United States – USC Economics Review

The Negative Implications of Los Angeles’ Increasing Inequality

south-los-angeles-110-and-105-freeways-aerial-view-from-north-august-2014 On a broad level, America is seeing rapid, widespread demographic shifts. But some areas are experiencing greater shifts than others. People of color will soon become the national majority, and at the same time, wealth inequality is growing. Wages have been stagnant for all but the richest earners, middle class job opportunities are becoming more scarce, and large racial economic inequities still persist. If inequality trends and demographic shifts continue on their current trajectory, the disparity will soon have an even greater impact on the nation as a whole. What these national statistics fail to convey are the extensive effects these trends also have at the local level.

In Los Angeles County specifically, there already exists greater inequality than the national average. A recent paper by the USC Program for Environmental and Regional Equity (PERE) reveals some causes and effects of this phenomenon. One factor influencing inequality in Los Angeles is a changing economic structure. Los Angeles is losing middle-wage jobs while gaining more low- and high-wage jobs. Between 1990 and 2012, Los Angeles experienced a 27 percent decline in middle-wage jobs in industries such as trade, construction, and manufacturing. During the same time, however, it gained low-wage jobs (a 15 percent increase) and high-wage jobs (a 6 percent increase). Prevalent not just in LA but the whole country, a related trend is uneven wage growth. Between 1990 and 2012, the highest earners saw marked growth in their earnings–a 38 percent increase, adjusted for inflation–while simultaneously, wages for low-income earners dropped one percent.

FredGraph

The ratio of mean income for highest 20% of earners, divided by the mean income for the lowest 20% of workers in Los Angeles, 2010-2017.

As shown above, income inequality in LA has risen noticeably: the inequality ratio has increased by two points in eight years, no small amount. But more alarming is how the trend is increasing consistently, with no telling how or when it will level off or reverse.

Demographic changes further account for growing disparities in wealth, because people of color are more likely to be either impoverished or working poor than whites. Los Angeles was one of the first cities to cross the “majority minority” threshold, and the relative proportion of people of color is only getting higher. Because of Los Angeles’ high diversity, the discrepancy in earnings between whites and people of color makes its income inequality even greater than the national average. Today, nearly one quarter of African Americans and Latinos in LA live below the poverty level, compared to only 10.6 percent for Whites, and the working poverty rate for Latinos is almost three times as high as for African Americans (12.5 versus 4.3 percent).

Education is another key factor of inequality. Unemployment generally decreases and wages increase with higher educational attainment, but racial and gender gaps persist in the labor market. Among college graduates with a bachelor’s degree or higher, blacks and Asian Americans and Pacific Islanders on average earn $6/hour less than their white counterparts while Latinos earn $9/hour less. At all education levels, women of color have the lowest median hourly wages. And only 10 percent of Latino immigrants, 28 percent of U.S.-born Latinos, and 34 percent of blacks and Native Americans have earned an associate’s degree or higher, which will be required for 44 percent of California’s jobs by 2020. This will likely lead to a skill gap, decreasing the county’s competitiveness in the economy.

If minorities benefit less in terms of lower earnings from college education, they have less of an incentive to earn a degree. Nevertheless, returns to education are still significant for minority workers, so they still stand to benefit greatly from any increase in availability of college education. This also increases the probability that their children will earn college degrees, which helps minorities to break out of the cycle of poverty.

Los Angeles residents rely heavily on driving as a mode of transportation, which influences commuting patterns: getting to one’s workplace is difficult if owning a car is financially unfeasible. Eighteen percent of Black households and 11 percent of Latino households do not have access to a car. In the overall region, very low-income African Americans and Latino immigrants are most likely to use public transit. The implementation of voter-approved tax measures to expand the region’s transportation infrastructure is an important opportunity to connect those neighborhoods and communities that have been left behind. This would make it more convenient for minorities to work at faraway jobs, improving the range of work opportunities available to them.

The Los Angeles region’s rising inequality and racial discrepancies in income, education, and poverty are bad not only for communities of color, but also for the region’s economic growth and prosperity. According to the PERE’s analysis, if there were no racial disparities in income, the region’s GDP would have been $380 billion higher in 2014–a 58 percent increase. This increased GDP would be accompanied by greater consumer buyer power and increased tax revenue, enabling future growth due to the increased output and growing population. While eliminating all racial disparities would be difficult, minimizing these divides as much as possible would be advantageous for the County.

One method to combat current and future inequality is to focus future resources and investments on communities that have been left behind in the County’s development. Impact investing is one recent phenomenon seen in LA, where companies create opportunities specifically for impoverished areas. In the words of LA’s Mayor Garcetti:

Major local companies are providing funding, internship opportunities, workforce development, and mentorship programs to young people from underserved communities. In turn, our rising industries are leading the charge on developing an inclusive workforce that reflects the diversity of Los Angeles.

Fostering and encouraging such civic engagement will provide great returns to the overall county. Secondly, leaders must be willing to stick with comprehensive strategies over the long-term. The problem of inequality has many facets and no simple solution, especially in the short-term. Politicians and agents of change in Los Angeles should be mindful of this, because bureaucracy could cause aid from philanthropists to be spent inefficiently.

Furthermore, subsidizing education for minority workers within Los Angeles and making a concerted effort to reduce racial discrimination in the workforce would create great returns and provide more social justice to the relatively poorer, powerless communities. Along with measures to expand the region’s transportation infrastructure, these would be progressive, worthwhile steps towards greater levels of equality and productivity which has not been seen in recent years. Every single resident of LA stands to benefit from reducing racial discrimination and lack of opportunity, and as such it should be a much higher priority on the city’s to-do list.

Los Angeles can be a model for change and reform nationwide: As the USC researchers state: “just as Los Angeles has led the nation in demographic transformation and income inequality, so too can it lead the nation in its strategies and solutions for a more equitable future. Doing so will require mechanisms for documenting solutions, evaluating progress, and for broadcasting lessons learned and successes that can be scaled to change the course of the nation.” Los Angeles is a city home to millions of diverse residents, many of whom are poor and all of whom are affected by rising inequality. If LA reduces its inequality problem, it can maintain its economic strength and cultural diversity and also provide better outlooks for many residents’ futures.

The California Pension Crisis

The bankruptcy of Detroit in 2013 shocked the country due to its sheer size, but was also fairly expected given the decline of the American automotive industry in the 2000’s. Less commonly known is that in just a four year period from 2008 to 2012, three cities in California–San Bernardino, Stockton, and Vallejo–also filed for bankruptcy, with Stockton having held the record for the biggest city to file for bankruptcy prior to Detroit. While California was hit hard by the 2008 financial crisis, the three California cities that declared bankruptcy did so mainly because they found themselves unable to fund the pensions of their retired public sector workers. In fact, although California as a whole has not gone bankrupt like these cities, it is facing the same problem of pension payments. Every year, the State of California collects money for pensions from current employees and employers, but this amount is less than the amount they pay in pensions, thus are running a deficit. This has lead to CalPERS, the California Public Employees’ Retirement System, despite being one of the biggest investors in the world with over $300 billion in assets, being worth less than 68% of what it owes in pensions. California’s other main pension system, the California State Teachers’ Retirement System (CalSTRS), also has the same issue with unfunded liabilities of $97 billion, being worth only 64% of what it owes. These deficits are expected to continue growing if kept untouched, with spending on pensions rising each year as more public sector workers retire. This brings California in a very difficult spot of having to make several major decisions and having to do so quickly before these deficits snowball.

Source : CalPERS

Explanation of the Issue:

While there are many reasons as to why California is in a pension crisis, it can be simplified into several key causes. The first cause is that California offered a far too generous pension plan to public sector workers around the Dot Com boom in the late 1990’s. One particular unsustainable pensions bill that was passed was the SB 400 in 1999. The bill offered most workers to have a higher percentage compensation at a lower retiring age. For example, highway patrol officers’ pension benefit formula changed from 2% at 50 to 3% at 50, which means that if they work for at least 30 years, they are able to retire as young as 50 years old and get the full yearly benefit of 3% multiplied by the number of years worked of their final salary. This is a significant change, with police officers who start working at age 20 retiring at age 65 with a pension worth 135% of his salary at retirement. Another important factor is that this bill was retroactive, meaning it applies to all workers and not just workers who were hired after this bill, thus the increase in pensions immediately started taking effect.

Such a generous pension plan was set based on several incorrect assumptions. During the Dot Com boom the economy was in a strong bull market, leading CalPERS to expect a very high rate of return of 8.25% per year on average over the next 11 years. This assumption turned out to be wrong very quickly, with the return going negative in just one year as the Dot Com bubble burst in 2000. Even after recovering from this poor start, investment returns struggled yet again with the 2008 financial crisis. CalPERS has since then gradually lowered their expected investment return rate, the most recent decrease coming in 2016 to 7% by 2020 after not being able to meet their 7.5% target for 2 years consecutively.

Another factor CalPERS failed to assume was that life expectancy would increase by approximately 2 years from 76.6 in 1999 to 78.6 in 2017. Although this may seem like a small change, if the current 600,000 retirees live another 2 years than what was predicted, that means 1,200,000 more pension payments of approximately $35,000 per year, or $42 billion in total. With there being more state employees who retire each year than retirees who pass away, the number of people who get pension benefits keeps increasing every year. The number of retirees with pensions will also not decrease in the future because California is still increasing public employment despite these issues.

In addition to this, public sector wages have also been rising. With state worker labor unions becoming more organized and stronger, new wage increases have been negotiated every few years. These increases have been significant and persistent in recent years, and the total wages for California state workers excluding college, university or court employees has risen from around $15 billion in 2015 to $17.7 billion by the end of 2017. Due to the pension payments being a percentage of an employee’s wage, these raises also cause an increase in total payments.

For the aforementioned reasons, California now finds itself in a situation where it lacks funds in their investments and face increasing pension payments every year. While CalPERS spent $23 billion and CalSTRS spent over $14.5 billion in fiscal year ended June 2018, this spending is set to keep increasing. By 2023-2024, CalPERS is expected to have to pay approximately $34 billion annually, while only collecting $28 billion. The gap between the payments and contributions can be shown by this graph published by CalSTRS, in their 2017 auditors report. For more than a decade, benefits have exceeded contributions, with the 2016-2017’s contributions being almost $4 billion in deficit to benefits.

Source: CalSTRS

The only difference between what goes into CalPERS and CalSTRS is that CalSTRS is funded through 3 sources–state contributions, employer contributions, and employee payments–while CalPERS uses investment earnings in place of employers contributions. For CalPERS, every dollar spent on pensions, 59 cents come from investment earnings, 28 cents from employer contributions, and 13 cents from employee payments. Keeping these factors into consideration, there are only two real solutions to this problem. Either to raise contributions or to lower benefits. There are approximately four options available in raising contributions: increasing investment earnings, state contributions, employer contributions, or employee contributions.

1. Investment earnings :

Increasing investment earnings if possible would be very convenient as it does not adversely affect other stakeholders, but it is not realistic for CalPERS. As discussed in previous paragraphs, California previously failed to meet its 8.25% target in 2015 and 2016, so it has lowered the target all the way to 7% for 2020. Attempting to readjust the target rate higher will result in having to invest in more risky investments, making the fund more susceptible to market fluctuations. Historical data shows that while 2016-17 did have a great return of 11.2%, which boosts the last 5 years’ average return to 8.8%, the investment return during this period was very volatile with 7.3% deviation. If we move track back further, investment return was 4.3% in the past 10 years, much lower than the current revised 7% target. Considering this past data, it is very unlikely that CalPERS will make riskier investments, since any further losses could jeopardize the pension fund.

CalPERS Historical Investment Returns and Volatility

Years	2016-17	2012-2017	2007-2017	1997-2017	1987-2017
Investment Return (%)	11.2	8.8	4.3	6.6	8.2
Volatility (%)	–	7.3	13.4	11.5	10.1

Source: CalPERS

2. State Contributions :

State contributions are also difficult for California to increase, as state law prevents state contribution rates from rising more than 0.5% per year. With the current contribution rate of 9.828 %, CalSTRS can only rely on state contributions to a limited extent. There is also the option of directing more bills like SB 84, which made the state pay an extra $6 billion to CalPERS in 2017, but these bills are more of a special case. Raising state contributions leads to a further problem of the state having to use funds originally allocated to other purposes to pension payments, or raise the total fund size by taking measures such as increasing taxes. With California already having such a high tax rate, such a decision will be very difficult to push through.

3. Employer Contributions :

Employer contribution rates vary according to which sector the employer is in. For all sectors however, rates have been on the rise, the reason being from an increase in normal costs – costs theoretically required to pay pensions the current active employees, and not to pay the unfunded liabilities. Rates rose by about 1% in each sector from 2017-18 to 2018-19, and this trend is expected to continue in the near future.

Source: CalPERS

While school employers have lower contributions rates to payrolls, they are also subject to increases, rates going up from 13.88% in 2016-2017 to 15.531% in 2017-18 and 18.062% in 2018-19. While raising these rates may seem to only hurt employers, all of these increases in employer contribution will in the long term spill over to users and employees of these services. State safety employees may face lower wages in order for the employers to cut costs and maintain profits, or prices could rise for state industrial related goods. Another example being potential decreases in salaries for professors at University of California schools and increases in tuition for students.

4. Employee Contributions :

Employee contributions vary similarly to employer contributions, with employee separated into 5 different groups, Miscellaneous tier 1 or 2 – state employees in administrative positions, industrial tier 1 or 2 – employees in California Department of Corrections and Rehabilitation or state hospitals, state safety – employees in correctional or forensic facilities at state hospitals or developmental centers with state safety named positions, peace officer/firefighter, and California highway patrols. These employees have contribution rates that correspond with their future pension benefits.

Contribution rates by Sector

Misc. Tier 1	Misc. Tier 2	Industrial Tier 1	State Safety	Peace Officer/Fire-fighter	Patrol
8-10%	3.75 %	8-9 %	11 %	13 %	11.5 %

Source : Human Resources Manual

Provisions have been made to raise contribution rates, but have been difficult as it must be met with a corresponding increase in pension rates for it to be fair. Despite this, California did create a plan in 2013 called The Public Employees’ Pension Reform Act of 2013 (PEPRA) which has dramatically changed situations for employees hired after 2013. The act requires these employees to contribute 50 percent of the total annual normal cost of their pension benefit as determined by the actuary. Therefore, they have to contribute half of the normal cost of 12.91 %, 6.5%. This rate will continue to rise automatically as normal costs rise, the PEPRA members facing an contribution rate increase to 7% in 2018-19.

Provisions like these will increase employee payments into the pension funding system and will help reduce the unfunded liability. However will need to be carefully implemented as state workers may feel discouraged from a deduction in real wage, causing risks such as more workers choosing the private sector over the public. In fact, labor unions hold a lot of power in California, just recently, the United Teachers Los Angeles, a labor union for public school teachers in LA, had a week long strike which lead to a 6% increase in wages and additional staffing. Due to the immense costs of public worker strikes, states are forced to negotiate.

Reducing Pensions:

While the CalPERS Actuarial Office has been using a 3% per year payroll increase rate, this number seems to be outdated, with the payroll growth being 3.7% in 2017. In order to maintain the rate at 3%, the formula calculating pensions need to be updated. There are several methods, such as raising the retirement age by a few years, changing the wage from which a worker’s pension is calculated from, or reducing the cost of living escalators. However any change will have to be non-retroactive – it cannot affect any workers that have already been employed. This is because of the “California Rule” which states that workers are presented a pension benefit plan when they are employed, and that this pension can only be replaced by one that is equal to or increases benefits. This protection means that any change made now will take many years to actually cause any large change in the growing pension payrolls.

PERPA was an attempt to reduce pensions, along with getting more contributions from members, with it changing the benefit formula to 2% at 62, a lower percentage and a higher retirement age. Former Governor Jerry Brown, who made this plan, also attempted to change the plan into a 401k style one, which is not defined benefit but rather defined contribution. However, this was rejected with huge opposition from labour unions, and Brown left office while still arguing with the state Supreme Court on changing the California Rule. Realistically, PERPA is a step forwards, but not significant enough to solve the problem. As long as the California Rule stands, solving the problem by reducing pensions will be a very long term plan.

Conclusion:

Analysis of the various methods of reducing CalPERS’ unfunded liabilities shows that most realistic methods will result in employees suffering. An increase in contributions by the state or employers will have spillover effects to all employees, and a plan like PEPRA will result in direct costs to future employees. Increase in contributions could also mean effects on unrelated California citizens who will have to face the decisions the state and employers make in order to maintain profits during rising costs.

The 401(k) style plan that Jerry Brown pushed for does seem reasonable when looking at how the burden of pensions is divided. A 401(k) plan would share the burden between the employees and employers, and could do so in a way in which benefits can automatically balance out employees’ own contributions. The current defined benefit system, on the other hand, puts too much burden on the employers, and the employees’ contributions are not what determine their pensions. However, it has been very difficult to implement this, as shown by the rejection of Senate Bill 1149 last year by labor unions. The biggest opponents of this bill, which simply offered an alternate 401(k)-style plan to new state workers, were K-12 teachers. This is because the current plan gives a higher benefit in comparison to the 401(k) alternative after one teaches for around 20 years, and 75% of current California teachers will serve 20 or more years before they retire. The biggest advantage of the 401(k) that makes it popular in the private sector is that there is no vesting period, one does not have to work in the same company for years to be allowed pensions, but this is not very attractive for California teachers. It can also be understood from the teacher union’s perspective that allowing an alternate plan could lead to the state attempting to make it the only available plan in the future, therefore wanting to reject it at all costs.

We can also learn several key lessons from the pension problem. We can see that when making decisions that will have a huge effect in the long run, it must be made with a lot of care for any risks. It must not be overly optimistic like SB 400, which was issued with an expectation for the economy to continue growing at a high speed and failed to consider economic fluctuations. We can also analyse that caution is especially necessary when the market is in a long bull market, like the years leading up to 1999 when SB 400 was issued, which coincidentally is very similar to what the stock market looks like right now. There is no such thing as a never-ending bull market, a recession no matter the size being inevitable. The fact that the US economy has looked so good in recent years, yet California has failed to meet investment return targets, also exemplifies just how poorly the funds have been managed.

This crisis is also an example of decisions that were made primarily for political gain, and without knowledge of long term economics. SB 400 was made partially because of the strong support and voting power of the public sector employees – short term gains being a factor that still affects many decisions in the government and state. The bill is especially bad because of the rigid nature of pensions, and the California rule which cements past plans through law. This California rule makes sense if the past benefits were reasonable, as it protects the state employees, but in a situation like this where it is causing a crisis, it is up to debate. As Governor Brown ended his term mid-negotiation, it will be up to the new governor, Gavin Newsom, to take his predecessor’s plans and set them into action without succumbing to the pressure of the labor unions.

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

Is what’s fair for a Californian feasible for an Alabaman?

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.

Index Funds Help Curb Corporate Short-Termism

Stock Stock Market Photo

Active money management has lost its luster. Since the Great Recession, investors have given up on expensive hedge funds and their mediocre returns, preferring far less flashy options like index funds. Even after years of loose monetary policies and low volatility, weary investors are hesitant to jump back into the fray of active investing. Passive investing in index funds is now the new normal for the stock market. If investors want to see companies return to innovation and long-term growth, they should hope it stays that way.

Passive investing holds promise as a key tool in the fight against an increasingly common issue: corporate short-termism. Measuring data for publicly traded companies from 2001 to 2015, a McKinsey report found a significant, upwards trend in short-term thinking by corporations. For public companies, short-termism typically takes the form of share buybacks. Rather than reinvesting profits in new projects, these companies use the money to buy shares from their investors to boost their stock prices. As a result, short-term companies invest less in innovation and, according to the same McKinsey report, experience lower earnings growth than companies with long-term strategies.

Company executives cite pressure from investors, arising from increased media coverage and lower trading costs, as one of the main reasons for their short-term thinking. Index funds offer insulation from these pressures, allowing corporate executives to worry less about volatile investor reactions and focus instead on long-term growth. Index fund investors focus on the performance of the fund as whole, and the diverse companies that make up these funds dilute the impact of any one company’s stock fluctuations. Because of this, missed quarterly earnings face less scrutiny when many investors are only looking at the performance of the index and not the individual stocks it is comprised of.

Furthermore, for the casual investor, index funds are typically part of a hands-off investing strategy, again offering more leeway for companies to pursue long-term growth. Individual investors increasingly recognize that neither day trading nor actively managed funds are likely to outperform stock indexes over the long term. In response, these investors rely more on diversified index funds, offering better returns and peace of mind. This means fewer stockholders scrutinizing the performance of individual companies, leaving fewer people to exacerbate price changes by jumping into the dangerous strategy of buying rising stocks and selling falling ones. Thus, index fund investors escape the dreaded “buy high, sell low” scenario that plagues traders of individual stocks, while corporations avoid the volatility that accompanies this positive feedback loop.

However, index funds do not erase volatility altogether, especially when one considers that not all index funds investors are so passive. In fact, trading data for a type of index fund known as an exchange-traded fund (ETF) indicates higher volatility for stocks making up ETFs due to the low trading costs of these funds. Importantly, though, this increased trading can largely be considered “noise,” not tied to market fundamentals of individual stocks. Because of this, individual companies’ actions have little effect on this volatility, still allowing executives to pursue long-term projects with less pressure from myopic investors.

By moderating investor pressure to meet short-term expectations, the popularity of index funds grants corporations more freedom to invest in innovation, even when these projects take time to turn a profit. Because most project expenses are immediate while resultant increases in revenue may take time to materialize, investments in innovation often fall prey to shortsighted expectations for a company’s bottom line. Other companies avoid investing in innovation due to the uncertainty of success, weighed against the investor backlash if they fail. If companies expect an outsized impact on their stock performance should a project prove unprofitable, otherwise-promising investment opportunities go unrealized. In either case, companies can invest more in innovation as more projects become worthwhile when given enough time to overcome the costs of the initial investment.

Some critics of index funds charge that rather than promoting innovation, the popularity of index funds instead encourages monopolization and other anti-competitive practices. Supposedly, index fund managers use their large ownership stakes of companies within the same industries to discourage competition and raise prices. As a recent piece from The Atlantic highlighted, though, fund managers can only offer their low-cost index funds by avoiding costs of highly active management. Thus, the coordination required to design and enforce anticompetitive efforts on such a large scale would prove prohibitively expensive for these index fund managers.

Furthermore, in instances where index fund managers do exercise their voting power, they typically do so in ways that support long-term company performance. In August 2017, Vanguard voted against ExxonMobil’s management to require disclosure of climate change risks. In the long-term, this increased transparency will help the company, boosting its reputation for honesty and encouraging it to adapt to the climate risks it will face. For Blackrock, issues over executive compensation make up the largest proportion of its votes against management. Both of these asset managers are willing to exert their influence to encourage long-term thinking in the companies they hold, largely because it is long-term performance that index funds’ customers seek.

These criticisms do raise another valid concern over the rise of index funds. While freedom from excessive investor scrutiny can encourage companies to pursue innovative projects, it can also allow corporate executives to engage in dubious business practices with fewer repercussions. Investors play a key role in disciplining C-suite executives through company votes, but this threat is only credible if investors catch wrongdoing in the first place. As large shareholders, index fund managers should remain vigilant of wrongdoing, monitoring companies on their own or heeding the warnings of activist investors.

The popularity of index funds has eased some of the pressure restraining corporate investment in long-term growth, but it is still up to index fund managers to ensure company executives use this freedom to enrich their investors, not to line their own pockets.

Making capitalism in rural New England

Since the 50s economic historians have gone back and forth over how to break down the puzzle of this shift in growth. Much of the debate has centered on figuring out why farms were so slow to produce food for such a long time. Some argued it was about a lack of access to markets for selling goods, so there was no incentive for producing more than what one family could consume. But then figures like James T. Lemon gathered data on output and family consumption (based on yield and family size estimates) revealing the presence of farm surpluses above and beyond what a family would need to sustain itself, which he believed proved the existence of early markets for agricultural output in the 1700s.

Others took a more anthropological approach, arguing that it wasn’t about market access at all, but a sociocultural “mentality” that was divorced from the idea of maximizing profit. These “moral economy” historians, borrowing from the anthropologist Clifford Geertz’s accounts of non-entrepreneurial Indonesian peasant villages saw early New England as a pre-capitalist, community-oriented system of exchange where norms, gifts and tradition mattered much more than efficient management and production to advance crop or meat output. In the words of historian Marc Bloch, “The society was certainly not unacquainted with either buying or selling. But it did not, like our own, live by buying and selling.”

This position is partly ideological. Marxist-minded historians like to think of peasant societies as having a non-capitalist ethics grounded in communal ideals. But there’s also some interesting evidence in its favor. Vickers, in his paper, “The culture of credit in rural New England, 1750-1800” describes farming communities as immersed in non-monetary exchanges– neighborly solidarity networks that helped families manage risk and allocate resources. Vickers provides some useful data based on farmer’s accounting books that offer a glimpse of how these informal networks of sharing, reciprocal gift-giving and mutual aid may have operated in rural American communities.

Some of the reports describe swapping casual labor or lending out farming equipment. One interesting data point comes from the diary of the midwife Martha Ballard. Nearly 78 percent of the transactions recorded in her journal account are purely non-monetary, with no mention of money or price value. In many cases, Martha provided lodgings and meals to travelers, or offered her abilities as a nurse. In exchange, members of the community would bring her foods or agree to watch her children, but in total Martha remained a major creditor to the community:

Vickers argues that Martha never expected to be paid back in full, but rather believed that, “the final unit of accountability in non-monetary exchanges was not the individual but the community.” It was only in the monetary world, in her work as a midwife, where she expected to be paid a regular fee. Similar results are found for male farmers who loan out labor and equipment without expecting exact monetary compensation. In his conclusions, Vickers notes that while these non-monetary exchanges were not explicitly quantified, exchanges did reflect a sort of balance based on ethical beliefs such as duty to kin, respect for the elderly, and pity for the disadvantaged.

So if we take the “moral economy” historians at their word, the American capitalist transformation was largely about a change in values and attitudes, whereby farmers were suddenly inspired to begin thinking like entrepreneurs, to efficiently allocate resources and produce goods for a market. As for what exactly created that change, no clear mechanism is presented besides a few vague references to “energies” generated in the American Revolution.

Winifred Rothenberg, first in a paper and then in her book From Market-Places to a Market Economy, made one of the most compelling cases for why the moral economy position is unrealistic, or at least not the best explanation for how we moved from low to high productivity on our family farms. For her, development occurred when a lot isolated farming networks began to connect together to form cohesive markets for goods and labor. Instead of looking at changing attitudes, Rothenberg considers a series of indicators of a gradual cohesion and consolidation of markets, including convergences in wage rates and farm prices, the extension of credit networks to further and further partners, and the proliferation of market towns. For Rothenberg, the Revolution did play a role, but it was in the form of catalyzing the emergence of commodity, labor and capital markets as established entities. In one analysis, Rothenberg charts how prices for staple crops began to converge and fluctuate in unison; an indicator of increased market connectivity. Price data was gathered from 54 manuscripts for the price of corn, potatoes, rye oats, hay, beef, pork and cider:

Her results showed a clear convergence of prices moving towards the 1800s in several commodities including corn and rye. Rothenberg writes, “The people who settled this land came from a tradition of Market Crosses, Market Days, Corn Markets, cattle, wool, cheese, silk and produce markets, stalls, shops, fairs, itinerant peddlers, and cattle drovers.” In other words, the farming families were never non-trading ethical peasants, but were instead just slow to develop the extensive networks needed to facilitate their entrepreneurial, labor productive spirit. The cultural changes that did occur (sons stopped spending their whole life on the family farm, the neighborly networks of mutual aid began to diminish in importance) were the result of market changes, not the other way around.

That’s not to say that we should completely discount culture-centric theories of capitalist transition. Jan De Vries has done important work documenting how changing aspirations for leisure products helped drive the consumption and productivity boom in the Netherlands. Vickers favors a view of America’s transition as an interplay between changing cultural values and impersonal market convergences. For him, people “engaged widely in marketplace dealings but conducted them on credit based on evaluations of personal character, which were inevitably cultural constructions…the concern over neighbourly reputation was actually a product of market growth, not its victim.” So mutual aid networks and moral economies actually helped facilitate the growth and expansion of interregional markets.

Following Vickers, we might conceive of America’s transition to capitalism as a case of New England farmers who for years relied on kinship and community norms to survive in a harsh, spartan climate, slowly and deliberately making way for market forces that incentivized productivity and wealth accumulation. The Revolution shook up labor and capital, and farmer’s sons began moving into the city looking for profitable work off the farm; technical improvements to roads and storage solidified generalized commodity prices, paving the way for railroads and new migrant workers to expand the manufacturing base, and the rest is history. It’s probably not a coincidence that during this period Adam Smith’s two major works on the entrepreneurial and sympathetic spirits of man, The Wealth of Nations and The Theory of Moral Sentiments were making the intellectual rounds. In his great paper “The Two Faces of Adam Smith,” Nobel laureate Vernon Smith argues that the two books come together to produce, “one behavioral axiom, ‘the propensity to truck, barter, and exchange one thing for another,’ where the objects of trade I will interpret to include not only goods, but also gifts, assistance, and favors out of sympathy … whether it is goods or favors that are exchanged, they bestow gains from trade that humans seek relentlessly in all social transactions…It explains why human nature appears to be simultaneously self-regarding and other-regarding.”

Triggering by Trump and the emergence of economics of escapism

A recent survey conducted by the online therapy company Talkspace found that, as of Inauguration Day, over 60 percent of respondents reported feeling some degree of post-election stress. In a 2016 Gallup poll, only 32 percent of Americans said they trusted conventional media “to report the news fully, accurately and fairly,” an eight percent drop from 2015 and the lowest level ever polled by Gallup. To cope with growing discontent, many Americans are turning away from their usual news outlets or their increasingly political Facebook newsfeeds in search of distractions. However, the thirst for distraction is not uncommon in American history, and escapism has become a staple during rough economic and political times.

Defined by the Merriam-Webster as “habitual diversion of the mind to purely imaginative activity or entertainment as an escape from reality or routine,” escapism may seem like a purely psychological issue, but there are very real economic ramifications when companies capitalize on this desperation by filling the demand for a break from reality.

During the Great Depression, Americans flocked to movie theaters. For 27 cents a ticket, about 4 USD in contemporary terms, people could escape the harsh reality of an economic depression for a stretch of time. Films like Dumbo, Fantasia and Arabian Nights, which were released during World War II, transported moviegoers into magical, exotic lands. The 1973-75 economic recession, which also marked the end of the Watergate scandal, the United States’ defeat in the Vietnam War, and two near assassinations of President Gerald Ford, shows a similar trend. In that time frame, directors like George Lucas and Steven Spielberg started releasing fantasy movies like Star Wars, Close Encounters of the Third Kind, The Exorcist and Jaws, all of which were among the top 10 highest grossing movies of the 1970s. Escapist cinema is key during economic and political hard times, as it is one of the easiest and most direct ways to find relief from the real world.

The Walt Disney Company, arguably the biggest player in escapist entertainment, had record breaking inflation-adjusted domestic gross ticket sales of over $2.93 billion in 2016, thanks to popular films like Captain America: Civil War, Finding Dory and Zootopia. From early November to late April, Disney’s stock increased over 26 percent. 21st Century Fox, another box office competitor, saw its stock rise by 37 percent from early September to late March. Even Netflix, which is not a direct competitor but another key player in escapist cinema, saw its stock increase by over 38 percent since the election, compared to a nine percent increase in the S&P 500 Index over the same period. Moreover, half of the top 10 highest grossing movies in 2016 were comic book adaptations, and all of the top 10 movies had a high degree of fantasy, meaning moviegoers actively seek fictional entertainment, and companies provide it.

The demand for escapist fiction extends over many markets, including the literature market. Orbit Books, a fantasy and science-fiction imprint, doubled its annual output last year. With the buzz of a likely science-fiction “golden age,” several other publishing companies launched their own science-fiction imprints. Is there a better way to hide from current unrest than to immerse oneself in a completely different universe? Along with science-fiction, the young adult (YA) genre – fiction published for readers in their teens – plays a key role in literature escapism. Seventy percent of YA novels are not purchased by teenagers, but rather by adults for their own reading enjoyment. YA literature provides not only a means of escapism, but also instant gratification and a sense of nostalgia.

Similarly, adult coloring books bring back nostalgia and reminiscence of childhood for the adult “readers.” In 2015, 12 million coloring books were sold in the United States, a huge increase from the one million sold in 2014. Millennials are 29 percent more likely to purchase an adult coloring book than all other buyers. Since coloring has the potential to reduce anxiety and increase mindfulness, it makes sense that the newfound popularity of coloring books would be directly related to the escalating need for escapism.

The rise of virtual reality (VR) and augmented reality (AR), evidenced by the boom of Pokémon GO, represents a new mode of escapist entertainment. Launched in July 2016 and known as the first use of AR to go “viral,” Pokémon GO has been downloaded globally by over 650 million people. By navigating around their physical surroundings, players are introduced to a parallel world on their phone screens, where a vast array of creatures and Pokémon supplies await discovery. The increase in popularity of AR and VR will be paved with exploitation by marketers, as already seen through the sponsorship deal between Pokémon GO and McDonald’s to entice players into the restaurant chain. Global revenue for the AR and VR markets are projected to reach almost $14 billion in 2017 and $143 billion by 2020. Clearly, this emerging market has the potential not only to provide a new means for escapism, but also to reap massive profits for those companies that utilize AR and VR.

From playing video games to trying new restaurants to visiting amusement parks, escapism is a natural way to de-stress when reality becomes overwhelming. Companies that already provide escapist entertainment are reaping the rewards of widespread unease, and if the U.S. political environment remains volatile, expect new entrants and innovations to satisfy a growing demand for escapism.

Small change, huge impact: How remittances assist development in impoverished regions of the world

In 2016, Mexicans living abroad sent home $27 billion in remittances home to Mexico, the largest remittance influx that Mexico has ever received. Remittance inflows now surpass crude oil and tourism as major sources of income for Mexico, and much of these inflows go to Mexico’s most rural, impoverished areas, where they are a lifeline. Most of the remittances sent to Mexico came from the United States due to a strong U.S. labor market, a weakening Mexican peso, and fears that the Trump administration may tax remittances in order to pay for a border wall.

Often, due to poor economic prospects and a lack of opportunity at home, migrants will seek work abroad and send back a portion of their earnings to help friends and family. These funds that are sent back are called remittances. Between 1960 and 2010, the number of migrants increased from 90 million to 215 million worldwide, and migration to western Europe and the United States accounts for around two thirds of this growth. In 2015, more than $431 billion in remittances were sent to developing countries, with each remittance (also referred to as a transaction) averaging around $200. In many developing countries, remittances constitute a huge source of cash inflow; in 2013, remittance inflows globally were three times larger than inflows from official foreign aid, and remittances regularly exceed foreign direct investment in developing countries. When considering a nation’s development, it is common for policymakers and others to only consider foreign aid and largely disregard remittances as a source for development funds. It is important to remember, however, that the remittances that migrants send home have powerful impacts on encouraging development and reducing poverty in the developing world.

In developing regions around the world, remittances are a lifeline, bringing much needed funds to people who are barely scraping by. India was the biggest destination for remittances in 2015, followed by China, the Philippines, and then Mexico. Some countries could not function without substantial funds from abroad–remittances make up 29 percent of Nepal’s GDP, and in Tajikistan, that number is 42 percent. For countries that were formerly part of the Soviet Union, such as Tajikistan, remittances are especially vital.

In impoverished parts of Mexico, remittances constitute around 19.5 percent of income, which is an even higher percentage than the contributions to income from government welfare programs. The remittances that families receive are put to use covering basic needs first, with the rest going towards investments and paying back debts, allowing those who receive enough in remittances to begin to focus on getting out of poverty. A report published by the Inter-American Development Bank found that in rural Mexico, 74 percent of remittance monies are used to cover basic costs of living, with 16 percent used to pay debts and 5 percent used towards investing in the home. Furthermore, remittances have a tendency to act like insurance for recipients. Remittances tend to be countercyclical–during an economic downturn or after a natural disaster in migrants’ home countries, remittance flows actually increase, allowing some of the poorest members of the global population to better weather financial crises.

In many cases, recipients of remittances use those funds to enroll their children in school, which allows them to achieve higher levels of education that can lead to higher-paying jobs. Data from the World Bank show that in many countries in Latin America, children in families that receive remittances are more likely to stay in school and have higher educational attainment. Thus, remittances provide a means for families to invest in the skills of their children, giving them tools that can help them break the cycle of poverty in later life.

There is also evidence that increases in remittance flows received by people in Mexico correspond directly to a decrease in crime. A study by the Inter-American Development Bank found that for every percentage point increase in remittances, street robberies in Mexico declined by 0.19 percent and homicides decreased by 0.4 percent. This decline can be attributed to several factors. First, as mentioned above, remittance flows give families the opportunity to send their children to school, reducing the incentive for these children to commit crimes. Not only does being in school prevent children from engaging in criminal activity, but the extra years of education allow students to eventually get higher-paying jobs that allow them to make ends meet without having to resort to crime. Second, remittances increase income and therefore decrease the benefits derived from committing crimes, and studies conducted in Brazil and in Colombia confirm this. Finally, 5 percent of remittance funds in Mexico are used towards home expenses, which stimulates the construction sector leading to the creation of construction jobs. These jobs offer people, particularly those with little education, the chance to earn a living without having to turn to crime.

In January of 2017, Mexican immigrants in the United States sent $2 billion back to Mexico, up 6.3 percent from this time last year. While a weaker peso did play a role in this jump, much of the increase stems from fears about a potential tax on remittances being sent from America. It is true that large sums of money flow from the United States into Mexico each year. However, this money is put to good use in impoverished regions where it is needed most. It allows children to stay in school longer and makes them less likely to commit crimes. It enables families to make ends meet and lays the groundwork for recipients to lift themselves out of poverty. Given the important role that remittances play in assisting in the development of impoverished regions of Mexico, such a tax would significantly hurt the people who rely heavily on those remittances to make ends meet.

Debunking the Model Minority Myth

Why is it that Asians and Asian Americans must score 140 points higher than their white counterparts to be accepted by the same university? In fact, because of this disadvantage, students from the Asian-Pacific American (APA) community are left with the option of working even harder to counter the forces that hold them to a different standard. Unfortunately, this vicious cycle only seems to reinforce the Model Minority Myth (MMM) by affirming the stereotype of the “hard-working” and “dedicated” Asian or Asian American.

Moreover, even if an APA student manages to defeat the odds and attend her dream college, the already uphill battle seems to only get steeper, as seen in the existence of the bamboo ceiling. Similar to the glass ceiling that many women face, the bamboo ceiling is a barrier that many Asian and Asian Pacific Americans face as professionals who want to advance in their respective fields. Coined by business adviser and writer Jane Hyun, the bamboo ceiling works by taking the form of the lack of presence in leadership positions, as seen in the 2.6 percent board represented in Fortune 500 companies. Despite the stereotype of the successful ‘model minority,’ many of these highly educated individuals will never get to experience the promotions and wage raises as do their white counterparts for the same achievements.

Though many claim to not see race in their supposed “color blindness,” prevalent expectations of certain racial groups persist. Stereotypical generalizations in the workplace promote the establishment of collective identities of entire racial groups, for example, in the case of the model minority myth. The Model Minority Myth is the belief that a minority group, typically East Asian-Americans, is made up of members who can achieve higher socioeconomic success than the average population. Culturally problematic implications aside, the Model Minority Myth has minimal basis in economic fact, as demonstrated by their average incomes, unemployment rates, and education levels.

Though the Model Minority Myth, in essence, is a myth, and it has brought about harmful results that have no place in a progressive society, such as the belief in The Asian Advantage. The Asian Advantage is the belief that Asians and Asian Americans have an advantage in schools and work due to their hard work and ‘positive’ stereotype as the model minority. Moreover, it states Asians and Asian Americans are likely to be perceived as more competent than their white counterparts, which helps them achieve great success. Despite the circumstantial belief called the Asian Advantage, this idea is harmful in that is renders white privilege obsolete and falsely skews favor of one group over another.

Additionally, the implications of An Asian Invasion, in which Asian Americans “take over” through their high levels of education, are damaging due to their oversimplified nature. The belief of an Asian Invasion has been prominent throughout history but has come up more often during political turmoil where scapegoating is a useful, strategic tool i.e. after the Japanese invasion of Pearl Harbor, many Japanese Americans were perceived as scheming with ulterior agendas for a Western downfall. Though the same racist remarks are not as widely vocalized as once before, the contemporary iteration of the Asian Invasion subverts itself in the fear that Asians and Asian Americans will crowd out colleges and workspaces.

The logical oversimplifications are evident- The grouping in “Asian American” itself consists of more than 20 ethnicities, raising questions about the risks of sweeping generalization in the Model Minority Myth. Moreover, income between Asian Americans and Whites might publically be perceived to be similar. However, the overall distribution of wealth is definitely skewed, as seen in Asian Americans’ larger debts, lack of homeownership and wealth inequality within the Asian American community. Moreover, the average per capita income for whites is $31,000 while Asian Americans are at $24,000, which further contrasts the external perception of Asian Americans with the economic realities they truly face.

As calculated by the Economic Policy Institute, Asian Americans repeatedly make less than do white individuals of the same level of education. Moreover, this is especially puzzling considering roughly 80% of Asian Americans reside in more expensive, metropolitan areas such as Los Angeles and San Francisco. With less income on average and larger expenses on average, Asian Americans clearly are not a racial group with the clear advantage, and the economic inequalities cast doubt on the reasoning behind the Model Minority Myth.

In 2010, the US Census Bureau reveals that Asian American men had a significantly lower income than their white counterparts, despite the same level of education.

While it is true that many Asian Americans have completed higher degrees, they face higher unemployment rates in comparison to their white counterparts as well. Though the unemployment disparity in 2008-2009 is a difference of a few percentage points, the chasm has widened in the next two years, as seen in the 33.7% Asian American college graduate unemployment rate compared to the 24.7% white college graduate unemployment rate in 2010.

In 2015, the overall employment rate was 14.3%. White people had an average unemployment rate of about 11.6% whiles Asian Americans were ar 11.7%. Even though Asian Americans faced a slightly larger unemployment rate than did their white counterparts, they could not shed the ‘model minority’ stereotyped persona.

Unemployment rates, by race and education, 2010 (age 25+)

As measured by the US Census, 18.5 percent of whites have a bachelor’s degree (roughly 45.7 million people) while 30 percent of Asians have a bachelor’s degree (roughly 5.1 million people). Asians and Asian Americans have a higher ratio of college graduates, largely due to the brain drain of countries like China and India. In 2012, Chinese and Indian individuals made up 71.6% of America’s brain drain, meaning they received numerous HB-1 visas to come to the US. These individuals definitely influence the statistics, considering they are two of the largest Asian ethnic groups in the US.

Although many Asian Americans wear MMM designation as an insignia, the implied generalizations within the myth have failed subset Asian communities by signaling to those in power that the misperceived communities do not need economic restructuring. The Model Minority Myth seems to be a complement of greater “Asian Invasion” concerns. Moreover, it lacks cohesive data that can factually support its implications, as we’ve seen in the measurement of income and unemployment rates.

In actuality, Asians and Asian Americans are not economically better off than their white counterparts. The misperception that these communities are predatory and legitimate economic threats is likely inspired by xenophobic politics, particularly politics motivated by changes to the demographics and aesthetic of the American workforce over the past few decades. Asian Americans are a deeply diverse group that on average receive lower incomes and have higher unemployment rates than whites at the same level of education, suggesting that racial discrimination in the job market may be a relevant force in employment and promotions thereon.