A Response to Keith Hennessey on Immigration

Derrick Morgan - May 23, 2013

Recently, Keith Hennessey, a former economic advisor to President George W. Bush, pointed out what he thinks are eight problems with the Heritage cost estimate of unlawful immigration and amnesty. During the course of his post he notes that “making 8-9 million people here illegally into U.S. citizens would increase future deficits” and “[t]here is a significant fiscal effect from making…them legal taxpayers and eventually beneficiaries eligible for the full panoply of government subsidies.”Those comments are refreshing and affirm that Heritage’s work reaches a valid conclusion: amnesty will cost taxpayers. While this seems commonsensical, some have implied or even posited that economic growth associated with amnesty would somehow make the huge fiscal costs vanish. To his credit, Hennessey does not do that.

While acknowledging amnesty will be costly, Hennessey takes issue with the $6.3 trillion tabulation. We welcome input from him and others. Heritage is the only one so far to try to quantify the lifetime fiscal costs in this debate. Heritage put our entire methodology as clearly as possible in the nearly 100-page study in part for the purpose of inviting comment and, as is our custom, making improvements.

Below, I address each of Hennessey’s critiques and note that several of the points he makes are in harmony with our own views.

Baseline Critique

First, Hennessey says that the $6.3 trillion number is too high because it includes costs that unlawful immigrants now impose. The title of the paper is “The Fiscal Cost of Unlawful Immigrants and Amnesty to the U.S. Taxpayer” (emphasis added). The purpose of the paper, in part, is to add up all the benefits and services received by unlawful immigrants and subtract taxes paid by them to come up with their net fiscal cost. Rector, following the methodology used by the National Academy of Sciences, includes costs of unlawful immigrants on “congestible” goods such as firefighters, emergency rooms, and schools.

The number Hennessey wants to know is the difference between the status quo (allowing unlawful immigrants to stay) and the costs we would have under amnesty, not the costs of unlawful immigrants versus having no households headed by those unlawfully present. Rector clearly provides this figure in the report. Having estimated the status quo costs at around $1 trillion, Rector writes, “The net increased fiscal costs generated by amnesty [alone] would be around $5.3 trillion ($6.3 trillion minus $1 trillion).”

Both of these numbers are useful to know. The $6.3 trillion figure combines the costs of status quo and amnesty. Amnesty alone costs $5.3 trillion.

Household Data

Second, Hennessey objects that the figure does not equal the costs of illegal immigrants because it includes citizen-children in unlawful immigrant households. Heritage, like others who have studied the issue, uses the most recent household data from the U.S. Census and includes costs of children in those households in its calculations. Heritage uses this same methodology (counting the costs of children toward their parents’ fiscal balance) to measure the impact of government benefits and taxes on economic equality in the whole U.S. population.

To do otherwise when looking at the U.S. population as a whole would effectively ignore that government policy is highly redistributive; the elderly and disabled might be net fiscal beneficiaries, but almost everyone else would be seen to pull their own weight (except, of course, children, who would individually be huge net liabilities). This does not represent actual conditions in the U.S.

Hennessey asserts the study is misleading because it employs an unusual analytic approach. Heritage is actually following what others who have examined the fiscal impact of immigrants have done by counting citizen-children. Prior to the Heritage study there have been three major studies on the fiscal cost of immigration or low-skill immigration at the national level and all three, including perhaps the most important of these, a report by the National Academy of Sciences, included the native-born children in cost estimates. 

Steve Camarota analyzed the fiscal cost of less-educated immigrants to the federal government for Center for Immigration Studies, and included the costs of children.

Even Julian Simon, who was for years the leading immigration authority at the libertarian Cato Institute, used this approach in analyzing the fiscal consequences of immigration. Simon asserted that the fiscal impact of immigration must include both the immigrant and the family “he brings or acquires.” After all, the children are here only because their parents have managed to enter or remain in the country unlawfully.

Hennessey would prefer to exclude the cost of the children of immigrants from fiscal analysis because, in his view, most of the costs associated with the U.S.-born children of unlawful immigrants are “sunk costs.” Hennessey implies that since there is no way to avoid these costs, there is no point in analyzing them. The Heritage analysis estimates that the net fiscal cost of unlawful immigrants under the status quo (allowing unlawful presence) will be around $1 trillion; all the “sunk costs” concerning immigrants’ children are contained in that sum. The analysis estimates that amnesty alone will add $5.3 trillion in additional fiscal costs.

While the tabulation of all costs, including those Hennessey believes are “sunk,” may or may not be of immediate concern to policymakers with respect to granting amnesty to this current population of unlawful immigrants and their children (compared to keeping the status quo), it is still valuable information. Cataloguing the total fiscal costs of unlawful immigration helps us understand the additional taxpayer burdens our citizens and legal residents face because of unlawful immigration.

Granting amnesty to current unlawful immigrants may indeed encourage more unlawful immigration in the future. After all, when Congress passed the first amnesty for unlawful immigrants in 1986, the sponsors of the bill said it was a one-time only event. Should an amnesty pass, many would-be unlawful immigrants might conclude that the United States will engage in serial amnesties in the future and decide to enter or remain in the United States unlawfully. It is therefore important for policymakers to understand all the fiscal costs of unlawful immigration, which include the costs to taxpayers of educating and otherwise providing for citizen-children of unlawful immigrants. (Of note, this report did not try to estimate any future costs from future unlawful immigrants or the vast increase in visas for family members of those receiving amnesty.)

It is also worth noting that amnesty does add extra costs for those children. Unlawful-immigrant parents do not currently receive the earned income tax credit and the additional child tax credit. Rector’s calculations show that after amnesty, the parents will become eligible for both credits at a net cost of $10 billion per year.

Because our methodology looks at households, it does not count the costs of about 20 percent of unlawful immigrants who live in households headed by lawful immigrants or U.S. citizens, which in that way would undercount the cost of all unlawful immigrants. This is only one way in which the $6.3 trillion figure could be too low.

This also raises an important related point. Any study of this kind includes estimations and simplifying factors. In a study of nearly 100 pages, Rector has gone into great detail as to his methodology and listed the most important 10 ways the costs in the study could be higher or lower. Ultimately, the figures Rector calculates must be understood to be estimates that roughly balance the effects of these various assumptions. Even if some would do particular elements of the study differently, there can be no doubt that amnesty is costly to the American taxpayer on the order of trillions of dollars.

What About Citizens and Lawful Immigrants' Deficits?

Third, Hennessey argues that “The Heritage logic would apply equally to legal immigrants and to babies born to low-income U.S. citizens.”

In fact, Hennessey is correct that the paper is an indictment of our bloated welfare and overburdened entitlement programs. Heritage certainly agrees with that assessment, as do, apparently, our colleagues at other think tanks. For example, Chris Edwards at the Cato Institute recently noted, “To me, the study provides a very useful exploration into how massive the American welfare state has become.”

Nicholas Eberstadt at the American Enterprise Institute wrote an entire book examining the redistributive nature of government policy in the U.S. In that work, he noted that there is “very little empirical research [] available on the overall incidence of taxation and transfer recipience in modern America….One admirable exception…is a study by the Heritage Foundation’s Robert Rector and Christine Kim.” Rector uses the same basic methodology in examining the costs of unlawful immigration.

Undoubtedly, U.S.-born citizens with lower education receive on average far more in benefits and services than they pay in taxes. Our government provides high levels of benefits to the least advantaged U.S. citizens and legal immigrants while requiring they pay comparatively little in taxes. Previous research by Rector has demonstrated this. Although there is disagreement about the appropriate magnitude of redistribution – and nobody has done more than the study’s author, Robert Rector, to try to reform our means-tested welfare programs – Americans seem to generally accept the notion that government should support and protect the most vulnerable U.S. citizens and lawful immigrants. 

Applying this same system of generous support, however, to unlawful immigrants whose only claim on taxpayer resources is that they have broken U.S. laws by unlawfully entering or staying in the country is another question entirely.

Entitlements Are the Problem

Fourth, Hennessey notes that the real problem is our unbalanced entitlement programs, not unlawful immigrants. “Illegal immigrants are being promised far more in benefits than they will pay in taxes not just because they are on average low income, but because almost everyone is being promised old age benefits that will exceed the taxes they will pay,” he wrote.

Hennessey is right that our unsustainable entitlement programs are a major problem. But how is adding millions more predominantly low-skilled individuals – those who entered or stayed in the United States unlawfully – to an unsustainable system helping at all? The answer is that it does not help; it makes the problem worse. (For the first decade or two it may appear to make our Social Security and Medicare problems better as younger unlawful immigrants pay into the system, but in the long run most will receive significantly more in benefits than they pay in taxes, just as all low-income Americans will.)

Heritage is hardly the only policy group to note the huge fiscal imbalance of Social Security and Medicare. Eugene Steuerle at the Urban Institute has published a piece looking at how much an average wage earner pays into and receives in benefits from these two programs. Even an average wage-earning couple who have worked all their lives and paid payroll taxes receive a huge net benefit from these programs, especially Medicare. Anyone with a lower wage who does not work for their entire lifetime in the U.S. gets an even bigger net gain courtesy of the taxpayer.

Hennessey argues that “Heritage’s calculations mistakenly assume Social Security and Medicare benefits will be paid in full to newly legal immigrants [in the future]” even though current law requires benefits to be cut before the amnesty recipients reach retirement. Specifically, Hennessey argues that in 2032, the Social Security trust fund will reach zero balance and Social Security benefits will be immediately cut across the board by 27 percent. Similarly, Hennessey predicts that Medicare benefits will be slashed by 17 percent in 2024. All too true, but what would Hennessey propose that the analysis assume instead?

Heritage is on solid ground in assuming for purposes of this analysis that these cuts will not occur. Look, for example, at the “sustainable growth rate” or “doc fix” that Congress changes every year. It is supposed to reduce reimbursement rates for government health care entitlement programs; instead, each year Congress puts off the cuts. At this stage no elected politician publicly supports massive cuts in Social Security and Medicare benefits such as will necessarily occur under current law. It would be interesting if comprehensive immigration reform proponents were to argue publicly that the long-term costs of amnesty will be reduced because they plan to cut Social Security benefits by 27 percent or more in the future.

Based on the benefits currently received by low-skilled legal immigrants, the Heritage analysis assumes that amnesty recipients will have future Social Security benefits only slightly above the minimum benefit level. As the Social Security trust fund and Health Insurance trust funds incrementally run out of money, and as Medicare more generally places an ever-increasing burden on the rest of the budget, changes will occur: more money could be taken from general revenue, benefits for the more affluent may increasingly be taxed, means-testing of benefits may be increased, and FICA taxes may be increased. The least likely change is that future benefits will be slashed across the board, including for the poorest beneficiaries; amnesty recipients will overwhelmingly fall in that group.

Amnesty increases the number of future low-income beneficiaries in Social Security and Medicare. By increasing the long-term unfunded liability in both programs, amnesty increases the pressure for future tax increases and/or benefit cuts.

What About Mobility?

Fifth, Hennessey says, “as best I can tell, they assume that a poor, low-skilled, poorly educated illegal immigrant will remain poor, low-skill, and poorly-educated, and that he will draw government subsidies his entire life.” At Heritage we have been studying mobility and continue to work on understanding the challenges of low-income, low-education workers trying to climb the economic ladder. We hope to be able to increase the chances for mobility and education for all Americans and those who come here looking to work.

Contrary to Hennessey’s suspicions, the analysis increases unlawful immigrants’ wages. A good way to project what will happen, on average, with low-skilled unlawful immigrants is to look at what happened after 1986. The amnesty enacted in 1986 did lead to an increase in wages among former unlawful immigrants. Based on academic research of the 1986 amnesty, the Heritage analysis assumes that amnesty recipients would receive an immediate boost of five percent in wages and there would be increases in reported incomes and taxes paid by boosting the portion of work they do “on the books.”

Admittedly, a one-time boost does not completely answer Hennessey’s concern. The data on less-educated immigrants indicates that wage increases will, on average, be modest and will mostly occur before age 40 (the average unlawful immigrant is 34). Moreover, as low-skill workers age, their labor-force participation declines and disability and medical costs increase. As a consequence, although wages go up with age (as reflected in the Current Population Survey data used in the report), the fiscal deficit per household still remains high. The bottom line is that even if unlawful immigrants’ wages were considerably higher than we already adjusted them, such households would still have a large and, Rector’s work shows, substantially similar fiscal deficit.

In addition, once unlawful immigrants earn access to the full panoply of welfare, they will face the same dilemma as U.S. workers: earning more means less government benefits. James Pethokoukis of the American Enterprise Institute calculated that a mother of two would be as well off with a job making $29,000 a year as a job making $69,000 a year after you include her government benefits with the lower-paying job.

Unfortunately, low-skill wages have not been increasing much, if at all, in the United States for some time, even before our recent recession, so dramatic increases in the average wages of unlawful immigrants, who on average have a tenth grade education, is unlikely.

Hennessey also notes that there are “people who arrive in the U.S. illegally [who] may initially take jobs well below their skill level because of language barriers that they later overcome. Others will get further education or build skills over time.”

Undoubtedly there will be some who will advance in skills and income more than average. As opportunity conservatives, we should do our best to help everyone to advance economically. It is important to remember that among unlawful immigrants, more than half do not have a high school diploma and another 27 percent have only a high school diploma. The vast majority of this group will work in relatively low-skill, low-income occupations for the rest of their working lives.

As Hennessey points out elsewhere in his critique, the fiscal deficit of unlawful immigrants is not unlike the fiscal deficit of lawful residents and U.S. citizens. On average, people with low education levels – of whatever immigration status, ethnicity, or national origin – will receive significantly more in government services and benefits than they pay in taxes.

It should also be noted that the analysis matches amnesty recipients’ benefits (means-tested welfare, etc.) to those of legal immigrants of the same age and education level. 

More Labor From Unlawful Immigrants

Sixth, Hennessey notes that “the fear of discovery and deportation has to constrain the labor supplied by those here illegally.” He uses the example of an engineer working as a cab driver since “green card verification is weaker.” As just pointed out, a majority of unlawful immigrants lack a high school diploma and another 27 percent have only a high school diploma; the vast majority, therefore, are not engineers. Moreover, the critique is at least partially answered by the increase in wages immediately following amnesty and the fact that the study moves most work “on the books,” both of which lead to higher taxes immediately after initial amnesty. 

His point about increased labor supply, however, is generally valid, though by definition one can only speculate as to the extent of the effect. We did not include a macroeconomic modeling effect of increased labor supply due to amnesty, but total output and incomes likely would go up a little since an increase in labor necessarily means an increase in GDP. The unlawful immigrants are already participants in the economy, so it would only be a modest increase in hours worked among a few million workers in a $15 trillion economy. The effect would most likely be only a very small increase that would overwhelmingly go to the formerly unlawful immigrants themselves, not to those here lawfully.

The proper economic lens through which to consider immigration and immigration reform is not whether GDP goes up or down – it will always go up with more labor – but does it increase the after-tax income of American citizens and lawful residents?

Summations of Costs

Seventh, Hennessey points out that the numbers are summations of 50 years of costs. We chose this time frame because the point of the paper was to look at the lifetime costs of amnesty for a specific group of people. The bulk of these costs will be outside the 10-year window typically used by the Congressional Budget Office. This is especially so because legalized immigrants under the descriptions of the immigration reform bill in the Senate, for example, would not immediately have access to many means-tested welfare benefits. (In the paper we assume many benefits will be unavailable during the “interim phase” of amnesty that lasts 13 years.) Looking at long time horizons is important when we are examining costs of programs that promise expensive retirement benefits.  The government, for example, looks at 75-year time horizons for these programs.

In some ways, a constant-dollar approach presents a smaller cost than it otherwise could; health and welfare inflation and spending have historically increased faster than overall inflation, but in our study we assume these costs will increase equal with overall inflation.

We chose a legitimate way of adjusting for inflation, by using constant 2010 dollars, believing this is a more understandable way to present costs. Hennessey’s preferred approach of net present value is also a valid way to look at costs and can be helpful to compare future costs to current costs. Looked at another way, net present value is the amount of money we would have to put aside today in order to pay for the costs over the next fifty years or more.

Cost to Government Not Enough to Know

Eighth, Hennessey faults the study for focusing only on the cost to government. Others have raised this same concern. The cost to government (or, more accurately, the cost to the taxpayers) is the point of a fiscal cost analysis; it looks at the fiscal, i.e., tax and spending, consequences of a policy. We have elsewhere pointed out that there could be economic gains from a properly functioning immigration system. Some reforms, like increasing high-skilled immigration, could help the economy and actually lower, on average, the fiscal burden of U.S. citizens and lawful immigrants.

The key question is: if we can get the bulk of economic benefits that those who support comprehensive immigration reform promise without absorbing the costly incremental fiscal impacts of amnesty, why wouldn’t we do that?

Our nearly 100-page study takes an exhaustive and detailed look at our modern redistributive welfare state as it operates in the context of illegal immigration. Proceeding with immigration reform without considering fiscal impacts is unwise.

Conclusion

Heritage and all those who want to know the cost of amnesty have benefited from the questions Keith Hennessey has raised. While not everyone will be completely happy with a complex analysis of 34 categories of taxes (including lottery ticket sales) and 73 expenditure categories, Rector’s work provides critically important information that must be considered by policymakers at this time of extremely high debts, bloated welfare spending, and clearly overburdened entitlement programs. We welcome questions about the report and additional work by others that properly accounts for our modern, massive redistributive state in considering the costs of amnesty.

AAF: Market-Based Student Loan Rates Benefit Students, Taxpayers

Joseph Lawler - May 23, 2013

Using market-based interest rates for federal loans to college students would benefit taxpayers and students while trimming the federal bureaucracy, a new report by the American Action Forum finds.

The analysis comes as the House of Representatives is set to consider legislation intended to stave off a doubling of federal loan rates due to take place on July 1st. House Republicans are planning to pass a measure along the lines of the one the right-leaning American Action Forum (AAF) examined to prevent rates from rising from the current 3.4 percent to 6.8 percent.

Pegging the rates charged to the rate of interest on 10-year Treasuries plus 2.5 percentage points for undergraduate loans would save students receiving subsidized loans an average of $335 over the course of the loans, according to AAF. Ten-year Treasury notes have averaged roughly 1.9 percent yield so far this year, the study notes, meaning that borrowers would pay around 4.4 percent on loans, instead of the federally-set 6.8 percent that would apply under current law (graduate student borrowers would pay a separate, higher market-based rate).

The study’s authors, Chad Miller and Scott Fleming, cite estimates from the Congressional Budget Office to conclude that such a reform would also allow the federal government would shift risk off its own sheets and save up to $4 billion over the course of 10 years.

The process for setting student loans rate plan favored by AAF and Congressional Republicans is close to that proposed by President Obama in his fiscal year 2014 budget, although the president would tie rates to 10-year Treasuries at a lower level and lock in the initial rates until the loan matured. Rep. John Kline, (R-MN), the chair of the House Education and Workforce Committee and lead sponsor of the GOP legislation, said that his proposal “largely mirrors” the one included in the president’s budget.

Nevertheless, the White House has threatened to veto the Republican plan because it would have interest rates on student loans reset every year. The White House said that the GOP plan "would create uncertainty and lessen transparency for students and their families who are making decisions about borrowing for college."

Despite the conflict between the White House and Congress, analysts have suggested that the distance between the two sides’ proposals is bridgeable. Matthew Chingos and Beth Ayers, researchers with the Brookings Institution, suggested that it might be possible to reconcile the proposals set forward by the House GOP, the president, and Democratic senators Jack Reed and Richard Durbin. All three plans would base student loan rates on rates paid by Treasuries, although only the Republican proposal would allow the rate to reset each year. “[T]his is a rare example where proposals from our two political parties seem close enough that compromise on a good policy should be possible,” the  Brookings scholars wrote.

Massachusetts Senator Elizabeth Warren, a Democrat and newly-elected liberal favorite, made waves among progressive circles and set herself apart from other legislators with a proposal to limit student loan rates to the rates charged to banks on loans taken out from the Federal Reserve’s emergency lending window. Warren’s plan, however, likely won’t affect the eventual legislative outcome. Chingos and Ayers dismissed it as a “cheap political gimmick.”

Obama Downplays Health Care Law Implementation Fears

Joseph Lawler - April 30, 2013

President Obama downplayed the risks involved in the rollout of his health care law at a press conference today. Asked by MSNBC's Chuck Todd why Sen. Max Baucus (D-MT) believes the implementation might be a "train wreck," Obama suggested that the majority of the law's installation had already been successfully carried out:

So there are a whole host of benefits that -- for the average American out there, for the 85 to 90 percent of Americans who already have health insurance, this thing's already happened, and their only impact is that their insurance is stronger, better, more secure than it was before. Full stop. That's it. Now they don't have to worry about anything else.

The implementation issues come in for those who don't have health insurance, maybe because they have a pre-existing condition and the only way they can get health insurance is to go out on the individual market and they're paying 50 percent or a hundred percent more than those of us who are lucky enough to have group plans.

The president did hedge his bets, somewhat, warning that setting up the law's state-level health insurance exchanges would be a "big complicated piece of business" and that dealing with Republicans in Congress and in state capitals "makes it harder." He also predicted future "glitches and bumps" along the way to full enactment of the law.

Yet overall his reassurances did not rise to the level of the the concerns that have been raised by Baucus and other Democrats about implementation. Baucus, in particular, in his "train wreck" comments was asking Health and Human Services Secretary Kathleen Sebelius about the public's lack of understanding of the law. Those fears are not going away. A Kaiser Family Foundation poll released just today indicates that 40 percent of Americans are not aware that the law is on the books.

Even more importantly, Democrats' and others' worries that the implementation might not go according to schedule or as planned are well founded. John Harwood sketched out some of the immediate challenges the administration faces in yesterday's New York Times:Among the complex imperatives: pushing reluctant states to set up insurance marketplaces and expand Medicaid programs, keeping an eye on insurance companies as they issue new rate schedules, measuring the law’s effects on small-business hiring, and coaxing healthy young people to buy coverage so the system works economically for everyone else.

Even if the administration is able to manage all of those complex tasks before Congressional Democrats face voters in 2014, Republicans will be watching to pick up on any signs of malfunction. The Washington Times reports that Utah senator Orrin Hatch, the ranking Republican on the Finance Committee, is monitoring proposed rate plans from across the country for any sign of spiraling insurance premiums. In Harwood's New York Times piece, conservative economist N. Gregory Mankiw indicates that the GOP will be on the lookout for evidence that the law discourages lower-income worker from working longer hours. And Republicans will also watch for corporations or state and local governments shifting workers on the exchanges.

The challenge of the health care law's implementation is a real one. Obama may be able to downplay the size of the task for now. But that won't be a viable strategy as 2014 draws nearer for Democrats in the House and Senate, the laws' deadlines approach, and news continues to trickle out about "glitches and bumps" in the process.

White House Admits 2012 Was Costliest for Regulation

Sam Batkins - April 25, 2013

In a long-awaited report to Congress on the costs and benefits of federal regulation, the Office of Information and Regulatory Affairs (OIRA) conceded 2012 was the costliest year ever for red tape. With $19.5 billion in regulatory costs, 2012 topped the next highest cost year by 57 percent. But that’s only the tip of the iceberg. The report, which was well overdue, also failed to record costs of six “economically significant” regulations. AAF’s tally has last year’s regulatory cost at $215 billion – still a pure addition of administration data.The OIRA report, which is traditionally released with the president’s Budget, was even more overdue than that – more than a week late.  This is actually an improvement from earlier delays.  Its final report from last year wasn’t released until last week, and the Unified Agenda of federal regulations from last spring wasn’t released at all.

One can’t blame the administration for not wanting to release this report. The cost drivers behind the $19.5 billion figure are hardly surprising to those who follow the regulatory world, but staggering nevertheless. EPA and the Department of Transportation implemented $17.5 billion of the total, followed by the Department of Health and Human Services, at $1 billion, with ObamaCare rules driving that total.

The actual rules that contributed to last year’s red tape binge also received plenty of attention: new CAFE rules ($8.8 billion), Utility MACT or the Air Toxics Rule ($8.2 billion), and new school lunch standards ($500 million).  Although the report might be an interesting read for those craving details on federal regulation, what’s not in the report is perhaps more intriguing.

For example, the White House included only 14 rules in its quantified figures. According to White House records, there were 45 major final rules published during the covered period, and 3,827 rules published in the Federal Register – the definition of cherry picking.

To be fair, the practice of selectively picking rules is common for an administration seeking to hide the costs of a regulatory agenda. However, the omission of six regulations where the regulatory text itself admitted it was “economically significant,” the jargon for a measure that imposes a $100 million impact on the economy, is troubling.

These six regulations all conceded they were economically significant and they all impose costs of more than $115 million, easily above the $100 million threshold. Combined, the White House excluded more than $1 billion of final rule costs and more than $1.4 billion of proposed rules. 

 

 

Economically Significant Regulations Omitted from OIRA Report

Regulation	Cost	Paperwork Hours
Energy Standards for Dishwashers	$881 million	380
Water Standards for Florida	$632 million
Pilot Certification Requirements	$443 million	7,112
Changes to Implement Patent Reform	$288 million	778,300
Practice Before the Patent Trial Board	$213 million	528,946
Patent Reform: Revise Reexamination	$115 million	235,365
Totals: $2.5 billion and 1.5 million hours

 

For an administration that boasts transparency and “good government” principles, these omissions are troubling. It has become common practice to hide-the-ball on regulatory transparency. Last year, the American Bar Association even chastised the administration for failing to release its agenda of federal regulations on time. Shouldn’t businesses at least know when regulations are scheduled for release and how much they will cost?

In the end, the administration itself admits 2012 was the highest cost year ever for federal regulation, and that is with a mere one-third of one percent sample of all rules published. The reality is that costs were far higher.

Study: Minority-Owned Banks Less Likely to Receive TARP Program Funds

Joseph Lawler - April 24, 2013

Banks owned by African-Americans and other minorities may have suffered racial discrimination at the hands of the TARP bailout program, a new study finds.

The report, authored by Louisiana-Lafayette finance professor Linus Wilson and Stanford political science grad student Lucas Puente, finds that non-minority banks were approximately 10 times more likely to obtain funds than African-American owned banks, controlling for other factors. The researchers compared the 36 banks and thrifts that received of roughly $500 million in funds disbursed through the TARP’s Community Development Capital Initiative (CDCI) in 2010 and controlled for differences other than race to obtain their results.

Wilson, a frequent critic of TARP, emailed RealClearPolicy: “It is disappointing to learn that black owned banks were significantly less likely to get TARP funds. The TARP program is distasteful enough to most Americans without the program being tainted by the specter of racial discrimination.”

The authors suggest that the racial gap in CDCI investments might have been related to the then-ongoing controversy surrounding Maxine Waters, who was at the time the third-highest-ranking Democrat on the House Financial Services Committee. Waters’ husband owned stock in an African-American-owned bank that received funds from a different TARP program at Waters’ urging. Following the incident, Waters became the subject of a Congressional ethics inquiry. The charges were resolved in 2012 in her favor, although her grandson, who served as her chief of staff, was reprimanded for his role. Puente and Wilson speculate that the controversy surrounding the episode may have scared off African-American banks or Treasury officials.

The study also concludes that recipients of CDCI funds were more likely to have participated in the original TARP capital infusion program, but that political influence was likely not a factor in the loans made.  

Obama Budget: Why $4.3 Trillion in Deficit Reduction?

Joseph Lawler - April 10, 2013

President Obama’s just-released budget includes plans for a total of $1.8 trillion in deficit reduction, for a total of $4.3 trillion in such measures intended to lower deficits for his tenure. “That surpasses the goal of $4 trillion in deficit reduction that many economists believe will stabilize our finances,” Obama said in his weekly address on Saturday.

As the president’s budget is rolled out and discussed, it’s worth reviewing that $4 trillion goal. Why $4 trillion, and not some other number?

$4 trillion in a decade is the number the Simpson-Bowles deficit commission chose as its starting point. Although the bipartisan commission failed, its recommendations have served as a benchmark for both parties since.

It’s also the amount that would roughly stabilize the debt near its current levels in the 10-year budget window. As the left-of-center Center for Budget and Policy Priorities points out, that would take roughly $4 trillion in lowered spending or increased taxes. The fiscal cliff tax hikes and sequester leave the government just $1.4 trillion away from that goal (Obama’s budget includes measures to replace the $1.2 trillion sequester with other policy savings and add on another $600 billion of other deficit reduction measures):

The idea behind the Obama budget’s $1.8 deficit reduction goal, then, is that, if everything goes as planned, the public debt would be not much higher than it is now, at 73 percent of Gross Domestic Product.

Of course, there are any number of reasons to think that not everything will go as planned, and that the federal government faces a severe financing problem beyond the 10-year window.

But setting aside questions about the assumptions undergirding the president’s budget, it’s worth asking why 75 percent of GDP is the goal debt level, other than that it’s about where happen to be right now.

Ethan Pollack of the Economic Policy Institute, for example, has suggested that the debt could just as easily be stabilized at 85 percent of GDP later in the decade, allowing for more stimulus now (although Pollack doesn’t address the longer-term debt problem in his argument). It’s not clear what the difference between 75 and 85 percent would be for the purposes of current planning. It’s also worth mentioning that Japan, a nation that’s followed a fiscal and economic trajectory in many ways similar to the one the U.S. is on, currently maintains a debt level above 200 percent of GDP, and hasn’t yet faced a fiscal crisis.

On the other hand, the fiscal hawks at the Committee for a Responsible Federal Budget think that Obama’s aiming for only have the amount of spending cuts and tax hikes the country needs. In a recent report, the CFRB suggested that the while the level of debt Obama’s aiming for “may not be a disaster, it would still amount to nearly twice our historical average and well above the international standard of 60 percent.”

The Suburbs vs. School Reform

Joseph Lawler - April 8, 2013

(Image via the White House Flickr feed)

If education policy is a war between reformers and teachers unions, the reformers seem to be winning. Under Education Secretary Arne Duncan, the Obama administration has steadily expanded accountability measures and boosted charter schools, making Duncan a foe of teachers unions. It’s not just Democrats, however, who have reason to celebrate. GOP reformers in red states such as Indiana and Louisiana are experimenting school choice measures, such as vouchers and education savings accounts, that threaten to undercut the unions’ position.

Yet the K-12 landscape is more rugged than meets the eye. As the education analyst Lewis Andrews has argued, teachers unions are far from the only ones resistant to change. An underappreciated feature of the American school system – and all of American politics – is that suburban families can be the greatest obstacle to change in the system. And while the teachers unions have seen their power chipped away during the Obama years, the submerged coalition of middle- and upper-middle-class families has removed all threats.

The Obama administration has aggressively pursued incremental changes to the way schools across the country work with whatever means available to it – most notably, the $4.35 billion Race to the Top slush fund created by the stimulus. At the same time, however, it has drastically reduced the impact of the Bush-era No Child Left Behind Act on suburban schools in what RiShawn Biddle, the editor of education news magazine Dropout Nation and a friend of RealClearPolicy, calls the Obama “waiver gambit.” For the 34 states and the districts that have submitted to the administration’s conditions for students’ college readiness, the administration has granted waivers to those states to ignore the Adequate Yearly Progress requirements of No Child for all but the bottom 5 percent of schools. In other words, suburban schools have evaded the most onerous requirements of No Child.

Meanwhile, as successful as conservative reformers have been in advancing a fairly ambitious school choice agenda, it’s clear that their efforts to enact school choice will not extend to middle class families. Most school voucher programs are geared toward benefitting students attending failing urban schools. Indiana’s voucher program, the nation’s most expansive, only serves children eligible to receive federal aid for school lunches; Louisiana’s choice program extends vouchers only to lower middle class families. Other forms of school choice have not been fared so well with suburban families. Charter schools, which have become the education providers of choice in cities such as New Orleans and Detroit, have made few inroads into the suburbs. Public school choice programs, which allow for urban students to attend suburban schools, are even more hotly contested. A plan proposed by Michigan Gov. Rick Snyder in 2011 to expand the state’s public school choice program, which allows urban students to attend suburban schools, died in the legislature.

Scratch the surface, and it’s obvious that families in suburban districts will hold out against change longer than the teachers unions will, and likely longer than would-be reformers will too. They’re motivated by the most powerful of kitchen table issues, one that is tangled up in childrearing, real estate, race, and crime.

That’s not to say their kids’ schools don’t need reform. Far from it. Schools that are in the middle of the pack in America lag those of other nations with advanced economies. Furthermore, our suburban school districts are in many cases failing to provide quality education to poor and minority students. There is no reason for upper-middle-class America to feel good about its schools, except for that they’re not as bad as their inner-city neighbors.

Michael Petrilli, an official in the Bush Department of Education, wrote in a 2005 New York Times that “despite all the talk about improving inner-city schools, the greatest promise of the No Child Left Behind Act was always in America's leafy suburbs.” Eight years later, Petrilli, having moved to a wealthy and snow-white school district for his own kids’ school years himself, has concluded that the political costs of bringing change to the suburbs are too high.

There is probably no changing this state of affairs. The chastened Petrilli suggests a system of limited integration, including setting aside a portion of seats in good schools for poor children from neighboring areas. Left-of-center reformers, such as Richard Kahlenberg of the Century Foundation, have proposed alternative ideas for socioeconomic integration. Biddle, on the other hand, argues that reformers should work more closely with the growing number of minorities in suburbia, who have found that the schools their kids now attend are often little better than the urban schools they fled.

But the modesty of these proposals attests to the power of suburban parents in U.S. politics. “You need political will to do this,” Petrilli says of his own plan. The lessons of the ‘70s busing episodes have probably been too well learned for any officeholder to muster that political will.

The top priority in the U.S. education system today is undoubtedly turning around the dropout factories that are failing our cities. But as momentum builds to force those schools to change, it’s worth noting that in American politics, some things never do.

Update: This article has been edited for clarity.

Why Young Folks Aren't As Wealthy As Their Parents Were

Joseph Lawler - April 3, 2013

A recent Urban Institute study mulled over the implications of the fact that today's under-40s have less wealth than their parents' generation did at the same age. It appears that the story can be boiled down to two factors.

The first cause of the drop in wealth for younger Americans is that most people buy their first home sometime in their early 30s. Of course, the timing wasn't going for the cohort of 30-somethings who bought their first house in the mid-2000s:

And this comes after they'd racked up unprecedented levels of student debt in their 20s:

The Urban Institute folks reach the same conclusion as Allison Schrager did: policy needs to be shifted to make non-retirement saving easier for young Americans.