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Wealth Taxes and Immigrants

July 21, 2013
the Economy: Home and the World
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Tyler Cowen’s new column for the New York Times concerns the rising wealth-to-income ratio in rich countries, and the opportunities thereof. While you’ll always find a lonely voice calling for wealth taxes, economists have largely ignored the possibility for the greater part of the last fifty years considering the strong theoretical challenges they pose. But as Cowen notes, the divergence between capital and income has become too remarkable to ignore: that agnosticism to this dynamic is no longer an option.

This is a long conversation, but I want to highlight something that very few (if any, aside from legalese) have mentioned as a positive to taxing wealth instead of income: its effect on skilled immigration. Indians, as an annual ritual, open the pages of The Hindu to see offers made by American giants to IIT “toppers”. Last year it was Facebook at over $100,000.

This is to say that if skilled wages in India aren’t already at parity, they will be rapidly. This isn’t surprising, educated and entrepreneurial folks are far more geographically mobile, and we would expect factor price equalization to occur more rapidly. Anecdotally, mid to senior management level positions also seem to pay almost 80% of American salaries.

Immigrants very rarely have any wealth. Those from developing countries might be entitled to old land, but by and large not much more. In this sense, income taxes are deeply inegalitarian compared with wealth taxes. We’re essentially putting the high-income, but poor, immigrant on the same level as established families with inordinately higher net worth, but a similar income.

This is economically, and depending on your justification for taxation morally, inexpedient. The most probable form of wealth taxation is likely to take the form of imposing the necessary wealth tax only after a relatively high entry level. For example, I’ve shown that it’s possible to eliminate much of the income tax with a wealth levy on estates greater than $250,000 in value. This addresses a bulk of the standard economic argument against wealth taxes:

  • An overwhelming number of Americans don’t have near $250,000 in wealth, and most live paycheck to paycheck. Since the $250,000 barrier is out of reach, there will be no real disincentives to save (and can hence be glued with a progressive consumption tax to encourage savings).
  • Those that do “qualify” for the tax are likely to have a relatively low marginal propensity to consume anyhow.

If a wealth tax replaced income taxes, it basically tells high-end immigrants “please come over, we won’t tax you immediately”. No doubt, skilled programmers (especially those with six-figure starting salaries) will eventually be subject to wealth taxes – whether they start at $250,000, $500,000, or likely even more – but not the second they get there. It’s basically an affirmation of the stereotypical American dream “we’ll let you make it before we tax you”.

There are many high-end immigrants today wondering why they should go to the United States (forget Europe) for marginally higher salaries, only to be taxed at relatively high rates, when they can stay home – where they have land wealth and family – instead.

Over a period of the immigrant’s lifetime – especially if he or she is successful – there’s a good possibility a wealth tax will extract more revenue. But this is deferred to the future. Hyperbolic discounting will attract many young, high-potential but poor immigrants to come today. At six-figure incomes if national, state, and local taxes eat between 30 and 40% of my salary in Silicon Valley that – whether liberals like it or not – is a disincentivizing factor. And not one in America’s favor.

Now a small detour on the moral case. A common justification for taxes is thus:

  • It is necessary for social rebalancing and investment in infrastructure, education and, when applicable, war.
  • It is the “repayment” for “using” social infrastructure as manifest in schools, roads, and employment opportunities.

But immigrants haven’t “used” American public education or services. In fact, foreign institutions have subsidized their education, only for the taxes to be paid in the United States. This weakens the moral justification for income taxes insofar as immigrants are concerned. Wealth taxes are immune from this critique, as buildup of wealth from saving in the United States represents the extent to which I “used” American services to earn that wealth.

Much of this argument can be extended to high-earning individuals originating from low-income families. It seems unfair – at least initially – to tax the “rags to riches” engineer at the same rate as we do the blue-blooded investment banker (or, for that matter, the blue-blooded engineer as we do the “rags to riches” investment banker). There’s a pretty deep lack of recognition that wealth plays an important socioeconomic role.

There is a lot to be said about progressive taxation. And there’s reason to believe in certain circumstances a wealth tax is preferable given behavioral idiosyncrasies with respect to the discount rate. To the extent we pride ourselves as the nation of immigrants or – more importantly – the “American Dream” it’s important we consider this dimension of the conversation.

The Costs of Auctioning Permits

May 23, 2013
the Economy: Home and the World
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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.

Immigration: Auction v. Tariff

May 20, 2013
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Theo Clifford has a thoughtful reply to my recent post calling for immigration on the open market:

That said, it isn’t the only way you could do market-based immigration policy. One alternative would be to have an immigration tariff, as advocated by Gary Becker. Instead of auctioning a fixed number of permits, the government would sell as many permits as demanded at a fixed price. The benefits of this kind of system are broadly the same as the benefits of an auction Ashok describes in his post. However, there are a few subtle differences that for me suggest a tariff might be a better way to go.

Now, before we go on, let’s note that standard econ theory would tell us the optimal policy is an infinite number of monthly permits, or a tariff priced at nothing – at which point the two systems would converge into open borders. Before I go through Theo’s argument, it’s important to note that in a government-controlled industry, we can control either price (and let quantity float by demand) or quantity (and let price float by demand).

When it comes to immigration – people – I assert that the latter is wildly more preferable. On what basis do we price immigration? It’s tough to come up with a non-arbitrary algorithm to achieve this. Immigrants, after all, are not “externalities” to be priced and taxed. On the other hand, it’s eminently possible to create a non-arbirary framework through which the number of immigrants are controlled.

A country like the United States may decide that it wants to target an n% labor force growth rate annually. Based on native fertility rate, the monthly auction can be sized to hit this target. Similarly, European countries with below-replacement fertility can target constant population. Therefore the comparison to international trade isn’t fair:

Ultimately, I think the parallel with international trade holds – tariffs are better than quotas. An immigration tariff would be more sensitive to the needs of the market, less bureaucratic, in some ways more predictable, and maybe even more politically palatable than an auction system.

To the extent neither of us are endorsing freely open borders – which would be the Kaldor-Hicks efficient solution – we accept that there are cultural constraints that dictate policy. Frankly, I don’t care how many tons of steel are imported each year, so long as my buildings are efficiently priced. But immigration is a whole different story – these are people you interact with. They will assimilate into your culture, to a large extent, but you into theirs. To abstract the migration of human families into human trade misses the very reason why neither of us advocate free borders (or perhaps he does, in which case a tariff is suboptimal).

But even beside that important point, I think a permit auction holds strong.

The first reason to prefer a tariff is that it means the market is more responsive to shifts in supply and demand. […] Using the auction system, the same number of people come – all that changes is the price. Under a tariff regime, on the other hand, the number of migrants is free to fluctuate according to the needs of the economy […] Yes, the government could adjust the number of auctioned permits according to economic circumstances, but it is better that changes in the number of migrants be market-driven, rather than decided by bureaucratic assessments of ‘need.

I think I’ve addressed most of my concerns with this claim above, i.e. that targeting price level is arbitrary whereas number is not. But even that aside, an auction is sufficiently robust to meet changes in demand. I’m not asking for a once-in-a-lifetime bonanza. The government would host an electronic auction monthly. Furthermore, state and local governments have the explicit right to petition for more permits to be floated on the market in response to acute changes in immigrant demand.

I would argue, too, that permit markets are far more conducive to deeper markets, by encouraging secondary and tertiary exchanges. A big part of my proposal piggybacks on the old, American, Jeffersonian ideal that states are in competition with each other – thereby bringing out the best in each. Michigan, as I noted, has shown a remarkable interest in immigrant labor. Under my proposal, it would be easy for Michigan to buy a block of permits and float them on an internal market open to Michigan’s only businesses. Theo’s proposal is quite similar to a permit market endorsed by Matt Yglesias, but I believe my employer-focused plan places greater emphasis on ensuring only the most valuable immigrants make are allowed. (Note I said “valuable” not “skilled”).

Another argument for tariffs is certainty of barriers to entry:

Having a fixed tariff price, or at least a planned price schedule, also gives a level of certainty to the market. If I live in Mexico and my family is saving up to buy my way into the USA, I want to know how much I’m going to need to squirrel away. With an auction, the price will vary from year to year, perhaps dramatically, and there will be no guarantee that my savings will prove sufficient to get me a permit this year, or even next year. Tariffs solve this problem.

Ask yourself this question. You’re the American president. You have to decide between providing some level of certainty to your own people about what their country will look like in a generation. Or you can provide certainty to some potential Mexican peanut farmer about how much he has to save to maybe make it.

But I’m not even convinced that prices will be so predictable in a tariff system. One of Theo’s main arguments was that the labor market can flexibly respond to changes in demand by allowing more people, but this is a double-edged sword. What if the price is too high, which would strangle innovation and economic growth? Can the government credibly promise business leaders it will keep it high? And what if the price is too low vis-a-vis nativist preferences, which are always in flux? Any sensible government would change the price according to national and business sentiment: but this removes any “predictability” to the whole thing.

Generally, for international trade, I’d support tariffs (if anything at all). But neither price nor quantity is arbitrarily defined. In labor, it makes a lot more sense to target a number than a price. The former can definitely be credibly sustained, with minor exceptions as per immediate request.

Auctioning permits gives the government far more control over its long-term demographic profile, which is ultimately the heart of all immigration debate. There’s a Cato post here that makes pretty much the same points as Theo, but ignores that there’s not something magically more “market” about controlling price than quantity. They (correctly) argue that America needs more immigration but then seem to assume that a tariff would not be overpriced relative to demand but an auction would be. I suppose the old joke about the economist on a stranded island assuming a can opener is appropriate.

Oh and by the way, if we’re extrapolating this debate, I wonder how the folks at Cato would feel about a tariff-based Sovereign debt system rather than an auction. There are scenarios where targeting price is better (international trade) and those where targeting quantity trumps (immigration). It would be wrong to equivocate two very different markets.

Of Markets and Migrants

May 20, 2013
the Economy: Home and the World
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It’s not secret that America has a rusty immigration policy that’s costing us billions. Almost everyone seems to agree that we could use more talented doctors and engineers, presumably from India or China. There’s even considerable consensus that tolerating unskilled (mostly Latin American) workers has huge long-run benefits.

But there’s a pretty vocal contingent – left and right – that believes other things equal more unskilled workers are bad thing. Take Madeline Zavodny from the American Enterprise Institute, what we might take as a reasonable barometer of center-right market-oriented thinking:

The fact that these immigrants would receive more in benefits than they would pay in taxes if they legalize their status does not mean that the US should not have an earned legalization program — it means that the US should reform its government transfer programs.

Tethering freer borders to the “reform” of America’s safety net is not only counterproductive, but effective political suicide on our third rail. Not to mention study after study has shown immigrants will increase America’s tax base (satisfying conservatives) as well as working-class salaries (satisfying liberals).

No matter, there is a superior alternative that would definitely raise revenues, and attract the most valuable immigrants: permit auctions. Australia and Canada are both cited as having relatively robust “point based” immigration policies. However, the market is a far more efficient and fairer arbiter potential immigrant competence than a bureaucrat in government.

America’s first-come-first-serve (FCFS) system is even worse. I propose that the government should electronically auction some anticipated number of permits at the beginning of each month on a free market. Similar ideas have been floated by economists like Giovanni Peri at the University of California at Davis, but my idea would be quite a bit different:

  • There are no different classes of permits for “high” and “low” end workers. Skill is determined only by the market.
  • There is no price floor, the government can tighten labor supply by supplying fewer permits on the open market.
  • The auction would not be limited to firms – it would include individuals as well as local and state governments.
  • Would shift the focus to employers rather than more common residency permit auctions, like the ones Matt Yglesias discusses here. The idea behind this is to attract the most productive, not the richest, people – though you could say the spirit of our proposals is quite similar.

To the extent that we cannot tolerate purely open borders, a consistent permit auction is the most optimal choice. Right now, family members and bad FCFS policies don’t ensure that each immigrant we accept is better than all potential immigrants. That is far from Kaldor-Hicks efficient.

But if permits are auctioned on the open market, only the agents that will maximize the resultant marginal revenue product (MRP) receive clearance. Furthermore, this will end the need for the cruel government practice of tethering visas to employment, which certainly depresses wages in the lab sciences. Rather, employers themselves will sign contracts with foreigners only on the condition of sustained employment, thereby mitigating the risk of purchasing permits.

Left-leaning liberals like Dean Baker should also be pleased. While I believe his concern that immigration decrease native wages is false (studies actually show it has a 2-3% positive effect), my proposal deals with this in two ways:

  1. Especially with minimum wage laws in full-force, the MRP of high skilled workers is almost certainly higher than unskilled workers. The only other purveyors of such permits might be the North Carolina Growers Association which couldn’t find a single American to do the job. (Okay, I lied, they found seven).
  2. Consistent auctions would lend a steady stream of revenue which can be used to finance education and employment for the poorest Americans, who those like Baker claim to care the most about.

Furthermore, this is a great way to increase partnership between the Federal government and immigration-friendly states. Piggybacking on the spirit of regional visas from Adam Ozimek, state politicians should be given the right to petition the Federal government for an increase in the supply of permits. I do not endorse that they be traded on a separate exchange, which would too strongly favor public sector work. Rather, this is a means by which interested states (like Michigan) can bring down the permit cost. If states buy large quantities thereof, they me operate a secondary market within their state, to identify the most competent local businesses.

Here itself, we can observe the deep flexibility of this market-oriented proposal. Secondary and tertiary markets allow for a reallocation of permits in a far more efficient manner than centralized bureaucracy can ever dream of. Further, the high-skilled immigrant labor market will become rather more competitive when employer restrictions imposed by the government are removed, thereby enhancing regional mobility and hence overall welfare.

The revenue potential is not insignificant. Just at this moment, the United States has almost 150 million potential migrants. The United Kingdom is a laggard runner-up with a figure of 42 million. Assuming each permit floats at $5,000 – and this is conservative based on Peri’s work – the United States has a potential revenue of $750 billion. Indeed, a market-based immigration reform would further accelerate demand to become American.

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.

Therefore, if the USA manages to bring more people today – who will then want to bring their friends, families, and loved ones – a naturally captive demand for American visas will alleviate the employer’s share of the permit burden.

Most economists firmly believe that tax is an evil far kinder than bad regulation. The American bureaucracy is rusty, expensive, and highly detrimental to long run growth prospects. A market (ultimately) for citizenship would increase government revenues, per capita income, labor market flexibility, and innovation. Markets lend themselves to a devolution of regulation to state and local governments, which can then compete with each other as centers of immigrant activity.

To maximize growth in a time of debt immigration market reform is the clearest step. And can perhaps command bipartisan support. Market framework also helps us clarify foggy thoughts. Why do we regulate migration, anyway? Would anyone even dream of something as nutty as a “permit to innovate robots”? No! But why is immigration any different?

Why wealth taxation may not erode capital formation (and why it’s good for immigration)

March 5, 2013
the Economy: Home and the World
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Evan Soltas and Theo Clifford were unconvinced with my call for a wealth taxation system.

Evan notes:

(1) Incentivizing individuals to shift consumption around in terms of time is inefficient; that is, a small wealth tax will create a large disincentive against saving and investment.

(2) Very little wealth is in liquid assets, and liquidation is costly.

(3) Wealth is probably easier to conceal than income, decreasing compliance or increasing enforcement costs.

(4) In the U.S., a constitutional amendment would be required.

(5) A national wealth tax of any size would create considerable global coordination problems.

Many economists favor moving in the opposite direction, such as towards a Hall-Rabushka consumption tax. Note, also, that the effective tax rate on wealth is already nonzero as a result of local property taxes, the capital gains tax, the estate tax, and the gift tax.

Theo adds:

Not only will it be very unpopular, but even if you did succeed, there’d be all sorts of exemptions and caveats. Some of these would be desirable. Many would not be. All would increase complexity and implementation costs.

Capital taxes have other weird effects. They can distort the debt-equity tradeoff. They can bias rich people against inflation if the tax is not indexed to inflation, and if the experience of the last five years has taught us anything, it’s that rich people being biased against inflation is a very bad thing. How will the tax treat declining asset values? What will the effects of the tax be on the relative demand for different risk classes of assets?

As for popularity, I don’t think April 15th is a particularly popular day, either. Evan and Theo cite standard economic theory, suggesting that a wealth tax would disincentivize saving and hence capital formation making it an “incredibly inefficient” form of taxation. However, standard economic theory would suggest that a progressive income taxation would disincentivize education, as higher incomes are usually derived from investments in human capital.

This isn’t to say economic theory is wrong, but that simply noting a single disincentive in the structure doesn’t necessarily warrant its effect. No less, I note that the tax can be implemented in a way so as to not encourage consumption:

Although IRS should aim for an average tax rate of 2.5%, it should be progressively implemented. One way to do this would be to exempt the first 50% of all wealth generated for society as a whole, and provide those exemptions on the first k dollars of overall net worth, and tax everything above at 5%. This is not purely for egalitarian reasons, but to incentivize saving. If all wealth is taxed, there is an implicit subsidy of consumption, discouraging long-term savings. For example, if k was 250,000 US dollars, the only people who would face a disincentive to save are those with already high savings rates, with a low marginal propensity to consume.

I recently came across a New York Times article by Daniel Altman making the same point:

For most families, whose wealth may never reach $500,000, all disincentives to save would vanish. And families trying to accumulate a fixed amount of wealth for retirement or their children’s college fund could devote less of their incomes to saving, since in most cases the wealth tax would take a smaller bite of their interest, dividends and capital gains than the current income tax. Though the remaining minority of families subject to the wealth tax might end up saving less and spending more, this shift would also reduce inequality; the dollars they spent would be more likely to end up in the pockets of people with less wealth.

As Altman hints, Evan’s claim that wealth is de facto taxed via capital gains tax is wrong. Capital gains is income. Indeed, in my proposal, these would not be taxed at all. Therefore, any disincentive to invest in capital is further eroded by potential for increased returns. A wealth tax will, however, compel a broader ownership of such capital.

I also address Evan’s second point by recommending the opportunity to amortize the tax over a longer period of time:

Wealth, as estate, taxes are a tricky business. Especially when much of one’s net worth is in form of home equity and similarly non-liquid assets, it might be difficult to pay an immediate 2.5%. Government can introduce the option to amortize the cost over 5 to 10 years, removing the immediate burden on a family.

While it is an important point that wealth can be hidden, I don’t know whether I agree that it’s easier to hide – I certainly haven’t read any study to that effect. Indeed, it is quite easy to get paid in cash (inconvenient, but easy). It’s a lot harder to hide that cash without a formal financial institution. The argument of capital flight is also irrelevant for a country like the United States, where assets may be taxed worldwide.

Miles Kimball is also very skeptical about the long-term effects of a tax on capital:

It looks OK in the short run, but with lower investment, the capital stock gradually declines. In this spirit you would be better off taxing land a la Henry George, since the amount of land won’t decline even if you tax it. But taxing the buildings on top of the land is like taxing any other kind of capital. (However right now we tax houses very lightly compared to factories, so if it weren’t for the housing bubble’s aftermath, we would be better off taxing houses more and factories—which employ people—less.)

This is similar to Evan and Theo’s point that my proposal would hinder capital formation. However, is there any evidence that a tax on capital itself would be any more harmful than taxation on capital gains? Indeed, I think incentivizing higher returns from capital is more important than incentivizing formation of capital itself. When investors consider an investment they must focus not just on future cash flow, but speculation against fellow investors. However, focusing on capital returns isolates the consideration to future cash flow, allowing a more efficient signaling process. He also notes that a one time wealth tax won’t have a harmful effect, but I really don’t think this is subgame-perfect. If government can do it once, investors will know it can do it again. This means a single-time tax would have the benefit of only one flow of revenue, but would have the same negative effects critics of a capital tax claim it to have.

Furthermore, I agree with Evan that a progressive consumption tax is a move in the right direction:

A wealth tax would also be well-supplemented with a progressive consumption tax on carbon, sugar, cigarettes, etc. – balancing out any non-market incentives to save or consume, while at the same time ridding the country of associated external costs.

Indeed, a pure consumption based tax system can encourage oversaving, and particularly hurt those who in the short-run need to consume more than they earn. As Kimball notes, it also has a big life-cycle element to it, hurting seniors the most. While any taxation system has a life-cycle element, that associated with a wealth tax can be somewhat mitigated with a proper system of amortization.

One final point. It’s been clearly argued that there are negative effects associated with a wealth tax. I’m not fully sure that it would benefit an economy today, but I do believe it deserves consideration and a broad, full-scope study by the government, which would be able to more appropriately map incentives, signals, and future capital potential.

In light of recent debate on high-end immigration, I also believe wealth taxes are a more egalitarian solution. The income difference between the average skilled immigrant and the average American is close to, if not below, zero. However, immigrants come without any wealth. However, because of their relatively high incomes, they immediately pay more taxes than most Americans, without the ability to build an equivalent wealth.

A wealth tax would give them a chance to reach some threshold before being taxed in the same manner. This is a crucial point. Facebook made headlines in India for offering an IIT graduate a starting salary of 6 million rupees, over $115,000. This is more than Microsoft’s self-professed minimum starting salary of $100,000 and loads more than salaries India has ever seen before.

If the United States signaled that the initial starting salary for the same job in Silicon Valley now pays 25% more, it would certainly increase flow of immigration. While in the future the immigrant, now a millionaire, will have to pay more money, behavioral economics has shown that people discount future cash flow highly, and after making the move to become a US resident, it will be difficult to summon them out.

Immigration, continued

March 3, 2013
the Economy: Home and the World
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Dean Baker comments on my recent post:

On the moral side, abstractly I would like to see everyone in the world treated equally, but that is not going to happen. Differences across countries are huge and I’m afraid that is not going to change. I have pushed lots of things that would allow for rapid improvements in living standards for people in the developing world (let’s end patent and copyright protections — huge dividends there), but i don’t think that people in Congo will on average enjoy the same living standards as people in the U.S. anytime soon.

Does that bother? Yes it does, but it also bothers me that people from privileged backgrounds in the U.S. will enjoy hugely better living standards than people from middle class and poor backgrounds in the U.S. This is true even ignoring the large inheritances than they stand to receive.

 

[…]I don’t see anywhere to equalize these enormous differences in opportunity by class. That bothers me morally too. I don’t have time to decide which one I find more offensive because it really doesn’t matter. The one thing I will say is that I see absolutely zero morality in improving the lot of the world’s poor at the expense of the less advantaged in the U.S. If someone can’t think of a way to help the world’s poor that either does not benefit everyone or comes at the expense of the most advantaged in the rich countries, then I suggest that they do more thinking

I completely agree that any improving international poverty at the expense of the American poor is immoral. As I’ve previously argued, I disagree that open, unskilled immigration disadvantages our own marginalized workers, but this is an argument that seems to be largely exhausted.

Though, I do wonder, by the logic that a diminishing workforce acts as a redistribution of income, of sorts, how one could not support the emigration of mass labor from Latin America to the United States. Indeed, I believe this would have a far more profound effect in labor-intensive countries than the rich, low-fertility ones concerned. Furthermore, I think if the United States moved towards open borders, the very threat of emigration would force the rich and political classes in Third World countries to better the lives of their own poor, so that they don’t run away to America.

There’s something about the message and rhetoric of “skilled” immigration today that bothers me. We were always an immigrant’s nation, but lately the intense emphasis on PhDs from India has distorted at least what I imagined to be America. By this I mean, in past eras we were the country that the underprivileged and oppressed in Europe could turn to for a better life (an “Alt Europe“, as Noah Smith calls it). Children of illiterates became corporate titans, potato farmers became professors – and somewhere, sometime, people concocted the mad idea of the “American Dream”.

I don’t want to wax eloquent  but I think there’s been a bad distortion of America as a center for the “best and brilliant”. Ellis Island, uncomfortable as it was, used to be a beacon that anyone who wanted to work hard had a place in this country.

Dean and I completely agree that charity to the world’s poor shouldn’t come from our own. There used to be a time when the vast inequality and grinding poverty didn’t inhibit social progress in the way it does today. I don’t think it’s fair to become a place for doctors and engineers while excluding farmhands because our public education system is broken.

Let’s fix tax. Let’s stop talking about myopic spending cuts and work on the systematic flaws of mired economic mobility. By restricting immigration of any kind, we’re only treating the symptom of a diseased society, not the agent itself. A complex of similarly reductionist policies might well offer temporary relief for the meat-packer or truck driver, but in the long-run it’s only a stopgap to a harmful restructuring of our economy.

Immigration – what’s the limit?

March 1, 2013
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Dean Baker replies to my post:

I may give a longer response later, but just out of curiosity, would you support a system of complete open borders in the United States. If so, given that we have 12 million people who were willing to go through months of hell to get over the border, do you have idea as to how many immigrants the United States would see if anyone who wanted could come to the United States and had the same right to work as native born citizens? If that is not the policy you are supporting, then how would you restrict immigration?

My initial response was:

I sometimes have trouble reconciling my views on this. On the one hand I’m in complete principle support of ‘open borders’, on the other, I know within the current system that would lead to chaos. I think immigration without assimilation is bad for a country and society, largely what has created a cohesive “American” culture is rapid (by international standards) assimilation towards our culture. I think a path to citizenship is also critical for all immigrants. So I would limit immigration at the point where our bureaucracy (not political framework) can’t support the infrastructure necessary for such assimilation and/or process citizenship requests in a sane manner fast enough. At the margin, for reasons you note, I would always pick the ‘skilled’ over the ‘unskilled’.

Because of vast inequality, we may already be reaching that limit, I don’t know.

But it still left me thinking. I don’t like the idea of arbitrary guidelines (“5 million is okay, but 10 million isn’t”). We would all prefer some general principle on which restrictions can be designed.

After a bit of thought, I think I was pretty close on. I came across a Pew Study that notes that 61% of children of Asian and Hispanic immigrants think they are ‘typical Americans’:

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The similarity between Asian and Hispanic children really struck me. Initially, I thought inequality was a big deal as far as assimilation is concerned, but maybe it isn’t. As I noted in my reply to Dean, when our social system can’t support immigration, protectionism might be valid. Systems that work to this end are highly accessible and robust public education systems, libraries, strong ESL programs, and interaction with ‘traditional’ customs.

Inequality erodes pretty much all those entities. Schools get bad, communities get segregated, and libraries get torn down. Asians are rich and latinos are poor, and both react very similarly, so I must have been wrong somewhere…

My gut tells me the long-term effect of today’s inequality has yet to be felt, especially as many Asians still live in the ‘poor man’ mentality (high savings rate, humble beginnings, etc.)

But every society has its breaking point. I don’t know what the number is, but if all of Africa suddenly came to the US well, then, there’s a problem.

I’d also like to know what Dean thinks about population density, in relation to land, but also in relation to overall natural resources. India is projected to have 1.5 billion people on land far smaller than the US. Doesn’t it make sense that some come over, it would seem to be more productive overall…

This is something I haven’t fully thought about, and expect to blog about soon; would love to hear opinions in the mean time.

Dean Baker and Immigration

March 1, 2013
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Dean Baker replies to Noah Smith regarding unskilled immigration reform:

As far as less-skilled immigration, I would want it sharply limited, except for family re-unification. The evidence is that this does lower wages, although most of the impact is on the wages of other immigrants because we have a highly segregated labor market. I don’t consider this to be a good thing. As I’ve written elsewhere, I don’t want policy to be structured to give professionals cheap help. I would be very happy with a world where no one could afford to hire nannies for their kids.

There are places in the world where jobs that are low-paying jobs here allow for a middle class standard of living. A retail clerk, custodian, or housekeeper can earn enough to support a family. We just need the right set of labor market conditions to make this possible.

I think I understand where Dean is coming from now. I was initially very skeptical at the idea that progressives, who just won a decisive victory with immigrant support, should become labor protectionists. However, I still am in favor of more flexible labor markets, for paupers and PhDs alike.

As I understand it, the crux of Dean’s argument is that an inflow of skilled professionals benefits our poor, whereas the inflow of menial laborers depresses their wages. He (rightly) argues that rigid labor markets place an undue burden on other marginal groups.

This is true. If the number of doctors, lawyers, and programmers suddenly doubled, the salaries of the top 5% may be hurt, but middle and low America would derive huge benefits from cheaper appointments, technology, and services.

Dean argues, though, that a large portion of consumer surplus derived through inflow of menial labor is allocated to the wealthy:

Of course, there is a story of labor shortages in this picture—in the sense that it will be difficult to find workers for the lowest-paying and least productive jobs. With a stagnant or declining labor force, workers will have their choice of jobs. It is unlikely that they will want to work as custodians or dishwashers for $7.25 an hour. They will either take jobs that offer higher pay or these jobs will have to substantially increase their pay in order to compete.

This means that the people who hire low-paid workers to clean their houses, serve their meals, or tend their lawns and gardens will likely have to pay higher wages. That prospect may sound like a disaster scenario for this small group of affluent people, but it sounds like great news for the tens of millions of people who hold these sorts of jobs. It should mean rapidly rising living standards for those who have been left behind over the last three decades.

And that is the basic story of fears over stagnant or declining populations. The people who hire help—the very same who also dominate economic policy debates—are terrified over the prospect that they will have to pay workers more in the future. But the rest of us can sit back and enjoy watching them sweat as ordinary workers may finally start to see their share of the gains of the economic growth of the last three decades.

This argument was made in context of shrinking populations epidemic across the rich world, but, can be extended to immigration as well. However, I have two qualms with this premise:

  1. This argument may actually be somewhat true for a poor country like India. That is, my lifestyle in India is rich because we have lots of people cooking for us, driving us around, tending the lawn, etc. Simply, wealth in India manifests in labor-intensive ways. However, while undoubtedly the increased consumption by wealthy Americans creates employment (heh), it is more capital-intensive and will continue to become more so.
  2. The rich will certainly take a disproportionate amount of the benefits from low-skilled laborers, sure. However, the decreased cost of menial labor will also benefit the poor. That is, most Americans buy the same food in similar grocery stores, and when there are more people processing food, the price of food will fall. Food eats a good portion of a poor man’s leftover salary, but isn’t even a consideration for the affluent. So, much of the financial surplus might go to the wealthy, but it will hardly change their lives, as it will that of the poor.

The idea that low-paying jobs provide a middle-class standard of living in some countries is true, but doesn’t apply for this argument. In my head, Dean’s argument sounds something like this: “If a Mexican field-hand comes and works in America, he’ll barely earn $20,000 a year. Gee, he’d be poor by American standards. But if he stayed in Mexico, that would get him a really middle-class lifestyle”. This is a pretty unfair caricature of his argument, but low end jobs in America, are low end jobs in Mexico. I don’t think there are any non-Western countries where “custodians” can live a middle-class lifestyle. Housekeepers, maybe, but for cultural reasons (i.e. maids that live in mansions).

Dean doesn’t buy Noah’s argument re: agglomeration effects:

On some more general points, Noah presents evidence that densely populated metropolitan areas have the highest productivity. I don’t have any quarrel with this or the economics of agglomeration that Noah cites, but there is a serious problem of untangling cause and effect. Certainly economically dynamic areas will attract lots of workers and workers are needed to sustain dynamism. But do we really think the benefits of a larger population increase without limit?

Mexico City’s metropolitan area has a population of more than 20 million people. Do we think the people in the area would be poorer on average if the population was just 10 million? I find that hard to believe, especially if we take into account the pollution and congestion rather than just a straight per capita GDP measure.

Because I’m working at the Santa Fe Institute on a project that is specifically concerned with socioeconomic scaling in cities, this was a really interesting point to me. And my answer is an emphatic YES! We would expect Mexico city, which is 100% larger than a city of 10 million, to be 115% richer. Of course, he’s absolutely right that pollution also increases superlinearly with population, but this isn’t as bad a thing (and will cease to be a problem with enough wealth and popular demand). The real concern for the future is water and carbon efficiency, which consistently scale sublinearly with population. The scaling laws hold true across America, Europe, and – based on some preliminary sleuthing – India as well. Cities are where ideas have sex, without birth control.

After reading this post, I’m a lot more sympathetic to the idea of labor protectionism. I’ve always been somewhat appreciative of the nativist viewpoint. Hey, I’m never going to be at the blue-collar margins, so it’s not me who has to face harder competition and maybe lower wages. But also, I’m allergic to the idea that we should prevent low-skilled laborers from entering the United States.

The poor in Mexico are surely more disempowered than those in America. Many go through months of hell to come up north, and I think it is slightly patriarchal to say “You’d have a better live in Mexico, you could be considered middle-class there”.

I found the tax treaty for skilled foreign labor a fascinating idea, though. This would not only be a great economic move, but would forge the way to much more robust relations with ‘source countries’.

Would also direct readers to Adam Ozimek’s thoughts on region-based visas. This is another idea that I’m against, but has changed at least some of my priors.