Immigrants and institutions

It’s becoming increasingly difficult to be opposed to significant immigration for economic reasons. One of the more sophisticated arguments for restricting migration–proponents include Paul Collier, in Exodus: Immigration and Multiculturalism in the 21st Century, and George J. Borjas in Immigration Economics–concerns the socio-political baggage that immigrants bring with them; institutions, characteristics, and social norms which might even have had some bearing on the poverty of their countries of origin.

There’s a substantial literature to support the claim that institutions like secure property rights and the rule of law are by far the most important guarantors of long term prosperity and growth. If it were true that high levels of immigration could serve to undermine these institutions, (as Borjas hypothesises) significantly mitigating the vast welfare gains some predict immigration will bring, those who support very high levels of immigration might well reevaluate their position.

The newly updated version of a Cato Institute working paper, soon to be published in Public Choice, goes some way to looking at these claims empirically. They use data from the Economic Freedom of the World Annual Report to examine the effects of migration on the institutions such as property rights. The main finding of their analysis is that countries with a larger percentage of immigrants in their population in 1990 had a higher level of economic freedom in 2011.

Indeed, Clark et al. conclude:

Regardless of the immigration measure used or the precise regression specification, we have not found a single instance in which immigration is associated with less economic freedom. It does not appear that immigrants are bringing the poor economic freedom records of their home countries abroad with them.

and

Overall, we find some evidence that larger immigrant population shares (or inflows) yield positive impacts on institutional quality. At a minimum, our results indicate that no negative impact on economic freedom is associated with more immigration.

As the evidence around the economic case against immigration is weakened (I could have also blogged today about a recent CReAM discussion paper which concludes that low-skilled immigration to Denmark pushed up native wages, employment, and occupational mobility), we might wonder whether people have other reasons for opposing it.

It’s always the same with these bureaucratic cash targets

The thing that is the same being that hitting the bureaucratic cash target becomes the priority, not actually spending the money in a reasonable or value adding manner:

More than two thirds of Britain’s aid budget is being given to organisations such as the EU and the World Bank to help meet official targets, despite billions of it going unspent for years, an investigation has concluded.

MPs found that £6.3 billion of Britain’s aid budget is being handed to major agencies to help hit the Government’s target of spending 0.7 per cent of the nation’s income on overseas aid.

Their report found that a growing proportion of the money is set aside for future spending, which means it goes unspent for an average of two years.

The amount committed to major organisations that has yet to be spent has increased from £1.5 billion in March 2010 to £3.7 billion in March 2014.

It was never sensible to adopt the target in the first place. And as we’re now borrowing that money to immediately hand it off into the bank account of the international bureaucracy we really shouldn’t be trying to achieve it now.

The five things you need to know about TTIP

The Transatlantic Trade and Investment Partnership (TTIP) is a free trade agreement currently being negotiated between the EU and the US. I think it’s a good idea. Here’s what you should know about it:

1. Abolishing tariffs is only a small part of TTIP.

Tariffs are generally low between the EU and US, but for some sectors they are very high. The EU currently imposes a 10% duty on car imports from the US, and the US imposes tariffs as high as 40% on some clothes from the EU, like shoes. Getting rid of those high sectoral tariffs will allow for greater economic specialisation, and the EU and US economies are so large that even reducing small tariffs overall would boost wealth levels a bit.

2. The biggest costs to trade are from so-called ‘non-tariff barriers’, and getting rid of these could have a big effect.

Most of TTIP is designed to harmonise regulation where there is redundant double-regulation (or ‘regulatory incoherence’) of firms operating in both the EU and the US. For instance, cars may be just as safe in the US and the EU (or not – nobody’s sure yet), but have to adhere to completely different safety requirements to achieve that. Harmonising car safety regulations could make it cheaper to build cars without reducing car safety at all. Because of different rules about egg washing that don’t seem to make a difference to actual safety, US eggs couldn’t legally be sold in the UK and vice versa. Some regulations are simply designed to make it more expensive for foreign firms to sell goods, to protect native firms. Harmonising some of these rules should reduce costs substantially.

Different regulatory regimes might allow for more experimentation, but the feedback mechanisms involved in regulation are so fuzzy that this kind of ‘discovery process’ rarely actually takes place.

3. The economic gains from TTIP could be pretty substantial.

The CEPR estimates that a successful TTIP that removed a lot of these ‘non-tariff barriers’ as well as all existing tariffs would cause an increase to EU GDP by €120bn (0.5% of GDP) and US GDP by €95bn (0.4% of GDP) in total. That’s modest, but would translate into an extra £400 annually for British households. 90% of those GDP gains would come from non-tariff measure cuts.

4. The only regulations that TTIP will prevent in the future are ones that discriminate against foreign firms.

This will include rules that mean that US and EU governments will have to consider foreign firms for public procurement in certain areas (but not publicly-funded healthcare, social services, education or water services). In general the EU is extremely restrictive about the impact TTIP can have on public services. EU governments can organise public services so that only one monopoly provider supplies it (eg, the NHS), and they can regulate whatever they deem to be ‘public services’ at any level of government. The only exception is where an EU government has already opened up a sector to foreign firms (ie, to avoid firms that have already invested from losing their money). This is a pity, I think – I’d like to see EU states sign up to an agreement that stopped them from discriminating against foreign firms in all areas. But TTIP is not that agreement.

5. The Investor-State Dispute Settlement (ISDS) mechanisms in TTIP – the so-called ‘secret courts’ – are nothing new.

Pretty much every free trade agreement signed around the world includes an ISDS provision, which allows firms to challenge states that renege on their part of the deal. Since 1975 the UK has signed 90 ISDS treaties, and 3,400 exist around the world. In that time the UK investors have brought 43 claims against other states. Only two have ever been brought against the UK and both were unsuccessful. What’s more, ISDSes cannot compel a state to change its laws, only to pay compensation to firms if it has broken its treaty obligations. It might seem pointless to have this – the UK and the US both have strong rules of law. But TTIP also includes countries like Greece, Hungary and Romania which have much less reliable judicial systems.

In praise of Standard Chartered and their advice on African tax avoidance

The perenially enraged over at Action Aid are today enraged about the way in which Standard Chartered bank gave advice on how to avoid (legally, of course) certain corporate taxes upon investments in poorer African countries. We, in contrast, would like to congratulate Standard Chartered on their public spiritedness in advising people on how to avoid certain corporate taxes in poorer African countries. And we do so on the basis of a point made by Joe Stiglitz.

The outrage is here:

One of Africa’s most high-profile banks – Standard Chartered – publicised the advice of a Mauritius-based financial company on how to avoid tax in some of the poorest countries in the world, a new ActionAid report states.

The FTSE-100 bank which operates in 15 African countries published the advice in its Standard Chartered Insights 2013/2014. The publication is aimed at company treasury departments.

The tax avoidance advice – which is entirely legal – can be used to avoid potentially hundreds of millions of dollars in tax in some of the poorest countries in Africa. It suggests structuring investments through Mauritius in order to avoid capital gains tax and withholding tax.

You can hear the frothing at the mouth as they shout in rage at this, can’t you? However, this outrage is entirely misplaced, presumably as a result of their ignorance of how corporate taxation works.

The most essential thing to grasp about it is that the company itself is never bearing the economic burden of such a tax. It is always some combination of shareholders and workers. In an entirely autarkic economy it will be the shareholders, capital if you like, which will carry 100% of that burden. In a more open economy the workers pick up some of that burden. For taxing capital in an economy where capital can leave, capital decide not to enter, means that there will be less capital in that economy. Capital plus labour is what raises productivity and thus wages, meaning that less capital means lower wages. As the economy becomes ever more open, and smaller relative to the size of the global economy, then the burden on the workers increases.

It never quite reaches zero on capital as Adam Smith pointed out in his one Wealth of Nations use of “invisible hand”. Even if people can invest abroad without penalty some will still prefer to invest at home and thus led, as if by that invisible hand, benefit their fellows. For us, here, this means that the impact of corporate taxation on capital will never be zero.

Which brings us to Joe Stiglitz’s point. Which is that the burden of a tax can be over 100%. What people lose from the tax being levied can be greater than the amount raised from that tax. That’s one of the failures of the Robin Hood Tax of course.

But now to the case at hand. As an economy becomes smaller relative to the global economy the workers carry more of the tax burden. Poor African countries have economies the size of a modest English town: they’re small therefore. And given that we are talking about foreign investment here they are entirely open to the global economy. So, the burden of any capital taxation is largely going to fall upon the workers in those poor African economies. And that burden can be (and we would estimate will be) higher than the tax collected.

Meaning that, if you’ve advised people to dodge that corporate taxation and the investment thus goes ahead, that you’ve just raised the wages of some of the poorest people in the world. For note that the effect isn’t upon just those workers in the investments made. It’s upon all of the workers in the economy where the investment is made.

Advising people to invest in sub-Saharan Africa through Mauritius thus raises wages in sub-Saharan Africa by whatever effect on investment happens now it’s free of those corporate taxes. All of which strikes us as a bloody good idea.

So why is Action Aid so spittle flecked at the very thought of it? We assume it’s just because they’re ignorant of how corporate taxation works. Which leaves us with only one last question. Why do they expend so much effort telling us how the tax system should work when they’ve no clue about how it does?

President Obama: the ultimate poverty hypocrite

Americans are experiencing buyer’s remorse. Last summer CNN found that 53% of those polled would choose Mitt Romney to be president today, over the 44% who chose Barack Obama. And with Obama’s approval ratings fixed these days below 50%, I suppose it’s only human to get a bit testy with those you’re compared to:

President Obama poked fun at former rival Mitt Romney and leading Republicans on Thursday, saying the GOP’s rhetoric on the economy was “starting to sound pretty Democratic.”

At the House Democratic Caucus retreat in Philadelphia, Obama noted that a “former Republican presidential candidate” was “suddenly, deeply concerned about poverty.”

“That’s great! Let’s go do something about it!” Obama added in a not-so-veiled jab at Romney.

What’s not particularly smart, however, is to frivolously attack someone’s track record on poverty when your own record looks abysmal:

A few ugly facts about the Obama Presidency:

  • Median household income has slumped from $53,285 in 2009 to $51,017 in 2012 just up to $51,939 in 2013.

BN-DV798_income_G_20140725164636

  • In comparison to his three previous successors, this fall in median income looks even worse:

20140927_USC762

  • Real median household income was 8.0% lower in 2013 than in 2007.
  • Nearly 5.5 million more Americans have fallen into poverty since Obama took office.
  • Obama oversaw the first time the poverty rate remained at or above 15% three years running since 1965.
  • Home ownership fell from 67.3% in Q1 2009 to 64.8% in Q1 2014; black home ownership dropped from 46.1% to 43.3%.
  • Labour force participation rate fell from 65.7% in January 2009 to 62.7% in December 2014.
  • The federal debt owed to the public has more than doubled under Obama, rising by 103 percent.
  • 13 million Americans have been added to the food stamp roll since Obama took office.

Obama has been very successful in painting a picture of himself and the Democrats as the ‘Party of the Poor’, and did an even more sensational job convincing 2012 voters that Romney’s riches and successes put him out of touch with the middle-class America. But in reality, the president’s policies have pushed millions more people into financial stress and poverty.

And he’s still causing damage; even his latest State of the Union address called to raise taxes on university savings accounts and still cited fake unemployment numbers, as if this somehow helps the double-digit workers who have given up looking for jobs.

Perhaps the president really thinks his increased federal spending will pay off for the poor. Maybe he really believes that multi-millions more on food stamps is a saving grace instead of a tragedy. But regardless of intention, the facts speak for themselves.

Obama’s talk on poverty is cheap. And his mockery of Romney cheaper.