ACE

Category: ACE Research

  • The Low-Income Housing Tax Credit: Expanding the U.S. Housing Stock

    The Low-Income Housing Tax Credit: Expanding the U.S. Housing Stock

    The Low-Income Housing Tax Credit

    The Low-Income Housing Tax Credit (LIHTC) is the primary supply-side subsidy for affordable development in the United States, financing approximately 90% of the nation’s affordable housing annually. To receive tax credits, a proposed development must dedicate at least either 20% of its apartments to people who earn less than 50% of the area median income (AMI) or 40% to people who earn less than 60% of AMI. To be affordable, rent for those apartments must be no more than 30% of the target income level. 

    Development Process

    While the LIHTC does aid developers in financing affordable projects, tax credits are not guaranteed. States allocate tax credits through a competitive process that varies by state, and most states have many more applications than available credits. On average, one project out of five may receive an allocation of tax credits. Even when LIHTC credits are granted, taxpayers claiming the tax credits are usually real estate investors, not developers, and the tax credits cannot be claimed until the real estate development is complete and operable. This makes affordable development through the LIHTC a multi-year process after acquiring land, planning development, and applying for funding.

    How Efficient is the LIHTC Program in Expanding the Housing Stock? 

    While the LIHTC is the United States’ largest and most successful mechanism of affordable construction, economists speculate about its efficiency in growing the nation’s housing stock. For instance, a 2002 study found a high rate of substitution between current housing stock and LIHTC units, meaning that the total stock of housing ultimately remains the same while new LIHTC units crowd out an equivalent quantity of unsubsidized housing. Another 2005 study concluded that subsidized housing could increase the average quality of housing available to low-income people but would not have a lasting effect on the quantity or price of housing available to them. This raises the question of the LIHTC’s efficiency—are tax credits awarded to projects that could proceed, and be successfully developed, without the aid of tax credit financing?

    When non-marginal projects, or projects that could be built without LIHTC funding, are constructed, developers retain most of the subsidy, rather than pass it on to tenants. Despite being more affordable than market value, developers and landlords are still inclined to charge the highest “affordable” prices they can, often at or close to the maximum permitted by the program. Unlike subsidized housing in other countries, rents are not tied to the individual household income of the tenant, but are leased only to eligible households with enough income to afford the rent. Because housing demand is so high, they have no problem filling their units with tenants who can afford their prices. The issue of crowding out leaves those who need rent levels below the maximum price without subsidized housing. 

    How Could the LIHTC be Improved?

    The LIHTC program should be altered to ensure that it effectively and efficiently expands the United States’ housing stock, which is the program’s established purpose. To do this, federal, state and local governments need to ensure there are enough subsidy funds available to meet the need. It is also important to consider the types of projects to which governments and Housing Finance Agencies allocate credit. Figure 1 below illustrates the impact LIHTC credits have on the quantity and price of the housing stock when LIHTC credits are widely available, granted to projects that could proceed without the LIHTC (listed as inframarginal projects), and when they are granted to marginal projects.

    In Case 1, when tax credits are widely available to all investors, there is a downward shift in the supply curve, increasing the aggregate housing stock from H0 to Ht and decreasing the aggregate price. In Case 1, developers can access as many LIHTC credits as they want, and the government can grant credits to every developer that applies. 

    In Case 2, LIHTC credits are only granted to inframarginal projects, or projects that crowd out other unsubsidized affordable projects. In this example, only the projects up to Ht receive tax credits, but the aggregate housing stock is unchanged at H0. Thus, the tax credit finances projects that would have been built even without the subsidy. 

    Case 3 shows the impact of marginal projects receiving credits. Marginal projects are projects that would not be developed without the tax credit. When the associated portion of the supply curve shifts, there is an addition to the housing stock from H0 to Ht. While the stock of housing up to H0 is unsubsidized, the additional stock of housing beyond H0 is subsidized. In this case, revenue loss from the LIHTC results in a net gain in the housing stock, and the subsidy is passed on to tenants as reduced rent.

    Of the three scenarios, Cases 1 and 3 are examples of how the LIHTC can be used to expand the housing stock. Ideally, Case 1 is the best option as there would be no competition between developers for credits, and all affordable projects that are proposed could be financed and built effectively. However, because LIHTC credits are not widely available, Case 3 illustrates how selecting marginal projects can still result in a net gain in housing stock. 

    To solve the issue of marginality and crowding out, the government must keep track of net gains and losses of its housing stock, especially for low-income units. A national affordable housing inventory system is a way for the Department of Housing and Urban Development to account for its housing stock and measure the efficiency of the LIHTC. Additionally, inventory should be kept on the number of households on rental housing waitlists to determine demand at a given time. 

    To measure the LIHTC’s efficiency and its impact on enabling affordable development, it must be determined whether credits are being granted to marginal projects or projects that could proceed without the program. If tax credits are awarded to marginal projects and these projects do not crowd out other affordable housing, then the LIHTC succeeds in solving the affordable-housing problem. Thus, the program’s effectiveness relies on the ability of state housing authorities to select marginal projects.

    Examining the applicants who fail to win credit awards may provide important insights to this. Do those who seek to build affordable housing still do so without tax credits? Do those who receive credits use them to make their units more affordable than they otherwise would be?

  • Introduction to the Death Penalty

    Introduction to the Death Penalty

    Individuals convicted of the death penalty are found guilty of capital crimes, most notably, murder, espionage, and treason. In the 1600s, the American colonies used the death penalty as a punishment for most serious crimes. By the 1800s, many began to oppose the death penalty because they felt that it was inhumane and unconstitutional. The 1972 U.S. Supreme Court Case Furman v. Georgia deemed the death penalty unconstitutional in it’s current state, and found that the legal process needed to be revised. This resulted in the emergence of the bifurcation procedure. The bifurcation procedure involves two trials. 

    1. The guilt phase: A jury decides an individual’s guilt or innocence.
    2. The penalty phase: Following the guilt phase, the jury receives additional information in the form of aggravating and mitigating circumstances that are meant to aid in deciding if the individual is deserving of death. Aggravating circumstances are situations or factors that increase the individual’s deservingness of death while mitigating circumstances are situations that decrease the individual’s deservingness of death.

    The death penalty is considered a state issue. 27 states use the death penalty and 23 states do not. The U.S. government has imposed moratorium in three death penalty states. This means that the individuals can still be sentenced to death but primarily only in the case of severe crimes, like murder.

    Source: ABC News

    In 2020, 18 countries implemented the death penalty, but most executions were concentrated in a few countries, namely China, Saudi Arabia, Iraq, and Iran. Saudi Arabia, Iraq, Iran, and Egypt made up about 88% of executions. 

    Arguments for the Death Penalty 

    1. Deterrence: Death is notably the harshest punishment practiced by the criminal justice system.  It is seen as a general deterrence because it prevents individuals from committing capital crimes. Ernest van den Haag, a professor at Jurisprudence at Fordham University, studied the topic of deterrence in terms of the death penalty and believes that since death is the most feared event for most people, it must have some effect in deterring crime. Furthermore, the death penalty specfically deters any future crime because it takes away the criminal’s ability to commit crimes after they are dead.
    2. Retribution: Those who support the death penalty from a retributionist perspective do so because they find that it serves the purpose of justice. If the death penalty did not exist as a punishment to those who commit capital offenses, they believe society would succumb to crime and violence. This perspective also supports Hammurabi’s code, or “an eye for an eye,” meaning that a crime will be equally matched with a punishment in which the criminal suffers the same pain as the victim. If an individual commits murder, he or she shall be put to death as punishment.

    Arguments Against the Death Penalty

    1. Rebuttal to retribution: The legal system cannot rely on emotional impulses for solving problems because it is not a sufficient justification, especially for such a serious form of punishment. The criminal justice system should be held to higher standards that reflect a prioritization of life. Reducing the reasoning of taking an individual’s life to an emotional aspect is dehumanizing and it acts as a reflection of the entire justice system, and not just a focus on capital crimes punishment. 
    2. Innocence and wrongful convictions: There is strong evidence that proves some individuals have been wrongfully executed. According to the Execution Database, 185 people have been absolved from guilt and released from prison. Although some of the absolutions may have resulted from judicial and investigative errors, this number demonstrates the possibilty for error within the death penalty procedures.
    3. Arbitrariness and Discrimination: Defendants of disadvantaged backgrounds are more likely to receive the death penalty than other groups. Black individuals convicted of a capital crime are 4.3 times more likely to receive the death penalty than white people. Since 1976, 158 black individuals have been executed by the death penalty for the murder of a white victim while 11 white people were executed for the murder of a black victim. The death penalty does not execute the worst offenders, rather it executes those who have the poorest defense. Those who do not have the resources to afford a lawyer are assigned a public defense lawyer, who is usually juggling multiple cases and unable to strongly focus on a single case.  
    4. Arbitrariness and Discrimination: Defendants of disadvantaged backgrounds are more likely to receive the death penalty than other groups. Black individuals convicted of a capital crime are 4.3 times more likely to receive the death penalty than white people. Since 1976, 158 black individuals have been executed by the death penalty for the murder of a white victim while 11 white people were executed for the murder of a black victim. The death penalty does not execute tthe worst offenders, rather it executes those who have the poorest defense. Those who do not have the resources to afford a lawyer are assigned a public defense lawyer, who is usually juggling multiple cases and unable to strongly focus on a single one single case. 

    Source: Death Penalty Information Center
  • Drilling in the Arctic National Wildlife Refuge

    Drilling in the Arctic National Wildlife Refuge

    Introduction

    On June 1, 2021, the Biden administration announced suspensions on drilling in the Arctic National Wildlife Refuge (ANWR) which covers 19.64 million acres of land and water in northeast Alaska. This decision counteracts the Tax Cuts and Jobs Act of 2017, requiring the Department of the Interior to issue two leases for drilling in ANWR over 10 years. Environmental groups and indigenous rights activists opposed the 2017 decision stating that oil drilling will harm the Gwich’in people that depend on the land as well as the Porcupine Caribou herd that annually give birth there. The Gwich’in call the land Iizhik Gwats’an Gwandaii Goodlit (The Sacred Place Where Life Begins). 

    These recent rollbacks concern the creation, history and legacy of public land use in the United States. The establishment of the ANWR and public lands across the United States arose from the conservation movement of the late nineteenth century featuring environmental leaders such as Gifford Pinchot, John Muir, and President Theodore Roosevelt. Understanding current dynamics in the ANWR and protected lands across America requires a historical investigation of the theories, visions, and oversights that prompted their creation. 

    Background

    In 1872, the United States government established the first national park, Yellowstone National Park, legitimizing the goals of the conservation movement, which aims to protect the land for recreation, tourism, and sustainable resource use. In the years that followed, the U.S. government created expanded areas allocated as “public lands”.

    Gifford Pinchot, a leader in the conservation movement and first Chief of the United States Forest Service under President Taft and President Theodore Roosevelt, introduced the notion of public lands as lands owned as a body politic. He believed in sustainable resource use in nature parks to ensure that future generations could benefit from the land. His aim was “the greatest good for the greatest number in the long run.”

    President Theodore Roosevelt, a colleague and friend of Pinchot’s, ascribed to his views of sustainable use. In a speech titled “Conservation as a National Duty,” he said, “One distinguishing characteristic of really civilized men is foresight, we have to as a nation, exercise foresight for this nation in the future; and if we do not exercise that foresight, dark will be the future.” As a result, President Theodore Roosevelt founded the National Wildlife Refuge System in 1903 under the jurisdiction of the U.S. Fish and Wildlife Service. The National Wildlife Refuge System is “dedicated to conserving America’s rich fish and wildlife heritage.” In 1980, President Carter designated ANWR as part of the National Wildlife Refuge System under the Alaska National Interest Lands Conservation Act. 

    President Theodore Roosevelt also confided in John Muir, a staunch preservationist. He believed that nature should remain untouched. Unlike Pinchot and Roosevelt, Muir worked outside of the government as a writer and advocate for protected lands, eventually co-founding the Sierra Club which continues to fight for a healthy planet today. Muir saw God in the natural world, calling it “sacred and divine” and wanted “to remove it from the corrupting hands of human society.” Muir’s musings on nature and preservation have influenced many Americans. Together with Pinchot and Muir, these three environmental advocates established the dominant view on nature and public lands in America. At the same time, the push for creating protected federal lands displaced and excluded millions of Native Americans. 

    National Parks as A History of Colonialism

    William Cronon, whose writing is nearly ubiquitous in Environmental Studies, writes in “The Trouble with the Wilderness” that Muir’s vision of nature as Godly and pure effectively erases the history of indigenous tribes who worked and transformed the land long before the US began protecting it. These lands were far from untouched, and indigenous tribes were integral to the health of the land. Yet, from the mid-1800s to 1914, when Yosemite became a national park, there was a concerted effort across nature parks in America to expel thousands of indigenous people from their land, destroying their livelihoods and culture. Amid this context, President Theodore Roosevelt established the National Wildlife Refuge System. 

    The events in Yosemite National Park were hardly unique. In Alaska, the Gwich’in people have called their land home since time immemorial. Though not a specific date, they held that land long before the Russians, who in the eighteenth century colonized Alaska and called it their own. In 1867, the United States bought Alaska for 7.2 million dollars. For nearly a hundred years, Alaska existed as a US territory. 

    With colonization came violence and disease. In the mid-1800s, commercial whale hunters from New England emptied the Bering Strait and Beaufort Sea of bowhead whales, depleting the Indigenous people’s source of food. Then, the Alaskan gold rush brought people who contaminated and rerouted streams, making them unable to sustain the local salmon populations on which the Indigenous people depended. With more people came diseases that wiped out nearly two-thirds of Alaska’s Indigenous population. By the time Alaska became a state in 1959, Indigenous people were no longer the majority. 

    Beginning in the 1930s, many Indigenous children were sent to schools geared to assimilate them to American culture. School officials took their clothing, chopped the boys’ hair, and forbade their language. When these Indigenous children returned home, they did not know how to hunt, fish, gather, or speak their native language. 

    Alaska Natives and Oil Multinationals

    In 1968, oil was discovered at Prudhoe Bay, just west of ANWR. It remains America’s largest oil field. This discovery brought relief to Alaska’s failing economy and brought the need for the construction of the Trans-Alaska Pipeline. In order to begin building, the state of Alaska needed to know what land belonged to who. The problem was that there were little to no boundaries allocating land to indigenous populations.

    Under the pressure to move quickly, the Senate and the US House of Representatives agreed on the Alaska Native Claims Settlement Act (ANCSA), which President Richard Nixon signed in 1971. Indigenous tribes received 44 million acres of land, far less than many felt was deserved, and $963 million in settlement payouts for the lost land. At the time it was the largest native land settlement, but it was exploitative and mainly benefitted corporations in the area.

    The Act stipulated that the 44 million acres be allocated not to the tribes themselves, but to corporations of which tribe members became shareholders. Indigenous tribes with little business training and minimal English language skills had to find a way to successfully manage a company. 

    ANCSA stated that Alaska natives had to abide by federal and state regulations regarding hunting, fishing, and land use. This completely upended their way of life. Since the discovery of oil at Prudhoe Bay, Alaska has relied on oil profits to pay for social programs, eliminate income and sales taxes, employ citizens, and fund the Alaska Permanent Fund that doles out annual payments to permanent citizens. 

  • Antiquities Act: History and Current Implications

    Antiquities Act: History and Current Implications

    The American Antiquities Act, passed in 1906, marks the country’s first legislative effort to protect cultural resources. In recent years, the act has received renewed attention due to the controversy surrounding Bears Ears National Monument. 

    Motivation for the Antiquities Act

    The Antiquities Act was motivated by a growing concern over the looting and destruction of archaeological sites in addition to an emerging national interest in Native American cultures. During the 19th century, news of the discovery of prehistoric ruins in western states led to the mass looting and destruction of these archeological sites as amateurs hoped to make a profit off of selling artifacts. By the 1880s, the American public became aware of and concerned over the ongoing vandalism of the country’s indigenous history. As no existing legislation existed to protect historical sites, these concerns led to the drafting and passing of the American Antiquities Act in 1906. 

    What is the Antiquities Act

    The purpose of the Antiquities Act is to provide the immediate protection of cultural resources. Since congressional actions generally require a slower process then executive actions, powers under the Antiquities Act are granted to the president. 

    The Antiquities Act consists of three relevant statutes: 

    1. It is illegal to destroy or remove any ruin, monument, or object of antiquity from public lands.  
    2. The president can create protected historical or scientific sites called national monuments. According to section two, a national monument can be declared on public lands containing “historic landmarks, historic or prehistoric structures, and other objects of historic or scientific interests.” Surrounding land can be included in the national monument, as long as the parcels reserved are the “smallest area compatible with the proper care and management of the objects to be protected.” When declaring a national monument, the president is allowed to restrict/prohibit any uses of the land that would harm the protected objects. 
    3. Permits are allowed to be granted for the examination and/or removal of ruins and objects from national monuments, as long as such actions are undertaken for the benefit of museums, science, or education. 

    Antiquities Act in Action

    Since its enactment in 1906, 17 presidents across multiple political parties have used the act to designate 158 national monuments, as well as to modify existing national monuments over 90 times. 

    The act’s vague nature has also left room for individual interpretations, and in practice, the act has become an important environmental conservation tool, as presidents have used the act to protect naturally occurring objects and large swaths of land. Such monument proclamations have resulted in controversies and litigation, but courts have largely supported this use of the Antiquities Act by upholding a very broad interpretation of the president’s powers under the act.

    For example, in 1908, President Theodore Roosevelt declared the Grand Canyon a national monument, which congress later transformed into a national park containing over 800,000 acres of protected land. A local mining company filed suit, claiming that canyons were not objects intended to be protected by the Antiquities Act. The courts rejected this argument, stating that the Grand Canyon was an object of “unusual scientific interest” and therefore fell under the Antiquities Act. Subsequent court cases have broadened the interpretation of the Antiquities Act to allow bodies of water, in addition to tracks of land, to be included in national monuments. 

    While the act has been broadly interpreted in the past, Congress has since amended the act to reduce the president’s powers, both in 1943 and throughout the 1970s. In 1943, President Roosevelt established the Jackson Hole National Monument despite vocal opposition from the state of Wyoming. Soon after, Congress passed legislation prohibiting the president from establishing further monuments in the state of Wyoming. In the 1970’s, President Carter established a many monuments in Alaska totaling 56 million acres. Opposition from many groups in the state led Congress to pass legislation prohibiting the president from reserving more than 5,000 acres of land in Alaska without the approval of both the House and the Senate. 

    As the three branches of government have interacted to modify and shape the meaning of the Antiquities Act, the applications and powers associated with it have changed as well. 

    The Current Issue: Bears Ears

    Recently, the Antiquities Act has received renewed attention over former President Trump’s controversial reduction of Bears Ears National Monument. President Trump’s proclamation stated that the protected objects were not in danger and that the lands reserved exceeded the smallest area possible, which would violate section two of the act. The plaintiffs of two court cases argue that the Antiquities Act does not allow presidents to reduce the size of existing monuments. While presidents have reduced monuments in the past, the claim has never before been brought to court, so it is unknown if the courts will uphold this action. Subsequent briefs will go into details on the specifics of Bears Ears National Monument and the current controversy. 

  • China’s Peaceful Development?

    China’s Peaceful Development?

    China’s official foreign policy strategy is known as Peaceful Development, and it is focused on global, harmonious growth. The purpose of the Peaceful Development strategy is to counter the Western notion that China’s “rise” is inherently dangerous while linking its development with that of other nations. 

    It is guided by five main principles:

    1. Peaceful development: China will not initiate wars or act in a predatory manner. 
    2. Cooperative development: China will treat each nation as an equal member of the international community with mutual trust and mutual development.
    3. Common development: China will assist world development while developing itself, and it will not act with selfish motives and/or actions.
    4. Win-win development: China will broaden common interests among nations.
    5. Mutual respect for sovereignty and territorial integrity: China will not involve itself in the domestic matters of other countries.  

    The principles of peaceful development are rooted in Confucianism, a philosophical outlook and attitude with large influence over the Chinese people. Confucianism’s main values are benevolence, trustfulness, equality, and forbearance, and it holds that the cultivation of these traits begins in the individual and then expands into society. For this reason, China’s desire to create a peaceful, stable international order is an extension of Confucian ideals of benevolence. The Confucian roots can be found in Peaceful Development’s Chinese name, where peace is known as 和平 (heping), literally translating to harmony and peace. The literal meaning is contrary to Western notions of peace, where it is simply the absence of war without mention of harmonious habitation. China’s understanding of peace is one of both harmony and benevolence that advances a narrative of non-aggression in the past and future. 

    However, China has not always acted in accordance with the peaceful development principles. Chinese troops engage in skirmishes along the Indo-China border, and China has acted aggressively in the South China Sea by ignoring international law (UNCLOS) over disputed islands, building military installations, and threatening foreign fishermen. The Belt and Road Initiative was officially created to assist developing nations by providing loans for infrastructure, but some countries report concerns over unsustainable loan debt and predatory lending. Apart from military aggressiveness, contradictions to benevolence are also found in China’s economic and cultural interactions with other countries. While its Belt and Road Initiative (BRI) was created to assist developing nations by providing loans for infrastructure, there is fear of unsustainable loan debt and predatory lending. Government-run Confucian Institutes have been established to promote Chinese culture and language internationally, but they have become controversial due to curriculum control from the Chinese state. 

    The contradictions found in Chinese foreign policy lie in the contrast between the international system China must survive in and its national interests. With a liberal international order in opposition to authoritarianism, China must present itself as a responsible power if it wishes to interact with the global community. Yet, China must also be cognizant of its domestic security that is based on sovereignty and territorial integrity, leading to perceived territorial, economic, and cultural aggressiveness.

  • Understanding Unemployment and Business Cycles

    Understanding Unemployment and Business Cycles

    The business cycle is the fluctuation of total economic activity over time. Recessions occur when total economic output, measured by Gross Domestic Product (GDP), grows at a negative rate for at least two quarters in a row. These downturns occur after the economy reaches its peak. Once GDP growth becomes positive again, the economy rebounds from a trough and begins expansion. The National Bureau of Economic Research (NBER) Dating Committee is the most accepted resource for dating recessions.


    Unemployment moves through a cycle within expansions as well. After the economy adds jobs consistently during the beginning stages of an expansion, it approaches full employment. Once full employment is reached, real wages tend to increase. Real wage growth typically ends in two scenarios: when inflation reduces workers’ purchasing power, or when the economy hits its peak, starting the business cycle once more.

    We can visualize how unemployment changes with GDP growth over time in Figures 1 & 2.

    Chart, histogram Description automatically generated
    Figure 1
    Chart Description automatically generated
    Figure 2

    Source for both Figure 1 & 2: Federal Reserve Bank of St. Louis.

    Dips in GDP growth correspond with higher unemployment, and unemployment tends to be at its lowest at the end of an expansion period. Macroeconomists term this relationship Okun’s Law after the American economist Arthur Okun who first observed this relationship. This relationship has held up empirically since it was first proposed in 1962. Figure 3 demonstrates this relationship’s consistency.

    Chart, scatter chart Description automatically generated
    Figure 3

    Source: Federal Reserve Bank of St. Louis.


    The nature of the business cycle has not remained constant in the long term. When the United States economy was consistently growing at upwards of 3% annually, the economy went through the business cycle in shorter, more volatile intervals. However, after a recession in the early 1980s, the business cycle became less acute and more predictable, with expansions lasting longer than in previous economic eras. This dynamic is termed the Great Moderation, as economic growth also moderated with the business cycle. In fact, the two longest expansions in United States history have occurred within the last 20 years, even though year-over-year growth decreased relative to pre 1980s levels. The lengthening of expansions becomes clear when we visualize each expansion in Figure 3.

    image2.jpg
    Figure 4

    Source: NBER Dating Committee.

    Reflection Questions:

    • How have business cycles affected me and my community in the past?
    • If we are currently at the beginning of an expansion, what type of macroeconomic trends should I expect?
    • Which is preferable: longer expansions with smaller year-to-year growth, or shorter expansions with higher growth, more similar to pre-Great Moderation business cycles?
    • How does the business cycle affect the way I vote?
  • History as Destiny: Chinese Identity

    History as Destiny: Chinese Identity

    China’s current foreign policy is largely influenced by its history with the tributary system that was in effect from the Han dynasty in 202 BC to the 19th century. In this system, neighboring states paid tribute by bringing native products and luxury items to the Chinese emperor in exchange for economic and security benefits from China. Part of the system involved the “kow-tow”, where heads of state bowed to the Chinese emperor to acknowledge China’s cultural sovereignty over their own. The Sino-centric system was based on China’s name as the Middle Kingdom, 中国 (zhongguo), or everything between heaven and earth. This meant that China’s prestige was rooted in its view of itself as the center of civilization ruled by a leader in possession of a “Mandate of Heaven” to govern the nation and its tributaries. 

    Today, while the tributary system is not in effect, the Chinese government views wielding influence on the global stage as a natural continuation of the “Mandate of Heaven”. In 2012, President Xi Jinping set forth the “China Dream” which aimed to reclaim China’s previous glory. This includes restoring Chinese prominence in Asia, regaining control over territories (Taiwan, Hong Kong, Tibet, Xinjiang), and gaining respect from global powers. President Xi Jinping is currently making the China Dream a reality by strengthening China’s presence in Southeast Asia with ASEAN, increasing government control over Hong Kong, and broadening China’s international reach through health diplomacy during the COVID-19 pandemic. Bearing in mind China’s previous role in Asia, in the context of the China Dream, it sees its destiny as a return to the prestige of its tributary days. 

    A return to prominence is also associated with the Century of Humiliation, a period from 1839-1949 where foreign incursions led to an erosion of Chinese sovereignty and prestige. China points to the First Opium War in 1839 as the beginning of their ‘humiliation’, where it fought Great Britain to try to end illegal opium imports into China and address a trade imbalance between the two nations. The war resulted in a British victory, and Britain asked for Hong Kong, the opening of five treaty ports for international trade, and most favored nation status. To the Chinese, a consequence of the war was a series of unequal treaties that continued with the Second Opium War, where China was further ‘humiliated’ by Great Britain, France, and the United States. This war resulted in the burning of the Summer Palace, which had great cultural significance, by British troops. 

    According to the current Chinese narrative, it wasn’t until 1949 under Mao Zedong’s leadership of the Chinese Communist Party (CCP) that the ‘humiliation’ came to an end. Since then, overcoming the Century of Humiliation has provided the CCP with domestic legitimacy and the impetus to return to tributary-like days. Due to the CCP’s significant role in ending ‘humiliation’, the party is seen as the only entity which can steward the country to the “China Dream”. The CCP is determined to avoid further subjugation at the hands of foreign powers, and interprets many decisions by Western actors as attempts to hold China back from its proper place on the global stage.

  • Perspectives on the Legalization of Marijuana

    Perspectives on the Legalization of Marijuana

    History of Drug-Related Offenses Enforcement

    The federal government of the United States began controlling the use or sale of illicit substances in 1914. At that time, bans were based on the connections a drug had with immigrant or minority communities. In the 1930s, the U.S. began to impose criminal penalties for narcotics, particularly cocaine. Marijuana, heavily and negatively associated with Mexican immigrants, became illegal under federal law with the passage of the Marijuana Tax Act in 1937. In the 1970s, the U.S. government cracked down on marijuana because of its association with the Vietnam War protests and the anti-establishment “counterculture.” Nixon declared a “War on Drugs” in 1971 and illicit substance criminalization peaked in the 1990s. Recently, state governments have begun to decriminalize marijuana. While the federal government has yet to change its official stance, it has also not taken any steps to intervene with state decisions.

    Statistical Data

    Throughout the era of marijuana criminalization, poor and minority communities have faced the most stringent policing, despite similar rates of drug use across all groups. Black individuals were over three times as likely as white individuals to be arrested for marijuana offenses. In states that have decriminalized marijuana use, minority groups are disproportionately charged with the offenses that remain illegal (such as unlicensed selling or underage use).

    According to a 2021 Pew Research Center survey, 60% of American adults believe that marijuana should be legal for both medical and recreational use, and an additional 31% say it should be legal only for medical purposes. Support varies by race, age, and political affiliation. Young people, political moderates, and liberals are more supportive of marijuana legalization, while older people, Asians, and conservatives tend to express more opposition.

    Arguments for Legalization of Marijuana

    Advocates for the legalization and decriminalization of marijuana often point to how such changes would ease the strain on the U.S. criminal justice system and reduce incarceration rates by freeing those who have been incarcerated for drug-related offences, a majority of whom belong to poor and/or minority groups. With many American prisons overcrowded, advocates are calling for a solution that would decarcerate nonviolent offenders and reduce socioeconomic disparities between races caused by the United States’ history of targeting Black and Brown communities with drug-related arrests. 

    In addition, pro-legalization activists point to the high costs and low rewards of enforcing marijuana bans. Even as a growing number of states have turned to legalization or decriminalization, FBI data shows that 40% of U.S. drug arrests in 2018 were for marijuana-related offenses, with 92% of those just for possession. According to studies of youth in the U.S. and Australia, prohibition does not deter people from using marijuana. In a 2019 Gallup poll, 93% of supporters of legalization agreed that law enforcement budgets and personnel could be better utilized in response to violent offenses rather than victimless crimes.

    Furthermore, pro-legalization forces argue that the legalization of marijuana would deter drug syndicates who have benefited from secrecy and shadows. When drugs like marijuana are prohibited, producers and dealers can charge more and settle disputes with violence, knowing that their consumers cannot turn to law enforcement for help. Legalizing marijuana would allow consumers to charge bad actors in the criminal justice system without fear of incarceration. It would also allow a legal marketplace to grow, which is regulated for safety.

    Legalizing marijuana also allows for the taxing the sale of marijuana. According to the Urban Institute, Colorado and Washington (some of the earliest states to legalize) now receive hundreds of millions of dollars in tax revenue annually from marijuana sales equating to almost 1% of their annual revenue. In 2020, California raised almost a billion dollars from marijuana taxes.

    Arguments Against Legalization of Marijuana

    Many detractors are not convinced that legalizing marijuana would be beneficial—for American society or the criminal justice system. Anti-legalization forces strongly believe that legalization of marijuana would not alleviate stress on law enforcement resources, but rather open up new avenues of danger. According to a 2019 Gallup poll, 91% of legalization’s opponents are concerned about an increase in car accidents due to driver intoxication. This possibility is likely to put a strain on law enforcement officers, courts, and jails, as well as reduce public safety. Opponents believe  marijuana use leads to the use of stronger, often illegal drugs, which remains a criminal offense. In addition, opponents say legalization comes with its own set of regulations and criminal offenses. They point out that states and cities would have to pay to train officers to identify violations and then provide funding to actually enforce the new rules if marijuana-related crime is to be legalized. Opponents also disagree with activists with respect to impact on drug syndicates, arguing that legalization would merely open up a new black market.

    It seems likely that states will continue to legalize and decriminalize marijuana. Nineteen states have already passed laws that legalize and regulate the cannabis industry, four of which were enacted in 2021. In addition, possession of marijuana has been legalized or decriminalized in thirty-two states and in Washington, D.C. 

    Image copyright DISA, June 2021

  • Perspectives on the American Rescue Plan

    Perspectives on the American Rescue Plan

    The American Rescue Plan Act of 2021, or American Rescue Plan, is a COVID-19 stimulus bill consisting of a package of roughly $1 trillion towards economic recovery and assistance in response to the Coronavirus Pandemic. The American Rescue Plan, or ARP, was signed into law by President Biden on March 11, 2021 as an extension of the previous stimulus package. The passing of the ARP comes a year after the Coronavirus Aid, Relief, and Economic Security Act, or the CARES Act, which was signed into law by President Trump on March 27, 2020. 

    Components of the ARP

    The ARP contains many extensions of provided benefits under the CARES Act. One of the prominent extensions included in the ARP is the Pandemic Unemployment Assistance, or the PUA, which is an unemployment insurance program that covers unemployment benefits for qualifying citizens. Under the CARES Act, the PUA was scheduled to terminate in December of 2020 after providing 39 weeks of benefits. This timeline has been extended to 79 weeks under the ARP, providing benefits through September 6, 2021. However, the ARP only gives states the option to extend unemployment benefits, since the power to give out unemployment benefits rests with individual states.

    The ARP also provides pandemic relief for state and local governments through “$219.8 billion, available through December 31, 2024, for states, territories, and tribal governments to mitigate the financial consequences of COVID-19.” This funding is directed to be used as pandemic relief, such as assistance for households, small businesses, nonprofits, or commercial industries; increasing employee wages or providing grants to employers; aiding to resolve the reduction in state revenue, territories or tribal governments; and investing in infrastructure.

    The bill also provides relief via tax cut: for people who claim the extended unemployment benefits, up to $10,200 will be waived from their federal taxes. This component of the law will have the largest effect on the deficit according to the Congressional Budget Office. 

    Critiques of the ARP

    Many argued the ARP was unnecessary considering unemployment rates showed a decreasing trend months before the ARP was passed (seen in Figure 1 and Figure 2). National and state unemployment rates were increased by the consequences of COVID-19. However, these trends shifted after the first stimulus packages from the CARES Act came into effect, causing a steady decrease in national and state unemployment rates through late 2020 and into 2021. The ARP was passed in March of 2021 while unemployment rates were decreasing throughout the United States. This led some economists and politicians to consider the plan excessive or unnecessary, as the ARP includes not only stimulus covering the repercussions of the health crisis, but also a multitude of unemployment programs.

    Source: Congressional Research Service

    The above graph displays the United States’ national unemployment rate between 2005 and 2021. After hitting a peak of 14.8% in April of 2020, the unemployment rate began a steady decline, reaching 5.8% in May of 2021. 

    Disputes over the unemployment provisions of the American Rescue Plan remain contentious and are largely fueled by a fundamental disagreement over the role of government in economic policy. One side advocates for laissez-faire capitalism—a system in which the government stays out of the economy and allows individuals to independently make economic decisions. The other is in favor of a more Keynesian approach. Keynesian economics theorizes that increased government spending and lower taxes are necessary during economic downturns in order to stimulate the economy. Those who support Laissez-faire economics believe that government intervention in free markets creates market distortions in the long run, in this case potentially discouraging those receiving benefits from actively seeking new employment. There are further concerns that these temporary provisions may remain in place even after the economy recovers, resulting in a soaring deficit. On the other hand, believers in Keynesian economics argue that the government has a responsibility to provide bailouts and other forms of support to citizens during recessions. Proponents of this view point out that shutdowns in the interest of public health caused unemployment to soar and argue that the unemployment compensation will bolster the economy.

    The debate over this provision boils down to a debate over liberty versus equity, with advocates for liberty arguing in favor of lower taxes and minimal social safety nets, while advocates for equity argue that greater public welfare is more important than lower taxes. Equity proponents point to studies that estimate the expansion of the child tax credit could reduce child poverty in the US by 45%, lifting millions of children out of poverty. Conversely, liberty proponents say that money belongs to those who earn it, that private individuals use capital more efficiently than the government, and that high taxes discourage investment.

    The ARP also designates nearly $350 billion for states’ budgets, which cannot run deficits in the same manner as the national government. $220 billion of those funds are for states to balance their budgets, which have suffered as a result of the COVID-19 recession, according to the Biden administration. The rest of the funds are specifically designated for states in dealing with the COVID-19 pandemic and its economic focus on reopening in-person primary education. The two categories of education relief are funds to address learning loss due to online schooling and virus mitigation efforts in school, particularly improving ventilation.

    Once again, disagreements here can be understood as an argument between Laissez-faire capitalism and Keynesian economics. Critics of this provision point out that many states—including California, New Jersey, Texas, and Arizona—ended the fiscal year with surpluses, arguing that this aid is misdirected and that unconditional bailouts for pension funds represent a moral hazard, a fundamentally Laissez-faire argument. Proponents of Keynesian economics largely support the federal aid for state governments, arguing that it is about more than just replacing tax revenue lost during the pandemic, and more importantly represents an attempt at boosting economic growth because state governments typically invest large portions of their budgets into economic drivers like education and infrastructure.

    Much of the debate surrounding the remaining provisions of the bill is centered on whether or not this bill was truly a coronavirus relief bill, as the Treasury Department claims. Some say that because only 9% of the American Rescue Plan’s funds are for direct COVID-19 relief, the bill is too broad and more closely resembles broad economic stimulus. Whether the bill is understood as coronavirus relief or broad economic stimulus, disagreements over the inclusion of the remaining provisions are again centered around a fundamental disagreement over whether governments should practice Laissez-faire capitalism or Keynesian economics, with Laissez-faire capitalism advocates arguing that the bill represents the government exceeding their ideally minimal role in regulating the economy. On the other hand, Keynesian economics supporters say that these stopgap measures are necessary to help millions of people who are struggling through no fault of their own.

    Reflection Questions

    • Is the American Rescue Plan a COVID-19 relief bill or broad economic stimulus?
    • Are you more in favor of Laissez-faire capitalism or Keynesian economics?
    • What parts of the ARP would you prefer the federal government renew or make permanent?
    • What do the details about the funding mechanisms reveal about federalism and its constraints on national policy making?
    • Where in your daily life do you observe the ARP’s footprint?
  • What are Involuntary and Structural Unemployment?

    What are Involuntary and Structural Unemployment?

    It may seem counterintuitive, but some forms of unemployment are good from an economy-wide perspective. Macroeconomists can measure and forecast the ideal unemployment rate for any given quarter based on structural characteristics of the economy at that time. Right now, the natural rate of employment rests just below 4.5%.

    To understand why the natural rate of unemployment rests around 4%, one must identify the forms of unemployment that occur in a healthy economy and the forms that indicate a recession.  Economists identify two main types of unemployment: voluntary and involuntary.

    Voluntary unemployment is when a worker chooses to leave their job, thus going into unemployment voluntarily. Voluntary unemployment can be frictional or seasonal. 

    • John Maynard Keynes, the progenitor of modern economics, defined frictional unemployment as the unemployment that occurs as the result of a worker quitting his or her job to look for a new job because they are not being paid enough. Economists consider this employment to be a healthy part of a market economy, as it indicates that workers have the opportunity to earn higher wages.
    • A key aspect of frictional unemployment is that workers continue to look for a new job. Yet many workers leave their jobs voluntarily for other reasons other than new employment opportunities; common forms of voluntarily leaving one’s job include going to become a full-time stay at home parent or retirement. Because these people are not actively looking for a new job, they are not considered unemployed, but rather have dropped out of the labor force. When the Bureau of Labor Statistics releases its monthly CPS report, it excludes those who have left the labor force voluntarily when calculating the unemployment rate.
    • Seasonal unemployment, also a form of voluntary unemployment, occurs when certain industries lay off employees during periods in which business is particularly slow. For instance, ski resorts tend to lay off much of their staff during the summer months, or restaurants in a beach town with a tourism-based economy might drastically reduce their payroll during the winter. Employees generally know that a seasonal job is a temporary one, which is why it is considered voluntary unemployment. 

    Involuntary unemployment occurs when a worker is forced to leave their job despite being willing to work at their current wage. 

    • Cyclical unemployment occurs during recessions when a business can no longer afford to employ its workers because its revenues are falling due to decreased demand. This shock means that many workers who want a job do not have one. In turn, these laid-off workers consume less. It’s cyclical because laid-off workers contribute to the fall in economy-wide demand, which yields to further layoffs. The government tends to respond to cyclical unemployment with stimulus bills, which distribute stimulus checks to boost consumer demand or create short-term jobs for laid-off workers.
    • Structural unemployment occurs when a certain job is no longer in demand because of long-term shifts in demographics, technology, or international comparative advantage. A few examples include coal miners losing their jobs because of technological advances in other energy sectors, American car or steelworkers losing their jobs to overseas competitors, or assembly line workers losing their jobs to automation. The decline of coal miners in the labor force since 1985 has been precipitous, as Figure 3 illustrates:

    Figure 3.

    image1.jpg

    Source: The Federal Reserve Bank of St. Louis.

    It is not clear that declining employment in this sector is necessarily bad for the economy or the country as a whole. As the United States consumes more renewable energy, jobs in coal mining will necessarily become more sparse. The decline of American coal is a quintessential example of why some forms of structural unemployment are good for the economy over time.

    The Pandemic and the Recession

    These concepts within unemployment all relate to our most recent recession. The COVID recession was a particularly unusual one because it was the first time the economy shut down voluntarily. In this case, some forms of cyclical unemployment were voluntary because workers chose to stay home to avoid spreading COVID rather than working. However, many people still lost their jobs involuntarily because of decreased demand. A counterintuitive example of this occurred in the healthcare sector in 2020. Because of a decrease in demand for non-emergency surgeries, procedures, and check-ups, the healthcare industry contracted in early 2020 despite the onset of a pandemic.

    Recent job reports possibly demonstrate the relationship between fiscal policy and job creation. Job growth in May and April was slower than economists expected. Economists have yet to reach a consensus as to why—it could be due to extended unemployment benefits, economic restructuring that has occurred as a result of the pandemic, continued hesitance to return to work due to health concerns and the risk of contracting COVID-19, or the normal friction of rehiring workers after a recession. Each of those explanations relies on key concepts related to unemployment: stimulus bills that respond to cyclical unemployment, structural unemployment, voluntary withdrawal from the labor force for health reasons, and frictional unemployment. In any case, it is useful to disaggregate the types of unemployment in this scenario to find the most effective macroeconomic policies.

    Reflection Questions:

    • When in my life have I experienced different types of unemployment?
    • How aggressive should the government be in addressing structural unemployment via fiscal policy?
    • How important is addressing unemployment for federal policymakers? Are there forms of unemployment that require no policy prescription?
    • What are some other examples of each type of unemployment?