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October 2, 2006

Paul Krugman: Things Fall Apart

Paul Krugman comes back from vacation to find things falling apart for the Republican Party:

Things Fall Apart, by Paul Krugman, G.O.P. Falters Commentary, NY Times: ...In his book “What’s the Matter With Kansas? How Conservatives Won the Heart of America,” [Thomas] Frank argued that America’s right wing had developed a permanent winning strategy based on the use of “values” issues to mobilize white working-class voters against a largely mythical cultural elite, while actually pursuing policies designed to benefit a small economic elite.

It was and is a brilliant analysis. But the political strategy Mr. Frank described may have less staying power than he feared. ... At its core, the political axis ... is an alliance between the preachers and the plutocrats — between the religious right, which hates gays, abortion and the theory of evolution, and the economic right, which hates Social Security, Medicare and taxes on rich people. Surrounding this core is a large periphery of politicians and lobbyists who joined the movement not out of conviction, but to share in the spoils.

Together, these groups formed a seemingly invincible political coalition... The coalition has, however, always been more vulnerable than it seemed, because it was an alliance based not on shared goals, but on each group’s belief that it could use the other to get what it wants. Bring that belief into question, and the whole thing falls apart.

Future historians may date the beginning of the right-wing crackup to the days immediately following the 2004 election, when President Bush tried to convert a victory won by portraying John Kerry as weak on defense into a mandate for Social Security privatization. The attempted bait-and-switch failed in the face of overwhelming public opposition. ...

And the religious and cultural right, which boasted of having supplied the Bush campaign with its “shock troops” and expected a right-wing cultural agenda in return — starting with a constitutional amendment banning gay marriage — was dismayed when the administration put its energy into attacking the welfare state instead. James Dobson, the founder and chairman of Focus on the Family, accused Republicans of “just ignoring those that put them in office.”

It will be interesting, by the way, to see how Dr. Dobson, who declared of Bill Clinton that “no man has ever done more to debase the presidency,” responds to the Foley scandal. Does the failure of Republican leaders to do anything about a sexual predator in their midst outrage him as much as a Democratic president’s consensual affair?

In any case, just as the religious right was feeling betrayed ..., the economic right suddenly seemed to become aware of the nature of its political allies. “Where in the hell did this Terri Schiavo thing come from?” asked Dick Armey, the former House majority leader... The answer, he said, was “blatant pandering to James Dobson.” He went on, “Dobson and his gang of thugs are real nasty bullies.” ...

So the right-wing coalition is showing signs of coming apart. It seems that we’re not in Kansas anymore. In fact, Kansas itself doesn’t seem to be in Kansas anymore. Kathleen Sebelius, the state’s Democratic governor, has achieved a sky-high favorability rating by focusing on good governance rather than culture wars, and her party believes it will win big this year.

And nine former Kansas Republicans, including Mark Parkinson, the former state G.O.P. chairman, are now running for state office as Democrats. Why did Mr. Parkinson change parties? Because he “got tired of the theological debate over whether Charles Darwin was right.”

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Previous (9/22) column: Paul Krugman: Insurance Horror Stories

More Promises

More promises that higher real wage growth is just around the corner from Allan Hubbard and Edward Lazear:

Coming of Wage By Allan Hubbard and Edward P. Lazear: ...In the past three years our economy has grown 3.7% per year, faster than any other major industrialized economy, and added more than 5.7 million payroll jobs... Yet questions understandably arise about whether this economic expansion is paying off for U.S. workers...

A pattern that prevails as the economy moves from recession to recovery, and then into a sustained expansion, is that productivity grows first. The higher productivity growth means higher profits for businesses, which induce them to expand output and then employment. Later, as fewer workers are available for hire, wages grow, profit rates fall, and workers' share of the gains rises. This is what we observed during the last expansion. After the recession in the early 1990s, wage growth was flat. It did not pick up until the last few years of the decade.

We are seeing the same pattern in this economic expansion. Productivity growth has been exceptionally strong in the past five years, well above the historical average. And now employee compensation per hour has also picked up. Over the first half of this year, compensation growth has averaged a remarkable 6.3%, at an annual rate adjusted for inflation. This growth is much faster than in previous years.

As has been the case for many years, higher health-care costs mean much of the growth in compensation goes to benefits. Although benefits are important, workers also naturally care about whether their paychecks are going up.

Recently, nominal wages of production workers have also grown considerably. At an annualized rate, nominal wage growth has been about 4% so far this year, faster than at this point in the last economic expansion. Nominal wages are now growing faster than the past couple of years and are growing at about the same rate as they were in the late 1990s.

The difference between this economic expansion and the last expansion is that higher-than-expected energy prices have consumed much of this strong nominal wage growth. Inflation-adjusted wage growth without the increase in energy prices is similar to past economic expansions. The issue here is energy prices, not wage growth. ...

The recent news on energy prices is good for workers. Nationwide gasoline prices have fallen by about 65 cents per gallon since early August and market data suggest that inflation will fall below the levels of the past few months. This decline, coupled with the nominal growth rates that we see in both compensation and wages, means that workers should enjoy more real earnings in the months ahead. ...

I would dispute that:

Inflation-adjusted wage growth without the increase in energy prices is similar to past economic expansions.

The relationship between wages and productivity we have seen after the last two recessions is not typical historically (NY Fed paper on this). When they say:

After the recession in the early 1990s, wage growth was flat. It did not pick up until the last few years of the decade.

The reason they note wage growth was flat is because it was atypical. They are pointing to the 1990s as a hopeful episode for workers - after many years wages finally went up they say, so be patient - but that sort of long delay in wage growth is a recent phenomena. Wages tracked productivity with much less lag prior to 1990 and it wasn't necessary to keep promising workers that real wage growth is just around the corner. They make such a promise when they say:

We are seeing the same pattern in this economic expansion. ... [W]orkers should enjoy more real earnings in the months ahead.

But it's hard not to think of Ed Lazear last May when he says:

Mr. Lazear said wages will catch up to productivity gains in the months ahead, boosting average pay. “We are moving into that phase where we expect that wage growth will catch up and eventually take over productivity growth.”

Five months later, we're still waiting for "the months ahead."

Immigration and Productivity

This is an argument against illegal immigration on the basis that it stifles innovation and technological change by taking away the incentive to lower costs:

Productivity and immigration, by Alfred Tella, Washington Times: Productivity is the offspring of human creativity and the primary source of our economic well-being. Productivity means doing things more efficiently, finding a better way. ... It is the wellspring of economic growth, the fabled goose that lays the golden eggs. But the goose can come to harm, and we need to be ever vigilant.

One threat to productivity today is cheap immigrant labor. An estimated 12 million illegal immigrants, mostly low-skilled, poorly-educated Mexicans and other Latin Americans, have stolen into and remain in our country. Their numbers increase by nearly a half million yearly...

The negative impact of illegal workers on American wages and social welfare costs has been well documented and publicized. But far less attention has been given to the detrimental effects the excess supply of immigrants has on productivity. Following is a summary of some of the more significant analyses.


Mark Krikorian, executive director of the Center for Immigration Studies, in a paper on guest-worker programs, explains how illegal immigration slowed productivity growth in American agriculture. Take the case of raisin grapes.

The conventional harvesting method involves cutting the grapes off vines by the bunch with a knife, then laying them on paper trays and repeatedly turning them by hand for drying. In the late 1950s, grape farmers in Australia, faced with a labor shortage, came up with a more efficient way of producing raisins whereby the grapes dried naturally on the vine and were knocked into bins by a tractor-mounted harvester. Labor use was cut drastically and yields skyrocketed.

Did this new technique spread among raisin farmers in American? For the most part, no. The ready availability of cheap immigrant workers blunted the incentive to make the expenditure to switch to the more efficient method, with consequent long-term losses to both farmers and consumers.

Because of the excess supply of immigrant labor in American, notes Mr. Krikorian, the European Union is well ahead of us in bringing new agricultural technologies to market, which could result in the U.S. losing out to international competitors. But if we were to restrict cheap foreign labor, modernization would be spurred ... says Mr. Krikorian...

Others have arrived at similar findings. A study titled "Alternatives to Immigrant Labor?" by agricultural researchers Yoav Sarig (Agricultural Research Organization, Israel), James F. Thompson (Department of Biological and Agricultural Engineering, University of California-Davis), and Galen K. Brown (Florida Department of Citrus), analyzed fruit and vegetable crop mechanization in the United States. The authors found there has been little investment in mechanized harvesting by growers since 1980 because of the ready availability of cheap labor, and "many workers were illegal aliens using falsified papers." ...

Michael Lind, Whitehead Senior Fellow at the New America Foundation, recently wrote in the Financial Times: "The availability of low-wage immigrant labor has caused the U.S. to lag behind Japan, Australia and others with advanced mechanical harvesting. And thanks to the glut of cheap labor, home construction in the U.S. remains low-tech and inefficient. A tight labor market would force rapid productivity gains in nontraded domestic industries that today are labor-intensive." ...

Unless and until effective immigration reforms, including border protection, employer sanctions and benefit restrictions are put in place, the tide of illegal immigrants entering our country will not abate. If low-skilled immigrants continue to increase their share of the work force, there likely will be a further dampening of technological and productivity growth in key sectors of the economy. America cannot afford that. It's not that productivity isn't growing, but it could be higher.

This leaves the wrong impression: "The negative impact of illegal workers on American wages ... has been well documented." Documented by some yes, but others disagree and this is not a settled area in the immigration debate.

So U.S. agriculture lags behind other countries in terms of implementing technology? We're getting our pants beat off by those enterprising Japanese (they don't subsidize the farm sector do they?), Europeans (I thought they also subsidized, and there's that welfare state thing), and Australians because we are "low-tech and inefficient" agricultural producers?

Uh, no.  I don't think that's right.

Growing up as the son, grandson, and brother of people in the tractor business in the farm country of Northern California (the "State of Jefferson" to those water-stealing southerners), that's not the story I heard. Maybe I'm biased from all those year wearing John Deere hats, I probably am, but Kubota tractors are not beating our pants off. As I worked my way through college at the parts counter of a tractor and farm implement dealer, as I grew up in a small agricultural based town, the rapid pace of technological change in U.S. agriculture compared to the rest of the world was always a point of pride. Take a look inside the cab a modern rice harvester for example, or even the cab of a tractor - there's no comparison to the ones my dad sold in the1960s or 1980s in terms of productivity. Rice can be harvested by hand with cheap labor, that's still done in many countries, but even so mechanized harvest is far, far cheaper and the availability of illegal labor has not slowed innovation in this area. Talk to U.S. rice farmers about how efficient the Japanese are and see what they say.

As for the example in the article, if it was cheaper to harvest raisins by machine, growers would not hesitate to do so. But, unlike tomatoes, prunes, walnuts, corn, wheat, rice, and so many other crops, even new growers who do not faced the fixed costs of switching alluded to in the article do not choose mechanical raisin harvesting, they harvest with labor intensive methods instead. They aren't failing to use the most efficient technology available to them as claimed in the article - the labor intensive technology is cheaper and more efficient (I don't know much about raisin farming from first-hand observation - but assume the author is correct about the lack of mechanization). What choice would farmers in Australia make if abundant cheap labor were available? Whatever cost the least to use.

Dealing with labor issues is a pain, and illegal labor is even worse. Farmers will choose to avoid employing illegal labor if they can, they have no reason to use illegal labor if cheaper planting and harvest methods exist, and this provides a strong incentive to find technologies to replace labor. We could still dig ditches with immigrants and shovels, but why do so when a tractor with a ditch digging attachment will do the job so much faster and cheaper? There's no lack of incentive to find cheaper ways to produce agricultural products, and there is example after example of cheap labor, illegal or not, being displaced by technological change.

I don't think this particular argument against illegal immigration, i.e. that it reduces productivity, holds up (yes, I know it's illegal, I'm focusing on the author's argument). I understand he is trying to say that paying labor $5 per hour instead of, say, $7 means that technological change that reduces costs to the $5-$7 range will not be cost effective and that without illegal immigration such change would be put into place - at least I think that's what I think he's saying - but the incentive to reduce costs below $5 remains powerful and I don't see any evidence that U.S. agriculture has suffered for lack of technological innovation to improve productivity.

In any case, other countries already have cheap labor and cheap agricultural products, that is what the fight about Doha has been about to a large extent. Without protectionism, the incentive to cut costs already exists, the labor does not have to come here. That is, if costs are $5 per hour in, say, Mexico, then preventing illegal immigration so that we can put in technological change that reduces costs to $6 won't help unless we are willing to impose protectionism to prevent the cheaper goods from crossing our borders.

Immigration is Good

This argues that, when the costs and benefits are compared, illegal immigration is a net benefit:

Illegal -- but Essential, by David Streitfeld, LA Times: Shortly after dawn, the day laborers began gathering beneath a San Diego Freeway overpass in West Los Angeles. A house painter pulled up in a pickup, looking for an assistant. He offered $12 an hour. A worker jumped in. Next to arrive was a white-haired woman driving a Honda. Her garden needed a makeover. She'd pay $11 an hour. She departed with a second worker. ...

Down here, at the West L.A. Community Job Center, arrangements were being made to remodel ... living rooms, landscape ... yards, rebuild ... decks. The work is undertaken by men from Mexico and Central America. Most are in this country illegally. The jobs, which last only a day or two and pay cash, are all but invisible to the state and federal governments. No one has to fill out paperwork, follow safety regulations or pay taxes.

Yet what happens here is far from marginal. The jobs that flow out of this day-laborer hiring spot — and from thousands of others around the state, some as informal as a street corner — are a pillar of California's economic strength.


To see why, check out Adrian Lopez, 20, who is kicking around a soccer ball as he waits. Lopez, who came here from the Mexican state of Oaxaca, is carrying in his Everest backpack a Sony Walkman from the Best Buy across the street. It's got a CD ... bought at a Ritmo Latino store. He has a bottle of Kirkland Premium Drinking Water, purchased at Costco, and a spare Old Navy shirt. He likes the grilled steak at Baja Bud's. ... "Immigrants buy everything here," Lopez said in Spanish.

The presence in the United States of Lopez and 12 million other illegal immigrants is one of the most contentious issues of the era. ... Economists are less divided. In the main, they say the American engines of industry and commerce have always been fueled by a steady supply of new arrivals. Immigrants, they contend, contribute to consumer spending and, instead of replacing native workers, create jobs. ...

Measuring the contributions of illegal workers is a difficult task, however. Many numbers are vague or open to dispute. A few experts contend that the gains are not clear-cut and that any benefits are far from being universally shared. ...

[E]conomists concede that [some] ... native-born Americans may be hurt by competition from illegal immigrants who are willing to work cheaply. But any harm, they say, is outweighed by the benefits to the overall economy. ... Restaurant prices are pushed down by illegal labor in the kitchen, fruit and vegetable prices by illegal field hands, new-home prices by illegal drywallers.

Immigrants aren't just a weapon against inflation. The tens of thousands of illegal nannies in the Los Angeles area, for example, lower the cost of child care, freeing mothers to return to work. This in turn increases families' incomes, which encourages spending and fuels the economy.

Many immigrants send a portion of their earnings home to their families, but their influence here remains potent. The Economic Roundtable, a Los Angeles think tank, estimates that the 400,000 illegal workers in L.A. County spend $5.7 billion annually on food, rent, transportation and other necessities.

The sales taxes they pay on all those consumer purchases boost the state treasury. The growing number of immigrants who use false papers to get payroll jobs are contributing to Social Security without the right to receive payments from the fund. That props up the beleaguered system by at least $5 billion a year, analysts say.

Other benefits may be less obvious, such as the gains in property values enjoyed by homeowners. ... Their apartments and houses may be shabby, but their sheer numbers exert a profound effect. In a state that never has enough housing, the hundreds of thousands of units rented to immigrant families put upward pressure on all prices.

Then there are the bad things that aren't happening despite the immigrants' presence. For instance, they don't seem to be creating an unemployment problem. Joblessness in California, with 24% of the country's illegal immigrants, has tracked the low national rate.

All this evidence, many economists say, makes a powerful argument that immigrants' role can be characterized as somewhere between important and irreplaceable. ...

Many Californians forcefully disagree with this assessment, saying immigrants have dragged down the quality of life in the state. They point to neighborhoods overflowing with poor immigrants. In some occupations, such as landscaping and construction, workers who don't speak Spanish say they can't get hired.

Other costs carry a more defined price tag. The California Hospital Assn. says emergency-room care for uninsured immigrants, including delivery of babies, costs taxpayers and private insurers about $650 million a year.

Whether born here or brought here, children of illegal immigrants have access to a free education. The Palo Alto-based Center for the Continuing Study of the California Economy estimates that this schooling costs as much as $6 billion annually. Teitelbaum says the cost is even higher if you take into account how the influx has strained classrooms. ...

When Panorama City in the San Fernando Valley boomed after World War II, ... General Motors made Chevrolets there, offering at peak production a solid income to more than 5,000 workers.

In 1992, the plant, the Southland's last car factory, was closed. ... Similar closures happened throughout the country. But when the plants shut down in Ohio or Pennsylvania, they tended to become permanent ruins. ... Pittsburgh, Detroit and Cleveland have had to grapple with massive, long-term population declines.

In Panorama City, vitality quickly reemerged in a new language and a new culture. What it had — which the cities back East lacked — was the proximity of Mexico. In the 1990s, ... [i]n Panorama City, the Latino population grew from a significant minority to an outright majority.

The community around the former GM plant is thriving, if not exactly upscale. The plant itself is a shopping center called, straightforwardly enough, the Plant. It is anchored by a Home Depot where illegal immigrants wait for work that will pay about half what the autoworkers got, with no benefits and no promises about tomorrow.

On the surrounding streets are clinics, cheap restaurants and music and furniture stores catering to Latinos. It's one of many centers of the informal economy in L.A., where most transactions are in cash.

To many Californians, this is not a change for the better. "I really don't consider the low-income parts of California to even be California anymore," said Kevin Waterson, an administrative employee of UC Davis, near Sacramento. "The quality of life is much more like that in Mexico."

A year ago, the Public Policy Institute of California polled state residents on whether immigrants were "a burden to California because they use public services" or "a benefit to California because of their hard work and job skills."

"Benefit" was picked by 56% and "burden" by 36%. Many of those in the latter camp, including Waterson, see illegal immigrants as competition. The struggle is less about jobs than scarce community resources, including affordable homes, gridlock-free roads and good schools.

Waterson grew up in Fontana in San Bernardino County, the son of a computer programmer and a billing clerk who were able to buy a three-bedroom house, own two cars and build a nest egg. That status, achieved by millions of Californians after World War II, now feels out of reach.

"There are a lot of places in Los Angeles I want to live that I can't afford," said Waterson, 27. "The places I can afford, I don't want to live." It's not just his perception. The Brookings Institution recently found that Los Angeles was the nation's most polarized city by wealth. ...

Waterson keeps looking for all those benefits the economists say immigration has brought to him. But if the informal economy benefits both the immigrants and the well off, it doesn't seem to be helping him and his wife, Julia, very much.

They don't use immigrants to mow the lawn or wash the car or take care of the kids. They can't afford to eat out, so they don't gain from the toil of illegal restaurant workers. They're renters, so any immigrant-driven boost to real estate just puts a home of their own further out of reach.

The informal economy that much of California has embraced so enthusiastically can be criticized on other grounds.

Small cash-and-carry shops and vendors who cater to immigrants may not pay sales taxes to the state or business license fees to local government. People who hire day laborers cheat the state by not using companies that pay payroll taxes. The laborers cheat the state by not paying income taxes. All of these groups put legal workers and legal businesses at an unfair competitive disadvantage. ...

But for Los Angeles County, the informal economy has been better than nothing — and nothing, urban affairs expert and Economic Roundtable President Daniel Flaming says, is what the county would have had otherwise.

"When manufacturing collapsed, there was no effort to salvage the infrastructure for other purposes," he said. "The formal economy here has been stagnant since the beginning of the 1990s. The only growth has been in under-the-table employment, predominantly fueled by desperate workers and in particular undocumented workers."

Without immigrants, Flaming said, Los Angeles would be smaller and weaker and poorer — Detroit or Pittsburgh or Cleveland with better weather. ... "We should be thankful to immigrants," Flaming said. "Without them, things would be much worse."

First the newcomers stabilized Panorama City. Now they are pushing it forward. The median value of a single-family home has doubled since 2000. And on the edge of the Plant mall, there's a sign that the informal economy might be yielding to a more traditional, bigger-budget state of affairs. Starbucks, that dispenser of $4 venti tangerine frappuccinos to the middle class, has just opened a store. ...

This is not a call to open the doors and say come one, come all. If too many people arrive too fast, they cannot be absorbed into the economy easily and we will have problems. But at reasonably liberal rates, with a mix of skills, there is no need to fear that immigration will bring about negative consequences. Instead, there are good reasons to believe the effects will be positive.

Free-Trade is Good

As a follow-up to this post noting some of the problems with the North American Free Trade Agreement (NAFTA) for Mexico, here's an argument strongly supporting free-trade agreements with Bolivia, Colombia, Ecuador, and Peru:

Don't Let the Andes Trade Pact Expire, by Sergio Muñoz, Comentary, LA Times: Salgado Chambi is a 30-year-old single mother who lives with her young children, Carlos and Ana, in a barrio in El Alto, Bolivia's third-largest city. She is one of tens of thousands of Bolivian artisans who owe their livelihoods to the Andean Trade Promotion and Drug Eradication Act, which the U.S. Congress first passed in 1991. The law allows about 5,600 Bolivian products — among them cut flowers, native fruits and vegetables, jewelry and traditional Indian clothing — to be sold duty-free in the United States.

Salgado, who learned the art of weaving from her Aymara Indian mother and grandmother, specializes in making alpaca coats, sweaters, bags and caps. Her clothing used to sell for less than $20 apiece in the local El Alto market. When the Andean trade law kicked in, ... and after a local bank loaned her $10,000 to buy the necessary equipment, she hired three women as weavers. Business has been good, and she now employs 15 women. She gets $50 for every clothing item sold in the U.S. for $90.

But the trade program that has created an economic miracle in El Alto — 80,000 new jobs and roughy $250 million in annual income from sales in the U.S. — may lapse in December.

The original goal of the Andean trade act was to combat drug production and traffic in Bolivia, Colombia, Ecuador and Peru by helping those countries create legitimate jobs, and it has largely worked. In 2001, Congress approved a five-year extension of the program, assuming that by 2006, all four countries would have negotiated free-trade agreements with the United States.

None have, although Peru and Colombia have signed deals that await congressional approval. Ecuador and the U.S. stopped talking free trade a few months ago. And Bolivia is not even on the table. ... Bolivian President Evo Morales' decision to nationalize the country's natural gas resources has only made things worse for Bolivia in the U.S. Congress...

For Bolivia, the expiring trade act is crucial to its economic vitality. ... Even Rep. Charles B. Rangel (D-N.Y.), whose free-trade voting record is mixed at best, has introduced a bill that would extend the trade provisions for Bolivia by two more years. But Sen. Charles E. Grassley (R-Iowa), chairman of the Senate Finance Committee, opposes any extension because of Morales' move toward nationalization, even though no U.S. companies would be affected.

To end Salgado's and other Bolivian artisans' competitive advantage in the U.S. marketplace would be shortsighted and counterproductive, and it would border on the petty. For Latin Americans, it would be hard to understand why the world's richest country turned its back on the second-poorest in the hemisphere by ending a trade program that benefits about 40% of El Alto's largely impoverished population and amounts to 65% of Bolivia's trade with us.

Washington has a broad interest in promoting democracy in the Andean region, where Venezuelan President Hugo Chavez is using his country's vast oil wealth to spread his "Bolivarian Revolution." With indigenous movements in Ecuador and Bolivia gaining strength, fighting in Colombia continuing and dissatisfaction with the market economy festering in Peru, it would be foolish for Washington to give Chavez more ammunition by denying poor Bolivian Indians access to the U.S. market. Extending the trade program not only would help solve Bolivia's enormous problems but would serve to restore regional trust in the U.S. commitment to democracy.

Vintage Varian: Raise Gasoline Taxes

Hal Varian from October, 2000 on the need for higher gasoline taxes:

Tax cutting may be in fashion, but it's a good time to raise gasoline taxes, by Hal R, Varian, New York Times, Oct 19, 2000: With all the talk of tax cuts, this may be an inopportune time to propose a tax increase. But it is easier to put tax reforms in place when times are good than when they are bad, and United States policy on gasoline taxation could be much improved.

Gasoline taxes are an emotional issue... But there are several good reasons that increasing the gasoline tax in the United States makes economic sense.

First, it is a good idea to tax the consumption of goods that impose costs on other people. One person's consumption of gasoline increases emissions of carbon dioxide and other pollutants, and this imposes environmental costs on everyone. And even those who do not care much about the environment have to acknowledge that driving contributes to traffic congestion. Increased taxes on gasoline would reduce consumption, cutting both pollution and congestion.

But, you might argue, we already have taxes on gasoline: federal, state and local taxes average about 41 cents a gallon, or 28 percent of the price of gasoline. Isn't this enough? The problem is that the tax is used mostly to pay for road construction and maintenance. True, the gasoline tax decreases the use of gasoline, but the road subsidy increases its use.

If we subtract the subsidy from the tax, we end up with a net tax rate on gasoline in the United States of about 2 percent, which is much, much lower than net gasoline taxes in the rest of the world.

There is another, quite different reason to tax oil products.

Economists like to tax things that are in fixed supply because the same amount is available whether or not the tax is imposed. ...[I]n the long run, there is only so much oil. Taxing petroleum products will not reduce the total amount of oil in the ground, it will just slow the rate at which it is discovered and extracted.

Taxes on gasoline reduce the demand for oil, thereby reducing the price received by the suppliers of oil. And most of those suppliers are foreign: the United States now imports 56 percent of its oil... Taxing foreigners is popular both economically and politically -- they do not vote. Of course, domestic oil producers not only vote, they contribute to campaigns, and a tax on gasoline would be unpopular with them. But deals can be made -- taxes can be traded for depletion allowances and other accounting goodies to make such a plan politically viable.

A gasoline tax in a small country falls mostly on the residents of that country. The world price of oil is essentially independent of the taxing policies of most countries, since most countries consume only a small fraction of the amount of oil sold.

But the United States consumes a lot of oil -- almost a quarter of the world's production. That means it has considerable market power: its tax policies have a major impact on the world price of oil, and economic analysis suggests that in the long run, a significant part of a gasoline tax increase would end up being paid by the producers of oil, not the consumers.

Nearly 20 years ago, Theodore Bergstrom, an economist who is now at the University of California at Santa Barbara, compared the actual petroleum tax policies of various countries with policies those countries would adopt if they wanted to transfer more OPEC profits to themselves.

He found that if ... the United States, Europe and Japan all coordinated their oil-tax policies, they would collectively want to impose net tax rates of roughly 100 to 200 percent. This is not as scary as it sounds since such a coordinated tax increase would mostly affect oil producers; the price at the pump would increase much less.

Mr. Bergstrom's analysis was focused entirely on transferring profits from oil-producing to oil-consuming nations. If we factor in the pollution and congestion effects mentioned earlier, the optimal petroleum taxes would be even higher.

In the past, Al Gore has advocated increasing gasoline taxes for environmental reasons, though he has been pretty quiet about this proposal lately. George W. Bush does not think much of oil taxes, but he likes the idea of a tax cut.

Let me propose a bipartisan plan: raise the tax on gasoline, but give the revenue back to taxpayers in the form of an income tax credit.

Average consumers would be about as well off as they are now, but the higher price of gasoline would tend to discourage consumption -- giving us environmental, congestion and tax-the-foreigner benefits. It would make sense to phase the tax in over several years, so that the next time drivers trade in their sport utility vehicles, they would have an incentive to buy those fuel-efficient cars that Detroit has promised to produce.

Increasing the net tax on gasoline by, say, 2 percent a year for the next 10 years would be pretty painless for most people. Oil prices would almost certainly drop back down in the next few years, tending to reduce the price of gasoline back toward historical levels. A higher gasoline tax would just mean prices would not drop quite as far as they would otherwise.

If something must be taxed, it makes a lot of sense to tax something that is costly to the environment, costly to the users and mostly controlled by foreigners. The United States is passing up a big opportunity by not taxing gasoline at a higher rate.

I haven't strongly supported these proposals, perhaps because I hate the idea of paying more for gas. But that's the point of raising the tax, I'm supposed to dislike it and reduce my consumption, and I can't deny that an increase in gas taxes is needed. Robert Frank has a similar proposal (analyzed graphically here), while Martin Feldstein has called for tradeable gas rights.

You Can't Say That Here

Should the government ban some people from the U.S. because they promote ideas that are too dangerous for us to hear? I think we're losing sight of what freedom means:

Why I'm Banned in the USA, by Tariq Ramadan, Washington Post, London: For more than two years now, the U.S. government has barred me from entering the United States to pursue an academic career. The reasons have changed over time, and have evolved from defamatory to absurd...

I am increasingly convinced that the Bush administration has barred me [because of] my political views. In recent years, I have publicly criticized U.S. policy in the Middle East, the war in Iraq, the use of torture, secret CIA prisons and other government actions that undermine fundamental civil liberties. And for many years, ... I have called upon Muslims to better understand the principles of their own faith, and have sought to show that one can be Muslim and Western at the same time.

My experience reveals how U.S. authorities seek to suppress dissenting voices and -- by excluding people such as me from their country -- manipulate political debate in America. Unfortunately, the U.S. government's paranoia has evolved far beyond a fear of particular individuals and taken on a much more insidious form: the fear of ideas.


In January 2004, I was offered a job at the University of Notre Dame, as a professor of Islamic studies and as Luce professor of religion, conflict and peace-building. I accepted the tenured position enthusiastically... After the government granted me a work visa, I rented a home in South Bend, Ind., enrolled my children in school there and shipped all of my household belongings. Then, in July, the government notified me that my visa had been revoked. It did not offer a specific explanation, but pointed to a provision of the Patriot Act that applies to people who have "endorsed or espoused" terrorist activity.

The revocation shocked me. I had consistently opposed terrorism in all of its forms, and still do. And, before 2004, I had visited the United States frequently to lecture, attend conferences and meet with other scholars. I had been an invited speaker at conferences or lectures sponsored by Harvard University, Stanford, Princeton and the William Jefferson Clinton Presidential Foundation. None of these institutions seemed to consider me a threat to national security.

The U.S. government invited me to apply for a new visa and, with Notre Dame's help, I did so in October 2004. But after three months passed without a response, I felt I had little choice but to give up my new position and resume my life in Europe. Even so, I never abandoned the effort to clear my name. At the urging of American academic and civic groups, I reapplied for a visa one last time in September 2005... Once again, I encountered only silence.

Finally, in January, the American Civil Liberties Union, the American Academy of Religion, the American Association of University Professors and PEN American Center filed a lawsuit on my behalf... In court, the government's lawyers admitted that they could establish no connection between me and any terrorist group; the government had merely taken a "prudential" measure by revoking my visa... The federal court -- which issued a ruling recognizing that I have been a vocal critic of terrorism -- ... ordered the government to grant me a visa or explain why it would not do so.

On Sept. 21, the long-awaited explanation arrived. The letter from the U.S. Embassy informed me that my visa application had been denied... After a lengthy investigation, the State Department cited no evidence of suspicious relationships, no meetings with terrorists, no encouraging or advocacy of terrorism. Instead, the department cited my donation of $940 to two humanitarian organizations (a French group and its Swiss chapter) serving the Palestinian people. I should note that the investigation did not reveal these contributions. As the department acknowledges, I had brought this information to their attention myself, two years earlier, when I had reapplied for a visa.

In its letter, the U.S. Embassy claims that I "reasonably should have known" that the charities in question provided money to Hamas. But my donations were made between December 1998 and July 2002, and the United States did not blacklist the charities until 2003. How should I reasonably have known of their activities before the U.S. government itself knew? I donated to these organizations for the same reason that countless Europeans -- and Americans, for that matter -- donate to Palestinian causes: not to help fund terrorism, but because I wanted to provide humanitarian aid to people who desperately need it. Yet after two years of investigation, this was the only explanation offered for the denial of my visa. I still find it hard to believe.

What words do I utter and what views do I hold that are dangerous to American ears, so dangerous, in fact, that I should not be allowed to express them on U.S. soil?

I have called upon Western societies to be more open toward Muslims... At the same time, I do not stop short of criticizing regimes from Muslim countries. Indeed, the United States is not the only country that rejects me; I am also barred from Tunisia, Saudi Arabia and even my native Egypt. ...

Today, I live and work in London. From my posts at Oxford University and the Lokahi Foundation, I try to promote cultural understanding and to prevent radicalization within Muslim communities here. Along with many British citizens, I have criticized the country's new security laws and its support for the war in Iraq. Yet I have never been asked to remain silent as a condition to live or work here. I can express myself freely.

I fear that the United States has grown fearful of ideas. I have learned firsthand that the Bush administration reacts to its critics not by engaging them, but by stigmatizing and excluding them. Will foreign scholars be permitted to enter the United States only if they promise to mute their criticisms of U.S. policy? It saddens me to think of the effect this will have on the free exchange of ideas, on political debate within America, and on our ability to bridge differences across cultures.

I can't figure out how I ended up in bizarro world where liberals are upset at government intrusion into the private sector, something that is supported and encouraged by conservatives. Even libertarians are largely silent as the government stomps on the marketplace for ideas and engages in other intrusions. And that's just the tip of the bizarro world iceberg these days. There's torture before we know if people are innocent or guilty, spying on private citizens without warrants, throwing people in jail without the right to contest it in court, all sorts of stuff that could only exist in some alternative up is down, bad is good universe. Seriously, this can't be real. Hopefully, it will be like the good Captain Kirk-evil Captain Kirk Star Trek episodes and things will be back to normal by the end of the episode.

The Neo-Liberal Road to NAFTA

Brad DeLong reconsiders the neo-liberal foundations of his support for the North American Free Trade Agreement:

Neo-liberalism has a patchy Mexican record, by J. Bradford DeLong, Project Syndicate: Six years ago, I was ready to conclude that the North American Free Trade Agreement (NAFTA) was a major success. The key argument in favor of NAFTA had been that it was the most promising road the US could take to raise the chances for Mexico to become democratic and prosperous, and that the US had both a strong selfish interest and a strong neighborly duty to try to help Mexico develop.

Since NAFTA, Mexican real GDP has grown at 3.6 percent per year, and exports have boomed, going from 10 percent of GDP in 1990 and 17 percent of GDP in 1999 to 28 percent of GDP today. Next year, Mexico's real exports will be five times what they were in 1990.

It is here -- in the rapid development of export industries and the dramatic rise in export volumes -- that NAFTA made the difference. ... Increasing trade between the US and Mexico moves both countries toward a greater degree of specialization and a finer division of labor in important industries like autos, where labor-intensive portions are increasingly accomplished in Mexico, and textiles, where high-tech spinning and weaving is increasingly done in the US, while Mexico carries out lower-tech cutting and sewing.

Such efficiency gains from increasing the extent of the market and promoting specialization should have produced rapid growth in Mexican productivity. Likewise, greater efficiency should have been reinforced by a boom in capital formation...

The key word here is "should." ...[T]he 3.6 percent rate of growth of GDP, coupled with a 2.5 percent per year rate of population and increase, means that Mexicans' mean income is barely 15 percent above that of the pre-NAFTA days, and that the gap between their mean income and that of the US has widened. Because of rising inequality, the overwhelming majority of Mexicans live no better off than they did 15 years ago (indeed, the only part of Mexican development that has been a great success has been the rise in incomes and living standards that comes from increased migration to the US, and increased remittances sent back to Mexico).

Intellectually, this is a great puzzle: we believe in market forces, and in the benefits of trade, specialization and the international division of labor. We see the enormous increase in Mexican exports to the US over the past decade.

We see great strengths in the Mexican economy -- a stable macroeconomic environment, fiscal prudence, low inflation, little country risk, a flexible labor force, a strengthened and solvent banking system, successfully reformed poverty-reduction programs, high earnings from oil, and so on.

Yet successful neo-liberal policies have not delivered the rapid increases in productivity and working-class wages that neo-liberals like me would have confidently predicted had we been told back in 1995 that Mexican exports would multiply five-fold in the next 12 years.

To be sure, economic deficiencies still abound in Mexico. According to the OECD, these include a very low average number of years of schooling, with young workers having almost no more formal education than their older counterparts; little on-the-job training; heavy bureaucratic burdens on firms; corrupt judges and police; high crime rates; and a large, low-productivity informal sector that narrows the tax base and raises tax rates on the rest of the economy. But these deficiencies should not be enough to neutralize Mexico's powerful geographic advantages and the potent benefits of neo-liberal policies, should they?

Apparently they are. The demographic burden of a rapidly growing labor force appears to be greatly increased when that labor force is not very literate, especially when inadequate infrastructure, crime, and official corruption also take their toll.

We neo-liberals point out that NAFTA did not cause poor infrastructure, high crime and official corruption. We thus implicitly suggest that Mexicans would be far worse off today without NAFTA and its effects weighing in on the positive side of the scale.

That neo-liberal story may be true. But it is an excuse. It may not be true. Having witnessed Mexico's slow growth over the past 15 years, we can no longer repeat the old mantra that the neo-liberal road of NAFTA and associated reforms is clearly and obviously the right one.