Thursday, January 11, 2018

Revoking Temporary Protected Status: Trump's Latest Assault on Immigration

Trump has had quite the presidential term when it comes to immigration, and I don't mean that in a good way. He signed an executive order in attempts to put a wall on the U.S.-Mexican border, which is unnecessary. Trump went for a refugee ban which would do more harm than good. He developed an antagonistic stance towards high-skilled immigrants with visas. Trump also supported the RAISE Act, a bill that would cut legal immigration by half and lower the number of refugees. I could tell you that the RAISE Act would not do any favors for America. He attempted to put more border patrol agents on the border, even though his own Department for Homeland Security was unable to justify it. And earlier this week, he revoked the Temporary Protected Status (TPS) of 195,000 El Salvadorans. The Trump administration is delaying the actual revocation 18 months in order to either give the beneficiaries time to either gain permanent status or leave the country.

A bit of background (read Congressional Research Service brief here for more information): In 1990, Congress passed the Immigration Act of 1990. One of the provisions of this Act was the TPS, which allowed for nationals whose countries were ravaged by an ongoing arms conflict, an environmental disaster, or extraordinary condition to temporarily be protected under immigration law, and thus immune from deportation. The temporary nature of TPS is not too dissimilar from Deferred Action for Childhood Arrivals, also known as DACA. You can read my analysis on DACA here, which I think is relevant given the parallels between the DACA and TPS controversies.

In 2001, there was a nasty earthquake in El Salvador that caused a humanitarian crisis. As a result, the United States took in about 195,000 El Salvadorans under TPS. El Salvador is not the only country for whom the United States provides TPS. As a matter of fact, El Salvador is not the only country for whom Trump revoked TPS. Late last year, he revoked TPS for 50,000 Haitian nationals who were fleeing from the travesty of the 2011 earthquake. What makes Trump's announcement more significant is because the El Salvadorans make up for nearly half of the estimated 325,000 individuals who have been offered TPS. Although individuals with TPS come from 13 countries, 93 percent come from 3 countries: El Salvador, Honduras, and Haiti (Warren and Kerwin, 2017). It is also significant because previous Presidents used the option written into the Immigration Act of 1990 that allows for the status to be renewed without limit. Trump reversed that set precedent.

Those who are happy with Trump's decision bring up the "it's about time" argument because the "T" in TPS stands for "temporary." The Trump administration used a more refined version of that argument in its announcement earlier this week by determining if "those originating continue to exist as required by statute." As much as TPS was intended to be short-term relief and shelter, the fact of the matter is that the individuals' residency in the United States has not been short-term. The El Salvadorans have been here since 2001, the Hondurans since 1998, and the Haitians since 2011. These individuals have established their lives here, especially so with the El Salvadorans since they definitionally have been here since 2001.

Upending these individuals' lives would be quite disruptive. As the Center for Migration Studies points out in its 2017 study on TPS, this would mean you're talking about 61,000 mortgages in jeopardy. Not only does this show home ownership, but also implies contributing to the local economy by paying sales and property taxes. It is not just the beneficiaries themselves, but also their children. These children are long-term U.S. citizens, including 273,200 U.S.-born children and 67,800 people who were brought here as children. These children would either be forced to be separated from their families or return to a country that is foreign to them. If they return to said country, it would be nigh impossible for them to integrate them into the society of the respective country. Even though the initial earthquake in El Salvador has passed, catastrophe is still with these countries. Honduras and El Salvador have the two highest murder rates in the world. Additionally, returning to these countries would mean making these individuals more vulnerable to extortion and gang violence. In 2015, nearly 1 in 4 El Salvadorans were victims of crimes, according to the U.S. Department of State. The decision to face these individuals is whether to return to one of the most dangerous places on Earth or remain in the U.S. as an unauthorized immigrant. Did it ever occur to Trump that the reason that the TPS continued to be extended is because some countries are just not safe places to live?

And if the humanitarian argument doesn't sway you, then there are the economic arguments to consider:
  • The estimated labor force participation rate for TPS beneficiaries ranges from 81 to 88 percent (Warren and Kerwin, 2017), which is a lot higher than the current overall labor force participation of 62.9 percent. Another way of saying this: TPS beneficiaries are hard-working. 
  • There is the cost of deportation, which the Immigration Legal Resource Center estimates would be $3.1 billion. 
  • There is the cost of $967 million that employers would incur because of turnover costs
  • The ILRC also estimates that deportation would cost the U.S. $45.9 billion of the GDP over the next decade. In its report on TPS, the Center for American Progress estimates that the GDP loss at $164 billion over the next decade. 
  • The Dallas Federal Reserve released a report (Orrenius and Zavodny, 2014) showing how that even temporary status to work in the United States improves labor market conditions for those who would otherwise be considered unauthorized immigrants. 
  • El Salvador also benefits from this. Political scientist Manuel Orozco estimates that TPS beneficiaries send $600 million to El Salvador annually, which is significant since a) that amount is 2 percent of El Salvador's GDP, and b) El Salvador's GDP has only grown at about 2 percent over the past few years. 

By revoking TPS for El Salvadorans, as well as the previous revocations for Haitian TPS beneficiaries, what the Trump administration has done is pave the way to ruin the lives of thousands of people, indirectly further destabilize El Salvador's economy by removing an important source of revenue, and diminish U.S. economic output with mindless immigration policy. And for what? This won't help with the U.S' national security. In spite of allegations of international drug trafficking, the El Salvadoran gangs have mostly been involved in local crime, which would further diminish a national security argument. As I have discussed before (see here, here, and here), immigration is a net gain for the U.S. economy.

Trump thinks that by tackling immigration in the manner he has, he is coming up with permanent solutions for immigration reform. The truth is that he is creating more problems. It's easier for Congress to kick the can down the road or pass it on to the executive branch rather than reform the U.S.' incongruent and nebulous immigration policy, which is why I don't have much faith in Congress stepping in to solve the problem. I would like for Congress to come up with something, such as creating a path to citizenship for these people who have lived in this country for so long. In the meantime, I have to hope and pray that these individuals can find a remedy to their situation on their own within the next 18 months.

Monday, January 8, 2018

What the Final Tax Cuts and Jobs Act Entails: The Good, The Bad, and The Ugly

The Republicans finally did it: they passed the largest tax reform bill since the Tax Reform Act of 1986. The Tax Cuts and Jobs Act (TCJA) is a 500-plus page piece of legislation that will have many ramifications over the years to come. As occurs during the partisan squabbling, the Democrats portray the Act as a gift to corporations and the "one percent" that simultaneously screws over the rest of Americans, and the Republicans are passing it off as the greatest thing since sliced bread that will boost the economy like no other. I took a look at the initial House draft a couple of months ago, so I can tell you that the truth lies somewhere in the middle. The question is where in the middle does it lie. Much like I did two months ago, I will outline the advantages and disadvantages of the major provisions of the final version of the TCJA (see bill here and a good chart summary of the bill here), which is why there will be some overlap from the last blog entry. I will then follow the outline of the advantages and disadvantages with a conclusion of my overall take on the TJCA.

Before beginning, however, I would briefly like to cover macroeconomic effects as a preface, the reason being that it doesn't neatly fit into categories of "good" or "bad." The President's Council of Economic Advisers calculated that the TCJA will grow the GDP by 3 to 5 percent, and was verified by three economists from Boston University (Benzell et al., 2017). The Right-leaning Heritage Foundation and Tax Foundation have similarly optimistic forecasts. The left-of-center Urban Institute is not so optimistic: it calculates that the TCJA will only boost the GDP by 0.8 percent in 2018, and will do virtually nothing for the GDP by 2027. The Joint Committee on Taxation, who officially estimates the effects of taxation for the U.S. government, estimates that the GDP will only grow by an additional 0.8 percent over the next decade. With that being said, let's begin, shall we?

The Good

Permanent corporate tax cut. This is definitely the most significant reform of the TCJA. As I commented as recent as September 2017 and also in August 2014 with considerable detail, lowering the corporate tax from 39 percent to 21 percent is a good thing. Even Presidents Obama and Clinton were eager to have the corporate tax rates lowered when they were in office. What is different with the final draft of the TCJA is that the corporate tax cuts are permanent, which makes for better tax policy (Hodge, 2017). With more capital, the capital-to-labor ratio will rise, which allow for higher wages because the United States will be able to better compete with other countries in the global marketplace, as well as counterintuitively help the average taxpayer. The leading economic research center in Europe, the Center for European Economic Research, found in its own research that the United States lowering its corporate tax will make the United States more competitive with other countries, particularly with Germany (Spengel and Heinemann, 2017).

Creation of a territorial tax system. I covered this in a previous analysis of the corporate tax, but essentially, the creation of a territorial tax system is preferable to a global one. After all it is no coincidence that more countries are trading in a global tax system for a territorial one.

Repatriation and a tax on international earnings. The final version of the TCJA sets a one-time mandatory 8 percent tax on illiquid assets and 15 percent tax on liquid assets from overseas earnings brought back in to the United States. Under tax law prior to the TCJA, any repatriation would have been subject to the corporate tax rate, which we already know is high to begin with. Not only would a lower tax on international earnings encourage U.S. companies to bring foreign cash back into the U.S. (e.g., Apple), but it would also bring a small boost to domestic investment.

Lower mortgage interest deduction (MID). Per my August 2017 piece on the MID, I think the MID should be completely repealed. The initial draft was going to lower the cap to $500,000. However, the final version only lowered it to $750,000. This means that 1 in 7 houses will be eligible for the MID, as opposed to the 44 percent of houses currently eligible. This item is one of those where I would have liked to have seen either a repeal or a lower cap, but at least it is a step in the right direction.

Removal of Obamacare individual mandate penalty. This is not the same as eliminating Obamacare, as much as I would love for that to happen. Over the next decade, this is estimated by the JCT to cost $297 billion. Not only will people be indirectly forced to purchase health insurance with this mandate, but removing the penalty is not tantamount to a tax increase.

Lower taxes for most taxpayers, especially middle class. In 2018, only 5 percent of taxpayers will see their taxes increase, whereas 80 percent will see their taxes lowered (Tax Policy Center). Even better, when looking at the percentage decreases of the tax cuts, the middle class will get a bigger cut than the upper class percentage-wise (JCT). The reason I am not going to compare who gets a bigger cut in dollar amount is because it should be obvious, as well as expected. The United States has a more progressive tax system in which the richest pay higher amounts both in terms of percent and dollar. Ergo, it is all the more remarkable that the middle class is experiencing a reduction in taxes in terms of percentage.



Expand the medical expense deduction. The Democrats were demonizing the Republicans over this bit because the initial House version was looking to scrap it. The final bill not only kept the deduction, but it actually expands this deduction for two years by lowering the threshold from 7.5 to 10 percent of adjusted gross income. Afterwards, it goes back to 10 percent.

Repeal the state and local tax (SALT) deduction. I covered this topic in my initial analysis of the TCJA, but essentially, it will free up some revenue at the federal level while incentivizing state governments with higher levels of taxation to either lower their taxes or at least not raise their taxes. The final TCJA caps SALT deductions at $10,000. Granted, it's not as good as capping it at $0, but it sure beats the former lack of a cap.

Estate tax. Under the final version, the exemption increases from $5 million to $10 million. This increased exemption will temporarily exist until 2025, after which, it will revert back to $5 million. What this means is that the number of taxable estates drops from 5,000 to 1,800 estates under the new law. Much like some of the other provisions, repeal would be more optimal. However, something is better than nothing.

Alternative minimum tax (AMT). I covered the AMT in my initial coverage of the TCJA. In the final version of the TCJA, Congress only eliminated the corporate AMT. This is another step in the right direction, but Congress should have also eliminated the individual AMT instead of retaining it with a temporary increase.

Unprecedented capital expensing. Under the pre-TCJA tax code, businesses were able to immediately deduct their regular costs. This was not the case for capital purchases. When a business makes a capital investment, it has to deduct the cost over several years using deduction schedules. With the TCJA, businesses can now immediately deduct capital purchases. This makes me happy for two reasons, the first being that of tax code simplification. The deduction schedules were complex and more difficult to enforce. It's nice to see at least some effort towards tax code simplification because there is less of it in the final version of the TCJA. Second, this requires all businesses with capital equipment, and not just huge corporations, to pay the expense of financing the upfront expense, which creates more burdens to businesses. The third reason I am happy is that it should create a slight boost to the GDP. In October 2017, the Right-leaning Tax Foundation released a report on the effects of temporary capital expensing, and found that it would modestly boost the GDP by 0.78 percent over five years. It's not as big as the effects of lowering the corporate tax rates, but it's something.

The Bad

Temporary nature of individual income taxes and its relation to economic growth. You would have thought we would have learned from the George W. Bush era and his tax cuts that the only good tax cut is a permanent one, but here we are. By 2025, the individual tax cuts will have largely been phased out. In 2027, 53 percent of Americans will have higher taxes compared to the current law due to the phase-out (Tax Policy Center). Much like with the corporate tax cuts, the individual income tax cuts should be permanent.

Reduced infrastructure investment. The bill makes infrastructure financing more expensive for state and local governments. Read more from the Brookings Institution here or Econofact here.

Pass-through tax treatment. This pass-through taxation allows for taxpayers who have some or all of their business income taxed on their individual tax return to benefit. This provision would include S-corporations, LLCs, partnerships, and sole proprietorships. With the TCJA, the top tax rate for pass-through income will decrease from 39.6 percent to 29.6 percent. The tax deduction will allow for self-employed individuals to make more than their wage-earning counterparts, as well as create further tax code complexity.

Slightly more progressive tax system. As the Joint Taxation Committee points out, even when the individual tax cuts go away, the distributional effects tax code remains just about as progressive as it did pre-TJCA (see below). This means that fewer will pay taxes in the bottom and more at the top will see their taxes increase. On the one hand, that might sound good because the poor are not burdened with taxes. On the other hand, we have a system where 47 percent do not pay federal income taxes, a figure that will increase as a result of the TCJA.



Endowment tax on universities. The final version will include a tax on university endowments. Aside from having the function of collecting government revenue, taxes also disincentivize behavior. This is true all of taxes. In the case of an endowment, it will disincentivize large donors from making charitable contributions to university foundations, thereby undermining the financial stability of postsecondary institutions. Prominent conservative economists, including Gregory Mankiw and Michael Strain, think it is a short-sighted idea. Most of the world's top universities are located in the United States, and if Trump were concerned about making America great again, he would be against this tax, as well.

Employer-sponsored health insurance. This ended on the "Bad" list not because of what Congress did, but because of what Congress did not do. Employer-sponsored health insurance is the largest tax break in the tax code. Additionally, as I explained in my previous analysis of the TCJA, it has multiple adverse effects, including exacerbating income equality and driving up the cost of health care in the United States.

Increased child tax credit. The TCJA expands the child tax credit (CTC) to $2,000. Much like I pointed out in my initial analysis of the TCJA, the expansion of the CTC only magnifies the already-existing problems with the CTC. The JCT estimates that the CTC will cost $543.6 billion over the next decade.

Modified education savings plan. The TCJA rolls the Cordell Savings Account into the 529 Savings Plan. Read my TCJA analysis from November for more detail on why that is problematic.

Retained subsidies for wind energy. The TCJA did not deliver a blow to wind subsidies (pun intended). If anything, the TCJA maintains the subsidies for wind energy. I wrote this piece three-and-a-half years ago, but it still summarizes why I have an issue with wind energy subsidies.

Allowing for drilling in the Arctic National Wildlife Refuge (ANWR). The Republicans were able to accomplish a years'-long dream with the TCJA: drill for oil in Northern Alaska. I'm not opposed to the idea because the environmental costs would exceed the economic benefits. As I wrote a month ago, we have a fossil fuel supply glut that there is no need to drill at this time. Given the costs of drilling in Alaska compared to other places in the continental U.S., it would be costly and yield little profit. At this point, allowing for drilling in ANWR is more a symbolic gesture than it is a way to boost economic growth.

The Ugly
The worst part of the TCJA is the same as it was in the initial draft: it is going to substantially raise the debt. According to the bipartisan Committee for a Responsible Federal Budget, the debt-to-GDP ratio will increase by 18 percent by 2027 as a result of this bill. The JCT estimates that debt will increase $1.4T over the next decade, whereas the Penn Wharton Budget Model is even more pessimistic in saying that it will raise the debt by $2T over the next decade, as opposed to the CRFB's estimation of $1.2T. While the tax reform has noteworthy features, it still is not as bold as it could have been. The TCJA's effects are limiting because it does nothing to address government spending. Instead, it has allowed for fiscal discipline and restraint to officially die in the Republican Party (if it didn't die beforehand) when Trump signed that Act. When the provisions are up for expiration in 2025, this will come back to haunt the Republicans while biting the American taxpayer in the rear. As we saw with the Kansas tax cut experiment, tax reform should not exacerbate government debt.


Conclusion
If I had to give the TCJA a grade, I would give it a B/B-. If the Republicans did not rush the process, they could have added a spending cuts bill in addition to the tax cut bill. This would have helped avoid more debt and would have allowed for greater fiscal discipline. Not only that, the tax cut reform could have been bolder, which would have meant greater macroeconomic effects. Many of the major provisions, most notably the individual income tax cuts, are going to sunset in 2025. If Congress can reevaluate the individual tax cuts and extend them into a more permanent status, that would be great both for the economy and taxpayers. I would also say there is something to be desired, such as addressing the employer-sponsored health insurance tax break or further tax code simplification. There are some provisions I wish were not in the TCJA, as is illustrated by the "Bad" section of this blog entry. Nevertheless, I am glad to see some concerted effort at tax reform. Now that it is law, we'll get to see what effects, both good and bad, the TCJA actually has.

Tuesday, January 2, 2018

Unemployment and Inflation: Can We Stop Using the Phillips Curve Already?

When a theory has been disproven, it typically gets discarded into the dustbin of history. Disprove that the Earth is at the center of the universe? You change your calculations accordingly. That should not just apply to science, but also to economics. However, some things die hard. As I was reminded by reading this recent article from the Council on Foreign Affairs and this November 2017 article from the Economist, the Phillips Curve is such an example.

What is the Phillips Curve? The Phillips Curve is an economic concept developed by A.W. Phillips that suggests that there is an inverse relationship between unemployment and wage inflation (see below). If unemployment goes down, wage inflation increases, and vice versa. Phillips conjectured that as the unemployment rate decreased, firms would be more likely to raise wages to attract scarce labor. Using the theory behind the Phillips curve means that fiscal or monetary policy could be used to adjust the economy to desirable labor market conditions.



In 1958, Phillips published his work on the unemployment and wage inflation rates in the U.K. from 1861 to 1957. This work led many economists to believe that there is indeed a solid, inverse relationship between unemployment and wage inflation. Although Phillips' work looked at wage inflation, economists applied it to general price inflation, which makes sense given that the prices that companies charge are closely related to wages. This economic framework is still believed to this day. Essentially, by creating inflation rate targets, policymakers now had a menu of contractionary and expansionary policy to adjust either for lower unemployment or lower inflation. Central banks across the world have used this logic to understand, forecast, and attempt to control inflation.

Something came along in the 1970s to disprove the Phillips curve: stagflation. Stagflation is when both unemployment and inflation get high. According to the assumptions of the Phillips Curve, stagflation should not have occurred, but that is precisely what happened in the United States during the 1970s. Looking at the Phillips curve from 1961 to 2015, we see a very tenuous inverse relationship between inflation and unemployment (see below). This relationship is even worse when considering that the economy performed better in low-inflation years than in high-inflation years. I know that correlations are typically not 100 percent, but the fact that there is no causation (nothing to say about correlation) should have invalidated the usage of this Curve in U.S. monetary policy.



While the simplified version of the Phillips Curve was disproven with the actual existence of stagflation, there have been a few alternative theories as to why the Phillips Curve isn't working "the way it should," modified Phillips curves, as well as analyses that include both short-term and long-term Phillips Curves (see below). Even Nobel Prize winning economist Milton Friedman argued that in the long-run, there is no correlation because employees will realize that their wealth increased nominally, and not in terms of real wealth (also see here and here).


I even have to question the short-run Phillips Curve. Why? The Director of the Philadelphia Federal Reserve co-authored a paper that was released last August (Dotsey et al., 2017). The conclusion of the Philadelphia Fed? Using the Phillips curve does not help predict inflation. At best, it might be somewhat helpful during an economic downturn, but even the authors concede that that assertion is far from conclusive (Dotsey et al., p. 27-28). The Minnesota Federal Reserve came to a similar conclusion in 2001 when it (Atkeson and Ohanian, 2001). The Federal Reserve Bank of San Francisco asked just this past October if the Phillips curve is flattening, and it doesn't look so good for the Phillips. It's not just in the United States where it has been put into question, but also in Europe. When looking at the minutes from the European Central Bank's July 2017 meeting, there is discussion on the disconnect between inflation and unemployment.

The U.S. Federal Reserve Bank's dual mandate is based on the assumption that the Phillips Curve is valid. The fact that the United States bases its monetary policy on a correlation that does not consistently exist should bother us. Right now, we have low unemployment and low inflation with a flat Phillips curve. Nevertheless, the Federal Reserve is making decisions based on a disproven economic theory. Instead of using invalidated economic model, how about the Fed tries making its decisions based on observable evidence?

Sunday, December 31, 2017

My Top Ten Blog Entries from 2017

2017 was a crazy year. The United States witnessed a first insane and unforgettable year with Donald Trump as the President of the United States and leader of the free world. It has been crazy enough where I even had some liberal friends saying how they missed President George Bush (43) because it has been that crazy. That does not even consider such international events as North Korea escalating its nuclear arms program, Catalonia seceding from Spain, or Emmanuel Macron being elected as President of France. As politics both in the United States and abroad become more polarized, I would like to take a brief moment to not only thank you, the viewer, for not only continuing to read the work that I publish, but also to take a look at some of the highlights that I published in 2017. In chronological order, here they are:

  1. Building a Wall on the U.S.-Mexican Border. This was one of President Trump's infamous campaign promises. After taking a look at the proposal, there was no public policy basis for constructing it. 
  2. Women Clergy in Orthodox Judaism. Politics are always intriguing to watch, but all the more so when adding religion into the mix. For those who are Jewish or who are even into Jewish religious politics, this topic has been one that has been transforming the Orthodox Jewish world. The long and short of my opinion? Orthodox Jewish women should be allowed to be members of the clergy. 
  3. Mandated Menstrual Leave in Italy. This one was more obscure than some of the others I have written, but it was interesting to take both the social and economic arguments in account before concluding that mandating menstrual leave would do Italy more harm than good. 
  4. The Opioid Crisis and Government Involvement. The interesting part of being a consequentialist libertarian who shows his side of pragmatism is to acknowledge when there actually a role for government to play in mitigating a crisis. Looking at what is going on with opioids in the United States, this is one of those times.
  5. Politeness versus Political Correctness. As much as proponents of political correctness would like to keep conflating politeness with political correctness, I can tell you that there is a world of difference between the two, which is why I prefer politeness over political correctness. 
  6. 15 Reasons to Dislike Obamacare. If there is any blog entry this year I would consider a magnum opus, this would be it. Critics of Obamacare, including myself, were able to point out the problems that Obamacare was going to face even before it was enacted, and it looks like the critics were right.
  7. Charlottesville Protest and White Supremacy. This blog entry took a look at hate crimes in the United States, the prevalence of the Far Right in the United States, the fighting words doctrine with regards to the First Amendment, and how to respond to hate. 
  8. Celebrating Rosh Hashanah When Life Is Anything But Ideal. On a personal level, this year was tough for me. I wrote this piece to help those who are going through a rough time navigate the Jewish High Holidays. 
  9. #MeToo and Sexual Assault. This one I found thought-provoking because I worked my way through the nuances of the sexual assault debate that go beyond tawdry stereotypes or simply ignoring the prevalence of sexual assault. 
  10. Wedding Cake Supreme Court Case. Tricky cases make for bad law. The Supreme Court case about whether a same-sex couple can be refused the service of having a wedding cake baked for them or if the baker should be coerced into baking it. As I pointed out, there are no upsides to a broad ruling from the Supreme Court. If the baker wins, it could lead to discrimination against an entire class of people. If the Colorado Rights Commission wins, it could mean forcing people to provide goods and services against their conscience. My take on it was that the Supreme Court should side with the baker, but keep the scope of the ruling as narrow as possible. 

Tuesday, December 26, 2017

Congress Lowering Alcohol Taxes: Should We Drink to That?

It looks like the Republicans finally passed the Tax Cuts and Jobs Act (TCJA) and made it into law. It has been a topic of much controversy over the past few weeks I did cover the House's initial draft of the Tax Cuts and Jobs Act last month, and I hope to cover the implications of the final version of the TCJA in a future blog entry. However, there is a provision in the TCJA that I would like to discuss right now: lowering the federal excise tax on alcohol. The current excise tax varies by type of alcoholic drink, but the taxes are going to be lowered across the board, which makes the alcohol production industry very happy with the news. The estimated annual savings for brewers is $130 million. There are those who are against the provision because of the public health ramifications behind lowering the alcohol tax. Should we celebrate this tax reduction with a drink or not?

A bit of background on the tax. An excise tax is an indirect tax charged on the sale of a particular good, in this case, alcohol. The argument against lowering the tax is that by lowering the overall price vis-à-vis the excise tax would encourage more alcohol consumption. This increased consumption would endanger the health and wellbeing of the consumer and potentially through related fatalities.  The Brookings Institution estimated that the Senate's tax could result in up to an additional 1,500 alcohol-related deaths per annum (Looney, 2017), although their is skepticism for these figures. One study estimates the social cost of excessive alcohol consumption at $250 billion per annum (Naimi et al., 2017), or $2.10 per drink. This sounds like a slam-dunk case for increasing the alcohol excise tax, but here are a few reasons to remain skeptical:
  • Price elasticity. This is the fancy economic term to describe how people respond to the change of a price of a good or service. If the price changes and there is not a huge change in consumption, that is called an inelastic good. If the reverse is the case, then it is elastic. In the case of the demand for alcohol, it is considered a relatively inelastic good. Looking at a meta-analysis from Health Economics Review, the average price elasticity is -0.5 (Nelson, 2013). Another meta-analysis confirms these findings (Gallet, 2007). The elasticity in the United States is slightly more inelastic than in other developed countries, but the point is that in comparison to other goods, peoples' consumption patterns are not as responsive to an alcohol tax than it would be on other goods.  
  • Seemingly a poorly targeted tax. Another issue is that if an alcohol tax is supposed to function like a sin tax, it is a poorly targeted tax. How so? The purpose of using the alcohol tax as a public health measure is that it is supposed to deter those with a drinking problem from purchasing more alcohol. The issue comes into play because it is impossible to differentiate between abusers of alcohol and moderate drinkers at the point of sale. Yes, making it more difficult for heavy drinkers to purchase alcohol comes with a benefit. However, making it more difficult for moderate drinkers to purchase alcohol comes at a cost. I say this because there is some evidence showing that moderate drinkers derive benefit from drinking. Moderate drinkers have an edge in emotional health, according to Gallup. Moderate drinking also has the potential to reduce the risk of stroke, diabetes, and heart attacks (e.g., Xi et al., 2017). As I will point out below, I have reason to be skeptical about this point of skepticism. 
  • Questionable effects on drunk driving rates. The Urban Institute and Brookings Institution recently released a study through their left-of-center Tax Policy Center, and found that alcohol excise taxes do not have a long-term effect on drunk-driving accidents (McClelland and Iselin, 2017). On the other hand, one study shows that since the federal government increased the alcohol tax in 1991, it lowered injury deaths by 4.7 percent, or 7,000 people (Cook and Durrance, 2012). 

Closing Thoughts: Even though I have some skepticism about the advantages of an alcohol tax, they do not necessarily withstand scrutiny. For one, the health benefits for moderate drinkers are not as conclusive as other health findings (e.g., smoking is bad for your health). One could argue that the elasticity is not so low that a higher tax could have some positive effects. Plus, it might be less of an issue since the regressivity of the alcohol tax is going to primarily affect the heaviest of drinkers. (Vandenberg and Sharma, 2016; Naimi et al., 2016; Daley et al., 2012). Another way of framing it is that if the alcohol tax increases, the heavy drinkers would feel the brunt of the tax increase, not moderate drinkers.

With that being said, I am convinced that given what I have seen, a federal alcohol excise tax should exist. Sometimes, we have to look at public policy through the lens of "the least worst option." As the libertarian Cato Institute points out in a 2009 article on alcohol taxes, alcohol taxes are more economically efficient than directly regulating or fining drunk drivers or those who abuse alcohol. In addition to the efficiency, I would argue that an alcohol tax is preferable because an excise tax is an indirect tax, as opposed to a direct tax or a more intrusive regulation. The benefit of a federal alcohol tax (as opposed to a state-level excise tax) is that it would be more difficult for consumers to buy across national borders than state borders.

What will the health effects of the latest tax cut be? I don't think that it will be as large as opponents think. When looking at the TCJA itself and viewing the cost of alcohol taxes on a retail level, alcohol taxes would only decrease 1¢ per beer and less than $2 per fifth of liquor. I don't need a PhD in Economics to remain skeptical of the magnitude of additional health costs of an alcohol tax cut. Even so, that does not negate my assertion that an excise tax on alcohol should exist. The trickier part is determining what that amount should be in order to balance the health concerns with the economic ones. This should not be the end of the alcohol tax debate, but I don't think the tax cut is going to be cause of a major uptick in alcohol-related deaths.

Thursday, December 14, 2017

Chanukah Gelt: The Significance of Giving Money on Chanukah

To quote Adam Sandler, "Chanukah is the Festival of Lights. Instead of one day of presents, we have eight crazy nights." In American culture, there is this pervasive myth that during Chanukah, Jewish children receive an awesome present each night. Giving Chanukah presents was not a practice until the late nineteenth century when Christmas became a federal holiday in the 1870s. The trend of exchanging Chanukah gifts did not really take off until the 1950s. The idea of Chanukah gift exchange is both modern and in response to Christmas so that Jews could better assimilate and not feel left out during the holiday season.

Before this Chanukah gift-giving extravaganza, there was a precursor: Chanukah gelt (חנוכה געלט). Chanukah gelt refers to money given to children on Chanukah. Looking at the history of the practice, giving money for Chanukah dates back to the sixteenth century. The practice itself came in a couple of variants. One was the Italian and Sephardic practice of money to purchase clothes for poor students studying Torah. In eastern Europe, it was either done to do outreach for Jews in more remote areas or to fundraise to keep yeshivas afloat. Another variant is that is a time to give tzedakah (charity). This is particularly the case when reading the Kitzur Shulchan Aruch (139:1), where it states that one is to give lots of tzedakah during Chanukah because the days of Chanukah are auspicious to correcting the flaws of the soul. What is it about Chanukah that allows for tzedakah to have such power? At least when looking at the time between Rosh Hashanah and Yom Kippur, giving tzedakah is supposed to avert the Divine decree (assuming you read Unataneh Tokef literally, which I don't). So what is the connection between money and Chanukah? Perhaps looking at explanations behind the practice could help:

  1. In Hebrew, the word Chanukah (חנכה) has the same three-letter root as "education" (חינוך). After the Greeks were defeated, the Jews had to reeducate their people, especially the children. Providing education takes funding. Giving money is to remind ourselves that children are an investment in the future of the Jewish people (Sifsei Chaim). This would explain why younger individuals were the typical recipients of the original variants of Chanukah gelt
  2. One of the major motifs of Chanukah is the cultural clash between the Greek hedonism and Jewish spirituality. With this motif in mind, the Greeks treated wealth more as an ends than anything else. In Judaism, we treat it as a means. We remind ourselves that with so many other things, we have the power to do good or evil with money. We have the choice as to whether to elevate something as seemingly mundane as money to something holier. By giving money on Chanukah, we illustrate what sort of good we can do when we give [money].   
  3. The Talmud (Shabbat 22a) discusses a case where a poor person does not have enough money to buy Chanukah candles and Kiddush wine for Shabbat. The candles took precedence over Shabbat, interestingly enough. To make sure this hypothetical did not turn into reality, one is to give enough money to make sure all Jews have enough money for both (Magen Avraham). This argument falls short with regards to connecting money to Chanukah. The reason for that is that giving money to make sure there is enough to celebrate holidays is not unique to Chanukah. Plus, the practice of giving money on Chanukah started centuries after this Talmudic debate. 
  4. R. Josh Flug suggests that after the war, the winners would distribute the loot to the soldiers and the poor. Giving gelt can be seen both as a commemoration of winning the war and helping those affected by the war.
  5. After the war between the Maccabees and the Greeks, the Hasmonean dynasty minted coins in 142 BCE with an image of a menorah. This minting was meant to represent a high point of Jewish freedom in the Second Temple era.
How do we tie these ideas together to get a clear picture behind the meaning of giving money on Chanukah? In the Chanukah story, we are taught that the ancient Greeks were obsessed with aesthetics. It was a "thinking culture that appreciated beauty." The issue was not with beauty so much as it was the extent to which it was admired. Having the physical valued at that extreme resulted in hedonism.

When applied to the idea of money, that sort of thinking typically results in splurging on material items. The Lubavitcher Rebbe (Likutei Sichot) believed that when the Greeks came into the land of Israel, it was not an issue of taking the possessions so much as it was infusing their values with the possessions so the possessions could be used for egotistical and ungodly purposes.

Money is a medium of exchanging for goods and services. It is a vital part of an economy. With Judaism, it is not about amassing ridiculous amounts of wealth for its own sake. At the same time, a Jewish live does not mean living a monastic or aesthetic life. Money is a means to an end, and as these explanations show, we are to transcend ourselves by using that G-d-given free will to disperse that money.

When we interact with something such as pervasive as money, we have to ask ourselves what our potential is. We can use Chanukah money to help Torah scholars, children, or the poor. We can use the practice of giving Chanukah gelt as a means of making us more generous or more grateful people. Chanukah teaches a lot about potential and what it means to be the best version of ourselves. A ragtag team of soldiers took their potential and fought against a well-trained army against all odds. While G-d gave us potential by being "created in His Image," potential goes to waste if it is not acted upon. To paraphrase R. Jonathan Sacks, we will be remembered for how we give, not on how we spend or take. We have to be willing to put our money where our mouth is if we are to actualize our potential. The Maccabees lived their lives not just in dedication, but also in giving.

A few questions to ponder as you give Chanukah gelt this year: Do we want to live according to our values?  Does being free simply mean doing whatever you feel like or does it mean taking that free will and transcending oneself? Do we want to make an impact on the world by what we give? Ultimately, can we put our money where our mouth is so we can not just "talk the talk" but also "walk the walk?"

Monday, December 11, 2017

Do We Really Need to Drill for Oil at the Arctic National Wildlife Refuge (ANWR)?

The dichotomous argument between economy and environment has found itself in many places, but I was not exactly expecting to find it in the Senate's tax bill. The Senate's version of the tax bill has many provisions in it, including one to start drilling in the Arctic National Wildlife Refuge (ANWR). There are many reasons the Republicans could have snuck this provision, but one is presumedly to get Senator Lisa Murkowski (R-AK) to support the tax bill. The debate about ANWR is nothing new. It has been ongoing for 40 years. You can read a 1993 assessment from the Government Accountability Office (GAO) here to get a sense of how long ANWR has been a political controversy. What is new is that this is the best chance to date that drilling will take place in ANWR. So here is what I would like to ask: should Congress go ahead with approving drilling in ANWR?

The back and forth on the topic goes something like this. Proponents of drilling opine that we only need a small portion of the land in ANWR to drill. Since the environmental impact would be minimal and the economic benefits substantial, there isn't much reason to be concerned. Opponents opine that there would still be considerable environmental damage, and that it's not worth taking the risk to ruin a pristine place of nature. Let's ask ourselves a few questions to help frame the debate:

  • How much retrievable oil is in ANWR? In 1998, the Department of Interior estimated that there is anywhere between 5.7 billion and 16 billion barrels of oil in ANWR. In 2013, the U.S. Geological Society updated their estimates to 10.4 barrels. The Bureau of Ocean Management made an estimation in 2014 that it would be about 7 billion barrels. To put this figure into perspective, the U.S. imported 2.9 billion barrels of crude oil in 2016. This should give us serious reservations about the myth of how ANWR is going to solve energy dependency woes.
  • How much economic benefit would be derived? According to an economic study from two Yale economists (Kotchen and Burger, 2007), the oil was estimated at a value of $354 billion at $53 a barrel, which is not too far from today's barrel prices (see below). A December 2015 study from the Institute for Energy Research (IER) puts the economic benefit at $39 billion a year (p. 9) while ultimately adding 77,300 jobs to the economy (p. 10).
Source: NASDAQ
  • How much government revenue would leasing ANWR earn? According to a 2012 Congressional Budget Office (CBO) report, about $10 billion over a decade for the federal government. This does not count the government's gross receipts from royalties, which could vary from $2.5 billion to $25 billion. Alaska is also expected to gain up to $8 billion in annual state tax revenues (IER, p. 13).
  • How many people visit ANWR every year? I ask this because I want to know how many people appreciate the pristine nature of ANWR. According to the U.S. Fish and Wildlife Service, there are about 1,200 to 1,500 visitors each year. To put this number in perspective, over 4 million visited Yellowstone in 2016 and over 500,000 visited Redwood National Forest. 
  • What is the potential environmental impact? I'm not here to say that oil drilling is without risk. The BP oil spill acts as a reminder of that notion. There has definitely been environmental concern expressed over Congress' recent decision (also see here). Also, the U.S. Fish and Wildlife Service stated that the ecological diversity in ANWR is unparalleled, which presents additional challenges. That being said, we should always measure risk against reward. Technological developments in seismic computational capabilities make it easier to limit the impact and acreage used to drill in ANWR. 
  • How will this impact the caribou? One of the larger environmental concerns is the impact that drilling in ANWR would have on caribou. What can give us some insight is how the caribou population has been affected since drilling took place in Prudhoe Bay. In 1975, there were just 5,000 caribou. The population peaked to 70,000 in 2010, and then declined to 50,000 since 2013 primarily due to reasons unrelated to drilling. If the past is an indication of anything, it means that although the porcupine caribou are largely located in the proposed land for ANWR drilling, it should not have major effects on the caribou population. 
  • Should we still drill in ANWR? The short answer to this question is "no." This is not because I think the environmental costs outweigh the economic benefits. It is because we don't really need to drill. Ever since the United States used hydraulic fracturing (fracking), we have had such a fossil fuel supply glut that the United States went from being a net importer to a net exporter of oil (see DOE chart below). It is not just an issue of net exports, but also prices. As the Congressional Research Service (CRS) brought up in its 2015 report on ANWR (CRS, p. 11), lower oil prices make oil exploration and drilling less economically feasible. Oil prices have not increased greatly since (see NASDAQ chart above), which means there is not much economic incentive for oil companies to drill in ANWR. This is something to consider given that the average cost of drilling in Alaska is 31 times higher than it is in the other 48 continental states (CRS, p. 15).




Bottom Line: If you would have asked me a decade ago if we should drill in ANWR, I would have said "yes." Now, I don't see the urgency since we have more than plenty of oil. As we run out of retrievable reserves, I would revisit the issue. But as it stands, I don't think our response should be "Drill, baby drill!"