Economics of Immigration #2

Statistics can be used to support different political opinions regarding immigration. One study might claim immigrants use welfare more and impose a fiscal burden on natives, while another study denies this. Page 177 of We Wanted Workers illustrates both perspectives. It shows two graphs of Trends in Welfare Use 1994-2015. Each graph has two lines – one for immigrants and one for natives, all significantly sloping upward after year 2000 or so. The Y-axis is percent receiving assistance. The first graph shows a large and widening difference between the lines, immigrants higher than natives. The second graph shows the lines for the two groups very close together. The numbers were derived from the same database, so why the difference? It is that #1 is based on number of households and #2 is based on number of persons.

Consider a young, single woman who immigrates to the USA and then becomes a single mother with two children and qualifies for public assistance. For #1 the household is counted once. The contribution to the Y value is 1 to the numerator and 1 to the denominator. For #2 the family counts for three persons – the mother as one immigrant and the children as two natives. The contribution to the value of Y for natives is 2 to the numerator and 2 to the denominator. Obviously such counting increases the overall value of Y for natives, enough overall to make little difference between immigrants and natives. 

Clearly a US citizen who favors open immigration would tend to choose #2 as evidence to support his/her opinion, and one who favors strict immigration controls would tend to choose #1 as evidence to support his/her opinion. 

Household statistics seem more objective. Adults earn most income, obtain public assistance, and pay the bills, not children.

Economics of Immigration #1

We Wanted Workers is the title of a book about the economics of immigration. (There is little or nothing about refugees, crime, and terrorism.) The author is a Harvard University economist who has studied immigration for 30+ years. I read some of Thomas Sowell’s book many years ago, but it’s the only book I’ve read about immigration recently. That and immigration becoming a hot political issue prompted me to read it.

There are crucial differences between viewing immigrants as workers, and more broadly, as people. The things that immigrants experience are specific to time and place, the people involved, and the people affected, that it is easy to overgeneralize. One should be skeptical about “expert” opinion, especially when tied to a political opinion. 

The author lists several of his insights. 

- Those who choose to move to the USA are fundamentally different from those who stay behind. 

- Assimilation is not inevitable, and it may take decades. 

- Immigrants affect the job opportunities of natives via supply and demand. Data suggest a 10% increase in the number of workers in a skill group probably lowers the average wage of the group about 3%. 

- Immigrants in the workforce redistributes wealth from those who compete with them to those who use immigrants. 

- The welfare state makes it possible that gains from the employment of immigrants are offset by assistance payments if the immigrants are net users of social assistance programs. There is little doubt that immigrants receive more assistance than natives in the short-run, but this may reverse in the long-run. 

- The argument that models and data can determine public policy scientifically ignores the advocate’s motives. 

- Low-skill, low income immigrants have much different effects than high-skilled, high income ones. The former make use of public assistance; the latter do not. The latter pay higher than average taxes; the former lower than average taxes or none.
- The more one aggregates skill groups, the more one masks the effects on more specific skill groups. 

The ideology of open borders can be held by libertarians and many on the leftist political spectrum, for different motives. 

He contrasts native and immigrant a lot. They are not completely mutually exclusive in common usage. Native sometimes means somebody living in a particular place for a long time even if foreign-born. Also, an infant born shortly before his immigrant parents arrive in the USA does not differ in many other ways than one who was born in the USA shortly after his parents arrive. So it seems anomalous to call the first an immigrant and the second a native. On the other hand, such anomalies may not be statistically significant.

Varieties of Capitalism #3

Business Law

Liberal market economies (LME) and coordinated market economies (CME), meanings here, differ in business law. 

In essence there are two solutions to problems that arise from incomplete contracting. 

The first, the classical or common law approach, attempts to protect each party's freedom to contract. It assumes all market participants are sophisticated. Courts enforce a written contract as written, even when there appear to be bargaining imbalances or unanticipated contingencies. Practices in the LME of the USA and England fit here.

The second, the regulatory approach, focuses more on power imbalances within contracts. It attempts to police the distribution of risks within contracts, often to order to implement broad societal norms calling for fair of just fulfillment of contracts. Courts do this by prohibiting powerful market actors from delegating unspecified risks caused by contractual incompleteness to weaker market players. Courts will also attempt to "repair" contracts disrupted by unforeseen contingencies.  Practice in the CME of Germany fits here.

The author doesn't specifically address unilateral contracts. Such a contract is written by one party to it, and the other party accepts it as written. So imbalances are inherent. An insurance policy is a good example. When there are ambiguities in a unilateral contract -- in the USA and absent legal precedent -- the ambiguity is generally interpreted against the interest of the party who wrote the contract (contra proferentem). This is an exception to the general rule in the second paragraph.

Varieties of Capitalism #2

Education and Job Training

Liberal market economies (LME) and coordinated market economies (CME), meanings here, differ on education and job training. There is an indication that countries with only a modest stock of firm-specific skills compensate by investing more in education. There is a negative correlation between tenure (time with the same employer) rates and university degrees. The USA is the archetypal case of an LME country with weak company and vocational training system, but a very advanced higher educational system. Indeed, a college education in the USA is considered a safeguard against an more volatile and more uncertain labor market.

In Anglo-Saxon countries university education tends to be very general, and even engineering and business schools provide very broad training not linked to a particular industry or trade. By contrast, in Japan and most continental European countries, many university degrees are more specialized and there tends to be stronger links between private industry and engineering and trade schools. While training systems produce a range of skills, each system can be roughly characterized by its emphasis on firm, industry, occupational, or general skills.

Sen. Rand Paul’s Obamacare Replacement Proposal

This page outlines his proposal. I regard it as a great improvement over Obamacare. I like two significant changes he proposes for Health Savings Accounts – that HSA money can be used to pay health insurance premiums (not allowed now), and removing the current strict rules on having a high deductible health insurance policy. However, there are two things regarding HSAs that I find misguided.

First, he proposes a tax credit for contributions to an HSA rather than a tax deduction. Common usage of the terms in bold are (a) a credit reduces tax owed, and (b) a tax deduction reduces taxable income. Also, a credit would be incoherent with the Equalize the Tax Treatment section of the proposal.

To clarify this, assume the following. John Doe is single and paid wages of $50,000, and contributes $3,000 to his HSA. Assume no other complicating deductions or credits. For 2016 his Form 1040 numbers would be the first column of numbers following. The second column of numbers shows what they would be with a tax credit rather than a tax deduction.

Wages                                         $50,000                          $50,000                        $53,000

HSA deduction                              - 3,000                                    0                                  0

Standard deduction                        - 6,300                           - 6,300                          - 6,300

Personal exemption                       - 4,050                           - 4,050                          - 4,050

Taxable income                          = 36,650                         = 39,650                       = 42,650

Tax                                               $5,038                            $5,690                          $6,440

HSA credit                                            0                            -3,000                          - 3,000

Net tax                                         $5,038                            $2,690                          $3,440

Moreover, if John Doe’s employer provided and paid for insurance coverage for him, his tax would be the $5,690 shown in the second column (with no deduction or credit as is the case now). However, if an HSA contribution became a credit, it would be wise for the employer to stop paying for the coverage, increase John Doe's pay $3,000, and John Doe buy his own insurance. That would reduce his tax to $3,440 (from $5,690) as shown in the third column of numbers. Hordes of other employees would follow suit, and much larger federal deficits would follow. 

The second thing, which makes no sense to me, is to allow individuals to make unlimited contributions to an HSA. That would turn HSAs into a huge tax haven. One could put all of one’s investments into the HSA and shelter interest, dividends, and capital gains from income taxes (until withdrawn?).

Negotiating Drug Prices

Donald Trump has said drug companies are “getting away with murder. We’re the largest buyer of drugs in the world, and yet we don’t bid properly, and we’re going to save billions of dollars” (link).

It seems by “we” he meant Medicare and Medicaid, and he was more specific on other occasions.

This was before Trump met with drug company executives. I know little about what happened at this meeting, and this article is very vague about it. Anyway, apparently after the meeting Trump abandoned the above ideas. Joe Nocera at Bloomberg wrote Trump Had One Good Idea. Then He Ditched It. His article also appeared in at least the Chicago Tribune and Cleveland Plain-Dealer.

Apparently what Trump did believe, and Joe Nocera still does, is that Medicare and Medicaid buy and dispense drugs and have the power to negotiate drug prices. They surely don't buy and dispense drugs. They are not set up – have the supply channel and direct contact with the patient/”dispensee” -- to do so. Hospitals, pharmacies, medical clinics, doctors, and some other entities buy and dispense drugs and can negotiate prices. That includes Veterans Administration hospitals. Medicare and Medicaid only (partly) reimburse those who do the buying and dispensing. Medicaid "negotiates", but  Medicare can’t by law. When Congress added the Medicare Part D prescription drug benefit in 2003, it prohibited the government from "negotiating" drug prices on behalf of Medicare beneficiaries and stipulated that outpatient drug coverage should be provided entirely through private insurers like UnitedHealth and Humana, under contract with Medicare.

Insurers have aggressively negotiated with pharmaceutical companies, so Medicare’s prescription drug program has cost the government less than originally predicted. But the private insurers have not obtained discounts or rebates as large as those secured by Medicaid. (Insurers also steer policyholders to particular pharmacies, e.g. Walmart, and particular drugs when there are substitutes).

Medicaid “negotiates” lower prices via rebates. Medicaid receives rebates from the drug companies related to the reimbursements the insurers receive. The rebate scheme is complicated with differences based on the particular drug (link). It is much closer to price and product controls than negotiation. The word "negotiate" is not in the linked page. In other countries a government is usually the main insurer. So, they really can  and do dictate prices to pharmaceutical companies. Medicare doesn't strictly dictate prices; it dictates how much it reimburses and for what. Yes, it pays attention to what private insurers pay, but “dictatorial” is the best fitting adjective.

The main counteracting force to the drug companies is pharmacy benefit managers. In order to get included in an insurance plan's formulary, the drug company needs to usually offer concessions to the pharmacy benefit manager in the form of rebates. That's really how they hold down pricing.  Express Scripts, CVS Health, and UnitedHealth are the three dominant companies. Drug companies oppose the type of discounts required by Medicaid, seeing them as government price controls. Of course, they are correct. Drug makers say they prefer Medicare’s market-oriented approach, in which discounts are negotiated between drug plans and manufacturers.

Are my points about buy-and-dispense versus reimburse and what “negotiate” means when the government is one party some of what changed Trump’s ideas after meeting with the drug company executives? If so, I’ll give him credit.

Varieties of Capitalism

The title is that of a book edited by Hall & Soskise. Amazon link. The school of thought is new institutional economics. The editors' Introduction presents two varieties -- liberal market economies (LME) and coordinated market economies (CME). In LME firms are more competitive and outcomes are more the result of market transactions. In CME activities are more coordinated and cooperative and rely less on competition and markets. The authors name non-market relationships with trade unions, business associations, and government. I believe it could also include some advocacy groups.
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The authors classify the economically bigger countries of the world as being LME or CME. Six are LME and include the USA and UK. Eleven are CME and include Germany, Japan, and the Scandanavian countries. They show GDP and unemployment number for each for 1961-98. Somewhat surprising to me was that the aggregate GDP numbers for the two groups were pretty close. The aggregate unemployment rates were significantly lower for the CMEs. The table of numbers can be seen on Amazon (page 20).

They use Germany as an exemplar of CME and the USA as an exemplar of LME. Some differences between them are:
1. Germany: Wages are set through industry-level bargains between trade unions and employer associations. Employees switching jobs and employers poaching hires from their competitors are less frequent. Finance is more institutional with close relationships between investors/lenders and the companies they invest in/lend to. Investors/lenders have longer outlooks.
2. USA: Wages are driven by a more active labor market, in which employers more often poach hires from their competitors, and workers are more mobile. Employers are more free to cut costs in a downturn by shedding employees. Finance is more dispersed with decisions made more by individual investors/lenders. Investors/lenders have a shorter outlook with greater focus on short-run financial results.

Spy In The Wild

Spy In The Wild is a PBS miniseries airing this month. We watched Episode 1 last night and enjoyed it a lot. Most of the Spy Creatures described on the web page above the brief episode descriptions are in Episode 1. They and the animal reactions to them are funny, too. Well worth watching. After each broadcast, that episode will be available for limited online streaming at pbs.org/nature.

Income taxes

I spotted this article about federal income taxes. "Unpaid taxes taxes are almost as large as the entire federal budget deficit." Wow!

Staff reductions and old computer software have significantly stifled collection and enforcement efforts. "The audit rate for households with income over $1 million has fallen by 40 percent since 2010."

If President Trump wants to lower the federal deficit, stronger collection and enforcement efforts look like "low hanging fruit."

During the campaign Trump called for reforming the treatment of "carried interest." I'm with him on that. Most management fees for mutual funds are taxed as ordinary income. However, performance-based fees at hedge funds get capital gains treatment. Manager X getting capital gains treatment on X's own assets in the fund, but why do fees X collects from a client Y based on Y's capital gains on Y's assets warrant capital gains treatment for X's fees? It seems very inconsistent to me. I can only say, "that's politics". Some hedge fund managers donate a lot of money to politicians. Prime examples are Tom Steyer and Donald Sussman, 100% (rounded) of it going to Democrats and liberals according to OpenSecrets.org. Steyer was Hillary Clinton's biggest individual donor. Isn't it ironic that it is mostly Democrats and liberals who complain about money or the rich corrupting politics?

I do not presume that taxing such performance-based fees as ordinary income would raise tax revenues a lot. The number of hedge fund managers or assets isn't huge. It is a matter of logic and equity.

Incidentally, whether or not Mnuchin becomes Treasury Secretary is an open question. Congressional Democrats are strongly resisting his confirmation. They voiced several concerns about him: He initially misstated his personal wealth on a financial disclosure form, and he misstated under oath how OneWest Bank, a bank he led as chairman and chief executive officer, scrutinized mortgage documents. The bank allegedly "robo-signed" foreclosure documents contrary to law.

Tax season accelerates around now. The official start was January 23, when the IRS began accepting returns.  But the deadline for W-2s and some other source-reporting forms is January 31. So the number of people going to tax preparers jumps around today.  I will be an AARP Tax Aide volunteer again starting February 6.