The year 1996 marked the 50th anniversary of what has turned out to be an enormously successful institutional innovation: the Council of Economic Advisers (CEA). It was neither obvious nor inevitable that the CEA would enjoy the success it has had. Who would have thought that a group of academics, typically with little or no experience with politics or realpolitik, would not only survive in the rough-and-tumble of Washington, but also thrive and have some influence over policy? To be sure, the CEA's influence has fluctuated and has had to be established anew with each administration. But the durability of the institution, despite repeated reexaminations, is a testimony to the contribution that it has made in both Democratic and Republican administrations.
When income levels of some group in the economy fall behind those of others, the blame frequently is cast on the nature of international trading relationships. Such has been the case recently in the United States with the struggle to maintain real wages for relatively lessskilled workers. Much of the debate has asked how changes in world prices or in technology at home or abroad have altered wage rates (see e.g., Susan Collins, 1996; Jones and Engerman, 1996). In this note we focus on another potential culprit, immigration, and probe more widely into past historical experience in the United States and other countries when inflows of labor from abroad disturb wage rates for nationals. Such international labor flows could serve to enhance rather than to depress the earnings of the country's own laborers. If the question addressed concerns the effects of immigration on the welfare of the original inhabitants of a country, a disarmingly simple answer was provided some years ago by Harry Johnson (1967): as long as immigrants bring an accumulated bundle of labor and physical or human capital that is different from that possessed by local residents, the latter must gain from immigration. This is the basic gains-from-trade argument, appropriate only if the country originally did not engage in any other form of trade and if all residents held balanced portfolios of capital and labor. As well, it ignores the social costs incurred and extra taxes collected when migrants flow into a country. In this note we focus not on aggregate welfare effects, but on the effect of immigration on the return to some homogeneous national group of laborers. This question is the one that most sharply divides the views of labor economists from those of trade economists. On the one hand, increases in the supply of labor would seem naturally to depress the return to labor, but in the basic Heckscher-Ohlin trade model with two factors and two produced commodities, an inflow of labor can be absorbed with absolutely no change in wage rates as long as the terms of trade remain undisturbed. We begin by asking what some basic theoretical models tell us about this issue, before turning to the historical record. Simple theory reveals that there are two basic attributes of immigration that affect income distribution: relatively how substitutable immigrant labor is for the national labor force, and the occupations in which immigrants are allowed to work.
The effects of fundamental tax refonn may work through many different avenues, but an important goal is to increase saving. The effect on saving of a switch to a flat-rate consumption tax would be influenced by at least several factors. First, the effect on saving would depend on the magnitude of the tax burden placed on saving in the current system. Second, it would be determined by the response of the rate of return to capital and the sensitivity of saving to changes in its after-tax return. Third, the effect would be contingent upon the redistribution of tax burdens across groups with different propensities to save, including any windfall gains and losses created in the transition to the new system. The uncertainties that households face and the role of precautionary saving are important components for evaluating these issues. These issues are examined using a generalequilibrium, overlapping-generations, stochastic life-cycle simulation model. The existing U.S. tax system is modeled as a progressive tax with a base that is a hybrid between a consumption tax and an income tax. Our simulation results indicate that moving from the existing system to a flat-rate consumption tax would raise the long-term saving rate by approximately I percentage point, and increase GDP by about 1-2 percent in the long run. These results reflect the interaction of several effects. Moving to a consumption-based tax would reduce tax rates on new saving, raising the after-tax return to saving, and would lighten tax burdens on households that save more. These effects would increase saving. But these positive effects on saving would be moderated by several factors. First, the current tax system already taxes a substantial portion of household saving as it would be taxed under a consumption tax. For saving that is tax-preferred in the current system, there is no first-order effect of switching to a consumption-based tax, as it already receives consumption-tax treatment. Second, saving that is done for precautionary reasons is relatively insensitive to the rate of return, so a portion of household saving would be unresponsive to an increase in the after-tax return induced by tax reform. Third, transition rules may eliminate taxes on consumption financed with assets accumulated prior to tax reform. These transition rules would shift some of the tax burden from older cohorts with lower saving propensities to younger cohorts with higher saving propensities, which would further reduce the positive saving effects of switching to a consumption tax.