Monday, September 25, 2017

Should There Be a Catalonian Nation Independent of Spain?: The Ramifications of Secession

Barcelona is a beautiful city known for its art and architecture. It is a city I would like to visit some day because it truly is a gem of Spain. Being located in the Spanish province of Catalonia (Cataluña), it is also in the middle of a political controversy. On October 1, the Catalonian people are to vote on whether or not Catalonia is to secede from Spain. The complication is that the Spanish government has declared the referendum for independence to be illegal. Catalonian independence dates back to the early 20th century when the Spanish government revived the Generalitat of Catalonia in 1932. This increased autonomy was quashed with the rise of dictator Francisco Franco. After Franco's death in 1975, the Catalonians focused on increased autonomy instead of an independent state. This changed in 2007 as a result of a fallout from the Great Recession. The main gripe: Catalonia has been paying more in taxes than it had been receiving in benefits. In a time where Brexit is taking place, it makes me wonder if Catalonia should secede. I do not want to get into whether or not Catalonia should hold a referendum. That is separate from the question I would like to answer: "Is it a good idea for Catalonia to separate from Spain and become its own country?" I asked a similar question three years ago when Scotland was looking to secede from the United Kingdom, and I will apply that general research methodology here to the Catalonian case study.

Economic Costs
Economics will play an important enough in the outcome of this election. The economic argument being used in support of Catalonian independence, which is being contested by some, is that it pays more in taxes than it does in expenditures, thereby creating a deficit. Catalonia receives 10 percent of federal funds while accounting for 16 percent of the Spanish population. Based on this cash-flow method, Catalonia is losing the equivalent of 8.5 percent of its GDP per annum, which is notable when its current debt-to-GDP ratio is 35.4 percent. Even if this money were to stay in Catalonia, there are multiple costs to the Catalonian economy, the first being that the services that the national government provide would have to be provided by the autonomous Catalonian government. This could very well reduce the benefits from 8.5 percent of the GDP to 4.2 percent, although the Generalitat of Catalunya estimates a rosier 5.8 percent (also see less rosier projections from the Societat Civil Catalana here).

Having an extra 4.2 or 5.8 percent of the GDP sounds like a nice win. However, this assumes that economic commerce resumes as normal after the secession. The big reason for that is because secession automatically means that Catalonia is ejected from the European Union. 65 percent of Catalonian exports are bought by the European Union. This is important because the European Union is a trade bloc. Being removed from that means paying tariffs, which diminishes the benefit of secession.

Much of that EU trade is with Spain: Catalonia conducts about half of its trade with Spain. Yes, France is Catalonia's largest exporter, but after that, Catalonia's biggest exporters are Andalucía, Aragón, and Valencia. Also, let us keep in mind that while Catalonia technically has a trade surplus, much of that surplus is with Spain. With the rest of the world, it runs a trade deficit of about 4 percent.

Considering that the Spanish government is already attempting to quash the referendum vote, it is unlikely that Spain is going play nice with Catalonia in the event of a secession. Spain's Economic Minister, Luis de Guindos, warns that Catalonia's GDP could drop by 30 percent. Why? There is great uncertainty as to how this will play out. The uncertainty would cause Catalonian households to consume less, which would damper the economy. When the costs and benefits are added up, a study from the University of Edinburgh actually found that disposable income would diminish by 3 percent (Comerford et al., 2014). There will most certainly be disinvestment and increased unemployment, both of which would diminish Catalonia's return. The reason for disinvestment is because many of the Catalonian businesses would prefer to stay in the Euro Zone, and would probably relocate to Spain.

Membership with the EU is not just about trade policy, but also monetary policy. Once Catalonia leaves, it would no longer be part of the Euro Zone. Sure, it could de facto use the euro, but it would be a country without a currency and have zero control over monetary policy. Its inability to receive financing from the European Central Bank (or Spain) would lead it to creating its own central bank and currency. Without an institutional history, its currency would probably be weak and its interest rates would be high.

Other Considerations
  • According to a survey from Deloitte surveying business owners throughout Spain, 74 percent of Spanish business owners think independence will hurt the Spanish economy. 43 percent of Catalonian business owners feel the same way.
  • Pluralism is one of those highly esteemed values, especially in a more democratic society. We get along with those around us in spite of our differences. Yes, the Catalonians have a distinct language with their own history and culture, but Catalonia somehow managed to maintain their heritage for over 400 years under the Spanish crown, as well as Franco's attempts to suppress Catalonian heritage. 
    • While it is admittedly easier to maintain more homogenous countries, many developed countries have maintained multilingual nations, including Canada, Israel, India, and Switzerland, not to mention other countries that can harmoniously deal with a multicultural society. 
  • The end-result of a secession greatly depends on the reaction of the country from which the separation is taking place. Catalonian separatists do not have the capacity or desperation to take on the Spanish army. Let's remember that in the not-so-distant past, the Spanish government was run by a far-Right Francoist military junta. Considering how important Catalonia is to Spain, the Spanish government using military might to quash the secession should not be dismissed outright. 
  • Catalonian independence has other militaristic ramifications. If Catalonia leaves Spain, it loses protection under NATO, and there would be no guaranteed that Catalonia would be offered protection under NATO. 
  • According to Spanish think-tank Fundación Alternativas, this does not just affect its status with NATO. Independence also adversely affects its status with the United Nations, European Union, the International Monetary Fund (IMF), and the World Bank. Specifically with regards to the European Union, Catalonia could not get into the European Union without Spain's help because entry into the EU requires a unanimous vote.
  • Per a 2012 European Commission report on regional governance, Spain ranked 13 out of 27 EU countries. More to the point, Catalonia ranked 130 out of 199 regions, and was the lowest-ranking Spanish region. The fact that corruption is more pervasive in Catalonia than it is throughout the rest of Spain indicates that the government would have a harder time performing and that the economy would not grow as well as anticipated. 
Conclusion: While Catalonia has a large and diverse enough of an economy to theoretically support its own statehood, the current dynamics would render a hypothetical secession a disaster both for Catalonia and Spain. Reforming the Spanish federal fiscal regime would be a much more prudent move than Catalonia leaving Spain. The people should be allowed to decide their own fate, but I nevertheless contend that the people of Catalonia should remain as a part of Spain.

Saturday, September 23, 2017

Want to Stop Corporations From Fleeing Vis-à-Vis Corporate Inversions?: Lower Taxes

Those in society tend to look down upon those who avoid responsibility as weak, incapable, or lacking the courage to act on basic decency. It is through this moralistic lens that some look at corporations who are "fleeing the country" through what is known as a corporate inversion. A corporate inversion is when a corporation completes a merger with a company in another country that is often smaller. The merger allows for the U.S. company to be treated as a foreign country in the U.S. tax system, even in spite of the fact that U.S. shareholders own more than 50 percent of the company stock post-inversion. Operations often stay in the United States, but it the legal headquarters is changed to a lower-tax jurisdiction. In 2014, Obama accused companies pursuing corporate inversions as being deserters, followed by a call for "economic patriotism." For Obama, paying taxes is a form of being patriotic since it helps support the government. By using the tax code to pay less taxes, the loophole is seen by inversion critics as avoiding one's patriotic duty. I want to challenge this notion of "economic patriotism" and see what the deal is with inversions, least of all because standard microeconomic theory states that a business primary goal is to make a profit (i.e., profit motive).

This line of thought comes in light of a report released by the Congressional Budget Office (CBO) on corporate inversions. The report had two main findings. The first main finding is that within the next decade, corporate inversions will cost the government $12 billion (CBO, p. 2). The second main finding is that on average, a corporation saved itself $45 million after the first financial year of completing the inversion (CBO, p. 1). The second finding of the CBO bolsters why corporations feel the need to go through an inversion in the first place: to pay less in taxes (also see Col et al., 2016).

If you have looked at corporate taxes, it is not difficult to see why corporations in the United States want to flee. It's because the corporate tax rates are high. The CBO released a report in April with corporate tax rates in G20 countries. The United States has the ranks highest in top statutory rate of 39 percent. Statutory is the rate that is "on the books," which is different than what is actually paid (i.e., effective rate). The United States still has the fourth highest rate of 18.6 percent. While the corporate tax revenue as a percent of GDP has declined over the years, overall tax revenue from corporate taxes has generally increased since the 1930s because U.S. GDP has grown considerably over the years. Also, these studies do not account for state corporate tax rates or the fact that 30 percent of companies pay as an S-corporation, a tax status in which the corporation pays individual income tax instead of corporate income tax.

It is true that the corporate tax rate in theory (statutory) is double what it is in practice (effective). At the same time, it is high enough where over 60 companies since 1993 went through the headache and paperwork to legally move. It is bad enough where U.S. corporations are at a competitive disadvantageI scrutinized the corporate tax three years ago when Walgreens was looking to make its inversion. I found a few things, one being that the tax incidence falls on the workers in the form of lower wages. I also found that it reduces labor productivity, slows down economic growth, and creates a double-taxation effects. The OECD opined that it was bad enough where it deemed the corporate tax the least efficient and most harmful tax (OECD, 2008, p. 2).

When looking at corporate tax rates in the United States, we have to remember that our tax code is not in isolation. U.S. corporations are competing with corporations in other countries with lower tax rates. Having a disadvantage in paying more taxes could result in a lower market share, as well as affect the workers at the corporation, many of whom are not bigwig executives. Combine this with the negative effects of the corporate tax, and it should be no wonder that corporate inversions are trending. The libertarian Cato Institute pointed out something interesting with regards to corporate inversions: it tends to be the CEO and other corporate executive that benefits from the inversion, not long-term investors. Executives' incentives are misaligned with those of shareholders, and that creates additional issues.

Inversions are a symptom of and a reaction to a malfunctioning tax code, which means that cutting corporate taxes to disincentivize inversions is better than some retroactive regulation or converting to a territorial system, the latter of which would create greater incentives to shift U.S. profits overseas to avoid taxation. Ireland and Canada are two examples of countries that have benefited from lowering their corporate tax rates. Canada was able to collect more tax revenue when it reformed its corporate tax rate in the early 2000s, which suggests that a cut in the corporate tax rate could lead to more tax revenue. Plus, corporate tax reform has something else uncommon in our day in age: bipartisan support, which means it would be politically feasible to pass.

The United States has a tax code that is over 10 million words long, which makes it all the more difficult to navigate. Again, it should be no surprise why certain corporations find it easier to complete an inversion than deal with the U.S. tax code. Simplifying the tax code by lowering or eliminating the corporate tax would be a step in the right direction for all involved.

Monday, September 18, 2017

How to Celebrate Rosh Hashanah When Your Judaism Is Shaken to the Core

Normally, at this time of year, I would take a passage from the Torah, Talmud, or some other Jewish text that relates to Rosh Hashanah. I would take that passage, analyze it, and come up with some sort of insight that can carry us through the Jewish year of 5778. This year, I don't have that luxury in my life because I am dealing with the loss of someone who was dear to me. Baruch Hashem, thank G-d that individual did not pass away. Although I shared many intimate moments and developed a strong bond with said person, what this person ended up doing to me recently was injurious enough where making up for the damage caused is impossible. One thing that this is done is change my view on humanity a bit. A redeeming feature of Judaism is that it reminds us that we are imperfect beings, but that G-d has given us a framework that provides us with second chances and the ability to do better through what Judaism refers to as teshuvah. Much like we learned with the Pharaoh in Egypt, an individual can fall into a pattern of behavior that can obscure our humanity to the point where they are irredeemable. A default assumption in Judaism is to believe that in spite of our flaws, we have the capacity to improve upon ourselves and be better than we were before. However, my past relationship with the aforementioned individual reminds me that either some people don't want to work on themselves or that some individuals are incapable of working on themselves. I still believe most people can improve upon themselves, but some people are truly beyond redemption.

Unfortunately for me, my recent loss did not just impact my relationship with this person, but also with my religiosity and how I feel about Judaism. Although I believe in an impersonal G-d, I have found myself in a position I have not found myself in years: angry at G-d. Rather than remember the benefits of living a Jewish life or how I have grown throughout my Jewish life, all I can feel is the pain I have endured as a result of Judaism and the costs of living an observant Jewish life. I feel adrift about my Jewish identity and Jewish practice in a way that I never have before. Fortunately, I have an exceptionally supportive Jewish community, family, and overall social network that is helping me stay afloat, but that still doesn't help me with how I proceed with Rosh Hashanah. How do I continue maintaining introspection while looking forward to how I can be a better person and Jew this upcoming year when I wonder whether I still even want to practice Judaism or be Jewish?

I am sure I am not the first person who has undergone an arduous trial in life during this time of year. Based on recent conversations I have had with my Orthodox friends, I know that I am not the first Orthodox Jew to go through, for lack of a better term, a "crisis of faith." Even in the Orthodox world, there are people who struggle with their Yiddishkeit and what it means to be Jewish. It is just that much like other topics in the Orthodox world, they are considered taboo. Instead of addressing these issues and helping people grow spiritually, the Orthodox world has a propensity to sweep these issues under the rug. With that being said, here are a few things I am going to keep in mind for the High Holidays (Yamim Noraim), as well as some advice for those of us whose hearts or minds are not necessarily or fully into the "holiday spirit" this year:
  1. A Jew is supposed to struggle and question. It is nice to think that being religious means unwavering support and never doubting or questioning. This is simply not true. This is not simply a matter of "three Jews, five opinions" or how the Talmud, and indeed Judaism as a whole, has been a discussion and debate that spans over the ages. Being able to struggle is literally a namesake of the Jewish people. The Jewish people are referred to as Israel (ישראל). In Hebrew, the word means "one who struggles with G-d." This name was given to Jacob after he fought and struggled with the angel in the biblical text. If we do not struggle with, doubt, or question Judaism, we are not doing it right. 
  2. Yom Kippur is not a hard deadline in finishing processing, grieving, or moving forward. This might seem counterintuitive given traditional Judaism's take on this time of year. At this time of year, Jewish tradition teaches that there is a Book of Life and a Book of Death. At Rosh Hashanah, G-d inscribes names in the Book of Life, and at Yom Kippur, G-d seals the Book of Life, thereby sealing our names in the given Book. While interesting imagery, this is not meant to be taken literally. As we see upon analyzing the prayer of Unetaneh Tokef, this is meant to be a metaphor. This time of year is not an opportunity to manipulate G-d in helping us cheat death for another year, but rather to make us think about the ephemeral nature of life. It is meant to bring us closer to G-d. It also reminds us of the fragility of life. This time of year is meant to inspire. At the same time, the Yamim Noraim do not magically solve all of our problems or remove our pain. The nice thing about Judaism is that it focuses on the journey, not the destination. Rosh Hashanah is meant to rejuvenate and inspire, which means that this time of year is meant to be a starting point, not an endpoint.  
  3. Take it one day at a time and do what you can. On the one hand, a Jew is supposed to step it up a notch at this time of year. In the High Holiday prayer books (machzorim), we see the phrase of "teshuvah, tefillah, tzedakah help us avert the Divine decree." We are supposed to do more repenting, praying, and giving money to causes per Jewish law than we do during the rest of the year. On the other hand, I had a good friend tell me in this context that "If you don't bend, you will break." To quote Ben Hei Hei in Pirkei Avot (5:26), "the reward is in proportion to the exertion (לפום צערא אגרא)." Rashi comments on this passage in Pirkei Avot that the reward is in proportion to the effort and difficulty needed for its performance. This passage means that G-d understands what you're going through, and that G-d is well aware of the mitigating or exigent circumstances. In the context of Rosh Hashanah observance, what this means is this. Ideally, it would be great if you go full-out and do mitzvahs galore. But if you don't, G-d understands. The main mitzvah on Rosh Hashanah is to hear the shofar blowing. Even if you are in a tough spot and only go to one service to hear the shofar, G-d will give you even greater kudos since He knows what you're going through. G-d wants Jews to do mitzvahs, but G-d also understands that for the vast majority of people, Jewish practice and dedication to Judaism has its ups and downs
    • As I wrote a couple of years ago, the Nazarite provides an example of how taking even a few small steps can help us grow immensely, especially during the Yamim Noraim. It doesn't matter if you're making small steps. As long as you're moving forward in your life, that's what ultimately matters.
  4. Forgive yourself and cut yourself some slack. I don't say this point because it's easy because I can tell you I struggle with this, especially given recent days. This time of year is about forgiving others, asking G-d for forgiveness, and asking others for forgiveness. There is a lot of forgiveness, but there is one aspect of forgiveness that is often overlooked: forgiving ourselves. I looked at this idea within the context of the Ashamnu prayer, which I know isn't recited until Yom Kippur, but it is still apropos. Why is forgiving ourselves important? Especially when we feel down, it is all too easy to look at the High Holiday liturgy and feel even worse about ourselves than we do. Yes, reflect on the right and wrong you did this past year. At the same time, if you want to do better this upcoming year, if you want to move forward from your struggle, and if you want to be the best version of yourself, then you have to forgive yourself. We are human, and as such, we will err and fall. We will do so many times. What defines us is not how we fall, but how we get back up. Part of getting back up is forgiving yourself so you can do better. If you can remember that, Rosh Hashanah will be more pleasant.  
Our lives are a process. How we feel about Jewish practice or G-d or Torah can and does fluctuate. It is part of the human condition. Will I return to a non-Orthodox denomination? Will I forsake religion altogether? Will I return to Orthodox Judaism after processing my loss and figuring out what I want in my spiritual and religious life? Quite frankly, I don't know. I want to do what makes me happiest and provides me with the most meaning in my life. While my relationship with Judaism and G-d is currently hurting, I am in the process of seeing where this healing process takes me. Much like I hope for myself, I hope for those of you struggling with their Judaism at this time of year, I hope you find solace and peace in your relationship with G-d. 

Monday, September 11, 2017

DACA's Net Benefits and Why Congress Needs to Save DACA

When it comes to the United States' history on immigration, it is fraught with tension. On the one hand, the United States has been a land of opportunity where an immigrant could become a citizen and make something of their life. On the other hand, there have been times in the United States' history where we see more restrictive immigrations policies, such as immediately after World War One or in the mid-1960s. This tension between lax and restrictive immigration policy plays out with the debate on the Deferred Action for Childhood Arrivals (DACA). President Obama signed an executive order in 2012 allowing minors who illegally entered the country to receive a two-year period of deferred action on their deportation combined with the ability to be eligible for a work permit. As of this year, 790,000 individuals, more colloquially referred to as Dreamers, are covered under DACA. While DACA provides Dreamers with temporary legal reprieve, it does not provide legal status or amnesty. In either case, last week, Attorney General Jeff Sessions made the announcement that President Trump rescinded Obama's executive order. Trump has allowed for a six-month delay for Congress to work on a legislative version to get passed so the Dreamers can stay in the United States. Was Trump's move a wise decision or not?

Much of Jeff Sessions' remarks last Tuesday on announcing the desistance of DACA had to do with constitutionality, which is highly contested. Article I, Section 8, Clause 4 provides Congress with the power to naturalize citizens. Keep in mind that naturalization is not the same as immigration. But even if this constitutional clause gives Congress the right to control immigration, it is hypocritical that Trump was fine using an executive order to instate his dubious travel ban, but he suddenly has an issue when it comes to DACA. Also, the executive branch has granted "deferrals of removal" or "deferred action" for at least a half century, so it is not as if Obama's actions are unprecedented. If anything would be unprecedented in American history, it would taking a group of people that were raised and rooted in the United States and stripping them of their legal recognition and shoving them into a state of unauthorized immigrant life.

After mentioning constitutionality, Sessions then says how eliminating DACA is important because "enforcing the law saves lives, protects communities and taxpayers, and prevents human suffering. Failure to enforce laws in the past has put our nation at risk of crime, violence, and even terrorism." He then proceeds to talk about how it will further economically the lives of millions who are struggling." Let's examine these claims and continue with looking at ramifications of rescinding DACA.

Higher Risk of Crime - Sessions implies that by removing DACA, we will have a lower rate of crime. On the macro level, we have seen a bit of an increase in violent crimes in 2015 and 2016 (FBI Statistics). Nevertheless, there has been a general decline in violent crime since the 1990s. Aside from that, we should ask whether the Dreamers' demographic, young adults who are undocumented workers, are increasing the crime rates. The "crime reduction" argument is the same one used for justifying Trump's border wall, and as I pointed out earlier this year, it does not have merit. As a matter of fact, the Cato Institute found that undocumented workers/illegal immigrants (whichever term you prefer to use) are 1.8 times less likely to commit crimes. Plus, Dreamers have to go through a background check prior to participating in DACA. Only 2,139 Dreamers (or 0.25 percent of the Dreamer population) lost DACA protection because of criminal behavior, which means that Dreamers are even less likely to be convicted of a crime or go to prison (Landgrave and Nowrasteh, 2017).

Prevent Human Suffering - Sessions' comments make even less sense when accounting for the crime rate of the Dreamers' demographic. DACA does come with a human cost, but it comes at a cost for the Dreamers, not native-born citizens. To be eligible under DACA, Dreamers had to register with the Department of Homeland Security (DHS). If Congress cannot come up with a bill to replace the executive order, the DHS can take that list, target the Dreamers, deport them, and split up families in the process. These Dreamers have been here, on average, since they were six years old, so deporting them to a country they to a Third World country that they do not really know is a form of human suffering. The only "crime" that the Dreamers committed was accompanying their parents, who entered the country illegally.

Protecting Taxpayers - By claiming that eliminating DACA would protect taxpayers, Sessions implies that immigrants do not pay taxes. The problem with that implication is that it is false. Immigrants, regardless of their legal status, pay taxes. As for being a "drain on society," that is also false: immigrants not only have a fiscal impact that is near net-zero, but also positively contribute to the economy. The Dreamers covered under DACA are no exception. 90 percent of Dreamers are employed, which is a higher labor force participation rate than native-born workers. Also, Dreamers are responsible for $2 billion in tax revenue. Dreamers are more likely to make a net fiscal contribution because they do not qualify for federal means-tested welfare. Plus, Dreamers are better educated than the overall immigration population, which means that they can better contribute to the economy and tax base. How deporting hard-working, tax-paying individuals protects taxpayers is beyond me.

Improve the Economy - Sessions also postulates that ending DACA would improve the economy. When discussing the issue of deportation a couple of years ago, I concluded that deportation would be costly with little to no economic benefit. Limiting the deportation to Dreamers would still be costly.
  • Budgetary Cost of Deporting Dreamers: According to the Brookings Institution, the average cost of deporting an individual from arrest to removal is $12,500. That would mean that it would cost $9.9 billion to deport the Dreamers. The Right-leaning American Action Forum estimates that the costs deporting the undocumented workers covered under DACA could be as high as $21 billion. The libertarian Cato Institute calculates that it would cost $280 billion in reduced growth and $60 billion for the government (also see here). To put this cost into perspective, the Immigration and Customs Enforcement (ICE) budget for FY2017 was only $5.8 billion, and it's not difficult to realize that this is something the United States government can ill-afford.
  • Economic Cost to Employers: Ending DACA would be the equivalent of 31 regulations, and would end up costing employers $6.3 billion to fire, replace, and train. 
  • Economic Benefit of Immigrants and Dreamers:  The Trump administration is under the impression that less immigrants is better for the country. This was something I explored only last month when asking whether Trump's support for a bill that would cut legal immigration in half would help the nation. Cutting immigration does not increase native-born workers' wages, it does not boost the GDP, and immigrants are less likely to be on welfare. Immigrants in general provide a modest, but net positive gain to the economy. Specific to DACA, ending DACA would lead to an estimated loss of $460 billion in GDP over the next decade, according the Left-leaning think tank Center for American Progress.  The American Action Forum estimates that between now and 2020, it would be a loss of $72 billion and 740,000 workers. 

The economic and moral case to create legislation to keep the Dreamers here in the United States is as overwhelming as it is damning. It is already clear that reducing immigration doesn't do the American people any favors, and given the demographic features of the Dreamers, it becomes all the more perplexing as to why Trump feels the need to go after the Dreamers. At the same time, I understand that DACA was never meant to be a permanent solution since the President can only defer deportation and does not provide a path to citizenship. Even if you want to argue that DACA is "good policy but bad law," the solution has been and continues to be Congress. At this point, it is up to Congress to create legislation to help the Dreamers and preserve the American dream.

Thursday, September 7, 2017

Tropical Storm Harvey and Why We Should Privatize Flood Insurance

Texas and Louisiana have been getting hit by Tropical Storm Harvey these past few days. The flooding was so bad that the National Weather Service had to update the graphics on their mapping to effectively reflect the unprecedented amount of rain. Since about 80 percent of those affected by the storm do not have insurance, Harvey can cost as much as $30 billion to $50 billion in damage. The pending Texas insurance law of reducing the penalty interest in insurance claims cases complicates matters further for those in Texas. This got me thinking about the nature of flood insurance.

Back in 1968, Congress passed the National Flood Insurance Program (NFIP) Act, a program that is presently administered by FEMA. The NFIP is a government-administered program that enables property protection from floods. It was created with the hopes that it would better insure [primarily] coastal buildings from flooding than the private sector has. The NFIP has been around for nearly fifty years and is up for congressional reauthorization next month. As such, it only seems fitting to see how the NFIP has performed, especially since the NFIP the only coverage for the vast majority of Americans. Here are but a few criticisms I have for NFIP:

  • Before Tropical Storm Harvey hit, the NFIP was already $25 billion in debt. FEMA has still not paid its NFIP debt from Hurricane Katrina over a decade ago. In its September 2017 report, the Congressional Budget Office is expecting more net shortfalls. 
  • Aside from being a form of wealth distribution from non-coastal areas to coastal areas, premium shares are larger than income shares for lower-income households (Bin et al., 2017). What this means is that this regressivity insures higher-value homes more than it does lower-value homes. 
    • The Government Accountability Office recognizes that the NFIP charges subsidized rates, which affect the market. 
  • Here is a bad sign that FEMA is lousy at assessing risk. According the Congressional Research Service in its June 2017 report (p. 1), the NFIP is on the hook for $1.24 trillion while only charging a total of $3.5 billion, as of early 2017. That is not simply the sign of fully reflecting the risk of flooding. It is the sign of a ticking time bomb, not a solvent or financially sound program.  
    • It doesn't help when FEMA is using outdated flood maps to assess risk, either, which is another example of mismanagement. It also doesn't help when FEMA is not allowed to exclude high-risk properties from NFIP coverage (Wriggins, 2016, p. 1450).
  • Moral hazard comes with the NFIP because it contributes to encouraging people to live in hurricane-prone, flood-prone areas (Ben-Shahar and Logue, 2015).

Since the global sea levels are rising and people are still incentivized to move to coastal areas vis-à-vis the NFIP, it is clear that the government is not helping by offering the NFIP as a form of flood insurance, even though some advocate for its continued existence. In the GAO's 2017 report, it states that none of its main criteria (see below). The NFIP is dealing with issues in financial exposure and challenges in management and operations, which is why the GAO ranks it as "High Risk." The American Academy of Actuaries are not hopeful of NFIP, either.

Maintaining the NFIP and creating perverse incentives is neither moral nor financially sound, so how do we deal with a program that looks like it is going from bad to worse? Privatization of flood insurance. It is not just when the Cato Institute puts out a wonderful policy analysis on privatizationIt should be a red flag when FEMA, the very government agency that is responsible for NFIP, has even encouraged more privatization as a partial solution since 2012. Greater privatization can lead to "multiple coverage options, lower costs, and rates that accurately measure risk."As Deloitte points out in its 2014 report on flood insurance privatization, not only do United Kingdom, Germany, and Australia privatize it, but depending on the insurance model used, it could also work here in the United States. We need to do something to reform the NFIP quickly before the American people drown from NFIP's mismanagement.

Monday, September 4, 2017

Apprenticeships: Can Trump Create More Apprentices Than On His Previous TV Show?

As we commemorate Labor Day, we reflect on the state of the labor market and how the workforce contributes to the economy. How we think about labor employment has shifted since the beginning of the Great Recession. There is more worry about automation, increased costs of livelihood, and whether or not the American dream still exists. We can look at the time since then and say some facets have improved. The unemployment rate (even that of U-6 unemployment) has dropped below pre-recession levels. Wage growth has been on the uprise, and so has job growth. Yet there has been some unease about the labor market. Yet there are some concerns nearly a decade after the Great Recession. Labor force participation is as low as it has been since women made their way into the workforce. Even with the low employment, the United States has not experienced this high of a level in job vacancies in over a decade.

There are those in the public policy world who see the increase in job vacancies as indicative of a skills gap (see here and here). The people over at the centrist Third Way even provide a report on which industries are experiencing a skills gap (see below). One way to potentially alleviate the skills gap, as well as improve the labor market more generally, is to increase the number of apprenticeships in the United States. 

There is an appeal to wanting to approve the status of apprenticeships in this country, given the labor market. The premise behind an apprenticeship is to "combine higher education with transferable and marketable work skills." Apprentices work alongside more seasoned employers, learn skills, and take college courses to complement the work training. The idea is to provide skills that will translate into employability and greater stability in the labor market for that individual. On the longer term, apprenticeships integrate practical skills with an understanding of fundamental principles. President Trump was so intrigued by the idea that he signed an executive order in June to bolster apprenticeships in the United States. Just last week, Congress introduced a bill to include apprenticeships from Section 595 of the IRS tax code, which is a college savings plan that would help give apprenticeships an advantage. One of the appealing outcomes is that nine out of ten Americans who join an apprenticeship find a job within the first year that makes at least $60,000 a year. Apprenticeships also have the potential to boost productivity and earnings (Lerman, 2010). These programs are also shown to have particular advantages for disadvantaged youth (Neumark and Rothstein, 2012). Greater support for apprenticeships has another feature that is seemingly uncommon these days: bipartisan support.

Some like to laud the German case study as an example of how it could be implemented in the United States. However, there is a distinct possibility that the differences in the German labor market might be great enough where the German framework cannot be imported to the United States, particularly with high unionism, industry-wide labor contracts, and professional licensing. The United States also has a cultural bias against non-college secondary education and "blue-collar work," not to mention a laxer labor market that makes it easier for an employee to switch employers than in a place like Germany. Additionally, there is recent research (Hanushek et al., 2017) that concludes that employment gains from apprenticeships can be offset by less adaptability and employability in the future, much like we see in the case of Germany. For more information on the advantages and challenges of implementing apprenticeships in the United States, read this Cato Institute report here

We should certainly be looking at alternatives to the four-year college degree since it is not an automatic guarantee for success. There are ways to enhance the presence of apprenticeships in this country, whether it is to provide more subsidies, tax credits, or to better define the role of government, employers, and educators and how they should created workforce development programming. Given the recent research, I think apprenticeships would be more successful for older people with lower education or less skills to gain an advantage in the labor market. I also think that apprenticeships are a good supplement for more disadvantaged students. Even so, we are going to need workers with general cognitive skills that can adapt to an ever-changing work environment, which means that apprenticeships can act as a short-term solution to a more complex problem. At best, apprenticeships are but one piece of the puzzle, which means that we need to better account for and find other alternatives to remedy failing K-12 education.

Thursday, August 24, 2017

A Case for Taking Down Confederate Statues

Some people just won't let things die. It's how I feel when I hear the rally cry of "the South will rise again." The Civil War was a war fought over 150 years ago because the Confederates thought that owning people as property was acceptable, and even used the Bible to justify the practice. The South lost the Civil War, yet there are those who feel nostalgia for "that better time." One of the ways in which they feel that nostalgia is by fighting against those who want to take down Confederate statues. Those who are in favor of these statues argue that it's about preserving history and "how dare you take away our heritage." In spite of these emotional claims, there are a few reasons why, after looking at the arguments on both sides, we should ultimately take down these statues:

1. Those arguing for these statues primarily base it on the preservation of history. Looking at when these statues were erected provide some sense of motive. First, most of the statues were erected long after the Civil War, thereby diminishing the "preservation argument." Second, the two major spikes (1900s-1920s and 1950s-1960s) were times of great civil rights tension and also when white supremacy in the United States were at their peak. This is why comparing the statues of Confederate soldiers to those of George Washington and Thomas Jefferson are false. Yes, Washington and Jefferson were slave-owners. But let's remember that the good they achieved (e.g., founding this country, establishing our country's ideals, the Declaration of Independence, the Constitution) outweighed their slave-owning. Even more importantly, very few (if any) of the statues of Washington and Jefferson commemorate the fact they owned slaves. The Confederate statues, on the other hand, are a different matter. Granted, there are some exceptions, such as General James Longstreet, who led an African-American militia after the Civil War. But for the vast majority of Confederate statues, they commemorate service to the Confederacy and what the Confederacy fought for (see Point #2).

2. The historical argument leads into why we build statues in the first place. Statues are not put up to merely make a values-neutral historical statement. They are erected with the intention of exalting and honoring the individual(s). In this case, Confederate statues are built to honor what the Confederates fought for. There is a difference between remembering and examining the Civil War versus celebrating the cause of enslaving a group of people based on skin color. The Confederates instigated a treasonous war, and it was not fought over "Northern aggression" or the abstract concept of states' rights. It begs the question of the "right to do what?" The answer? Own another human being (see below). The Confederates lost the moral battle and lost on the physical battlefield. Why is that worth honoring? Why is Southern pride being based on its most shameful moment of history? I'm sure that the South has more to offer than a legacy of slavery.     

3. There is a history of toppling statues once a certain individual or side loses, one that predates our modern-day notion of political correctness. After the Declaration of Independence was signed, the statue of King George III was toppled. Germany removed Nazi statues after WWII. The same goes for statues of Stalin, Lenin, and Saddam Hussein. If countries are able to remove statues honoring tyrants to symbolize a better tomorrow, I think the United States can handle removing statues of Confederate generals.  

4. Taking down a statue does not lead to a false slippery slope of removing the Confederates from libraries, museums, or history books. Nor does it mean that we stop individuals from putting up Confederate flags or statues on private property. Conflating the specific removal of Confederate statues on public property with the general removal of the Confederates from historical remembrance is simply inaccurate. We should not forget this history. If anything, we should remember what they fought for, what they believed, and why they were ultimately in the wrong. We should teach that racism and treating people like property are unacceptable in any civilized society. 

5. Building statues does not address any market failure, which means the government has no business building statues of any kind in the first place. As Cato Institute scholar Jeff Miron argues, we should simply take down all statues in public parks. 

6. Confederate General Robert E. Lee was against building Confederate statues. Why? Because they are too divisive. Because it would be more difficult for the nation to heal from the wounds inflicted by the Civil War. Lee believed that by keeping these statues around, they perpetuate the divisions that have been around since the Civil War. Boy, was General Lee right on that one! 

These Confederate statues don't deserve a status of honor. At best, they deserve to be in museums or other historical sites such as battlegrounds to remind us of past mistakes and how to make sure we don't repeat the mistake of subjugating people simply because they are different from us. We should not use taxpayer dollars to fund or preserve divisive symbolism such as Confederate statues. Yes, we should take down the statues, but even if we remove the statues, the divisiveness will remain. Why? The statues are a manifestation of the divide, and merely act as a symptom of the wounds that have not healed since the Civil War, as is illustrated by the debate over the statues. Rather than commemorate a flawed and morally troublesome past, we should build a future that represents the democratic values the Founding Fathers had in mind. We should have a society that believes in and preserves the life, liberty, and pursuit of happiness for all Americans. The Confederate statue debate simply reminds us that we as a nation have a ways to go on making that ideal a reality.