The Costs of Auctioning Permits

Reihan Salam asks me to consider the cost of my revenue-positive immigration plan. In other words, the $750 billion dollars isn’t coming out of thin air. I wrongly took this for granted earlier, but on second thought it brings a fresh perspective to this argument. The explicit costs will clearly fall on the firms and local governments which choose to purchase permits to “import” (for wont of a better word) employees.

I also noted this might create a downward pressure on immigrant wages, which can be considered a “tax” as well:

It’s crucial to note that the burden of permit financing would fall on both employers and employees, depending on elasticities of demand and supply. The dearer the permits, other things equal, the less a potential employer is willing to pay for the same level of output, realized as a lower wage. This can be thought of as a migrant financing his own permit.

Let’s consider a firm operating in an imperfect labor market – as most inevitably are. If the market rate for a permit at a given time is $n, the only immigrants who will be hired are those for whom employers expect the discounted value of all future earnings to be greater than n. For these workers, the costs are explicit $10,000 each. Consumer surplus here is represented by (NPV – n).

The more important welfare loss derives from the implicit cost expropriated on firms that want to hire workers whose NPV is less than the market value of permits. That is governmental intervention prevents an otherwise profitable transaction. In this sense, welfare loss will be roughly proportional to the ratio of firm demand for immigrants to the number of permits supplied on the open market by the government.

This isn’t a mathematically rigorous statement, rather an intuitive heuristic. If demand for migrant workers falls, the permit price on the open market will drop, resulting in fewer excluded transactions. Same logic on the denominator, wherein government can increase the supply to cut permit costs.

By this point it’s clear that the real price of permit auctioning is the cost of closed borders. Standard economic theory tells us that open immigration is the Kaldor-Hicks efficient solution, and any regulation thereof will inflict deadweight losses. At this point, it’s worth comparing (if briefly) my proposal to our current solution.

The deadweight loss comes from the difference between employer demand for migrants and actual cleared licenses. But there are two, huge benefits of auctioning n permits rather than allocating the same number on a first-come-first-serve basis as we do today:

1. The deadweight loss is lower because auctions will almost definitely command a higher quality of immigrant. If firm A wants to bring a highly profitable doctor, and B a similarly “skilled” professional whose just not as competent, the former will be willing to pay more on the open market. This information cannot be captured in any other way. (Nobel Laureate Al Roth has written about how good auction design compels market participants to divulge useful information).
2. Even if the deadweight loss is equal, in my revenue-positive proposal, at least the government captures some of it. In today’s system, all is lost. I suppose more surplus is captured by firms who “make it first” or have large systems that can maneuver government bureaucracy efficiently (like, say, Google).

In fact, there’s a Schumpetrian superiority to permit auctions – over our current system or even the better Canadian “points” program. Byzantine systems requiring “proof of need” etc. give an unfair advantage to large and established players. Startups, the blood of American innovation, are discriminated in the present system. The Canadians and Australians will face a similar problem, if to a much lesser extent. Therefore, the burden of argument is on those who would rather surplus be captured by monopolistic corporations rather than the government.

Though this isn’t the point of my post, I want to conclude with some notes on Reihan Salam’s last remark (which I can’t seem to find, now), which echoed the idea that either of us could design a policy much better than status quo, but that political deliberation makes that impossible.

I don’t think he’s being fatalistic here – he has argued for the Canadian option – but that’s what makes this interesting. It’s hard to argue the American system doesn’t cater to vested interests with regard to immigration. However, what are the “loopholes” really, of the Canadian system? It’s a very transparent, skills-oriented, rubric which cannot be “gamed” in any meaningful way – at least not to my knowledge.

As far as American policy goes, why is my (or whatever his preferred choice is) solution “idealistic” whereas Canada’s is somehow more politically sound? I say this because I’m rather surprised at the paucity of “creative conservatives” arguing for an auction-oriented approach to immigration. I really believe if this idea finds more traction, it’s at least as realistic as a point system. Indeed, both Reihan and I worry more about native wages than overall welfare gain – a topic which puts me at odds with many liberals like Matt Yglesias and deserves a post of its own – and I think few ideas command the “most valuable” immigrants as the quantity-regulated open market.