The Rhetoric of "Class Warfare"

In the middle of my morning routine of flipping back and forth between Sports Center and Squawk Box on CNBC while nursing my second cup of coffee, I listened to Wilbur Ross and Joe Kernan discuss the pros and cons of the Bush tax cuts.  This wasn't the first time I heard the argument from wealthy conservatives that allowing the Bush tax cuts to expire was akin to starting a new "class warfare" pinning the so called rich against the very people they help by creating jobs - but something about the way it was being discussed this morning made me mental.

What is debatable about this issue is the effect the change in tax rates might have on an economic recovery.  But because economists and policy makers are uncertain about the effects, given the already uncertain state of the economy, the discussion has disintegrated to guilt, blame, and fear - things our politicians and news media outlets are good at creating and disseminating.  I'm not surprised, just depressed.

It truly amazes me to hear wealthy business owners, like Wilbur Ross, argue the class warfare angle as the reason to extend the tax cuts when the majority of the people who helped him become a billionaire make less than $20 per hour.  In fact, income inequality has never been higher in the US.  The Bush tax cuts actually created a significant amount of the inequality we have today.  Ending the tax cuts for the wealthy won't create class warfare, the class warfare started in 2001 and 2003 with the tax breaks for the wealthy (see "How Progressive is the U.S. Federal Tax System? A Historical and International Perspective" by Emmanual Saez and Thomas Piketty in the Journal of Economic Perspectives; Winter 2007, Vol. 21 Issue 1).

Let's get back to debating the economic merits of tax cuts but if, as many economists are saying, the expiration of the tax cuts will have little effect on the pace of the recovery, then maybe we should look at this issue as an argument for improving equity instead of projecting the decision to end the Bush tax cuts as a personal attack on "freedom, free enterprise, and success".  

Comments on Illegal Immigration

The following are my comments to questions presented by a local reporter for a story on illegal immigration. 

--Companies that hire undocumented workers pay them roughly half of what legal workers earn. Companies that do not hire illegal immigrants say they cannot compete because they pay their workers fair wages. Yes, in general, companies that hire mostly illegal immigrants will have a competitive advantage, all other things being equal.  But the comparison is not that simple.  Economic research suggests that illegal immigrants are as much as 30% more productive than similar legal workers of the same age and education (See William Ford's research in Economic Education Quarterly, 2007).  Often, the lack of competitiveness argument due to illegal workers partially masks other inefficiency or demand problems facing firms or industries.

--The unemployment rate for construction workers is double the overall rate. Some people say this is due in part to companies using illegal labor. Unlike farm or other unskilled, low-paying jobs, unemployed, legal workers covet construction jobs, which are generally higher-paying.
It is clear that the unemployment rate for construction workers is high due to the current global economic slowdown and the current housing crisis.  It would seem logical that if unemployment is high for legal construction workers, it is also high for illegal construction workers.  There is no evidence that the ratio of legal to illegal construction workers is any different than it would be during better economic conditions.  In order to support the above statement, one would need to know what the unemployment rates are like for legal and illegal construction workers during better economic conditions.

--If companies using undocumented workers build a house, it can translate into lower prices for home buyers. In this economy, would consumers pay more for a house if they knew it was built by legal workers? Some consumers may be willing to pay more for a house based on the type of labor used to build the house.  This behavior is similar to consumers paying more for "Buy American" products or products that are "green".  Unfortunately during tough economic times, demand for these higher priced alternatives is low.  In addition, I'm not sure we would benefit from encouraging this behavior.   If people have to spend more to buy a home, then it is reasonable to assume that many will cut back on new furnishings and appliances or may have to tighten the family budget.  Hence, one group's benefit, legal construction workers, is another group's loss.  In order generate net benefits for society from a tightening of labor laws, the gains for legal construction workers would have to outweigh the losses from home buyers and other business that cater to new home owners. 

--Many people say that illegal immigrants are necessary to do low-paying jobs, such as farm work. What could happen to the economy if all illegal immigrants were forced to leave the country? I don't beleive there is much debate among economists that eliminating illegal immigrants from the labor force will slow down the growth of the economic pie. It is also likely to increase the prices of many goods and services which will result in a change in how families and businesses allocate their budgets.  These changes will have unintended consequences in other parts of our economy that may result in greater costs than the benefits to workers in those industries that compete with illegal immigrant labor.

--Illegal workers do not pay taxes but use schools, roads and health care. What is the impact on the local, state and national economy? How much potential tax revenue is lost? For specific numbers on net tax revenue implications, I'd suggest researching the economics literature.  One place to start might be the Center for Immigration Studies.
As for a general comment, illegal workers pay more taxes than most people think.  Studies by the Social Security Administration indicate that a relatively large number of illegals pay payroll taxes and income taxes using fake social security numbers or by obtaining an individual tax identification number from the IRS just to avoid being detected as an undocumented worker; and many don't file for a refund even if they are owed one for the same reason.  This is an interesting phenomenon since illegal immigrants cannot collect social security.  Also, let's not forget many illegal immigrants pay property taxes and taxes on utilities indirectly when they rent, sales taxes when they consume goods and services, and excise taxes on gasoline, utilities, telecommunications, liquor, and tobacco products.  Although illegal immigrants may still create a negative net tax burden, part of that is due to the relatively low wages they earn, not the taxes they do not pay.  If illegals were made legal, their tax burden on society would likely be larger as they would qualify and take advantage of more government assistance as well as those who are currently paying income taxes to avoid detection would likely pay no income tax under current rules.