Executive Summary

Immigration reform can raise population growth, labor force growth, and thus growth in Gross Domestic Product (GDP). In addition, immigrants have displayed entrepreneurial rates above that of the native born population.  New entrepreneurial vigor embodied in new capital and consumer goods can raise the standard of living.

These channels suggest that any discussion of immigration reform that omits the benefits on economic performance is incomplete.  Similarly, there will be direct feedback from better economic growth to more revenues, fewer federal outlays, and “dynamic” improvement in the federal budget. Traditional “static” budget analyses of immigration reforms’ impacts will be similarly incomplete.

A rudimentary analysis of these impacts suggests that in the absence of immigration, the population and overall economy will decline as a result of low U.S. birth rates. A benchmark immigration reform would raise the pace of economic growth by nearly a percentage point over the near term, raise GDP per capita by over $1,500 and reduce the cumulative federal deficit by over $2.5 trillion.

Click here to read the full study [PDF].

Good morning --

The Federal Housing Administration: the latest failed government program that could leave taxpayers on the hook for tens of billions of dollars. The WSJ writes that "the feds announced Friday that the FHA's liabilities exceed its assets by at least $16.3 billion -- and the gap could reach $93.7 billion in the worst case." Why? "The FHA got into trouble because it deliberately expanded in 2007-2009 even as the market was crashing."

 This is the trouble when the federal government gets involved, they fail to accurately weight benefits and costs the way the market does. "Most businesses would look at these losses and flee such a market. But the FHA, which responds to political rather than market incentives, has literally tried to make it up on volume."

In more positive economic news, the WSJ reports yesterday that "existing homes sold at a seasonally adjusted rate of 4.79 million units in October, the second-highest level of the year and up 2.1% from September." Of course, a stronger housing recovery is one of the upside risks in any forecast, but it could easily be derailed by a bad fiscal cliff outcome.

As negotiations over the fiscal cliff continue, focus weighs heavily on President Obama's and his congressional allies' insistence on raising taxes on "the wealthiest Americans." But the NY Times points out that the group the president is referring to is a "sprawling category." A chief economist at the Tax Foundation told the NYT that "there is a price that comes with these tax increases on the very wealthiest because that is where capital is concentrated. That price is economic growth and hiring." Furthermore, while the president continues to fight for tax rate increases on "the wealthy" he ought to remember "even if the top rates do not rise, the efforts to limit deductions would make the tax system more progressive with the biggest impact felt by those at the very top in incomes."

Doug's Daily Economic Outlook

At the heart of the health care reform are the "exchanges" where citizens will shop for insurance and receive subsidies for its purchase.  Accordingly, one of the most significant decisions that states have to make are whether to (a) set up an exchange on their own, (b) let the federal government set up the exchange in its state, or (c) engage in a partnership with the federal government.  Originally, the deadline for this decision was this past Friday.  However, in response to the request of the Republican Governors Association (who requested more time and more information), the deadline was extended to December 14.  HHS promised Thursday that it would deliver more Affordable Care Act details soon, but that states will have to wait at least a week.

Idaho Gov. Butch Otter, who’s been supportive of a state-based exchange, captured the importance of better information, saying “I don’t want us buying a pig in a poke, so with this extension I’m hoping we’ll get answers to the questions and concerns we’re hearing from legislators and the public."  Meanwhile,  Florida Gov. Rick Scott — who has been one of the ACA’s harshest critics — echoed the sentiment somewhat more skeptically.   “I am hopeful it is possible for us to work together to lower costs and improve access and quality,” Scott wrote. “Under the current regulatory requirements and the information we have been provided, however, Florida does not have evidence that a PPACA exchange can accomplish these goals.”

The most recent states to make decisions have been Ohio and Wisconsin who announced Friday, and Oklahoma who announced yesterday that they would not set up exchanges, bringing to 20 the number of states choosing a federal exchange.  18 states will set up their own exchanges, while 3 will partner with the federal government.  10 states -- Arizona, Arkansas, Florida, Idaho, Michigan, New Jersey, Pennsylvania, Tennessee, Utah, West Virginia -- remain undeclared.  

While the constitutionality of the Affordable Care Act has been settled, its ultimate structure and impact continue to evolve, and remain among the most important areas of health and economic policy.

What We're Reading

American manufacturing is coming back. Manufacturing jobs aren't -- The manufacturing jobs that do remain are very different from the old world, in which a man (it was almost always a man) without much education could show up at the door of a factory and have a multi-decade career at the middle class ages assembling things. Rather, at least 30 percent of "manufacturing jobs" are things that would look to most people like white-collar service jobs: Sales, engineering, design, that sort of thing…The manufacturing worker of the future is more likely to have a graduate degree and wear a suit or a lab coat to work than to have only a high school education and carry a lunch pail. (WaPo)

Proving that NYC does not quite understand Washington, DC…Investors Show Optimism That Cliff Will Be Avoided -- Hopes that lawmakers in Washington will reach an agreement on taxes and spending gave investors new confidence and drove stock indexes to their best day in two months. Investors have spent a tense few weeks since the election watching for smoke signals out of the nation's capital for indications that Democrats and Republicans are nearing a compromise. On Monday, they found reason for optimism. (WSJ)

Analysis: Weak data point to bigger economic drag from Sandy -- A recent string of weak economic data suggests the recovery may take a much bigger hit from superstorm Sandy than first thought, but economists have yet to abandon hopes for a quick rebound. Data covering retail sales, industrial production and first-time applications for unemployment benefits have shown unexpected weakness, raising concerns among analysts that they might have underestimated the damage from the storm. (Reuters)

Holidays, Cliff and Sandy Will Skew Inventory Cycle -- The fourth quarter has just six weeks left, but big economic events are still to come: resolving the fiscal cliff, holiday shopping and rebuilding from Sandy. All three will skew the final demand part of the economy, but also look for impacts on the inventory sector, a volatile but often overlooked part of the gross domestic product equation. (WSJ)

Think the fight over taxes is bad? Just wait until we get to entitlements -- The fight over the Bush tax cuts may be the biggest stumbling block to averting the austerity crisis. But it isn't the only one. If Republicans do agree to a deal on tax revenue, it will be on the condition that Congress and the White House will also make major cuts to spending to reduce the deficit as well, presumably focused on the entitlement side. (WaPo)

Retailers Add Politics and Nature to Their Holiday Worry List -- Many retailers have more than the usual riding on sales beginning this Thanksgiving weekend. The presidential election pushed holiday shopping later than usual because some toy and game makers held off on their big introductions for maximum attention. The aftereffects of Hurricane Sandy have included logistics problems and merchandise delivery delays. (NYT)

Also from the Forum

Fiscal Cliff E-Book – Everything you need to know on the fiscal cliff including: an FAQ, one-pagers on both the tax and spending components, a scorecard to track legislative action, studies, and op-eds. (e-book here)

Balanced -- Balanced reflects the principle that the United States is served best by a contained, efficient government focused on core national security and domestic activities, including a durable social safety net.  It is guided by the lesson of history that the best approach to simultaneous poor growth and explosive debt is to keep taxes low, reform taxes to be more pro-growth, preserve core functions of government, and focus on transfer programs – entitlement programs in the United States – as the route to controlling debt. (Plan here)