–- Diana Furchtgott-Roth, former chief economist at the U.S. Department of Labor, is a senior fellow at the Hudson Institute. The views expressed are her own. –

Good news for Americans with large families or who need to transport substantial amounts of gear: President Obama’s new vehicle emissions standards are not as tough as they seem. But this is bad news for environmentalists, who want to lower the use of gasoline.

When Obama, using authority granted to the president in the 2007 Energy Act, announced earlier this month that automakers will be required to achieve a higher fleet average, 35 miles a gallon, by 2016—four years earlier than Congress had mandated—Americans might have been forgiven for thinking that in 2016 the window stickers on the new cars would reflect this new standard.

Not so.  Window stickers describe only the calculated gasoline efficiency of the model they are pasted on.  Moreover, even if miles per gallon (MPG) were averaged for all models, the result would fall below the new standards Obama announced for 2016.

What he promulgated was a higher “fleet average” for each automaker as calculated by the Department of Transportation, using a kind of vehicular treadmill to test cars’ fuel efficiency.

But MPG for each model is calculated by the Environmental Protection Agency, using a different method that purports to take account of how cars are driven.  Model for model, EPA’s MPG is lower than that of the corporate fleet average calculated by the Transportation Department.

The CAFE standards declared by Obama—for cars, minivans, and light trucks—are scheduled to rise to an average of 35 MPG in 2016 from levels of 27 MPG now for cars and 22 MPG for light trucks.

A 35 MPG CAFE standard corresponds roughly to a 26 MPG EPA standard, according to the automotive information Web site Edmunds.com, a 40 percent increase from present levels. Edmunds.com reports that this is met already by 29 car models and 36 truck models.  Half these trucks and one third of the cars are made by domestic automakers.

In other words, there was less to Obama’s announcement than met the eye—or made the headlines.

If he had aimed at a 35 MPG EPA standard, so that the window stickers of the new cars would show averages of 35 MPG, automakers would have had to increase fuel efficiency by 70 percent. Doing that would lead to even higher prices than will result from the costs imposed by achieving the MPG goals that the president declared.

“The CAFE tests performed now for the Transportation Department are the same as the ones performed under the initial CAFE standards introduced in the 1975 Energy Policy Act,” said Environmental Defense Fund senior fellow John DeCicco in a phone conversation this week.   “Congress has not changed these tests since they were put into place in 1978.”

These scientific tests require special fuel and place the vehicle tested on a dynamometer, a machine designed to measure fuel intake in a repeatable pattern that is not the same as ordinary driving. Plainly, this yields better “mileage” than would driving over the road.

Whatever the “real” MPG of new cars, this approach to raising efficiency has substantial disadvantages compared to a higher gasoline tax.  Last summer, when the price of gasoline climbed above $4 a gallon, Americans cut back on their driving—with no extra CAFE standards. Dealers faced waiting lists for more efficient hybrid models, such as the Toyota Prius.

Raising emissions standards is a complex issue, requiring negotiations between different government departments and nuanced methods of measurement. And automotive fuel efficiency has been rising without stricter CAFE standards, even as engine power increases, because as older cars are replaced with newer ones, fuel efficiency improves.  If Obama wants Americans to use less fuel, a gas tax would be simpler and more effective than higher emissions standards.

– Diana Furchtgott-Roth, former chief economist at the U.S. Department of Labor, is a senior fellow at the Hudson Institute. The views expressed are her own. —

President Obama is in favor of moving towards “energy independence,” but his new 2010 Budget specifically seeks to raise taxes on domestic oil exploration by $31 billion over 10 years, a larger tax increase than on any other industry. In addition, oil and gas producers would bear a disproportionately heavy share of other tax increases on business, more than $320 billion.

Surely a president who desires energy independence would leave oil companies alone so that America could develop greater domestic reserves.  But this is not the case.

The ostensible rationale for the tax increases is that the current tax system “distorts markets by encouraging more investment in the oil and gas industry than would occur under a neutral system. To the extent expensing encourages overproduction of oil and gas, it is detrimental to long-term energy security…” This wording, with reference to credits, lower tax rates, special treatment, and accelerated depreciation, is repeated eight times in the Treasury Department’s Green Book, a description of proposed spending and revenue changes in the budget.

President Obama believes that subsidies for renewable energy are acceptable, even though renewable energy is only responsible for 4 percent of America’s supply.  He does not consider expenditures of $60 billion on “clean energy investments” to be distortions.  But oil, which accounts for almost 40 percent of America’s energy usage, is a different matter, apparently deserving of higher taxes to limit overproduction. With fuel prices close to $5 a gallon last summer, we could have used a little overproduction.

If America is to reduce use of imported fuels, it needs to raise domestic production to increase long-term energy security. Every additional barrel of oil produced in America is one barrel fewer that needs to be imported.  The oil and gas industry already employs more than 1.5 million workers, and has the potential to employ many more.

Estimates of American oil and natural gas reserves keep growing, potentially generating more job opportunities.  In 2007, 200 trillion cubic feet of natural gas, equivalent to 33 billion barrels of oil, or about 18 years of U.S. oil production, were found in the Haynesville Shale, a rock formation in northern Louisiana. Discoveries have also been made in Texas, Arkansas, and Pennsylvania. New optimism about U.S. gas reserves and production capacity has been pushing natural gas prices down.  Since the fuel is there, why propose new taxes to discourage production?

President Obama’s new tax proposals, rather than leading towards energy independence, would drive oil and gas production abroad.  New taxes would place American producers at a disadvantage in the global market, punishing domestic American oil and gas companies and benefiting countries with large reserves such as Venezuela, Saudi Arabia, Iran and Russia.  Does President Obama really want these countries, all under fire for their neglect of basic human rights, to get richer at our expense?

Moving towards energy independence is under attack from another quarter—extreme environmentalists. After Tuesday’s failure of California ballot initiatives to cut spending, Californians might take seriously Governor Arnold Schwarzenegger proposal to allow additional offshore drilling from Platform Irene, off the coast of Santa Barbara, which would raise $1.8 billion. But drilling on the Outer Continental Shelf remains unpopular. It’s telling that residents find it preferable to release 40,000 prisoners from jail or fire thousands of teachers—rather than drill offshore, which could bring in a steady stream of revenue to the state capital of Sacramento.

Until the United States has the technology to operate its 250 million motor vehicles without gasoline and natural gas, we need more domestic exploration, not less.  At some point, maybe later this year, maybe in 2010, our economy is going to shift to post-recession recovery, and oil and gas consumption are going to rise.  We don’t want a repeat of $5 gasoline and sky-high home heating bills.

– Diana Furchtgott-Roth, former chief economist at the U.S. Department of Labor, is a senior fellow at the Hudson Institute. The views expressed are her own. —

As President Obama considers whether to fulfill his campaign promise to raise the minimum wage from $7.25 to $9.50 per hour by 2011, there’s no better illustration of the consequences of well-intentioned policy-making than recent events in American Samoa, a United States territory in the South Pacific that falls within the purview of Congress.

Chicken of the Sea, the tuna company, announced this month that it will close its canning plant in American Samoa in September. The culprit is 2007 legislation in Washington that gradually increased the islands’ minimum wage until it reaches $7.25 an hour in July 2009, almost double the 2007 levels.

In 2007, the hourly minimum wage in American Samoa for fish canning and processing was $3.76 and the minimum wage for government employees was $3.41. Shipping had the highest minimum wage, at $4.59. Garment manufacturers got the lowest, at $3.18 an hour. A $7.25 wage is a substantial increase for most residents.

Chicken of the Sea will lay off 2,041 employees—12 percent of total employment, almost half of all cannery workers. And the 2,700 workers at StarKist, the other American Samoa tuna canning company and Chicken of the Sea’s rival, are probably concerned that their jobs are the next to go.

American Samoa’s loss is Georgia’s gain. Chicken of the Sea will move to Lyons, Georgia, (2007 population 4,480) employing 200 people in a new $20 million plant on a more capital-intensive production line.

In January 2007 the legislation originally did not include American Samoa, perhaps because Del Monte, at the time the parent company of StarKist, was headquartered in Speaker Nancy Pelosi’s district.

Until then, the Labor Department had set wage rates in American Samoa every two years, following an extensive study on economic conditions on the island. But before final passage, Congress included American Samoa.

Back in 2007 American Samoa Governor Togiola Tulafono worried that increasing the minimum wage “would kill the economy” and Congressional Samoan Delegate Eni F.H. Faleomavaega forecast that it would devastate the local tuna industry.

They knew that industries would go elsewhere if they have to pay $7.25 an hour.

They were right. American Samoa will lose not only the 2,041 jobs at the Chicken of the Sea canning plant, but also secondary jobs from the ripple effect of loss of income—stores and eateries that cater to cannery workers, shops that mend fishing nets, shipyards, and buses that transport workers.

In a telephone conversation this week, Representative Vaito’a Hans A. Langkilde of the Ma’oputasi District #10, representing the villages of Leloaloa, Satala and Atu’u, described the prospective devastation of the community. His district is home to both StarKist and Chicken of the Sea.

Mr. Lankilde told me, “Over the past 50 years the industry provided massive job opportunities for unskilled labor. The 2007 law that increased the minimum wage was the beginning of the end for the tuna industry and the cause of massive job losses for our already fragile economy. The only way to resolve the trend towards total economic disaster is for Congress at its soonest opportunity to reverse its position.”

With the recent laying of fiber-optic cable linking American Samoa to the United States, Samoans could get jobs in call centers. Yet the higher minimum wage could discourage firms.

Raising the minimum wage to $9.50 an hour would drive even more jobs away from American Samoa. In the United States it would have the effect of shifting jobs from low-skill to high-skill workers, raising unemployment among those who are least equipped to handle it.

Rather than having to accept direction from a government thousands of miles away where they have no voting representation, residents of American Samoa should be given the power to decide on their own minimum wage. Congress should leave further minimum wage increases to individual states to choose as they see fit, because wage levels and the cost of living vary substantially between states such as Mississippi and New York.

The closure of the Chicken of the Sea cannery in American Samoa shows us that higher minimum wages cause low-skill workers to lose jobs. What’s true for American Samoa holds equally true for the United States.

– Diana Furchtgott-Roth, former chief economist at the U.S. Department of Labor, is a senior fellow at the Hudson Institute. The views expressed are her own. —

Jack Kemp, who died on May 2 at the age of 73, lived the American dream as the football star who was elected to the House of Representatives. He had the vision to translate his intellectual ideas into the practical tax cuts, housing vouchers, and enterprise zones that sparked not only the Reagan revolution in America but also similar economic revolutions in many countries around the globe.

Jack Kemp spent his life as a champion of the little guy, the forgotten man, the person left behind in a world too busy to care. It is easy to look to other way and ignore the cries of the weak and the helpless. Jack Kemp could have done that. But Jack Kemp always stopped to listen. And when he listened, he stood up for the downtrodden.

His economic plan for America had a consistent theme: help the little guy. For Kemp, that meant letting him prosper and getting the government off of his back. That would work in America, and that would work around the world. Kemp spent much of his career trying to get oppressive governments off the backs of the forgotten.

Take the Soviet Union, for example. Today, almost 20 years after its demise, we can see from hindsight that the system was doomed. Yet in the early 1970s it was not obvious.

In 1974, four years after Kemp was first elected to Congress, he was a co-sponsor of the Jackson-Vanik amendment that called for eliminating trade negotiations and all scientific, educational, and cultural exchange missions with the Soviet Union until the country restored freedom. The Soviet Union was crushing dissent at home and sending refuseniks to die in gulags. Jack Kemp heard and stood up for the forgotten Russians. The Jackson-Vanik amendment was passed and signed by President Gerald Ford in 1975.

Jack Kemp kept his eye on the Soviet Empire and the people it crushed. In 1978, he introduced a resolution urging the U.S. Olympic Committee to hold the 1980 Summer Olympic Games outside the Soviet Union. The next year, it was a resolution urging the Soviet government to “end the oppression of Jews in the Union of Soviet Socialist Republics.” It would have been easy to look the other way. Jack Kemp didn’t.

In 1985, he introduced a resolution that supported President Reagan’s decision to discuss Soviet human rights violations against the people of Afghanistan with Soviet leader Mikhail Gorbachev and called on him to reiterate the U.S. desire to achieve a negotiated political settlement agreeable to all parties in Afghanistan. This included withdrawal of foreign troops, restoration of an independent and sovereign Afghanistan, and the safe return of Afghan refugees. Most Americans could not find Afghanistan on a map. Jack Kemp knew it was filled with people crushed by the Soviet Union and forgotten by the world.

Kemp also fought for a free people in Poland. In 1984, he sponsored a bill that “authorizes the use of a specified amount of Economic Support Fund money for agricultural activities in Poland which are managed by the Polish Catholic Church or other nongovernmental organizations”. In 1987, he introduced a joint resolution that specifically provided aid to the Polish independent trade union organization Solidarity. It would have been easy to ignore the people of Poland but Jack Kemp didn’t.

Kemp did not forget the people of Hong Kong facing more than a billion people in the People’s Republic of China. That country wanted to take over Hong Kong without regard to the wishes of its people. Jack Kemp introduced a resolution supporting the self-determination of the people of Hong Kong, saying that without the agreement of its citizens, new government will not be imposed. Unfortunately the principle of self-determination was pushed aside and China moved its forces into Hong Kong. Now the only people of Hong Kong who live free are the ones who were able to escape.

After America left Vietnam, most American politicians wanted to forget about the Vietnamese. Not Jack Kemp. In 1979, he attempted to help Vietnamese who wanted to come to the United States. Kemp introduced a concurrent resolution to help refugees and to establish a consular office in Vietnam for those wishing to emigrate.

In countries from Angola to Nicaragua to Israel, on every continent, Jack Kemp fought for the forgotten man and against oppressive governments. He could have looked the other way. He could have appeased the totalitarians. He could have ignored the cries of the weak. Not Jack Kemp.

Jack Kemp’s life provides valuable lessons for the leaders of today. Stand up for principle, even though the probability of success might initially appear small. Just as the Soviet Union fell and democracy spread across the globe, we have the power to defeat dictators who are funding terrorism and want to bring the West to its knees.

– Diana Furchtgott-Roth, former chief economist at the U.S. Department of Labor, is a senior fellow at the Hudson Institute.  The views expressed are her own. —

In his first one hundred days, President Obama has shown himself to be one of the most radical U.S. presidents in history.  He is harming America’s defenses by publishing memos on interrogation of detainees and threatening to prosecute lawyers who drafted supportive memos.  He shakes hands with America’s enemies, such as Venezuelan leader Hugo Chavez, and sends mixed signals to its friends, such as Colombia’s President Uribe.

And, in the name of combating a recession, he is destroying the fundamental institutions of America’s free-market economy.

Not only would President Obama’s proposed programs move government spending to levels, in relation to the economy, unseen since the end of World War II, but his administration is increasingly involved in the minutiae of a new, unwise, industrial policy, such as how much firms can pay workers, and which banks are allowed to repay government loans, and which industries and companies deserve a government rescue package.

Under Obama’s proposed budget, the nonpartisan Congressional Budget Office projects the government deficit to hit $1.2 trillion in 2019, or six percent of GDP, after “bottoming out”—if it does—at  $658 billion in 2012, a level more than 40 percent above the highest deficit under the presidency of George W. Bush. By 2019, government spending would take up nearly a quarter of GDP, far higher than at the peak of Iraq war spending and the highest, excepting 2009 and 2010, since 1946.

Much has been written about President Obama’s plans for multi-year, growing expenditures on energy and health care. He has proposed to invest billions of dollars in wind, solar power, and other renewables, which now produce about 3 percent of U.S. energy, yet he neglects nuclear power, which produces 20 percent.  He has suggested a substantial cap-and-trade energy tax, which would raise more than a trillion dollars over time, according to some estimates. And he wants a down payment of $634 billion for a universal health care plan whose details he has not yet confided to the public.

In addition, Obama is pushing for other programs which are both costly and naive.  One of his priorities is high-speed passenger rail service, which was given a downpayment of $8 billion in economic stimulus funds and possibly $5 billion more in the budget.  This proposal is, to put it charitably, poorly-designed. Real high-speed rail, with trains that travel 150 miles an hour and faster, can be found in Europe and Japan, but they have not stemmed the increasing use of road transportation.  And these trains need their own, specially engineered rights-of-way, which would cost much more than $13 billion.

Some of Obama’s economic proposals appear to be aimed at placating labor unions, an important element in his political base, rather than encouraging economic recovery.  In March, even before the swine flu scare, he signed legislation ending a program, opposed by the Teamsters union, allowing a small number of Mexican trucks to enter into the United States.  Mexico is retaliating by imposing tariffs on almost 100 agricultural products, including wheat, beans, beef and rice, hurting American exporters.

In another concession to unions, the president has let the U.S. Labor Department end some disclosure requirements for union finances, originally put in place so that union members can learn how their dues are being spent.

Although Obama lauds transparency, the Labor Department has announced that it would not enforce the filing of the form that requires union officials to report conflicts of interest, such as whether they had personal relationships with firms doing union business.  In addition, unions will no longer be required to disclose supplemental information about officers’ pensions and compensation.

Even as unions are allowed to reveal less about their finances, financial institutions that have taken government funds, some reluctantly and under Treasury Department duress, are subject to an unprecedented level of scrutiny as to their compensation of senior executives.  Goldman Sachs, Morgan Stanley, and J.P. Morgan are being discouraged from repaying their Troubled Assets Relief Program funds, even though pay caps are interfering with retention of talented staff.  A government pressuring banks to do something not required by law is engaged in extra-legal behavior.

The government’s treatment of executive compensation bonuses, standard in many industries, has also been capricious. Some executives working in banks that received TARP funds were paid their bonuses without complaints from Washington.  Others, notably those working at AIG, were demonized both by the press and government.

For those who favor nationalization of the economy, or at least of big business, Obama’s first 100 days have been a roaring success.  Others, however, pray that the economy can survive not only the recession but also the president’s prescriptions.

– Diana Furchtgott-Roth, former chief economist at the U.S. Department of Labor, is a senior fellow at the Hudson Institute.  The views expressed are her own. —

Chairman Henry Waxman of the House Energy and Commerce Committee announced yesterday that his American Clean Energy and Security Act of 2009 “will create millions of jobs, revive our economy, and secure our energy independence.”

The 648-page bill, co-sponsored by Waxman and fellow Democrat Edward Markey, Chairman of the House Energy and Environment Subcommittee, has been the subject of four days of committee hearings this week.  It would set new limits for greenhouse gas emissions, and prescribe radically new standards for energy production and use.

The most surprising word in the 648-page bill is one that isn’t there, not even once.  That word is “nuclear.” To discuss clean energy and security without mentioning increased development of nuclear energy, now powering 20 percent of America’s electricity with no greenhouse gas emissions, shows that Chairmen Waxman and Markey are not taking the issue seriously. They’re just trying to raise taxes on Americans and enhance the power of Congress and the agencies it oversees.

Over 100 pages in the bill are spent on measures to reduce greenhouse gases.  The bill requires greenhouse gas emissions in 2012 to be no more than 97 percent of 2005 emissions, 58 percent in 2030 and 17 percent in 2050.  This last target, four decades into the future, is incompatible with our present standard of living—and illustrates the arrogance of politicians who think that they can micro-manage the economy far beyond anyone’s capacity to foresee events.

The mechanism for this is a “cap-and-trade” program, proposed by President Obama in his budget, under which allowances—the number and price as yet unspecified—to emit greenhouse gases would be issued by the Environmental Protection Agency.  If a firm’s emissions exceeded its allowance, or cap, it would have to purchase more allowances, either from the government or from other firms.

As allowed emissions decline over time, firms would have to buy more allowances, driving up costs that inevitably would be paid to consumers.  The Obama March Budget forecast that revenues of $646 billion over eight years would be collected from cap-and-trade.

Representative Joe Barton of Texas, ranking Republican on the Energy and Commerce Committee, offered his version of candor at yesterday’s hearing.  “Ladies and gentlemen, if you like the idea of reducing your carbon footprint to the size that this legislation proposes, you can test drive these carbon emissions levels by living in Nigeria,” he said.

Cap-and-trade is only one part of the bill that would drive up prices.  Consider energy production.  The bill would require doubling in three years of the share of electric utility output that comes from renewable sources—wind, solar, geothermal, biomass—from three percent now to six percent in 2012.  In a further leap of central-planning arrogance, the bill would raise that standard in stages to 25 percent in 2025.

Sounds good? Maybe, but the technology to do it doesn’t exist. Nor do transmission lines to deliver wind energy from where it is likely to be produced,  in the central states, to the population centers on the coasts, where it would be consumed.

Solar energy might be produced in the southwestern desert and California, yet exporting it to Rhode Island and foggy Washington State is practically impossible.  The bill could address this problem by giving the Federal Energy Regulatory Commission additional authority to site transmission lines, yet it does not do so.

Or, take energy efficiency. If people don’t conserve energy voluntarily, the bill would require them to do so.  Existing federal energy efficiency standards for commercial and residential buildings would rise by 30 percent until 2016 for new buildings, and 50 percent thereafter. EPA would set by next year new emissions standards for cars, trucks, trains, and aircraft. Electricity distributors would be required to achieve energy savings beginning with one percent in 2012 and reaching 15 percent in 2020.

If this bill would create millions of jobs and revive our economy, why not make the standards tougher and create even more jobs?

With the global economy in the depths of the worst recession since the Great Depression, according to the International Monetary Fund, now is not the time to raise the cost of energy and consumer goods.  Chairmen Waxman and Markey should reconsider.

– Diana Furchtgott-Roth, dfr@hudson.org, former chief economist at the U.S. Department of Labor, is a senior fellow at the Hudson Institute. The views expressed are her own.  –

It’s April 15, and you’ve finished the arduous task of filing your taxes. You’ve found your W-2 form from your employer, your pennies of interest income from your checking account. If you itemize, you’ve tracked down the acknowledgement of your charitable contributions to the church, the Sierra Club, and the local anti-poverty organization.

The system is so complex that it may have contributed to the tax delinquencies of four Cabinet-level Obama appointees (or their spouses) who had to pay up to win Senate confirmation. At least two other Obama choices withdrew because of their tax problems.

President Obama recognizes the problem. Today he asked his Economic Advisory Board, under the leadership of former Federal Reserve Chairman Paul Volcker, to send him recommendations for tax simplification by the end of the year.

Enter Wisconsin Representative Paul Ryan, a member of Congress for 10 years and now the ranking Republican on the House Budget Committee. In H.R. 6110, entitled “Roadmap for America’s Future” (www.americanroadmap.org), he has proposed a radical simplification of the tax code.

Mr. Ryan describes the tax system as “needlessly complex and burdensome.” In contrast, he writes, “a world-class tax system should be simple, fair, and efficient. The U.S. tax code fails on all three counts.”
Under the Ryan proposal, couples would pay tax at a 10 percent rate on their first $100,000 of taxable income ($50,000 for singles), and then 25 percent on any earnings above that. They would pay a 15 percent tax on capital gains and dividends, and no tax on savings. In exchange, they would give up almost all deductions, including home mortgage interest and charitable contributions.

The only deduction allowed would be a refundable $5,000 tax credit for families and $2,500 for individuals to help with the purchase of private-sector health insurance. Health insurance could be purchased in any state, to encourage more companies and plans to participate.

Many efforts to simplify the tax code have failed because people are attached to their deductions — and because Congress seeks to use tax law to achieve social goals, such as home ownership and helping low-income parents with the earned-income tax credit, a stunningly complex provision.

Moreover, charities and universities fear, probably with good reason, that if contributions are not deductible, people will give less.

To disarm the opposition, Mr. Ryan would give taxpayers a choice. Within 10 years of the passage of the law, they could choose today’s system, with its multiple rates and deductions; or they could adopt the simplified Ryan system, giving up the deductions. To prevent people from switching every year if it would benefit them, they could change only once in a lifetime — except in the case of what Ryan calls “a life-changing event,” such as death, divorce, or marriage, when an additional change would be permitted.

Mr. Ryan’s proposal is a variant of the flat, or one-rate, tax suggested in the Reagan era by some economists and advocated in the 1980s by then House Majority Leader Dick Armey, and later by Steve Forbes in his 1996 and 2000 bids for the Republican presidential nomination.

Then, the main attack on the idea was that it is inequitable. However, Mr. Ryan’s tax contains not one but two rates, and it is progressive because it retains standard deductions and personal exemptions. A family of four would start paying tax only after earning $39,000. Further, many upper-income people benefit from existing deductions, and they would lose this benefit if they adopt Ryan’s two-rate tariff.

No tax proposal offered by a minority member of Congress of either party ever has any chance of passage. Political loyalties aside, the American public might want to take a careful look at Mr. Ryan’s proposal, while memories of filling out their tax forms are still fresh.

– Diana Furchtgott-Roth, former chief economist at the U.S. Department of Labor, is a senior fellow at the Hudson Institute. –

It’s welcome news that President Obama will turn his attention to immigration reform this year, as was announced on Wednesday by Deputy Assistant to the President Cecilia Muñoz. Economic recovery will happen more quickly if both high- and low-skill immigrants are permitted to enter the United States and work legally.

Two years ago, when Congress was considering comprehensive immigration reform, both President Bush’s Council of Economic Advisers and the Congressional Budget Office, headed by Peter Orszag, an economist closely identified with the Democratic Party, estimated that the benefits of additional immigrants outweighed the costs. If Congress allowed more immigration, then American taxpayers would come out ahead financially.

Yet, after Congress refused to pass President Bush’s plan to allow most undocumented workers to receive work visas and wait in line for citizenship, the Bush administration’s immigration policy deteriorated into a series of arbitrary raids on different companies, rounding up undocumented workers and deporting them, in many cases separating husbands and wives, parents and children.

We can do better. Although the unemployment rate reached 8.5 percent last month, the jobs are going to come back, and, as has been the case in the past, native-born Americans will want jobs that are different from those of immigrants, according to economics professor Giovanni Peri of the University of California at Davis.

Congress needs to overhaul immigration law and create an expanded temporary worker program with a path to citizenship, along with more verification to prevent workers from working illegally, and monitoring of tourists and students so that they do not overstay their visas.

A rational immigration policy would have numerous advantages:

• Undocumented workers would pay taxes to federal and state governments rather than to grey-market check cashing services.

• Payments for health care through insurance could be collected more easily, rather than burdening hospital emergency rooms with immigrants without health insurance.

• Foreigners who want to work here could pay the government for visas rather than pay smugglers for unsafe, illicit transportation.

• Improvements in security. Legal visas and bank accounts would make it far easier to identify and track potential terrorists, dubious financial transactions, and those who simply overstay visas.

A rational immigration policy would solve several real problems the United States faces with regard to immigration. The international economy is tremendously dynamic; our immigration system is not. Temporary workers must spend months applying for admission, and due to the pile-up in April of every year, may not even get a visa.

Few low-skilled workers have a legal and reliable method to enter this country and work legally, and few Americans want to do the jobs, such as fruit picking and cleaning, that these workers want to pursue. And even high-skilled workers trained at U.S. colleges and universities, often at taxpayer expense, might have to wait years and spend thousands of dollars to become permanent residents of the nation.

Mr. Obama might want to consider transferring the authority of setting quotas from Congress to the Labor Department. The Labor Department already has the presumptive authority to judge whether demand for foreign labor is justified, through its foreign labor certifications. If the Labor Department is allowed to determine whether or not a foreign worker would displace a native one, it could also be allowed to calculate visa quotas.

High-skilled workers educated in America ought to be able to stay; otherwise, our investment in their education becomes lost to another country. If the Labor Department determines that a foreign worker would not displace Americans, that worker should not be barred from entering the country due to an arbitrary quota. And people who want to enter this country in order to work in jobs Americans are not willing to take ought to have an easy, legal way to do so.

Mr. Obama has the opportunity to craft a sensible and dynamic immigration system. All Americans should wish him success.

– Diana Furchtgott-Roth, former chief economist at the U.S. Department of Labor, is a senior fellow at the Hudson Institute. —

The economy is in a painful slump. Growing numbers of people need help, charities are facing a decline in donations and states are cutting back on services. The April employment report from the Labor Department will show a further increase in the number of unemployed.
Yet, rather than harnessing the generosity of Americans to help out, President Obama has proposed to reduce the tax incentives for charitable giving. He wants Congress to limit to 28 percent the tax saving from contributions for taxpayers who itemize their deductions.

Mr. Obama proposed to use the revenue gained to fund universal health care. He would make the 28 percent cap on the tax saving for contributions take effect in 2011, when he contemplates letting the Bush 2001 tax cuts for upper-income people expire.
The combination of higher rates and a 28 percent cap on the value of deductions for charitable contributions (and mortgage interest) would diminish donations to charities ranging from local churches to national opera companies. Cutbacks on charitable giving would be more pronounced among the well-to-do, not only because they have more to give, but because their tax rates would rise at the same time as their deductions would be limited.

Mr. Obama’s proposal has resulted in opposition from not only charities, but also Republicans and Democrats in Congress.

According to Senate Finance Committee Chairman Max Baucus, a Montana Democrat: “I’m a little – especially concerned about the 28 percent limitation, which has nothing to do with health care.” And Senate Republican Leader Mitch McConnell said, “Congress should preserve the full deduction for charitable donations and look for additional ways to encourage charitable giving, not discourage it.”

Under the law now, if a taxpayer in the 35 percent federal tax bracket gives $100 to charity, he can subtract the $100 from his taxable income, reducing his total tax bill by $35. The after-tax cost of his gift is $65. (Relief from state income taxes might bring the net cost still lower.)
If the value of the deduction is limited to 28 percent, the after-tax cost of the gift rises to $72, and the net result would be diminished giving.

In a March 24 news conference Mr. Obama argued that his change would add fairness to the tax system because the tax saving for those in the 33, 35 or 39 percent brackets should not exceed the saving for people taxed at 28 percent.

Research has shown that charitable contributions are price sensitive, and the gifts of higher-income taxpayers are more sensitive to price than are the gifts of those lower on the income scale, according to George Washington University economics Professor Joseph Cordes. So reducing tax savings will shrink giving, hurting recipients.

In 2007, Americans gave $306 billion to charity, with 88 percent coming from individuals and the remainder from foundations. As a percent of GDP, Americans are the most generous in the world, giving twice as much as the British and over 10 times as much as the French.

Without undiminished deductions, the government would gain billions in tax revenue, but charities and others would lose. That would lessen the ability of charities to help the neediest, not what the president intended.

In fact, on February 5, in an executive order expanding the role of President Bush’s Office of Faith-Based Initiatives, Mr. Obama stated that “few institutions are closer to the people than our faith-based and other neighborhood organizations. It is critical that the Federal Government strengthen the ability of such organizations and other nonprofit providers in our neighborhoods to deliver services effectively.”

But tax policies that move funding from charities and towards the government would hurt those organizations that Mr. Obama wants to help. The full deductibility of charitable deductions enhances our national generosity, and we should leave that tax provision alone.

– Diana Furchtgott-Roth, former chief economist at the U.S. Department of Labor, is a senior fellow at the Hudson Institute. —

On Tuesday, President Obama suggested that his new proposed spending, if adopted by Congress, would be an investment that will pay for itself.

Mr. Obama declared: “We invest in reform that will bring down the cost of health care for families, businesses, and our government.” Such investments, he argued, will in the long run make the economy operate more efficiently.

Mr. Obama was optimistic about how his policy recommendations, if enacted, would play out.  But the nonpartisan Congressional Budget Office estimated that government spending and the deficit would grow steadily from 2012 through 2019, not only in dollars, but also as a percent of GDP.

After “bottoming out” at $658 billion in 2012—a level more than 40 percent above the highest deficit under the presidency of George W. Bush— CBO projects the deficit to reach $1.2 trillion in 2019, or 6 percent of GDP.  By 2019 government spending would take up nearly a quarter of GDP, far higher than at the peak of Iraq war spending, and the highest, except 2009 and 2010, since World War II.

Mr. Obama’s stimulus plan and budget are not one-time investments followed by years of reduced spending.  Instead, they form a platform for spending growth that continues into the indefinite future.  The vast majority of this spending is not what a well-run business or the Internal Revenue Service would count as investment—plant, equipment, and other tangible assets. Rather, most of the Obama spending would be for services.

Although Mr. Obama wants to spend and borrow more, a failed UK government’s bond auction earlier this week showed that investors are not always ready to finance the debt. And there are limits to how high taxes can rise before slowing an already fragile economy.

Alternatively, is it possible for Mr. Obama to cut spending?  Menus of changes in spending and taxes provided by CBO since 1978 suggest the answer is yes.  The latest complete volume of Budget Options was issued in February 2007, and another is due out soon.  A volume of health care options to both increase and decrease spending was published in December 2008.

CBO lists billions in savings in 10-year increments.  If only politicians had the willpower to choose among them, the budget might well be balanced. Let me assure readers that if only economists were elected to Congress, the deficit would shrink soon enough.  Of course, the economists might not be reelected.  But politicians try to woo different interest groups by spending money, with the ultimate cost falling on generations of taxpayers.

Here are a few examples of savings calculated by CBO, all over 10-year periods.

• Social security benefits are now indexed for inflation using a formula based on wage levels rather than price levels.  Changing to a price index would result in a 10-year savings of $141 billion.  Gradually raising the standard retirement age, which will reach 67 in 2026, to allow for increased life expectancies would save another $86 billion.

• Changing Medicaid payments for acute care services into block grants to states, and indexing these payments for price increases and changes in population, would save $556 billion.

• CBO estimated that giving a voucher to purchase health insurance to every uninsured family within 200% of the poverty line—that’s below an income of $44,000 for a family of four—would cost $65 billion, a savings of $569 billion over the Obama plan, which calls for a down payment on a universal health insurance fund of $634 billion.  Double the generosity of the CBO voucher, and that’s still $500 billion less in spending than the president proposed.

• Although Mr. Obama last year proposed creating a public health plan for uninsured Americans that looked like the Federal Employees Health Benefits Program, CBO calculated that replacing the FEHB with a voucher program would save $70 billion.

Other savings proposed by CBO range from $105 billion over ten years from reducing Federal aid to highways, to $13 billion from selling some Tennessee Valley Authority Electric Power assets, to $11 billion to eliminate Federal grants for wastewater and drinking water infrastructure, to savings from defense and agriculture.  All agencies are included.

In the name of investment, President Obama’s budget would increase the deficit by $4.8 trillion over the next decade.

He could serve us taxpayers better by carefully examining each line of spending and cutting the waste, as he promised us he would do during the campaign.

Click here to read a related opinion column, “To Pay for Vital Programs, Congress Must Make Tough Choices,” by Deborah Weinstein of the Coalition on Human Needs.