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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 Case of Detroit

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Between 1900 and 1950, the population of Detroit increased more than six times over. But this understates how radical the growth really was at its peak—between 1900 and 1930, the population grew by 4.5 times. In the decade between 1910 and 1920 alone, the population grew by nearly 115 percent.

A lot of this population increase was due to inflows from other regions of the United States, but no small fraction of it can be attributed to foreign born immigrants. In Wayne County, where Detroit is located, the foreign born population increased by about 326% between 1900 and 1930. If our current foreign born population increased by a similar proportion, it would add another 130 million to their numbers.

And it’s not as though the native-born Americans who migrated there were cut from the same demographic cloth as the Detroit residents of 1900. African Americans from the south, for example, migrated to Detroit by the tens of thousands during that time period.

Moreover, the migrants to Detroit were overwhelmingly competing for very similar factory jobs–foreign in origin or not, the straightforward supply analysis of immigration restrictionists would suggest that wages for these jobs should have plummeted due to all the new arrivals. After all, the people who were there in 1910 had to compete against a labor market that was more than twice as large a decade later! To say nothing of the people who were there in 1900 and in three decades had to compete in a labor market that was more than four times as large as the one they started in!

But this is exactly the opposite of what occurred. It was precisely during this time period that the median wage of low-skilled workers in Detroit was exploding, rather than falling. The reason was largely the auto manufacturing revolution, an economic phenomena that owed quite a lot to one son of an immigrant. The innovation in manufacturing drew over a million people to Detroit like a magnet, and still a huge portion of the benefits of the innovation ended up with the average worker, even with the dramatic expansion in the supply of their competitors.

If we had gone back in time and closed America’s borders prior to 1900, hundreds of thousands of the people who helped make the Detroit boom happen would never have come. And if we applied the same restrictionist logic to Wayne County and limited the inflows from the rest of the country, far from helping out Detroit’s residents, the city would have played no part in the auto manufacturing revolution whatsoever; it would have gone to another, less restrictive city.

Immigration inflows are not random. They are likely to occur where the labor is most highly valued–and the increase in scale can have dynamic effects beyond simple supply and demand analysis. In Detroit, it made an entirely new industry possible.

So what can we learn from this specific episode in one city’s history? In my next post, I will discuss that very question.

Anti-immigration marketing, consistent with open borders

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I’ve been following the story of the United Kingdom’s plan to run advertising that will deter Romanian immigrants by playing up Britain as a bad destination, but it didn’t really pique my interest that much at first. After all, from an open borders point of view, there’s nothing wrong with anti-immigration speech — it’s anti-immigration coercion that has to clear a bar. Nevertheless, my interest was piqued, after I read this BBC article about a Romanian counter-campaign aimed at inviting British immigration to Romania.

The article is a fun read in of itself, but I also found this quote near the end, from an open letter signed by some Socialist Members of the European Parliament, to be noteworthy:

We are facing the danger of citizens of the newest member states being prevented from exercising their rights guaranteed to them by EU treaties.

What is more, we believe that a wave of hostile statements since the beginning of the year aims to stigmatise these citizens as second-class Europeans who pose a threat to the social systems, just because they want to exercise their basic rights to free movement and work.

I’m a bit of an EU-agnostic, at least when it comes to political integration. But on this particular point, I say to the Socialists, bravo! The only quarrel I would pick with their statement is that it seems curiously myopic for an ideology which started out as explicitly international and humanist in nature. What makes Europeans so much more innately entitled to the “basic rights [of] free movement and work”?

One could make a racial argument I suppose, but even Europeans are a bit antsy about declaring Western and Eastern Europeans as being of the same stock (this is part of the reason there exists British tension about Eastern European immigration in the first place). And besides, outside a vocal fringe, racial arguments are not very compelling.

One could argue that citizenship in an EU member state is what counts, because of the EU’s political nature. In a legal sense, this is absolutely correct. But in a moral sense, it seems odd that a basic right ought to derive from the state. The point of a basic right, after all, is that barring some disqualifying reason, we tend to assume a person in good standing should be entitled to it.

And moving around or working, in of themselves, are not political acts. One could argue that voting is a “basic right” but naturally something to be circumscribed by the state because of its nature. Well and true, but naturalisation, and arguably permanent settlement, are the only ways that immigration might be a political act. Simply exercising one’s freedom of movement and freedom to work is not a political act — it is a basic right.

The Socialists’ statement echoes with me because with a few emendations, it is a concise summary of the open borders moral philosophy:

Arbitrary immigration restrictions stigmatise people as second-class humans who pose a threat to the social system, just because they want to exercise their basic rights to free movement and work.

Introducing Adam Gurri

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We’re happy to announce that Adam Gurri will be joining Open Borders as an occasional blogger. Adam Gurri works in digital advertising and has an MA in economics from George Mason University (where Bryan Caplan, Donald Boudreaux, and many other open borders advocates teach). His father’s family migrated to the United States from Cuba, fleeing Castro shortly after the revolution. His great-grandparents on his mother’s side all came here from Russia, seeking refuge from political persecution and institutionalized antisemitism. On his own blog and at The Umlaut, he writes primarily about technology and society.

Adam is a champion of open borders. He feels that the persecuted and desperately poor of the world ought to be extended the same opportunities that his own family was lucky enough to have. In his posts for the Open Borders blog, he will be exploring history for what it can teach us about the effects of loosening immigration restrictions, as well as the moral case for open borders.

Incentives to be accurate about what forms of enforcement work

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Does “self-deportation” (also known as attrition through enforcement) work, if the goal is to cut down on (unauthorized) immigration? For those who want to cut such immigration down, this is a key question to answer. Restrictionist groups such as NumbersUSA, CIS and VDARE have generally taken the stance that attrition through enforcement is a workable strategy (see here, here, and here). The Immigration Policy Center, on the other hand, has argued otherwise.

I laid out hints of my own position on the matter here and here. Briefly put, yes, attrition through enforcement does work, but it also imposes costs and collateral damage on citizens/residents. After some reflection, though, it occurred to me that even without knowing much about the details, one would be led to suspect this.

I begin with the assumption that restrictionists actually want to achieve what they say they want to achieve — that there should be less future immigration (legal and illegal) and that most current illegal immigrants should leave the country. It is, of course, possible that people like Mark Krikorian don’t really want their stated agenda to be implemented, because it would make their jobs as restrictionist advocates superfluous. I find this unlikely, because it seems to me that restrictionists are generally extremely talented people who can find employment in a number of areas that involve the skillful and convincing presentation of a weak case — as lawyers, political aides, or lobbyists — and that their sticking to the relatively less lucrative area of immigration restrictionism is at least partly explained by genuine conviction.

If restrictionists sincerely want what they say they want, this means that their incentives are very much aligned towards determining how to achieve it. Thus, when they evaluate policies like attrition through enforcement and border security, they’re probably the best judges of the effectiveness of these policies.

On the other hand, open borders advocates and immigrant rights groups don’t want immigration enforcement (for the most part) to succeed — or at any rate, not without corresponding liberalizations of immigration policy. Their incentives, therefore, are not well-aligned towards an unbiased evaluation of the success or failure of these policies. To an extent, they face conflicting incentives. If they see a particular enforcement measure that is cheaper and more “effective” at achieving restrictionist ends, do they acknowledge this — and end up providing free service to the restrictionist cause — or disingenuously deny it, coming up with reasons against? I suspect that this is a very real dilemma, and many immigrant rights groups resolve it by fooling themselves into thinking that the effective methods of enforcement are ineffective. It’s similar to how drug use legalization people might feel at being asked to evaluate the effectiveness of drug raids at imprisoning drug users.

For these reasons, you’d see why one might have a strong prior that restrictionists would be more likely to have figured out the best methods of achieving their goals than open borders advocates and immigrant rights groups.

Nonetheless, there is another side to the picture: cost and collateral damage. Here, the incentives for restrictionists are bad. Without knowing the details, one would be led to suspect that restrictionists would systematically underestimate the cost and collateral damage of their proposed methods to citizens and natives. The reason is that hardcore restrictionists have a much higher preference for getting rid of illegal immigrants than the general public, so in order to sell their message to a relatively less (but still highly) restrictionist public, they’d need to underplay the collateral costs of their policies. On the other hand, immigrant rights and open borders advocacy groups would be quick to point out the collateral damage to citizens, and run sympathetic stories of citizens, authorized immigrants, and tourists on valid visas getting detained and harmed by over-enthusiastic enforcement.

My own take on this matter is that the best response for a hardcore open borders advocate to discussions of what forms of enforcement work is to first acknowledge that his/her own complete disagreement with the end goal makes him/her an extremely bad person to consult regarding the means to be used towards that end. One can think of this almost in the sense of a “conscientious objector” who refuses to participate in a system that his/her conscience goes against, or a person who refuses to testify against himself/herself in court. If it is necessary to offer an opinion, there are two alternatives. The first is to be genuinely honest about what forms of enforcement work, but argue that something “working” does not mean that you endorse it. The other alternative is to deliberately dissemble about what forms of enforcement work. While the former is more intellectually honest, I suspect that one can make a case for the latter from a consequentialist point of view, at least in the rare cases that one’s opinion could actually influence or shape immigration enforcement. At any rate, however, the trade-off between intellectual integrity and a conscience that forbids lending support to a policy one perceives as evil should be undertaken consciously rather than out of a reflexive desire to disagree with restrictionists.

UPDATE (March 31, 2014): When I wrote this post, I was broadly of the view that interior enforcement is more effective than border enforcement. However, this blog post by Alex Nowrasteh cites a literature sumary by the Council of Foreign Relations that suggests the opposite. Assuming this summary is correct, restrictionists’ focus on interior enforcement seems puzzling, and the broad claim of this post might well be misguided or false.