North Africa and Middle East region, in contrast, have had continued high fertility, creating bulging populations of young people looking for gainful employment in labor markets plagued by low wages and the scarcity of steady work. Further to the south, population growth rates in sub-Saharan Africa, a region with still lower relative earnings, remain among the highest in the world. ...
As an example, we predict the number of African-born first-generation migrants aged 15 to 64 outside of sub-Saharan Africa to grow from 4.6 million to 13.4 million between 2010 and 2050. During this same period, the number of working-age adults born in the region will expand from under half a billion to more than 1.3 billion, meaning that international migration would only absorb 1 percent of the overall population growth. ... The coming half century will see absolute population growth in sub-Saharan Africa five times as large as Latin America’s growth over the past half century. 
If Americans want to imagine the political tensions over immigration in the European Union, imagine try to imagine the current US political climate if instead of having the total number of unauthorized immigrants falling during the last 10 years, the total had instead been increasing strongly over the last 10 years--and was predicted to keep doing so into the future.

P.S. A recent alternative study of the size of the unauthorized immigrant population estimates a substantially higher total. Mohammad M. Fazel-Zarandi, Jonathan S. Feinstein, Edward H. Kaplan published "The number of undocumented immigrants in the United States: Estimates based on demographic modeling with data from 1990 to 2016," in PLoS ONE (published September 21, 2018). Two quick comments here:

1) Although this study finds a higher total number of unauthorized immigrants at any given time, the pattern over time is the same: that is, a sharp rise in the 1990s and the early 2000s, and then a leveling off after about 2007. 

2) The assumptions behind these alternative estimates have been questioned. In a follow-up "Commentary" published simultaneously online on PLoS One, Randy Capps, Julia Gelatt, Jennifer Van Hook, and Michael Fix point out that the model is not benchmarked against other available demographic data, and in fact is inconsistent with such data. In particular, their estimates are highly sensitive to what assumptions are made about how many unauthorized immigrants return to Mexico and other places on their own: if you assume that very few return (an assumption not backed up by the available survey evidence), then the total remaining the US will obviously look much higher. 

Thursday, November 29, 2018

Snapshots of Falling US Mobility

Americans are moving less, although the reasons aren't clear. The US Census Bureau has just released an updated set of tables and graphs showing the trend.

For example, here's the overall pattern. The blue bars show the total number of movers (measured on the left axis) while the black line shows the mover rate relative to population (measured on the right axis).
Figure A-1. Number of Movers and Mover Rate: 1948-2018
Although moves of all types have declined, the number of short-distance moves within a given county has fallen somewhat more.

number of relatively short moves, under 50 miles, hasn't fallen much. It's the longer-distance moves that have fallen.


I also thought the regional pattern of net domestic migration was interesting. The Northeast has consistently been losing population to moves; the South has been consistently gaining; and the West and Midwest as a whole have been roughly breaking even.

The reasons for this decline in mobility are not clear. A good explanation needs to explain a long-term trend--that is, pointing to something like people who didn't want to move after the drop in housing prices in 2008 can't explain a pattern that has been going on for decades. Moreover, most common explanations are easily tested. For example, if the reason for declining mobility is the US population getting older, then younger  households should be continuing to move at the same rate, which isn't actually true.

For an overview of the research on this topic from a few years back, Raven Molloy, Christopher L. Smith, and Abigail Wozniak wrote "Internal Migration in the United States." in the Summer 2011 issue of the Journal of Economic Perspectives. For example, they write: "Migration rates have fallen for most distances, demographic and socioeconomic groups, and geographic areas. The widespread nature of the decrease suggests that the drop in mobility is not related to demographics, income, employment, labor force participation, or homeownership."

About a year ago, David Schleicher discusses the issue in "Stuck! The Law and Economics of Residential Stagnation," appearing in the Yale Law Journal (October 2017, 127:1, pp. 78-154). (I discussed the article here.) He argues that a wide variety of local and state rules and regulations have combined to make movement more difficult: like limits on residential building that drive up the price of housing and rules requiring state-level occupational licenses for certain jobs.

The question of why US mobility is falling can be rephased in this way: Why don't we see more movement from areas with lower wages and fewer jobs to areas with better economic prospects? It used to be that US regions with lower income levels had faster growth, and thus tended to converge with the rest of the country. But regional convergence has now slowed down dramatically, or even stopped.

I'm not sure what might best be done about the decline in mobility, but it seems to me a legitimate public concern. It's bad for an economy when labor resources are not being reallocated to areas where they would be more productive. In addition, less mobility means that people have less shared life experience with others across a range of neighborhoods, communities and regions.