Many people try quit alcohol or tobacco because it is harmful to one's health. There is also another type of "quitting" that has been encouraged by certain individual religious figures: being homosexual. For a number of years, there have been those who have been encouraged homosexuals to become heterosexual through what is called conversion "therapy." Conversion "therapy" is the idea of changing one's sexuality through psychological or spiritual means. Methods of conversion "therapy" range from "pray the gay away" to electroshock therapy. I put the word "therapy" in quotes because I'm of the opinion that there is nothing wrong with being gay, especially when dealing with the idiotic argument of "homosexuality is unnatural" or realizing that G-d doesn't even have an issue with it. Ergo, there is nothing to cure. Even if there were something to cure, the definition of the word "therapy" implies that it can be cured. Some things we can change and others we cannot: that's life. The first question to answer is whether something like sexuality can be changed and whether conversion "therapy" helps.
It is more than the anecdotal evidence I have from some friends and acquaintances that conversion "therapy" is completely bunk and harmful. The fact of the matter is that conversion "therapy" is a pseudoscientific practice with no real evidence to back up its assertion that sexuality can be changed. There is one study stating that it could potentially have some positive effect (Nicolosi et al., 2000), and even that study has more than its fair share of flaws (e.g., only a minority of participants claimed success, it was only based on self-reporting). Conversely, Columbia University identified 12 studies showing that conversion "therapy" is ineffective and/or harmful.
There is no evidence that conversion "therapy" helps. There is, however, plenty of evidence that conversion "therapy" is harmful, and leads to increased likelihood of depression, suicide, anxiety, and social isolation. The American Psychological Association wrote a lengthy and substantive report on the topic in 2009 and concluded the same thing. It's not just the APA. You also have the American Academy of Child Adolescent Psychiatry, the American Academy of Pediatrics, the American College of Physicians, the American Medical Association, the American Counseling Association, the American Psychoanalytic Association, the British Psychological Association, the Canadian Psychological Association, the Australian Psychological Society, the World Psychiatric Association, the Pan-American Health Association, and the Substance Abuse and Mental Health Services Administration (SAMHSA). There was a time that the mental health profession believed that homosexuality was a mental disorder. The good news is that we know better. We know that bisexuality and homosexuality are natural and healthy variations of sexuality.
And if the consensus of mainstream mental health organizations is not enough, how about Robert Spitzer? Spitzer was a professor of psychiatry that was famous (or rather infamous) in this field. He was the one who led the fight against having homosexuality declassified as a mental disorder back in the 1970s. He was also the one who released a report that was used to "prove" that conversion "therapy" could "cure" homosexuals (Spitzer, 2003). Not only did he retract his findings, but he issued an apology for all the harm he caused. And then there's another great story. After 37 years of trying to "convert" gay people, the well-known ex-gay therapy group Exodus International closed its doors in 2013 and apologized to the LGBT community for the harm it caused. And for added fun, I would like anti-gay individuals who assume that sexuality is a choice do some serious reflection and ask themselves "At what point did I choose to become heterosexual?" Because if those anti-gay individuals were intellectually honest, they would realize that they did not choose their sexuality. To summarize thus far, conversion "therapy" is devoid of scientific backing, and it is proven to harm those who are subjected to it.
Knowing what we know about conversion "therapy," the question is whether the government should step in and ban it. Although I consider myself libertarian, this question is trickier than initially anticipated. Conversion "therapy" is as much quackery as being against vaccines or saying that genetically modified organisms (GMOs) are unhealthy. At the same time, we have an opt-out system for vaccination and we allow people to choose whether they want to eat GMOs or organic food.
On the one hand, the empirical research shows that it is consumer fraud to sell the idea that one could change their sexuality vis-à-vis sexual orientation change efforts (SOCEs). On the other hand, I believe that adults should make their own decisions, no matter how much I disagree with it. Research shows that having children before marriage is a bad idea, but if you want to mess up your life, it's yours to mess up. The same goes with smoking cigarettes, not wearing a bicycle helmet, eating unhealthy food, or buying lottery tickets. If we are to have a [relatively] free society, you have to be free to make poor life choices and even partake in actions that could cause self-harm. I think that, regardless of whether counseling is considered a First Amendment issue or not.
On the other other hand, the adults who enter conversion "therapy" tend to be in religious communities that stigmatize and demonize homosexuality and homosexuals. Take ultra-Orthodox Jews who happen to be homosexual. They can go to a place like JONAH (which, thank G-d, was sued for consumer fraud, ordered to pay a settlement, and was shut down so it could never harm another soul again) or they can leave their community. While that sounds easy, it's not. In ultra-Orthodox communities, Jewish children are typically not brought up with a secular education or life skills that would help them live in the real world. Some of them converse only in Yiddish, so it makes choice seem like more of an illusion than anything else. I'm sure homosexuals who are part of non-Jewish religious communities have similar impediments to making an actual choice. Even with that caveat, I still think adults should have the option to enter it, as long as they have the ability to opt out at any point. Plus, there is no ex ante manner in which to filter out the sorts of adults that I just mentioned in order to prevent such harm.
With regards to banning conversion "therapy" for adults, I am legitimately torn between my libertarian principles and seeing the harm it so clearly causes. However, the libertarian Reason Magazine brings up a good point: It was not too long ago when homosexuals were erroneously considered to be mentally deranged predators. Based on the logic of the current conversion "therapy" bans, it would have been perfectly acceptable for the government to have banned any therapist from trying to encourage homosexuals to accept and act upon their sexuality. The state of Tennessee actually tried banning teachers from teaching about homosexuality as recent as 2013. The anti-gay bigotry that permeates throughout much of American history should remind us why government should not control cultural discussions in such a manner.
Children are also another complicated case. I bring this up because a study from the Williams Institute, which was released just last week, shows how 20,000 youth currently between the ages of 13 and 17 will be exposed to this fraud by the time they turn 18. And that doesn't count the 700,000 U.S. adults who have previously been exposed to conversion "therapy" (ibid.). While children are human beings and deserving of respect, they do not quite possess the mens rea to fully make their own decisions. Something tells me that a teenager who is struggling with their sexuality would seldom, if ever, would choose to opt for something that horrific. Looking at recent conversion "therapy" bans, they are confined to mental health professionals on the job (e.g., does not ban non-licensed religion based conversion efforts), as well as the "therapy" being providing to minors. I actually came across a libertarian arguing for conversion "therapy" bans based on the current state licensing structure. Since therapists have to undergo licensing, it is a lot easier to regulate conversion "therapy" than it is some other harmful thing a parent could subject their child to, such as corporal punishment.
At the end of it all, my opinion is twofold. For adults, I reluctantly opine that adults should be allowed to partake in conversion "therapy" if they so choose, as long as there is a clear way to opt out. As for children, I have no problem having conversion "therapy" bans for minors. Even if the parents believe they are acting in their best interest of their homosexual child, they should still not be allowed to subject their child to such cruelty. Yes, it is true that Gallup and Pew Research findings show there are still a considerable minority of Americans who believe that being gay is a choice or can be altered. However, the good market trend is that conversion "therapy" is being more and more discredited as time goes on and is falling out of practice, as it should be. I look forward to the day that it nothing more than a moment in history in which we shake our heads and wonder what people were thinking in believing in such nonsense. Until then, banning conversion "therapy" for children is the best we can do in the meantime while still preserving our freedoms.
Tuesday, January 30, 2018
Friday, January 26, 2018
Solar Panel Tariffs: Trump's Latest Protectionist Folly
While on the campaign trail, then-presidential candidate Donald Trump made campaign promises to add high tariffs on products imported from Mexico and China. Naturally, this sort of response pleased certain Americans who were frustrated with the U.S. economy. After his first year in office, President Trump is making good on that campaign promise. Earlier this week, he imposed a 30 percent tariff on solar panels. This has been the most significant action that Trump has made on international trade since he withdrew from the Trans-Pacific Partnership on his first day in office. This all started when two solar panel manufacturers, Sunviva and SolarWorld, brought a case to the International Trade Commission last year. In September, the ITC Chairs recommended tariffs ranging from 10 to 35 percent on solar panels (see here and here). As a result, the Trump administration ruled that it will impose a 30 percent tariff on solar panels that will gradually reduce to 15 percent.
Reading the ruling, you get the impression that Trump is leveling the playing field. For Trump, the Chinese had been subsidizing these two industries, thereby giving the Chinese undue advantage. He thinks he will make America great again by imposing these tariffs. The problem is that he is wrong. How do I know?
For one, tariffs do not give the imposing country the advantage he thinks it does. I covered the economic theory and economic literature on the subject a couple of years ago. Tariffs limit economic growth and efficiency while making citizens poorer. Tariffs only benefit a few, well-connected domestic producers while screwing over everyone else.
Second of all, this is not the first time the United States imposed such a tariff. The last time that the United States invoked Safeguard under Section 201 of the Trade Act of 1974 to impose a similar tariff was when President Bush imposed steel tariffs in 2002. How did that turn out? You can refer to my 2017 piece on those steel tariffs here, but essentially, it resulted in 200,000 jobs lost and $4 billion in lost wages (Francois and Baughman, 2003). If it weren't successfully challenged at the World Trade Organization (WTO), the United States would have ended up in a trade war with the European Union.
Solar power is expected to grow at a 2017-2022 CAGR of 5 percent, which is the fastest-growing energy industry. It is growing so fast that solar accounted for 1 out of 50 new jobs in the U.S. in 2016. Prior to this tariff, solar power was expected to exceed the current energy capacity of India and Japan combined. That could very well change as a result of this tariff, especially considering that 80 percent of U.S. solar panel installations use imported panels. Here are a few estimates of impact:
The only ones who benefit are select manufacturers of solar panels. Everyone else, including the installers of solar panels, utilities that purchase solar power, commercial users of solar power, and other consumers are all going to be harmed by this solar panel tariff. Economic theory, a substantial amount of empirical evidence, historical precedent with safeguard tariffs, and current estimates of the solar panel tariff all point to how damaging the tariff will be to the solar industry.
A tariff that only lasts four years and ratchets downwards will not have the boost for manufacturing that Trump is looking for. Instead, it will hinder the solar power market from growing just when it's starting to reach grid parity. In a worst-case scenario, it could impede solar power from being a viable power source that could meet America's energy demands, although it is probable that it will hamper the solar market. This is the first case that Trump was able to use his discretion on imposing tariffs. Now I am afraid that he has opened the floodgates for more litigation, more tariffs, and harming the American people with his misguided protectionism.
1-27-2018 Addendum: Here is a piece from the Council on Foreign Relations as to why the tariff will create more losers than winners.
Reading the ruling, you get the impression that Trump is leveling the playing field. For Trump, the Chinese had been subsidizing these two industries, thereby giving the Chinese undue advantage. He thinks he will make America great again by imposing these tariffs. The problem is that he is wrong. How do I know?
For one, tariffs do not give the imposing country the advantage he thinks it does. I covered the economic theory and economic literature on the subject a couple of years ago. Tariffs limit economic growth and efficiency while making citizens poorer. Tariffs only benefit a few, well-connected domestic producers while screwing over everyone else.
Second of all, this is not the first time the United States imposed such a tariff. The last time that the United States invoked Safeguard under Section 201 of the Trade Act of 1974 to impose a similar tariff was when President Bush imposed steel tariffs in 2002. How did that turn out? You can refer to my 2017 piece on those steel tariffs here, but essentially, it resulted in 200,000 jobs lost and $4 billion in lost wages (Francois and Baughman, 2003). If it weren't successfully challenged at the World Trade Organization (WTO), the United States would have ended up in a trade war with the European Union.
Solar power is expected to grow at a 2017-2022 CAGR of 5 percent, which is the fastest-growing energy industry. It is growing so fast that solar accounted for 1 out of 50 new jobs in the U.S. in 2016. Prior to this tariff, solar power was expected to exceed the current energy capacity of India and Japan combined. That could very well change as a result of this tariff, especially considering that 80 percent of U.S. solar panel installations use imported panels. Here are a few estimates of impact:
- Goldman Sachs anticipated that global solar panel costs would double and that demand for solar power would be substantially reduced.
- The Solar Energy Industries Association is estimating that 23,000 jobs will be lost in an industry of 260,000 employees, as well as the delay or cancellation of billions of dollars worth of solar projects. Only about 38,000 employees in the solar market are manufacturers, whereas the remainder are focused on installation. Since the majority of the solar jobs depend on cheaper imports, net unemployment is certainly feasible. The problem is that Trump is also trying to keep his other campaign promise of "bringing manufacturing jobs back," which is based on two erroneous assumptions: 1) China took [most of] the manufacturing jobs, 2) Trump can actually bring them back, even though automation was the primary culprit.
- Bloomberg New Energy Finance estimates that the final price of solar systems will increase 10 percent for utilities and 3 percent for consumers.
- GTM Research found that the tariff is expected to reduce solar panel installations by 11 percent through 2022 (see below), as well as slow 2018-2022 market growth by 8.3 percent.
- Just last year, Trump's ITC found that removing significant restraints (e.g., tariffs) would increase annual U.S. economic welfare by $3.3 billion by 2020. Ironic considering what the ITC recommended for the solar panels, isn't it?
The only ones who benefit are select manufacturers of solar panels. Everyone else, including the installers of solar panels, utilities that purchase solar power, commercial users of solar power, and other consumers are all going to be harmed by this solar panel tariff. Economic theory, a substantial amount of empirical evidence, historical precedent with safeguard tariffs, and current estimates of the solar panel tariff all point to how damaging the tariff will be to the solar industry.
A tariff that only lasts four years and ratchets downwards will not have the boost for manufacturing that Trump is looking for. Instead, it will hinder the solar power market from growing just when it's starting to reach grid parity. In a worst-case scenario, it could impede solar power from being a viable power source that could meet America's energy demands, although it is probable that it will hamper the solar market. This is the first case that Trump was able to use his discretion on imposing tariffs. Now I am afraid that he has opened the floodgates for more litigation, more tariffs, and harming the American people with his misguided protectionism.
1-27-2018 Addendum: Here is a piece from the Council on Foreign Relations as to why the tariff will create more losers than winners.
Tuesday, January 23, 2018
Debunking Five Myths Used Against Capitalism
Capitalism gets a bad reputation. Critics have blamed it from everything to exploiting workers to inequality, racism, global warming, and poverty. With all the accusations lobbed against capitalism, you would think that capitalism is the worst thing to have ever plagued the planet. Yet when you take a closer look at capitalism, it's quite the opposite. It's in that vein that I write this blog entry: to dispel some myths people use to discredit capitalism.
Before beginning, I would like to briefly cover what capitalism is because there is enough misunderstanding of what capitalism is. Capitalism is an economic system that is characterized by private ownership of the means of production. The production, distribution, and exchange of wealth is conducted by private individuals or enterprises. Although there are different gradations of a capitalist system, common features of a capitalist system include property rights, spontaneous order, voluntary exchange, consumer sovereignty, and willingness to adapt and change. Capitalism is also hallmarked by minimal government intervention, although in its purest form, it would be considered a free market system. I would like to start off with debunking five myths today in the hopes that I can debunk more in the future. With that out of the way, let's begin:
1. Capitalism causes poverty. Poverty predates capitalism. When looking back in history, poverty was the default. 99.999999% of people in premodern times lived in squalor. It was not some foreign aid or international development project that caused the decline of extreme poverty in the world. It was market capitalism. Allowing for freer trade, foreign investment, and market liberalization have done more for alleviating poverty than any government intervention. There is no political or economic system that holds a candle to capitalism.
2. The United States has a capitalist economy. One could apply a purity test to the term "capitalism," but it wouldn't be practical. Government has always played some economic role. The question is whether that role is extensive enough to no longer be considered capitalist as was outlined in the introduction. According to Heritage Foundation's Economic Freedom Index, the United States is only considered "Mostly Free." Its score has declined since former President Obama took office. The United States currently is ranked in 17th, and is tied with Denmark.
Looking at general government spending statistics from the OECD, the United States spends 39 percent of its GDP on government spending. There are a fair amount of taxes that have to be acquired to fund this largesse. And then there's the size of the public sector. In the United States, 17 percent of the labor market was public sector in 2013. This is smaller than the OECD average of 21 percent, but it's still a far cry from having a capitalist society. Why?
Capitalism is about maximizing the separation between the private and public sectors, as well as limiting the public sector's scope. In the United States, you have considerable government intervention, not just in terms of taxation but also regulation. The government interferes in the economy in a number of ways to achieve social aims, including, but not limited to, tariffs, occupational licensing, the child tax credit, land use regulations, federal student loan subsidies, and daylight savings time. While there are certain elements of voluntary exchange in the U.S. economy, it cannot definitionally be considered capitalist. Yes, the United States has more elements of capitalism than most other countries, but it is, at best, a mixed economy.
3. Being pro-capitalist is the same as being pro-business. The premise behind consumer sovereignty is that businesses have to compete against one another to benefit the consumer. Since this means that businesses have to work harder than they would like, there are a fair number of businesses that actually despise capitalism for this reason. Businesses will use their political connections to get into bed with Big Government in order to protect themselves from competition in what is known as rent-seeking. Here are some examples. Walmart has supported minimum wage, not because it wants to provide people a living wage but because its competitors cannot afford to pay it. Netflix is for net neutrality not because it cares about its customers, but because it doesn't want to be charged a premium for being a bandwidth hog. Oil producer Exxon-Mobil supports a carbon tax not out of concern for the environment, but to tax coal companies and give itself an advantage in the market.
4. Capitalism was responsible for the financial crisis that caused the Great Recession. For one, the U.S. government was instrumental in causing the Financial Crisis. It heavily subsidized the risk and incentivized housing investment that created the conditions leading up to the housing bubble. Let's also recall that there was more financial regulation, not less, leading up to the Great Recession. Looking at the companies that benefited under the bailouts from the Troubled Asset Relief Program (TARP) were huge corporations, including banks, automobile companies, and government-backed mortgage giants Fannie Mae and Freddie Mac. This was not free enterprise. This was a collusion between Big Business and Big Government known as "corporatism" and "corporate capitalism," or what I prefer to call "crapitalism" (see points #2 and #3).
5. Capitalism is about greed and envy. As Nobel-winning economist Milton Friedman points out in his succinct case for capitalism (see 1979 interview with Phil Donahue below), no political or economic system is immune from greed. I don't necessarily want to get into how self-interest is not the same as selfishness, but I would like to say this. Capitalism is not synonymous with greed, but rather functions primarily a description of voluntary exchange. Entrepreneurs want to maximize profit, and do so by pursuing their self-interest and creating a product or service that benefits consumers. Consumers want to maximize utility by purchasing said goods and services. Laborers want to maximize their wages.
The premise behind voluntary exchange is that actors engage in economic activities with minimal coercion. There is legitimate self-interest and then there is the illegitimate kind that involves deceit, coercion, and violence. When legitimate self-interest is pursued, then all parties benefit (see point #1). Capitalism is about an economic system in which legitimate self-interest is best channelled to maximize economic efficiency and the benefit of society as a whole. Legitimate interest is the foundation for real economic growth that not only spurs innovation and production, but has done so much to give us a quality of life that our ancestors could only dream of.
Before beginning, I would like to briefly cover what capitalism is because there is enough misunderstanding of what capitalism is. Capitalism is an economic system that is characterized by private ownership of the means of production. The production, distribution, and exchange of wealth is conducted by private individuals or enterprises. Although there are different gradations of a capitalist system, common features of a capitalist system include property rights, spontaneous order, voluntary exchange, consumer sovereignty, and willingness to adapt and change. Capitalism is also hallmarked by minimal government intervention, although in its purest form, it would be considered a free market system. I would like to start off with debunking five myths today in the hopes that I can debunk more in the future. With that out of the way, let's begin:
1. Capitalism causes poverty. Poverty predates capitalism. When looking back in history, poverty was the default. 99.999999% of people in premodern times lived in squalor. It was not some foreign aid or international development project that caused the decline of extreme poverty in the world. It was market capitalism. Allowing for freer trade, foreign investment, and market liberalization have done more for alleviating poverty than any government intervention. There is no political or economic system that holds a candle to capitalism.
2. The United States has a capitalist economy. One could apply a purity test to the term "capitalism," but it wouldn't be practical. Government has always played some economic role. The question is whether that role is extensive enough to no longer be considered capitalist as was outlined in the introduction. According to Heritage Foundation's Economic Freedom Index, the United States is only considered "Mostly Free." Its score has declined since former President Obama took office. The United States currently is ranked in 17th, and is tied with Denmark.
Looking at general government spending statistics from the OECD, the United States spends 39 percent of its GDP on government spending. There are a fair amount of taxes that have to be acquired to fund this largesse. And then there's the size of the public sector. In the United States, 17 percent of the labor market was public sector in 2013. This is smaller than the OECD average of 21 percent, but it's still a far cry from having a capitalist society. Why?
Capitalism is about maximizing the separation between the private and public sectors, as well as limiting the public sector's scope. In the United States, you have considerable government intervention, not just in terms of taxation but also regulation. The government interferes in the economy in a number of ways to achieve social aims, including, but not limited to, tariffs, occupational licensing, the child tax credit, land use regulations, federal student loan subsidies, and daylight savings time. While there are certain elements of voluntary exchange in the U.S. economy, it cannot definitionally be considered capitalist. Yes, the United States has more elements of capitalism than most other countries, but it is, at best, a mixed economy.
3. Being pro-capitalist is the same as being pro-business. The premise behind consumer sovereignty is that businesses have to compete against one another to benefit the consumer. Since this means that businesses have to work harder than they would like, there are a fair number of businesses that actually despise capitalism for this reason. Businesses will use their political connections to get into bed with Big Government in order to protect themselves from competition in what is known as rent-seeking. Here are some examples. Walmart has supported minimum wage, not because it wants to provide people a living wage but because its competitors cannot afford to pay it. Netflix is for net neutrality not because it cares about its customers, but because it doesn't want to be charged a premium for being a bandwidth hog. Oil producer Exxon-Mobil supports a carbon tax not out of concern for the environment, but to tax coal companies and give itself an advantage in the market.
4. Capitalism was responsible for the financial crisis that caused the Great Recession. For one, the U.S. government was instrumental in causing the Financial Crisis. It heavily subsidized the risk and incentivized housing investment that created the conditions leading up to the housing bubble. Let's also recall that there was more financial regulation, not less, leading up to the Great Recession. Looking at the companies that benefited under the bailouts from the Troubled Asset Relief Program (TARP) were huge corporations, including banks, automobile companies, and government-backed mortgage giants Fannie Mae and Freddie Mac. This was not free enterprise. This was a collusion between Big Business and Big Government known as "corporatism" and "corporate capitalism," or what I prefer to call "crapitalism" (see points #2 and #3).
5. Capitalism is about greed and envy. As Nobel-winning economist Milton Friedman points out in his succinct case for capitalism (see 1979 interview with Phil Donahue below), no political or economic system is immune from greed. I don't necessarily want to get into how self-interest is not the same as selfishness, but I would like to say this. Capitalism is not synonymous with greed, but rather functions primarily a description of voluntary exchange. Entrepreneurs want to maximize profit, and do so by pursuing their self-interest and creating a product or service that benefits consumers. Consumers want to maximize utility by purchasing said goods and services. Laborers want to maximize their wages.
The premise behind voluntary exchange is that actors engage in economic activities with minimal coercion. There is legitimate self-interest and then there is the illegitimate kind that involves deceit, coercion, and violence. When legitimate self-interest is pursued, then all parties benefit (see point #1). Capitalism is about an economic system in which legitimate self-interest is best channelled to maximize economic efficiency and the benefit of society as a whole. Legitimate interest is the foundation for real economic growth that not only spurs innovation and production, but has done so much to give us a quality of life that our ancestors could only dream of.
Thursday, January 18, 2018
Parsha Bo - Note to Pharaoh: A Little Humility Goes a Long Way
"I was wrong" are some of the most difficult words one could utter. They shutter the disillusion that we, as humans, could be perfect. Making a mistake can leave us vulnerable and feeling insufficient. Realizing that "to err is human" can make us realize that we do not have as much control over our lives as we once thought. Very few exemplify this than the Pharaoh in this week's Torah portion of Parsha Bo (Exodus 10:1-13:16). In last week's Parsha, we finished up the first seven plagues. Moses and Aaron approach the Pharaoh to ask that iconic request of "Let my people go." During that interlude with the Pharaoh, Moses said the following to Pharaoh:
When looking at the text, Rashi picks up on the Hebrew word לענות (to be humbled). He thought it meant "to be afflicted," (see Exodus 22:21), but concluded that it means "to be humbled." The Hebrew לענות has the same root as the word עני (poor person). Rashi concluded that it did not mean "to be afflicted." Rashi tells us to look at the previous plague of hail. G-d gives the Egyptians a way out of the plague without having to even free the Israelites: go inside (Exodus 9:19-20). Those who heeded G-d's word were spared, and those who were defiant were afflicted. For Rashi, the question asked in Exodus 10:3 is asked at this moment to remind us that G-d ultimately wanted to humble the Pharaoh and the Egyptians.
I'm not sold on the idea that the question was asked at this time because G-d's sole intent was to humble the Pharaoh, but it does bring up an important point about humility. In order to accept G-d, it takes humility. Even in a completely secular or humanistic context, it is very difficult (if not downright impossible) to see the truth if you think you are always right and can never do any wrong. That is the crux of R. Bachya's commentary on this passage. Pharaoh was so haughty that he could not utter the words "I was wrong." By continuing to harden his own heart (see my commentary on what it meant to have Pharaoh's heart hardened), Pharaoh continued to stroke his own ego and assumed that he was right about everything. He dug his heels in so deeply that it ended up devastating his country, wiping out his army, and costing him his own life by the end of the Exodus story.
Because the Pharaoh could not humble himself, he paid a steep price. How we can learn from the Pharaoh's mistake is asking ourselves what it means to be humble. Yes, the verb "to humble" shares a root with עני (poor person). At the same time, we have to be reminded that Moses was considered to be ענב מאד, or "very humble" (Numbers 12:3). It brings us a lesson in what constructive humility looks like, and it's not meekness. After all, Moses led a group of Israelites through the desert and stood up to G-d at least twice in the Torah. Humility was about understanding one's place and where they fit. As R. Jonathan Sacks points out, humility is about honoring others: "it does not mean holding yourself low; it means holding others high." Moses understood the concept of humility well, but Pharaoh was oblivious. There was so much evidence in front of him that there was someone more powerful, and he could not see past his ego.
Truth was an elusive concept for Pharaoh, and that is what happens when we cannot admit or utter the words "I don't know," "I can't," or "I screwed up." If you cannot see your errors, you cannot see truth. By being incapable of seeing this truth, you cannot repent and work on yourself to grow as a person. Pharaoh was so oblivious that he could not recognize that G-d controlled the very air that Pharaoh needed to breathe (Sforno on Exodus 10:3). Pharaoh is the personification of arrogance, and his demise is a literary device as to what happens when cannot make any space to admit we were wrong or that we can grow. As Moses and Abraham teach us, we are not meant to be doormats. At the same time, we are not meant to get so caught up in ourselves that we think are immune from error. When can we become humble? As Pirkei Avot (1:14) asks, if not now, when? Our ability to be humble can start now by learning what not to do from the Pharaoh's example. We can ask ourselves how we can hold ourselves in high regard while still holding others in high regard. That way, we don't have to repeat the fate of Pharaoh by drowning in a sea of hubris.
כה אמר הי אלהי העברים עד מתי מאנת לענות מפני שלח עמי ויעבדני.
"So said G-d, the G-d of the Hebrews, 'Until when will you refuse to be humbled before Me? Send out My people that they may serve Me!" -Exodus 10:3
When looking at the text, Rashi picks up on the Hebrew word לענות (to be humbled). He thought it meant "to be afflicted," (see Exodus 22:21), but concluded that it means "to be humbled." The Hebrew לענות has the same root as the word עני (poor person). Rashi concluded that it did not mean "to be afflicted." Rashi tells us to look at the previous plague of hail. G-d gives the Egyptians a way out of the plague without having to even free the Israelites: go inside (Exodus 9:19-20). Those who heeded G-d's word were spared, and those who were defiant were afflicted. For Rashi, the question asked in Exodus 10:3 is asked at this moment to remind us that G-d ultimately wanted to humble the Pharaoh and the Egyptians.
I'm not sold on the idea that the question was asked at this time because G-d's sole intent was to humble the Pharaoh, but it does bring up an important point about humility. In order to accept G-d, it takes humility. Even in a completely secular or humanistic context, it is very difficult (if not downright impossible) to see the truth if you think you are always right and can never do any wrong. That is the crux of R. Bachya's commentary on this passage. Pharaoh was so haughty that he could not utter the words "I was wrong." By continuing to harden his own heart (see my commentary on what it meant to have Pharaoh's heart hardened), Pharaoh continued to stroke his own ego and assumed that he was right about everything. He dug his heels in so deeply that it ended up devastating his country, wiping out his army, and costing him his own life by the end of the Exodus story.
Because the Pharaoh could not humble himself, he paid a steep price. How we can learn from the Pharaoh's mistake is asking ourselves what it means to be humble. Yes, the verb "to humble" shares a root with עני (poor person). At the same time, we have to be reminded that Moses was considered to be ענב מאד, or "very humble" (Numbers 12:3). It brings us a lesson in what constructive humility looks like, and it's not meekness. After all, Moses led a group of Israelites through the desert and stood up to G-d at least twice in the Torah. Humility was about understanding one's place and where they fit. As R. Jonathan Sacks points out, humility is about honoring others: "it does not mean holding yourself low; it means holding others high." Moses understood the concept of humility well, but Pharaoh was oblivious. There was so much evidence in front of him that there was someone more powerful, and he could not see past his ego.
Truth was an elusive concept for Pharaoh, and that is what happens when we cannot admit or utter the words "I don't know," "I can't," or "I screwed up." If you cannot see your errors, you cannot see truth. By being incapable of seeing this truth, you cannot repent and work on yourself to grow as a person. Pharaoh was so oblivious that he could not recognize that G-d controlled the very air that Pharaoh needed to breathe (Sforno on Exodus 10:3). Pharaoh is the personification of arrogance, and his demise is a literary device as to what happens when cannot make any space to admit we were wrong or that we can grow. As Moses and Abraham teach us, we are not meant to be doormats. At the same time, we are not meant to get so caught up in ourselves that we think are immune from error. When can we become humble? As Pirkei Avot (1:14) asks, if not now, when? Our ability to be humble can start now by learning what not to do from the Pharaoh's example. We can ask ourselves how we can hold ourselves in high regard while still holding others in high regard. That way, we don't have to repeat the fate of Pharaoh by drowning in a sea of hubris.
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:
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 creates a net benefit 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.
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.
- Removing these remittances not only eliminates a significant source of tax revenue, but also undermines the national security of El Salvador and Honduras.
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 creates a net benefit 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 TCJA.
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-TCJA (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.
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.
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-TCJA (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 (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?
3-9-2018 Addendum: More evidence that the Phillips curve doesn't work: this time, from the International Monetary Fund (Piazza, 2018).
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 (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?
3-9-2018 Addendum: More evidence that the Phillips curve doesn't work: this time, from the International Monetary Fund (Piazza, 2018).
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