The Market for Citizenship

citizenship1

Every country has a comparative advantage, the ability to produce some sort of good or service and produce it well. The United States, for example, has a thriving airplane industry, France is known for its cheese, and Saudi Arabia is a major oil producer. Some countries, however, have found more unusual niches. In the case of some, especially smaller island nations such as Dominica, that comparative advantage appears to be purchasing citizenship.

The number of “Economic Citizenship Programs” (ECPs or Citizenship by Investment Programs) worldwide has surged in recent years. Such programs allow wealthy individuals to legally obtain citizenship and a passport in return for a large contribution to a national development fund or a sizable real estate investment in that country. What’s more, many of these programs don’t require individuals to relinquish their existing citizenship, and instead allow them to hold multiple citizenships simultaneously. The concept of the ECP is not new; St. Kitts and Nevis’ program dates back to 1984, and Dominica introduced its Citizenship by Investment program in 1993. Today, between 30 and 40 countries have such programs, offering either immediate citizenship in exchange for an investment or a faster track to obtain citizenship for those who make a large investment in that country.

Worldwide, several thousand individuals spend around $2 billion per year to obtain citizenship and passports through ECPs. The market for citizenship is growing, with most investors coming from China, Russia or the Middle East, places where political circumstances at home make international travel difficult. ECPs tend to target wealthy individuals from developing countries who may have the means to travel internationally, but lack a passport that will enable them to do so. A wealthy executive from the Middle East, for example, will likely be able to travel to many more countries visa-free with a Caribbean passport than he would be able to with a passport issued by a country such as Iraq. For wealthy individuals from poor or otherwise unstable countries who love to travel, going through the process to buy a second passport, while often time-consuming and expensive, is entirely worth it.

Particularly for those countries that are smaller and less affluent, ECPs generate large revenue streams with little hassle. Frequently, when a national government needs money, it will resort to either raising taxes, cutting spending, or issuing sovereign debt. Raising taxes and cutting spending can be politically unpopular, especially during a recession. Sovereign debt, while a popular option, does require governments to pay interest to investors, thus introducing a financial obligation. Legally selling passports, however, imposes no additional costs on the taxpayer base and does not require a national government to pay back investors. Instead, a national government can capitalize on the appeal of citizenship and use these earnings to finance other debts, development programs, and disaster recovery programs. (Disaster recovery programs are especially important for hurricane-prone Caribbean nations).

citizenship2.jpg
A street in Malta’s capital, Valletta. While Malta’s ECP is pricier than many, it does offer investors easy access to continental Europe via Malta’s EU membership. 

Take the case of Dominica’s Citizenship by Investment Program, one of the world’s most lenient ECPs, allowing individuals to receive almost immediate citizenship and a passport in exchange for either a $100,000 donation to the country’s Economic Diversification Fund or a $200,000 investment in a government-approved real estate development project. It only requires that the investor hold on to the property for at least three years. Furthermore, Dominica’s program has no residency requirement whatsoever. In other words, it is possible to become a citizen of Dominica with no intention of ever going there.

Dominica’s Citizenship by Investment Program has had remarkable success, with the tiny island nation selling around 2,000 passports per year. Dominica is not an affluent country — its GDP per capita was $7,144 in 2016 — and its main industries, namely tourism, agriculture, and light manufacturing, are not especially lucrative. Recruiting foreign investment through citizenship, therefore, allows Dominica to capitalize on its status as a small country with a benign presence on the world stage. Dominican citizenship is especially attractive to wealthy individuals from unstable regions of the world, as Dominican passport holders can travel to over 120 countries without a visa. Furthermore, the Dominican government has gone to great lengths to make the island a business-friendly place. In Dominica, there are no capital gains, inheritance, foreign income, or wealth taxes, and qualifying entities can be exempted from import duties.

One of the oldest ECPs, that of St. Kitts and Nevis, began as a means to cope with the withdrawal of European sugar subsidies, which destroyed the local economy. Today, anyone interested in obtaining citizenship from the tiny nation of 55,000 can do so either by contributing $250,000 to St. Kitts and Nevis’ Sugar Diversification Industry Fund, which is tasked with diversifying the sugar-dominated economy, or by investing $400,000 in a government-approved real estate project. So far, St. Kitts and Nevis has sold over 10,000 passports for at least $250,000 each, and earnings from its program now account for around 25 percent of its GDP. These inflows have also benefited St. Kitts and Nevis’ real estate, tourism, and construction industries.

Small Caribbean nations are not the only countries to have citizenship by investment programs. Approximately half of European Union member states have immigrant investor programs, and those who buy in benefit from the freedom of mobility throughout the EU under the Schengen Agreement. Typically, these programs cost more than programs in the Caribbean and have stricter residency requirements, but those who do buy in are able to live and work anywhere in the EU. Even the United States has an immigrant investor route: the EB-5 (Employment-Based Fifth Preference Immigrant Investor) visa program reserves around 10,000 visas per year for immigrants who invest at least $1 million to create or preserve jobs in the United States (or $500,000, if the investment is made in a high-unemployment or rural area). A qualifying immigrant investor, plus a spouse and children, then receive 2-year conditional green cards that can potentially be converted into permanent resident status, and eventually, citizenship.

ECPs, however, have come under criticism, and have been exploited for purposes of criminal activity. Italian businessman Francesco Corallo, for example, managed to purchase a Dominican diplomatic passport despite being on Interpol’s most-wanted list for tax evasion and bribing politicians. When confronted, Corallo tried to claim diplomatic immunity by saying that he was Dominica’s permanent representative to the UN’s Food and Agriculture Organization (his claim failed to sway the authorities, however, and he is now being held in St. Maarten). Similarly, St. Kitts and Nevis’ program has drawn criticism from around the world for its lax controls, and in November 2014, Canada revoked St. Kitts and Nevis citizens’ visa-free travel privileges, thus diminishing the power of the St. Kitts and Nevis passport. The United States’ program has also drawn criticism and has been accused of “selling American citizenship” as opposed to merely attracting foreign investment. Furthermore, it is very difficult to measure the impact that immigrant investors have had on the American economy, leading many to question the EB-5 program’s effectiveness and efficiency.

ECPs provide an innovative way for countries to raise revenue without having to raise taxes or take on more sovereign debt, often providing revenue for development projects, and sometimes disaster recovery that would not have been available otherwise. Yet the success of these programs relies on a solid design that promotes the efficient use of investor funds and that prevents criminals from exploiting the system. If designed well, these programs are a lifeline; if not, they can become pipelines for international crime.

 

 

 

Advertisements

Economics of Happiness: An Interview with Richard Easterlin

easterlin

“There’s a fair proportion of economists that will dismiss this out of hand as heresy,” Richard Easterlin, renowned “father” of the economics of happiness and namesake of the controversial Easterlin Paradox, told me. “But on the other hand, as you know, the Sarkozy Report came out about 2008.”

The Report by the Commission on the Measurement of Economic Performance and Social Progress (2008), or, as Easterlin put it, the “Sarkozy Report,” was a speculative paper commissioned by Nicolas Sarkozy, then-president of France, “to identify the limits of GDP as an indicator of economic performance and social progress … [and] assess the feasibility of alternative measurement tools.” Tasked with reporting on these initiatives was Nobel laureate Joseph Stiglitz, with close advisement from fellow Nobel laureate Amartya Sen and Neo-Keynesian economist Jean-Paul Fitoussi.

Easterlin best articulated the significance of the Sarkozy Report in his widely popular response paper “Policy Implications of the Sarkozy Report” (2010). The paper delineated four primary economic measurements contained in the report:

  1. Production (GDP)
  2. Economic well-being (material living level)
  3. Overall well-being (of which economic well-being is one of eight components)
  4. Well-being of current vs. future generations (“sustainability”)

It should come as no surprise that Easterlin, who has dedicated the greater part of his academic career to the economics of happiness, would mark the third item as the Sarkozy Report’s most substantive contribution. In fact, this report is a familiar document to students of his economics of happiness course at USC due to its significance as a milestone for the happiness and well-being branches of behavioral economics.

Having begun research on the topic of subjective well-being (SWB) in the early 1970s, Easterlin found true validation in an international effort to explore policy implications of the economics of happiness.

“It was indicative of the fact that there really has been a major paradigm shift where economists increasingly are willing to listen to what people say. Sometimes it’s just political attitudes,” said Easterlin. “But as I said, it has taken off. So it’s really been, from my point of view, quite surprising, but at the same time rewarding because it makes me feel like people are paying attention to this, and this is very important.”

Throughout his academic career, Easterlin has faced criticism from voices across mainstream economics, informed by the disciplinary dictum that “economists don’t care about what people say, [they] only observe what people do.” For example, unemployment data – which Easterlin views as a self-reported, falsifiable metric – remains unimpeachable in the established paradigm of economics.

“You inherit it, and you don’t question it,” Easterlin said. “But new things come along, and you question them pretty severely if they run counter to the paradigm as happiness did. Not just in terms of its relationship to economic growth, which made it doubly hard to understand, but simply because it was accepting what people had to say about their well-being.”

Easterlin’s rejection of the academic status quo manifested itself in his declaration of the Easterlin Paradox, which challenged one of the fundamental tenets of economics: that more money leads to higher happiness. In the short run, Easterlin found that higher income does indeed correlate to a higher level of happiness; however, after acknowledging available data on the long-run relationship between happiness and income, he found no significant positive correlation. Easterlin’s explication of the inconsistency between cross-sectional and long-run time series data brought him fame and put his research at the center of charged debates between economists, behavioral and classical.

The research that Easterlin has conducted is highly empirical, constructed with data compiled over decades from multinational populations. For example, Easterlin has challenged notions that transitions from Soviet-style socialism to capitalism increases life satisfaction. While data from social scientist Hadley Cantril, author of “Soviet Leaders and Mastery over Man,” showed that there is a massive decline in life satisfaction following the collapse of a socialist nation, his research failed to include later-released data showing that life satisfaction existed at “fairly high happiness” leading up to the collapse. This suggests that it was not the socialist system per se that decreased life satisfaction, but rather political factors that compromised the stable period of high happiness. Of course, political factors are related to economic systems, but in Easterlin’s reckoning, whichever economic system maximizes the dimensions of SWB should be pursued.

“I didn’t start out with the view that socialism had any redeeming features or that the welfare state was a superior situation. As the evidence has accumulated, it’s becoming increasingly meaningful,” Easterlin said. “At the individual level, evidence seems to suggest at the extent you sacrifice your family and your health to make money, intuitively it’s not going to do much for your happiness. Whereas to the extent you try to achieve a reasonable balance, you know, put a lot more weight on your family life, exercise … the happier you’re going to be. But what we can do is have economic growth in which the incremental resources, instead of being left to the individual via consumer sovereignty as to how they are used, are determined much more by governmental intervention. Healthcare policy, schooling, maternity leave, paternity leave, provisions for old people – that is sort of a cradle-to-grave welfare policy you have in Scandinavia. They have high rates of growth as the Western world goes – Scandinavia is as good or better than most countries, including the U.S.”

Fiscal policies and fundamental beliefs in theories of government clearly divide those aligned with Easterlin and those who fare libertarian or right-of-center. But to Easterlin, there’s no mistaking it: a healthy work-life balance determines high quality of life, and Scandinavian economic systems provide the healthiest work-life balance recordings, and thus, the happiest reported populations.

When asked which measures could be taken to foster research conducted in his field, Easterlin focused on empirics.

“We still need a lot more specifics and data about policies that are conducive to happiness, [like] family policies,” said Easterlin. “So my feeling is that [the future] is trying to get better insight into those things, and probably also into broader questions on civil rights. And I think it’s interdisciplinary. I think you need to know something about political science, and that’s where the commodification of labor comes in.”

Easterlin concluded: “You know I think with all these studies, people need to be attuned to them and educated [on them] in order to make holistic statements about what happiness and welfare are about, and I feel we are progressing.”

____________

To read more about welfare economics, Easterlin suggests:

The Oxford Handbook of the Welfare State

Edited by Francis G. Castles, Stephan Leibfried, Jane Lewis, Herbert Obinger and Christopher Pierson

“Produced entirely by political scientists. Not one economist in that one or sociologist. But it’s indicative that the study of the welfare state is much more a private thing in the field of political science. [Additionally, it addresses] the political socialization process, and other psychological mechanisms.”

I would also suggest:

Happiness, Growth, and the Life Cycle

by Richard Easterlin

The Argentine Inflation Problem

argentina

In the final week of 2017, Argentina’s Merval index, the most important index of Argentina’s stock exchange, hit the 30,000 point mark for the first time in history, surging 77 percent in 2017 alone. Economic growth within Argentina appears to be strengthening, and the Organization for Economic Cooperation and Development (OECD) is optimistic that Argentina will continue to experience growth in its agriculture, manufacturing, retail and construction sectors in the near future. All of this is welcome news, both for Argentina’s president, Mauricio Macri, and for the people of Argentina, as the country appears to be emerging from recession. Yet despite this welcome news, the Argentinian economy remains beleaguered by one particularly insidious force: high inflation.

According to Argentine daily newspaper La Nación, Argentina had the second highest rate of inflation in the entirety of Latin America in 2017, ending the year with an inflation rate of 24.8 percent. The only Latin American country with an inflation rate higher than that of Argentina was the catastrophic Venezuela, which experienced an inflation rate of 2,616 percent in 2017. Argentina’s high inflation rate has plagued the country, leading to the deterioration of the Argentine peso vis-à-vis other currencies while causing prices to soar, and must be brought under control if Argentina and its industries are to succeed on a global scale.

High inflation wreaks havoc on economies via a rapid rise in prices, the erosion of the purchasing power of an individual’s income, and the deterioration of the value of an individual’s savings. An extremely high rate of inflation (a rate of 1,000 percent or more) is known as a hyperinflation, which cripples economies and can be very difficult to recover from. Zimbabwe’s inflation rate, for example, hit 500 billion percent in 2008, marking the worst hyperinflation event in global history. When billions, even trillions, of Zimbabwe dollars became less valuable than the paper they were printed on, the country was forced to give up its national currency. Today, Zimbabweans conduct transactions using foreign currencies such as the U.S. dollar, the British pound and the Indian rupee.

Argentina’s inflation woes stretch back decades. In the mid-1970s, Argentina’s inflation rate shot up and averaged 300 percent per year for the next 15 years. In 1989, the inflation rate in Argentina hit a whopping 3,079 percent. In an attempt to cure the hyperinflation of the late 1980s, Argentina introduced a currency board in 1991, under which the peso was pegged one-to-one with the U.S. dollar. In other words, as the dollar appreciated and depreciated in relation to other currencies, the value of the peso would move with it. For a short period of time, the currency board was successful and tamed Argentina’s high inflation levels. However, over the course of the 1990s, as the dollar appreciated, Argentina’s currency board became overvalued, harming the country’s competitiveness globally and plunging the country into recession. With the collapse of the dollar peg also came elevated inflation, and the currency board was abandoned in 2001.

Inflation dropped to 10 percent in 2003, but it began to rise again during the presidential administrations of Nestor Kirchner and his wife and successor, Cristina Fernández de Kirchner. Yet as the inflation rate became worse and worse, Argentina’s government chose to deny it: when told in 2012 that the inflation rate in Argentina was 27 percent, Ms. Kirchner scoffed. “If it were as high as they say it is,” the then-president retorted, “the country would explode.” During Cristina Kirchner’s presidency, INDEC, the government statistical office in Argentina, began producing doctored inflation statistics that grossly underestimated the true inflation rate and nearly destroyed the country’s relationship with the International Monetary Fund. The Economist stopped printing the inflation statistics published by INDEC in its weekly issues.

Persistent high inflation has pushed up market interest rates, forcing Argentina’s government to pay an interest rate of around 25 percent to borrow in pesos. It has also destroyed Argentina’s mortgage market, forcing many Argentinians to pay upfront (and often in dollars, given the peso’s volatility), in addition to diminishing private sector lending overall by causing interest rates to skyrocket. Across low and middle-income economies, private sector lending constituted around 97 percent of GDP in 2016, and in Latin America, that number was approximately 49 percent. In Argentina, private sector lending constituted a mere 14 percent of GDP in 2016, giving Argentina one of the lowest rates in the entire world. This rate is on par with rates seen in deeply impoverished countries, such as Zimbabwe (12 percent) and Haiti (18.3 percent).

Confidence in the Argentine peso faltered, and over the next few years, it dramatically dropped in value vis-à-vis the dollar. Argentinians dumped the pesos they had and poured their wealth into U.S. dollars before their savings would wither away any further – a practice that soon became largely illegal. President Cristina Kirchner instituted currency controls that made it nearly impossible for Argentinians to purchase dollar assets. These currency controls had the unintended consequence of making Argentinians poorer compared to savers in other countries, as they were being forced to invest in an asset that was rapidly losing value. Upon the implementation of the currency controls, a black market for U.S. dollars quickly emerged in Argentina. Known as the “blue market,” it enabled Argentinians to purchase dollars against the law, albeit at exorbitant prices. In Buenos Aires, cuevas, or caves, popped up across the city to facilitate dollar purchases, and even the smallest cuevas would handle $50,000 to $75,000 in transactions per day.

When Mauricio Macri was elected president in November of 2015, he soon embarked on a variety of much needed, albeit painful, reforms to rehabilitate the Argentine economy. The former mayor of Buenos Aires quickly restored the independence of INDEC, charging the agency with creating a new and accurate inflation rate. While the move restored credibility to INDEC (The Economist began to publish INDEC’s inflation statistics again in 2017), it revealed how uncomfortably high Argentina’s inflation rate actually was. Under President Cristina Kirchner, inflation in Argentina averaged around 10 percent per year according to INDEC. Upon the election of Mauricio Macri, INDEC found that number to be closer to 25 percent.

President Macri also ended the Kirchner-era currency controls, once again allowing the peso to float freely. While this allowed Argentinians to invest in more stable assets and freed Argentina’s exporters from the burden of an overvalued peso, it also caused the value of the peso to decline further, and pushed inflation up to 40 percent in 2016. The day that the end to the currency controls was announced, the Argentine peso fell by 29 percent against the dollar

President Macri’s economic reforms initially eroded his popularity, and by metaphorically “biting the bullet” and pushing through the economic reforms that Argentina desperately needed, President Macri put himself and his party at great political risk. In 2017, however, Argentina’s fortunes began to turn around. In July, the Argentine economy expanded by 4.9 percent, and salaries began to rise. Furthermore, business confidence rose, the percentage of Argentinians living under the poverty line fell, and inflation began to fall as well. President Macri and his “Let’s Change” coalition experienced a much-needed popularity boost as well, with the coalition winning 41 percent of the vote in Argentina’s October 2017 midterm elections. This electoral mandate encouraged the president to go ahead with work on reforming the tax code and reducing Argentina’s budget deficit.
Overall, Argentina’s prospects are looking up. Argentina’s stock market had a banner year in 2017, and on February 20, Forbes published an article titled “Is Argentina The New Darling Of Emerging Markets?” Yet persistent high inflation threatens to derail Argentina’s economic recovery. The sooner its inflation rate can be brought back to a low, stable and predictable level, the better.

Will Trump Tariff Solar Panels at the Cost of American Service Jobs?

solar-panels-1794467_1280       

One of President Trump’s main promises on the campaign trail was to crack down on free trade in the name of protecting American businesses, particularly the manufacturing sector. Despite the charged rhetoric during his campaign, President Trump has been a relatively traditional Republican when it comes to trade policy, outside of withdrawing from the Trans-Pacific Partnership (TPP). Last month, however, the Trump administration announced the imposition of new tariffs on imported solar panels and washing machines, a move designed to protect domestic manufacturers against a market flooded with cheap foreign goods, mainly from Asia. The tariffs on solar panels, which start at 30 percent and decline by 5 percent each year until 2021, have particularly profound implications for the expanding market of solar panels and solar energy.

As the cost of producing and installing photovoltaic solar cells has fallen drastically, the market for solar energy has grown rapidly, transforming the idea of widespread adoption of solar energy from an environmentalist’s pipe dream to a practical source of power. According to Bloomberg’s New Energy Finance Team, the price of solar energy has fallen from $350 per megawatt hour in 2009 to about $100 in 2018, with some projections estimating that average solar costs will fall below those of coal in the next decade. The International Energy Agency reported that 2016 saw solar grow faster than any other source of energy, with most of the activity coming from China, whose governmental support has enabled its producers to capture almost half of the entire market.

In many ways, China is on the forefront of the solar energy boom; the country alone added more solar capacity this past year than the total energy capacity of Germany and is responsible for driving much of the innovation that has caused the price of solar energy to fall so drastically. However, Chinese dominance in the solar sector has not been a blessing to American manufacturers struggling to compete with low-cost Chinese panels. Two companies, Suniva and SolarWorld Americas, complained to the White House and the International Trade Commission that they could not compete with the cheap photovoltaic cells imported from China without government intervention to “restore fair competition in the U.S. market.”

The complaints made by Suniva and SolarWorld are not unfounded. Suniva, a Chinese-owned company based in Georgia, filed for Chapter 11 bankruptcy last spring as a direct result of the influx of foreign panels. The International Trade Commission recommended a tariff of 35 percent on imported solar panels, and the Trump administration delivered with last month’s decision. Domestic producers of solar cells, such as Suniva, SolarWorld, First Solar and Tesla, stand to win as they will be able to sell their panels tariff-free and face less competition from their Chinese rivals. The possible benefits that these firms may receive from the tariff were reflected in their stock prices, as both SolarWorld AG’s and First Solar’s stock prices jumped shortly after the decision was made public. There is also no doubt that the creditors of struggling U.S. solar manufacturing firms have a positive view of the tariff, as the value of their investments will appreciate as a result. As far the U.S. solar manufacturing sector is concerned, the tariff does what it is supposed to do.

Proponents of the tariff overlook one crucial fact about the solar industry in America: the vast majority of jobs in the solar industry are not in manufacturing. In 2016, there were about 260,000 people employed in the solar industry (twice that of coal), but only 38,000 of those jobs were in manufacturing (14 percent) and only 2,000 were involved in the direct production of solar cells. Most of the jobs in solar are involved in the development and installation of residential and utility-level solar projects. The Bureau of Labor projects growth of 105 percent in the number of solar installers in the next 10 years, which would make it one of the fastest growing occupations in the country. The tariff will restrict the supply of panels available in the United States and thus raise their prices; in turn, higher panel prices will lead to fewer installations, forcing layoffs. The Solar Energy Industries Association estimates that as many as 23,000 jobs could be lost as a result of the tariff, and Green Tech Media estimates that the tariff could reduce solar installations by as much as 11 percent, setting the United States back in the adoption of clean energy. While some proponents of the tariff may point to the fact that Chinese companies like Jinko Solar have announced plans to build factories in America, the relatively few jobs that these highly automated factories would produce likely wouldn’t make up for the loss of jobs caused by the tariff itself.

Considering the net job loss that will result from this trade decision, it is hard to justify the implementation of the tariff. This decision seems to not result from economic analysis alone, but rather from a desire to maintain congruence between campaign trail rhetoric and public policy. President Trump promised to bring manufacturing jobs back to the United States, and this tariff might do just that – albeit relatively few. The fact that the tariff might slow the adoption of solar energy and bolster other forms of energy may also be a deliberate strategy to play to his base of support. “America First” intentions aside, the tariff’s economic ramifications will harm the livelihoods of many Americans, which should be the preeminent consideration on any policymaker’s mind.     

    

The Uneven Costs of Raising the Federal Minimum Wage

mimimumwage.jpg

In major cities like Los Angeles and Chicago, local hourly minimum wage levels have reached $12.00 and $11.00, respectively. They depart drastically from the minimum wage levels set by the federal government, which have stagnated since the $0.70 increase to $7.25 in 2009. The minimum wage discussion has become a hot-button political issue, with Republicans arguing that national wage increases would be destructive to the American economy and should be decided at the state level. Democrats have taken a strikingly different opinion, pushing for $15.00 federal minimum wage, which would increase the current federal minimum by over 50 percent. Those two stances don’t seem reconcilable, but in trying to find a solution, should we choose to focus on politics or economics?

In economic terms, the minimum wage is defined as the lowest legal hourly wage an employer must pay his employee. Classic microeconomic theory states that equilibrium wage will be determined where the workers’ demand and supply intersect. A minimum wage is most influential as a price floor above the equilibrium wage, but it is most efficient when it coincides with this market-determined wage, allowing worker supply to best meet worker demand and subsequently minimizing unemployment levels. However when rapid, non-market induced changes in minimum wage are forced by the government, there can and will be significant economic consequences.

Professor Alan B. Krueger of Princeton University argues that dramatic federal wage increases such as to $15 would be “counterproductive,” putting our economy into “unchartered waters.” Due to sparse and incremental federal minimum wage raises the throughout the 2000s, economists cannot gauge the consequences of an increase to $15 with certainty. A higher unemployment rate is one possible effect, and we should not downplay the possibility of other long-term economic costs.

In response to the federal government’s reluctance to increase the minimum wage, state governments have taken on the responsibility, resulting in wage levels more likely to help low-wage workers than hurt them. When high wages are implemented in economies that cannot support them, low-wage workers face the consequences of reduced hours and substantial layoffs to make up for lost profits. Specifically, we are seeing effects of such increases in cities like Seattle, where newly implemented wage legislation has already demonstrated negative economic consequences for workers. University of Washington Economics Professor Mark Long states that due to drastic wage increases in Seattle “the net amount paid to low-wage workers declined instead of increased.” More dramatically, an increased minimum wage can catalyze automation in some sectors, with the potential to replace low-wage workers jobs. Gradual increases that allow for economic price adjustments to occur at the state level will buffer the negative effects of wage hikes and better protect low-wage workers’ jobs. Additionally, federal wage levels may not be able to properly compensate for purchasing power differences amongst states. In cities like Los Angeles where cost of living is considerably higher than in cities such as Des Moines, nationwide wage increases would not be the most effective way to take account for these variations in purchasing power.

The federal government can intervene in ways other than wage increases to help low-wage workers. Programs like the Earned Income Tax Credit (EITC) provide low-wage workers with a refundable tax credit, benefitting working class families with children who receive a larger credit than other workers. Economist Michael R. Strain writes, “earnings subsidies like the Earned Income Tax Credit makes sure the dollars we redistribute find their way to the working poor by explicitly targeting low-income households.” In 2013, EITC tax credits alone were able to lift 9.4 million Americans out of poverty. By incentivizing employment and complementing earnings, expanding programs like the EITC would help low-wage workers keep their jobs and remove wage pressure on businesses.

When we look at the minimum wage debate through an economic perspective the answer is clear: a minimum wage increase at the federal level could do much more harm than good to low-wage workers. State governments should oversee the minimum wage because they are better equipped to assess how the economic tradeoffs involved would affect their specific constituencies. Lawmakers must carefully evaluate how wage increases would impact the population of low-wage workers in their states and adjust them accordingly. By moderately increasing wages at the state level and supporting federal pushes for programs like the EITC, profits of low-wage workers can be maximized and economic costs can be minimized.

Renegotiating NAFTA May Harm College-Educated African Americans

NAFTA Article Photo

Introduction

A key promise of Donald Trump’s presidential campaign – the renegotiation of the North American Free Trade Agreement (NAFTA) – is well under way, with a fifth round of trilateral talks held last month. It is no secret that President Trump has been highly critical of the trade deal, as he has taken to Twitter to slam Canada and Mexico for being “difficult” during the negotiations and suggested that his administration will “probably end up terminating NAFTA at some point.”

Proponents of free trade assert that it leads to cheaper foreign goods, additional income in the pockets of consumers, and an increase in overall economic well-being. In fact, economists tend to favor the concept of trade liberalization, with a 2007 survey finding that 83 percent of members of the American Economic Association agreed with the notion that the United States should eliminate its remaining trade barriers. Despite such a widespread consensus among economists, the American public remains divided on the virtues of free trade: a recent survey from the Pew Research Center found that 52 percent of Americans believe that free trade agreements are good for the United States, with 40 percent disagreeing.

This article investigates the differential labor-market effects of NAFTA by linking the wages, industries and geographic locations of impacted workers to changes in tariffs induced by trade liberalization. I find that African American workers experience drastic effects due to trade liberalization, while there is little evidence of a differential impact for Native American workers. In my main regression specification, individual characteristics including age, race, marital status, ability to speak English, educational attainment, worker industry tariffs and Mexican comparative advantage account for about a quarter of the variation in wage levels. Furthermore, I find that trade liberalization has stronger negative effects for less-educated workers, who tend to be employed in industries with higher initial, pre-NAFTA tariffs.

Background

As a general matter, there are deep distinctions in economic security among white, Hispanic and African American families: on average, white families have approximately ten times the wealth of Hispanic families and 13 times the wealth of African American families. Additionally, research by Amitabh Chandra finds very slow rates of wage convergence between white and African American male workers from 1950 to 1990, with African American male workers earning approximately 75 percent of what their white counterparts do, when excluding non-workers. Such large racial discrepancies in earnings introduce the possibility of endogeneity when attempting to quantify the labor-market effects of NAFTA; in other words, it is difficult to disentangle the effects of NAFTA attributable to race from the effects of other underlying factors that also influence wages. Therefore, it is important to take any prima facie relationship between race and NAFTA with a grain of salt.

Economists John McLaren and Shushanik Hakobyan have explored the local labor-market effects of NAFTA, finding evidence of substantially lower wage growth among low-education workers in areas most vulnerable to trade liberalization. Moreover, they find evidence of a “multiplier effect,” with liberalization putting significant downward pressure on wages across all industries in NAFTA-vulnerable regions. Finally, in their seminal 2013 paper, David Autor, David Dorn and Gordon Hanson find significant evidence of downward pressure on American workers’ wages as the share of Chinese imports increased.

Data and Methodology

The dataset used in my analysis incorporates publicly available U.S. Census information from 1990 and 2000, maintained through the IPUMS project of the Minnesota Population Center. The U.S. Census divides the country into 543 similarly-sized, overlapping regions determined primarily through economic integration called Consistent Public Use Microdata Areas (ConsPUMAs). The U.S. Census also defines 89 traded-goods industries. Table 1 includes summary statistics for the sample workforce for 1990 and 2000.

Table1

While most of the above measurables are fairly stable over time, there are some differences to note. First, the workforce was more diverse in 2000 than it was in 1990, as the proportion of the country identifying as “white” dropped by approximately 5.3 percentage points. Second, there is a perceptible difference in educational attainment levels, with a slightly larger proportion of workers having a college degree in 2000.

For each industry, I designated τ to be the average tariff that the United States levies on Mexican imports in that industry, similar to McLaren and Hakobyan’s convention. However, since vulnerability to NAFTA is only important if Mexico has a comparative advantage in the production of a particular good, I use a weighted-average tariff for each ConsPUMA that incorporates Mexico’s revealed comparative advantage (i.e., the share of Mexico’s world exports of a particular good relative to the share of Mexico’s world exports across all goods). The change in the weighted-average tariff from 1990 to 2000 for each ConsPUMA c is given by locΔτc.

For the purposes of estimation, I use what is known as the LASSO, or least absolute shrinkage and selection operator, to penalize the inclusion of additional, irrelevant variables to my model. The following is the preliminary model specification, prior to LASSO feature selection:

Model

The dependent variable in the model, log(wi), is the natural logarithm of worker i’s wages in 2000. The independent variables include educ, which measures the maximum educational attainment of each worker; border, which applies to those geographical areas along the border between the United States and Mexico; and X, a set of personal characteristics intrinsic to worker i, such as sex, race, age, marital status and ability to speak English. The two other independent variables, minwage and chnm, represent the state-level minimum wage and the employment-adjusted share of Chinese imports in the worker’s industry, respectively. In my analysis, the parameters of interest are β4 and β5, which measure the geographical impact of NAFTA on wages, disaggregated by race.

Results

The results of my analysis are included in Table 2. I find that African American workers with a college education likely benefited from trade liberalization resulting from NAFTA. This may be due to higher-than-average growth in the proportion of African Americans with a college degree relative to the rest of the workforce between 1990 and 2000. Additionally, college-educated African Americans were typically employed in industries that had fewer trade protections, and thus saw tariffs decline by less on average. This is an important point because industries that are less protected are more likely to benefit from economic integration and a higher demand for exports. Hence, in these industries one would expect less outsourcing of labor to low-wage countries, ultimately benefiting the worker.

I also find that NAFTA had a roughly uniform effect on Native American workers, as there is no statistically significant evidence of a slope change, which indicates that the effects of NAFTA on Native American workers are independent of other factors like educational attainment or industry-specific tariff reductions. This likely reflects the fact that college-educated Native American workers are more prevalent in higher-protected industries that saw larger declines in tariffs, on average. When coupled with the negative wage shock for Native Americans, the result is likely a mixed, insignificant effect of NAFTA on the wages of Native American workers. Furthermore, I conclude that the change in the share of Chinese imports in a worker’s industry, while indeed placing downward pressure on a worker’s wages, has effects that are separate and distinguishable from those caused by NAFTA’s trade liberalization.

Table2

Conclusion

From my findings, I conclude that while trade liberalization had no significant impact on the wages of Native American workers, college-educated African American workers greatly benefited from trade liberalization policies resulting from NAFTA. This likely results from the fact that college-educated workers are concentrated in industries that are less protected from Mexican competition, giving employers little incentive to outsource their jobs. However, the wage growth seen by African American workers who did benefit from NAFTA was slower than that of their white counterparts – further evidence of the persistent wage gap between white and African American workers in the United States.

Moreover, my findings suggest that President Trump’s desire to renegotiate NAFTA may reverse key gains made among urban, college-educated African Americans while failing to actually bring back blue-collar manufacturing jobs. In addition, while it may be the case that trade liberalization depressed wages for less-educated workers, American workers – including racial minorities – are becoming more educated. Thus, free, unrestricted access to Canadian and Mexican markets for professional services may benefit minorities with higher levels of educational attainment and help narrow the massive income disparity between racial groups in this country.

No Grounds to Stand On: Analyzing the Case Against Lil’ Bill

bicycle-1850008_1920

The video was all over Facebook, trailed by hundreds of angry comments from USC students. The reason? “I’ve been asked to leave the campus,” says Aaron Flournoy in the clip. “It’s like an eviction so to speak.”

The word “eviction” glares in bright gold from its subtitle on the screen, as if daring someone to object to its usage. First covered by Annenberg Media on March 31 by Cole Sullivan, the story of Lil’ Bill’s Bike Shop has frequently been spun as an economic injustice, for reasons that have little economic justification.

Lil’ Bill was being “evicted” from campus, because Solé Bicycles was becoming a vendor for USC Village. Solé and the university had agreed to sign a non-compete clause, preventing USC from allowing a competitor like Lil’ Bill to sell bikes on campus with a business move that has been virtually banned from California, except in three circumstances:  

  1. When one business acquires another
  2. When a partnership is dissolved
  3. Limited Liability Companies (LLCs)

USC isn’t acquiring Solé. The two had no preexisting partnership, and are not involved in an LLC, so none of the three circumstances apply. Has Lil’ Bill been illegally targeted?

When asked to elaborate on the specifics of the non-compete in an email exchange, David Donovan, Associate Director of USC Transportation, who has previously addressed media inquiries regarding the Village, declined to respond. Even so, studying the case history of non-competes in California may offer an answer.

An exception to California’s strict criteria for non-competes emerged in Campbell v. Board of Trustees of Leland Stanford Junior Univ., 817 F.2d 499 (9th Cir.1987), where the court ruled against Stanford’s contract preventing a professor from reproducing a psychological test he developed. Campbell states that contracts “where one is barred from pursuing only a small or limited part of the business, trade or profession” are valid, and that the burden of proving whether a contract fully bars business is up to the plaintiff.

This statement became known as the “narrow-restraint” clause, and has since been applied to several other cases. It might be Solé’s justification behind implementing a non-compete clause, which would not fully bar Lil’ Bill from his profession of fixing bicycles. In fact, in Boughton v. Socony Mobil Oil Co., the Ninth Circuit upheld the narrow-restraint clause to allow a non-compete that prevented the use of land for a competitor’s business, rather than prevent the competitor from carrying out business.

The only problem? In 2008, the California Supreme Court overturned the “narrow-restraint” clause in Edwards v. Arthur Andersen LLP, claiming that “if the legislature had intended the statute to apply only to unreasonable or over-broad restraints, it could have included language to indicate so.” While the Court in Edwards agreed with the Boughton decision, the Court argued that restricting use of land did not qualify as a non-compete. Furthermore, California lawyer David Trossen points out that the court claimed Boughton did not offer any guidance on evaluating non-compete, suggesting that using Boughton as a precedent for justifying a non-compete would be risky for Solé.

Yet Solé must have felt threatened enough by Lil’ Bill to risk a non-compete clause. After all, according to the Daily Trojan, Lil’ Bill and his family have been serving the USC community for 40 years. Surely, those 40 years gave enough of a foundation for them to gain significant market power and become a monopoly within the USC community. Perhaps Solé meant to kill Lil’ Bill’s market power.

Or perhaps the justification was even simpler. USC faces strong incentives to favor Solé’s non-compete over Lil’ Bill. The university financially benefits from Solé paying rent for a venue in the Village. Furthermore, in 2028, when USC Village will be used to host the Summer Olympics, Solé will reap additional profit from sales to competing athletes. Meanwhile, Lil’ Bill’s venue takes up a parking spot on USC’s property for free. Even if the financial loss of favoring Lil’ Bill were discounted, USC could face the legal cost of facilitating an illegal business. In a Daily Trojan interview, David Donovan said that “the city of Los Angeles has identified [Lil’ Bill’s] shop as an illegal business because it is operating out of parking lot and occupying a handicap space.”

But what do Lil’ Bill’s losses matter? They are excluded from the contract, as a negative externality–that is, a cost that signers of the contract cause, but are not held accountable for. And it is not enough to ask Lil’ Bill to give up his business and work for Solé, and call it accountability. When companies make decisions about their community, without the community’s legal ability to negotiate, the law itself ought to be reevaluated to consider the existing community businesses as stakeholders. To do otherwise, would be an economic injustice.