The Unseen Costs of Taxation and Regulation

On a EconLog post about E-Verify, commentor “Jay” writes:

I’m confused, if [E-Verify] poorly enforced and therefore only sparsely followed by employers, how does it raise hiring costs?

Jay’s question is an excellent one, and one that gets down into one of the main reasons we have deadweight loss (DWL) stemming from taxes and regulation.  Taxes and regulations change behavior (if they didn’t, we’d only have a transfer of wealth from consumers/producers to the government and there would be no DWL).  The obvious way they change behavior is when people adopt less efficient use of resources (in the case of E-Verify, hiring a worker who may be less productive over a worker who would be more productive because the first worker will pass E-Verify and the second worker won’t).

But evasion of those taxes and regulations are also a cost.  For example, if an employer hires someone who would not pass E-Verify, and as such goes to lengths to ensure his hiring is not caught (paying him under-the-table, hiding him of INS come looking, that sort of thing), these are all extra costs being paid.  Costs of time, or money, or effort that would otherwise have been spent doing something productive (and that’s not even counting the government’s cost of enforcement!).

These costs, while unseen, are very real.  Employers face evasion costs just like anyone else, and will make decisions based upon them, even if they never show up explicitly as some budget item or in an official government report.  These costs will change their actions, and we are all worse off for it.

Love Knows No Borders

On 15 April, 2013, during the Boston Marathon, two homemade bombs exploded in the crowd of onlookers, killing three and injuring hundreds more.  A massive, city-wide manhunt lead to the arrest of one of the terrorists, and the death of the other (another police officer was killed in the manhunt).  They were two brothers from former Soviet Republics.

Five days later, the Boston Red Sox took to the field at Fenway Park to play the Kansas City Royals.  The Red Sox organization and the people of Boston turned to David Ortiz, DH for the Red Sox and himself an immigrant from the Dominican Republic, to speak on behalf of the club.  Ortiz took the microphone and said what was on the hearts and minds of every Bostonian:

This uniform.  It doesn’t say “Red Sox.”  It says “Boston.”…This is our fucking city!  And nobody’s going to dictate our freedom.  Stay strong!

In its hour of need, the City of Boston turned to our hero to guide us.  He was not one born in this city, or even this country, but he loved it nonetheless (Ortiz’s nickname is “Big Papi,” a term of endearment in his native DR).  He gave Boston hope when it needed it the most.  His loud, booming voice, amplified by the speakers at Fenway Park, echoed across the entire nation, representing all that is good about America and her immigrant population.

It is true that two immigrants, the Tsarnaev brothers, caused grief and harm.  But it is also true that the immigrant Ortiz relieved that pain.  For every Tsarnaev, there are many more Ortiz.  For every criminal, there are many more good people.

The Ortiz of the world are why I am shamelessly and unapologetically open borders.  The City of Boston would be a much darker place if not for people like Ortiz.

In Defense of the Law

The great French economist and philosopher Frederic Bastiat wrote in The Law:

The mission of law is not to oppress persons and plunder them of their property, even thought the law may be acting in a philanthropic spirit. Its mission is to protect property.

The law is justice — simple and clear, precise and bounded. Every eye can see it, and every mind can grasp it; for justice is measurable, immutable, and unchangeable. Justice is neither more than this nor less than this. If you exceed this proper limit — if you attempt to make the law religious, fraternal, equalizing, philanthropic, industrial, literary, or artistic — you will then be lost in an uncharted territory, in vagueness and uncertainty, in a forced utopia or, even worse, in a multitude of utopias, each striving to seize the law and impose it upon you. This is true because fraternity and philanthropy, unlike justice, do not have precise limits. Once started, where will you stop? And where will the law stop itself?

Bastiat’s point, that the law exists to serve justice and nothing more, is the essence of the rule of law.  The rule of law is the idea that no one is above the law, but also no one is beneath the law.  Many people remember the first part, but conveniently forget the second.

Over the past few years, and especially since the election of Donald Trump, the law has come under attack, both by those on the Left and the Right.  Both want to carve out exceptions to the law, either by eliminating protections under the law for disliked groups (the Left for the alt-right, the Right for immigrants and Muslims) or by giving themselves greater share of “legal plunder” (tariffs, welfare, subsidies, etc etc).  As a classical liberal, it disheartens me to see my country, one founded on (if not always practiced) the ideals of justice, liberty, and the rule of law so willingly and vehemently attack these very ideals for the sake of political virtue-signalling or simple spite.

Justice is blind.  That means she sees not the devils nor the angels of our nature.  She hears only the circumstances, and defends the wronged party.  Whether that party is black, white, Hispanic, Republican, Democrat, Christian, atheist, Muslim, of the “right” mind, of the “wrong” mind, it doesn’t matter.  Justice defends them all.  This must mean that, yes, we must give the Devil himself the benefit of the law for the sake of justice.

A couple of examples.  First, here is a NYT story explaining the jubilation many had after Richard Spencer (the notorious neo-Nazi) was attacked.  Second, this story from Reason responding to the Republican (and sometimes right-libertarian) argument that immigration should be restricted because immigrants tend to vote Democrat.  In both cases, we have an ‘in-group’ trying to carve out exceptions to the law (in the first case freedom of speech, in the second case freedom of migration and protection under the law) for an ‘out-group’ who thinks differently from the in-group.  In both cases, the in-groups are making a mockery of the law.

As a classical liberal, I will defend the rights of both out-groups, indeed all out-groups, because Justice cares not whether one is in or out, and the law shouldn’t either.  I will defend them, not because of any sympathies to neo-nazis (of which I have none) or particular love of immigrants but for my own safety’s sake.  If we weaken the protection of the law for out-groups, what happens when we find ourselves the out-group?  To borrow the language from A Man For All Seasons, if we cut down every law to apprehend the Devil, what will protect us when the Devil turns on us?  Yes, I would give the Devil the benefit of the law for my own safety’s sake!

Tyrants rarely run roughshod over the law, but rather use precedence set by those before them (this precedence, although itself a mockery of the law, gives the illusion that the tyrant’s actions are lawful).  Exceptions to the law, granted by angles to pursue angelic ends, then become the tools of the devil to pursue devilish ends.  Vast presidential powers, handed over by Congress to the Executive Branch, now lay in the hands of Trump.  A vast regulatory government, once in the hands of relatively moderates now exists in the hands of an ignorant, egomaniac populist.  When the moderates were in power and wanted more and more leeway, the classical liberals objected; like More in the clip above, we refused to cut down the law to pursue the Devil for the exact reason that now is in our face: the Devil has turned ’round upon us and many laws have been cut down.

We must defend the rule of law and its protections for all people, including the Devil himself.  Once the door is opened that people who have “wrong” opinions do not deserve the same protections and liberties as people with “right” opinions, then it’s damn near impossible to close that door.

Some More Thoughts On Immigration

Many people will complain that, so long as the institution of welfare and voting exist in this nation, we cannot have open borders in regard to immigrants.  They claim the immigrants will just come here and become welfare queens and vote away our democratic institutions for their socialist ones.  Ignoring the factual issues with these complaints (Immigrants use welfare at lower rates than domestic citizens and naturalized-immigrant voting patterns and policy views don’t differ much from Americans), there are larger issues at play here.

Continue reading

Regime Uncertianty: NBA Edition

President Trump’s executive order last week banning entry into the nation from several predominantly Muslim countries can best be described as a charlie-foxtrot.  Among those caught in the wave of uncertainty following the order was the National Basketball Association.  From nba.com:

The NBA, its players and its coaches have waded into political waters in the months before and since the November election. But this week politics bled into the NBA when President Donald Trump signed an executive order temporarily limiting immigration from seven Muslim-majority countries.

Milwaukee Bucks rookie Thon Maker and Los Angeles Lakers veteran Luol Deng both are natives of Sudan, one of the countries subject to the temporary ban along with Iran, Iraq, Libya, Somalia, Syria and Yemen.

The Bucks were concerned about Maker’s ability to travel freely with the team back to the United States from its game Friday in Toronto. The NBA released a statement saying it has contacted the State Department for information on how the restriction might affect personnel from the seven countries.

Fortunately, there were no initial negative consequences for the Bucks.  From ESPN:

Bucks coach Jason Kidd, in announcing Saturday that Maker would start, confirmed that Maker had made it to Milwaukee without incident. Maker scored eight points and grabbed two rebounds in eight minutes in Friday night’s 102-86 loss at Toronto, where he had lived for two years prior to being drafted in 2016 by Milwaukee.

However, the fact that Maker was able to re-enter the country from Toronto does not mean there are any losses involved.  Indeed, there were many unseen consequences from the executive order:

  1. Coach Kidd had to spend time devising an emergency game plan in case Maker was detained.  This subtracted from his time focusing on a “true” game plan where all his players can be used.  This may have contributed to their 112-108 loss to Boston on Saturday.
  2. NBA and team lawyers have been scurrying to get clarification on the new rules, detracting from other duties
  3. State Department officials have been scurrying to answer the questions poised by the NBA and team lawyers, detracting from other duties
  4. Maker himself (and likely his teammates) were distracted by this non-basketball issue, diverting attention away from practice and game planning (again, possibly contributing to the loss on Saturday).

The list above is hardly exhaustive.  Further, we can imagine this uncertainty, and similar costs, multiplied across the nation for all kinds of industries and employers.  These disruptions, while perhaps at a cost of only a few thousand dollars each (a number I arbitrarily made up.  Could be higher/lower), multiplied across millions of individuals becomes a great sum.

One final NBA-specific point: 90 days (the length of the ban) seems small in the scheme of things.  But, for the NBA, that is half their season.  This ban is no small thing for the Association.

On (Im)Perfect Subsitution

Another Econ 101 mistake people make, especially with regard to immigration and international trade, is some form of “foreigners (immigrants) can do all the work we do but for much lower prices!  Without subsidies/tariffs/minimum wage, they’re just going to take all our jobs!”  Other versions of this include “if a bunch of immigrants enter the nation, they’ll drive down wages!  Law of Supply and Demand!”

Both the above arguments make the same mistake, namely they assume foreign labor is a perfect substitute for domestic labor.  They treat all labor (or all low-skilled labor) as a homogeneous blob, one part easily replaceable with another.  But, alas, that is not the case, as price theory can show us.

Looking simply at the wages of laborers, we should ask the question “why do immigrants/foreigners command lower prices than domestic workers?” The fact that there hasn’t been wholesale replacement of domestic labor with foreign means we can rule out any cultural/biological/cost-of-living reasons such as “lower cost of living in 3rd world” or “they have a lower standard of life and thus demand lower pay” etc.  If this were indeed the case, domestic companies could just pack everything up and ship it overseas (that is, stuff that can’t be staffed by immigrants) and make tons of profits (while I have no doubt some people believe that is what is happening, the data say otherwise).

What’s more likely is that foreign workers and immigrants are simply less productive than domestic workers.  Immigrants coming into the country, legal or otherwise, face major barriers, not the least of which is the language barrier.  The manager at McDonalds cannot simply fire an American order-taker making minimum wage and hire a foreign worker for half the cost. The foreigner, simply by virtue of not knowing the language, will be less productive, thus his lower salary.  A similar argument for offshoring can be made: foreign workers, by virtue of less capital augmentation, will be less productive and thus command lower salaries.

In short, foreign workers/immigrants are not perfect substitutions for domestic labor!

It may make sense for some firms to replace/augment domestic labor with foreign labor, but the mere fact it is cheaper is not the reason why.  David Ricardo’s powerful idea shows there are times it is prudent to replace more productive resources with less productive resources, but to do so on a large scale with disregard to opportunity cost is a recipe for disaster, and why firms and individuals do not do it.