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Arizona-Style Immigration Laws Hurt the Economy

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This piece originally appeared in Forbes here, and is reproduced with permission from the author. It is written specifically in the context of United States politics.

With  the “papers please” portion of Arizona’s recent immigration law SB 1070 going into effect, civil rights and watchdog groups are in  overdrive readying for the litany of purported abuses and complaints.  Lydia Guzman, president of Respect Respeto, a civil rights group in Arizona that records abuses at the hands of police, said, “Our hotline has been receiving hundreds of calls a day since the law was implemented.”

Forcibly removing peaceful unauthorized immigrants from the U.S., separating them from their families, property, and jobs, to satisfy arcane labor market regulations created by Progressive politicians, is an appalling indecency.  It also inflicts significant economic harm. Arizona’s immigration laws have drastically damaged its economy since mid-2007. The humanitarian arguments may leave those who complain the loudest about unauthorized immigration unmoved, but the supporters of Arizona style immigration laws might be persuaded by the economic costs.

In a new Policy Analysis by the Cato Institute called “The Economic Case against Arizona’s Immigration Laws,” I analyze the economic carnage inflicted by Arizona’s immigration laws.

The Legal Arizona Workers Act (LAWA or employer sanctions) was the first such law, and it tried to regulate unauthorized workers out of the market.  Its chief tool is E-Verify, an electronic employment eligibility verification system used to weed out unauthorized immigrants when they apply for a job.

E-Verify has three major problems.  It is very expensive, discourages investment and increases unemployment.

Just to run an employee through costs around $147. Compliance, however, also requires additional human resources and legal services, increasing the financial burden on firms.

The second problem is that E-Verify scares away businesses, investment, and workers.  E-Verify is tied to what then-Governor Janet Napolitano called the “business death penalty.”  Businesses that knowingly hire unauthorized immigrants have their licenses revoked on a second offense, killing the business.

Despite the fact that application of the business death penalty has been relatively rare the prospect has scared investors and businesses out of the state.  It was largely responsible for a shocking business formation rate decline of 14.3 percent in the third quarter of 2007 in Arizona, rates of business formation in California and New Mexico increased over the same time.

Entrepreneur Richard Melman halted plans of opening a restaurant in Arizona after LAWA passed said:  “You put in $3 million or $4 million, and you can be shut down for a mis­take. Why take a chance? I want to see how it plays out.”  He wasn’t the only one.

The third problem with E-Verify is that it increases unemployment.  Supporters of E-Verify like Kris Kobach, the Secretary of State of Kansas and author of many different state level anti-immigrant bills, claim that E-Verify will force unauthorized immigrants out of jobs so Americans can fill them.

In reality, some unauthorized immigrants are forced out of jobs, which then mostly remain unfilled.  In the immigrant heavy farming industry, crop production employment dropped by 15.6 percent in the first 4 years after LAWA was passed.  American workers did not fill the gaps.  In neighboring New Mexico and California, crop production employment increased over the same time period.  E-Verify explains much of that difference.

Two and a half years after LAWA was passed, Arizona created a more controversial law called SB 1070 to enforce immigration laws outside of the workplace.  The combined effects of LAWA and SB 1070 forced about 200,000 people out of Arizona, most of them from the Phoenix area.

In the six years after April, 2006, the home price index for the 20 largest metropolitan areas in the nation declined by 32.9 percent.  In the Phoenix area, the price index declined by a whopping 51.29 percent.

The housing bust, combined with forcing 200,000 consumers of real-estate out of Arizona lowered prices further.  Homeowner and rental vacancy rates in Arizona were consistently above those in California and New Mexico.  For four years after LAWA passed, Albuquerque and Los Angeles even recorded vacancy rates that were 50 to 75 percent lower than those prevailing in Phoenix.

As a result of the triple whammy of E-Verify, the business death penalty, and the housing price decline partly caused by forcing hundreds of thousands of renters and buyers out of the market, employment in construction collapsed faster and further than in neighboring states.

The economic harm caused by LAWA and SB 1070 is only the tip of the iceberg.  Following the next election, when numerous states will begin to consider Arizona style immigration laws, they should pause to survey the tremendous economic toll it has taken on Arizona.

Open Borders note: More related information is available at the Arizona immigration crackdown page.

“The arc of the moral universe is long, but it bends toward justice.”

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I am no recent convert to the cause of open borders, but like others in the blogosphere, including Vipul himself, I have become increasingly convinced that this is the most important moral cause of our times. Vipul has kindly invited me to join this blog, and I consider it a great privilege. My convictions about immigration stem not only from intellectual pondering, but personal experience.

A bit about myself: my father is Chinese Malaysian and my mother is Filipino (with some Chinese heritage). My parents met during graduate school in Thailand. I was born while my father was completing further studies in Japan. I lived in Singapore for the first few years of my life, and grew up in Malaysia, a country I am proud to call home. I came to the United States for college, unexpectedly obtained a green card before graduation, and presently work in a major US retail bank. Along the way, I’ve studied abroad in the United Kingdom and held immigrant visas in both Australia and New Zealand (both rather long stories for another time there).

As a matter of nature, of genetics, I literally would not be here today without immigration. As a matter of nurture, of life experiences, I would not be who I am today without immigration. I’ve virtually lived the benefits of open borders. Being able to cross borders has taught me countless things about life and about humanity; it has given me countless acquaintances and friends; it has made my life immensely richer in ways you can never aspire to place a dollar value on. If we do talk dollar values, I earn much more in my current job than I would at the highest-paying similar alternative in Malaysia.

Yet I have enjoyed the benefits of immigration through blind luck: I have caught more than my fair share of lucky breaks. I had no say about being born into a relatively wealthy, well-educated and highly mobile family, the biggest lucky break of all. Nothing entitles me to the great blessings I have had, the same blessings which have largely been denied to, say, the children of farmers in Bangladesh.

Continue reading “The arc of the moral universe is long, but it bends toward justice.” →

Introducing John Lee

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The first blog post on the Open Borders blog (written by Vipul Naik) was published back on March 18, 2012. Shortly thereafter, Nathan Smith joined with an inaugural blog post on Hong Kong. Alex Nowrasteh, also an open borders advocate, agreed to have his writings re-posted on the Open Borders blog, making a total of three bloggers on the site.

We’re glad to announce that a new person will shortly be joining the Open Borders blog. This is John Lee, a Malaysian working for a US bank. John has written a lot about Malaysia-specific issues — you can read more about these at his blog-cum-website. He’s also been advocating open borders and engaging restrictionist arguments in the comments section on EconLog, which is how we discovered him. John will bring a unique cross-national perspective to his blog posts. His first blog post should appear in a couple of days.

Welcome, John!

Victor Davis Hanson

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I made the following comment about Victor Davis Hanson at EconLog, in response to David Henderson’s recent post:

Hanson’s argument seems to consist entirely of anecdotal evidence. Well, here’s my anecdotal evidence. I moved out to the Central Valley of California a year ago. I lived for a little while in southeast Fresno, then in Sanger, a small town a little east, very near orange orchards, and now I’m in central Fresno. I haven’t had any encounters with crime. I once hired a guy who was a member of the Bulldog gang (inactive) to fix my car (didn’t know he was a gangster till he got to talking– very talkative guy). He had a lot of resentment towards the cops, and if I recall correctly his dad (we were at his parents’ house) was behind on the rent, but he was nice enough to me. I often leave my door unlocked at night. That’s dumb and it’s just my forgetfulness, but it’s indicative that I don’t feel a lot of fear. Basically, life is normal. If you look at crime statistics– see here: http://www.disastercenter.com/crime/cacrime.htm– property crimes are down, murders are down, forcible rape is down, burglaries are down by MORE THAN HALF since 1986, when Reagan’s amnesty passed. But “no one calls the sheriff anymore,” says Hanson. Well, surely they’d call the sheriff about MURDER, and that’s fallen sharply. Really, shouldn’t Hanson give us some evidence? Not just personal anecdotes but solid, statistical evidence? By his account, central California sounds like it’s descending into anarchy. Who am I to believe, him or my own lying eyes? As someone who lives here, his account just doesn’t ring true.

Now, it’s true that central California is sort of rural and backward compared to the East Coast metropolises where I lived for the previous ten years. One misses the charm of Georgetown, the buzz of sophisticated conversation in a corner Starbucks, the intelligentsia. But making the immigrants go away won’t make the intelligentsia come. On the contrary. The agricultural industry here is heavily dependent on immigrant labor. A lot of the economy around here, as far as I can tell, would just unravel without it.

I listened to a little of Hanson’s book, Mexifornia. He commits every fallacy in the book, again and again. I’ll concede that median and average incomes are probably a bit lower in the Central Valley than they would be without the immigration. That’s not inconsistent with immigration being beneficial to most immigrants and most natives, or even to it being Pareto-superior to closed borders. “Pareto-superior,” of course, is a concept far too sophisticated for the likes of Hanson to understand. Which is why he shouldn’t be taken seriously on this issue.

Henderson responded:

@Nathan Smith,
Wonderfully put, Nathan.
Until the last two sentences. I know Victor a little. As I mentioned, we are both Hoover fellows and so I occasionally talk to him in the special coffee room at Hoover. Don’t sell him short. I bet he can understand “Pareto superior.” And even people who can’t understand have views on the issue that we should take seriously. I did take him seriously, which is why I bothered responding. If we don’t take people’s concerns seriously, we get nowhere.

Well,  OK. Let me take Hanson seriously by responding to the introduction to his book Mexifornia on Google Books. It will soon become clear why I’m reluctant to respond to the whole thing. I may also make clear my impatience with Hanson on the topic of immigration. (I understand that Hanson is an excellent historian of ancient Greece. A while back, I listened to a brilliant course on ancient Greece from Yale by Donald Kagan, who repeatedly stressed his admiration for Victor Davis Hanson. But good specialists often make bad public intellectuals. I’m also probably closer to Hanson on foreign policy than Henderson is.) Mexifornia begins by pointing out that public opinion and policy have moved in Hanson’s direction since 2003. Hanson is partly right, though he exaggerates: Continue reading Victor Davis Hanson →

The story behind the “double world GDP” estimates

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[UPDATE: I have added a new blog post titled gains from migration: GDP versus surplus that covers an issue that I didn’t adequately address in this blog post: that even though the contribution to GDP is largely made directly through the migrant, the “benefits” of this, in terms of the social surplus, are captured more broadly.]

Critics of immigration generally spend very little effort critiquing the strongest quantitative argument in favor of open borders: that they would result in a one-time increase in world GDP by 50-150%, or, in short, slogan form, double world GDP (the canonical literature review is this paper by Michael Clemens and the slogan “double world GDP” seems to have first been used in this blog post by Bryan Caplan). Many of these critics are citizenists, and frankly couldn’t care less about world GDP. But others have scoffed at these estimates without providing a clear-cut argument against them.

To my knowledge, the best critique of these estimates is expressed in a series of blog comments by Ghost of Christmas Past, a commenter on EconLog. The most complete versions of the critique are in this comment by Ghost of Christmas Past on Caplan’s “National Egoism” post and this comment by Ghost of Christmas Past on Caplan’s persuasion bleg post. I would like to provide a detailed point-by-point response to Ghost of Christmas Past’s critique. Prior to that, however, I need to establish more clearly just where the “double world GDP” estimates come from and what I think are the weaknesses of these estimates.

The first question: how are these world GDP estimates calculated?

One of the things that Ghost of Christmas Past glosses over in his/her critique is that the “double world GDP” estimate is not simply the estimate made by Michael Clemens. Rather, Clemens does a literature review and considers the many different estimates, showing that they are in a range of 50-150%. The back-of-the-envelope estimate by Clemens is more of a sanity check of the following sort: okay, assume that gains are half of what we observe today, how much can that give us? Then, Clemens goes over the various aspects that go into computing these estimates and the degree of uncertainty behind each of these factors. For those who don’t have the time to read Clemens’ paper, a quick list of the factors that would need to be considered, solely from the migration of labor, are: the effect on migrants, the effect on competing labor, employers, and consumers in the target country, and the effect on competing labor, employers, and consumers in the source country. Of course, when people move, it’s a migration of both labor and consumers, as well as, possibly, a migration of capital. This would further complicate the analysis.

The overall story behind the double world GDP estimate is that the first-order effect on migrants — aka the benefit to migrants — is huge, thanks to the place premium. In other words, migrants gain a lot by migrating. What they do with these gains (for instance, whether they send part of the money to their home countries as remittances, or save and invest in businesses in the country they migrated to) is not directly relevant to the GDP gain estimate.

What about the gains and losses by others, including competing labor, employers, and consumers, in the source and target countries? These gains and losses could both be important, but they are quantitatively likely to be substantially smaller than the gains to migrants. There could be considerable debate about the sign of these effects. For instance, the debate surrounding the suppression of wages of natives is about the extent to which competition in the labor market from immigrants drives down native wages. Pessimists believe that the driving-down effect from three decades of immigration to the United States has been about 4.8% for high school dropouts in the United States, and closer to zero for other categories of workers. Optimists see the effects as zero or slightly positive at current levels of immigration to the United States (more US-specific stuff at the link). Both optimists and pessimists believe that substantially more open borders would probably lead to a bigger decline in native wages, though less so in the long term than the short term. The overall magnitude and sign of the effects is up for empirical debate. Note: Even with a modest wage decline, natives may still be better off if price declines and the expansion in the range of consumption options makes up for this decline. They may also be better off as employers and land-owners. It’s only a small fraction of natives who are unambiguously likely to be worse off — those who depend primarily on wages (i.e., don’t own land), work in unskilled jobs that directly compete with unskilled immigrant labor, and don’t value the expanded range of consumption possible through immigration.

So how does this fit in with the “double world GDP” estimate arguments? The crux is that these gains and losses figure as rounding errors compared to the huge gains experienced by migrants. Continue reading The story behind the “double world GDP” estimates →