Building a New Era of Governance – Part 1

*Note: the views expressed in this posting are my own, and do not in any way represent the views of any other group or institution, public or private


Last Tuesday, November 4th, it is fair to say that the second Republican “wave” since 2010 swamped Congress and state governments across the nation. In Congress, the GOP managed to pick up at least 7 seats in the Senate (giving them a majority of 52, over the key threshold of 51), as well as at least 12 seats in the House (increasing their majority to at least 244). Gubernatorial elections also proved to be a route for the Democrats, as the Republicans snatched up another 3 governor-ships from the Democrats.

Despite these impressive gains, however, they will prove to be utterly meaningless unless Republicans in Congress can seize this opportunity to act in a bold, pragmatic, and bipartisan manner to go about conducting the nation’s business. More than anything, people are simply disgusted and fed up with what is shaping up to be (by many measures) one of the least productive governmental terms in American history (see chart).  While some may view inaction as a good thing (less activity means a smaller government = good, right?) I do not see this stagnation as benefiting anyone.  Even if few bills are passed, old ones already enacted are left to atrophy and will not be updated regularly to adapt to changing circumstances, creating new problems.  Additionally, it takes legislation to repeal legislation; inaction does not mean the government is in fact getting any smaller (and assuming a smaller government is even desirable in the first place).

Overall, as many pundits have noted, it is best to view the results of this election as an expression of disillusionment with a lack of leadership on either side of the aisle and a desperate plea for governance, as opposed to an endorsement of some ideological mandate. Especially when it comes to Congress, people are incredibly irritated that its members are well-paid, work part time (with much of their time spent campaigning), and yet very little of the country’s increasingly urgent problems are attended to. It is true, what many business-minded people would say: if the government were a private entity, they would’ve pushed out of the market a long, long time ago.

4.10.14.2

In terms of bills passed per legislative session, the 113th Congress is shaping up to be among the least productive in recent history

It is true that the outlook for an increase in Congressional productivity remains bleak, at least for the next two years. It’s a well-established pattern by now that American government doesn’t do too much unless a single political parties occupies both the Whitehouse and controls both chambers of Congress. However, this need not be an excuse for inaction; in fact, it cannot. The following is an agenda that I think Republicans can pursue that will not only help to solve the problems the public wants solved (and in a way that is congruent with the wishes of the electorate), but to help to build a new era of lasting American governance.

1) Lengthen the terms of the President, House, and Senate.  Of the many issues facing the country, this one (along with the next two agenda items) may seem like one of the least deserving of our attention.  However, relatively short Senate, Presidential, and (especially) House terms I believe has had a dramatic impact on the productivity of individual members.  Since elections come so frequently, many in the federal government must be in a near constant campaign mode that not only distracts them from legislative work but serves to polarize their “views”, making bipartisan consensus much more difficult.  At least attempting a Constitutional amendment, though quite unlikely to pass, could get the ball rolling on a future reform down the road.  Enactment of this reform, along with the following agenda item, could help to address the entrenched legislative paralysis.

2) Find a way to tie Congressional & Presidential pay to performance.  This one would be tough to implement (requiring another Constitutional amendment) and to find sufficient political support for, but I think it is an absolute must if we are to make meaningful legislative activity a core incentive for our politicians.  In my view, an independent committee (much like a state-level Civil Service Commission) would simply be given power to set Congressional & Presidential salaries and benefits upon a non-biased, impartial “performance review”.  This commission would be made up of individuals equally divided between the main political parties and would themselves be subject to background checks to ensure institutional independence

Many other potential reforms, such as a partial or complete scrapping of First-Past-The-Post (FPTP) representation in favor of more proportional representation and the outsourcing of congressional redistricting to independent commissions could help to both decrease the partisanship of the federal legislature and increase the “representative-ness” of individual members of Congress.  Ironically, the prospects of these reforms passing is weak at best; nonetheless, they would be crucial for the government to enact productive agendas in the future, and thus should be given priority in the agenda of the 114th Congress, even if chances of passage are slim.

As for other politically-feasible policy objectives that should be on the Congressional calendar:

3) Immigration reform.  No, seriously.  As discussed in more detail in my post “Why Republicans Should Embrace Comprehensive Immigration Reform”, the United States is in desperate need of both low and high-skilled labor, especially as the population ages in the coming decades.  Allowing in more immigrants (especially high-skilled) is not only politically reachable but is in line with a Republican emphasis on supply-side economic reforms.  Emphasis on increased border security (which is a prerequisite for any action for the party base, even if redundant and impractical) could be combined with reforms and/or increased funding to streamline the legal naturalization process.  At the very least, both Democrats and Republicans agree on the need for more high-skilled immigrants and an increase on the cap for H-1B work visas.  Increasing visa caps could help stem the tide of illegal immigrants (which Republicans are more concerned about anyway) via the substitution effect.  For best chances of passage, I would leave out measures that deal with illegal immigrants currently residing in the U.S. – a piecemeal, incremental approach would work best here.  Overall, immigration reform is an almost cost-free method to spur the economy in both the short and long-term, and considering how long it has been on the national agenda, it is incomprehensible that some sort of agreement cannot occur.

Due in part to an aging population, the U.S. Labor Force Participation Rate has reached levels not seen since 1978, increasing the need for new sources of labor

4) Corporate tax reform 

Again, opportunities for bipartisan agreement are rife here.  Everyone knows the corporate tax code is an unmitigated disaster, with high rates, too many loopholes, lost revenue, and distorted economic activity.  Make the system more territorial, modify depreciation schedules, scale down MNC deferral opportunities, eliminate tax expenditures, and reduce marginal rates.  Specific expenditures that are especially worthy of the chopping block are special preferences for oil & gas operations, insurance companies, corporate jets.  This operation need not be revenue-neutral, either; although this would technically constitute a tax “increase”, the removal of distortions and tax compliance hurdles will act as a counter-acting tax cut.  The government can gain revenue by increasing effective rates while simultaneously increasing growth and leaving businesses feeling better off than they do under the current tax regime.

5) Replace the sequester with targeted cuts & incremental, implement long-term reforms

The era of yawning short-term fiscal deficits is over – temporarily, at least.  Indeed, America has witnessed its fastest pace of fiscal consolidation since World War 2, with deficits as a percentage of GDP falling from 9.8% of GDP in FY 2009 to 2.8% of GDP in FY 2014 – a swing of 7% in just 6 fiscal years.  This has come about due to a variety of factors, including economic growth, slightly higher taxes and broad-based cuts to discretionary outlays.  It is this last option that is cause for concern, however, as the cuts initially enacted in the Budget Control Act of 2011 (the founding legislation of the so-called “sequester”) are quite blunt.  They also come at a time when discretionary spending is approaching record lows as a percentage of GDP, and arguably when increased federal spending on items such as infrastructure are desperately needed and interest rates remain at historic lows.  Additionally, they have subtracted from economic growth in the short-term, lengthening the time needed to close the output gap between real and potential GDP.  As has been projected for decades now, the biggest threat to American fiscal sustainability is the coming explosion in mandatory spending.  Therefore, the new GOP-led Congress must enact gradual but effective entitlement reform now – the longer it waits (as past Congresses have), the more abrupt the future adjustment.

Fiscal policy has not been this contractionary since the end of World War 2

Fiscal policy has not been this contractionary since the end of World War 2

Economic growth since 2009 has increased revenues and decreased "automatic stabilization" spending.  Meanwhile, higher taxes have also increased revenues, and new spending cuts have been enacted.

Economic growth since 2009 has increased revenues and decreased “automatic stabilization” spending. Meanwhile, higher taxes have also increased revenues, and new spending cuts have been enacted.

Non-defense discretionary spending has fallen to record lows as a percentage of the American economy

Non-defense discretionary spending has fallen to record lows as a percentage of the American economy…

...even as interest rates remain at record lows

…even as interest rates remain at record lows

Debt Held

The true threat to America’s finances comes from the coming explosion in mandatory “entitlement” spending. Congress much enact tough reforms now to stem this tide of red ink.

 

To be continued…

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Why Republicans Should Embrace Comprehensive Immigration Reform

The escalating child migrant crisis has once again brought our ailing immigration system back into the mainstream spotlight.  As usual, both sides revert back to their usual arguments.  Republicans take the migrant crisis as being a result of loose borders and lax executive enforcement, and many call for more deportation of both the child migrants and all illegal aliens within the United States.  In contrast, Democrats generally argue for making it easier and faster to become a citizen and to implement gradual amnesty. Though both sides have legitimate concerns and arguments, I (surprisingly) mostly side with Democrats on this issue, and I strongly believe that Republicans should reconsider their stance on immigration reform.  Here’s why:

  1. We need more immigrants, legal or illegal, and badly.  Contrary to the beliefs of many, virtually all types of immigrants – legal or illegal, skilled or unskilled, etc. – benefit the country economically (though legal immigrants are, of course, preferable to illegal immigrants).  Skilled immigrants make up a large proportion of  innovative business start-ups, while low-skilled immigrants lower prices for consumers & employers and take jobs that natives are less inclined to perform.  All groups add to national GDP, and (unlike in many European countries), they usually contribute more to overall tax revenues than they consume via social programs, helping to balance budgets at the federal, state, and local levels.  As such, there is a strong economic argument to expanding legal immigration and making legal naturalization avenues more efficient.  Macro-economically, more legal immigrants could serve as both a short and long-term economic stimulant to the moribound US economy, adding to short and long-term supply and demand.  Due to the retirement of the baby boomers, the US labor force will continue to contract in the coming decades, producing labor shortages that an influx of immigrants could help fill (and freeing up natives to perform other jobs, thus boosting job creation).  Additionally (and largely due to the aforementioned retirement of the baby boomers), America faces long-run fiscal challenges that more legal immigrants (with their contribution to higher GDP and higher tax revenues) could help to alleviate.  Considering that Republicans are broadly regarded as the “party of business” and of fiscal conservatism, Republicans should thus be embracing legal immigration.  Instead, though they pay lip service to legal immigration, their laser-like focus on illegal immigration and accelerating enforcement measures overshadows their support for legal immigration.  Ironically, an increasing of legal immigration via immigration reform would help to solve illegal immigration and the presence of large numbers of undocumented workers.
  2. Continued deportation of unauthorized immigrants is impractical and costly.  Currently, there are over 11 million unauthorized immigrants residing within the United States.  Many Republicans argue that deportation should be ramped up to deal with them.  I disagree.  First of all, despite the perception among many, deportation rates have stabilized at relatively high levels in recent years – rates have not fallen off a cliff, so it’s not like this strategy isn’t being actively pursued.  Second, can you imagine trying to deport all 11 million + immigrants from the US?  Deportation already costs the government quite a bit, with the Department of Homeland Security reportedly requesting approximately $230 million in budgetary authority for the deportation of undocumented immigrants just in fiscal year 2015.  That is for the current rate of about 400,000 people a year, which is, of course, partially offset by continued inflows of unauthorized immigrants.  Logistically, deportations of a larger scale would undoubtedly create massive strains on the system.  Additionally, the removal of 11 million people would be hugely destructive economically – lowering productivity, raising prices, and disrupting both the creation and operation of businesses, at a time when the US has yet to fully recover from the 2007-2009 recession.  Of course, we also cannot forget the costs of splitting up families, which imposes deep scars the social fabric of the nation.  If anything, deportation should be scaled down.
  3. Resources devoted to immigration enforcement are at historical highs – and further enforcement measures, like building a wall, will not stop illegal immigration.  As partially mentioned above, immigration enforcement (such as deportations) is hardly on decline.  Indeed, according to The Economist, border enforcement costs about $20 billion a year, which is more than all other federal law enforcement agencies combined.  Yet, despite all these costs, we clearly still have enforcement problems, and until we reform the immigration system, we always will.  Why?  The reason is simple: the economic incentives for people to immigrate to the United States are overwhelming.  Even for low-skilled immigrants, pay is usually several times greater in the United States than it is in their country of origin.  No matter how much the federal government devotes to border enforcement and trying to prevent people from immigrating (legally or not), people will keep trying to come here – and many will find ways to succeed.  Since these forces will not be disappearing anytime soon, it would be better to work with the force, not against.
  4. Current immigration policy is tantamount to anti-trade protectionism – the antithesis of Republican ideology.  Republicans, in accordance with their belief in free markets, tend to be much more supportive of free trade than liberal Democrats.  However, the current legal immigration system is based largely on a series of quotas.  According to Vox.com, on the employment side a maximum of 65,000 H1B visas (for high-skilled workers) and 66,000 H2B visas (for low-skilled workers) are issued by the federal government annually.  Both of these quotas are usually hit pretty quickly, indicating that employer demand in the US is far outstripping supply.  These quotas are artificially restricting the supply of workers, raising employment costs and decreasing growth prospects.  Additionally, the number of “green cards” supplied tends to be less than demanded, especially for people without US-based relatives or prospective employers.  These restrictions do not let the market to operate efficiently, which goes against Republican notions of free market capitalism.  Not to mention, these quotas help to drive the illegal immigration that everybody is so furious about.
  5. Current immigration proposals do not grant unconditional amnesty – nor should they.  Last time I checked, the current mainstream immigration reform bills passed by House committees in the summer of 2013 allowed unauthorized residents to gain citizenship only after meeting several conditions, including paying several fines and going through vigorous checks.  Republicans are right to be weary of the granting of unconditional amnesty – unauthorized immigrants did, after all, technically break the law, and the rule of law must be upheld for the republic to function properly.  However, the current bills (and any bill that is likely to be passed) will not let unauthorized immigrants  off the hook.  Now, many Republicans say that any form of amnesty, conditional or not, is both unfair (as others still had to wait to become naturalized) and undermines the rule of law.  I think the fines help to partially offset this, punishing those who broke the law.  Though it (understandably) seems unfair that immigrants would be able to gain a “special” route to citizenship this way, such a route is, on net, still much more practical than sending those residing here illegally “to the back of the immigration line”.  Doing so would be too costly economically, difficult logistically, and would overwhelm the already strained legal immigration system.
  6. Republicans could use immigration reform to their political advantage.  Everyone knows that Hispanic voters tend to lean Democratic, and that this persuasion is becoming increasingly costly for Republicans electorally.  As the Hispanic population continues to grow in influence, the political parties increasingly need their support in order to win elections.  Right now, Republican opposition to immigration reform and a perceived anti-immigrant ideology is hurting the party.  Embrace immigration reform, and the Republicans could vastly improve their political fortunes.

Considering all of the outstanding issues on the federal policy radar, it is understandable that immigration reform might not top the policy agenda at the moment.  But until Washington is ready to devote its full attention to the issue, Republicans should seriously consider revising their views on the subject.  Too much is at stake for them not to do so.

State of the Union Reactions, Part 2

I was talking last time (Part 1) about my immediate reactions to the State of the Union Address, particularly from a political lense.  Now I’d like to focus on the major problems the President wishes to tackle and the strength of his domestic policy recommendations, in order as they come up in the address (though, because of the length of the address, I won’t be hitting every point).

Obama is right to place heavy emphasis on equality of opportunity.  Unlike the concept of income inequality, an opportunity agenda is something that has broad support across the political spectrum and is a shared value nation-wide.  One of his best recommendations is an overhaul of the tax code, whose loopholes cause precious time and resources to be diverted away from productive activities as individuals and companies seek to minimize their burdens.  Running at an estimated cost of at least $250 billion/year in lost economic output and at least $1 trillion/year in lost revenues, the tax code is an abomination.  This lost output translates into lost job opportunities and slower job creation.  If the President fails to reform it (e.g. by cutting loopholes and lowering marginal rates), it will assume the title of Obamination.  His proposal to use some of the savings to help rebuild the nation’s infrastructure is also not a bad proposition, as the American Society of Civil Engineer’s 2013 Infrastructure Report Card estimates that America would need to allocate an extra $1.6 Trillion just to upgrade our infrastructure to a state of “good repair”.  If we continue to fail to maintain the nation’s physical capital, our competitiveness will deteriorate and the sluggishness in productivity growth that has been the norm since the 70’s will drag on.  Additionally, his idea of further connecting businesses and universities via regional hubs is also laudable.  Universities are a critical source of research and discovery; connecting them with businesses can help transform those ideas and discoveries into useful, productivity-enhancing goods and services.  All of these ideas will bolster American opportunity.

From there, his message starts to deteriorate a bit.  He mentions that his administration has made more loans to small businesses than any other, and wants to do still more.  Is this really a good thing?  State-directed lending (à la China) has had mixed results both in the past and present.  Although sometimes successful, loans tend to be politically driven and may not exhibit much, if any, return on investment.  As such, they tend to distort the market and allocate resources inefficiently, propping up businesses, ideas, and methods that aren’t economically viable in the long-run.

The address then turns back to embracing the market with his sound advocation of patent-reform and the ongoing natural gas/fracking boom.  Indeed, both are important issues; litigation has gotten out of control in many parts of the country, adding needless transactions burdens on thousands of businesses; a sounder process that reduces frivolous litigation would be welcome.  Streamlining the permitting process and reducing red tape for natural gas is also a long-needed reform; it’s good that the administration is finally realizing that fossil fuels still hold massive potential in both creating jobs and lowering American energy costs (which have dramatically increased our competitiveness relative to other developed nations, such as those in Europe).  At the same time, his mentioning of reducing fossil fuel subsidies is good as it produces problems similar to the problems small business loans produce.  Republicans would be smart to firmly stand with the President on this issue and work to get rid of the subsidies once and for all.  Corporate welfare almost never works – we have far better uses for our money.

After talking about the usual climate change mantra, he then shifts to immigration.  Personally, my views contain a mix of both Republican and Democratic thinking.  I agree with the Republicans that “blanket amnesty” would have some serious harmful effects on the country.  Specifically, I think granting illegal immigrants citizenship status who broke the law without penalty would undermine the rule of law, something that has already been undermined during this administration (think federal drug enforcement).  Not only that, it isn’t really fair to those who took the time and effort to come here illegally.  At the same time, Democrats are right in that deporting millions of illegal immigrants isn’t practical (or smart policy) either.  Not only is it extremely costly in fiscal terms, but it is damaging economically.  Like it or not, immigrants add to our GDP, lower costs for businesses and allow other citizens to specialize in higher value-added jobs.  Deporting them would raise costs, disrupt economic activity and ultimately slow growth.  Additionally, many illegal immigrants now have children – the so-called “Dreamers” – who came to this country through no fault of their own.  Deporting them or, worse, splitting up families via deportation is emotionally traumatizing and morally questionable.  As such, I think the best solution is to grant them citizenship status only after a) thorough background checks have been conducted b) high penalties (for breaking the law) have been applied, including perhaps putting them at the end of the line behind other immigrants that are attempting to get naturalized status.  Also good would be to streamline the naturalization system in a way that maintains our national security.  The President didn’t lay out the terms of his desired reform package in his address, though I’m sure that whatever he supports will contain lots of needed naturalization and far too little penalization.

The President then moves on to the importance of education, especially pre-K education.  It is true that early childhood education can improve cognitive development and boost achievement in a child’s academic career (and even later on in life), and is something the country needs to consider to bolster its human capital and even total factor productivity (the level of efficiency in turning capital and labor into economic output).  However, his advocation of “invest(ing) in new partnerships with states and communities across the country” to boost pre-K education should be approached with caution.  I believe that states and localities know best how to create competitive, high-quality educational programs.  Getting the federal government involved, even if it is “just” via funding, might not be a good idea.  Federal involvement can hinder local innovation and can make localities far too reliant on federal aid (something that can make states puppets of whatever the federal government wants – think Medicaid).  Increasing federal involvement since the 1970s, especially since the creation of the Department of Education by the Carter Administration hasn’t noticeably boosted educational access or progress; indeed, since the 1970s, progress on indicators ranging from reading and math proficiency to graduation rates have stagnated.  Let the states and localities do it on their own; no federal involvement is necessary.

Obama’s policy proposals then turn outright populist with his insistence that Congress raise the minimum wage, and lended support to Senator Tom Harkin and Representative George Miller’s proposal to raise the federal minimum from $7.25/hour to $10.10/hour.  On net, I think this is a very bad idea.  Let’s start with the usual neoclassical argument: assuming that the current minimum wage right now is at the “equilibrium” wage (which likely is not true), a raise in the price floor would lower business demand for labor while simultaneously increasing the supply of people willing to work.  This creates a labor surplus that would translate into unemployment.  Indeed, a Congressional Budget Office estimate of the proposal’s effect on employment projected that enacting the Harkin/Miller bill would reduce employment on net, with its central estimate at about a 500,000 decrease in employed workers.  Then we hear the counterargument by left-leaning economists, such as those at the Economic Policy Institute.  They argue that an increase in the minimum wage could actually increase economic growth and job creation, counteracting any job losses.  This would be due to the “multiplier” effect of raising the wage of millions of low-income citizens, whose marginal propensity to consume (according to Keynesian theory and many studies) is high.  In other words, the newfound income these people would have would be spent almost immediately, increasing aggregate demand and generating economic activity.  That is a possibility I suppose. However, we must remember that the equilibrium wage is vastly different across the nation – different states have different price levels and levels of competitiveness; for some, raising the minimum wage could theoretically increase job creation; in others, however, raising the minimum would place it far above the current equilibrium, increasing unemployment.  As The Economist has noted, places like Puerto Rico are already suffering from high labor costs due to the current minimum wage, and economists in general have long recognized the high minimum wages of many European countries as contributing to their high long-term unemployment rates.  In places like these, the costs of further increases would far outweigh the economic “benefits”.  Additionally (as The Economist also mentioned), let’s face it: many of the jobs minimum wage workers currently perform could easily and efficiently be done by technology and automation.  I believe that the only reason many of these jobs still exist is due to cultural norms, which have a tendency to get in the way of rational economic thinking.  Raising the minimum wage could accelerate the shift towards these technologies substituting for low & medium-skilled workers, hurting them in the short term.  No matter what, the minimum wage is a command-and-control solution to tackling the problem of poverty and low-wage work that will cause more harm than good.  Other ideas (such as an increase in the earned income tax credit that the President mentioned) that reward workers without distorting the market and disincentivizing them from working (or employers from hiring) are needed.  Additionally, wages are partially a result of overall cultural norms – change the norms, and perhaps we can change the wage. 

The last big thing I wanted to address from Obama’s speech is a commendable proposal, the MyRA.  Partially due to record-low interest rates, savings rates for Americans are at an all-time low.  This is very worrying.  Savings are crucial for a good retirement (which Social Security was originally meant to compliment, not substitute) and for consumption smoothing (look up the Modgliani life cycle hypothesis).   A lack of them can put further liabilities and pressures on entitlements.  Additionally, savings help the economy to grow by boosting available financial capital for investment.  Without them, long-term economic growth is put into jeopardy.  Helping workers to put away reliable savings, especially at a time when defined-benefit pensions are dissapearing in favor of less stable 401Ks is potentially a good idea for governmental involvement.  My only caveat: should it be federal?

Overall, the speech was good, with a mixture of good and bad proposals.  The nation now needs to prioritize and, when that is done, begin to have thorough debates on these critical issues.  Forget midterms; this is among the administration’s last good chances to finally leave a positive mark on American history.