Saturday, July 17, 2010

The fallacy of linking unemployment to immigration

Are immigrants a significant cause of unemployment? Would their deportation open up jobs for native Americans?

David Frum writes:
… here’s a crucial fact that Brookings omits: that 125,000 per month increase in the US labor force is not a law of nature. In fact, during the Bush years, more than half the growth in the US labor force was due to the arrival of immigrant labor.

Immigrants now make up some 15% of the US labor force. They are concentrated in the less skilled portion of the labor force and in industries hardest hit, especially construction.

If immigration levels were curtailed, the job gap would be a lot smaller. And if illegal immigrants returned home, rather than being put on a “path to citizenship,” the problem of putting the unemployed back to work would be smaller and easier.
Karl Smith responds to Frum’s “lump of labor fallacy”:
The US population and thus the number of job seekers has fairly grown remarkably over the last 200 years. Why is it that unemployment hasn’t grown steadily as well?

Because every worker is also a consumer. When you send a immigrant worker packing you are sending his consumption packing with him. For those who have trouble with the abstract interwovenness of the economy think about it this way: Is the one thing our economy really needs right now fewer residents and thus less demand for housing?

If anything we have a construction industry which is predicated on a large and growing population. Perhaps faster growing than we can maintain, but in any case, slowing down growth is not likely to improve matters.
Immigrants – documented or undocumented – create jobs. First, by willing to work for low pay and at often menial tasks (e.g. gardeners, domestic servants, etc.) jobs are created where done existed before due to higher priced domestic labor. Second, as Smith points out above, every worker is a consumer. U.S. dollars paid to an immigrant as wages does not suddenly disappear. It gets poured back into the U.S. economy as payment for rent, the purchase of food, the purchase of a car, etc. thus creating (or maintaining) jobs for others elsewhere in our complex economy.

And lets not forget how immigrant farm labor makes our food purchases affordable thus stretching our spendable cash for nonfood purchases creating jobs elsewhere in the labor market.

Whatever other considerations there are to take into consideration regarding the issue of immigration, forcing immigrant workers/consumers to return to their native lands is not a positive step to take in regards to its impact on our struggling economy. In fact, it would be hurtful.

Friday, July 16, 2010

Cutting taxes and slashing spending to deliberately keep the fiscal crisis alive

Republicans hope to seek advantage in this fall’s midterm elections by stoking fears about federal budget deficits while at the same time pandering to voters with appeals to lower taxes. Assuming their concerns about the deficit are real (and they aren’t) then how can they advocate lower taxes at the same time? There are two possibilities. The first is that despite the facts and common sense a majority of the leadership of the modern Republican Party is clinging to a cut-taxes-at-any-cost-ideology regardless of whatever the consequences its impact has had and will continue to have on our economy. The second possibility is the “starve the beast” scenario. In other words, they are well aware tax cuts will only deepen the federal deficit but their real motive is to keep the financial crisis alive in order to slowly dismantle government program by government program they dislike despite the consequences for our society.

Paul Krugman explains:
… Ronald Reagan said that his tax cuts would reduce deficits, then presided over a near-tripling of federal debt. When Bill Clinton raised taxes on top incomes, conservatives predicted economic disaster; what actually followed was an economic boom and a remarkable swing from budget deficit to surplus. Then the Bush tax cuts came along, helping turn that surplus into a persistent deficit, even before the crash.

But we’re talking about voodoo economics here, so perhaps it’s not surprising that belief in the magical powers of tax cuts is a zombie doctrine: no matter how many times you kill it with facts, it just keeps coming back. And despite repeated failure in practice, it is, more than ever, the official view of the G.O.P.

Why should this scare you? On paper, solving America’s long-run fiscal problems is eminently doable: stronger cost control for Medicare plus a moderate rise in taxes would get us most of the way there. And the perception that the deficit is manageable has helped keep U.S. borrowing costs low.

But if politicians who insist that the way to reduce deficits is to cut taxes, not raise them, start winning elections again, how much faith can anyone have that we’ll do what needs to be done? Yes, we can have a fiscal crisis. But if we do, it won’t be because we’ve spent too much trying to create jobs and help the unemployed. It will be because investors have looked at our politics and concluded, with justification, that we’ve turned into a banana republic.

Of course, flirting with crisis is arguably part of the plan. There has always been a sense in which voodoo economics was a cover story for the real doctrine, which was “starve the beast”: slash revenue with tax cuts, then demand spending cuts to close the resulting budget gap. The point is that starve the beast basically amounts to deliberately creating a fiscal crisis, in the belief that the crisis can be used to push through unpopular policies, like dismantling Social Security.

Thursday, July 15, 2010

The myth of conservative opposition to deficits

In politics there is a constant struggle between reality and perception. Nowhere is there a better example of the latter often becoming confused with the former than the belief that the right-wing of the Republican Party (which these days essentially is the Republican Party) opposes federal budget deficits. Despite what they may say it is simply untrue that the modern conservative movements through its representatives in the Republican Party oppose deficits. Mathew Yglesias explains:
1) There have been two presidents who were members of the modern conservative movement, Ronald Reagan and George W Bush, and they both presided over massive increases in both present and projected deficits.

2) The major deficit reduction packages of the modern era, in 1990 and 1993, were both uniformly opposed by the conservative movement.

3) When the deficit was temporarily eliminated in the late-1990s, the mainstream conservative view was that this showed that the deficit was too low and needed to be increased via large tax cuts.

4) Senator Mitch McConnell says it’s a uniform view in his caucus that tax cuts needn’t be offset by other changes in spending.

5) The deficit reduction commission is having trouble because they think conservative politicians won’t vote for any form of tax increase.

In sum, there are zero historical examples of conservatives mobilizing to make the deficit smaller. What is true is that most conservatives oppose increases in non-military spending when those increases are proposed by Democratic presidents. A minority of conservatives are more consistent opponents of increases in non-military spending. But the key element of conservative fiscal policy is that tax revenue as a percent of GDP should be made as low as possible. This isn’t a goal they pursue that stands in some kind of balance with concern about the deficit, it’s the only goal they pursue. You can like that or not, but every single journalist who writes articles about the deficit debate that doesn’t highlight the conservative movement’s deep, decades-long hostility to deficit reduction is being grossly irresponsible.

Wednesday, July 14, 2010

Death and taxes (but not for the wealthy)

The late George Steinbrenner, who built upon a fortune he inherited from his father, will pass on to his heirs not only a fortune but a tax-free fortune thanks to the campaign against the so-call “death tax” and the compromise in the adjustment of tax rates. Michael Tomasky opines:
I do not mean to say with the above headline that George Steinbrenner's heirs and assigns aren't mourning the scion's death yesterday at age 80, as undoubtedly they are.

What I do mean to say is that Steinbrenner's passing points us to an odd quirk in US estate-tax law.

In 2008, Forbes put Steinbrenner's net worth at $1.3 billion. And because he died in 2010, not 2009 or 2011, his heirs won't pay a penny of federal estate tax.

This is how the compromise was worked out in Congress when Republicans began agitating about the "death tax" in the early 2000s. You can see a graph here. In 2001, the "exclusion amount" - the level of taxable estate value (gross value minus various deductions) was $675,000. The R's gradually increased it over the decade until last year it was $3.5 million (for individuals that is, and $7 million for couples - that is, married couples, needless to say, heaven forbid not gay ones).

But this year and this year only, there's no federal tax at all. That's because it goes back up next year, with a much lower exclusion amount ($1 million) and a higher rate (55% rather than 45%). So Steinbrenner, who inherited a quite grand shipping fortune from his own father and to his credit turned it into a grander one, and then enjoyed the benefit of a presidential pardon from Ronald Reagan for funneling illegal campaign contributions to Nixon, has seen fate smile on him again.

As for the estate tax, nothing so represents the GOP's true agenda as its campaign to eliminate this tax. I would agree that $675,000 was far too low a threshhold, and I'm the first to say (I've said it) that the Democrats erred in not changing it themselves first. When the GOP seized on the issue, they were able to forge an alliance between the wealthy and the middle class, because by 2001 many middle-class people were sitting on estates worth $675,000. That's an alliance that never loses. The Democrats were dumb not to raise it to something like $2.5 million.

But eliminating it altogether as Republicans know, I guess I'd only say that these people (and their children) made their money in the United States of America, and somewhere and somehow along the way the US helped them make their fortunes, and although it's very quaint to talk about things like citizenship and civic responsibility, it doesn't seem unreasonable to me that they owe some portion of their success to their country.

It's the old story about the self-made man who never took a dime from anyone until someone pointed out to him all the many ways in which the civic and regulatory infrastructure of the country made it possible for him to earn far more than he might have earned if fate had plopped his soul inside the womb of a woman in Nigeria or Costa Rica. But we're not supposed to speak of such things these days.
The estate tax serves to prevent the perpetuation of wealth, free of tax, in wealthy families or, as Winston Churchill argued, estate taxes are “a certain corrective against the development of a race of idle rich”.