The Political Economy of Immigration
(written by Lancelot Finn, September 2003 / December 2004)
First, it is easy to understand that some people benefit economically from immigration. The immigrants themselves are presumably better off, or why would they come? Native-born employers of cheap immigrant labor also obviously benefit. Sometimes these may be factory owners, but most typically these are in the service industry, e.g. restaurants. The customers who use these services also benefit: a haircut costs twice as much in Boston as in San Diego, because San Diego has lots of Mexican immigrants. If the manager of your favorite restaurant can hire cheap immigrant labor, he can afford to lower his prices. And if his competitors can hire cheap immigrant labor, he has to lower his prices to keep his market share.
But while some gain, others lose. Anyone who is competing with immigrants is at a disadvantage. This may mean competition for rental apartments or for slots in the best colleges, but most typically it means competition for jobs. Low-skilled jobs as wait staff or janitors are a typical example of what immigrants effectively compete for, but computer programmers and nuclear scientists also face steep competition. So if some gain and others lose, how do we know how to add up the benefits and the costs? Economists defending free trade admit that free trade has losers but claim that the winners always gain more than the losers lose, so that the nation as a whole benefits. The same holds for immigration, probably much more strongly, but as with free trade, immigration may have unwelcome redistributive consequences.
To understand this point, try the following thought-experiment. Suppose that 1) the American population consists of 200 million working-age adults, plus an assortment of dependents, 2) every American adult is employed and earns $30,000 per year, 3) every American adult has $150,000 worth of stocks on Wall Street, which pay annual dividends of 10%, 4) every American adult has a degree from a state university, 5) every American adult owns and lives in or on $100,000 worth of real estate, which consists of either an urban apartment, a suburban house, or a country ranch, 6) every American adult spends half his or her income on manufactures and half of it on services. Public services do not play a significant role in the economy. There is no immigration. At this point, someone introduces a proposal to open the borders.
In Congress, whose members are perfectly aware of and committed to the interests of their identical constituents, the following points are raised.
1) Immigration will create more competition in the (perfectly flexible) labor market, and therefore lower wages. Every American adult will suffer a drop in pay to $20,000 per year.
2) Cheaper labor and a larger domestic market will boost corporate profits. Profits, and therefore dividends, will double from 10% to 20% of stock market capitalization.
3) An increase in population will increase the size of cities by 50%.
4) A fall in the wage rate will result in a change of prices. Manufactures are traded on international markets so their prices will remain the same. But services are produced domestically, so they will become 33% cheaper. (The price of services falls by as much as the native-born adult’s salary does, not because labor is the only input in service production, but because all the adults are college-educated, while many service jobs will go to less skilled immigrants who will work for lower pay.)
Congress quickly concludes that the first of these results of immigration will be bad for their constituents, costing each adult $10,000 a year. The second result benefits them, however: they will now earn $15,000 more in dividends per year. So, subtracting the salary cuts from the stock market gains, Congress observes that every American will end up with $5,000 more income.
Whether the third result is good or bad is partly a matter of taste. Some Americans may be dismayed by the growth of the cities. Those who prefer the suburbs may find themselves enveloped by the growing city. This in turn will push the suburbs outwards, enveloping some who would have preferred to live in the country within the growing suburbs. Yet Congress also notices that if their constituents are willing to move, they can not only live in their preferred environment but also realize substantial capital gains. For as immigration drives the expansion of cities, it also raises the value of land. As cities envelop suburbs, developers will offer to buy (previously) suburban land in order to build (urban) apartment buildings. Urban apartment buildings are much more valuable, per acre, than suburban houses, so suburban owners who are willing to move can sell their homes at a large premium. The same applies to country ranches, whose owners will be approached by developers who want to convert the land into suburban houses. And while it may be a bit sad to see the green fields where horses run turn into “little boxes on a hillside, and they’re all made out of ticky-tacky,” this is America we’re talking about: there’s plenty of land left out there.
Congressmen are unsure about the third result. Most members think that their constituents will be glad to take the capital gains and move a few miles, but some worry that this will mean a painful break-up of communities. However, they all agree that the fourth point is welcome. Even if their constituents continue to consume manufactures and services in the same ratio, the fall in the price of services is worth the equivalent of $4,000 in extra income. In fact, their constituents will probably substitute away from manufactures towards the cheaper services, and thereby end up even better off. Congress judges that the second and fourth points (higher dividends and cheaper services) easily outweigh the first one (lost wages) and judges that the third point (expansion of cities, more expensive land) is probably positive on balance. It unanimously passes the motion for open borders.
Of course, this example is unlikely to convince anyone, and not just because the numbers are made up. That the gains to corporate profits, and the benefits from lower-cost services, outweigh any fall in wages that immigration might cause, is probably true. As for the growth of the cities, the fact that Americans are generally leaving the land and moving into the cities shows that Americans do not really think their country is too crowded: in practice, whatever they may say, they are voting with their feet for population density by moving to the most crowded places. No, what makes the example absurd is that it assumes all Americans are equal. Financial capital, education, land and access to employment are distributed evenly among them. In the real world, not only are all these distributed unevenly, they are distributed in a way that has dire consequences for the political economy of immigration.
Americans in the example enjoyed three kinds of income: wages for their labor, dividends on their financial capital, and the flow of non-monetized value they enjoyed from living on their real estate. In practice, labor is by far the most equally distributed of the three. The vast majority of Americans who want to work can do so, and wages from labor generally constitute much the largest share of their income. Many Americans are home-owners and thus enjoy flows of non-monetized value from living in their homes, but this resource is much less evenly distributed than labor, since homes vary tremendously in value, and since about a third of Americans, and generally a rather disadvantaged third at that, are renters, who pay by the month for what home-owners enjoy automatically. Financial capital is even less evenly distributed, with most of the country’s financial assets concentrated in the hands of the top 10%. Moreover, services are a luxury consumed disproportionately by the rich. Inequality transforms the conclusions of the model. If the harms from wage cuts fall heavily on the middle-class majority, while higher dividends and cheaper services benefit the upper-class few, Congress will serve its constituency best by slamming the door on immigrants’ hopes for a better life.
Moreover, something else is left out of the model: public services and land. Streets, roads and parks are all provided by the government to the public, that is, to anyone who shows up there, native-born and immigrant alike. The government also provides education free, and while health care is generally private, there are many circumstances in which the government steps in to help. The government also provides security. And even if the welfare state is out of fashion, there is still a network of social workers, public programs and private charities that provide a somewhat threadbare social safety net. Immigrants usually send their children to school, occasionally receive indigent care at hospitals, may turn to social workers and charities in time of need, and hang out in the streets and parks, all of this in some sense at the public expense. (It’s not exactly clear how poor immigrants cost the public by hanging out in streets and parks, but perhaps they, well, lower the tone.)
Yet all this can be fixed. The secret is, as trade economists like to say, to redistribute from the winners (in this case, immigrants and capitalists) to the losers (workers who compete with immigrants). First, we can allow as many immigrants to come as want to, but we impose a special tax on their wages; say, a sliding scale of 60%-80%. Similar taxes would be imposed on self-employment, but lower, though still discriminatory, taxes would apply to immigrant businesses. This would serve two purposes: it would prevent immigrants from bidding down native-borns’ wages too much, and it would provide a source of revenue. We forbid them from using public services unless they pay special user fees—for example, if they want to go to the public library, visit a national park, or send their children to school. It is not practical to charge user fees for hanging out in public parks or walking down the street, but we can do the next best thing: forbid immigrants to own or rent property near parks, or in the most desirable parts of cities, though in any case their heavily taxed wages would probably not suffice. None of these rules need apply to immigrants who are already here, or to immigrants who acquire visas through the channels previously established. Rather, they would accompany a proclamation of open borders and apply only to those immigrants who entered under the new open borders law. The zoning boards of major metropolises could get together and plan where to encourage immigrant housing projects: these would be well away from the city but well served by a bus line or perhaps the odd subway, large cheap high-density tenement towns that immigrants could afford on their low after-tax take-home pay. Concentration of immigrant populations would minimize fraternization with native-borns, which might inspire envy and create opportunities for theft; it would also facilitate the creation of support networks among immigrants of the same national origin, and the continuation of the traditional frugality they practiced at home. To reduce the risks from immigrant unrest, regular police surveillance would be arranged. After a period of a decade or so, immigrants who had proven law-abiding and economically self-sufficient would receive an upgrade to normal permanent resident status, and the special tax rates and other penalties would be lifted.
Opponents of immigration often cite the negative impact that it has on relatively poor segments of the native-born population. We have already partly solved this through special immigrant tax rates, which would prevent immigrants from bidding down wages for unskilled positions as low as they would be able to do otherwise. But we can go further by boosting native-borns’ capital stock. So far, our immigration plan has expanded the tax base, not only by taxing immigrant wages but also presumably by increasing taxable corporate profits as they exploit a larger labor supply. This extra tax revenue can be used to “endow” all native-born citizens with a chunk of capital. Whenever a native-born citizen turns 18, they receive a $6,000 check as a birthday present from the government. The check would come with some strings attached. It could be spent on such things as schooling, vocational training, buying a house or apartment, or starting a business. Citizens could defer it for up to seven years, in which case it would accrue interest the whole time. An interview with a social worker or job counselor would be a prerequisite for dispersal of the funds; multiple interviews would be necessary for those who did not seem to be on track enough to be trusted with the funds. In addition, immigrant taxes could help fund schools in poor areas, beautify slums, and other projects to ensure that open borders worked to the advantage of the native-born poor. They would benefit in another way too: poor immigrants would increase the demand for the kind of low-cost services and products that native-born poor people want to buy, thus leading to economies of scale in the production of such products and services and making them more available.
What are we to make of this open-borders-cum-collective-exploitation-of-immigrants scheme? Probably the plan would strike most citizens of democracies with horror. Even if it did yield net gains for the native-born, the price of moral compromise at which these gains would be purchased would be intolerable. Morally, how could we live next to tightly policed immigrant tenements where people were living on (after-tax) wages far below the minimum that natives had to live on? There is a disturbing notion here of first-class and second-class citizenship, an echo of indentured servitude. Surely he’s being facetious?
Well, I am being partly facetious, and I also find the scenario disturbing to contemplate, but what is more disturbing is this: even this policy would be more benevolent than our current policies are! The proof of this is very simple: immigrants can always stay home, so they won’t come unless coming makes them better off. Perhaps they wouldn’t come? Maybe the bargain outlined above is so unfair that even people from the poorest countries would refuse it? I wish, but having studied world poverty a little, I have little doubt that many millions would leap at the offer. The assurance that the immigrants were benefiting would lie in their option of exit: anytime they thought they would be better off back home, they would be free to go. A simple policy would ensure that the exit option was real. The INS could run a regular deportation-upon-request service. To finance it, any immigrant entering the country would have to make a deposit at the INS equal to the cost of deporting him. He would then be entitled to be sent home for “free” by the INS upon request. The deposit would be refunded on demand if the immigrant returned to his home country by other means.
Now, if such a plan would improve the lot, both of those who had the chance to immigrate, and the lot of native-borns, why has nothing like this been adopted, or even considered? The particulars of the plan can be varied greatly, of course: penalties and restrictions could be raised or lowered, special immigrant taxes reduced or increased, citizenship or permanent residence granted sooner, or later, or never. But the principle is simply that the right to work and live in America is a commodity of great value, and by refusing to put it on the market we’re turning out backs on a fortune, while harming others at the same time.
The main reason it would not be in America's interest to implement the policy I described is that we don’t want to see them. We don’t want to have poverty next door to us, we don’t want to fund the government by the toil of exploited immigrant labor, even if it makes us better off, because it would make us feel guilty. And yet how should we feel guiltier under those circumstances than we do now, when no matter how poorly we treated them, if they made the choice to come and could go back at any time, then they must be benefiting from the arrangement? True: but if we can’t see them, we don’t feel responsible.
This gives us an answer of sort as to why borders-as-membranes restrict the entry of poor people, and try to maximize the wealth-to-population ratio. It is not to protect the per capita income of the native-born, because an open borders law could be set up which served that end better. Instead, border-membranes are a blindfold, which keep the world’s poor far away from the eyes of America’s rich “middle class,” so their consciences will keep quiet. In the New Testament story of the Good Samaritan, a man is beaten and robbed on the highway and left lying wounded on the side of the road. A priest and a Pharisee pass along that highway and deliberately walk to the other side of the road and pretend not to see. Borders are our way of walking to the other side of the road.
Though the democratic spirit and egalitarian traditions of the rich countries rules out the exploitative open-borders scheme I described, the stratified society that I have hinted at here still exists. It is simply forced to straddle those strange entities, borders.