Thursday, June 20, 2019

Comparing Refugee Detention Centers to Concentration Camps Is Inappropriate, Regardless of Stance on Trump's Immigration Policy

If I had told you a few years ago that the semantics of the phrase "concentration camp" would become part of a major political debate, you would probably think I was pulling something from science fiction. And yet, that is exactly where we have ended up in U.S. politics. Earlier this week, freshman Congresswoman Alexia Ocasio-Cortez (D-NY), or AOC for short, released a video expressing her rancor towards the detainment of Central American refugees crossing the U.S.-Mexico border and how they are being treated. During this video, AOC said that "the U.S. is running concentration camps on our Southern border." After receiving backlash for her comments, she doubled down by citing Andrea Pitzer, an author who has written on the history of concentration camps.

As a Jew that is aware of the history of anti-Semitism, I can confidently say I don't want the disenfranchised, marginalized people, or minorities to be oppressed by a government, certainly to the extent to which Nazi Germany carried out their atrocities. We should hold governments accountable to human rights abuses. At the same time, when we are evaluating a problem or issue, we should do so with a clear perspective in order to make accurate comparisons and assess the situation. As such, I would like to do two main things here. One, answer the technical question of "What is a concentration camp?" Two, determine whether using the term "concentration camp" is appropriate for the current refugee situation on the U.S.-Mexico border.

Technical Definition of "Concentration Camp"

What is a concentration camp? You would think that it would be an agreed upon, unambiguous term. Not so much. To illustrate that point, here are some definitions:

U.S. Holocaust Museum: A camp in which people are detained or confined, usually under harsh conditions and without regard to legal norms of arrest and imprisonment that are acceptable in a constitutional democracy.

This definition is broad enough to arguably include the detention centers near the U.S.-Mexico border. Let's look at another definition.

Webster's Dictionary: A place where large numbers of people (such as prisoners of war, political prisoners, refugees, or members of an ethnic or religious minority) are detained or confined under armed guard, used especially in reference to camps created by the Nazis in World War II for the internment and persecution and other prisoners

This definition could also cover AOC's assertion, although I will cover the latter clause in the next section. Here is a definition that does not make it so clear.

Encyclopedia Britannica: Internment centre for political prisoners and members of national or minority groups who are confined for reasons of state security, exploitation, or punishment, usually by executive decree or military order. Persons are placed in such camps often on the basis of identification with a particular ethnic or political group rather than as individuals and without benefit either of indictment or fair trial...They are also to be distinguished from refugee camps or detention and relocation centers for the temporary accommodation of large numbers of displaced persons (own emphasis added).

Two things with Encyclopedia Britannica's definition. One is that such a center would need to violate due process, a point that is also made in the U.S. Holocaust Museum definition. Two, and more importantly, Encyclopedia Britannica is exercising some nuance by distinguishing between concentration camps and camps temporarily holding refugees or asylum seekers (more on that momentarily). This gives some leeway to argue that the detention centers on the U.S.-Mexican border are not necessarily concentration camps.

Is It Appropriate to Call the Detention Centers "Concentration Camps?"

We can get into a debate about the technicalities of what is or is not a concentration center. As illustrated above, one could select and finesse a definition for or against the claim. But here's the thing with that. AOC's words do not exist in a vacuum or stay in an ivory tower. It doesn't matter that the term "concentration camp" predates the Second World War or that concentration camps were used during the Boers War. Words have meaning outside of a technical sense, and even if you want to argue that the detention centers on the U.S.-Mexico border are technically concentration camps, it's irrelevant. AOC made her statement in a political context.

The truth is that for many Americans post-WWII, the phrase "concentration camp" evokes images of Nazi death camps. This isn't the first time in language in which a word can technically mean one thing but colloquially mean another. AOC is perfectly cognizant of that reality. She knew that because in her video, she said that "'Never again' means something." The phrase "Never Again" was used after World War II as a slogan conveying the message that we do not want a repeat of the Holocaust, which took the lives of 6 million Jews and over 5 million non-Jews in state-sponsored genocide. This is not the first time that AOC has pulled such a stunt. Last November, AOC compared the migrant caravan scenario to Jews fleeing Nazi Germany. AOC has no qualms invoking Holocaust imagery and making analogies to the Holocaust to advance a political agenda.

If you are going to evoke the Holocaust out of sincerity instead of trying to score political points by exploiting Jewish trauma, you better be damn sure that your comparison is more like the Holocaust than not. Yes, these detention centers have some similarities from the Nazi concentration camps. They are both government-operated camps in which the detainees are not free to leave. Both the detention policies target specific groups of people. In both cases, children are being separated from their parents. One could argue that in both cases, the living conditions are absolute squalor.

Yes, there are similarities between the detention centers on the U.S.-Mexican border and the Nazi concentration camps. However, the reality is that the differences between the two are much more pronounced than the similarities. Nazi concentration camps existed for the purpose of cleansing the world of what the Nazis deemed undesirables, including, Jews, homosexuals, Gypsies, and the physically disabled. There was a clear genocidal intent with the Nazi concentration camps. In Nazi concentration camps, the Nazis were actively murdering its detainees, either through gas chambers, mass executions, or starving and working the prisoners to death. There were those in Nazi concentration camps were experimented on by doctors. The ones who weren't killed right away or being experimented on were forced into slave labor. There is a reason why the Holocaust is used as the prime example of human rights atrocities: because it was that despicable and deplorable.

Say what you want about Trump's immigration policy or his detention centers, but none of the aforementioned features in the previous paragraph can be attributed to the situation on the U.S.-Mexican border. The migrants crossing the border are apprehended and detained. As CNN points out, the detainees stay until HHS can find someone with whom to stay. After their stay, the average of which is 48 days, they stay with someone else until their case could be processed. These refugees are not being detained because of a lack of due process, but due to a backlog in processing their cases. This last bit is important because it would arguably not make the detention centers concentration centers by the previously mentioned definitions. If you want to make a more accurate analogy, compare them to the Japanese-American internment camps run by the Franklin D. Roosevelt administration (Yes, that is the same FDR that inspired AOC so much that she created the Green New Deal).

When using Holocaust imagery, AOC is minimizing the evils of the Holocaust. The world has unfortunately seen similar atrocities to the Holocaust since World War II that could be accurately analogized. Joseph Stalin killed 20 million or more. Mao Zedong's Great Leap Forward killed as many as 50 million people in China. Pol Pot killed nearly two million in Cambodia. There are also the genocides of Rwanda and Darfur.

"Never Again" should not only be reserved for the Holocaust. Conversely, if "Never Again" simply becomes shorthand for "I don't agree politically, therefore I am going to evoke Hitler," not only do you diminish atrocities (when looking at it from the overall arc of history), but it becomes a lot more difficult to take your argument (in this case, reforming the detention centers) seriously. I want to elaborate on this point a little more. When I wrote about the #MeToo movement two years ago, one of my criticisms was lumping together sexual assault/rape and sexual harassment. Yes, rape and sexual harassment are both morally wrong. However, one is more morally problematic and reprehensible than the other. It becomes a question of magnitude.

Let's apply that concept to the detention centers. You can argue that the way that Trump is going about detaining Central American refugees is morally wrong. Last year, I scrutinized Trump's family separation policy, and went as far as calling it a part of his fear-mongering immigration policy. As recent as earlier this month, I criticized Trump for stupidly trying to use tariffs to solve the refugee issue. I can and do criticize Trump's usage of detention centers and his seeming lack of desire to help out refugees without evoking the Holocaust to make a false equivalence. That being said, let's ask ourselves some questions:

  • Is the treatment of the Central American refugees in these detention centers a human rights abuse? Yes. After all, government policy doesn't need to be at the level of the Holocaust to be morally wrong. The United States should have learned its lesson from the Japanese-American internment camps from World War II. 
  • Is being placed in an imperfectly managed detention center while waiting for asylum applications to be processed anything like the horrors of such concentration camps as Auschwitz or Dachau? Not even close. Again, there is a reason why Nazi Germany is infamously in the history books. 
  • Does this mean that we should do nothing? No. Something should be done to speed up the applications and provide the asylum seekers with better conditions while they wait, and to make sure their dignity is preserved in the process.

Some people say that we are spending needless time on the semantics. Yes, I believe we should be spending energy reversing an exceptionally misinformed refugee detention policy. At the same time, the fact that we even need to be discussing these semantics is indicative of how out of whack U.S. civil society is. Forget for a moment that Obama also had detention centers during his administration. It is becoming more difficult in U.S. society to have a discussion about policy without evoking Holocaust imagery, and thusly implying that the "side you don't agree with" is a literal Nazi. If political discourse has reached a point where one side literally views the other as Hitler for simply disagreeing, thereby using the logical fallacy of reductio ad Hitlerum, then it is no wonder the U.S. has this level of political polarization.

I'm not going to pretend as if there were some magical time in which everyone respectfully disagreed because no such time existed. Politicians have used such discourse since the beginning of time. Using hyperbole or antagonistic, divisive rhetoric is done by all those in power, regardless of ideological inclination. I ask that we learn how to talk with those with whom we disagree and work across the aisle in the hopes of making discourse civil again.

Thursday, June 13, 2019

Why Cory Booker's Affordable Housing Plan Is Mostly Deficient, But Has Some Good in It

In recent months, I have noticed that various Democratic figures are shifting the Democratic Party to the Left. The Green New Deal, introduced by freshman Congresswoman Alexia Ocasio-Cortez (D-NY), has been a  topic of discussion long after it was voted down. Congresswoman Pramila Jayapal (D-WA) introduced a version of "Medicare for All" that was even more extreme than that of Bernie Sanders (I-VT), which says something. Presidential hopeful Elizabeth Warren (D-MA) has proposed student debt forgiveness. Now Senator Cory Booker (D-NJ) has joined the fun. Booker recently released his affordable housing plan. Before getting into the particulars of his plan, Booker tells the story of the challenges his parents faced in acquiring housing. He then has a five-point plan: renters' tax credit, Baby Bonds, zoning reform, combat housing discrimination, and eliminate homelessness. For time's sake, I am only going to cover the first three in detail here today.

Tax Credit for Renters
Booker has proposed a renters' tax credit that covers the difference between the 30 percent of a beneficiary's income and their rent [capped at the neighborhood fair market rent]. The median tax credit, if enacted, would be $4,800 annually. His reason for such a tax credit is that nearly half of renters pay more than 30 percent of their pre-tax income on rent. To mitigate the burden of rental costs and ultimately allow for better savings to eventually purchase a house, Booker finds this to be part of the solution.

There are some issues with this proposal, such as administrative costs, incidence, and whether the government can deliver the credit when the rent is supposed to be due [monthly], as opposed to one annual tax credit (Tax Policy Center). The main issue with Booker's plan is that his tax credit acts similar to a demand-side subsidy. I agree that a subsidy is technically not the same as a tax break. A tax break is allowing for a taxpayer to keep more of the paycheck that they earn, whereas a subsidy is a government expenditure to directly fund something. However, my caveat with this is that 47 percent of Americans do not pay federal income tax. When looking at federal taxes by income quintile, the lowest quintile pay a net federal tax rate of 1.5 percent. With the average household income for the lowest quintile being $12,457 (Census), the federal taxes that these households pay ($187) is less than the median amount of the tax break proposed by Booker, thereby making the tax credit de facto act as an indirect government subsidy.

That being said, mainstream economic theory states that such a subsidy would artificially push the demand curve upward. While an increase in demand would increase quantity consumed, it would also increase price. This is not mere economic theory. It plays out in practice. With regards to college, government subsidies towards college tuition have caused college tuition prices to skyrocket. Single-payer healthcare has pushed the demand curve well beyond market equilibrium, thereby making healthcare more expensive. Granted, the two main issues with these analogies is that a) they do not take place in the housing market, and b) these are direct government subsidies, whereas Booker's proposal is a tax credit.

If you want me to point out something more directly related, look no further than the mortgage interest deduction (MID), a tax break that de facto subsidizes the housing market. What happened when the government tried to use the tax code to incentivize housing and make it more affordable? Not what was expected, that's for sure. The MID does not make housing cheaper. It merely incentivized people to purchase more expensive homes, thereby increasing indebtedness. The MID did not end up increasing home ownership, which was its primary goal. It actually made it more difficult for lower-income households acquire a house. As such, it would be reasonable to assume that similar unintended consequences would result in the rental housing market, as is brought up in the Tax Foundation's analysis of Booker's renters' credit proposal.

Instead of fighting fire with fire, perhaps Booker could make the tax code more neutral by repealing the MID instead of causing more complexity to the tax code and the housing market.

Baby Bonds
Booker's second proposal, which is actually the one policy idea that currently distinguishes him in the presidential race, is to implement Baby Bonds. A "Baby Bond" is a government-funded savings account that, per his proposal, would grow in a federal trust and provide enough seed capital to fund a downpayment on a house. A study from Columbia University recently found that it would help close the wealth gap between black and white people (Zewde, 2018), a wealth disparity that exists regardless of income quintile (Duke University; St. Louis Federal Reserve). The other good news is that it would cost about $80 billion annually, which would be $800 billion over a decade. This is low compared to certain government budget line items or certain tax credits. It would also be less divisive than reparations. Even if you set up the Baby Bond in a way that the money would only be withdrawn for paying towards a house, we still run into some issues.
  1. The tax break acts as a subsidy towards housing. As brought up in the previous section, the mortgage interest deduction (MID) has distorted the housing market with multiple unintended consequences. It would not be surprising to see similar distortions to the housing market as a result of Baby Bonds. 
  2. We already have a clear example of how the government handles asset management: Social Security. Social Security provides lower rates of return relative to alternatives (see 2018 Heritage Foundation backgrounder; 2018 OECD report showing that private pensions fare better; 2016 Tax Foundation report; Ahmed et al., 2016; and my 2013 analysis). 
  3. My general skepticism surrounding the government's asset management for Social Security is compounded with Booker's plan. When Booker initially proposed the Baby Bonds idea through his "American Opportunities Account Act" in October 2018, he proposed putting them in low-risk bonds at an estimated rate of return of 3 percent. While government bonds don't have the lowest rate of return, there are other higher-yielding options that could further create wealth.  
  4. The government shows a lack of political willpower to deal with the fiscal insolvency component of Social Security. Can we expect the Baby Bonds program to realistically stay solvent?
  5. More broadly, there is the question of how the U.S. government is going to pay for it. This country is still dealing with burgeoning debt growth. Under the Congressional Budget Office's baseline projections, the debt-to-GDP ratio is going to reach 93 percent by 2029 (CBO, p. 2). It is going to take eighteen years before the first recipients even cash out. In the meantime, the U.S. government has added $800 billion to the debt (plus applied interest payments). Too high of a government debt dampers economic growth, which impacts quality of life, especially for those who Booker is trying to help (see Peterson Foundation; Congressional Research Service; Mercatus Center; European Commission; Dallas Federal Reserve). The Baby Bonds program isn't going to break the bank, but it doesn't mean it wouldn't exacerbate the debt issues, either.
  6. Booker plans on increasing the capital gains tax and estate tax. An increase in the capital gains tax and estate tax would slow down wealth growth, which would be ironic considering that wealth is what Booker is trying to grow. 
  7. One criticism of the Baby Bonds is dealing with more imminent poverty issues, such as child poverty. University of Chicago law professor David Hemmel argues that the focus should be on child poverty because the effects of poverty on a child are lifelong. Hemmel posits that it would be preferable to address these current issues, in no small part because there are many developmental needs that need to be met before the individual would cash out on the Baby Bond at age 18. Zewde, the author of the Columbia University, presents the counterargument that providing children with hope about their future has its own intangible benefits. 
  8. There is an issue of political feasibility. Even if the Democrats took both Congress and the White House, a recent Rasmussen poll shows that 48 percent of Americans disapprove of Booker's proposal.
  9. Much like I expressed with the child tax credit, I have a philosophical qualm as to whether childless households should have to support another household's choice to support children. A philosophical qualm is more subjective than a policy outcome, but it's still worth considering.
  10. Since this is part of a housing plan, let's assume that the Baby Bond could only be cashed for housing purposes. Booker's plan comes with the paternalistic assumption that lower-income households do not know how to best spend this accumulated wealth, which is why Booker proposes that the spending goes towards housing. Forgetting that owning a house is not for everyone, I have to ask this question: If lower-income households cannot be trusted with spending the accumulated wealth on something aside from housing, how can we trust them to make the right spending decision with regards to the house for which they make the downpayment? 
    • Alternatively, let's assume that the eighteen-year old could gain access and use it for whatever they would like. In this alternative, the plan would implicitly assume that the young adult is going to spend that money wisely. This individual just became an adult. There is a chance that they are going to spend it on something stupid or frivolous, especially considering that the brain doesn't fully mature until around the age of 25. There is also a high likelihood that they are going to get their college tuition bill and spend it towards college. If the Baby Bond turns into a federal subsidy for college tuition, we already know that such a subsidy is going to cause college costs to skyrocket further.
Zoning Reform
Booker points out that restrictive land use regulations have constrained affordable housing by more than 50 percent from 1964 to 2009. I wrote a piece a couple of years ago on land use regulations (also see October 2017 policy report from the Cato Institute), and this is the one area in which Booker and I are in total agreement. Land use regulations have driven up housing prices by constraining housing supply, as well as create more volatile boom-and-bust cycles in the housing market.

Bottom Line: Baby Bonds and renters' tax credits are only going to add to the issues of affordable housing. If we want to make a difference, two sound policies would be abolishing the mortgage interest deduction (MID) to make housing more affordable and to remove land use regulations in order to increase affordable housing supply.

Tuesday, June 4, 2019

10 Reasons Why Trump's Proposal to Use Tariffs to Punish Mexico Over Immigration Is Faulty (and Even Dangerous)

Trump simply can't help himself. He is threatening another country with tariffs, except this time, he is threatening Mexico. I thought Trump stirring the pot with 25 percent tariffs on $200 billion worth of Chinese imports was bad enough. Now he is threatening an ally with tariffs because he is dissatisfied with the migration surge on the U.S.-Mexico border. What Trump announced last Thursday was an intention to implement a series of phased tariffs, starting at 5 percent effective June 10, and making their way up to 25 percent by October...unless Mexico can contain the mess, that is. It should be no secret by now that I strongly dislike tariffs, but for the purposes of laying out a cogent argument, let's go into the myriad of reasons, ten to be exact, as to why Trump extending his trade war to Mexico would be a bad idea.
  1. U.S. tariffs imposed on foreign goods are a tax paid by American consumers. As recent as Sunday has the Trump administration asserted that U.S. consumers will not pay the burden of these tariffs. I have news for you: that's not how the economics of tariffs works. Under standard microeconomic theory, two parties lose economic welfare under a tariff: foreign producers and domestic consumers. More to the point, a study released from Princeton University earlier this year confirmed that the burden of Trump's enacted tariffs falls on the American consumer (Amiti et al., 2019). 
  2. Trump's trade war has already cost the American people, and will continue to do so. The authors of the previously mentioned Princeton study released an update on May 23 with the latest figures on consumer burden. What did they find? Trump's tariffs cost the average American household $811 a year. Additionally, his tariff on washing machines alone cost the American people $1.5 billion in 2018 (Flaaen et al., 2019). If you need a sense of where prices will increase, here are a few major goods that the U.S. imports from Mexico: produce, alcohol, television sets, monitors, fuel (especially crude oil), medical instruments, rubber, and automobiles. This gets more complicated considering how many raw materials, components, intermediate goods the United States imports from other countries, including Mexico. Imagine the combined effects of the already-existing tariffs with tariffs on Mexico, the country that recently became the United States' number one trading partner. Such tariffs would have a ripple effect that would be felt by Americans across the country.
  3. Trump is undermining his own trade deal and trade relations with Mexico. In November 2018, the presidents of Mexico, Canada, and the United States have signed USMCA, which is Trump's version of NAFTA that is slightly worse than the original. The legislative branches of the three countries have yet to sign it. I'm not a master of "The Art of the Deal" like Trump is, but I can take an educated guess that this will affect the likelihood that USMCA is ratified by the Mexican legislature. Senator Chuck Grassley (R-IA), a senior Republican Senator on the Senate Finance Committee, also thinks that this move threatens USMCA. If USMCA doesn't pass, Trump would be shooting himself in the foot because reforming NAFTA was one of his major 2016 presidential campaign promises. This could also undermine his own reelection in 2020 if the trade war spirals out of control.  Trump's tariffs on Mexico beg another question: Why have a trade agreement to eliminate tariffs if Trump is going to impose tariffs anyways? Mexico may or may not acquiesce, but it certainly puts strain on U.S.-Mexican relations.  
  4. Tariffs on Mexico would affect trade relations with China. You might be wondering how relations with Mexico would possibly have any bearing on Sino-American trade relations, but bear with me for a moment. China is already skeptical of Trump based on their dealings with him. China's skepticism has increased since Trump exacerbated U.S.-Mexican trade relations. Trump promised back in late 2018 that he would remove the global steel and aluminum tariffs (another bad idea) provided Canada and Mexico signed USMCA. He didn't get around to removing those tariffs until only about three weeks ago, and that was even done under considerable pressure. Instead, Trump intends to go against the terms of the free-trade agreement and impose tariffs on imported Mexican goods. If Trump cannot honor a signed international agreement, how could you expect him to keep his word with China?
  5. Trump is eroding diplomatic relations with all countries. The effects of Trump's tariffs on Mexico go well beyond Mexico, as the Council on Foreign Relations illustrates. For one, other countries will be hesitant negotiate trade agreement terms with Trump because all he has shown is that he is willing to break his promises on a whim. The second issue has to do with the International Emergency Economic Powers Act (IEEPA). As the Peterson Institute shows in its report on trade agendas in the 2016 presidential campaign, the IEEPA was meant to impose economic sanctions when "unusual and extraordinary threats" merit it. If the IEEPA turns into a tariff free-for-all, not only has Congress' authority been severely undermined, but it sends the message that the United States (or at least the Trump administration does not care about rule of law, which opens a Pandora's box on international cooperation. 
  6. Trump's tariffs on Mexico are going to negatively impact the global economy. One thing I have learned as being a market research professionally is that the one thing that businesses hate even more than regulation is uncertainty. As illustrated above, Trump is creating plenty of trade uncertainty. This trade uncertainty has negative consequences, including deterring investment (Davis, 2018; Krol, 2018), reducing consumer welfare (Handley and Limao, 2017), lowering economic activity (Kliesen, 2013), and adversely affecting stock returns (Bianconi et al., 2019). This past Sunday, multinational investment bank Morgan Stanley predicted a recession within the next nine months if Trump escalates his trade war any further. 
  7. "Illegal Immigration" has been declining. In his statement on Thursday, Trump mentions the "sustained influx of illegal immigrants [that] has profound consequences on every aspect of our life." It is true that there has been an influx of border apprehensions in 2019. In spite of the influx, the number of apprehensions throughout the first six months of the government's fiscal year 2019 (i.e., October 2018-March 2019) remain below historical highs for the first half of the fiscal year (Pew Research). Additionally, Trump should realize is that the unauthorized immigrant population has been on the decline for over a decade, from 12.2 million in 2007 to 10.7 million in 2016 (Pew Research). Tariffs won't do anything to deal with this influx, and as the Cato Institute illustrates, it could backfire and increase the immigration across the border. 
  8. The influx of border crossings is not about "illegal immigration," but refugees. The reason for the aforementioned influx is largely not due to undocumented immigrants/"illegal immigration", but rather due to asylum seekers. In recent years, Guatemala (along with Honduras and El Salvador) has been plagued with gang warfare and violence that is so extreme that it has made it one of the most unsafe places on the planet. This humanitarian crisis has resulted in a number of Guatemalans fleeing their country in search of a better life. Not only is the right of asylum something that dates back to the ancient Greeks and Egyptians, but it is also covered under Article 14 of the Universal Declaration of Human Rights, the 1951 Convention Relating to the Status of Refugees (the U.S. is not a signatory on this Convention), and the 1967 Protocol Relating to the Status of Refugees. Trump should not be playing this as an issue with "illegal immigration," and he certainly shouldn't be treating refugees as a national security threat, which he has erroneously done in the past.  
  9. Undocumented immigrants are not the problem Trump makes them out to be. Even if Trump's claim about "illegal immigration on the rise" were true, it wouldn't matter. As I have covered when asking whether we should have a border wall, undocumented immigrants are not a net fiscal drain, they are not more likely to commit crimes (see 2019 Cato Institute report here), and they actually pay taxes. More generally speaking, low-skilled labor benefits the U.S. economy. If you're worried about "making sure immigrants coming in the legal way," advocate for policies that fix the broken system and cut through the red tape. The Cato Institute provides some ideas here.
  10. Trump's demands are unrealistic and hypocritical. If the United States, the most powerful country on the planet, cannot handle the issue, what does Trump expect Mexico to do? Mexico already put up a border wall of sorts (also known as a containment belt) in March because there are a number of Guatemalan refugees applying for asylum in Mexico. It's clear that the Trump administration does not know the answer to the question because its press release does not go beyond "Mexico should do something about it." Plus, he expects Mexico to figure it out and solve it in a matter of weeks. As Reason Magazine astutely points out, "Mexican officials are being told to fix a problem they didn't cause, to do it in a matter of weeks, and without knowing how their performance will be measured." 

Postscript
I view Trump's trade wars as if Trump had a hammer and all he saw were nails, except the hammer in this case are tariffs and the only toolkit in his toolbox is a rusty hammer. Trump is taking that hammer, trying to fight an imaginary war on "illegal immigration," when in fact, he has swung that hammer at an ally that is vital to American interests. I'm sure Trump thinks he is doing the country a favor by combining his two key issues (trade and immigration), but all he is doing is harming the global economy while screwing over the people he purports to help: the American people.

Tuesday, May 28, 2019

I Still Consider Myself a Pro-Life Libertarian, But It Comes with Some Major Caveats

Abortion has become a hot-button topic once more. Earlier this month, the state of Georgia passed a heartbeat bill, which restricts abortions to women after six weeks, which is the time when one can often detect a fetus' heartbeat. If that were not restrictive enough, Alabama made abortion a class-A felony. Missouri then signed a bill into law banning abortion beyond eight weeks. Needless to say, my social media feeds flared up with posts on abortion, particularly from those who view abortion as a fundamental right. At first, I tried ignoring the posts. But the more I saw them, the more I wanted to say something. Now I have decided to say something, and that response comes in the form of this piece.

You read the title of this piece, and you are probably asking yourself how I could call myself pro-life while maintaining my libertarianism. After all, libertarianism emphasizes individualism and using freedom to secure life, liberty, and property. Exercising one's free will is essential to libertarianism. How can I advocate for restrictions on abortion when it violates what a woman wants to do with her body?

I want to answer that question, but I want to say this first. My experience has been those who self-identify as pro-choice tend not to be concerned with choice on a broader level, but use the label because it's expedient and sounds a lot better than "pro-abortion." If those who self-identify as pro-choice were truly pro-choice, they would be libertarian, or at the very least, they would apply that belief to a lot more than the topic of abortion.

I have advocated for many freedoms and "rights to choose" on this blog, including the freedom to own a firearm, earn a living as a prostitute, marry whatever consenting adult you want (or adults, if that's your thing), sell your kidneys or other organs for money, burn the U.S. flag, practice religion (or not), spend or invest your money as you see fit instead of being coerced into Social Security, say what you want (including freedom of the press and the right to spew hate speech), smoke marijuana, eat and drink whatever you want, or not being coerced to pay for health insurance because of Obamacare.

I believe freedom to choose how to live your life is very important. At the same time, I don't view freedom as an absolute. I view it as axiomatic, which is to say that it is crucial, but nevertheless has limits. With the exception of anarcho-capitalists, libertarians understand these limits, including murder, theft, fraud, rape, arson, and assault. As Cato Institute scholar David Boaz writes in his book Libertarianism, "No one has the right to initiate aggression against the person or property of anyone else (p. 74)." To frame it another way, "you can live your life however you want as long as you are not harming anyone else," or alternatively, "my rights end where yours begin." That is the non-aggression axiom in a nutshell, and it is central to libertarian philosophy.

This brings us to a few key questions. What is the fetus? How do we view the fetus? Is it merely a clump of cells? Is it a full-fledged human being that has or should have rights? Is it part of the mother or is it a separate entity? I don't think the answers to these questions would automatically result in a conclusive decision. Nevertheless, I find that answering these questions informs us and provides a better foundation for a moral or philosophical argument, especially given how morality and philosophy have evolved in the Western world. If it is more analogous to plastic surgery or removing a tumor, then the pro-abortion arguments become more compelling. If it is more analogous to murder or homicide, then the anti-abortion arguments become more compelling.

The Facts of Life: A Biological Look at the Gestational Development
I'm not going to cover the entirety of gestation here, but I will say that those who are against abortion use the line "life begins at conception." This much is biological fact. Biologically speaking, life begins when female and male gametes (sperm and egg) unite, i.e., fertilization or conception. The result of the union is a biologically living, single-cell entity known as a zygote. The zygote possesses DNA from both the father and mother, thereby diminishing the pro-abortion argument of "the fetus is part of the mother." The zygote undergoes miotic divisions and cellular differentiation to turn into an embryo, although one could argue that separate DNA or cellular differentiation does not automatically translate into personhood. During the embryonic stage, the embryo develops a central nervous system, a heart, and most of its organs. After the eighth week of fertilization, the embryo has become a fetus (Merck Manual), and thusly has developed enough of the parts of the body that make it more "distinctively human." These facts about gestation are also acknowledged by Planned Parenthood.

As previously alluded to, the question of "when life begins" is independent of ethical, moral, religious, or political consideration. Even so, the biology helps inform questions of personhood. I will get into where I draw the line momentarily, but what I will say up to now is that biology, more specifically that of embryology and fetology, provide a basis for a pro-life position.

I'm Pro-Life, But.....: Time for Some Nuance
One of the things that frustrates me about the abortion debate, like with so many debates, is that the extremes have a disproportionately loud voice. Based on these loud extremes, you either have to be for abortion in all cases or in no cases. It is easier to have snippy one-liners such as "Abortion is murder" or "My body, my choice" and paint the other side as morally inept while forgetting the multiple facets of the abortion debate. What is interesting is that when looking at Gallup polling on abortion, most Americans do not hold to these extremes, and neither do I. That being said, I would like to tackle some of the nuance I hold that doesn't make "Abortion is murder" my instinctive reaction every time abortion reaches my news feed.

Where to Draw the Line (Pt. 1)? A Word on Gestation: One of the most fundamental questions surrounding the abortion debate is when the entity in question, whether it be the zygote, embryo, or fetus, is granted personhood, and thus should be granted legal protections. For those who are staunchly anti-abortion, the answer is "at conception." For those staunchly pro-abortion, the answer is "at birth". These can be appealing because they are clear-cut stages within human development. In spite of clear-cut distinctions, what is interesting is that most Americans do not fall on either extreme. Sixty percent of Americans think abortion should be legal within the first three months. The support drops to 28 percent in the second trimester, and down to 13 percent percent for the third trimester (Gallup).

For me, my view on the issue is not too far off from most Americans. My view is that the line should be drawn in the first trimester. The trickier part is determining at which point in the gestation period to draw that line. There is some allure to drawing the line at the six-week mark, which is when these new "heartbeat bills" are drawing the line because a heartbeat can be detected by some recently developed technology. There is also some allure to drawing it at the eight-week mark. Why? It's not quite as clear-cut as conception or birth, but it's still based in embryology. One, it has the human organs and other features that make it discernibly human. Two, the embryo has become a fetus at that point, thereby providing a clear-cut stage in gestation.

Embryonic Viability and Miscarriages: I also draw the line towards the end of the first trimester because it addresses another issue that is not discussed often enough in the abortion debate: miscarriages. Miscarriage is another term for "spontaneous abortion," and about 80 percent of these happen in the first trimester. For women who know they are pregnant, about 10 to 15 percent of pregnancies end in miscarriage (March of Dimes). Mayo Clinic recognizes the number is probably higher because most miscarriages happen before the woman knows she is even pregnant. To that point, research finds that anywhere from 40 percent up to 70 percent of embryos fail to develop into a person. The lower probability of viability diminishes the argument of potentiality, something that would not be the case once the embryo becomes a fetus.

The existence of miscarriages can be used for both sides. On the pro-abortion side, it shows that abortions naturally exist, and that conception does not translate into pregnancy. If those who are anti-abortion take the loss of life seriously, they should mourn the millions of lives lost by miscarriage, as well. It is all the more harrowing for an anti-abortion theist to realize that God created a universe in which abortion naturally occurs. An argument for the anti-abortion side is that there is still the reality that a loss and grieving process is felt after a miscarriage. I was reminded of that by an article from the Left-leaning Vox, of all places. This is important because it acts as a reminder that we are dealing with more than a mere clump of cells or "potentiality."

Additional Moral Issues with Certain Pro-Abortion Arguments: While we're discussing the status of the unborn, there are those on the pro-abortion side that argue for abortion based on the idea that the unborn are a "mere clump of cells." There are three arguments used to support that notion that I would like to highlight here. The first is viability, i.e., the fetus cannot live outside of the womb, ergo abortion is justifiable. The second is whether a fetus is wanted or unwanted, i.e., the lack of desire to carry the fetus to term justifies abortion. The third is the Sovereign Zone argument, which manifests itself in such sub-arguments as "My body, my choice," or "As long as it's within my private domain (e.g., my womb, my home), it doesn't matter."

My philosophical issue with using any of these arguments to justify abortion is that they could just as easily be applied to already-born individuals that are deemed unwanted or are as perceived as "not being able to make it on their own" (e.g., infants, the homeless, those who are physically handicapped). This is not to say that those who identify as pro-choice support such practices as infanticide, but rather to illustrate the logical conclusion of these arguments, and thus the moral quandary, when these arguments are applied consistently. To be fair to the pro-choice/pro-abortion side, there are better arguments to be made, as is illustrated below.

Where to Draw the Line (Pt. 2)? Segmentation of Abortions by Gestation Period: Drawing that line between a period after conception and before birth means that there is a period in which there is a certain percentage of abortions with which I would not have a problem. What is that percentage? I decided to find some data that breaks down the number of abortions by week of gestation. The CDC was able to provide me with its figures that it released in November 2018. Where I decide to draw that line makes a significant difference. If I draw it at the six-week mark, like the Georgia heartbeat bill does, it would mean I would be okay with 36.7 percent of abortions. If I go with eight weeks, like the Missouri bill does, it would mean being okay with 65.6 percent of abortions. Even when looking at the more restrictive of the options, it would mean that in practice, I would have to be okay with at least nearly two out of five abortions that are performed, and at most, about two out of three abortions.

Enforcement Concerns and Underground Markets: Especially when discussing bans, a quintessentially libertarian concern is the ability to enforce a ban. Libertarians have argued against the Prohibition [of alcohol], as well against making marijuana illegal, not only because enforcement is difficult, but because there are certain unintended consequences of bans (e.g., black markets, increased crime). The essential libertarian argument about legalization in these cases is "it's not perfect if you make it legal, but there are by far more issues forcing it into the black market and making it illegal." I don't argue that abortion is a victimless crime, but I also would be worried about the consequences of driving women to use abortionists in the black market. I would argue that technology has improved conditions since pre-Roe v. Wade, but I'm also not exactly confident of the conditions of abortions performed in the black market.

Second, I have a concern about the elasticity of demand for abortion. In layman's terms, elasticity is the economic term referring to the change of quantity consumed relative to a price change. I don't live in a world where you think you can get rid of abortion completely, especially if there is a demand for abortion services. If the demand largely holds during an abortion ban, it would mean that all that is being done is driving abortions to less safe conditions. This, of course, would be an economic question to see what the elasticity of abortion historically has been. I would be interested in doing it as a separate blog entry, but for now, let's say driving abortions underground is a legitimate cause for concern, and what I would view as the strongest argument for either keeping the status quo or not making as prohibitive as a full ban.

Then there is the question of what the law would look like if you were to give full personhood to zygotes, embryos, and/or fetuses. Mississippi tried passing a Personhood Amendment in 2011, which would have done exactly that. I had to ask myself what full personhood for zygotes would look like.  Detecting a zygote is much more difficult than detecting an infant. It would have been an enforcement nightmare because it would have affected everything from criminal enforcement and inheritance law to Social Security, welfare benefits, and tax law. Some of these issues could be curtailed by providing partial rights to the unborn, but there is a question of what granting partial or full rights to the unborn would look like in practice.

Exceptions to Allow for Abortion: When debating abortion, there are usually three exceptions that even self-identified pro-life individuals make: rape, incest, and when a fetus is threatening the mother's life. Going back to the Gallup polling, 83 percent are okay with abortion in the first trimester when it threatens the mother's life, and 77 percent for cases of rape and incest. The numbers decrease a bit for third trimester, but still stay above 50 percent.

I am fine with abortion when it threatens the mother's life both because an abortion in that scenario would be a justifiable act of self-defense, and because the loss of only one life is better relatively speaking than the loss of two lives. As for rape and incest, I understand both sides of the argument, but I would have significantly less of an issue with abortion in those instances. For rape, the choice to have a child was forced upon the woman (this scenario is another reason I support emergency contraception). As for incest, there would be a concern about birth defects. Speaking of birth defects, there is also a concern as to whether an abortion would be okay if there were some sort of birth defect. It would depend on the defect. I would have a bigger issue with abortion in the case of Downs' Syndrome (where the individual can lead a full, productive life) than I would with something like Tay Sachs' (where the individual leads an extremely painful life while dying at a young age).

That being said, the reality is that these exceptions are in the minority. Florida is unique in that it actually tracks reasons for having an abortion. When combining physical and emotional health reasons, only 3.4 percent of abortions in Florida were performed for these reasons. One percent were performed for genetic defects, and 0.2 percent for reasons of rape and incest. Yes, Florida is only one state. At the same time, 2004 survey data from the Guttmacher Institute (they unfortunately do not have more recent survey data), which is Planned Parenthood's research arm, helps confirm the notion that abortions performed for such exceptions as rape, incest, and threatening the mother's life are indeed exceptions to the norm.

Personal Responsibility and Birth Control: If it already wasn't made clear, I highly value freedom and the ability to have "life, liberty, pursuit of happiness." One of the arguments for abortion is that a woman has the right to do what she can and cannot do with her body, and as a result, has an absolute right as to whether to carry a child to term. While I can sympathize with that argument more strongly as a libertarian, here is where I still take issue with such an argument.

What is implicit in freedom is that while you are free to make your own choices, you also have to accept the consequences, both good and bad. The biological reality is when a man and women have vaginal intercourse (coitus), there is a real chance that the sexual act will result in pregnancy. As the aforementioned survey data suggest, most abortions are not because an unfortunate situation, such as rape or incest, was forced upon the woman, thereby taking away her choice. In most scenarios, the woman chose to engage in sexual behavior, knowing that there are risks to that behavior. This would mean that the woman knowingly chose to participate in such activity, and as such, should be held accountable for the choice she freely made. From a cultural standpoint, I have concerns about the respectability for life when most abortions are done for convenience's sake. On the other hand, violent crime has declined since Roe v. Wade (another topic for another blog entry), thereby diminishing that argument.

I have a quasi-counterargument against the personal responsibility argument, which is that of birth control. The truth is that birth control helps reduce the abortion rate. Not all places have great access to birth control. In some communities, there is a stigma attached to birth control, which I find so unfortunate that I made an argument in 2014 for subsidizing birth control. Yes, greater birth control creates a social good, including that of a lower abortion rate. From a libertarian viewpoint, I made another argument. There isn't a world in which you have lots or no government. It's a false dichotomy. A desirable and more realistic expectation is what shrinks the size of government. If birth control is readily available, then there would be fewer unintended pregnancies. Fewer unintended pregnancies would mean fewer government expenditures spent on the criminal justice system, means-tested welfare benefits, and a number of other government programs. In short, I would rather have a relatively non-intrusive form of government intervention as opposed to aggrandizing the government in multiple areas. Personally, I wish the staunchly pro-life would stop treating it as if every sperm were sacred, and support birth control so we can continue to lower the abortion rate.

A Word on Being Pro-Life versus Anti-Abortion: Some on the pro-abortion side could criticize me and other individuals that self-identify as pro-life because pro-life views only apply to the issue of abortion. Much like I scrutinized the usage of the "pro-choice" label, I have also scrutinized the "pro-life" label for consistency and fairness. Yes, there are some in the pro-life world that are anti-abortion only. The majority of self-identifying pro-life individuals I have met apply their pro-life values beyond the issue of abortion, myself included. I find myself against the death penalty because I value life. With the exception of self-defense or some other exigent circumstance, I find myself to be against fighting wars on moral grounds.

If we were to talk about being pro-life (instead of "pro-birther"), I think we should remove the red tape so it is easier for adoption to be an option. As previously mentioned, the evidence of birth control and emergency contraception is so strong that I have found an exception to "government shouldn't subsidize that" rule to support access of birth control and emergency contraception for women. I believe that communities and social networks should be more supportive when a woman exercises her choice to carry the child to term. There is also plenty of empirical research showing how more liberalized economies translate to greater economic welfare. As a result, women could have greater access to healthcare, and children can have greater access to education. This is my way of saying that a greater push capitalism has the ability to improve quality of life for all, from womb to tomb.

Postscript

When discussing the abortion issue from a libertarian standpoint, there are two major issues that are in play and in conflict: the importance of freedom and the respect for other individuals in which one does not violate the non-aggression axiom. I was somewhat surprised at survey data that showed a deeper divide in the libertarian world. The issue becomes murkier in the greater picture because there is no agreement in philosophy, religion, or medicine as to when the "right to life" begins. There are multiple points in gestation where one could choose to draw the line. To illustrate that phenomenon, let's look at two religious viewpoints.

The Catholic Church fervently advocates for and protects life at the moment of conception (Catechism, paragraph 2270). Traditional Judaism, on the other hand, has a more nuanced view. I would need an entire blog entry to cover the particulars, but if I had to summarize it succinctly, the unborn within the first forty days is considered "mere water" (Talmud, Yevamot 69b). After 40 days, the fetus is provided with some protections, although the mother's life takes precedence (Talmud, Sanhedrin 57b). Once the fetus has partially emerged from the womb, it is granted full protections under Jewish law (Mishnah, Oholot, 7:6).

I currently do not consider myself a religious Jew, but I would nevertheless like to point out that my view incidentally is not that far off from traditional Judaism: there is a period at the beginning of gestation (i.e., with zygotes and embryos) where I do not have a moral objection with abortion. After a certain period (somewhere around the sixth or eighth week), I have an issue with abortion unless it threatens the mother's life (physically, and to a lesser extent, psychologically) or some other exigent circumstance merits an abortion (e.g., the fetus has Tays-Sachs). In practice, I would be in favor for something more restrictive than Roe v. Wade, but something that would allow for exceptions based on gestation and reason for the abortion. Essentially, I have a view that upsets both extremes in the debate. While my view on abortion comes with nuance, I can state that I have an issue with depriving individuals of "life, liberty, and pursuit of happiness." If I am to take my respect for the autonomy of the individual seriously, I would need to extend that belief to fetuses.

In addition to outlining my position about personhood with regards to gestation, I also have expressed my concerns about enforcement of an abortion ban, my views on personal responsibility with regards to life choices, the role of birth control, and how I view capitalism to be in alignment with being pro-life, all of which adds to my nuanced pro-life view.

Especially in an age of political polarization, it is difficult to sit down with those with whom we disagree and have a discussion, particularly on an issue as controversial as abortion. The controversy is compounded by the fact that there is a fundamental disagreement on the moral or philosophical status of the unborn. I find some solace in survey data showing that most Americans have a similarly nuanced view on the abortion issue, and that it is nowhere as simple as "100% for abortion" or "100% against abortion." I would like to think that most Americans not existing on either extreme would help, but I have more than a feeling that the "silent majority" (or at least the more moderate majority) will be overpowered by those who are loudest.

Tuesday, May 21, 2019

Using 25 Percent Tariffs to Escalate the Trade War With China Will Only Make Things Worse

This month has been an intense one for international trade. Trump postponed the auto tariffs on Japan and the European Union for 180 days. Trump even performed the unusual act of removing aluminum and steel tariffs on Canada and Mexico. In addition to all that hullabaloo, Trump decided to escalate the trade war with China. On May 10, 2019, Trump increased tariffs on $200 billion worth of goods. The tariffs on these targeted goods increased from 10 percent to 25 percent. Trump thinks he is saving the steel industry by doing so (see my analysis on aluminum and steel tariffs here to see why that is incorrect). He is also under the impression that the tariffs will bring in tens of billions of dollars. Trump thinks he is actually doing the citizens of the United States a favor. Imagine that! Let me get into why Trump increasing these tariffs is only going to make things worse on the international trade front.

For one, it is not as if Trump got his wish by having China surrender. Far from it. China announced retaliatory tariffs on $60 billion of U.S. goods, and surprise, surprise, Nasdaq declined by 3.4 percent. But it's more than a tit-for-tat tariff escalation that is ineffective in bringing about a trade agreement between China and the United States. When looking at the economic theory and history of tariff implementation, tariffs are a bad idea because tariffs make people poorer on the whole. Economic experts were surveyed last March about Trump's aluminum and steel tariffs, and all of them that answered agreed that the tariffs were going to make things worse. Not a single one agreed with Trump's trade policy. As the Congressional Research Service (CRS) points out in its February 2019 report, most economists agree that that tariffs are likely to have a negative effect overall. Additionally, estimates on Trump's tariffs generally show a modestly negative impact (CRS, p. 28). In case that were not enough, let's see how Trump's tariffs have worked so far.

  • Economic welfare of American consumers. A working paper from Princeton University concluded that the incidence of the tariffs fell on the American consumers (i.e., yes, it was the American citizens that paid the tax). More to the point, it cost the American people a monthly average of $3 billion in added tax costs and an addition $1.4 billion in deadweight loss (efficiency losses). The researchers found similar patterns in other retaliating countries (Amiti et al., 2019). 
  • Effects of the washing machine tariff. In 2018, Trump enacted a 20 percent tariff on washing machines. Researchers from the University of Chicago found that the tariffs brought in $82 million of tax revenue while increasing consumer prices by $1.5 billion, or $92 per washer. That means that the 1,800 washer production jobs created cost the American people $817,000 per job (Flaaen et al., 2019). 
  • Other macroeconomic factors. The tariffs had already had a modest, but nevertheless negative effect on the economy at large. According to the Tax Foundation's latest estimate, Trump's enacted tariffs have reduced the GDP by $52.2 billion [in 2018 dollars] and reduced the workforce by 161,751 people (or by 0.13 percent). The Trade Partnership estimated in February that if Trump were to enact these tariffs (which he did), then the GDP would decrease annually by 1.1 percent (or average annual costs of $2,200 per family).
  • Who has been affected the most by these tariffs? The centrist Brookings Institution released a report last October (Parilla and Buchet, 2018). First, they found that those specializing in metals and agriculture got hit especially hard. Second, rural areas disproportionately felt the cost of Trump's tariffs. Third, counties that voted for Trump were hit because of their reliance on tariff-affected exports, a finding that was confirmed by a later study (Fajgelbaum et al., 2019). And if you want to add to that, a Tax Foundation study found that poor families and single-parent households were hit harder (York, 2018).

I called it last year when I said that a full-blown trade war would not end well, and the current results are sadly confirming that prediction. It's unlikely that the trade war will end soon, and it's unlikely that it will get better before it gets worse. With my time as a professional market researcher, something I have learned is that the one thing that businesses hate even more than regulation is uncertainty (e.g., Kliesen, 2013). His actions signal that he isn't clear of how he wants to proceed with his perceived enemy, let alone his allies. The unpredictability that Trump has spread throughout the economy makes businesses think twice about their long-term investments. Trump is taking the opportunity to pick a fight with China, something that he promised back in his 2016 campaign. Trump had the best chances to deal with China by joining the Trans-Pacific Partnership and by using the dispute mechanisms through the World Trade Organization. He could have built a multinational coalition, too, but he has been burning those bridges by imposing additional tariffs on allies.

The idea of fighting tariffs with tariffs has been a real loser. There is no shortage of evidence showing how tariffs limit economic growth, increase costs to consumers and producers, lower employment, depress wages, and make it more difficult for businesses to compete in the global economy. Protectionism won't make this country great again. If anything, Trump's latest barrage of tariffs will show how costly his "Art of the Deal" will be for the American people.


5-24-2019 Addendum: The New York Federal Reserve found that Trump's latest 25 percent tariff is going to cost the average American household $831 annually.

Thursday, May 16, 2019

Note to Sanders and AOC: Capping Consumer Loan Interest Rates Would Hurt Those You Want to Help

Senator Bernie Sanders (I-VT) and Congresswoman Alexandria Ocasio-Cortez (AOC) teamed up as a "'Dynamic' Duo of Leftist finance public policy" last week. Their legislative initiative du jour? The Loan Shark Prevention Act. The long and short of this legislation is that Sanders and AOC would like to limit the interest rates for credit cards and other consumer loans at 15 percent.

The argument for this bill, as presented in Sanders' op-ed piece in Medium, is that credit card debt has never been higher, and the credit card companies are making an "exorbitant amount" on credit card interest ($178 billion in 2018). For Sanders, modern-day loan sharks are not those who work in the criminal underworld, but rather those who work on Wall Street collecting interest rates on credit cards. That is not a hyperbolic description. That is the introduction paragraph of his op-ed piece.

Sanders then goes on to invoke Dante's The Divine Comedy and proceeded to cite a 1980 piece of legislation that enacted a 15 percent credit card interest rate cap on credit unions, which he thought worked quite well, although the legislation has allowed for the National Credit Union Administration to bypass it. Sanders showed an additional disdain for payday lenders that charge an average interest rate of 391 percent, a service that disproportionately affect the African-American and Hispanic communities. Essentially, Sanders wants to "create a financial system that works for all Americans," and to "stop financial institutions from charging outrageous interest rates and fees."

Sanders really wants to stop predatory lending and make sure that Americans are not consumed by credit card debt. At least his heart is in the right place. Like with so many of his proposals, I have to ask the question of whether there are good results to match the good intent.

Economics of Interest Rate Caps
Proponents of credit card interest rate caps believe that the financial market functions differently than other markets because people need access to credit in order to live a good life. While I believe that access to credit is important, it doesn't automatically necessitate a solution, and it doesn't mean that the credit card industry is different in market functionality. When I discussed student loans in 2013, I explained the purpose of an interest rate, i.e., how interest is the cost of borrowing money. Every business has a product or service. For a bank, its business is money, both the investment of its customers' bank deposits and the loans the bank issues. A credit card company is also a lending institution, and is similarly subject to the supply and demand of money. Consumers make choices on the supply and demand of money, just like they do with any other good and service.

With that being said, how does the interest rate cap function? In economic terms, the interest rate cap is a price ceiling. To quote Milton Friedman from his book Free to Choose (p. 219):

Economists may not know much. But we know one thing very well: how to produce shortages and surpluses. Do you want a shortage? Have a government legislate a maximum price that is below the price that would otherwise prevail. 

Standard microeconomic theory therefore suggests that demand for loans would exceed supply, assumedly because there would be enough lenders that would not want to loan money [to high-risk borrowers] at such low rates. How does the economic theory play out in practice?

Interest Rate Caps and Usury Laws in Practice
Usury laws are nothing new. As the Mercatus Center points out in its analysis on the arguments made by interest rate cap advocates (worth the read if you want more detail on the topic), such laws are the oldest and most tried government intervention in financial markets. Let's forget for a moment that payday loans have lower annual percentage rates (APR) than overdraft fees and bounce checks (Summers, 2013), that payday loans are short-term loans (hence the higher APR), payday loans do not adversely affect credit score (Bhutta et al., 2015), or that customers generally know what they're getting into when they take out a payday loan (e.g., Durkin et al., 2014Elliehausen et al., 2001). Let's see what usury laws similar to the Loan Shark Prevention Act look like in practice.

After the Great Recession began, Congress passed what is known as the Durbin Amendment. The Durbin Amendment put a cap on the fees that could be charged for using debit cards. This was done in order to lower consumer burden in terms of consumer cost. Did it help consumers? No, not really. Instead of debit fee income, the banks instead opted to charge new fees on the bank accounts and raised the minimum balances required on bank accounts, as a Penn State University research team discovered (Mukharlyamov and Sarin, 2019). Not only did the Durbin Amendment shift more people from debit cards to more expensive credit products (i.e., credit cards), but it made one million Americans unbanked, thereby limiting their access to the mainstream credit system (Zywicki et al., 2014).

The phenomenon of making up the loss of the lower interest rate is not confined to debit cards. It has played out in the auto loan industry, as a working paper from the Consumer Financial Protection Bureau [CFPB] illustrates (Melzer and Schroeder, 2017). In the case of the auto industry, it did not restrict loans per se. What happened in the auto loan industry was two-fold. Although auto dealer lenders issued similar monthly payments, they compensated for the loss induced by the usury lawny raising the mark-up on the product sale instead of the loan interest rate. Second, higher-risk borrowers who borrowed from non-dealers received lower interest rates, but also received smaller loans relative to the collateral, i.e., they had restricted access to credit.

Shifting the costs to make up for profit loss did not only happen in the auto industry. In 2015, a federal court issued a ruling that voided usurious loans (i.e., no obligation to pay on the principal) in New York and Connecticut. The good news was that there was no evidence of strategic default. However, a look a secondary markets found that investors priced the increased legal risk about the usury amount when a borrower is late on payments. It was also found that credit availability for risky borrowers decreased significantly (Honigsberg et al., 2016).

In Ohio, a de facto payday loan ban resulted in the proliferation of pawn shops (Ramirez, 2019). Why? Because the demand for these financial products doesn't disappear with the cap. In the case of Ohio, it simply incentivized people to sell valuable possessions to get access to that money. Arkansas had a similar story in the 20th century. Not only did Arkansas have a spike in pawn shops, but small loan credit was not readily available and many consumer finance companies stopped operating in Arkansas (Peterson and Falls, 1981).

Conclusion
As hard as lawmakers have tried, it is very difficult to eliminate the concept of interest. We see one of two main unintended consequences take place. One is that high-risk borrowers have their access to loans and credit limited, thereby isolating them from the mainstream credit system (see Zinman, 2008 as an example). The second is that lenders add clever elements within the loan deal in order to keep within the letter while making up for the financial loss caused by the interest rate cap, as we saw with debit cards and auto loans (i.e., borrowers, especially high-risk ones, are de facto paying [close to] the same price in either case).

Much like with rent control or minimum wage laws, a credit card interest rate cap would simply hurt the people advocates are purporting to help. A very generous best-case, but nevertheless improbable, scenario of the Loan Shark Prevention Act is that it would do nothing to improve credit access for millions of Americans. The worse and more likely scenario is that credit will be more difficult to access, and that financial hardship will increase for a number of economically disadvantaged individuals. I hope that the American people can escape these jaws of death by not having Congress pass the Loan Shark Prevention Act.


Tuesday, May 14, 2019

Maybe Career and Technical Education Isn't Working So Well

I have said it before, and I will say it again: college isn't for everyone. The fact that the college dropout rate is nearly half in the United States reaffirms that notion. Not everyone was cut out for a four-year college, but that doesn't mean those individuals are doomed to mediocre economic well-being. This is where career and technical education (CTE) enters the scene.

As the Brooking Institution's primer explains, CTE is a vocational education in secondary schools that dates back to 1917. The purpose of CTE is to prepare students with skills that are in high demand in the labor market while simultaneously preparing them for a post-secondary degree program in a technical field. CTE can include career-oriented classwork, internships, and apprenticeships. The premise of CTE is to provide those who were not bound for the traditional four-year college to have enough skills and training to be attractive enough upon graduation (or at the most, after a two-year, post-secondary degree). While CTE started to decline in the 1980s, it made a comeback this decade. It has become all the rage now as young adults try to find a lucrative alternative to the four-year college degree.

The idea behind CTE seems intuitive enough: provide people with an alternative so they do not have to live a life of squalor or constantly have to struggle economically. How has CTE fared so far? As the Brooking Institution illustrates, the amount of research on CTE is extremely limited. Some research shows success in terms of higher high school graduation rates, attendance at a two-year college, employment rates, and wages (e.g., Doughtery, 2018). Some research is mixed, such as the research that shows that while CTE helps with high school dropout rates and graduation rates, it doesn't help with college attendance rates (Gottfield and Stratte Plasman, 2017). There has been some academic literature from Stanford criticizing CTE, suggesting that CTE students have diminished earnings later in life because they are less able to adapt to the labor market when it changes (Hanushek et al., 2017). The American Enterprise Institute (AEI) adds to the research that questions CTE's success. Earlier this month, AEI released its CTE report, entitled The Evolution of Career and Technical Education: 1982-2013.

What AEI's report does is cast some doubt on the overall success of CTE. The report segments the students by two main types: Traditional Vocational course takers and New Era course takers. Traditional Vocational courses include such subjects as construction and manufacturing, whereas New Era is more of the Computer Sciences and Engineering. In aggregate, average test scores and graduation rates are improving for CTE concentrators. On the other hand, when you look at Traditional Vocational course takers as a segmentation of the CTE course takers, they are not doing so well.

The shift from Traditional Vocational courses to New Era courses shows that vocational education is less focused on the academically weaker than it has ever been. What the AEI report is suggesting is that the aggregate data are hiding the problem of vocational education, mainly that it is not adequately helping the students that it was meant to help. As long as there is a population of academically disinclined students, vocational education (and its successor, CTE) is going to have the challenge of providing students with enough skills that do not require a post-secondary degree. This will continue to be a challenge since there is a societal expectation that true success comes from a four-year college degree, which is not true. We should remove the stigma from vocational education, CTE, whatever you want to call it, and realize that because people are diverse in their interests, academic inclination, and skill set, so too should tracks of learning be diverse to meet their learning and career needs. Anything less is going to cut off access for a number of those who would like to live the American dream.

CTE demographic information from the Institute of Education Sciences can be found here.