Immigrants as negative externalities

The Cato Journal’s new issue is all about immigration, and it includes an article from Gordon Hanson, who is one of the leading economists on this. Hanson repeats a claim that is common, and I think worth debating: that the fiscal externality of low-skilled immigrants should be internalized by their employers. Here is how he puts it:

Another source of unequal burden sharing is that U.S. employers enjoy benefits from immigration, in terms of higher productivity for their operations, while taxpayers pay for the education and health services that immigrant households receive. Taxpayers thus subsidize employers in agriculture, construction, meatpacking, restaurants and hotels, and other sectors that have high levels of employment of low-skilled immigrant labor. A reasonable solution to the current predicament is to eliminate such subsidies by making employers internalize the fiscal cost of immigrant workers. One way of achieving internalization is to subject employers to an immigrant labor payroll tax that would fund the benefits that their immigrant employees, and their family members, receive. Such a tax would make employers bear the fiscal consequences of immigration, releasing taxpayers from the burden and perhaps easing political opposition to immigration.

The notion here is that the employment of low-skilled immigrants is generating an externality, and that the employer who make up one side of these exchanges are not internalizing the cost of this externality. This leads them to hire them more low-skilled immigrants than they would if they had to pay the full cost. This treats low-skilled immigrants as being comparable to pollution generated by the employers, and proposes a Pigouvian tax to internalize the costs. But is this logic correct?

For one thing, I am surprised when I read liberals accepting that welfare and subsidies to low-income people are externalities to the Americans who pay for them. Is there some economic reason why these externalities should be internalized when foreigners generate them and not when natives do so?

Typically, transfers to the poor are justified on the economic grounds that people care about other people, and so improving the welfare of the poor is a public good to some extent. This isn’t just a liberal argument, here’s Greg Mankiw embracing it. In this case the fiscal burden of the low-skilled is not an externality, because everyone else receives positive utility from seeing them less poor.  Some might argue that by this logic what separates subsidies to immigrant from subsidies to natives is that Americans in general don’t care about the welfare of immigrants enough to justify the subsidies, so they are in fact externalities. This, to me, suggests that it is the policy that is generating the externality, and not the employers. If we wish to correct this is it not better to change the law so we stop giving subsidies to immigrants?

Another problem with thinking of employers as generating the externality is the fact that non-working immigrants surely generate a greater net fiscal burden than working immigrants. A tax on low-skilled immigrant working hours will result in less low-skilled immigrant working hours. In some cases this will result in immigrants returning home which will reduce the fiscal burden. But in other cases it will just result in immigrants working less hours, with perhaps less family members per household working, which will increase the net fiscal burden. Given this it seems to make more sense to tax immigrants themselves rather than those who hire them.

Gordon Hanson is just trying to find ways to make immigration more acceptable to Americans so that there can be more of it, so I don’t begrudge him for proposing an unpalatable solution. After all, most pragmatic solutions to convincing Americans to tolerate more immigration seem to have some unpalatable aspect to them. But I think accepting that the fiscal burden of low-skilled immigration represents a real externality generated by employers is both untrue and an unproductive framing of the problem.

What can we do about spending as a percent of GDP?

Ezra Klein has a post where he calls the balanced budged constitutional amendment Republicans are pushing and calls it both terrible policy and dangerous. I haven’t read the actual amendment or taken a close look at it, but based on Ezra’s description I’m tempted to agree with him. But that’s not why I’m writing. I’m writing because I want to disagree with this statement of his:

But the problem isn’t simply that the proposed amendment is extreme. It’s also unworkable. The baby boomers are retiring and health costs are rising. Unless you have a way to stop one or the other from happening — and no one does — spending as a percentage of GDP is going to have to rise.

While economists may disagree about the fiscal impacts of past immigration, there is a general agreement that higher skilled immigrants have a positive impact on government budgets.  Part of our long-term budget problem is demographic, so, as Rick Santorum so usefully implied, we should be letting in more immigrants who are on average younger in order to counteract our country’s aging (that was Santorum’s intended point, right?). Also, more immigrants also allow us to spread the fixed defense costs over a more people, and lower defense spending as a percent of GDP. Illegal immigrants are even better from a budgetary standpoint, since they frequently contribute to social security but don’t take out of it, and have thus put around $120 to $240 billion into the system. So what we really need is a massive influx of highly skilled illegal immigrants.

Does Welfare Make Us Dislike Immigrants?

Bryan Caplan and I clearly have a disagreement about this question. I argue that anti-foreign bias, identified by Bryan in his book The Myth of the Rational Voter, ensures a significantly high enough dislike of immigrants that changes in our welfare programs don’t significantly influence public demand for stricter immigration policies. Bryan, in his latest post in the ongoing debate about liberaltarians and immigration, argues that this is not the case:

Anti-foreign bias is indeed strong and durable.  But this hardly implies that it is invariant to circumstances.  Immigration really was much more free before the welfare state arose.  Welfare state abuse really is one of the most popular arguments against immigration.  And there is good evidence that opposition to the welfare state heavily depends on the perception that out-groups disproportionately benefit from it.  It’s no stretch to flip this evidence and say that support for the welfare state heavily depends on the perception that out-groups don’t benefit from it.

To his point about immigration being freer in the pre-welfare era, I would point out that this was true only for some people, some of the time. For instance there was the Chinese Exclusion Act in 1882 which severely limited Chinese immigration to this country until it was overturned in 1943. There was also the Immigration Act of 1917 and the National Origins Act of 1924, the latter of which completely banned immigration from any Asians. Notice these laws were passed prior to any kind of welfare program and removed the decade after this country’s first major welfare programs were past in the New Deal.

So while overall immigration may have been freer, there has been a lot of really ugly and, depending on who you are, more restrictive immigration laws that existed prior to any sort of welfare state in this country.

But as Karl has recently pointed out, Bryan is a betting man. So I’d like to propose an empirical test to this. If welfare can drive opinions on immigration, then the welfare reform passed in 1996 should have motivated a significant increase in tolerance for immigrants.  The GSS asks whether respondents whether immigration should be increased or decreased, and I think it also has a “neither” option. I propose taking data for the full timeperiod of the GSS and we will not see a positive spike in 1996 or 1997 more than two standard deviations from the mean for those supporting more immigration, or a negative spike for the percent against more immigration. Thats four tests.  I’ll call Bryan the winner if any of them are in his favor, and I’ll bet him $50. I promise I haven’t peeked at the data, in fact I wouldn’t know how since I’ve never worked with GSS data before. This is why I also want to request that, if he accepts the bet, Bryan crunch the numbers since I know he has used the data many times before.

UPDATE: Eli Dourado points out in the comments the series is too short to have a meaningful standard deviation, so let me alter the bet offer to this: support for immigration increases by less than 10% from 1995 to 1997.

UPDATE 2: To put my point above in perspective, think about what the percent of the world that lived in all of Asia from around 1880 to 1943 was. I won’t venture a guess at what that number is, but lets say a large percent. For this part of the world immigration was harder in a pre-welfare state period than it is today.

Caplan’s Liberaltarian Challenge

Bryan Caplan offers this challenge liberaltarians:

From what philosophic point of view is “maximizing growth + lots of redistribution + the immigration restrictions lots of domestic redistribution naturally encourage” better than “maximizing growth + no redistribution + free immigration”?  Whether you’re concern for the poor is Rawlsian, utilitarian, or even dogmatically egalitarian, “no redistribution + free immigration” is the way to go.

I consider myself a liberaltarian, so I’ll take up Bryan’s challenge.

I think the key disagreement here is that I don’t think redistribution policies are actually a binding constraint on immigration. Specifically, I disagree with Bryan’s presumption that domestic distribution actually encourages that much of a restriction on immigration, or at least that the immigration restrictions we have would go away or significantly loosen if we suddenly abandoned all redistribution policies.

This is because people would oppose immigration pretty much regardless of how much or how little immigrants benefitted from welfare and redistribution policies. How do I know this? Well, because Bryan Caplan told me so. In his excellent book The Myth Of The Voter Bryan identified the anti-foreign bias, which is a “tendency to underestimate the economic benefits of interaction with foreigners”. No amount of minimal government is going to do away with this bias, and I don’t think it will help reduce it much on the margin either.

You know why else I think more immigration is consistent with welfare policies? Because Bryan Caplan told me so. In the slides to the presentation he gave on immigration for the Future of Freedom foundation, Bryan specifically counters the Milton Friedman’s claim that “You cannot simultaneously have free immigration and a welfare state.” Here is his rebuttal to Friedman:

• Was he right?  Key fact about the U.S. welfare state: Most of the money goes to the old, not the poor.  New immigrants tend to be young.
• Julian Simon and others calculate that the average immigrant is a net tax-payer.
• – Absurd?  Remember – much gov’t spending is non-rival.  Immigrants help spread the cost of national defense, debt service, etc.
• – Further result: Illegal immigrants are a great deal for taxpayers.  People who pay taxes on fake SS#s are pure profit for the Treasury.
• – Others aren’t as optimistic as Simon, but almost no serious researcher finds a big negative fiscal effect of immigration.
• Even if the complaint were true, there’s clearly a much cheaper and more humane alternative: Freely admit immigrants, but make them ineligible for benefits.

So Bryan is right and immigrants are net tax payers and they help spread the costs of national defense around, then more immigrants should make our welfare state that much easier to maintain.

If an anti-foreign bias prevents people from seeing that current immigrants provide us with net economic benefits even with our welfare policies, then it would seem foolish to abolish those welfare policies on the hopes that it will somehow convince people to suddenly abandon the anti-foreign bias that prevents them from seeing that they don’t matter in the first place.

So Bryan’s challenge to liberaltarians is not so tough, especially when you have Bryan on your side backing up your arguments.

What kind of immigration matters

From a white paper from Gordon Hanson proposing a research agenda for economists studying immigration comes this important point:

While doubling the supply of illegal immigrants (currently 5% of US workers) in the US labor force would likely have at most second order effects on economic growth, doubling the supply of high skilled immigrants could have a first order effect.

Despite this, Hanson notes that the bulk of research -though of course not all of it- has focused on estimating the impact of low skilled immigration on the well-being of natives. Likewise, political discourse about immigration seems to exhibit a similar bias towards focusing on low-skilled and illegal immigration. Hanson argues that economists should change their focus, and I think this is probably true for pundits and journalists as well. This of course is not to say that low-skilled immigration isn’t an important issue, especially for humanitarian reasons. But when the issue is self-interested immigration, we should understand that the impacts of low-skilled immigration are likely to be minimal compared to high-skilled immigration, and the discussion and policies should reflect that fact.

This paper is part of a series on “grand challenges” in the social and behavioral sciences that the National Science Foundation requested in order to help them “to frame innovative research for the year 2020 and beyond that enhances fundamental knowledge and benefits society in many ways”. Other submissions from economists can be found here.

How immigrant amnesty would affect housing markets

I’ve long suspected that immigration amnesty would be a boon to housing markets. The idea is that illegal immigrants could be deported and so will be less willing to make the fixed investment of homeownership, and illegal status holds down wages which should also decrease the demand for housing.  However I haven’t seen any persuasive studies on this issue. Today I discovered a new paper by Catalina Amuedo-Dorantes and Kusum Mundra that provides some evidence:

A significant homeownership gap still remains between natives and immigrants in most countries.  Because of the many advantages of homeownership for immigrants and for the communities where immigrants reside, a variety of countries have tried to implement policies that facilitate immigrant homeownership.  Many of these policies hinge on immigrants’ legal status.  Yet, owing to data limitations, we still know very little about its impact on immigrant homeownership.  We address this gap in the literature and find that legalization raises immigrant homeownership by 20 percentage-points even after accounting for a wide range of individual and family characteristics known to impact housing ownership.  This finding underscores the importance of legal status in immigrant assimilation –housing being an important indicator of immigrant adaptation, and the need for further explorations of the impact of amnesties on the housing markets of immigrant-receiving economies.

Note that this does not address the question of whether legalization increases the demand for housing or just the type of housing. For instance, legalization may simply lead illegal renters to buy houses that are identical to the ones they were renting, which aside from potential externalities to homeownership shouldn’t affect prices. This seems unlikely to me, and I’d wager that legalization also increases the demand for housing, and therefore house prices.

I’ve argued frequently that letting in more immigrants is the last best tool we have to help increase house prices, but perhaps legalizing the immigrants we already have would help as well.

UPDATE: MorallyBankrupt provides some excellent thoughts in the comments:

I used to live in Boston. While living there, a few of my friends lived in inexpensive rental apartments where line cooks–often Brazillian–also lived. They used to pack-in pretty tight in those apartments to minimize expenses and maximize remittances. A common theme was that the men would often move out to their own place if and when their wives / girlfriends came into the country or if they formed a family locally.

I think that amnesty coupled with the ability to extend legal resident status to immediate family (spouses, children) would be a great option. Not only would the units of houses demanded per newly-legal resident probably increase, but the number of residents demanding housing would increase as well. Additional positive effects would be to move (at least some) of the consumption from those remittances into the US.

Finally, establishing residence would allow access to legal, documented earnings which would increase tax-receipts and access to credit, enabling purchases of not only housing, but also durables.

A strange model of the economy, ctd

Ryan Avent at the Economist explains much more clearly than I the wrongness of the claim that low population growth will make us better off:

The point concerning government spending is simply bizarre. Projected growth in federal spending is largely due to rising spending on entitlements, especially Medicare and Medicaid. Slower population growth isn’t going to limit this spending growth; it will just increase the dependency ratio and the expected per capita burden of taxation….

…Indeed, all of the above is precisely what has been observed in Japan, where population growth slowed, halted, and eventually reversed. Per capita incomes have risen only very slowly, government debt is enormous, households are heavy savers, and deflation is endemic.

Also in the comments Andy Harless tries to provide an explanation for what Johnson may be thinking:

(1) fewer immigrants mean less competition for jobs in the short run (assuming immigrants don’t create enough domestic demand to support their employment), and (2) fewer children mean less drain on governments. Of course fewer children do also mean less demand and therefore fewer jobs, but this is obviously endogenous: children are just a manifestation of the multiplier effect, an expense that people choose based on their income. OTOH immigration is also endogenous, so all the first argument is really saying is that it’s a good thing people aren’t dumb enough to keep coming to the US when there are no jobs.

I think this is quite possibly what Johnson is thinking, and I like Andy I think there are some big problems with it. I won’t rehash the arguments here, but there are a lot of other reasons why more immigration would make us better off.

Commenter Adam and Matt Yglesias (via twitter) also point out that an economy based mainly on some scarce natural resource or agriculture could have diminishing returns to labor even in the long-run as capital adjusts, which would explain higher real wages as population grows. However as Matt, Adam, and I agree, this a very bad model of the U.S. economy.

Karl addresses the monetary impacts in the comments:

More worker would imply an increasing demand for money. If you are thinking of the money stock as fixed this will tend to be deflationary and worsen our condition.

However, we have a rate target so increasing money demand should be met by increasing lending. More population should supply more credit unconstrained borrowers who can profitably take out loans at the prevailing interest rate.

Overall I am less puzzled by what Johnson could be thinking, but don’t see a plausible case for why he could be right.

More Immigration, Higher House Prices

In today’s Philadelphia Inquirer I have an op-ed about how immigration could be used to increase house prices. I’ll put the whole thing below the fold, but it’s also worth noting another recent study that supports the results of the study I cite in my piece. Importantly, this study provides evidence that immigration raises house prices even in housing markets with low price inflation and rent control, and even when the immigration amounts are modest. The impact they find, which is for Switzerland, is that a 1% increase in immigration causes a 2.7% increases in home prices. To my knowledge it is still the case that every study on this issue, which is admittedly few, has found that immigration has a positive impact on house prices.

Here is what I wrote in the Inquirer, with more below the fold:

Amid reports of continuing declines in home prices, it’s safe to say that government policies designed to prop up those prices have failed. More than 14 percent of home mortgages are delinquent or in foreclosure, and 23 percent of homeowners owe more on their homes than they’re worth. At this point, it may seem as if we have to let prices fall until they find a bottom.

But we haven’t yet tried one of the easiest and least costly options for helping the housing market: more immigration.

A market for immigrant citizenship

I’m not going to argue that we should necessarily have a market citizenship for immigrants, but I think it is a useful starting point for analysis. After all, when we have some scarce resource we want to allocate, absent some public goods nature of the good, markets are the way we normally do it. Does citizenship have some public goods nature? Even if this is the case, markets should be the starting point of analysis and the market failure should be clearly explained so that market-based solutions can be examined.

How would markets allocate citizenship? While citizenship is necessarily produced by the government, it doesn’t need be allocated by mandate or allocating shares democratically, but instead it could be done by auction. Each year the government can choose how many citizens to produce, and then they could auction them off. What would the problems be with doing it this way?

One could argue that low-skilled immigrants hurt low-skilled natives, whereas high-skilled immigrants are likely to invent things and produce externalities in production, which means we should favor the high-skilled over the low skilled. However, a system that allocates citizenship based on auction will naturally favor individuals who will be very productive, because they will have a high-willingness to pay. If the externalities to certain migrants were certain enough, we could also offer a x% discount to individuals with specific degrees or qualifications. That means these migrants would get a matching grant of 20 cents for every dollar they bid in the auction. Starting from a price system and attempting to correct for positive and negative externalities will be much more efficient than the status quo, and compared to setting immigration quotas based on country, education levels, etc. it would require less information from policymakers and be more dynamic.

Another objection is that we want to grant some people immigration for humanitarian reasons, and these people would be priced out of the market. But there are lots of goods we want to give people for humanitarian reasons, but we don’t throw out the price system for these goods. Private charities and individuals could spend money buying citizenship for people. Imagine how many people could have been brought from Haiti to the United States if citizenship could be bought. This allows private groups like NGOs who are actually on the ground in these countries to try and allocate citizenship to those who need it most.

I’m prepared to accept that markets won’t work for immigration or that there are some massive market failures that can’t be overcome. But I would like to see these things identified rather than assumed. I also think this analysis is useful in terms of selecting optimal non-market allocations. After all, if you think we should value high-productivity workers more than a price system, perhaps one combined with subsidies for specific degrees, then you should explain why. Likewise, if you think we should allocate these based on humanitarian reasons more than private charities and a market system would, then you should explain why. What is it about citizenship that suggests we should diverge from the allocations markets would produce?

 

ADDENDUM: It’s also worth noting how this relates to the DREAM act. People who have lived here for most of their lives, and especially those who are college bound,  will likely have a very high willingness to pay for citizenship. After all, consider this: if you’re an American reading this, what would your willingness to pay for U.S. citizenship be? Given this, I think the DREAM act is a pretty good marginal proxy for a market outcome, since it’s granting citizenship to likely auction winners.

It’s not perfect, of course, as some possible immigrants from across the world would probably outbid some DREAM act beneficiaries, and some charities would probably outbid them for citizenship for Haitians. Nevertheless, it does seem to be as good of a marginal allocation as any centrally planned allocation we could conceivably get.

Wilkinson vs Frum

Will Wilkinson has another excellent post on the DREAM Act up at Democracy in America. He takes on David Frum, who is critical of the act. You should really read the whole thing, but to give you a taste here is how it ends:

Were Mr Frum to read the bill, he would see that he has made a serious error. DREAM is a stopgap measure of exceedingly limited scope which would slightly mitigate the injustices wrought by America’s reality-defying immigration and citizenship law. I look forward to his correction.

For more from Will on the DREAM Act see here.

Different immigration, same issues

The question of how immigration affects the wages and employment of natives is a frequent topic of research in the U.S. With respect to wages, a simple model of course suggests an increase in supply will decrease prices, thus more immigrants bring down native wages. Some research, notably the work of George Borjas, supports this. Another model is one where immigrant labor is complimentary to native labor, and thus more immigration increases native wages. Other research supports this model, which was described recently by Tyler Cowen in the New York Times. Similar stories are told for employment. Unsurprisingly, a similar question of immigrant and native complementarity exists in other countries. A new paper sheds some light on this issue with respect to China:

Hundreds of millions of rural migrants have moved into Chinese cities since the early 1990s contributing greatly to economic growth, yet, they are often blamed for reducing urban ‘native’ workers’ employment opportunities, suppressing their wages and increasing pressure on infrastructure and other public facilities. This paper examines the causal relationship between rural-urban migration and urban native workers’ labour market outcomes in Chinese cities. After controlling for the endogeneity problem our results show that rural migrants in urban China have modest positive or zero effects on the average employment and insignificant impact on earnings of urban workers. When examine the impact on unskilled labours we once again find it to be positive and insignificant. We conjecture that the reason for the lack of adverse effects is due partially to the labour market segregation between the migrants and urban natives, and partially due to the complementarities between the two groups of workers. Further investigation reveals that the increase in migrant inflow is related to the demand expansion and that if the economic growth continues, elimination of labour market segregation may not necessarily lead to an adverse impact of migration on urban native labour market outcomes.

As I’ve said before, I think people who are sympathetic to more restrictive immigration regime in the U.S. should ask themselves, especially in the face of such contrary evidence, whether they think China should restrict immigration to possibly preserve the wages for the relatively well-off at the definite expense of poorer immigrants from rural China or from immigrants from other countries.

The DREAM Act shows we are not monsters

Will Wilkinson writes the best blog post I have read in some time. The issue is immigration, and more specifically, the DREAM act. With all due respect to The Economist and the Democracy in American blog, this should piece should be run as an op-ed in the New York Times, or even better, USA Today, as it deserves a very wide audience. Here is one great paragraph, but definitely read the whole thing:

The DREAM Act sends the message that although American immigration law in effect tries to make water run uphill, we are not monsters. It says that we will not hobble the prospects of young people raised and schooled in America just because we were so perverse to demand that their parents wait in a line before a door that never opens. It signals that we were once a nation of immigrants, and even if we have become too fearful and small to properly honour that noble legacy, America in some small way remains a land of opportunity.

More Immigrants, Please

In the New York Times, Tyler Cowen says we need them:

The current skepticism has deadlocked prospects for immigration reform, even though no one is particularly happy with the status quo. Against that trend, we should be looking to immigration as a creative force in our economic favor. Allowing in more immigrants, skilled and unskilled, wouldn’t just create jobs. It could increase tax revenue, help financeSocial Security, bring new home buyers and improve the business environment.

Read it closely, remember the arguments, convince your friends and family.

Net Externalities: Immigrants versus Children

The Kauffman foundation has produced the results of its latest survey of economics bloggers. Included in the survey was a question at the request of Bryan Caplan that I found quite interesting. The survey asked:

The net externality of the birth of an additional child in the United States is… [POSITIVE, ZERO, or NEGATIVE]

The results show that a majority of econo-bloggers believe the externalities to be positive:

This begs the question of the externalities of immigrants. After all, positive externalities for natives probably don’t start appearing until after high school or college, and before that they are on average consuming far more than they produce.

Since the average immigrant age is around 30, that means when they’ve arrived they are already past the stage when they just consume society’s resources, and have begun producing externalities. Doesn’t this suggest that positive externality of immigrants is even larger than that for natives? If you’re going to claim that the average lower education level of immigrants reduces their externalities, keep in mind that immigrants are also more likely to be small business owners and PhDs than natives.

It’s interesting that when immigration is discussed economists quickly jump to the debate about the impact on native wages. I doubt that the 72% of economists above believe that the average externality of people is smaller than 6% of the wages of highschool dropouts, which is around the lowest credible estimate in the literature, so why don’t economists accept that externalities of immigrants trump wage effects and quickly move to arguing for more immigration?

Illegal Immigration Is Global

The illegal immigrants come seeking higher wages, steady employment and a chance at better lives for their families. They cross the border in remote stretches where there are no fences or they pay traffickers to sneak them past border guards.

Then they work as maids, harvest crops or toil hunched in sweatshops.

Think you’ve heard this story before? No, it’s not illegal Mexican immigrants coming into the United States, but Southeast Asian, North Korean, and African illegal immigrants coming into China. If you think our border problem is daunting, consider that China’s mostly unprotected border stretches 13,670 miles across rain forests, mountains, and deserts.

According to the article, from the L.A. Times, the demand for foreign labor comes from rising Chinese wages and a shortage of low-skilled workers, and those willing to do harder field work at profitable pay. For instance:

Chinese farmer Lu Qixue hires Vietnamese laborers before the autumn sugar cane harvest. For as long as five grueling months, the foreign workers put in 10-hour days thwacking sugar cane stalks with scythes.

“They work slowly and we always have to train them, but we can’t find enough skilled Chinese,” said Lu, a rail-thin 58-year-old village chief with gravelly stubble. “If we don’t hire the Vietnamese we won’t be able to grow as much.”

“I don’t want to carry sugar cane down the mountain,” said his youngest son, Lu Xinghuan, 26, who aspires to own a trucking company. “It’s hard work.”

Labor activists said the increasing use of undocumented foreigners is undermining gains made with China’s 2008 labor law regulating working hours and workplace conditions.

For those who oppose more immigration and want to crack down on illegals, I am curious if they think that welfare would be increased in this scenario by preventing the vietnamese workers from coming into the country, and thus decreasing the output of the cane farmer and his wealth and spending power. I suspect people will be more sympathetic to illegal immigration into China than they are with illegal immigrants into this country.

Employers of Illegal Immigrants

A common perception is that people who hire illegal immigrants are necessarily exploiting them with below minimum wage pay and horrible working conditions. The story I linked to yesterday about the effects of illegal immigration crackdowns on some restaurants serves as a useful reminder that this need not be the case:

Mr. Malecot is an active philanthropist in San Diego, contributing to causes including Alzheimer’s and cancer research and education to help victims of torture. His employees describe him as a father figure who has paid for their dental work and babysitting, charters a fishing boat for the annual company party and provides every employee with a week’s paid vacation, extremely rare in restaurants.

Because of his financial troubles as a result of the case, he said, he can no longer afford some of these perks. The next court date is Nov. 29.

“He’s very generous,” Asunción Gallardo, a Mexican immigrant who has cooked at the restaurant for 16 years, said in Spanish, out of earshot of Mr. Malecot. “It’s like we’re all a family. We eat — he gives us three meals a day and food to go. And then he gives out food for the poor.”

People who favor crackdowns in illegal immigration often argue as if they are really looking out for the best interest of illegal immigrants, who are victims being exploited by greedy employers. And this may be true some of the time, but it is clearly not true all of the time. It is important to remember this when people try to overgeneralize about the working conditions faced by illegal immigrations in order to justify kicking them out.

How Obama is attacking businesses… no, not in the way you’re thinking

Imagine if there were some productive input, say for example a source of energy, that was cheaper than all of the other alternatives and allowed many businesses to operate with lower costs. Say this productive input was also illegal, but did not cause any externalities. Would right now, in the midst of a terrible recession, be a good time to crack down on this illegal input that many businesses depended on? This is what the Obama administration is doing with their crackdown on illegal immigration, and it is hurting businesses.

A recent story from the New York Times highlights how economically damaging this can be to successful businesses. Michel Malecot, a restaurant owner, faces 30 years in prison, $4 million in fines, and the seizure of his assets for hiring illegal immigrants at his restaurant. The governments indictment is causing him serious economic distress:

Since the indictment, Mr. Malecot said, he has lost at least $500,000 in catering jobs. Catering accounts for about 70 percent of the French Gourmet’s revenues, which so far this year amount to roughly $4.5 million, Mr. Malecot said.

In an industry with that employs an estimated 500,000 illegal immigrants, Mr. Malecot is not alone:

In June, the owner of two Maryland restaurants who pleaded guilty to hiring and harboring illegal immigrants was ordered to forfeit to the government more than $700,000 in assets — in addition to his motorcycle — and faces up to 10 years in prison. In November, a restaurateur in Mississippi who had pleaded guilty to hiring illegal immigrants was sentenced to a year in prison and a year of supervised release. Combined fines in the case, shared among several defendants, amount to $600,000.

I understand the rule of law is important and all that, but is there some pressing reason why choose now, of all times, to crack down on illegal economic activity? Note this is not just Obama fighting illegal immigration as previous presidents have, but “[u]nder a policy that went into effect in April 2009, the Obama administration is taking a much tougher stance on employers who hire illegal immigrants than any administration in decades”.

Now would actually be a good time to be really lax with illegal immigration, not crack down on it. People seem to understand that limitations on international flows of capital, aka protectionism, is a bad idea in a recession. This is true of international flows of labor as well: preventing labor from moving to it’s highest use will reduce global economic growth.

End protectionism in labor markets

Calculated Risk tells us the key to fixing the housing market:

The key to the housing market is to absorb the excess inventory. That means more households and fewer new housing units. Luckily housing starts are very low right now, but unfortunately there is very little job growth (and therefore little new household formation).

But job growth is not the only way to get new household formation, as I’ve argued again and again, we have immigration at our disposal. Of course, there are the usual complaints about jobs. But the weakness of this argument can be seen in a new paper Felix Salmon directs us to:

Statistical analysis of state-level data shows that immigrants expand the economy’s productive capacity by stimulating investment and promoting specialization. This produces efficiency gains and boosts income per worker. At the same time, evidence is scant that immigrants diminish the employment opportunities of U.S.-born workers.

It is well understood that the removing capital tariffs and protectionism would increase overall efficiency and incomes. Since immigration restrictions are labor market protectionism we shouldn’t be surprised to see that is has similar positive effects.

Unfortunately, journalists and pundits don’t seem to oppose labor protectionism nearly as much as they oppose capital protectionism. We would see an outcry among op-eds and pundits if we were seeing a worldwide rise in capital protectionism, because they recognize that beggar-thy-neighbor policies make everyone worse off. But no similar reaction has come from the rise in global labor protectionism. Here is how a recent report from the Migration Policy Institute describes the situation:

Confronted with the most severe economic crisis in decades and rising unemployment, governments in locations across the globe embraced a range of policies to suppress the inflow of migrants, encourage their departure, and protect labor markets for native-born workers.

From Malaysia and Thailand to Kazakhstan, Taiwan, Australia, South Korea, and Russia, many governments have sought to restrict access to their labor markets by halting, or at least decreasing, the numbers of work permits for foreigners. Others, such as the United Kingdom, tightened admission requirements. And while the policy focus of many of these countries was on reducing the entry of low-skilled workers, the United States placed restrictions on some companies seeking to bring in the highly skilled.

In addition to the results from Felix above, the wider literature on the issue tells us the quantifiable impact on wages is likely to be minimal compared to the impact on house prices. For instance, research from economist Albert Saiz found

“…a very robust impact on rents and housing prices that is an order of magnitude bigger than the estimates from the wage literature. Immigration inflows equal to 1% of a city’s population were associated with increases in average or median housing rents and prices of about 1%.”

Emphasis his. In previous research, Saiz used a classic example of exogenous immigration from the literature and found effects of a similar magnitude. Looking at the Mariel boatlift, a sudden inflow of immigrants from Cuba which increased the population of Miami by 4%, Saiz found that rents in Miami increased 8%. Overall, there appears to be a robust relationship between immigration and housing prices.

Calculated Risk tells us that “Usually housing is a key engine of recovery, especially for jobs. But this time housing is going to follow the economy.” But this is not because of economics, but politics. Instead of waiting around for the labor market to lead housing recovery, let’s use the tools we have to help housing recovery lead.

Illegal Immigrants Deporting Themselves

It has apparently become a complaint that the Obama administration has not been arresting and deporting enough illegal immigrants. According to Suzy Khimm, subbing in for Ezra Klein, while workplace raids have gone up 50% since the Bush administration, arrests and deportations have gone down 80%. This apparently has at least one former Bush official saying that Obama’s policy is “de facto amnesty” and they are “turning a blind eye to entire categories of aliens”. But no matter what Obama is doing, you would expect arrests and deportations to be going down right now, since immigrants are already deporting themselves, so to speak.

Contrary to the popular perception that illegal immigrants come here to lay in the shade and grow fat off of our generous welfare state that is freely available to illegal immigrants, they actually come here to work. Labor markets are thus a key determinant of immigration, and when labor markets get tight illegal immigrants leave.  This inexplicably colored chart from the Office of Immigrant Statistics tells the story:

Between 2000 and 2008 the illegal immigrant population grew by 3.1 million, from 8.5 to 11.6. From 2008 to 2009, the latest year for which I could find numbers, the population decreased by 800,000, from  11.6 million to 10.8 million. These numbers are as-of January 2009, and I’m betting that downward trend has continued over the last 19 months since this measurement was done.

While the decrease may not be huge percentage-wise, especially compared to the 80% decrease in arrests and deportations,  it is an indicator that the illegal population is currently experiencing a large amount of unemployment or underemployment.  This decrease in illegal immigrant employment would also partly explain why arrests and deportations are going down: since the raids target workplaces,  it’s harder to find them if more of them aren’t working.

It’s a lot easier to arrest and deport illegal immigrants when they are flowing into the country by the hundreds of thousands than when the population is decreasing by the hundreds of thousands. So maybe critics can lay off Obama on this and stop demanding that he actively destroy jobs in the middle of a recession.