Word is our pro-free-market brethren at the Heritage Foundation will release a new study on the fiscal impact of immigration reform in time for the congressional debate. It will be an update to a 2007 study that played a key role in derailing immigration reform then.

While the 2007 study was influential, it was fatally flawed, as I detail here. Hopefully Heritage’s updated version will correct for those criticisms and others, or else its analysis must be judged as lacking. 

The key flaw in Heritage’s 2007 study is its use of static fiscal scoring, rather than dynamic fiscal scoring, to evaluate that year’s immigration reform bill. “Scoring” a bill means predicting its impact on the U.S. budget in the future by estimating how it will affect future spending and tax revenue. A statically scored prediction assumes the bill will not affect the rest of the economy – which is highly unrealistic. 

A dynamically scored prediction, on the other hand, assumes that the bill will affect the rest of the economy, also changing tax revenue and government spending. Since increased immigration will increase the size of the economy, it will also increase tax revenue and some government spending. It’s important to factor those increases into any scoring model. Heritage’s 2007 study did not. 

The Congressional Budget Office (CBO) has adopted dynamic scoring for the coming immigration bill for reasons they explain here. The best justification for using dynamic scoring comes from Ed Feulner, who only recently stepped down as head of the Heritage Foundation and retains an emeritus title there. He writes:

Indeed, some lawmakers are fighting a proposal that would require them to take real-world considerations into account. They prefer to keep ‘scoring’ each bill-estimating how it will affect the economy and the amount of taxes they take in-with the ‘static’ model used by the store owner’s friend. If, say, a 5 percent tax on something brings in $50 million, they assume a 10 percent tax will fetch $100 million.

Not surprisingly, this approach has caused lawmakers to come up with some wildly inaccurate assumptions over the years.

Feulner goes on to explain how numerous tax cuts actually produced more revenue despite static models predicting the opposite.

Can you imagine any private business acting this way? Of course not. That’s why it’s time Congress switched to a method many business owners use-‘dynamic scoring’-which assumes that if you change the way you do business, customers will react in relatively predictable ways. Before they’ve hiked a price or changed a product, most companies have a pretty good idea of how many customers they’ll gain or lose.

Would ‘dynamic scoring’ always give lawmakers perfect estimates? No, but it surely would get much closer to the true cost than “static scoring” does. If doubts remain, put it to the test: Have Congress produce ‘static’ and ‘dynamic’ scores of various pieces of legislation for a few years and see which prove more accurate.

Using dynamic scoring to predict the effects of legislation is as relevant for immigration reform as it is for tax cuts. Allowing more legal immigration, and legalizing those here, will increase the number of workers and entrepreneurs in the U.S., necessarily growing the size of the economy. Capital accumulation and land improvements then catch up to the population growth. Those effects boost GDP, ergo tax revenue.

A common retort to the above is that many new immigrants will be low-skilled and, because of our progressive tax system, will not pay much in taxes. Expanding the supply of laborers and entrepreneurs through immigration would increase profits, expand the production possibilities frontier, increase the return to capital, and raise incomes for most American workers who are complements. Thus, even if most future immigrants are low-skilled—and they likely will be—their positive effect on the economy would increase tax revenues indirectly.

Heritage’s former president supports dynamic scoring, and now so does the CBO, at least for immigration. For the sake of an honest debate, I sure hope Heritage’s upcoming report does too.

An interesting report from the Washington Post:

Dutschke went into hiding on Thursday to escape the media attention. The FBI and local law enforcement officials spent five hours hunting for him before his attorney revealed her client’s location.

Evidently, the attorney directed the police to her client’s home address.

James Everett Dutschke, 41, was taken into custody about 12:50 a.m. Saturday at his home in Tupelo, Miss., the FBI said.

According to the story, that’s the very same house the police searched earlier in the week. Note also the number of law enforcement agencies that were on the case:

Among the government agencies that joined the FBI in the investigation were the Secret Service, the U.S. Postal Inspection Service, the Capitol Police, the counterterrorism section of the Justice Department’s national security division, the Mississippi National Guard, the Mississippi Office of Homeland Security and multiple county and city law enforcement units.

And they needed the attorney’s help to discover Dutschke at his home? As Glenn Reynolds likes to say (in jest), “we’re in the very best hands.”

Policymakers might just want to take stuff like this into account when the agencies say their budgets can’t be cut and that their surveillance powers must be “enhanced.”

Paul Krugman recently tried to declare victory for Keynesian economics over so-called austerity, but all he really accomplished was to show that tax-financed government spending is bad for prosperity.

More specifically, he presented a decent case against the European-IMF version of “austerity,” which has produced big tax increases.

But what happens if nations adopt the libertarian approach, which means “austerity” is imposed on the government, rather than on taxpayers?

In the past, Krugman has also tried to argue that European nations have erred by cutting spending, but this has led to some embarrassing mistakes.

• He asserted that “British growth has stalled” because of “spending cuts,” but he overlooked the elementary fact that government spending in the U.K. was growing twice as fast as inflation.
• And in the case of Estonia, where there actually were genuine spending cuts, he wanted people to somehow think that those cuts in 2009 were responsible for an economic downturn that occurred in 2008.

Now we have some additional evidence about the absence of spending austerity in Europe. A leading public finance economist from Ireland, Constantin Gurdgiev, reviewed the IMF data and had a hard time finding any spending cuts:

…in celebration of that great [May 1] socialist holiday, “In Spain, Portugal, Greece, Italy and France tens of thousands of people took to the streets to demand jobs and an end to years of belt-tightening”. Except, no one really asked them what did the mean by ‘belt-tightening’. …let’s check out expenditure side of Europe’s ‘savage austerity’ story… The picture hardly shows much of any ‘savage cuts’ anywhere in sight.

As seen in his chart, Constantin compared government spending burdens in 2012 to the average for the pre-recession period, thus allowing an accurate assessment of what’s happened to the size of the public sector over a multi-year period.

Here are some of his conclusions from reviewing the data:

Of the three countries that experienced reductions in Government spending as % of GDP compared to the pre-crisis period, Germany posted a decline of 1.26 percentage points (from 46.261% of GDP average for 2003–2007 period to 45.005% for 2012), Malta posted a reduction of just 0.349 ppt and Sweden posted a reduction of 1.37 ppt.

No peripheral country — where protests are the loudest — or France et al have posted a reduction. In France, Government spending rose 3.44 ppt on pre-crisis level as % of GDP, in Greece by 4.76 ppt, in Ireland by 7.74 ppt, in Italy by 2.773 ppt, in Portugal by 0.562 ppt, and in Spain by 8.0 ppt.

Average Government spending in the sample in the pre-crisis period run at 44.36% of GDP and in 2012 this number was 48.05% of GDP. In other words: it went up, not down.

…All in, there is no ‘savage austerity’ in spending levels or as % of GDP.

I’ll add a few additional observations.

Sweden and Germany are among the three nations that have reduced the burden of government spending as a share of GDP, and both of those nations are doing better than their European neighbors.

Switzerland isn’t an EU nation, so it’s not included in Constantin’s chart, but government spending as a share of economic output also has been reduced in that nation over the same period, and the Swiss economy also is doing comparatively well.

The moral of the story is that reducing the burden of government spending is the right recipe for sustainable and strong growth. Growth also is far more likely if lawmakers refrain from class-warfare tax policy and instead seek to collect revenue in ways that minimize the damage to prosperity.

Unfortunately, that’s not happening in Europe…and it’s not happening in the United States.

A few countries are moving in the right direction, such as Canada, but with still a long way to travel.

The best role models are still Hong Kong and Singapore, and it’s no coincidence that those two jurisdictions regularly dominate the top two spots in the Economic Freedom of the World rankings.

My recent observations on Hoover’s Defining Ideas about the relationship of civil liberties to national security have drawn a stern response from Cato’s own Jim Harper, whose central claim is that I have sounded “needless anti-privacy notes” in my attack on the privacy protective policies that have been championed by Massachusetts Republican State Senator Robert Hedlund, whom I criticized for being too squeamish on aggressive and targeted government action to counter the threats that became all too visible on April 15, 2013. 

Harper’s initial parry is to stress a proposition that no one should care to deny, namely, that the Fourth Amendment imposes a bar against unreasonable searches and seizures, which in turn requires an examination of the purported relationship between the restriction that government seeks to impose and the evil that it seeks to defend against. But in his choice of example and articulation of principle, Harper is guilty of grievous non sequiturs that add needless confusion to a problem that is already difficult enough to handle.

To examine the relationship between privacy and security, it is always a mistake to start with an example that the author describes as “an illustration ad absurdum,” which is just what Harper does when he bravely denounces a rule that allows for “100% crotch checks at street corners in major cities.” The simple response is that this kind of action is under current law regarded as per se illegal even in connection with the so-called Terry stopswhich allow a police officer “to stop and frisk” individual on the public street if he or she has “reasonable suspicion” to think that the targeted person has engaged in illegal activity. 

That example has absolutely nothing to do with the design of a workable surveillance system. It also falsely calibrates the relevant choices by dismissing the current cries for increased surveillance as a “closer” question, when the two situations are worlds apart. The Fourth Amendment treatment of unreasonable searches and seizures rests on a critical distinction between investigation of particular suspects and the stopping of dangers from unknown quarters. There is a lot more information in the first case, so that a dragnet search makes no sense, which is why particularized evidence is required. But general surveillance at unknown targets has to spread its net far wider. It is both less intrusive and more comprehensive, and it can and does work. It was painfully clear from the pattern of events in Boston that the private surveillance cameras that were trained on the Boston Marathon provided indispensable information toward identifying and apprehending the Tsarnaev brothers. What makes their use unreasonable, when there is not the slightest evidence that the information so acquired was used for improper purposes unrelated to the search?

It may be “worth discussing,” as Harper suggests, whether the use of surveillance will help deter some crimes and stop others. But, if so, the only useful discussion is one that asks the means-ends question of how, in light of cost and privacy concerns, one can construct the best cost-effective surveillance system available, which can then be coordinated with the activities of police officers and volunteers on the ground, especially at any public event that presents a soft target.

But to dismiss these efforts on the unsupported speculation that “the possibility of apprehension seems not have occurred to the Tsarnaev brothers” can only be described as blinding error, especially in light of their frantic efforts to escape capture so they could strike again. Nor does it make the slightest sense to tie general surveillance policy to some dubious account of the psychological make-up of two individuals. It is far wiser to develop policies that improve the ability to track and identify dangerous suspects. Of course it is possible to construct a “surveillance architecture” that so dense as to be useless. But once again, the sensible case for beefing up Boston’s public surveillance does not require that system designers leap from one indispensable extreme to another. The real question is how to identify the comprehensive policies that do make sense.

Harper is equally off target about the potential gains from racial or ethnic profiling. No one accepts the extreme proposition that all terrorists come from the same ethnic stock or practice the same religion. But that observation offers absolutely no reason to ignore valuable information that could help tweak the design of surveillance systems of searches. The question here is not whether sensible protocols and profiles can narrow the search down to one-fifth the world’s population, most of which does not live in Boston anyhow. It is the question of whether one can winnow the list of potential suspects from 100 to 20 people, which, if done reliably, gives law enforcement a huge leg up in conducting its investigations.

In sum, Harper would have a stronger case if he had tried to comment constructively on serious proposals that are put forward. But to take an ill-advised a priori position that does nothing to advance either the protection of human life and human property, both private and public, is inconsistent with any sound libertarian position. Remember that libertarians like myself, and I hope Harper, regard the protection of both as the primary function of the state. Harper’s careless and imprecise invocation of the Fourth Amendment cannot conceal this fundamental truth.

A lot of people are writing about the Oregon Health Insurance Experiment results, released yesterday, which found zero evidence that expanding Medicaid to the most vulnerable people targeted by ObamaCare’s Medicaid expansion improves their physical health. Here’s my take on the study and its implications. Megan McArdle, Shikha Dalmia, Avik Roy, and Peter Suderman are making solid contributions to the debate. Zeke Emanuel gets points for making an admission against interest (“It’s disappointing”). Points also to Jennifer Rubin for her take on what the OHIE says about ObamaCare’s Medicaid expansion: “If there had been a giant trial of a heart medication with lousy results we wouldn’t proceed in mass-marketing the drug; we might even take it off the shelves.” Not a bad idea. Ezra Klein and Evan Soltas call for more such experiments. Yes! Let’s have more randomized, controlled trials of the effects of Medicaid, on pre-ObamaCare populations, in big states like California, New York, Texas, Florida, and Illinois, where we can harnass even more statistical power. The only unethical thing would be to keep spending trillions on this program without knowing whether it’s even effective (much less cost-effective).

Others are making less-solid contributions. Here’s a question for them.

Since the OHIE shows that Medicaid makes no difference in the diagnosis or use of medication to treat high blood pressure or high cholesterol, and has no effect on blood-sugar levels despite increasing diabetes diagnoses and medication use, would you support eliminating Medicaid coverage for these screenings and medications?

If not, why not?

I often argue that we need to preserve tax competition and tax havens in order to limit the greed of the political class.

Without some sort of external constraint, they will over-tax and over-spend, creating the kind of downward economic spiral already happening in some European nations.

Speaking of which, new evidence from Europe bolsters my case.

Back in 2009, facing pressure from the big G‑20 nations, all of the world’s major low-tax jurisdictions — even Switzerland — acquiesced to the notion that human rights laws protecting financial privacy no longer would apply to foreign investors.

In other words, high-tax governments now have much greater ability to track — and tax — flight capital.

So how have they responded since that time? Well, look at this chart from the European Union’s new report on taxation trends. Tax rates have begun to increase, reversing a very positive trend (which began with the Reagan and Thatcher tax cuts, though this chart only shows data since 1995).

We can’t say, of course, that the increase in tax rates since 2009 is because tax competition was eroded. Just like we can’t say the reduction of tax rates in the preceding years was because of tax competition.

But we do know that simple economic theory tells us that monopolists are more likely to raise prices than firms in competitive markets. Likewise, governments are more likely to raise tax rates if they think taxpayers don’t have escape options.

And we also know that the proponents of higher tax rates, such as the statist bureaucrats at the Paris-based OECD, are also the biggest opponents of tax competition. The OECD even complained in one of its reports that tax competition “may hamper the application of progressive tax rates.”

Well, those international bureaucrats (who, by the way, get tax-free salaries) are getting their wish. Tax rates are increasing.

However, you can’t make an omelet without breaking a few eggs. As a past representative of Europe’s political elite once remarked, “let them eat cake.”

Marie Antoinette eventually may have regretted her choice of words, but Europe’s current politicians are probably more clever and have contingency plans. When the you-know-what hits the fan and Europe descends into social disarray and economic chaos, ordinary people will be the ones at risk.

Unfortunately, the United States is on the same path, as shown by these sobering charts from the Bank for International Settlements (and also as illustrated by these very funny Michael Ramirez and Bob Gorrell cartoons).

For more information on the important liberalizing impact of tax competition, here’s the video I narrated for the Center for Freedom and Prosperity.

But remember that restraining fiscal burdens is not the only reason to preserve tax competition and tax havens. There also are very important moral reasons to support low-tax jurisdictions.