Should the United States Try to Weaken the Dollar?

By and ·August 5, 2019
The Fletcher School, Tufts University and University of California, Berkeley

Should the United States Try to Weaken the Dollar?

The Issue:

Political leaders from President Trump to Democratic presidential candidate Elizabeth Warren see the dollar’s current strength as a drag on the American economy. Is a strong dollar a barrier to growth? What are the options open for U.S. policies to manage the dollar’s value and what are their costs?

The Facts:

  • The U.S. dollar appreciated by 25 percent between July of 2011 and
...

Read more

Share

What Explains the Wages of Undocumented Workers?

By and ·July 24, 2019
Queens College, City University of New York

The Issue:

An estimated 7.6 million unauthorized immigrants ages 18 and older were in the U.S. labor force in 2017, representing 4.6 percent of the labor force. Undocumented foreign workers earn lower wages than legal immigrants and native workers with similar skills. What are the reasons for this wage gap?

The Facts:

  • Lower average wages for undocumented workers largely reflect differences in education and skills. However, when you compare undocumented workers to documented workers with similar education and skills, undocumented workers continue to earn lower wages.  
  • It may be that undocumented workers have weak bargaining power or have lower unobservable skills such as poorer physical and mental health. But being undocumented may also limit workers' ability to maximize their potential.
  • Many undocumented workers are over-qualified for the jobs that they hold. Unlike documented workers who are able to find work in the occupations for which they have greater aptitude and where they are likely to be most productive, the employment options of undocumented workers are limited to occupations with low exposure to apprehension and weak enforcement. In addition, because of professional licensing, in many states undocumented workers are effectively barred from entering certain professions including teachers and lawyers, healthcare practitioners, policemen and firefighters. Correspondingly, relative to similarly skilled documented workers, undocumented workers are over-represented in certain occupations, such as cleaning and maintenance, restaurants and construction.
  • Distinguishing empirically which factors account for lower wages of undocumented workers is difficult. Our analysis suggests that lack of legal status reduces the wages of undocumented workers by about 12% due to occupational barriers. The overall productivity loss may be substantially higher if undocumented youth under-invest in human capital because of the anticipation of labor market barriers in occupations with high skill requirements, or if lack of legal status increases stress and anxiety.

What this Means:

Our results show that lack of legal status lowers the productivity and wages of undocumented workers. Without work permits, they face reduced access to jobs, which discourages them from investing in human capital. Fear of deportation causes high rates of anxiety and depression, further reducing their productivity. Hence, policies that improve access to jobs for undocumented workers will increase their productivity and lead to net economic gains.

Read more

Share

Staring Down the Debt Limit

By and ·July 22, 2019
Brookings Institution and Tax Policy Center

The Issue:

In what has become a predictable cycle, policymakers meet under pressure to raise the “debt ceiling,” the legal limit on the amount of debt the federal government can accumulate.

The Facts:

  • Until World War I, every issuance of federal government debt explicitly required presidential and congressional approval. During the war, however, President Wilson and Congress eliminated that rule and created an overall limit to make it easier to finance the mobilization. Since then, Democratic and Republican presidents and Congresses have raised or suspended the debt ceiling more than 100 times, including more than 75 times since 1960 and more than 15 since 2001. 
  • Voters often assume – and lawmakers often assert – that a vote to raise the debt ceiling is a vote for new spending programs. In fact, however, raising the debt limit is about paying for past choices, and debt limit debates are about whether Congress should authorize the government to borrow to pay for spending that it has previously authorized
  • The debt ceiling applies to a concept that has no economic meaning. For historical and legal reasons, the debt limit applies to what is called “gross debt,” the sum of net debt plus intragovernmental debt. Net debt is what the government owes the public — including investors, pension funds, and domestic or foreign central banks— and it is the measure that economists consider to be important (see chart). 
  • The economic consequences of a large-scale, intentional default are unknown, but predictions range from the merely bad to the truly catastrophic. Even flirting with default can create uncertainty, hurt the economy, and drive up interest rates and government costs.
  • Many commentators have argued that it would make sense to get rid of the debt ceiling, or at least stipulate that if Congress has voted for a spending program it has also authorized the government to pay for that program by borrowing if necessary.

What this Means:

Raising the debt limit has nothing to do with controlling future spending or raising the taxes necessary to pay for future spending; it’s just a matter of paying bills that we've already incurred. The debate about spending more or accumulating more debt implicitly occurred (or should have explicitly occurred) when policymakers voted to raise spending or cut taxes in the first place. While it is difficult to predict the precise magnitude and composition of the economic effects of the U.S. government defaulting on its debt, the effects would not be good. At the broadest level, creating a politically-manufactured crisis that threatens the full faith and credit standing of government debt hardly seems like a smart or patriotic thing to do. For all of these reasons, the idea of lawmakers willfully defaulting on our debt by not raising the debt limit is alarming— this is something to avoid.

Read more
Required reading

Share

International Students and U.S. Higher Education

By ·July 17, 2019
Carleton College

The Issue:

After four decades of mostly steady enrollment growth, international student enrollments in the U.S. have recently declined. International students make up almost 6% of higher education enrollments and an even larger share of students at flagship universities, contributing meaningfully to the academic and financial robustness of higher education institutions.

The Facts:

  • The total number of international students studying in the U.S. has increased from just over 25,000 in 1948/49 to more than 1 million today — averaging 5.6% annual growth for almost seven decades. While increasing numbers of students have been drawn from all parts of the globe, more recently almost 80% of the total increase is attributable to two countries: China and India.
  • International students account for more than 10% of enrollments at doctorate-granting institutions. Because only one in six international students receive institutional aid these students contribute disproportionately to net tuition revenue. When housing, food, and other retail expenditures are added, the total direct economic impact of international students is estimated to be just under $40 billion. Ten states receive more than $1 billion each in economic benefit (see chart). 
  • The growing international student market has attracted new competition from established colleges and universities in the Americas, particularly in Canada, and newly created schools in China, India, and elsewhere. 
  • The U.S. has tightened enforcement, effectively imposing added costs on international students who study here. While immigration reform legislation shows little signs of moving through Congress, wide-ranging regulatory change under the Trump administration has and promises to change the international student experience. 
  • The most recent data show back-to-back years of declining numbers of new international students. The nearly 10% reduction in new students seen in the two years beginning in 2016/17 is notable given the incredible consistency of growth in this market seen in the previous 69 years.

What this Means:

The number of international students beginning studies in the U.S. has recently declined after decades of growth. For colleges and universities, this reversal potentially signals erosion in a critical submarket. For local communities, states, and the country as a whole, a decline in international student enrollments represents a contraction in an important export market.

Read more

Share

Globalization and its Consequences (VIDEO)

By and ·July 16, 2019
The Fletcher School, Tufts University and The University of California, Berkeley

While globalization has made people better off in aggregate, it has created winners and losers. How much of globalization's adverse impact is due to cross-border trade, versus technological advances and automation? Maurice Obstfeld, UC Berkeley, and Michael Klein, Executive Editor of EconoFact, discuss.

Read more

Share

Is China Weakening the Yuan to Fight U.S. Tariffs? (UPDATE)

By ·July 11, 2019
Fletcher School, Tufts University

The yuan has declined in value against the dollar by about 9 percent since the Spring of 2018. A weaker yuan tends to make Chinese goods cheaper in the United States and would partially offset the tariffs that the Trump administration is imposing on Chinese imports.

The Facts:

  • The Chinese government largely manages the value of the yuan. However, capital controls are not airtight, and market pressures influence the exchange rate to some degree. While the yuan has been weak against the dollar, its value has remained stable against other currencies.
  • Most analysts agree that the dollar is significantly overvalued against the currencies of its trading partners — not just the yuan.
  • The movements of the dollar against the yuan closely track an index of the dollar against its other major trading partners (see chart). The common path of the dollar against the yuan, and of the dollar against currencies other than the yuan, becomes clear by comparing the solid orange line (the dollar against all its major trading partners) and the dashed red line (the dollar against all its major trading partners but for China). These two lines follow each other very closely over the entire three-year period depicted in the figure. Both index lines show a strengthening of the dollar during the first three quarters of 2018 and, after a small retrenchment at the end of the year, continued strengthening in the Spring of 2019. In fact, the index that excludes the yuan strengthened a bit more during 2019 than the index that included it.

What this Means:

While the Chinese government maintains broad control over its currency’s value, the key point is that the dollar is strong against a wide range of currencies, and not just the yuan. This broad strength points to domestic sources of the dollar’s high value, not Chinese actions. The most likely sources are widening U.S. budget deficits and the strength of the U.S. economy relative to its trading partners.

  • Editor's note: This is an updated version of a post originally published on August 7, 2018.

  • Read more