All posts by Nathan Smith

Nathan Smith is an assistant professor of economics at Fresno Pacific University. He did his Ph.D. in economics from George Mason University and has also worked for the World Bank. Smith proposed Don't Restrict Immigration, Tax It, one of the more comprehensive keyhole solution proposals to address concerns surrounding open borders. See also: Page about Nathan Smith on Open Borders All blog posts by Nathan Smith

Tyler Cowen’s not too convincing argument against open borders

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Tyler Cowen’s capacious mind prioritizes input over synthesis. He is a compulsive moderate, happiest in the mainstream, always glad to have an excuse not to rock the boat. I respect him tremendously. I am a happy user of his Principles of Economics textbook, and his blog, Marginal Revolution, is in my top five. Better yet is MR University. I haven’t listened to all of it yet, but I listened for hours last Friday to their brief profiles of many development economists, while doing the more mechanical parts of exam grading. I’ve rarely encountered such great content in a course distributed online, and never in economics. It’s amazing that this stuff is free. Three cheers for Cowen and Tabarrok’s two-man crusade to educate the world in economics. Cowen isn’t as dazzlingly lucid as Bryan Caplan as his best, but his judgment is probably more reliable precisely because of his prejudice for moderation. I sympathize with Cowen’s conservatism, his deference to consensus views. But of course, that’s also why I wouldn’t expect him to favor open borders, though he is pro-immigration. Open borders is too radical an idea for him. Still, he’s not one to dismiss a position without argument. Here’s Cowen on “Why open borders won’t work”:

The first issue is to pin down what we mean by open borders.

Land use restrictions are often a more important “”immigration policy” than border control per se.  It is not just how many people getin at what cost, but who can afford to live here.  This includes zoning laws, restrictions on the number of people allowed to live in an apartment, policies toward “squatters,” and rules for the homesteading of public property.  So by “open borders” I mean also liberal land use policies; nominally open borders would matter far less if unskilled laborers couldn’t also afford to live in the U.S.  (Note to anti-immigration types: you are focusing too much on the ease of crossing the border and not enough on the costs of living here.  How much the best immigration restrictions involve land use policy or border policy is a curiously underexplored question.)

Now, it’s true that immigration could be controlled indirectly through land use policies. But I think these questions are more separable than Cowen implies. Even if land use restrictions placed an absolutely binding ceiling on how many people could live in the US, so that even under borders no net immigration were possible, open borders would still make a huge difference. Land values would soar, and many US citizens whose value of living in the US is relatively low would sell out and emigrate. Since some of those who don’t own real estate would, I suppose, find themselves effectively evicted from the country, which is bad, but of course this whole scenario is counter-factual. In practice, whatever limit land use regulations notionally place on the number of people who can live in the US are not even close to binding, and if they threatened to become binding, they could be relaxed. A few metropolitan downtowns might be blocked by law from increasing their populations, and open borders would just drive up rents, but plenty of other places would allow developers to house the new people.

If both the border and land use were free, markets would be very powerful in organizing mass migration.  Consider Hyderabad.  Many of the very poor live either at or right next to garbage dumps.  They live in tents or ramshackle lean-tos.  Their jobs often involve scavenging the garbage dump for potentially useful scraps.  Why do they live there?  Do they like the short commute?  Is it because they love the Indian culture one finds right next to the garbage dump?  No, no, and no.  They live there because they will put up with almost anything to have a chance of survival.

How many of these people would book passage on a slow ship to Baltimore, with the hope of living in a richer garbage dump?  The ship would serve cheap rice and lentils, make them sew garments while sailing, and collect further payment five years after arrival, tagging them with GPS if need be or “monitoring” relatives back home.  Or perhaps the Indian government would pay their way.

How about the nine or so million Haitians — almost all living in extreme poverty — who face a much shorter and cheaper boat trip?

I like Cowen’s imaginative filling out of the picture of what open borders would look like. I think it would turn out something like this. But he hasn’t gotten to the downside yet. After all, probably these people would find a richer garbage dump to live on, and since he hasn’t given any reason to expect natives to be harmed by it, the changes envisioned may be Pareto-improving.

I can imagine the U.S. staying a high-quality capitalist democracy with some percentage of the population living in garbage dumps and shantytowns.  While I think we are underinvesting in shantytowns, the permissible percentage is not very high and almost certainly falls short of fifteen percent.  (Btw, there is much complaining about the Mexicans, but in fact we share a long land border with a relatively wealthy third world country; this is rarely appreciated.)

OK, but given how important the issue is, I’d appreciate a little more theory here. What exactly would prevent the US from being a high-quality capitalist democracy with 20% of the population living in shantytowns? Would the shantytown dwellers stage a revolution? Would they vote for redistributionist politicians? But of course, that assumes they’re given the franchise, and that doesn’t have to happen automatically. Cowen would be the first to agree that the golden age of US-led innovation was the golden age of open borders. Capitalist democracy was thriving then, too. Things have changed a lot since then, and yes, global income gaps are larger and the relative poverty of immigrants might be more severe than in the 19th century. But the world is also more Americanized, democratic, English-speaking, etc., than it was in the 19th century, and anyway, is there any evidence that America was pushing the limits of its absorptive capacity in 1914? With all due respect to Burkean conservatism and the precautionary principle, the humanitarian stakes are very high here. It’s fair to ask for a clearer argument of what exactly Cowen means by “high-quality capitalist democracy,” and how it’s threatened by open borders, and if so, whether “high-quality capitalist democracy” in Cowen’s sense (whatever that is) is really so valuable as to justify shutting out so many tens or hundreds of millions from a great chance at a better life.

That is why I do not favor unlimited immigration.  To the extent that nominally “open borders” would be tolerable, it is because we already impose implicit immigration restrictions through land use policies.

That all said, I will reiterate my view that we could take in many more immigrants than we are doing now, both skilled and unskilled.

Maybe Cowen and I aren’t so far apart. Cowen’s not sure what the upper bound on absorptive capacity is, but it’s certainly higher than what the US permits now. Raise it, see what happens, repeat. I wonder if he could be persuaded to position himself as an open borders skeptic rather than nailing his flag to “open borders won’t work.” Also, I wonder whether he’d endorse my DRITI scheme, which seeks to safeguard natives’ living standards and the integrity of existing institutions while retiring discretionary migration restrictions.

My marching orders

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C.S. Lewis, in Mere Christianity, wrote:

People say, “The Church ought to give us a lead.” That is true if they mean it in the right way, but false if they mean it in the wrong way. By the Church they ought to mean the whole body of practicing Christians. And when they say that the Church should give us a lead, they ought to mean that some Christians- those who happen to have the right talents- should be economists and statesmen, and that all economists and statesmen should be Christians, and that their whole efforts in politics and economics should be directed to putting “Do as you would be done by” into action.

That’s what I’m trying to do here.

World poverty

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If there is a single worthiest cause, a goal most deserving of our best efforts, that goal may be the alleviation of world poverty. That is not the only reason I favor open borders, but it is the biggest. It was to try to do something about world poverty that I enrolled in the MPA/ID program at the Kennedy School of Government ten years ago. I had lived in Prague, far from the poorest place in the world but certainly poorer than the US, and traveled through Bulgaria, Serbia, and Turkey. I felt the guilt of privilege. I had a very high opinion of my own intelligence then, and when I was admitted to the MPA/ID program, I was confident I could be useful, somehow, though I had no idea how. Afterwards, I went to the World Bank, and spent a couple of months, in the spring of 2004, on a project in Malawi.

It may be that by the time I’m an old man, such poverty as I saw in Malawi will have vanished from the world for good. Malawi has improved since I was there (nothing to do with my work), though it’s still one of the poorest countries in the world. At that time, it was chronically on the brink of hunger. There had been, not quite a famine, but a food shortage in 2002. I was there in the spring, and my colleagues would look at the maize fields and say it wasn’t enough, they foresaw hunger coming. A Peace Corps volunteer I met, who had been there during the hunger in 2002, said she had seen someone dead in the road, dead simply of hunger. I was told that people from the cities visiting their relatives in the villages in those days would bring food, but with a layer of clothes on top. If stopped, they would claim they were delivering clothes. Food would be stolen. That’s hearsay, but I saw plenty with my own eyes. There were beggars everywhere. That seems to be a cultural difference, in part, for even well-off Malawians would ask you for stuff. One group of young people we met and spent an evening with had jobs in government ministries, yet afterwards they sent us an e-mail explaining their problems and asking for a few hundred dollars. But most of the beggars really were desperate.

There was a general lack of professionalism. I was working with people from the Malawian statistical agency. We would work 9am to 4pm, at a leisurely pace, which I was always pushing, and then they’d go home and I’d go back to the World Bank offices and keep working. The culture is relaxed. Indeed, the people were as friendly and pleasant as the weather. Americans, by contrast, seem much busier and more stressed. This is only an impression, and I don’t want to give offense, but it seemed to me that Malawians exhibit a good deal less forethought than Americans, or Europeans, or Russians do. It’s not an American thing, nor even a Western thing: in China, I had a very different impression, and I suspect that the Chinese practice forethought as much as Americans do. And doubtless there are exceptions among Malawians; but that did seem to be the pattern. If a Malawian had a full belly– again, take it with a grain of salt, but it was my impression– he was happy. That’s good in a way, but it doesn’t contribute to the long-term planning that grows the economy. Continue reading World poverty →

John Kennan’s “Open Borders”

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This post is going to attempt to do something difficult, namely: bring a contribution to technical economic theory within reach of lay readers. The typical lay reader, or for that matter even an atypically intelligent reader who is not a specialist in economics, could understand little of Kennan’s paper, or for that matter most academic economics papers. I don’t totally understand the paper either, but I think I mostly understand it. I’m pretty sure I understand the main thrust. The work in question is “Open Borders” by John Kennan. If one had to pick one thing to stick in a newspaper headline, it would be Kennan’s prediction that

For the 40 countries in Figure 6 this gives an estimate of $10,798, per worker (including nonmigrants), per year (in 2012 dollars, adjusted for purchasing power parity). This is a very large number: the average income per worker in these countries is $8,633, so the gain in (net) income is 125%. For all of the countries in the Penn World Table that are not at the productivity frontier (as defined above), using GDP data to estimate relative wages, the estimated gain is $10,135, relative to an average income of $9,079, so the gain is 112%. These are of course just rough estimates, relying on a number of strong simplifying assumptions. But unless these assumptions are extremely far off the mark, the results indicate that the gains from open borders would be enormous.

In other words, open borders could double the income of the world’s most disadvantaged people. Far from causing a “brain drain” effect, harming poor countries by poaching productive people, even nonmigrants would benefit from open borders. Furthermore:

These gains are associated with a relatively small reduction in the real wage in developed countries, and even this effect disappears as the capital-labor ratio adjusts over time; indeed if immigration restrictions are relaxed gradually, allowing time for investment in physical capital to keep pace, there is no implied reduction in real wages.

How does Kennan arrive at this conclusion? Via a theoretical model, calibrated to fit certain real world data. The approach is oversimplified and crude, yet at the same time, in some ways, painstakingly subtle… but that’s economic theory for you. The logic must be impeccable, but economists’ tolerance for departures from realism can be opaque at first, then, once understood, rather shocking. But one has to do it. A question like “what would happen if the world opened its borders?” involves such a large departure from current reality that common sense and experience fail us. Theory can, so to speak, see in the dark. It allows us to keep thinking clearly, at least, about very remote situations. But down to business.

After a short intro, Kennan’s first really substantive paragraph is:

Before proceeding to analyze a world economy with open borders, the first question that must be answered is whether restrictions on factor mobility have any real effects. If product prices are the same across countries (because there is free trade and transportation is not costly, for example), and if there are two goods that are produced in two different countries, and if the production technologies (for these two goods) are the same across the two countries, then the factor price equalization theorem applies. That is, real wages and other factor prices are equalized across countries even though factors are immobile, because differences in factor prices are implicitly arbitraged through the product market. The theoretical argument is beautiful, but of course the facts are otherwise. For example, wages in the U.S. are about 2.5 times the Mexican wage, for comparable workers.

This will require some unpacking, especially “factor price equalization” and “differences in factor prices are implicitly arbitraged through the product market.” An important result in international economics is that in the “long run,” given certain fairly standard (albeit apparently unrealistic) assumptions, immigration will not reduce wages in the host country, because the mix of industries in the host country will shift to accommodate the new supply of workers to such an extent that wages will be exactly the same. (See the closely related Rybczynski theorem.) Thus, to use the example from the Feenstra and Taylor textbook that I teach this stuff out of, suppose there are two industries, computers and shoes. Computers are a capital-intensive industry, shoes a labor-intensive industry. If a lot of immigrants enter a country called, say, Home, then Home will start producing more shoes and fewer computers.

Fewer computers? Yes, fewer. Even though there are more workers? Not just proportionally fewer? No, fewer in absolute terms. Think of it this way. There’s the same amount of capital in Home as there was before. But there are now more workers. It’s not surprising that the shoe industry will take the lead in absorbing these workers, since its technology is the more labor-intensive of the two. But as it does so, it will lower the marginal product of labor and raise the marginal product of capital in the shoe industry. Or to try to express it without the jargon, the shoe industry will have trouble finding useful things for so many new workers to do without new machines, structures, and other capital goods for them to work with. Even if the shoe industry can’t increase its capital at all, it could find something for all the new workers to do. It will be able to make more shoes. But not that many more shoes. The greater supply of workers increases the shoe industry’s demand for capital. In fact, it implies that the shoe industry wants capital more, at the margin, than the computer industry does. As capital moves from the computer industry to the shoe industry, workers move too, since the scarcity of machines makes them less productive in computers. Importantly, the relative price of computers and shoes stays the same. This is because prices are pinned down by international trade: any deviation in the relative price would cause arbitrage. Wages don’t fall– again, this is in the long run– because relative prices don’t fall, and wages depend on relative prices. The growth of the shoe industry and the shrinkage of the computer industry raise the economy’s demand for labor relative to capital, exactly canceling out the tendency for a greater supply of labor to reduce its wage. This implies not only that wages shouldn’t be reduced by immigration, but also that wages should be the same in every country. Continue reading John Kennan’s “Open Borders” →

Auctions, tariffs, and taxes

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A draft that Alex Nowrasteh sent me to read provoked me to think in a new way about various market alternatives for regulating immigration. All of the following policies use the price mechanism, in one way or another, to ration visas by willingness-to-pay, while capturing some of the surpluses generated by immigration to return them to natives.

1. Auctions. Under this mechanism, a certain number of visas would be sold to the highest bidder. There’s a lot to be said about auction design, but for concreteness, you could just let everyone submit a bid, and then accept the top x bids, requiring them each to pay, not what they bid (which would make them bid strategically) but the lowest acceptable bid (which would make them reveal their true values). Auction winners would pay their bid, and be issued visas.

2. Tariffs. Under this mechanism, the government would set a price for a visa, and whoever was willing to pay it would receive one. There might, of course, be restrictions: knowledge of English, perhaps, or criminal background check, or some regions of the world (Pakistan?) might be excluded or treated differently on national security grounds.

3. Taxes. This is the approach I’ve long advocated: the DRITI scheme would be one way to design it. In this case, to come would be nearly free– in the DRITI scheme, I have people preimburse the government for a deportation option which they could then exercise if they were destitute and wanted to go home– but those who came to work would pay a surtax (DRITI has some other features but never mind those for now).

Now, at a highly theoretical level, the effects of all these policies could be much the same. It is not the case that, say, auctions are necessarily more restrictive than tariffs, and tariffs than taxes. If you auctioned off enough visas, that could be quite a loose immigration policy. If you set a tariff, or a migrant surtax, very high, the policy could be rather restrictive. If the government knows its own preferences and the demand curve for immigration, it doesn’t matter whether it controls the quantity (via auctions) or the price (via tariffs/taxes): the number who will come, and what they will pay, will maximize the government’s objective function. Similarly, if immigrants know what they’ll earn and are not credit-constrained, it doesn’t matter whether they pay everything up front (via auctions/tariffs) or over time (via taxes): either way, those will come whose net present value of migrating is greater than the net present value of the payments required.

There are a lot of practical differences between the three policies but I think the crucial one is how the burden of uncertainty is distributed, if, as is realistic, the government does not know exactly what the demand for immigration is like, nor do immigrants know exactly what they’ll earn in the US.

Under the auction mechanism, the government faces no uncertainty about what may the most important variable, namely, how many immigrants will come, though it faces uncertainty about how much it will raise from the auction. Immigrants, on the other hand, face a lot of uncertainty, because they don’t know if their bids will prove sufficiently high to qualify for visas. Immigrants might find it difficult to plan, not knowing whether they would be able to come or not. Also, they wouldn’t know how much they would end up paying. If an immigrant bids $500,000, he might be fairly confident of coming, but not know whether he’d end up paying $20,000 or $100,000.

Under the tariff mechanism, the government faces uncertainty about how many immigrants will come, and also about how much revenue it will receive in total, but not about what price each immigrant will pay. It knows how much revenue it will get per immigrant. Meanwhile, immigrants know what they’ll have to pay for a visa, and face no uncertainty on that front. But they face a lot of uncertainty about what they’ll earn in the US, and how much they’ll like it there. The value of immigrating is probably quite uncertain, but they have to pay the same price in any case. If they pay a lot, then are unlucky in the labor market, or have overestimated their value, or become unbearably homesick, they’re in trouble. Of course, they might also get large, unexpected surpluses if their fortunes in the US are better than they had anticipated. But it’s a risky undertaking.

Under the tax mechanism, the government faces uncertainty, both about how many immigrants will come, and about how much the immigrants will earn and therefore how much they’ll pay in taxes. The government, moreover, has to wait to get paid. Immigrants, on the other hand, face much less risk. They don’t know how well they’ll succeed in the US, but if they do badly, they can go home, or if they stay even though they’re earning little, they’ll pay little (though even a small amount might be painful) for the privilege of staying. If they do well, they’ll pay a lot, but they can afford it then. If they earn well enough but dislike life in the US, they’re not bound to stay just so they can pay off the debt they incurred for the visa: the visa was near-free. Immigrants also don’t need to have a lot of liquid assets to come.

I much prefer the tax mechanism, because the government can handle the risk easily. The government is highly “diversified” in that many immigrants will come, and more taxes from the successful will offset fewer taxes from the less successful. And the government can easily afford to wait and garnish wages rather than getting a lump sum up front. I think only the tax mechanism would (virtually) eliminate undocumented immigration, because anyone who could afford to pay a coyote could afford to get a visa. I also think the government could raise the most money through immigration taxes, because immigrants who were relieved of risk and the need to go into debt would be willing to accept arrangements that, on average, would ultimately cost them a good deal more than what they would have agreed to pay as a lump sum ex ante.

But it occurs to me (or perhaps Vipul suggested it, I can’t remember) that a policy path to open borders might involve (a) auctions first, (b) then tariffs, and (c) taxes last.

If the public appreciated the efficiency advantages of regulating immigration by working through markets, but was still spooked by the possibility of getting swamped, they might go for the auction approach. That way they’d still control how many immigrants came in.

If the auction mechanism had been in place for a while, people might start to feel they knew something about the shape of the immigration demand curve, which would make them more comfortable with the idea of tariffs, since the number of immigrants who would use them, though unknown, would be less unknown. People could make an educated guess. Moreover, the auction mechanism would have some problems which a tariff could resolve. For example, what’s the auction schedule? If it were annual, people would have to wait a long time for it, and to lose a bid could mean the disruption of a lot of big plans. If it were monthly, people would speculate on a favorable month. Prices might fluctuate in strange ways. Some might be willing to pay a lot more than the usual auction prices during the off-season, while others would overbid and regret it. A tariff would promise to be less arbitrary and raise more revenue.

Later, when the tariff mechanism had been in place for a while, people would have a clearer idea what the income profile of immigrants tended to be, which would help them project the earnings of a migration tax. There would be lots of stories about spirited, entrepreneurial aspirants to immigration who, however, couldn’t raise the money to come, though they seemed sure to succeed in the US if they could just get over that hurdle. Others would pay the tariff, get homesick, but be stuck, needing high earnings to pay off creditors. A switch to taxes would promise to relieve immigrants of risk and avoid excluding promising people merely because they had poor access to credit, while at the same time, increasing the revenue the government could take in.