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

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.

The political tide

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It might be a good thing if Open Borders: The Case, in addition to provide an “attic,” so to speak, of economic, ethical, and philosophical arguments for open borders, could provide running pundit-style political commentary from an open-borders perspective. But political punditry is a full-time job in its own right, and it seems to require a kind of reading between the lines which one can’t do well unless one reads a lot of political news. There seems to be a lot of political momentum behind immigration reform right now, what with Obama’s speech in Nevada urging immigration reform earlier today, and a bipartisan group of eight senators— the Republicans were McCain, Rubio, Flake, and Graham– presenting a plan yesterday. I’ve got to respect Marco Rubio for taking the case to the conservative talk shows.

One change, it seems to me– but I could be wrong, I find it difficult to follow all the political proposals that come and go– is that everyone now seems to be talking about a pathway to citizenship for all the 11 million undocumented immigrants who live here, or nearly all. Up to now, attention has seemed to focus on the Dreamers. It made some sense to focus on them because they were the clearest case: the usual “enforce the law” arguments lose all moral credibility when applied to them, so Dreamers were a sort of wedge case, which left opponents of reform without any moral leg to stand on. But amnesty for Dreamers plus deportation for 10 million or so non-Dreamer undocumented immigrants would be atrocious, and it’s good that the conversation seemed to have moved on from the Dream Act to something more genuinely comprehensive.

A writer at The Guardian argues that Republicans are mistaken if they think they’ll earn political capital by supporting immigration reform, because Latinos are Democrats, and agree with the Democrats on other issues besides immigration, too. I’m not convinced. The Hispanic vote has swung a good deal as Republicans have gone more nativist. Republicans may not have a convincing strategy at the moment to win over Hispanics, but support immigration reform will open up new possibilities for coalition building. And I also think a lot of non-Latino voters will look more favorably on the GOP for this. Republicans will look less “mean,” and also more plausibly freedom-loving and anti-Big Government.

Immigration reform packages always come as mixed blessings, because with the concessions come demands for more enforcement, for employer verification of migration status, for greater effort to secure the border, for a general ramping up of the police state. E-Verify, if it worked, would needlessly make life difficult for a lot of people, not only undocumented immigrants but their employers, too. It would separate a lot of people from jobs where they were useful, people who badly needed the wages. More effort to secure the borders is expensive, for one thing, but it also has the bad effect of separating people from job opportunities or even family members. One can hope that the “enforcement” measures will be eviscerated, legally or via the operations of black markets (though that’s a problematic remedy), but I’m reluctant to wish on us the plague of more enforcement, even for the great benefit of amnesty. While I do want to see something pass and expect that it will be an improvement if it does, a lot of the arguments used by Rubio and others on my side (e.g., “back of the line”) are bogus. Ironically, the quote I agree with most is from opponent Lamar Smith:

“By granting amnesty, the Senate proposal actually compounds the problem by encouraging more illegal immigration.”

Yes, I think that’s true. And for me, that’s one of the strongest reasons to support it. Mexican migrant supply may have peaked, and demand is still down because of the bad economy, but if amnesty passes, and if the economy rebounds strongly at some point (probably not under Obama), then at some point I expect people from other countries– India, China, Africa, Vietnam, Indonesia, South America– will find ways physically to enter the country, even at great risk and expense, in anticipation of the next amnesty. If the process continues, that could move us a long way in the direction of open borders.