All posts by Hansjörg Walther

Hansjörg is a mathematician by training with a doctorate from the University of Bonn, Germany. After a year at Stanford University as a guest scientist, he went on to work in the financial sector and managed corporate bond funds. Currently, he is building his publishing company Libera Media. See our blog post introducing Hansjörg, or all blog posts by Hansjörg.

A Country Deep in Trouble?

I understand that the following is not a rigorous argument, just something to check intuitions that come so easily to many people.

Here’s the set-up: I will tell you about a country and its situation and you try to judge what happened to them. Are they being swamped by immigrants? Is there a threat of societal breakdown? Do they suffer economically? Is the political system in trouble? Etc.

However, I will not tell you which country I am talking about. For the moment it is just “Openbordia.” To obfuscate it a little, I will change some of the magnitudes. But you will see that I do it only on the side that goes against the usual intuitions. Then I will disclose the name of the country.

Just a fun game. Ready to play?

Okay, here goes …

Openbordia is a rather small country surrounded by much larger countries. There are four countries closeby. And there are plenty of other countries in the wider region. If the population of Openbordia is 100, the four closest countries come in at more than 1,000 each, and all the countries in the region together at more than 10,000. So it does not look good for Openbordians as they are outnumbered at least 100 to 1.

What makes the situation even more desperate is that Openbordia is also richer than the surrounding countries. Here’s GDP per capita (PPP, Worldbank figures for 2005-2012): If Openbordia is at 100, then the four closest countries only muster a meager 40, 44, 45, and 47. And it gets worse. One country in the region with already many emigrants to Openbordia stands at just 28. To be sure: they alone have more than ten times the population of Openbordia. And then there are other even poorer countries of similar sizes where it goes down to dismal levels of 24 for two countries much larger than Openbordia. And a little further away, there are two countries with more than ten times the population of Openbordia, but only levels of 18 and 17. So there are plenty and plenty of poor people surrounding Openbordia.

For comparison: If the US is at 100, then Russia is at 47, Mexico at 33, Venezuela at 27, China at 18, and Nigeria at 17. So if Openbordia decided to open its borders it would be like the US opening its borders for all those countries. But then the US is a much more populous country. It should be worse for Openbordia.

Now you would think that the Openbordians had learned something from reading restrictionist websites. But guess what, they have not. In a fit of complete delusion they threw their borders open with their two closest neighbors already decades ago. But remember: those two countries are still not even half as rich as Openbordia. So probably there was a lot of pressure from unchecked immigration.

With such an experience, you might guess that Openbordians had now at last read up on restrictionism. Well, they stayed completely deaf to it. Instead, they pushed for even more open borders. More then a decade ago, they got their two other close neighbors to open their borders, too. As those two countries are even larger than the first two countries, that should have made the situation untenable. However, the Openbordians ignored the peril they were in and, hard as it is to believe, even prided themselves that the open border treaty was named after a town in their country!

At that point, you’d expect some prominent restrictionist to intervene and write a blog post telling the Openbordians that they were headed for doom. As far as I can see, restrictionists completely missed the problem. And Openbordians went on with their rampage against borders. Already years ago they did away with them also for lots of other countries in the region, all the way down first to the level of 24% of relative GDP per capita and then even to the level of 17%.

This is a disaster waiting to happen, right?

No, this is Luxembourg. The “poor” countries in their neighborhood are The Netherlands, Belgium, Germany, and France. The country many immigrants have come from is Portugal. The countries in the region at 24% of GDP per capita are Poland and Hungary. Romania is at 18% and Bulgaria at 17%.

Luxembourg has been in a customs union with The Netherlands and Belgium since 1948, and completely opened its borders in 1960. The Schengen Treaty with those two countries as well as France and the Federal Republic of Germany was signed in 1985, has been effective since 1995, and is named after the town Schengen in Luxembourg. The Schengen Area grew from there and now encompasses countries with a population of more than 400 million people. Since Luxembourg only has about half a million inhabitants, they are outnumbered not just 100 to 1, but almost 800 to 1.

The last time I was in Luxembourg is more than a decade ago. It looked rather tranquil then. But I may have missed something and things went downhill from there. Give me a little time to do the research. Restrictionist websites will certainly have lots of posts on Luxembourg …

Additional Remarks

  • One objection might be that GDP per capita is not the correct measure here. However, other measures do not yield materially different conclusions about the relative position of Luxembourg vis-à-vis its neighbors. Take e.g. average net monthly wages. Luxembourg has an average of $4,230. The Netherlands, Belgium, Germany, and France come in at $2,671, $2,496, $2,865, and $2,845, or roughly 60% to 70% of Luxembourg wages. Portugal has $1,164 or 28%, which is about the percentage also for GDP per capita. Poland and Hungary at $866 and $856 look even poorer with a level of only about 20%. And Romanians and Bulgarians at $485 and $414 earn only 11% and 10% of Luxembourg wages.
  • As I said at the start, this is not a rigorous argument that can prove all that much about other countries. Or at least I would have to work harder. However, I don’t think the example of Luxembourg can’t prove anything at all. It is a counter-example to many common intuitions:
    • “With lots of potential immigrants that are poorer and often much poorer, a small country is bound to be swamped.” — Foreigners are making up 38% of the population (the most for any European country), but Luxembourgers are still a majority. There is no takeover going on that I am aware of.
    • “With so much immigration, a country runs into economic problems. Competition from poor people will make domestic citizens poor, too.” — But Luxembourg is doing fine economically, as the country with the highest GDP per capita in the world according to Worldbank figures. Wages are a lot higher than in Germany or in France.
    • “Their wealth and the steep differentials with other European countries will attract lots of criminals.” — But then the homicide rate is at 0.6 per 100,000 a year, which is way lower than in the US at 4.7, and even lower than in neighboring Germany at 0.8 and France at 1.1.
    • “They must be overrun by people only trying to collect welfare.” — Still they have one of the lowest unemployment rates in Europe, lower than Germany and much lower than France. And if the Luxembourg government had to shell out so much in welfare, how come they have much lower tax rates than Germany and France?
  • I really ran a search for “Luxembourg” at the VDARE website, but could not find anything. That’s strange. Luxembourg should be a poster child for demonstrating all the pathologies of immigration. In every dimension, it looks like Luxembourg is in the worst possible position of any European country. This should be a bonanza for restrictionists, and I am giving it away for free.
  • You may ask: How can wage differentials persist for long times? One reason is that labor is not homogeneous, so many potential immigrants do not compete for the same jobs because they do not have the respective skills. Luxembourg is geared towards the banking sector, so competition comes from other such cities, e.g. Zurich, Frankfurt, and London, where wages are also high. It is not as if hundreds of millions could “take away” specialized jobs and drive down wages only because they come from poor countries and are willing to work for low wages. Another possible reason might be cultural and/or linguistic. Many immigrants find it easier to emigrate to countries that are culturally and linguistically similar to their home country. Luxembourgers are fluent in both German and French, and in addition speak their own language, Lëtzebuergesch, which could be viewed as a German dialect strongly influenced by French. The francophone component may explain the rather high proportion of Portuguese immigrants (as for France, but unlike Germany). In general, migration within the EU is lower than would be expected from wage differentials. Here are two papers on the phenomenon:

    Linguistic and cultural barriers may make it harder to capture gains from open borders as predicted by models that only rely on wage differentials as the driving force. This perhaps cuts somewhat against the most optimistic predictions on the open borders side — but also against restrictionist predictions of large inflows of culturally dissimilar immigrants. According to the Gallup Survey on International Migration 35 million people worldwide are interested in migrating to Spain, but only 25 million to richer Germany.

The photograph of Luxembourg featured at the top of this post was taken by Marcin Szala and is licensed under the Creative Commons Attribution-Share Alike licence.

Immigration and Civil War

Vipul Naik posted a “Lebanon and political externalities bleg” in June. His question was whether the Lebanese Civil War from 1975 to 1990 might furnish an example where immigration led to distastrous consequences for a country. Of course, Steve Sailer makes just such a point in one of his posts: “Diversity Is Strength! It’s Also … Lebanonization”. Sailer’s argument is broader as he indicts not only immigration, but diversity in general as well as differential birth rates.

That got me interested in what the relationship between immigration and civil war is. Do high levels of immigration cause or precipitate civil wars? If so, you would find more civil wars in countries with higher levels of immigration, fewer in those with less immigration. To get an idea, and no more, I did the following:

First I needed some data that do not rely on my selection of examples. For this purpose, I downloaded the “UCDP/PRIO Armed Conflict Dataset” as of July 2013. This is a dataset of all armed conflicts worldwide from 1946 to 2012 where at least one side is a state (there is also a dataset for non-state conflicts, but only with a shorter history from 1989 to 2011). The dataset not only includes civil wars, but also regular wars. There are 2098 entries, one per year of each conflict and the sometimes changing coalitions. On both sides the primary and any other combattants are listed as well as the location of the armed conflict. Since I was only interested in whether a country had had a civil war in the period, I filtered the data. There were 768 different conflicts with the same participants and location, however with some multiple counting. E. g. there were 29 armed conflicts for Afghanistan because of the changing coalitions. Next I looked which countries had had at least one conflict that was not a regular war between countries. There were now 104 countries.

To give you a flavor of what those examples are: there were 10 for Europe. Four are related to the breakup of Yugoslavia (Serbia, Croatia, Bosnia-Hercegovina, Macedonia), the UK versus various factions of the IRA, Spain versus ETA, France versus OAS, the Greek Civil War after World War II, the civil war after the fall of Ceauscescu in Romania, and Cyprus. 17 were in the Middle East and in Northern Africa, 18 in Latin America and the Carribean, 22 in Asia ex the Middle East (mostly in Central Asia and as part of the Indochinese Wars), 36 in Africa ex Northern Africa, and one for the United States vs. the Puerto Rican Nationalist Party. Not all have the feel of a “real” civil war, some like ETA in Spain could also be viewed as an extended terror campaign. But that would also be pretty bad if it were related to high levels of immigration.

Next I needed some data to quantify the level of immigration. What I took were data from the UN on International Migration from 2006, and here especially the “migrant stock” as a percentage of the population, i. e. what fraction was foreign-born. Of course, there is a problem here. Levels of migration might be influenced by civil wars: less immigration for countries with civil wars, and more for those without. However, my intent was only to get a rough idea what the relationship might be, all very tentative. And as you will see, it looks rather implausible that what I obtain is due to such an effect.

I then matched the data. There were 232 countries in the UN data set. However, there were also many tiny ones, e. g. the Holy See with 1,000 inhabitants and 100% migrant stock. I threw out all countries with less than a quarter of a million inhabitants, which reduced the number to 179 countries. There were 97 of them that had had an armed conflict. The seven that disappeared were not in the group of tiny countries, but were countries that no longer exist, e. g. South and North Vietnam, North and South Yemen, or did not yet exist in 2006 like South Sudan. The migrant stock varies from almost 0% to a high of 78.3% for Qatar.

The countries which had had an armed conflict had an average migrant stock of 4.3%, whereas those without an armed conflict had 12.7% migrant stock. Now this may be due to many small countries with high levels of immigration (e. g. the gulf states, European countries). However, also weighting with population, I calculated that countries with an armed conflict had a migrant stock of 2.2%, and those without one had a migrant stock of 6.6%. Or in other words: countries without an armed conflict had a migrant stock about three times as high as countries with an armed conflict.

In addition, I made the following evaluation. On the x-axis you see the 179 countries sorted by migrant stock from those with high percentages down to those with low ones, i.e. in decreasing order. I then summed up from left to right how many countries had armed conflicts, which is shown as the blue line. So the 50 countries to the left with the highest level of immigrants had 15 armed conflicts. All 179 countries had, of course, 97 conflicts. The blue line is rather smooth, so there is not some group with a certain level of immigration that had many armed conflicts and unduly influences the result.

As a comparison I added the red line which rises linearly from 0 to 97. If countries had an armed conflict with equal probability, then you would expect the blue line to be close to the red line. But it is not. There were only 15 armed conflicts among the first 50, but there should have been almost 27 with equal probabilities. The blue line is actually below the red line all the way, which means that there were fewer armed conflicts than equal probability for groups of countries above any threshold.

I said that there might be a problem with the effect running the other way: more armed conflict leads to less immigration. However, if you look at the specific cases, it looks rather implausible that this would change the results materially. Actually, it might make the results even stronger. E. g. the country with an armed conflict and the highest level of immigrants at 39.6% of the population is Israel. It is arguable whether that was an internal conflict at all. However, it would be a dubious claim in any way that the high level of immigration had anything to do with the situation Israel finds itself in. Probably Israel would have had the same armed conflicts with the Palestinians if there had been no immigration since 1946. In a similar vein, many of the armed conflicts in countries with high levels of immigration have no connection with immigration: the US vs. the PRNP, Spain vs. ETA, the UK vs. IRA, France vs. OAS. Or if you look at the thirty countries with the lowest migrant stock (0.5% or less), of which 24 experienced an armed conflict, it seems very hard to argue that they once had high levels of immigration that went down as a result of an armed conflict. Here are a few of the countries you would have to argue this for: Afghanistan, Peru, Guatemala, Angola, Eritrea, Haiti, Mali.

This is not to say that immigration caused lower levels of armed conflicts. In the literature on civil wars, it is often claimed that poorer countries have more civil wars than richer countries (cf. for a critical take). And richer countries will also attract more immigrants. So the true reason for both might be that a country is richer. However, if you think that immigration is a major driver of armed conflict, your claim does not look obvious and prima facie seems to be wrong. There is some research that would imply that civil wars can be contagious, i. e. can precipitate civil wars in neighboring countries and then also via a large influx of refugees (maybe Lebanon is such an example). However, if an argument along these lines can be made, its relevance is rather limited, and does not apply to the countries that typically receive immigrants. But I freely admit that my analysis can improved upon. It was just to get an idea what the relationship might be, no more.

How to Seal a Border

Perhaps the most famous and ambitious attempt to seal a border was the Berlin Wall, built in 1961 and dismantled in 1989. It formed part of the Inner German border. Only in Berlin was it a real wall, elsewhere a system of restricted zones, protective strips, barbed-wire fences, minefields, and spring-guns, patroled by the Border Troops of the GDR, which were 44,000 strong in 1989. Another 3,000 to 5,000 “voluntary helpers” assisted them in their role. In addition, the Staatssicherheit (State Security) secret police employed 91,000 or 1 in 180 citizens, the largest security apparatus in world history, with another 173,000 unofficial collaborators. Not all Staatssicherheit personnel worked on preventing “Republikflucht”(desertion from the republic), but one of their major tasks was to block attemps early on. And then you would also have to add some of the 80,000 regular police officers of the “Volkspolizei” (People’s Police) and their 177,500 volunteers who were also engaged in detecting potential refugees.

So how did it work out?

Let’s go back to before the Wall was built, way before it was built. In 1891, the classical liberal politician Eugen Richter published a short novel: “Sozialdemokratische Zukunftsbilder,” translated as “Socialist Pictures of the Future” and also available online. He took the then Marxist program of the Social Democratic Party as his starting-point and made predictions what would happen after a Socialist revolution. His conclusion: Germany would team with secret and regular police and people would leave the Socialist “paradise” in droves because of its economic decay and political oppression. In the novel the Socialist leadership first take it in stride because they think that it is only about a few bourgeois exploiters and dissatisfied artists. But then they realize that all kinds of people try to emigrate. Since the government cannot tolerate the loss of their labor force, they eventually man the borders and shoot the refugees. Not only in this regard did Eugen Richter’s prediction turn out to be amazingly accurate.

Now fast forward: After the end of World War II, Germany and its capital were divided into American, British, French, and Soviet occuption zones. There was vast destruction in all of them, and economic conditions were dismal throughout. However, the Soviet Union put pressure on their occupation zone to go Communist from the start. That prompted hundreds of thousands to leave for the West, 1.6 million from October 1945 to June 1946 alone. In 1949 the GDR was established which institutionalized the Communist regime. Not only growing oppression in the GDR pushed people to emigrate, but also the “Wirtschaftswunder” (economic miracle) in the West exerted increasing pull. So from 1949 on, between 125,000 and 280,000 people left the GDR each year, with a peak of 390,000 in 1953, or more than 2% of the population. Until 1961, this added up to 2.7 million or about 15% of the population.

The GDR reacted with a series of ever stricter measures. In January 1951, it issued an executive order that demanded emigrants hand in their passports before leaving for the West or else face jail of up to three months. A passport law in September 1954 held out a prison sentence of up to three years for leaving the GDR without permission. Already in May 1952 the GDR had started to make massive efforts to seal the Inner German border. However, alerted by these measures and after the suppressed uprising of 1953, even more people left, most of them now via West Berlin where control was harder to implement. In 1961 the government of the GDR was at the end of its tether and made the fateful decision to seal the border for real. The construction of the Berlin Wall began on August 13, 1961. Eugen Richter’s prediction had become reality after 70 years, and also that border guards would shoot on refugees. At least a few hundred and probably more than 1,000 would die until 1989.

What’s interesting is that however impressive the Inner German border was, even after August 1961 plenty of people were able to cross it. Certainly not as many as had before, so the GDR could achieve its goal of stabilizing the regime, yet far more than one might expect. Those who wanted to leave showed an inventiveness that could well match that of the GDR apparatus: tunnels were built, some escaped in self-made balloons, West Germans smuggled others out in the trunk of their cars, and sometimes brute force would do the job with improvised explosives or a truck ramming through the border fortifications.

However, the first choice was to use an easier route via countries that did not have as strict a border regime. In this way more than 43,000 managed to leave the “Paradise of the Workers and Peasants” in 1961. Of course, the GDR clamped down on such emigration by restricting travel abroad. In 1962 there were still 11,000 of them, though, and in 1963 more than 9,000. Putting in more effort, the GDR reduced this number to a low of only 1,768 in 1979 from where it started to rise again to more than 9,000 in 1988. From 1961 to 1988 it all added up to slightly less than 180,000 emigrants. When Hungary opened its borders with Austria in September 1989, 15,000 East Germans on vacation in the country took the opportunity with both hands and left for the West in the first three days alone, another 20,000 in the rest of the month. Two months later the Wall was history.

What’s even more amazing is how many managed to cross the Inner German border as so-called “Sperrbrecher” (blockade breakers). There were 8,500 in 1961, and still 5,800 in 1962. The numbers dropped, but it took the GDR until 1970 to push it below 1,000 a year surging again to 1,800 in 1973. A low of 160 was only reached in 1985 after which the number started to rise again. The total from 1961 to 1988 came to an impressive 40,000 people who found the border fortifications no hindrance to leave. The “success” of the GDR in reducing numbers came with ever heavier oppression. From January 1968 on, “illegal border crossings” led to a sentence of up to two years, or for “more serious cases” of up to five years which was increased to eight years in 1979. Also surveillance of the population grew ever tighter. From 1976 when the Staatssicherheit started to keep tabs to 1988 about 38,000 attempts to leave the GDR were thwarted or about 3,000 on average a year. However, border checks themselves proved rather inefficient despite the high level of scrutiny. Of the 3,000 “Ausschleusungen” (smuggling out) about 1,200 succeeded or roughly 40%.

What are some of the conclusions that closed border enthusiasts can draw from the experience of the Inner German border and the Berlin Wall?

Well, first a moral point that I would make: all this was a grave injustice, barring millions of people from escaping oppression and improving their economic condition. I am glad the Federal Republic of Germany never for a moment thought about sending anyone back. Actually the Federal Republic even bought out many of those who had been caught or were imprisoned for just handing in an application to leave the GDR. And I am also glad the Federal Republic of Germany restricted this not only to Germans from the East under the assumption that the GDR was illegitimate and so refugees were German citizens. Also Hungarians after the failed revolution of 1956, Czechs and Slovaks in 1968, Vietnamese boat people in the 1970s and Poles in the 1980s were welcomed and not sent back.

The other conclusion is that you cannot seal a border completely. The GDR even had the advantage that it had a Socialist economic system where all economic activity across the border is under state control and hence monitored more easily. Likewise the GDR did not have to care much about business travelers or tourists. And then it still took a lot a effort. A quarter of a percent of the GDR population were engaged in border control. Another percent worked on surveilling the populace for the Staatssicherheit and Volkspolizei, more than one percent acted in a supporting role. And, of course, it all involved a lot of intrusion and disregard for civil liberties. The only good point I can see was that throttling exchange with the outside world also made the GDR so much poorer and backward that it could not accomplish all it wanted. Some former Staatsicherheit officers have recently expressed awe at the extent of NSA data collection. However, if so often any potentially negative consequences of free migration are highlighted, how about the concrete negative consequences of trying to block it? If you want to literally seal a border, it takes more effort than even the GDR put into it.

Additional Remarks

– There is a difference between keeping people in and out of a country. Being locked in in the GDR was much more serious than being locked out. However, thwarting emigration is at the same time much easier because the government has all the means to surveil the population, build a dense network of informers, etc. In the analogous case for immigration, this would amount to doing all this on foreign soil.

– My numbers come from different sources, so they are not perfectly consistent. According to the Staatssicherheit data, there were fewer people who escaped. Since my point does not depend on the exact numbers, but only on the order of magnitude, I have not tried to mend this. My point is that hundreds and maybe thousands could cross the Inner German border each year even against the coordinated and massive efforts of a huge police apparatus.

– One of Eugen Richter’s predictions was also that the Socialist state would have no problem with emigration of pensioners. Actually, that turned out to be true as well. The GDR dumped old people on the Federal Republic of Germany. This is a caveat for proponents of open borders who argue that a welfare state and free migration do not collide or only in a minor way. That may be true under current conditions where immigration policies are tilted towards young people. Cynical governments like the GDR could well put this to the test.

– I am sorry that many of the references point to websites in German. Unfortunately often I could not find similar material in English. I hope with some translation tool you can get a grasp of what is in the German original.

The photograph featured at the top of this post is of West and East German border police confronting each other, moments after a woman successfully crossed the interior German border in Berlin, 1955. Photo by Three Lions/Hulton Archive/Getty Images, via the Google Cultural Institute.

Immigration-backed Bonds

Nathan Smith has proposed a scheme for a keyhole solution: DRITI, that has as its main features return deposits, surtaxes, and savings accounts. While I found it interesting, it looked a little complicated to me. In a similar vein, Anu Bradford suggests that a bond be posted by companies for the immigrants they hire. I liked that idea, too, but I share David Henderson’s reservations regarding the exact scheme.

Now, allow me to offer my own proposal. I am for real open borders. So it is only meant as a compromise that could work with most people being skeptical or even hostile to open borders. For want of a better name, let me call it an “immigration-backed bond” (unfortunately, “immigration bond”, which would be a better term, already refers to bonds that immigrants have to post to get out of detention).

The main points that I would like to change are these:

  • The above proposals rely on individual and private contracts. It would be preferable to exploit economies of scale and create a market with public information.
  • A product that needs to attract a lot of capital has to be reasonably simple. Even better if it conforms to some standard template.
  • There is often a complaint that proponents of open borders want the benefits for themselves, but risks are socialized. It would be nice if you could instead put your money where your mouth is.
  • Self-interest has been a reliable motivation for ages. So those who supply the capital should reap a profit commensurate with risks taken.
  • To increase political feasibility, I would also like to create a material interest on the part of the government.

The basic structure of an “immigration-backed bond” may look complicated, but only relies on rather standard features that have been around for a long time, e. g. for corporate and mortgage-backed bonds. It is a bond that has a certain maturity, e. g. in ten years, and is then paid back. In the meantime it pays a regular coupon. The coupon depends on a pool of immigrants and how they behave. It might pay back before maturity (in part or whole), i. e. there is a “callable” provision. And in extreme cases what you receive at maturity could be less than 100%. Of course, the coupon would have to be high enough to compensate you for the risks you take.

How does this relate to the immigrants?

For every, let’s say, $20,000 in bonds issued, there is a visa for one immigrant. The visa is “shall issue” and not “may issue”, i. e. the government can only refuse to issue it if there are some predefined reasons (e. g. no clean criminal record, affiliation with a terrorist organization). “Shall issue” is in line with a prima facie right to immigrate, whereas the current “may issue” is not. The bond insures risks from the immigrant, and the $20,000 serve as collateral if there are any problems that result in expenses to the government or third parties (e. g. fines, damages, cost of repatriation).

Unlike with current visas, the immigrants keep their visas as long as they pay up. So losing a job or changing employers would not be a problem per se. Or someone else might pay for them, e. g. a charity, family members or a spouse. If the immigrant does not incur any such costs, or less than some limit, they become permanent residents at maturity. If they default on payments or cross the limit, they can be sent back to the country they came from.

It still may not be clear how this would work on an operational level. So let me elaborate. To make it very concrete I suggest a rather specific implementation. However, I don’t think that the specifics are in any way optimal. They are only meant to show that there is no inherent problem.

The main part would be to set up a special legal entity (usually called a “Special Purpose Vehicle”) that obtains a certain amount of money from investors, let’s say, 500 million dollars for ten years, which would correspond to a pool of 25,000 immigrants. Half a billion dollars would be more than enough for a liquid market in the bond. In principle, the Special Purpose Vehicle could directly handle everything and have a dedicated staff for that purpose. However, that is not particularly likely because it is inefficient to start all over again for each new bond. Instead most operations would probably be outsourced to external parties who receive a fee from the Special Purpose Vehicle for their services.

As for the external parties involved I could imagine the following:

  • Investment banks set up the Special Purpose Vehicle and take care of bringing the bond to market.
  • A bank takes over the financial side of operations.
  • Rating agencies might supply a rating for the risks involved.
  • An accountancy firm supervises the different operations.
  • Probably a law firm takes care of handling charges from the government and re-couping them from the immigrants.
  • One or more human resource consulting firms originate the pool, i. e. select the immigrants (and probably also match them with job offers).
  • Some other party (e. g. a telephone operator) collects payments from the immigrants.
  • Insurance companies might also be involved, e. g. insuring extreme risks.

What is perhaps unclear is how some party (probably a human resource consulting firm) would originate the pool. Here’s how this could work:

The Special Purpose Vehicle comes with a definition for the characteristics of the immigrants. That’s because investors probably want to have an idea of what the risks are. The human resource consulting firm would then try to find people with the relevant profile in the usual way via ads or going through their databases (and probably also match them with respective job offers). Or it could be the other way around: the human resource consulting firm has a larger pool of potential immigrants, they “repackage” part of their larger pool and offer it to someone who wants to set up a Special Purpose Vehicle. An accountancy firm certifies they follow a defined protocol. To make the originator interested in delivering a good result, they could be asked to take on some of the risk themselves, e. g. with payments staggered until maturity, dependent on whether there are unexpected losses.

How would the definition be set for the pool? The main point would be to target a certain level of risk, and select immigrants accordingly. So any set of attributes that has predictive power, such as age, gender, education, etc. might be interesting as well as indicators for commitment (acquisition of relevant language skills, knowledge about the target country). The originator could also ask the immigrants to post some collateral themselves, or that someone vouches for them (e. g. their prospective employers, domestic citizens in the receiving country, immigrants with a good track record in some other pool, etc.). So parameters like degree of self-collateralization or percentage vouched for by reliable parties could also play a role.

What happens with the money?

Obviously, it would be stupid to leave it in a bank account at money market rates, so it should be invested in something. And here is where I would rely on the interest of politicians and the government: the money is invested in newly issued government bonds. And to make this even more attractive for the government, you could give them better than market conditions, e. g. no coupons or even negative coupons that are paid and not received by the Special Purpose Vehicle. Technically, you would perhaps want to keep the two things separate, so you have standard government bonds that can be sold in the market, plus a regular or lump payment to the government.

Up to this point, this looks like a money-losing operation. Holders of “immigration-backed bonds” would only have government bonds with lower or even negative coupons minus additional costs. That’s why the Special Purpose Vehicle has a claim on the immigrants for regular payments that cover all costs so far (market interest rates as an opportunity cost, expenses for origination and operation, extra payment to the government, a risk premium for investors).

It may be the business of the Special Purpose Vehicle to collect payments from the immigrants. However, it would probably outsource operations to some other party. Any company in the business of collecting money over a wide area would do. One idea would be to collect it via phone bills. Alternatively, contributions could be tacked onto tax payments as a surtax that is routed to the pool (minus some compensation to the government for supplying the infrastructure and costs for collecting the surtaxes). Since immigrants might die or leave the country before the ten years are over, there could also be a so-called “callable” provision, i. e. early payback of part of the principal, either by lot or pro rata. The government might also have to cede any extra payments after that point, so the underlying government bonds can be sold in the market. Or you could do without such a provision and investors would have to bear the risk of the respective defaults.

Could this work in the real world? Just a back-of-an-envelope derivation to see whether the dimensions are okay: If the pool were pretty risky, e. g. on a par with a junk bond with a rating of BB, you would want a premium of perhaps 5% per year to compensate for this. This is a truly risky pool, as over ten years you would expect charges and defaults of about $10,000 dollars per immigrant. You would also want a market rate for a riskless security over ten years. Now those are very low at the moment. A realistic long-term level would perhaps be something like 4%. Then there may be additional costs for origination and operation of 2% and a further 2% to get the government interested. This adds up to 13%. Now 13% of 20,000 dollars would translate to 2,600 dollars a year per immigrant or somewhat more than 200 dollars a month. My guess would be that this is more of an upper bound.

The government would get 10 million per year and half a billion in capital for ten years. The originator and operator (and their subcontractors) would obtain an annual $10 million together. Again this is only meant as a rough estimate and more of an upper bound to see whether something like this could work.

Would a typical government be interested? I think it would. For an extra 100.000 immigrants in one year, the government would have $40 million in extra money per year and an extra $2 billion in government bonds issued. For an extra 100,000 immigrants per year, you would have to do this for ten years in a row and then revolve. Now it is an extra $400 million per year and $20 billion in government bonds issued. Many governments in the Eurozone would have been glad to get their hands on such cheap refinancing. Of course, in that case the underlying government bonds would account for much of the risk premium.

With this rough calculation, my conclusion is that “immigrant-backed bonds” could be feasible and interesting for all parties involved. However, there are all kinds of loose ends and potential problems:

  • Unlike with mortgages that can be originated over an extended time frame and then repackaged, here many things have to happen within a short period of time, e. g. 25,000 applicants with a job offer right now. There could be some leakage with offers or applications being withdrawn at the last minute. However, one solution would be to have an excess of applicants and jobs, so there are always enough to fill the pool.
  • It could be tricky to define when and how much to pay to the government. As for fines and damages, this would be the same as what the immigrants have to pay directly. But how about expenses for court cases, police enforcement, etc.? What about if these charges materialize only after the bond has matured? And how about welfare payments? There could be some moral hazard problems here.
  • Is insurance limited to $20,000 per immigrant (or whatever it is, as the figure was purely arbitrary) or is there a real insurance via the pool where also extreme risks are insured (e. g. one of them perpetrating a major terrorist attack)? In the latter case: What if the Special Purpose Vehicle goes bankrupt? A typical solution would be to insure such extreme risks with a reinsurance company.
  • Asymmetric information and adverse selection: the immigrants who are selected could not immigrate in other ways, so there might be some hidden risks.
  • The originator could be corrupt. Supervision by an accountancy firm might not be sufficient to detect this. However, one remedy is to make them share in the risk via staggered payments that depend on results. The prospect of repeat business and protecting your reputation could be additional motivations for diligent origination.
  • “Asset-backed bonds”, after which this proposal is modelled, have fallen out of favor with investors and regulators in the wake of the financial crisis, but have made a modest comeback since then. So there might be a certain reluctance to participate in an offering, especially in the beginning.
  • It is easy to shoot down such a scheme with moralistic hyperbole: “You are treating immigrants like a commodity.” There is also a lot of potential for harrowing stories how immigrants are “exploited” or about “human trafficking.”
  • There might be perverse incentives for politicians to close down other venues because “immigration-backed bonds” are more lucrative. So there could be some crowding-out.
  • It might be hard to end such a scheme if you want to go for real open borders. On the upside, that would also apply if the government wanted to abolish it for more closed borders.

I am admittedly not an expert on structuring such products, so there might be even major improvements or else arguments why the whole concept would not work. That’s the reason I would like to offer this proposal for debate. However, if “immigration-backed bonds” came to pass as the best possible alternative under given circumstances, I would certainly be interested in investing my own money in them, just to show that I put my money where my mouth is – and to make a profit from a great opportunity to increase wealth.

[I would like to thank the Open Borders team for valuable input on a previous version of this post. I hope I now address most of the points they have raised. As always: all errors are mine. And for full disclosure, I would like to add that I work in the financial sector, but have no professional stake in what I suggest. And I am certainly not speaking on behalf of my employer.]

Did Open Borders Change the Course of World History?

Allow me to make the following counterfactual: Suppose all immigration of Germans to America had been blocked from the start. Restrictionists would have had lots of arguments on their side: Germany was a hotbed of various collectivist ideologies that were inimical to American liberty: rabid Nationalism, Antisemitism, Communism, and National Socialism. IQ of German Americans is at best average. German immigrants only slowly assimilated and kept speaking German. And then alien habits like minors can drink beer. Etc.

Now let’s go back to 1940.

The US had a population of 132 million, Germany including Austria, Greater Germany, had a population of 79 million. So the US had a population 67% larger than that of Greater Germany.

Today about 17% of Americans claim German ancestry. Since there was only low immigration of Germans after World War II compared to other groups, the fraction should have been even higher in 1940. Assuming a quarter of US population in 1940 was of German descent, US population in the counterfactual would go down by 33 million to 99 million. Add the 33 million to the German population and you get 112 million. So now Greater Germany is 12% more populous than the US. The effect would have been like another major power of 66 million had entered the war on the side of the Axis.

And it gets worse: Forget about General Eisenhower, and get used to Generalfeldmarschall Eisenhauer. Same for Chester Nimitz for the Navy (now: Generaladmiral Nimitz) and Carl Andrew Spaatz for the Air Force (now: Generalfeldmarschall Karl Andreas Spatz). And more as a footnote: also no William Patrick Hitler receiving a Purple Heart for his service in the US Navy.

I will not expand on the counterfactual and make a claim that the Axis powers would have won the war. But then I am not sure I could argue the opposite. In a world of completely closed borders for citizens of Germany, Italy, and Japan, you would have to repatriate also millions of German emigrants and their descendents from the British Empire and another big chunk of the US population for Italian Americans.

How well did restrictionist predictions stand up in the real world? Letting a fifth column onto your soil could have disastrous consequences. Plenty of danger for the US, right?

Not really. Incidents of treason and disloyality were few and far between. The “Christmas Declaration by men and women of German ancestry” was more representative, signed among others by Babe Ruth:

“[W]e Americans of German descent raise our voices in denunciation of the Hitler policy of cold-blooded extermination of the Jews of Europe and against the barbarities committed by the Nazis against all other innocent peoples under their sway. These horrors … are, in particular, a challenge to those who, like ourselves are descendants of the Germany that once stood in the foremost ranks of civilization. … [We] utterly repudiate every thought and deed of Hitler and his Nazis … [and urge Germany] to overthrow a regime which is in the infamy of German history.

Moral: You can look on immigrants as people who perhaps keep some allegiance to their old country and its culture. If that culture is thorougly collectivist as it was in Germany in 1940, that does not look good. Assimilation may be slow and incomplete.

However, that is looking on things only from the limited perspective of one country. If you look on them at a global scale, the effect is different. Even incomplete assimilation means having more people who are less committed to their previous views, and even some (and in the case of German Americans many) who are completely out of reach for collectivism. Open borders undermines collectivism.

So if you are concerned about liberty in the world long-term, you would want to have as many people as possible who are not stuck in collectivist societies and can be indoctrinated by totalitarian governments, and as many as possible who are exposed to liberty and have a chance to change their minds in an open society.

Good luck for the world that liberty went along with open borders for a long time.

The photograph of then-General Dwight D. Eisenhower speaking with paratroopers on the eve of D-Day, 1944 featured in the header is available at the Library of Congress.