The NCAA Cartel

Lonzo Ball and De’Aron Fox have taken centre stage as up and coming basketball stars, and yet these athletes are not paid a dime. Are they being exploited, and is there a solution?”

By Andres Rodriguez

If you ask a college sports fan why they love it so much, they will tell you that these players compete for the sake of competing– the love of the game. In a way, it is more pure than professional sports, where players are merely mercenaries competing for money, rather than passion. With this in mind, it could be argued that paying college athletes would destroy this notional integrity of college sports, and shift their motivation from the love of the game to a paycheck.


While the argument might seem to have some merit at surface value, it is clear that the romantic ideal merit after we consider the specific context After all, it is not as if there is no money involved in the market. College sports is a billion dollar industry, generating revenue through advertising, television fees and stadium charges.  Yet these players get very little value in return for their production. While a some flawed analysis, such as that of USA Today, suggests their compensation is valued at around $125k, their valuation includes athletic training and coaching. On the other hand, Andrew Zimbalist, a Sports Economist from Smith College, argues that this is merely equivalent to in job training and that the actual compensation is better measured by their graduation rate times the tuition rate, equivalent to under $20k for most schools. Even then, this is assuming that college athletes get the same level of education as every other student. Sadly, because of the vast extent of network effects, players have little to no choice but to play in the NCAA in order to achieve their dream of playing for the big leagues.


It is extremely easy to demonstrate this, since college players are paid far below their market value. After all, their non-payment status-quo is only maintained through rules and stringent penalties for those who break them. Players are deemed ineligible and can be suspended or banned if they are found to break these rules. Schools can be prohibited from participating in the playoffs. This rule serves as a de-facto price control, limiting compensation to a full scholarship.


Even the educational compensation that is given is a joke in respect to its actual value. Education is an investment and circumstantial evidence suggests that the gains in human capital for these students are far less than those full time students receive. The graduation rates are extremely low and so is educational achievement. Male college basketball players graduate at a rate 20.6% points lower than the average male college student. Though the NCAA forces students to meet academic eligibility, these requirements often mean more lenient grading for these students, making the previous statistic even worse.. Thus, even if their actual returns on human capital aren’t affected, the signaling effects are likely going to be negative, ás the negative stories raise suspicion about the legitimacy of college athlete’s achievements.. Furthermore, the students face very low graduation rates. For example, University of North Carolina, which just won the NCAA’s College Basketball March Madness Tournament, has been at the center of an academic discipline scandal, due to fake classes and grades. This is the alleged educational compensation these students receive. But no worries, at least they get to keep their memories, injuries and health issues for the rest of their lives.


The NFL requires players to be at least 3 years removed from high school in order to be drafted into the NFL in order to allow physical maturity before entering the league. The NBA requires players to be 1 year removed from high school, due to the legal restrictions of scouting underage, high school players. The MLB allows you either enter immediately after high school or after three years in college, which means that unless you believe yourself to be ready to enter the league you will have to stay in college for three years before you give it a shot. In a competitive market, players could simply choose to participate in another league. However, sports are characterized by network effects, which means that players have very little alternatives if they hope to play professional sports in the future.

Simply put, other leagues do not have the same combination of talent and commitment to young players as the NCAA does. Therefore, choosing an alternative path will likely jeopardize one’s chances to play for the big league. There aren’t any good alternatives for young football players to prove their worth. In the case of the NBA and MLB, foreign professional leagues don’t have a strong incentive to develop young talent when they know they will simply leave as soon as they are able to be productive for them. It is not the best way to spend the resources for them. Therefore, if players wish to develop their skills and prove their value to professional leagues, these players will sadly be stuck playing for the exploitative cartel that is the NCAA.



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Patents and Private Data Ownership: A Catastrophe in the Making

Unless IP laws are modified, technological developments will take us towards a monopolistic economy.”

By Andres Rodriguez Brauer

     Automated cars are expected to become a mainstream phenomenon in the near future. With it, creative destruction will result in a displacement of more than 4.4 million worker; around 3% of the employed population. While this problem is certainly striking, it might not even be the biggest issue stemming from the development. The challenges of automation, job displacement and compensation is one we have seen in the past and ones which we have seen discussed in multitude. We know that worker compensation, combined with worker training might serve to ease the pain that will come to this large segment of the American population. A new, more significant challenge comes into play with the rise of the data economy, stemming as a result of our patents based system and the private ownership of data.

Over-Patentization and Patent Trolls

     Currently, a technological innovation receives a patent, by preventing copycat competitors from stealing the development, which would eliminate a large portion of the incentive to innovate. The effects of this incentive are certainly beneficial, as we currently see a race to develop the efficient and safe technology necessary to make driverless cars work effectively. While it is currently unknown just how much of driverless car technology is patentable, it is clear that significant developments required to make one function are able to be patented, as was the case with smartphones. Just like smartphones, we likely see the market overrun by patent trolls. This will effectively create large barriers to entry, existing beyond the logical protection of actual technological innovations. In the end, just as in the smartphone market, we will see a couple of companies, and perhaps a single company, control the rights to develop such products for a long period of time.

     This issue of patents is also seen in health care markets. By preventing generic drugs from an extensive period of time, drug prices and health care spending as a percentage of GDP is extraordinarily high. By creating a large amount of small monopolies, competition in the demand side leads to higher drug costs. Because of this factor, governments have had to create monopolies in the demand side, such as those created through a single payer market, and resort to price controls in order to limit these costs. (Canada,Singapore).

Private Data Ownership, Economies of Scale and Monopolization

     However, in the driverless car market, the issue extends beyond extensive patents. Driverless cars are reliant on data. The sensors, combined with previous situations, informs the machine on how it should act in a similar situation in the future. This can inform vehicles on fastest routes and safe maneuvering. The more cars from one company that exist and the longer that these are used, the safer and more efficient they will be. As we can see, data thus benefits greatly from economies of scale. In a system where data is owned privately, the result for the driverless cars will likely be one of indefinite monopoly, perhaps even in a system without patents. However, patents still reinforce this phenomenon and guarantee this occurrence, as the innovating firm will have a large period of time where they are able to gather data, while other firms are left behind. While in other technological markets the magnitude of returns to scale from data might be less than in the driverless car market, they are very much still present. Here, the patent system will create monopolies where there would not be otherwise, due to the advantage received from patents.

What should they do?

     Looking at this situation, it is clear that the mechanisms we utilize to regulate data and innovation are greatly antiqued and are unsustainable for an economy more and more technologically reliant. The combination of patents and private data ownership will lead to an economy dominated by monopolies, leading to lower wages, more income inequality lower and lower economic productivity. Open sourcing might be necessary for the United States to maintain a healthy and competitive economy. Patents must be eliminated and data must be held public. In its place, we must start to think of more effective ways of rewarding innovation and the acquisition of data in order to prevent the free rider problem that would stem without a replacement. A possible solution would be to utilize government funds to reward innovation by a value stemming from expected economic value. While taxes would likely increase in order to fund these rewards, consumers will overall save money due to the added competition that would stem from the removal of these large barriers to entry.




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The Tragicomedy of High-Skilled Immigration Policy in the United States

When misled outrage prevents the solution.”

By Andres Rodriguez Brauer

Looking back at the past year, perhaps the most notable and important tendency to rise up in the western world was that of right-wing populism. Largely related to an anti-elite and anti-immigration sentiment, the West fell victim to the shocking victories of Brexit and Donald Trump. These events have cemented a worrying wave of anti-globalization politics, present in both major parties of the UK and US respectively. While these anti-globalization sentiments were most obvious through Bernie Sanders and Donald Trump’s opposition to the Trans-Pacific Partnership in the 2016 campaign, the current administration’s views on high-skilled immigration has begun to express the same disposition.

President Donald Trump recently announced a desire to pause new green cards for foreign workers in a counterproductive attempt to decrease unemployment and increase wages. He also promoted reforming the H-1B visa system in an effort to promote these same goals. These actions indicate a belief in the lump of labor fallacy, as he is assuming that there is a fixed amount of jobs that people must fight over.

Workers undercutting other workers doesn’t result in mass unemployment, but rather causes a shift in labor supply to the right. This partial equilibrium suggests that rather than creating unemployment, it would simply lower wages for high-skilled workers in the United States.

The Facts

However, this basic analysis still fails to illustrate the whole picture. Increased competition and creative destruction end up decreasing total costs of production and increasing economic efficiency. High-skilled immigration lowers costs for firms and increases competition by stimulating innovation and entrepreneurship, both directly and indirectly. These developments decrease prices for consumers, which increases their real purchasing power and increased demand for labor, as the production constraint increases. Additionally, the increase in entrepreneurship increases demand for high skilled workers. Lastly, these high-skilled immigrants are consumers themselves, which also means that the demand for all products increases, including those that require high-skilled immigration themselves.

Therefore, theoretical effects point towards ambiguous wage and purchasing power for upper middle class workers in the STEM field, with the rest of the population achieving significant gains in real income. Empirical studies suggest that the wage effect for high-skilled labors is ambiguous, with studies deviating on the direction and size of the effect. However, the majority clearly point towards increased economic productivity, cheaper goods for all Americans and lower income inequality.  

This scientific analysis strongly supports the need for expanding the amount of high-skilled immigration into the United States. This is especially true when we consider this policy in the context of the economic developments of the past few decades. The technological developments since the 1980s have led towards increased demand in skilled labor and decreased demand for low-skilled labor, which results in the very income inequality that has led to the rise of populism in the United States. Expanding high-skilled immigration can help counter those very worrying long term trends by lowering income inequality and increasing economic growth.

Democrats in Conflict

Hillary Clinton was very much in favor of high-skilled immigration, an issue that was perhaps not emphasized enough during her campaign. She outlined her plan to increase high skilled immigration to the United States by allowing for start up visas and would have attempted to provide nearly automatic green cards to foreigners that acquire STEM advanced degrees in accredited institutions. That being said, Bernie Sanders, who challenged her in the Democratic primary, has historically opposed increasing worker visas and has utilized rhetoric very similar to that of Donald Trump on the issue.

In 2007, he opposed expanding visas for both low-skilled and high-skilled labor, in an effort to prevent increased unemployment and lower wages for Americans. This message has been consistent with his track record and is in-line with the logic he utilizes for opposing trade agreements.  During his platform for the 2016 campaign, the independent senator for Vermont reworded his opposition, branding his opposition to high-skilled visas such as H1-B and J-1 programs as an issue of “foreign worker exploitation”, while attempting to avoid stating that immigration will lower wages. That being said, the fear that undercutting American workers will result in lower wages and employment is still obvious, as his platform states that “Senator Sanders will ensure that if there is a true labor shortage, employers must offer higher, not lower wages”. Furthermore, his internal logic is obvious during his interview with Ezra Klein, where he deemed open borders as a “Koch brothers proposal” and “right wing”, which “would make everyone in the United States poorer”.

Populist Proposals on Both Sides

Both populist leaders seem to be gathering plenty of support on the issue. In the Republican Party, Marco Rubio had previously pushed for the cap on H1-B visas. Now the situation has changed and both the White House and Congress are looking for ways to restrict the current program. Senator Tom Cotton and David Perdue are attempting to reduce the number of green cards issued by the United States, with Marco Rubio being “open” to the idea. Senator Orrin Hatch, a historically strong supporter for trade and work visas, is now working to compromise on the issue of H1-B visas and reduce the “abuse” of the system in order to stop undercutting American workers. Republican congressman Darrell Issa would increase the de-facto minimum wage for H1-B visas to $100k a year, which would limit high skill immigration and would reduce a large amount of the economic benefits that could come from the program. Yet, other national figures such as John McCain and Lindsey Graham, continue to be supportive of the program. Others, such as Paul Ryan, have yet to come out with a clear position, indicating that the party remains split.

In the Democratic Party, we see California representative Zoe Lofgren introduce a similar bill to Rep. Issa, but the de-facto minimum wage for H1-B visas would be $130k. While most Democrats have failed to outline a clear position on the issue, it seems probable that the Bernie Sanders faction of the party will continue its opposition and would be willing to work with Donald Trump to restrict the amount of high-skilled immigration into the United States.  That being said, it is yet to be seen if the rest of the party will follow.

Ironically and tragicomically, the rise of populist leaders aiming to combat the rising income inequality and stagnant wages is now preventing the solution to the very issue. Donald Trump has significant support on the issue of H1-B visas and it certainly seems he will be able to count on the support of the majority of Republicans to restrict the program. However, they will still have to depend on Democrats to be able to pass the reform and it is yet to be seen how they will respond. Will Hillary Clinton’s defeat and Bernie Sanders’s leadership steer the party towards populism, virtually assuring the demise of high-skilled immigration into the United States? Or will the anti-Trump, pro-immigration sentiment prevail over the protectionist tendencies of the party? These questions are essential for the future of the United States economy and the state of income inequality in the country.


Image Source: WikiMedia

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Betsy DeVos: School Choice or School Privatization?

“Should we put more funding back into public schools or should we move towards the school choice movement, emphasizing voucher programs and charter schools? Betsy Devos’ recent nomination as Secretary of Education brings this debate to national spotlight.”

By Andres Rodriguez Brauer

     It is no secret that the 2016 presidential campaign failed to emphasize policy discussion, as the historically unpopular personalities of Donald Trump and Hillary Clinton headlined the race. Across the campaign, the voucher school debate was nowhere to be seen. However, after Donald Trump’s victory this past November, his nomination of Betsy DeVos for Secretary of Education has propelled the issue into the forefront.


Practical Issues with School Choice

Mrs. DeVos is a self-identified member of the school choice movement. The movement wishes to give parents the ability to choose where they send their children, rather than being locked to their district. One way to achieve this goal, as Betsy DeVos has favored, would be to provide grants to students, allowing them to study for free in whichever school they wish. A more moderate approach is that of charter schools, which allows private organizations to manage government owned schools that would compete against already existing public schools. However, opponents of the movement believe that these plans entail privatization and would be ill-advised due to a rise of predatory for-profit schools and the creation of a two-tiered system.

     Without proper regulation, the concerns over a “two-tiered education system” are certainly valid; there are market failures in the education market that could threaten the principle of equal opportunity and quality of education as well as some very serious issues regarding information asymmetry. Sadly, right wing ideologues often ignore these issues and fight back against attempts to address them. Often times, parents don’t have readily accessible information about the quality of the schools. Even when the parents have the information available, they tend to make decisions based off of other aspects, such as how nice the professors and facilities are. Too lax of a regulatory framework can result in a flood of for-profit schools who prey on uninformed parents and cash in on the vouchers. Furthermore, unless the government imposes strict regulations, public schools will likely be left with children with disciplinary issues, special needs and those which parents fail to make an active choice. If the public schools are not modified to address the above concerns, the students that are left stranded in the public schools will most likely be worst off. In addition to a decreasing pool of resources, the schools would be significantly underfunded and left with a large amount of fixed costs and the students with the highest amount of marginal costs.

     Unlike most sectors in which government is involved, the education market does not have the same shortcomings and market failures to require its control. Education does not have the same amount of barriers to entry and economies of scale issues that exist in the police departments, prisons, and transportation systems, meaning that an effective market can (and does) exist. Additionally, the potential for human rights abuses that exists in the prison and police departments are also non-existent in the education market, meaning private management will likely be effective. Therefore, there is no theoretical issue for why it must be government owned, except for the potential issues in information asymmetry, most of the issues highlighted above can definitely be solved with a proper regulatory framework.

     We have already seen these issues in practice, and thus have both theoretical and empirical validity. We have seen predatory schools in the university market, where for-profit colleges are created and provide useless degrees to take advantage of the college subsidies provided by the federal government. This issue has also already been seen inside Milwaukee’s voucher market, leading to underwhelming results, performing statistically identical to traditional public schools. The idea that vouchers will merely emphasize cost-cutting rather than educational improvement also has some empirical evidence. Results from Chile’s own voucher program suggests that voucher programs incentivize schools to cut costs, rather than boosting educational achievement, where the effects of the program is ambiguous. In the United States, the effects of the school choice inspired programs have been underwhelming. Empirical studies have been ambiguous over the total impact of all programs, with little evidence of improvement due to the implementation of charter and voucher schools.


Upsides to School Choice

     Nonetheless, the core concept of the school choice movement has some very significant merits. Currently each public school has a monopoly over all students in their zip code, giving them the ability to charge higher prices and offer lower quality, as there is no threat of defection. This is especially true in a market where consumption is required, such as the public school, with significant minimums in place for when children are allowed to stop attending. If the option to find a better alternative doesn’t exist, the school has zero incentive to improve. In the case of government organizations, these hold soft-budget constraints. Therefore, whenever they spend more than they have, they can expect the government to cover their shortcomings, thus dissuading efficiency. Breaking the monopolistic nature of the current school system would be incredibly beneficial, regardless of any change in distribution and management. Allowing parents to choose whichever public school they wished to attend would have a very significant positive impact in and of itself. Overall, competition incentivizes all schools to improve and would increase the quality of already existing public schools.

     The current voucher and charter programs in the United States are not subject to all federal regulations at this point, which is a significant cause for a lot of the shortcomings mentioned earlier. Being more selective in distributing voucher and charter privileges as well as being more active in shutting down and removing privileges from under-performing charter schools and voucher schools will greatly limit the extent of which cost-cutting will be the focus. It is also essential to create guidelines to aid parents in selection as well as making academic performance data readily available for all schools so parents can utilize the information to easily compare and contrast different schools around their area, decreasing information asymmetries and incentivizing schools to improve their educational standards. Furthermore, bans on for-profit schools from receiving vouchers and charter schools can also be a helpful. We have already seen the ability to regulate these markets effectively in the Obama administration, where for-profit colleges were imposed deeper academic standard regulations. This presents a possible framework to solve the issue of predatory schools in voucher and charter programs.  

     Under a voucher program, schools might create divisions focused on treating children with special needs. Additionally, the amount of schools directly focused on these students might also increase in quantity. If these are still not enough to solve the issue, a shift in focus for these public schools towards aiding this niche type of students is certainly likely to help. In the case of charter schools, the worries are also lessened, since they could easily be forced to abide by the same rules as public schools, thus solving the selection problem. Parents who fail to make an active choice will cause their children to be left behind only if we make public schools the default option. If parents are left with no default option and are legally required to choose a school, all parents will have to make an active choice, likely decreasing the magnitude of the issue.

     The implementation of these programs does not necessarily imply a defunding of public schools. Less resources might be coming in, but educators will also be teaching less students, which would compensate for a large part of the loss in income. Furthermore, the competition in schools will likely pressure schools to be more cost-efficient, thus using the already existing resources more efficiently. These effects, plus the increased competition in achievement, can lead to public schools to be in a better condition after the programs, rather than worse. As of now, empirical evidence appears to be ambiguous, with most studies showing statistically insignificant effects.

     While the school choice track record has been questionable, well-regulated programs have had far better results, such as Boston, New York City and New Orleans. In the case of Massachusetts, empirical studies have found large and statistically significant gains in academic proficiency for children attending charter schools, with these positive effects being noticeable in their competitiveness in the college admissions process. Empirical evidence has found positive results for all of these programs, in contrast to those which leave their charter schools unaccountable.


Opposition from the Left

     Some members of the left also express an unhelpful concern over the idea of privatization itself. Left wing ideologues hold blanket opposition to the reforms; a position as troubling as the anti-regulatory position of right wing ideologues. After all, what should matter is the quality and accessibility of the education, not who controls or manages it. In theory, it is certainly possible to implement an effective voucher and charter school programs. In practice we have seen that the empirical evidence is most definitely ambiguous, despite the fact that implementation has usually been lackluster due to an insufficient amount of regulations targeted at reducing the previously mentioned market failures. However, in programs that managed to implement an effective regulatory framework, such as in the Massachusetts charter school program, the empirical data has been supportive of the benefits of the program.

     This brings us back to the person who helped bring this debate back to the forefront: the new Secretary of Education, Betsy DeVos. Aside from the policy controversy in itself, DeVos had a remarkably terrible showing during her confirmation hearing. When questioned by Senator Al Franken, she seemed completely uninformed about Senator Tom Harkin’s Individuals with Disabilities Education Act (IDEA). Surprisingly, or maybe not, her track record is honestly as bad as her hearing performance was. As the Economist highlights, test scores have declined over the last 10 years in her state and 80% of charter schools are below the state average in math and reading.  

     Betsy Devos lobbied for voucher schools in the state of Michigan, where she displayed a lot of the same harmful tendencies that the right wing ideologues fall into. She promoted a massively unregulated system, making it easy for almost anyone to open a charter or voucher school, in order to expand competition. However, the lack of standards for opening schools led towards the creation a lot of profit-oriented lackluster schools coming in. In theory these schools will lose out on customers and go out of business, but these facts are often not seen until much later, after kids and families already lost their investments. The information asymmetry also makes it questionable if future families will even realize the perverse notion of the school, maintaining them in business. To make matters worse, she has also lobbied to allow failing programs to expand, under her naive belief that the market will naturally take care of it; totally ignoring its failure in this situation. Betsy DeVos has supported some regulations, such as requiring that schools ranking in the bottom 5% for three straight years to be closed. However, the delicacy of the issue and the importance of regulation in it makes DeVos a dangerous figure, given her natural skepticism of government intervention.


Is the Investment Worth it?

     Regardless of ideological belief, school choice has the potential to improve academic performance in the United States. However, it has to be done right. Former President Barack Obama himself spoke positively of charter school programs, but expressed strong instincts for regulation and oversight.  Sadly, under Betsy Devos, educational policy will continue to fall victim to ideological extremes and will continue to promote her failed vision of what our public education system should look like.



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Environmental Standards in the Age of Trade Liberalization

By Andrés Rodriquez Brauer

Over the past century, free trade has expanded significantly across the globe. While free trade may often be controversial amongst the general public, economists typically agree that trade liberalization has spurred economic growth. This is in part because added free trade results in further competition among exporters, thus it fosters innovation and more efficient production processes. That being said, many environmentalists are concerned that this rise in competition among exporters might lead to a “race to the bottom” for environmental standards.

The “race to the bottom” view comes from the classic prisoner’s dilemma model, where each country has an incentive to ‘free-ride’ from the rest of the world’s regulation and deregulation.  

Assuming this view is correct, issues that arise from individual incentives to relax environmental standards can be mitigated, most-likely through action taken by the World Trade Organization (WTO). Using an existing framework, the WTO could move to firmly enforce environmental standards.

As a first step, the WTO could set environmental standards that adhere to those dictated in the Paris Agreement. In effect, the WTO would allow countries to impose pollution tariffs on countries that do not follow environmental regulation requirements, thus deterring deregulation. So, as long as these requirements are clear, and guidelines for retaliation are well defined, this policy could greatly reduce countries’ incentives to loosen environmental standards.

Furthermore, we have seen free trade deals serve as a way to impose environmental standards on other countries, which has been the case with the North Atlantic Free Trade Agreement (NAFTA) and the Trans-Pacific Partnership (TPP). In NAFTA, the Canadian, American and Mexican governments all pledged to not reduce their environmental regulations. The governments also exalting the importance of sustainable development and expanding environmental standards. It also incentivized Mexico to expand its environmental protections and created additional institutions for environmental cooperation, even though the strength and enforcement abilities of said institutions leave much to be desired. While NAFTA could have benefited environmental standards even further, it shows that with determined enforcement, free trade deals have the potential to increase environmental regulations. The Trans-Pacific Partnership, which President Donald Trump recently withdrew the US from, had attempted to expand environmental standards by increasing requirements and enforceability capacities.

Lastly, the fact that these provisions are being introduced so often in new trade deals, and the fact that the developing world seems to be making their own pushes for environmental regulations, seems to indicate that the prisoner’s dilemma model might not be an accurate reflection of the situation. We now see that plenty of individual nations are prepared to sacrifice some marginal competitiveness for a more sustainable environmental policy. That being said, it certainly seems that the new President of the United States certainly seems to think in terms of the prisoner’s dilemma, even claiming that global warming was a Chinese hoax. Under the Trump presidency, it is likely that the United States will become more protectionist, while also reducing environmental standards locally in a flawed attempt to boost local production. Furthermore, not only did the United States withdraw from the TPP, but it seems likely that NAFTA will be modified. In this modification, it is likely that the enforcement of environmental requirements will be loosened and that the focus on sustainability will be removed.

However, even if Trump decides to take this course, the trade agreements might still not be overall a net negative for the environment. After examining academic literature, it can be seen that free trade has not led to a reduction in environmental regulations, despite the fact that the grand majority of trade agreements have not emphasized the cause. Daniel Drenzen from Tufts University finds no evidence for the “race to the bottom” hypothesis and cites that the World Bank, OECD and ILO have all conducted similar studies and reached similar conclusions. Jeffrey Frankel from Harvard University and Andrew Rose from the University of California at Berkeley claim “there is little evidence that trade has a detrimental effect on the environment.” They cite the “gains from openness,” which says that since trade raises incomes countries are able to obtain more environmentally friendly goods. Additionally, they mention the benefits of increased public awareness, multinational corporations’ insistence upon clean technologies, and the potential for trade to spur innovation that might have positive effects on both the economy and the environment.

In conclusion, free trade seems to have a negligible effect on the environment, with gains from openness often canceling out increased production. Furthermore, environmental standards seem to be such a small part of the overall production cost, that governments don’t face a lot of pressure to remove them, especially considering the local demand that often exists for said standards. All in all, “race to the bottom” hypothesis is thus not only incorrect, it is deeply counter-productive. Contingent upon the government’s focus on environmental sustainability, free trade has the potential to export sustainability to weaker, less willing governments.

Image Source:

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Health and Safety Regulations: Protectionism in Disguise?

While health and safety requirements are often necessary, countries often use these concerns in order to protect their local markets.

By Andres Rodriguez Brauer

    Tariff barriers are the most common analyzed examples of preferential treatment for local products, and have historically dominated the protectionism debate. However, following the post-WWII push for free markets and international trade, a lot of the developed world has been finding more subtle ways to restrict their markets against entry of foreign competition. These so called “non-tariff barriers” are defined by the WTO as “any obstacle to international trade that is not an import or export duty. They may take the form of import quotas, subsidies, customs delays, technical barriers, or other systems preventing or impeding trade.”

    Many examples of non-tariff trade barriers are pretty explicit, such as import quotas and subsidies. While they don’t impose taxes on the import of foreign agricultural products, they either directly restrict the amount of imports or subsidize their produce in order to make their sector artificially competitive. However, there are some other more subtle ways in which countries prevent foreign competition, particularly through regulatory measures under the pretense of public safety.  

    Different countries have different ideas about the adequate amount of health and environmental protections and impose different regulations as a result. However, these diverging regulations actually end up having some negative economic consequences for all countries involved. More specifically, the diverging regulations add an additional cost to international trade, as companies have to end up changing their technical particularities for each country, which limits global economic efficiency. Good-intentioned and beneficial regulations such as pharmaceutical regulations, car safety laws, environmental standards, and food safety standards often come with a cost.

    In some cases, restrictions are implemented intentionally in order to restrict foreign products from entering the market. For example, in 2009, the Family Smoking and Prevention and Tobacco Control act was signed into law by President Obama, under the concern for public health. One of these provisions banned all cigarettes that utilize flavors other than menthol. This ban extended to “kretek”, also known as clove cigarettes. As a result of this ban, Indonesia, which exports over 90% of the world’s kretek cigarettes, filed a complaint against the United States in the World Trade Organization, claiming that the measure is protectionist because it exempts menthol cigarettes from regulation. The World Trade Organization sided with Indonesia and concluded that kretek and menthol cigarettes are “like products” and thus the ban was discriminatory against foreign competition, since most menthol cigarettes are produced locally and almost all kretek cigarettes are imports. Despite the WTO’s ruling, the United States ignored the decision and left the ban in place.

    Nonetheless, it can be exceedingly difficult to determine the overall spirit behind these regulatory measures. In 1989, the European Union banned American and Canadian cattle containing growth hormones, expressing worries over the health risks of the practice. The World Trade Organization permits such bans whenever there is scientific evidence to back up the health concerns that led to these bans. The United States and Canada disputed the regulation and in 1997 the WTO sided with the United States and Canada, claiming that scientific evidence does not support the health concerns associated with these growth hormones and allowed the disputing countries to impose retaliatory tariffs against the European Union. However, these measures did not dissuade The European Union. Just a few years later, the EU imposed further restrictions on the use of growth hormones in cattle as a result of the 2003 Mad Cow Scare. They appealed the WTO’s decision and presented new scientific evidence in favor of their case. Nonetheless, the World Trade Organization upheld the previous decision and sided with the United States and Canada once again, citing FDA studies that suggested that the level of hormones was not high enough to be a threat towards humans. To this day, Europe maintains their ban on the cattle in place.

    Tariff barriers, while the most obvious, are far from being the only form of trade restrictions. There are clear alternatives that come to mind, such as subsidies and import quotas, but the most interesting, and subtle, form of trade restrictions come from regulatory discrepancies. Overall, it is often difficult to be certain if trade barriers genuinely serve to protect the public, or if they are only an excuse to restrict foreign competition.

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Mexican Inflation Hawks React to the Brexit


By Andres Rodriguez Brauer

 The people of England made a momentous decision in the 23rd of June, when they voted in favor to leave the European Union. The most obvious effects have been on the Pound, which has fallen 14% since the vote and is at its lowest value since 1985. However, the effect of their decision has most definitely not been limited to just the United Kingdom and the international community’s worries seem to be warranted. In fact, countries all around the world have already had to react and Mexico’s response stands out amongst all.

First, some context. Back in February, the Mexican Central Bank decided to differ from the Federal Reserve and hiked its interest rates in order to curb peso speculation. Given the Mexican peso’s liquidity, the currency is often utilized as a hedge mechanism against global risks. The nature of the functioning of the foreign exchange markets raised questions about whether the speculation was routine or if it reflected systemic issues with the Mexican economy. The Bank of Mexico, however, argued the former and thus justified its hiking of interest rates to clamp down on inflation resulting from devaluation.  

Similar to the British Pound, the Mexican Peso suffered severe devaluation after the Brexit vote. It dropped 7.15% during the aftermath of the Brexit vote, trading at 19.52 pesos per dollar. The Bank of Mexico responded by increasing their benchmark interest rates by 50 points, in yet another bold decision by the central bank to prevent inflation, despite it currently being at only 2.6%.  This response is very different from that of the Bank of England, which is considering decreasing their interest rates below the current rate of 0.5%, which is already a record low for the bank.  The Bank of England is not worried at all about inflation, given that the UK has inflation at 0.5% as of April 2016 and thus expansionary policy makes a lot of sense at the time, particularly when the negative shock of the Brexit could potentially send them into deflation.

Having said that, it might be unwise for the Bank of Mexico to follow its current path of reining in inflation further. Despite the counteractive effect it has had in relation to the external market conditions following the Brexit vote, their fear of inflation is overstated given the current situation. The devaluation of the peso, stemming from a global speculative capital outflow from emerging markets, likely means only that the international markets are worried about the Brexit’s effect unto developing economies and Mexico due to the worldwide uncertainty. Simply put, the cause of the subsequent devaluation is well founded fear by investors in regards to worldwide effect of the Brexit. The decrease in aggregate demand coming from this uncertainty and fear should be partially counteracted by the devaluation of the peso in its currency market. By increasing interest rates, they are preventing this and are adding yet another negative shock to the country’s aggregate demand. As a result, it is likely that the Mexican economy will now underperform predictions and grow at a rate lower than the 2.6% that was estimated.

This distinct approach to a sudden decrease in aggregate demand worldwide brings us to the divergent responses to the 2007 financial crisis by the Federal Reserve and the European Central Bank. While the United States responded to the recession with aggressive expansionary policy, the European Central Bank sided with inflation hawks and enacted tight monetary policy. As a result, aggregate demand and growth in the Eurozone was low, relative to nations which adopted looser policies and in fact continues to flirt with deflation, causing the slow return of the Eurozone’s real GDP to pre-recession levels. In comparison, the American GDP is now 10.8% higher than it was in 2007.  

It is clear that the Brexit shock is nowhere near the same size as the American housing crisis of 2007 and the ensuing global financial crisis. Thus it is unlikely that the Bank of Mexico’s decision will be as painful as that of the European Central Bank. Nonetheless, by siding with the inflation hawks, Mexico will continue to lag behind and will have slower growth than it would have had they acted differently.


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More than Debt: Puerto Rico’s dysfunctional Labor Market

by Andres Rodriguez Brauer

June 23rd, 2016

    Puerto Rico’s economy has been in recession since 2006. Today, the country’s Real GNP per capita is 5.85% lower than it was at the start of 2006. Meanwhile, national debt has increased successively and is now at over 72 billion dollars, bringing wide public attention. However, such focus has distracted many from recognizing Puerto Rico’s deeper structural issues–its astonishingly problematic labor market.

    In 2006, Government Development Bank of Puerto Rico (GDB) stated that 43.3% of the Puerto Rican population over age 16 reported being employed. Ten years later, the employment rate has dropped to 35%, which is significantly lower than that of the United States. Puerto Rico’s employment rate is tied with war-stricken Iraq for third lowest in the entire world, further highlighting the gravity of the situation. The issue derives from the extraordinarily low labor force participation rate of only 39.4% according to the GDB. The International Labor Organization(ILO) estimates from 2014 show that Puerto Rico’s labor force participation rate for individuals aged 15-24 was a mere 25%, fourth worst in the world, and 50.6% for ages 15-64, which is still the eleventh worst in the world.

    While a lot of people attempt to dismiss the astonishingly low labor force participation numbers by attributing the issue to the underground economy, it is extremely unlikely that this fact can explain the majority of the effect, simply due to the magnitude and abnormality of the problem. The truth of the matter is that Puerto Rico is clearly suffering from chronic labor underutilization, which greatly limits the island’s economic potential and reduces the amount of goods and services that are able to be produced. The large majority of these issues are caused by underlying structural issues that characterize the Puerto Rican labor market.

    First of all, Puerto Rico has the issue of the federal minimum wage. Puerto Rico’s median hourly wage is $9.61, and thus the federal minimum wage is $7.25 an hour, 75.44% of the median wage. According to Aridrajit Dube, one of the many pro-minimum wage economists, the ideal minimum wage would be about 50% of the median wage. Too high of a ratio could constrain employment as a large part of the labor force would find itself at a point where their marginal contribution would be less than their marginal cost, given the specific minimum wage. In Puerto Rico, 28% of hourly workers earn $8.50 or less, versus 3% in the United States, making the price floor a lot more binding than in the United States and causing the employment effect of the regulation far more impactful. As a result, there are a large amount of people being priced out of the labor market due to this federal minimum wage, contributing to the incredibly low employment rate of the island.

    Additionally, labor regulations in Puerto Rico are more costly and restrictive than those in the United States. For example, overtime is calculated after the day of work instead of at the end of the week; paid vacation is longer than the United States; dismissals are harder to go about without breaking any “unjust dismissal” laws. All of these regulations increase the cost of hiring workers and therefore reduce both wages and employment. The impact becomes even more profound when combined with the other effects mentioned.

    Lastly, the island’s welfare system also contributes to the low employment rate by discourage work. According to Anne Krueger, “one estimate shows that a household of three eligible for food stamps, AFDC, Medicaid and utilities subsidies could receive $1,743 per month – as compared to a minimum wage earner’s take-home earnings of $1,159”.  As a result, low income individuals in the island would be financially better off not working. Given that most people tend to be rational decision makers, this system creates a disincentive for labor participation and discourages low income individuals from working. The system’s design makes it so that if one chooses to work, they would no longer be eligible for a lot of these benefits and the losses in benefits outweigh the benefits of being unemployed. This phenomenon was shown by Laurence J. Kotlikoff and David Rapson’s study of the United States market. However, the actual effect is likely to be far greater in Puerto Rico, given that so many more individuals earn wages near the federal minimum wage and the fact that the island enacts utility subsidies for qualifying low income residence.

    In order for Puerto Rico’s economy to reach its potential, it is imperative for them to enact serious labor market reforms. These problems are far more impactful and consequential in the long term than the national debt, and they should therefore warrant at least as much attention as the debt problem does. Without this attention, Puerto Rico will always linger behind and will never be able to match the economic potential it possesses. Deep structural change is needed in order to increase the national employment rate and bring the country out of this recession.


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