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The Economic Cost of Repealing DACA

By Giovanni Peri·September 11
University of California, Davis

The Issue:

On September 5th, 2017, Attorney General Jeff Sessions announced the plan to rescind the program known as Deferred Action for Childhood Arrivals (DACA), which grants protection from deportation to undocumented immigrants who came to the United States as children. The repeal was described by the attorney general as necessary to correct the effects of DACA, which, among other issues, denied jobs to hundreds of thousands of Americans by allowing those same jobs to go to illegal aliens.” Is there any support in facts and research behind this, explicitly economic-based, justification for repealing DACA?

The Facts:

  • DACA was instituted through an executive order by president Obama in 2012 and has protected from deportation nearly 800,000 young individuals who came to the United States before the age of 16. Ending DACA will make them subject to deportation and will push these youth back to being “undocumented” increasing their marginalization in the economy by drastically reducing the range of jobs they can access.
  • Program requirements ensure that DACA beneficiaries have at least a high school education or its equivalent, and many beneficiaries either have or are pursuing higher degrees. More than a quarter of DACA enrollees, 220,000, live in California and 120,000 live in Texas (see chart).
  • DACA allowed these young individuals to find jobs that offer better pay for their skills and encouraged them to achieve more schooling, as they could benefit from such investment by accessing the legal labor market. By increasing wage income, DACA also increases consumption and overall demand for U.S. services, products and jobs where DACA recipients live and spend.
  • The idea that removing the legal status or deporting DACA recipients will create skilled jobs that unemployed Americans can take seems particularly farfetched now. The unemployment rate is currently very low and employers are reporting difficulties in hiring skilled workers.

What this Means:

The ultimate contradiction is that the Trump administration’s recent proposal for reforming the legal immigration system is built around merit and economic contribution, explicitly selecting people with skills that are in demand by U.S. employers and who speak English fluently. The beneficiaries of DACA are a perfect example of such immigrants. The current action on DACA pushes this group of foreign-born individuals — who meet the stated criteria — into illegality and potentially away from the United States, at an economic cost to the U.S. economy and all other U.S. workers.

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The Dodd–Frank Financial Reform

By Jeffrey Frankel·September 8
Kennedy School, Harvard University

The Issue:

After the U.S. mortgage crisis of 2007 led to the severe global financial crisis and global recession of 2008-09, there was strong popular support for strengthening financial regulation in the United States, with the goal of reducing the frequency and severity of such financial crises in the future. Ten years later, there is a movement to roll back the regulations that were put in place.

The Facts:

  • The Dodd–Frank Wall Street Reform and Consumer Protection Act, signed into law in 2010, works to prevent banking bailouts or deposit guarantees from burdening taxpayers or encouraging "moral hazard" which is when awareness of the safety net encourages excessive risk-taking.
  • The banking provisions include higher capital requirements to make sure banks are unlikely to get over-extended and regular stress tests for financial institutions with above $50 billion in assets. The law extends supervision beyond banks to other financial institutions that are significant to the health of the financial system. It also established the Consumer Financial Protection Bureau to give households the same sort of protection against misleading or abusive provision of financial services as they have for consumer goods. And, among other changes, the reform improved regulation and transparency of derivatives.
  • Some on the Left seem to believe that Dodd-Frank has accomplished little. At the same time, others believe that the problem is too much financial regulation rather than too little. In response to an executive order by President Trump, the Treasury Department issued detailed recommendations in June to revise banking regulations. And, the House of Representatives approved the Republican-sponsored Financial-Choice Act, which would undo many of the key provisions instituted in the wake of the financial crisis.
  • It is easy to agree that Dodd-Frank can be improved upon, but it is insufficiently recognized that many shortcomings arise because some features that were in the originally proposed legislation were then cut out or neutered by Congressional opponents of regulation.

What this Means:

The Dodd-Frank Act has many solid features that help make the U.S. financial system more resistant to financial crises. But the legislation is under increasing assault from those who seek to peel back regulation. At the same time, some who passionately favor tough financial regulation have failed to recognize the important contribution made by Dodd-Frank and what would be lost if it were rolled back. As Federal Reserve Vice Chairman Stanley Fischer observed, “now after 10 years everybody wants to go back to a status quo before the great financial crisis. And I find that really, extremely dangerous and extremely short-sighted.”

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The Geography of Need and the Proposed Foxconn Deal in Wisconsin

By John C. Brown·August 28
Clark University

The Issue:

Many states and localities have tried to attract and retain high-paying jobs through packages of subsidies and tax incentives offered to manufacturing firms, such as the proposed deal for a new plant by the Taiwanese electronics supplier, Foxconn, in Wisconsin. Debates regarding such deals tend to focus on whether the benefits of the investment subsidy will be realized. However, there are also distributional issues to be considered. While the costs tend to be broadly shared by taxpayers, the economic logic of such “ecosystems” means that benefits will be spatially concentrated and may not reach those in greatest need.

The Facts:

  • The Wisconsin State Assembly approved $3 billion in incentives to the Foxconn Technology group in exchange for construction of a $10 billion plant in the state. The deal now goes to the State Senate. With an initial staff of 3,000, Foxconn projects that the plant will employ 13,000 workers by 2022. The state credits will cover 17 percent of the salary paid to any employee earning between $30,000 and $100,000 for the first fifteen years of the plant’s life. The new tax revenues anticipated for the project will only fully recoup the cost of the subsidies in 2043.
  • In theory, injecting a large amount of new investment can raise productivity among existing manufacturing firms in a county. In addition, recent studies find that one new job in manufacturing generates an additional 0.7 to 1.7 jobs in related industries and non-export sectors. But designing an efficient subsidy that makes the best use of tax revenues requires information on the size of spillover benefits, the geographic scope of a cluster, and the technologies involved. While there are no hard conclusions on the magnitude of these spillover impacts on employment, there is considerable agreement that they are limited in geographic scope. Although studies of manufacturing clusters find that their geographic extent varies widely by industry, most are limited to a radius of about 30 miles.
  • The proposed Foxconn plant is projected to be sited in the prosperous southeast region of Wisconsin and is not likely to provide many benefits to the areas in greatest need. Those with limited education or work experience in the target area earn 8 to 20 percent more than the state median of $30,000 for less educated workers (see map). Residents of the 34 low-wage Wisconsin counties live for the most part from 100 to over 300 miles from the probable site of the Foxconn complex. The only economically distressed part of the state that will have any access is the City of Milwaukee (about 25 to 30 miles away).

What this Means:

Locations that may offer the highest payoff to a place-based subsidy, for example those with excellent infrastructure or a highly skilled labor force, may not be those in the greatest need in terms of poverty or unemployment. Other types of subsidies, such as those for higher education, could potentially yield a broader payoff for workers. The Foxconn project comes at a high cost with uncertain economic benefits, but clear political payoffs. Those likely to reap immediate benefits: the governor of the state, for whom the proposal is the cornerstone of an effort of job creation; the Speaker of the House of Representatives, Paul Ryan, who can claim credit for a multi-billion infusion of investment in his district; and owners of land for the greenfield site, who will be paid sums well above the going price for farmland. For most of the rest of the state’s 2.8 million employed residents, the Foxconn deal likely misses the target. Near-term, it guarantees all residents will pay millions of net costs in higher taxes or reduced services. Promised for the longer term are jobs most likely concentrated in one of the most prosperous regions of the state and mostly inaccessible to those in the greatest need of an effective—and equitable—strategy for economic development.

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Can U.S. and U.K. Forest Bioenergy Subsidies Have Adverse Climate Consequences?

By Stefan Koester and William Moomaw·August 15
Fletcher School, Tufts University

The Issue:

Favorable treatment of renewable energy to replace fossil fuels aims to reduce carbon dioxide concentrations in the atmosphere to limit climate change. But there are important differences in achieving this goal across various renewable energy sources. Almost half of the renewable energy consumed in the United States comes from biomass (plant material) that releases heat and carbon dioxide when burned.

The Facts:

  • Renewable energy sources made up about 10 percent of U.S. energy consumption in 2016. Wood biomass harvested from whole logs, trimmings, and forest residue, is used to generate electricity and comprised 19 percent of renewable energy consumption (see chart).
  • The U.S. exports a large share of its forest or wood biomass production to the United Kingdom and the European Union, where it is heavily subsidized. In the United States, federal and state governments provided almost $1 billion in subsidies between 2009 and 2013 to various forest bioenergy programs and forest bioenergy is eligible for the same U.S. federal production tax credit as zero carbon renewables such as wind and solar.
  • There is a continuing debate, however, over the environmental merits of wood biomass energy. Emissions from the bioenergy sector occur throughout the entire production process, from logging to burning. Whether or not forest biomass is considered carbon neutral depends on the details and the carbon accounting rules used. It takes decades to centuries for forests to regenerate, and reabsorb the amount of carbon released from the combustion of forest bioenergy.
  • A section within the recent House Omnibus spending bill decides this debate on the carbon neutral merits of wood biomass legislatively by requiring agencies to “support the key role that forests in the United States can play in addressing the energy needs of the United States… and reflect the carbon-neutrality of forest bioenergy and recognize biomass as a renewable energy source.”

What this Means:

Subsidies for renewable energy sources may be justified if they displace other energy sources that have greater adverse impacts on the environment. Forest bioenergy is more costly than other zero emission renewable energy sources such as wind and solar, and paying subsidies to add carbon dioxide and particulates and other pollution to the atmosphere undermines efforts to address climate change and meet air quality standards.

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What Does the Seattle Experience Teach Us About Minimum Wages?

By Jesse Rothstein and Diane Schanzenbach·August 7
University of California, Berkeley and Northwestern University

The Issue:

The federal minimum wage is $7.25, well below historical levels in inflation adjusted terms. Both California and New York State, along with several cities, are scheduled to raise their minimum wages to $15 per hour in coming years. A new study of recent Seattle minimum wage increases, to as high as $13 per hour for some workers, finds much larger employment losses than does the previous literature. Some have taken this as evidence supporting the view that higher minimum wages have much more negative employment effects than are seen for lower wage floors, and thus that the new wave of increases is ill-advised.

The Facts:

  • The new study, by a team of scholars at the University of Washington, finds that hours worked by low-wage workers in Seattle fell by 9 percent following the minimum wage increase. The study also finds that the increased minimum lifted average wages in these jobs by only 3 percent, implying that the average income of individuals who would have had low-wage jobs in the absence of the increase fell by $125 per month.
  • While Seattle's $13 minimum wage is high by historical experience, in practice the raise received by many workers was below this rate because the increase was lower at smaller firms and for workers that receive tip income or health benefits.
  • The study excluded employers with multiple locations such as retail chains, which tend to be high employers of low-wage workers.
  • The Seattle economy was booming during the period covered by the study, which might have been expected to reduce low-wage employment as employers offer higher wages to attract scarce workers. Determining which changes in Seattle can be attributed to the minimum wage hike requires finding a comparable location that is subject to all of the same market forces, but did not institute a minimum wage increase. The study used other areas in Washington state as a comparison. However, these areas did not see similar growth in high-wage employment.

What this Means:

It is an important and unresolved question whether minimum wages at the levels that will be reached in many cities and states in coming years—and that have been proposed at the federal level—will lead to meaningful reductions in employment, even where the evidence points to few or no such effects for lower minimum wages. Unfortunately, the Seattle study does little to resolve this question. We cannot be confident that it has uncovered the causal effect of the Seattle minimum wage increase, which took effect in an economy that was already booming. Moreover, its estimates are not directly relevant for considering the effects of higher minimum wages than estimates from past research since the Seattle study pertains primarily to workers facing minimum wages well below $13 per hour.

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