Monday, August 21, 2017

Privatizing the U.S. Postal Service Wouldn't Make Us Go Postal

Sometimes it is nice to go back to previous blog entries and see if you change your mind a few years later. One such blog entry of mine that comes to mind is one I wrote about six years ago on the United States Postal Service. My conclusion was back then was that the USPS should be privatized. However, I recently came across this article from the conservative news and political commentary outlet Townhall, of all places, and I thought I would take another look at the state of the USPS.

Looking at their FY2016 financial results, whether the USPS ran a profit or loss depends on how you want to define profit. Standard practice is to define profit as "revenue minus cost [expenses]." By that standard definition, the USPS ran a loss of $5.6 billion. The USPS uses another metric of financial health known as controllable income. Controllable income is when one identifies the expenses that unit-level management controls and subtracts that figure from the revenue. In the case of the USPS, facets out of unit-level control are retirement benefits and workman's compensation. When filtering out those costs, the USPS' controllable income was a gain of $610 million for FY2016. And yes, using controllable income as a measurement is a legit practice under Generally Accepted Accounting Principles (GAAP).

How can we explain this discrepancy in profit figures? If you remove the retirement benefits, the USPS would be running at a profit, hence the controllable income measurement. The good news is that the USPS has found a way to earn more money delivering mail than it costs the USPS to deliver it. However, it's not like retirement benefits can be isolated from financial reality. They are still a financial concern of the USPS. Before Congress passed the Postal Accountability and Enhancement Act in 2006, retirement benefits were paid under a pay-as-you-go system, much like Social Security. This changed in 2006 when the Act mandated that the USPS pre-fund its benefit obligations. It might sound like a case of solving the problem with repealing a fiscally unsound law. But isn't it more fiscally unsound to provide lavish benefits that you cannot afford, even with being tax-exempt, having monopolistic power of first-class and standard mail, being exempt from zoning laws, and borrowing money from the Treasury at subsidized interest rates [for which they already maxed out their credit line] (Shapiro, 2015)? This is all the more the case considering that the USPS provides higher worker compensation than its private-sector counterparts (ibid.). No wonder the USPS lost $51 billion between 2007 and 2014!

Not only is there a lack of flexibility on how it handles its retirement benefits, but the USPS has shown inflexibility that is not typical in the private sector. Two examples: there has been pushback on facility consolidation and eliminating Saturday service. Also, the USPS has a monopoly on certain classes of mail. I have complained about monopolies before because they cause inefficiency and create less welfare for the people (see here, here, and here). Even the Government Accountability Office (GAO) recognizes that the USPS needs to stop its monopolistic ways. The USPS is incapable of reaching its goals for on-time delivery for its First Class mail. First Class mail volume dropped by 40 percent from its 2000 peak in no small part due to the Internet and paying bills online. Advertisements accounts of 60 percent of current mail volume, which asks additional questions about the USPS' use and help make us realize that monopolistic protection won't save the USPS from its decline.

The USPS is in need of reform, so what to do about it? Privatization, which is something the centrist Brookings Institution agrees with (at least in part). We have seen privatization of postal services in some other countries, including Japan, the United Kingdom, and the European Union. Since I am a bit on a time crunch, I'll paste a list from this Cato Institute study that illustrates examples of when postal service privatization worked in other countries:

We have seen other countries successfully privatize their postal system in response to declining mail volume. Creating an initial public offer (IPO) to put it on the stock market could generate $40B for taxpayers [in 2011 dollars]. I know that the USPS is one of the few government services that is explicitly mentioned in the Constitution (Article I, Section 8), but based on what has happened in other countries, relinquishing government control and opening the postal market to competition could very well be the way to save it.

Thursday, August 17, 2017

How to Respond to the Charlottesville Attack and White Supremacists

All hell broke loose in Charlottesville, Virginia this past weekend with the Unite the Right rally. The Unite the Right rally was a Far-Right gathering of white supremacists, neo-Nazis, KKK members, and neo-Confederates. Their reason to rally? To protest the removal of Confederate monuments and memorials. The weekend started when some protestors walked around the University of Virginia campus screaming such racist epitaphs as "Jews will not replace us." The tension continued on Saturday with hundreds of protestors at Emancipation Park, as well as hundreds of counter-protestors. Violent clashes ensued. One of the protestors even plowed his car into a crowd of counter-protestors, thereby causing the death of one and injuring 19 others. As a result of the violence in Charlottesville, many people have used it to illustrate the rise of the Far Right (or "alt Right") in the United States. One of the running theories is that the Trump campaign and subsequent presidency energized white supremacists and other hate groups. I want to first see how bad the hate is in the country, ask whether or not we should stifle the haters' freedoms, and finally ask how to proceed from here.

How Bad Is The Hate? 
I ask how prevalent crimes against minorities has been because I want to see if media sensationalism blows it out of proportion, if the voice of racists (who are a small minority) is being amplified in ways that it was not previously, or if there is legitimate and significant increase in racism and bigotry. Measuring how much hate is out there is difficult because it's not like we have a unit of measurement for it like we do with gallons, miles, get the idea. We can ask how much this hate is causing people to murder. There's a good start, and the Cato Institute illustriously did that in response to the Charlottesville attack (see here and here). How many people have died as a result of right-winged terrorist attacks similar to Charlottesville since 1992? 292 people, according to the Cato Institute (see below). An additional 992 were injured. The odds of getting killed in a terrorist attack perpetrated by a right-wing extremist is about 1 in 33 million. Injury in such an attack was 1 in 7.6 million. The odds of getting struck by lightning? Only 1 in 161,856. The odds of getting killed in such a terrorist attack perpetrated by someone on the Far Right is very low.   

Source: Cato Institute 

Even with these terrorist attacks being rare, the government is nevertheless worried about these Far Right elements. In a 2014 survey of law enforcement officers commissioned for the Department of Justice and conducted by Duke University, it was found that nearly three-quarters of law enforcement believe that "anti-government violent extremists" present the greatest domestic threat. An April 2017 report from the Government Accountability Office concluded that far-right extremists pose the greatest domestic threat. For both of these reports, the main domestic threat post-9-11 was not radical Islamists, but far-Right extremists.

Another metric to look at would be the rate of hate crimes. As of date, the FBI has reported its Hate Crime Statistics through the year 2015. Since the federal government is not set up to both collect and distribute hate crime data on a weekly basis, 2015 data is the most recent nationwide data we have. Below is the number of incidents by religion (graphs courtesy of CNN). 

And here it is by race....

Nationwide data is not collected and reported as frequently as it should, and most cities do not release as good of data. However, there are some cities that gives us an idea. Take New York City as an example, and you'll see that the two main targets of hate crimes in recent years are the Jews, followed by gay people. New York City has seen hate crimes against Jews double in 2017 when compared to the previous year. In Chicago, the three main victims for 2016 were LGBT, black, and Jews. Hate crimes in Chicago were higher in 2016 than in previous years this decade. In Washington, DC and Los Angeles, crimes against LGBT individuals has caused much of the uptick in hate crimes from 2015 to 2016.

When looking at numbers grow, we also have to keep population growth in mind. In order to account for population growth, and thus measure the likelihood of a hate crime, we need to look at the rate of hate crimes. Nationwide, the rate of hate crimes has not particularly risen between 2004 and 2015 (Bureau of Justice Statistics). Rates are important when looking at hate crimes when comparing certain demographics because certain groups (e.g., Jews, LGBT) are smaller than others (e.g., African-American community). That explains how the African-American community has more hate crimes perpetrated against it, but Jews are 3.5 times more likely to be a victim of a hate crime than an African-American (or 1.5 times more likely than a Muslim).

We could also use survey results to approximate. Let's take anti-Semitism as an example. According to the Anti-Defamation League (ADL), only 9 percent of Americans in 2014 held anti-Semitic views. In 2015, that went up to 10 percent, and by 2016, that increased to 14 percent. The problem with such survey results is that either there is subjectivity behind developing survey questions to measure it or there are at least some who wouldn't admit it publicly.

Then there is the Southern Poverty Law Center, an organization that monitors hate groups. The SPLC tracked the number of bias incidents post-election. Even by the SPLC's numbers, the commotion calmed down shortly after the election, thereby somewhat refuting the notion that Trump's election caused such an upsurge in hate crimes.

To summarize this sub-section, overt terrorist attacks are extremely rare. As for hate crime data, we only have nationwide data up until 2015. Given when the FBI releases its data, we'll have to wait until the end of 2018 to even begin to know the sort of effects Trump's election has had on crime levels.

Should We Cut Off These Fascists' Free Speech?
It is tempting to stifle or censor the fascist, racist, anti-Semitic, homophobic scum. Their speech is offensive on more levels than one. So why do I stick up for their general freedom to speech? It sure isn't because I agree with what they say. Quite the opposite! The reason is because free speech is very important. Free speech helps bring about change. It is necessary for a pluralistic democracy and a well-functioning intellectual marketplace that allows for people to be better informed.

A defense of the protestors' free speech assumes that this was a peaceful protest, which it was not. They were screaming such epithet as "the Jews will not replace us." Even the racist chants got personal when individuals were calling black people "niggers" or gay people "faggots." Not only is this behavior 100 percent despicable, it is arguably unconstitutional. As much as free speech is generally protected in the United States, speech under the "fighting words" doctrine is not. Fighting words covers written or spoken speech intended to incite hatred or violence from the target. In a 9-0 decision, the Supreme Court decided that "fighting words" are not protected under the Constitution (Chaplinsky v. New Hampshire, 1942) because they add nothing to public discourse and "incite an immediate breach of the peace." The "fighting words" doctrine continued to be upheld, but was narrowed. For instance, burning a flag while verbally abusing the flag is not against the "fighting words" doctrine because offensiveness is not enough (Street v. New York). Wearing a jacket that said "fuck the draft" was not a violation of the "fighting words" doctrine because it did not include a personal epithet (Cohen v. California). Based on Supreme Court precedent, it is considered "fighting words if 1) it is an insulting epithet, 2) it is uttered to an individual, and 3) it is likely to provoke someone to retaliate. The speech of the protestors qualify under the "fighting words" doctrine, which would mean their racists epithets are not protected.

Even if you go after these racists and their free speech, it is still problematic. You can only arrest someone after they have uttered the "fighting words" or incited the violence. Arresting beforehand solely on the basis of their beliefs is downright Orwellian. Also, let's remember that free speech is indivisible. If you go after their free speech, the mechanisms are set in place to censor any dissident of the government. For those who are Left-of-center or are simply anti-Trump, let me ask you this: given how Trump has responded to the Charlottesville attack and given that you view his presence in the White House as an emboldenment of these racists, why in the world would you give him that power? Wouldn't Trump be more likely to censor the likes of CNN and the New York Times than he would the KKK or neo-Nazis? Even if carried out on the state level, most states are Republican, which means they would be more likely to silence Democrats and other dissidents. But this illustrates why we should not be for silencing free speech: because it stifles progress.

One other point: having the freedom to do something means taking responsibility for your actions. If you say something, you have to live with the consequences. If you are at a neo-Nazi rally spewing racist BS and your incitement causes someone to punch you in the mouth, don't be surprised. If you come into work on Monday and lose your job because your boss saw on social media that you attended that rally the previously weekend (like this schmuck did), you have to live with those foreseeable consequences. Our actions come with consequences, both good and bad, and the Constitution doesn't protect us from bad consequences.

How Should We Respond?
If quashing First Amendment rights isn't the way to go, what is? This one is much trickier to answer because it depends, at least in part, on your political views and worldview. For example, as a libertarian, I could argue that freer markets help solve the problem of racism (see here and here for articles on the topic).

One idea outside of political ideology is to call out their stupid and baseless arguments by presenting better, more intelligent arguments (not a difficult task, but the fact we're even having this conversation tells me that it might be difficult for some). And I'm not just talking about neo-Confederates. The fact that the Confederacy lost over 150 years ago is something the neo-Confederates really need to accept. Other countries have. Germany doesn't pay homage to the Nazis. Statues of Lenin and Stalin have been knocked down. The Chinese don't honor the Guomindang (国民党) anymore. The South isn't going to rise again. Get over it!

But it's not just that or that these people account for a very small percentage of the population and have little power, which is something we should keep in mind. It's the whole bigotry thing. Racism, anti-Semitism, homophobia, these prejudices are based on ignorance and fearing that which one does not understand. When you get to know people who are different than you, you realize that they have dreams, hopes, fears, desires, and problems, just like you have. They are human, just like you. Yes, people are different and have unique experiences, but we all have that essential humanity. Let's not forget that moving forward.

We should fight hate when it comes in our lives. The Southern Poverty Law Center provides a good guide on how to do that, but the point here is that we should not tolerate evil in our midst. I brought this up seven years ago, but if we are going to love love, we have to hate hate. Paradoxical, I know, but allowing evil (and I mean actual evil, and not "I think you're evil simply because you disagree with me") in our midst is unacceptable if we're going to uphold the values our Founding Fathers held dear.

While we should hate hate because how evil hate is, our general approach should be that of unity. We should reach across the aisle, understand where other individuals are coming from. In a country of extreme polarization, that has become a lost art. We need to be willing to have a dialogue with others instead of a screaming match. Even when we're done with the dialogue, we need to remember that there is another individual on the other end, whether that conversation is in person or online. Being able to treat others with dignity and respect is what makes us human, and by doing so, we can work on building a better tomorrow. 

Monday, August 14, 2017

How Gentrification Is Rare and Comes With Its Own Benefits

When things get worn-down, we tend to replace them. If you have an air conditioning unit that is 30 years old and either doesn't emit cold air or breaks down half of the time, you would think that it is time to replace it. There are many things that get worn-down by usage: tools, musical instruments, appliances, furniture. The same thing happens with buildings. There is a point where a structure is too old to properly function. When you replace an appliance or piece of furniture, it is considered an improvement in life, an upgrade. When offices, apartments, or other buildings get replaced, particularly in urban areas, it comes with the politically charged term of "gentrification."

Gentrification happens when a neighborhood with relatively low-cost housing and occupied by lower-income households experiences an influx of higher-income buyers. These new entrants buy up the housing and rebuilds or refurbishes it, which subsequently pushes up housing prices in that neighborhood. On the one hand, this improves the overall quality of the neighborhood, as I'll explore shortly. On the other hand, it makes the neighborhood more expensive for those who had been living there prior to the gentrification. Those who have an issue with gentrification believe that because gentrification results in one less affordable neighborhood, the individual has to find a new, affordable neighbor in which to live. This means that more lower-income households have fewer places to live, which leads to greater concentration of poverty, or so goes the criticism. Now is the time where we take a look to see how well these criticisms align with the reality of the situation.

Caveat: The research on gentrification comes with some limitations. For one, there is not necessarily an agreement on basics, such as what is gentrification, how to measure it, or what constitutes as a "significant" effect. Most of the available data is from the 1980s and 1990s (although some studies cover the 2000s). Although there are certain limitations, we can still draw some conclusions based on the currently available data. 

Prevalence of Gentrification
A more nuanced response is that the extent of gentrification varies from city to city, and can be dependent on how much housing costs outpace wage growth, as the Penn State's Wharton School illustrates in its primer on gentrification. In 2013, the Federal Reserve Bank of Cleveland found that for most cities, less than a third of their low-income areas were gentrified in the 2000s. Only five Metropolitan Statistical Areas (MSA) experienced a gentrification rate a greater than a third: Boston, Seattle, New York City, San Francisco, and Washington DC. In three-quarters of the 55 MSAs, less than 10 percent of neighborhoods experiences gentrification. Another fun fact is that the gentrification is relatively limited, geographically speaking. From 1970 to 2010, 46 percent of gentrification occurred in three U.S. cities: Chicago, New York, and Washington, DC (Cortright and Mahmouddi, 2014). In short, gentrification is on the whole relatively rare.

Does Gentrification Displace Low-Income Residents? 
The intuition behind thinking gentrification is bad for lower-income residents is that higher prices make living in the neighborhood less affordable, thereby crowding out the lower-income residents from their neighborhood, which ultimately creates neighborhoods with higher concentrations of poverty. This criticism is the most important to address because it is the most common of criticisms.

The short answer is that gentrification is not a major cause of displacement. A study from the Philadelphia Federal Reserve concluded that displacement is no more likely to take place in a gentrifying neighborhood than a non-gentrifying one. Other studies confirm the Philadelphia Fed's findings (Hyra, 2016; Freeman et al., 2015Ellen and O'Reagan, 2011McKinnish et al., 2008Vigdor, 2002). Some even go as far as saying that gentrification is less likely to occur (McKinnish et al., 2010Freeman and Braconi, 2004). In spite of anecdotal evidence about gentrification, there is intuition why original residents would stay in the gentrified neighborhood, whether that is due to new community amenities, renewed neighborhood pride, or benefit from reduced crime rates (Brown, 2014, p. 9).

Even for those who left the neighborhood, another interesting finding was that the neighborhood change was primarily voluntary exiting, not economic displacement (Ellen and O'Reagan, 2011). That same study also concluded that the incomes of those moving in versus those moving out are not significantly different (ibid.). This leads me to the Federal Reserve Bank of San Francisco's literature review (Zuk et al., 2015). It finds that stability and staying in the same neighborhood can actually be a form of imprisonment. 70 percent of families who were living in impoverished neighborhoods in the 1970s are still living there today. This would imply that the primary issue is not gentrification, but rather that there are more high-poverty neighborhoods than there were in 1970 (see below).

Pros of Gentrification
Gentrification is a sign of economic growth. Neighborhoods become less rundown and dilapidated. Construction jobs and the subsequent business conducted in the new buildings spur business. This creates better cash flow for businesses, which makes investments more desirable. Here is a short list of benefits of gentrification:

Improved Income and Financial Health: Gentrification can boost the income for lower-income residents, as well as raise their level of housing satisfaction (Dastrup et al., 2015Ellen and O'Reagan, 2011McKinnish et al., 2010). The McKinnish study from 2010 actually found that African-Americans with a high school degree earned a disproportionate amount of income gains as a result of gentrification. Generally speaking, financial health improved with gentrification. The Federal Reserve Bank of Cleveland found that financial health improves with gentrification (also see Ding et al., 2015). As a result of gentrification, original residents experience improved financial health in comparison to original residents of non-gentrifying residents.

Improved Employment: Gentrification is supposed to improve employment opportunities in the neighborhood both because gentrification attracts more educated individuals and because spurs local hiring. The findings from the Federal Reserve Bank of Cleveland confirm this notion, as does the Federal Reserve Bank of St. Louis (also see Meltzer and Ghorbani, 2017).

Diversity: One study showed that gentrifying neighborhoods are more diverse than non-gentrifying neighborhoods (Freeman, 2009). The increased diversity leads to improved social capital (Ikeda, 2004), which enhances skills and productivity.

Higher Property Values: Part of gentrification is that it raises property values (Levy et al., 2006). Larger property values typically mean a larger tax base, which can fund schools and improve neighborhood services (Levy et al., 2011).

Less crime?: While there is some evidence that gentrification leads to less crime (e.g., Smith, 2012), it is still difficult to determine the extent to which gentrification contributed to lower crime rates.

Conclusion: Conversation About Affordable Housing
When looking at the academic literature, the prevailing conclusion is that gentrification is rare and that the benefits typically outweigh the costs. Gentrification not only infrequently comes with displacement, it also provides economic benefits for the lower-income original residents. As the Brookings Institution points out in its white paper on gentrification, many of the factors causing increased gentrification since the 1950s are economic: rapid urban job growth, increased traffic congestion, demographic changes, and lengthier commutes. Opportunistic investors pick up on the limited housing supply and buy new land at a fraction of the cost. These supply-side factors play a role in increased housing costs. However, this is not the entire story.

Government policy comes in to exacerbate the situation. Land-use regulations are one example. With zoning regulations that either limit housing density, building height, or require a minimum number of units, housing supply ends up being constricted, thereby making housing more expensive. The mortgage interest deduction is another great example since it is one of the largest tax cuts in the United States. The mortgage interest deduction was supposed to increase home ownership, but it only incentivized buying more expensive homes and worsened income inequality. Then there's the Department of Housing and Urban Development (HUD) and its attempt to provide more affordable housing, which I can tell you is not flattering. Rent control is another infamous example that has caused housing in such cities as New York and San Francisco to skyrocket. If we are going to have an honest conversation about the increased costs of housing, we need to take the conversation beyond gentrification because at worst, gentrification is a symptom (e.g., lower crime has led to more gentrification [Ellen et al., 2017]), not a cause of higher housing prices. Otherwise, housing will continue to remain expensive and lower-income people will disproportionately feel the brunt of a bad combination of market forces and adverse government policy.

Thursday, August 10, 2017

Trump's Cutting Legal Immigration In Half Would Not RAISE The U.S' Standard of Life

While the attempt to "repeal and replace" Obamacare seems to have little success, Trump has been making more waves in an area that he campaigned on heavily during the 2016 presidential campaign: immigration. Trump has not wasted much time in working on what he views as immigration reform. Trump has taken the steps to work on his border wall that will do nothing except waste taxpayer dollars. He has also taken steps on a pointless refugee ban and work towards mass deportation of undocumented workers, a plan that will in all probability cost the American people billions. There are a number on the Right that want to go after illegal immigration either because of [perceived or actual] national security threats or economic threats. I have noticed over the years that conservative pundits and policy wonks distinguish between legal immigration and illegal immigration. With Trump's latest immigration plan, that distinction no longer matters because Trump is now going after legal immigration.

Last week, President Trump supported the RAISE Act, a bill proposed by Senator Tom Cotton (R-AR). If passed, this would arguably be the largest immigration reform since the Immigration Reform and Control Act of 1986. The biggest measure taken under the RAISE Act would be to lower the number of green cards from 1 million to 500,000 cards. Although that is the main provision, that is hardly the only one. The RAISE Act also shifts immigration to a more skills-based system, cuts green cards for family members who are not spouses or minor children, eliminates the Diversity Visa Lottery, cut the number of refugees to 50,000 refugees, and has a scoring preference for English speakers. Per his press release, Cotton believes that the RAISE Act would spur economic growth and raise working American workers' wages. Trump also backed Cotton's play in a press release by saying that this merit-based immigration plan would protect workers, taxpayers, and the economy.

Part of the argument that Senator Cotton uses is that the U.S. would be keeping immigration at the average that it has been in the past 13 years. The major issue with Cotton's assertion is that he is looking at the number of immigrants, not the rate at which they enter the country. The Migration Policy Institute has immigration data dating back to 1820 (also see Census data). As the Cato Institute indicates, we need to measure rates instead of population inflow to account for population growth. When looking at immigration rates (see below), current immigration flows are 29 percent below the historical rate of 0.45 percent of the population. If the RAISE Act passes, the rate would fall 60 percent below the historical rate.

The question we have to answer is whether the RAISE Act would lower them to adverse levels or if the rates have historically been too high. One of the main premises behind this plan and justifying lower rates is that by limiting the number of low-skilled immigrants, working-class Americans would suffer less because they can better compete in the U.S. labor market. What I would like to do here is scrutinize the main points that support the underpinning of the RAISE Act.

Does Reducing Legal Immigration Boost the GDP?
In 2016, Moody's did an economic analysis of Trump's plans, including his immigration policies. Moody's found that if implemented, it would cause a recession that could last longer than the Great Recession.

A study looking at 18 developed countries found that both high-skilled and low-skilled migration improved productivity and GDP (Jaumotte et al., 2017). Immigration leads to labor specialization, which leads to increased productivity (Peri, 2009).

Economic literature also finds that when comparing over 100 countries from 1990 to 2011, immigration has a positive, but small, impact on economic freedom (Clark et al., 2015), which thereby contributes to the higher GDP. As a case study, Israel allowed for mass immigration of Russian Jews under its "Right to Return" law in the 1980s and 1990s. The result was that Israel was able to absorb the immigrants, and because of it, economic freedom actually improved (Powell et al., 2017).

In summation, reducing legal immigration does not boost the GDP. This public policy brief from the Manhattan Institute, this paper from the Federal Reserve Bank of Dallas, and this 2016 brief from Brookings Institution shows how increasing immigration increases economic growth. The Wharton School of Business provides a background brief showing the overall positive effects on the economy. You can also check out my economic analysis on immigration from four years ago when I came to the same conclusion.

Does Reducing Legal Immigration Boost Domestic Wages?
Trump is for the RAISE Act because it would "reduce poverty and raise wages." In economic theory, when you lower the number of workers in a market, the supply curve shifts upwards, which means that wages increase. However, there is some reason to doubt that. For one, as the Council for Foreign Relations reminds us, wage stagnation has multiple and intermingled factors, including trade policy, capital flows, education, and automation. As the OECD points out, wage stagnation is a problem facing all developed countries.

The National Academies of Sciences (NAS) released a report last year, and what did it conclude about wages? The impact is very small, and to the extent where there are negative impacts, it affects prior immigrants or native-born workers who do not have a high school education (which is still about 8 percent of the labor force). Even when comparing the data between economists Ottaviano and Borjas, the latter of whom is really skeptical about the positive effects of immigration, they both found that the overall effect is the same on native workers: a modest, negligible increase in overall wages (see below). The ones who were most heavily hit were previous immigrants. Employment data from 1991 to 2008 shows that immigrants boost both the productivity and wages of workers (Kemeny and Cooke, 2017). High levels of immigration lead to short-term and long-term increases in native wages (Ottaviano and Peri, 2006).

The last time the United States restricted immigration in a similar fashion was in 1964 when it eliminated the bracero program, which cut off a supply of 500,000 workers. What were the results? According to a study from the National Bureau of Economic Research, not only did wages stay stagnant, but they grew more slowly because farmers increased automation (Clemens et al., 2017). Another way of saying that is the last time the United States cut off immigration did not boost the wages of low-skilled American workers.

Another example is the Mariel boat lift, when a massive amount of Cuban refugees were absorbed into the Florida economy in 1980. What does the research show? With the possible exception of high school dropouts, wages went up for native workers. What the bracero and Mariel examples show is that a sudden and large influx of immigrants does not adversely affect native workers' wages.

Are Immigrants More Likely to Be on Welfare?
Current law prevents legal immigrants from accessing means-tested welfare for five years. Needless to say, there are certain exceptions, such as pregnant women and children. One of the arguments to justify the RAISE Act is that immigrants are more likely to use welfare than native citizens. The Trump administration uses a study from the Center for Immigrant Studies to bolster this claim, a study which I refuted back in 2015. A few points to help answer this question:
  1. When compared to similarly situated natives, poor immigrants are less likely to use welfare services than poor native-born citizens (Ku and Bruen, 2013). The amount that immigrants contribute to Medicare (Zallman et al., 2013) and Social Security (Anderson, 2005) have been found to be net positive towards the programs. If U.S. natives consumed Medicaid at the same rate that immigrants did, we would pay 42 percent less in Medicaid. 
  2. Not only do legal immigrants pay taxes, but they pay enough where their net contribution to the economy is positive, and their fiscal impact is near net-zero (Nowrasteh, 2014). 
  3. The labor participation rate of Mexican immigrants, which is comparable to that of native-born citizens, suggests strongly that they are here to work, not to be on welfare. Another fact to further prove this notion: during the Great Recession, net Mexican migration fell to zero or less, and has not since increased. 
  4. The government spends so much more on the native-born through means-tested welfare and Social Security. If your concern is about the government accruing more debt, then the focus should be on all welfare reform, not just welfare reform for a small percentage of the U.S. population.
Should We Be Cutting Back on Low-Skilled Immigrants?
Whether we should have skilled immigrants is much less controversial than whether we should have low-skilled immigrants. The major provision of the RAISE Act is to cut green cards by nearly 500,000 to have a higher percentage of high-skilled immigrants (although the bill does nothing to raise the number of total green cards awarded to high-skilled immigrants). The Brookings Institution points out that low-skilled immigration grew during the 1990s and early 2000s, after which, it plateaued in 2007 (Hanson et al., 2017).

Proponents of RAISE think that having a skills-based immigration approach is uncontroversial since such countries as Canada, Australia, and New Zealand. The European Union also has a Blue Card, which is a worker permit that prefers high-skilled labor. As the Cato Institute pointed out recently, the systems in Australia and Canada are much more open to immigration than the United States, and thus not comparable. More to the point, if the United States does not open its doors to high-skilled immigrants, these other countries will take them, thereby causing the United States to lose its competitiveness in the global market.

When we ask the question of whether there are too many or too few low-skilled immigrants, it assumes that there is some magic number we should stick to once we reach it. The problem with this is that markets change because supply and demand of multiple markets having various interactions with one another are in flux.

But first, let's keep our own history in mind. In 1940, 88 percent of European immigrants did not have a high school degree, yet when we take a look at historical employment data, that did not stop labor market growth. If anything, a lot more jobs were created. The U.S. job market was able to handle both an increase in immigrants and women entering the workforce. Not only has the U.S. labor market been resilient, but there is a demand for low-skilled workers. As the Bipartisan Policy Center points out, there is high demand for these immigrants in construction, hospitality, healthcare, and agriculture.

Low-skilled immigrants are more helpful than simply filling current labor shortages. Low-skilled immigrants can actually raise the wages of native workers (Foged and Peri, 2016). Why? Because low-skilled immigrants have skills that are complementary to native workers (Peri and Sparber, 2009), which means they are not in competition (also see NAS report mentioned earlier). Even for those who did end up switching jobs, they usually got better-paying jobs. Essentially, it gives the native-born a better push to do better in the job market. Allowing people to reside where their work is most valuable creates greater productivity, which is why immigration helps boost the GDP (see previous question above).

Should We Be Cutting Back on Refugees?
The Refugee Processing Center has data dating back to 1975 (see below). When looking at the history of refugees, this country has been able to absorb larger amounts of refugees than the RAISE Act is intending to admit. In addition to the previous questions I asked being applicable to refugees, there is the additional question as to whether refugees are a threat to our national security. As I detailed in February, the short answer to that question is a resounding "No!"

Other Points Worth Remembering
  • Immigration improves the productivity of U.S. firms (also see here), as well as spurs Americans to attain more education.
  • This country is losing its market dynamism, and without more immigration, we'll see our economy become less vibrant and great. 
  • Since the United States' fertility rate is below replacement rate, we need to focus on increasing immigration to improve labor force growth, increase our fertility rate, and increase economic productivity. 
  • In the third presidential debate, Trump stated that amnesty was unfair for the ones who were waiting in line. If the RAISE Act passes, he will effectively screw over so many those waiting in line because he will take them out of the line if they cannot get admitted within a year after the RAISE Act passes.
You know that something is wrong when 1,470 economists from multiple sides of the political spectrum have to sign a letter telling President Trump about the benefits of immigration. The only group of U.S.-born workers that you could even begin to plausibly argue are harmed by more immigration is high school dropouts, and that is even tenuous. On net, immigration has decidedly been a benefit for the United States. This country could use some immigration reform, but cutting green cards by nearly 500,000 while doing nothing to raise the number of skilled immigrants does nothing to advance the United States' national interest. Passing the RAISE Act would effectively set U.S. immigration policy back at least half a century.

Monday, August 7, 2017

15 Reasons to Dislike Obamacare

A few days ago, I came across a rarity that we see in today's polarized world. I saw Democrats praising a Republican. Why? Because Senator John McCain (R-AZ) was the vote that stopped the "skinny" Obamacare repeal bill from passing. I saw some friends on social media rejoice over this vote being turned down because they were under the impression that Obamacare saves lives (I covered this a month ago: repealing Obamacare wouldn't particularly save lives). I can agree with my friends on the Left that the Republican attempts to replace Obamacare are bad, but we disagree on the reason.

In public policy, the optimal goal is to pass legislation that is an improvement over the status quo. The Republican "repeal and replace" attempts are not an improvement over the status quo because they tweak some of the financing aspects while ignoring and maintaining the insurance regulations that make Obamacare insolvent in the first place. The Republican plans have essentially been "Obamacare-lite," which believe it or not, are actually worse than Obamacare. What we cannot forget in the midst of this political upheaval is that while the Republican plans are worse, Obamacare is still bad policy. It is not something we should admire or advocate. It is far from perfect, and it has caused considerable damage to the healthcare market in the United States. This blog entry needs to serve as a reminder as to why that is the case, which is why I will provide a condensed list of reasons.

But before beginning, I would like to add one caveat at the beginning. I am looking to pull the most recent information, but I will deemphasize information released in 2017 for two reasons. One, the election of Trump and Republican attempts to repeal (both in terms of the failure of passing a bill and the lack of clarity on direction) have caused uncertainty in the healthcare market, which in turn has caused adverse reactions that are not due to Obamacare. This makes it more difficult to isolate the effects of Obamacare. The second reason is that Obamacare is the single most important defining aspect of President Obama's legacy. The fact that data coming from his administration is anything but flattering further illustrates how much Obamacare has failed. With that caveat out of the way, let's begin, shall we?

1. Increased premiums. Obama said that he would pass a healthcare bill that would cut the typical family premium by $2,500. Politifact deemed that claim as a broken promise. In October 2016, which was right before Trump was elected, healthcare consulting firm HealthPocket projected considerable increases in premiums for 2017. The years 2015 and 2016 saw similar spikes in premiums. eHealth found that the average premium on the individual market increased 99 percent from 2013 to 2016 (and 140 percent for families), and the Kaiser Family Foundation found that the average premium for families increased 32 percent from 2010 to 2016. The centrist Brookings Institution had an interesting finding (Kowalski, 2014, p. 301). From right before the law was enacted to mid-2014, premiums increased 24 percent more than they would have if Obamacare had not become law.

Proponents of Obamacare want to put the blame on a weak individual mandate penalty. That could be part of the equation, but as I explain later in Point #11, that causes another problem. There are two other factors causing increased premiums, one of which is the "essential health benefits" provision. Under Obamacare, coverage is quite extensive, ranging from free preventative care and contraceptives to mandatory mental health and substance abuse coverage. When you cover more goods and services, prices go up. Making it legal to purchase less comprehensive insurance does not do any favors for premiums. Another factor driving up premiums is mandated coverage of pre-existing conditions. I covered this topic three years ago, but Obamacare allows for anyone to enroll during the enrollment periods, which means that people don't have incentive to pay into the system until they get sick. Not only does it create a lack of incentive for younger people to join, but it unsurprisingly drives up prices. The way that Obamacare was created undoubtedly raises premiums, much like Obamacare critics predicted it would.

2. Skyrocketing deductibles. A deductible is the specified amount of out-of-pocket money that the insured individual has to pay before the insurance company will pay any claim and cover any costs. On top of the thousands that families pay for premiums, they have to pay even more money in deductibles before being able to take advantage of the insurance for procedures beyond an annual check-up. You know it has to be bad when the New York Times and CNN, supporters of Obamacare, come to the realization that high deductibles make Obamacare all but useless. Since the Obamacare deductibles are not pegged to income, their regressivity disproportionately affects the poor. Another issue with the high deductibles we see with Obamacare is that they make it more likely for one to avoid or delay care, according to the Left-leaning Commonwealth Fund. The Commonwealth Fund study found that 51 percent of those under 200 percent of the federal poverty line, the demographic that Obamacare is trying to help, said it was difficult or impossible to afford their deductible, as well as their co-payments. Those who less affordable deductibles made it nearly twice as likely that they would afford going to the doctor (see below). Even when the deductibles were less than 5 percent of income, over 10 percent of insured people decided to delay or not purchase medical services.

Why are skyrocketing premiums and deductibles important? The official name of Obamacare is the Affordable Care Act (ACA). It's the reason I don't like calling it the ACA: the legislation has made healthcare less affordable for millions. Since healthcare is less affordable for many under the ACA, they are less likely to use their newly-found insurance, which makes me further question the effectiveness of Obamacare (see Points #7, 13). It should make even proponents ask an important question: "What good is health insurance under Obamacare when so many cannot afford healthcare under Obamacare?"

3. Low Obamacare exchange enrollment. For the year 2015, the IRS had 12.7 million taxpayers file an exemption to purchase Obamacare coverage, while 6.5 million paid the penalty instead of signing up for coverage. In 2016, the Congressional Budget Office (CBO) had the enrollment figures at 12 million in the Obamacare exchanges and 13 million enrolled in Medicaid vis-à-vis Obamacare. For a plan that was a) supposed to be a comprehensive, affordable plan, and b) there is an individual mandate penalty, the enrollment numbers are disappointingly low, certainly lower than initially projected.

4. Relatively high number of uninsured people. Obama made a solemn pledge that he would sign a universal healthcare bill into law. The problem is that Obamacare is not a universal health care bill. The CBO projected in March 2016 that by 2026, there will still be 28 million uninsured under Obamacare (CBO, 2016, Table 4). Leaving about eight percent uninsured is not the same as universal healthcare The figures of "insured vs. uninsured" should make us question how much we are paying (see Points #1-2, 5) versus how many we are covering with all the money spent.

5. Less choice in insurance. Obama promised more choice and more competition, and we have the exact opposite of that, according to the Obama administration's Health and Human Services (HHS). The HHS found that marketplace issuers are to drop from 232 insurers to 167 (HHS, p. 27). The number of marketplace insurers in 2017 is now lower than it was in 2014, which is when Obamacare's major provisions kicked in (187 insurers down to 167). The percent of customers with three or more insurance providers dropped from 88 to 56 percent in just one year (HHS, p. 38). The Right-leaning Heritage Foundation details this phenomenon, finding that the individual health insurance market is 45 percent less competitive than it was pre-Obamacare. Even better, 77 percent of counties will either have two providers or less in 2017The health insurance market had a 3.3 percent profit margin in 2016, and is expecting close to break-even profit margins for 2017. A profit margin below 5 percent is not particularly high when compared to other industries. Shouldn't it say something about the quality of the exchanges if major insurance companies are leaving it? Insurance companies leaving the exchanges makes for more instability, a phenomenon that was taking place before Trump took office.

6. Less choice of doctors within network. Not only are there less insurance providers, but there are also less doctors in each network, according to the Employee Benefit Research InstituteMcKinsey also found that 48 percent of networks have been narrowed, meaning that less doctors are in the network in attempts to contain costs, which is droll considering that it's already expensive to begin with.

7. Medicaid expansion under Obamacare. It'll be a difficult attempt to cover Medicaid in the span of a couple of paragraphs, but here it goes. Obamacare was meant to help give access to private-sector insurance, but instead, it turned into a major Medicaid expansion. Three reasons this is problematic. One is that Medicaid is expensive. According to the CBO, Medicaid is supposed to cost $5.19T in the next decade (CBO, 2017). Medicaid is the fourth most expensive government program, after Social Security, Medicare, and military spending.

Two, a doctor is less likely to see a patient if they are on Medicaid. In 2014, only 45 percent of doctors were accepting Medicaid, a figure that was 55 percent just five years earlier. The problem predated Obamacare, and shows no sign of abating. Three, there is evidence that Medicaid is almost like having no insurance at all. Now, you can show me a study like this (Sommers et al., 2012) trying to prove the contrary, except that a) it is an observational study, and b) it has mixed results when looking at the state-by-state breakdowns. An observational study is less reliable because you cannot control for the variables, which is why I would prefer a randomized experiment. As a matter of fact, such a study exists: the Oregon Medicaid experiment (Baicker et al., 2013). Randomized experiments are a rare treat in the public policy world, so it's nice to see them when they come along. Its conclusion? There were no significant differences between those on Medicaid versus those who had nothing. As of May 2017, we had 68.8 million on Medicaid (around a fifth of the nation), about 13 million of which are due to Obamacare. Obamacare has been, in large part, a Medicaid expansion, so let me ask this: How does it help anybody, especially those who need insurance, to be put on expensive, subpar health coverage? 

8. Loss in coverage. In 2009, Obama made that infamous plan of "if you like your plan, you can keep it." This promise was infamous enough where it became Politifact's 2013 Lie of the Year. This shouldn't bewilder us. After all, part of Obamacare was to mandate more comprehensive coverage. Certain plans would not be comprehensive enough under Obamacare, and out they went. In its March 2016 projections, the CBO estimated that a total of 13 million will lose their insurance by 2026 because of Obamacare: 9 million from employer-sponsored insurance and 4 million from non-group coverage (CBO, Table 4).

9. Increased federal budget costs and debt. Obama promised that Obamacare would not add one dime to the deficit. The projections from the CBO show otherwise. According to their March 2016 projections, Obamacare is going to add $1.403T of debt over the next decade (see below). The idea that Obamacare could lower costs by providing more and subsiding more people was unrealistic from the onset. Even in 2010 and working under generous assumptions,  the Centers for Medicare and Medicaid Services (CMS) found that Obamacare would increase national healthcare spending by $310 billion more than if the law would not be enacted (CMS, p. 4).

10. More taxes. Obama promised that his healthcare plan would not raise taxes for anyone making less than $250,000. Obamacare came with a slew of about 20 taxes, fees, and penalties, and they affect more than just the "one percenters." A look at a few of the taxes: The individual mandate penalty falls on lower-income and lower-middle-income families, costing a total of about $4 billion a year. The flexible spending account (FSA) tax will hit 30 million people, most of whom are middle-class. The Cadillac tax is estimated by the Kaiser Family Foundation to affect 1 in 4 Americans. There is the chronic care tax. Before Obamacare, there was an income tax deduction for medical expenses that exceeded 7.5 percent of adjusted gross income. Now, 10 million people who are looking to pay for chronic care will have more problems.

11. Disproportionately affecting younger people. One of the major ways that Obamacare affects young adults is through the age-rating provision. The provision limits age variation of premiums for adults with a ratio of 3 to 1, which means that an insurer can only charge a 64-year old three times the rate it charges a 21-year old. The natural age variation (and what it was before Obamacare) was a ratio of 5 to 1.

The shift with the age-rating provision made insurance cheaper for older individuals while making insurance more expensive for younger individuals. Both the Left-leaning Urban Institute and the Right-leaning American Action Forum show that removing the 3:1 ratio would lower premiums for younger people. This is not bad for young people simply because the wealth gap between the young and old is widening.

The young people targeted by Obamacare's regulations are not on employer-sponsored insurance. This is important since employer-sponsored insurance exacerbates income inequality, meaning that young people on employer-sponsored insurance tend to fare better than those not on it. The young people targeted by Obamacare have two options: pay for insurance or pay the fine. If I were making well under $20/hour and were mandated to pay thousands for insurance or pay a relatively modest fine, which would I do? It should be no wonder that young people are not entering the Obamacare exchanges at the rate initially predicted: the young would otherwise be subsidizing the old. It is a problem that even the Urban Institute admits (Urban, pp. iv).

And would increasing the mandate penalty increase enrollment? Perhaps, depending on the increase. But it would come at the cost of screwing over a demographic who is already having troubles either entering the job marketplace or making sure they don't go broke. 

12. Less economic growth. The tax increases, subsidies, Medicaid expansion, and employer mandate cause less employment. Obamacare resulted in a 1.7 percent decline in full time equivalent (FTE) hours worked (CBO, p. 18). This is important because the number of people working and their productivity has a direct impact on economic growth. As I have pointed out before, burdensome taxes and high government spending, much like we see with Obamacare, hamper economic growth. Read more from Manhattan Institute to see how Obamacare affects macroeconomic growth, including an Obmacare-induced GDP loss of $175 billion in 2015.

13. Obamacare Is Not Particularly Saving Lives. I wrote a blog entry on this a few weeks ago, so I don't need to go into much detail. However, I wanted to add one other bit of research from Richard Kronick. Kronick is not some right-winged hack. Not only was he ranked one of the most influential people in healthcare in 2014, but he also served under Clinton as an advisor and under Obama as the Director of the Agency for Healthcare Research and Quality (AHRQ). What did he find about health insurance? When accounting for demographics, health status, and health behaviors, there is little effect (Kronick, 2009), which makes sense since insurance is first and foremost a financial product offering financial protection. Kronick's conclusion was that "there is little evidence to suggest that extending insurance coverage to all adults would have a large effect on the number of deaths in the United States."

14. Obamacare co-ops. When the Democrats were trying to pass Obamacare back in 2010, they were trying to go for the "public option," a federal-run government program. The Democrats were unable to get enough votes to pass Obamacare with the "public option," so they created a compromise: the Consumer Oriented and Operated Plan, or "co-op" for short. These 24 state-based co-ops are essentially the government alternative to private-sector insurers. We were told by the CMS not to worry because the co-op applicants were screened and demonstrated "a high probability of financial viability." After spending $2.4 billion on the cop-ops, how did that turn out? By mid-2016, 16 out of 23 of the co-ops failed due to solvency issues. If the United States government could not handle provide competitive healthcare that meets consumers' needs or centrally plan health insurance, why should I trust the government with something like a "public option" or single-payer healthcare?

15. website. If the government wasting money on its failed experiment at providing its own version of insurance isn't enough to make your blood boil about government waste, how about the website? There has not been a straight answer to that question, which should say something about transparency. The Government Accountability Office estimated in June 2013 that it cost $394 million, which did not include CMS salaries or other administrative costs. It would be reasonable to believe that it ended up costing the taxpayers more than $500 million since then (the costs could be upward of $1 billion or even $2 billion as of 2014). By the website's release, less than ten people enrolled initially. Based on latest enrollment figures, the website is doing better than it started, but it should not have had this many glitches and it should not have cost that much.

The website should have arguably cost less than $10 million, and that is when we compare it to other websites. Facebook didn't even spend $500 million on its website until it was in operation for six years. Twitter cost $55 million to develop, LinkedIn cost $200 million, and Spotify cost $288 million. An even better comparison is the Apple iPhone. Apple's iPhone only cost $150 million to develop, which is a mini-computer that is more complicated than a portal that connects people to insurance companies. The problem with looking at this example is that it could come off as nitpicking when looking at an American economy of about $19 trillion. The real problem is looking at the wasted government spending in isolation. When we add up the costs not just of all the money wasted or misspent due to Obamacare, but indeed all of government spending, such as the $144 billion in improper payments made for Social Security, Medicare, Medicaid, and other programs last year. It should make our blood boil not simply because of the amount of waste, but also realize that the wasted money could have been spent on helping the people the government claims it is helping.  

A Brief Word on Tradeoffs
The first rule of public policy is that there are always tradeoffs. As the passage below from this Mises Institute article illustrates, every policy has winners and losers, and Obamacare is no exception. I'm sure we can all come across a story of someone who benefitted from Obamacare. Nevertheless, that is not what this national debate is about.....

Today's blog entry is not about what could be done to reform healthcare, although you can see here, here, and here for some reforms. [Aside from healthcare being such a huge topic, I have commented on healthcare reform options more than once (e.g., here, here, here), and I intend to do so again in the future.] I'm not here today to reflect on what Obamacare could have been in theory or what Obamacare was intended to accomplish. Today's analysis is about what Obamacare has actually done, and what it has done is screw over American healthcare in more ways than one. As two health policy professors who are prominent supporters of the ACA put it, what was meant to be major healthcare reform "turned out to be ineffective, poorly targeted, or not ambitious enough to address deeply rooted problems." If you need a list of why I am in favor of "repeal and replace," now you have a detailed one. Even if you are still in favor of Obamacare or the idea of it, I hope this helps you realize that Obamacare is far from perfect and in dire need of reform. Wherever you stand on the state of American healthcare issues facing us, we should all be able to agree that the status quo is unacceptable. 

Thursday, August 3, 2017

The Mortgage Interest Deduction: A Call for Repeal (Or at Least for Reform)

Owning a nice home with a white picket fence has been considered part of "the American Dream" for more than half of a century now. Often times, home ownership is used as a metric of that dreamlike prosperity, which is ironic given that the United States has one of the lowest home ownership rates in the developed world. The government tried engineering the American Dream through public policy, not only with using land-use regulation to induce suburban sprawl, but also to subsidize house ownership through the mortgage interest deduction (MID).

The MID is a tax deduction that allows for homeowners to lower their taxable income base by the amount of the interest paid on the loan that is secured by their place of residence. The purpose of the deduction is to incentivize home ownership. While the MID had existed in the United States since 1913, it was not explicitly mentioned in the tax code until 1986 (more on the history of MID here). If it has been part of the U.S. tax code in one way or another, it makes me wonder how good of a job it has done, especially since the lost revenue from the MID accounts for 7 percent of total personal income tax payments.

Last week, a study at the National Bureau of Economic Research was released. The topic of this study (Gruber et al., 2017) was the MID in Denmark. Although this applies to the Danish market, it has some relevance because, as the abstract states, this is the "first comprehensive long-term study of how tax subsidies affect housing decisions." The study spans back to the late 1980s, which is when the Danish government slashed the MID for wealthy taxpayers.

This Denmark study had two main interesting findings, the first being that it did not increase home ownership. The other main finding of this study is that it made homebuyers purchase more expensive homes than they would have otherwise, thereby increasing indebtedness. This Denmark study is hardly the first study to find adverse effects of the MID:
  • In terms of straight-up cost, the Joint Committee on Taxation found that the MID is going to cost the U.S. $350 billion in tax revenue from 2016 to 2020 (Table 1), which makes it one of the most expensive tax breaks out there. This same report also found that those who benefit the most are those making $100,000 or more (Table 3), which makes sense since you can't take the deduction unless you itemize on your taxes and those who itemize tend to be upper-income.
  • Looking at data from 1984 to 2007, economists from Harvard and MIT concluded that the MID only helps higher-income households, and on the whole, the MID neither promotes home ownership nor improves social welfare (Hilber and Turner, 2014; Toder et al., 2010Glaeser and Shapiro, 2002).  
  • Instead of encouraging home ownership, the primary effect of the MID is to artificially inflate housing prices, which makes housing less affordable for lower-income households (Landis and McClure, 2010).
  • Repealing the MID would cause housing prices to fall. However, this would actually help with home ownership because the decreased in housing prices would help credit-constrained renters better afford a house. Also, since the MID disproportionately helps higher-income households, eliminating the MID would shift housing consumption more to lower-income households, thereby improving overall social welfare (Sommer and Sullivan, 2017, p. 37-39).
  • A study from the Mercatus Center shows that the MID does not increase home ownership, and that the MID diverts resources from more socially valuable endeavors into more expensive homes (Fichtner and Feldman, 2014). As the Left-leaning CBPP points out, this non-optimal use of resources could potentially skew capital allocation, thereby lowering wages and living standards (also see Morrow, 2012). 
  • Another study found that while the home ownership rate did not increase, the square footage of the houses purchased did increase (Hanson, 2012). 
To summarize, the MID is one of the largest tax breaks out there. It disproportionately benefits high-income households while doing next to nothing to improve home ownership rates, which was its primary goal. It also makes me question whether home ownership should be encouraged by the government (see more here).

There are some ways to reform the MID to improve the status quo. Replace the MID with a refundable credit would eliminate the artificially high demand for higher-end homes (Viard, 2013). Reduce the ceiling on the debt eligible for an interest subsidy (Lu, 2015) or cap the the income tax rate at which taxpayers can take itemized deductions (Katz, 2016). Personally, I am all for repealing the MID, especially since economists generally agree that removing the MID in exchange for lower taxes would be a more efficient use of resources. Plus, repeal would make conservatives happy by simplifying the tax code while making liberals happy since the MID is a regressive tax that arguably exacerbates income inequality. If Trump wants to make housing great again, and if Trump wants to cut taxes and simplify the tax code to improve economic welfare, Trump needs to add repeal of the MID as part of his tax plan.