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The Economic Case for Sentencing Reform

By Emily Weisburst and Sandra Black·May 19
University of Texas, Austin

The Issue:

Attorney General Jeff Sessions issued a directive instructing federal prosecutors to "charge and pursue the most serious, readily provable offense" in all but exceptional cases. This policy reverses prior guidance that encouraged the use of judiciary discretion in applying mandatory minimum sentences for low-level, non-violent drug offenders. More rigorous application of sentencing guidelines will subject a larger share of defendants to longer periods of incarceration, and increase the total incarcerated population in the U.S.

The Facts:

  • The United States has a higher incarceration rate than any other large country in the world (see chart). Approximately 2.2 million people, with minority and low-income individuals disproportionately represented, are currently serving sentences in jails and prisons.
  • Research has found that the crime-reducing benefits of incarceration decline as the incarcerated population grows. Increasing the length of time that prisoners serve could help reduce crime if it acts as a deterrent to potential offenders or if keeping people in jail prevents them from committing criminal offenses. But longer sentences can also increase future re-offending by causing social or emotional harm, by allowing offenders to build criminal expertise, or by causing labor market skills to atrophy while an individual is incarcerated.
  • U.S. spending on incarceration totaled over $80 billion in 2012. In addition, incarceration has large indirect costs for incarcerated individuals and their families. Among other costs, job applicants with criminal records face significant difficulties finding jobs and lower earnings.
  • Policies such as increasing the number of police or improving education and labor market opportunities for at-risk populations may have higher returns for community safety than increased incarceration.

What this Means:

As U.S. incarceration rates have grown, policymakers from both sides of the aisle, researchers, and advocates have become increasingly concerned about the equity and effectiveness of current incarceration policies. A growing body of economic research supports the bipartisan case for sentencing reform, through both reducing mandatory minimum sentences and increasing judicial discretion in sentencing. The recent change in sentencing guidelines issued by the Department of Justice is unlikely to be cost-effective and will provide limited public safety benefits while increasing the costs borne by the least advantaged groups of our society.

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The Productivity Slowdown is Even More Puzzling than You Think …

By Dan Sichel·May 17
Wellesley College

The Issue:

Increases in labor productivity — the amount of output produced from an hour of work — are what fuel rising living standards over the long haul. Unfortunately, the rate of productivity growth in the U.S. has slowed dramatically in recent years. That this has happened in the midst of seemingly rapid advances in technology creates an apparent paradox.

The Facts:

  • U.S. labor productivity rose at an average annual pace of roughly 3-1/4 percent during the Internet boom but slowed after 2004, dropping to nearly ½ percent a year during 2010-2016 (see chart).
  • Economists do not have a complete answer to why productivity growth has slowed. Some argue that innovations which have the potential to transform economic life on a grand scale — such as electricity and public sanitation — are things of the past. Others claim that factors such as lower capital investment by firms and excessive regulation place limits on the pace of productivity growth.
  • New research finds that prices of high-tech products are falling more rapidly than is captured by official statistics, which would imply that the pace of innovation in these products is more rapid than previously estimated.

What this Means:

If the pace of innovation in high-tech products is faster than implied by official statistics, the productivity slowdown is even more puzzling. But, it also gives hope for the future. In past epochs of innovation it took a long time for new technologies to diffuse through the economy to a sufficient extent that they boosted economy-wide productivity growth. The same type of delay could be happening now, and the faster pace of innovation that recent research points to could be the fuel needed ultimately to lead to a productivity revival.

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Puerto Rico’s Debt Trap

By Daniel Bergstresser·May 16
Brandeis University

The Issue:

Puerto Rico entered an unprecedented form of bankruptcy protection with a record breaking $123 billion in combined debt and unfunded pension commitments. There is significant uncertainty about how losses will be shared between bondholders, pension recipients, the island’s taxpayers and residents, and others.

The Facts:

  • Unlike U.S. municipalities, Puerto Rico – with its special status as a U.S. territory –  cannot resort to the more familiar Chapter 9 of the Bankruptcy act, which has been used in previous municipal bankruptcies. The “Puerto Rico Oversight, Management, and Economic Stability Act” (PROMESA) law, passed in 2016, created an oversight board with the authority to oversee Puerto Rico’s budget and facilitate restructuring talks as well as a bankruptcy-like "Title III" mechanism.
  • The Puerto Rican economy was supported during most of the post-war period by two tax-related American policies. First, U.S. corporate tax exemptions made the island an attractive location for manufacturing firms. The repeal of this tax incentive contributed to the deep economic recession in the island that began in 2006 and has not abated.
  • In addition, Puerto Rican municipal debt has enjoyed what has been called the “triple tax exemption". The interest on this debt has been exempt from federal, state, or local taxes for U.S. residents – an arrangement that made Puerto Rican debt attractive for American investors and facilitated borrowing.

What this Means:

The need to keep schools, water systems, and electricity services functioning will, in all likelihood, turn out to be impossible to square with full repayment for the owners of different bonds issued by the island and its agencies. As Matt Fabian, a widely respected municipal analyst, said recently: "There just isn’t enough money. Nobody has any idea what is going to happen."

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Import Limits on Steel and Aluminum: Protecting National Security or Protectionism?

By Menzie D. Chinn·May 9
Robert M. La Follette School, University of Wisconsin-Madison

The Issue:

The Trump Administration has proposed a number of trade related measures purportedly on the basis of national security. The question is whether the threats posed to national security are genuine, or merely a means of protecting domestic industries under the guise of national security.

The Facts:

  • On April 20th and April 27th, the Administration directed the Secretary of Commerce to initiate investigations under section 232 of the Trade Expansion Act of 1962 to determine the effects on national security of steel imports, and aluminum imports. There have only been 26 Section 232 investigations since the law was established 55 years ago.
  • In past investigations, the negative impact of imports on national security were identified as arising from either (i) excessive dependence on imports from unreliable or unsafe sources, thereby resulting in vulnerability to a supply disruption, or (ii) threats to the viability of U.S. industries and resources needed to produce domestically goods and services necessary to ensure U.S. national security.
  • The share of steel imports used in domestic production was 29.9 percent in 2016. Canada was the top source (see chart). National defense and homeland security needs accounted for only 3 percent of total steel shipments in 2005, according to the American Iron and Steel Institute.
  • High-purity aluminum is used to make F-35 and F-18 fighters, C-17 transport aircraft, and other military equipment. Canada was the largest source of United States aluminum imports in 2016. Imports from Canada were about four times as much as Russia, and nearly six times as much as China.

What this Means:

It is unlikely that import competition in the steel and aluminum industries poses a real threat to national security, given ample supply of domestically sourced steel, and the presence of reliable alternative non-domestic sources of aluminum. Hence, these investigations, if conducted as they have in the past, will likely result in negative determinations. If the investigations do result in protectionist measures, these are likely to raise prices for downstream consumers in the defense industry, as well as the overall economy. A finding that leads to protectionist measures is also likely to invite retaliation by our trading partners, which could lead to a process of escalating protection.

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The Success of the Earned Income Tax Credit

By Hilary Hoynes·May 8
University of California, Berkeley

The Issue:

The Earned Income Tax Credit (EITC) is a major anti-poverty program that elicits wide bipartisan support and benefits both children and adults. It currently does not provide much income support for recipients without children.

The Facts:

  • The EITC is a refundable federal tax credit that low- to moderate-income families and individuals can claim on their tax returns. It encourages work since the credit is only available to those with earned income.
  • The EITC reached 28.5 million tax filers in 2014. The refund available from the EITC can be as much as 45 percent of a family’s pre-tax income; the maximum credit in 2015 was $3,359 for families with one child, $5,548 for families with two children, and $6,242 for families with three children.
  • The labor force participation incentives that the EITC generates also play an important role in reducing poverty. When credits for families with children increased relative to families without children in 1994, employment increased significantly more among families with children (see chart). Failing to take into account these indirect effects leads to an underestimation of the anti-poverty benefits of the EITC by as much as 50 percent.

What this Means:

The EITC has proven to be an important way to support the working poor and, particularly, the children in these families. But the EITC largely bypasses families without children – in 2015, the maximum benefit from this program accruing to them was only $503. An extension of the successful EITC to this set of people is warranted as well.

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