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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?

Jay Goltz warns us in the New York Times that Amazon is keeping prices artificially low today  to gain market share:

Why would a company choose to operate without a profit? Because it wants to provide great value? Check. Because it wants everyone to love the brand? Check. Because it wants to gain market share? Check. Because it wants to put everyone else out of business, so that it can one day flick a switch to raise prices and make a fortune? CHECK!

Don’t believe me? Well, here is Jeff Bezos of Amazon, explaining why making a profit isn’t important. Of course, he doesn’t say he’s planning to raise prices after he puts a lot of people out of business, but let me translate something for you: Gaining market share by not taking a profit makes the most sense if you are planning to raise prices later when you have less competition.

That’s probably one of the most natural explanations of NASDAQ:AMZN, but I think Matt Yglesias is right:

And maybe it is. But it’s hard to see how that plan would work. Part of the genius of the Internet is that it makes it much easier for brands to directly market their wares to people. It’s easy to see how Amazon might put K-Mart out of business, but the only way for them to put Samsung out of business would be to actually manufacture mobile phones and televisions. And if Amazon ever starts trying to charge outrageous markups on Samsung’s products, people would just buy directly from Samsung. Amazon would probably be more efficient at delivering things quickly, but then any price premium Amazon charges would be in effect an upcharge for fast delivery not a monopoly rent. And most of the time delivery speed just isn’t that big a deal. 

There’s a word for this. Normally, when economist and journalist types talk about market health, they’ll use “perfect competition” and, by extension, number of firms, as a good baseline. In fact, the idea of “many firms” is so inculcated in the economic psyche that we’re loth to consider welfare efficiency by any other measure. Indeed Google returns 252,000,000 hits for “perfect competition” against a measly 555,000 for the much more appropriate “contestable market” – defined by The Economist as:

A market in which an inefficient firm, or one earning excess profits, is likely to be driven out by a more efficient or less profitable rival. A market can be contestable even if it is dominated by a single firm, which appears to enjoy a MONOPOLY with MARKET POWER, and the new entrant exists only as potential COMPETITION (see ANTITRUST).

In other words monopolistic rents are moderated by the threat of potential competition. As the Google hit numbers will tell you, this idea just hasn’t gained that much traction. But digital economics are very different. Internet monopolies are usually determined more by network effects (a la Facebook) more than real, physical barriers to entry. The obvious exceptions might be massively-scaled cloud storage etc. Even Paul Krugman missed this distinction regarding Google Reader. That’s why this little bit from Goltz really misses the mark:

If this competition with giant Internet companies seems like some kind of Brave New World, it’s really not. It’s pretty much the same strategy the robber barons employed in the 19th century. Today’s combination of tax avoidance and profit delay enjoyed by the Web retailers has made it very difficult for some local retailers. But is the end near?

In fact, it’s actually nothing like robber barons in the 19th century. For one, while Amazon is clearly the king of online retail, direct sales, as Yglesias notes, play an important role. But more importantly, Amazon’s appeal comes from rich, and reliable, system of product review it provides. Yeah Amazon Prime is great; the web infrastructure too. But do we really think consumers will let Bezos charge any real markups when Yelp is right next… click?

Furthermore, any markups can be so easily exploited by instant arbitrageurs that rents cannot exist for long. Price information spreads so rapidly that consumers will flock to other sites, or direct retail itself, the second they find any noticeable increase in price levels. iTunes reviewers have, on more than one occasion, saved me of $9.99 by pointing readers to legal ways of watching a movie free. Anecdotal, but powerful.

Goltz ends with what sounds like a guilt trip:

And if you are a customer, please think twice before you use the services of a local retailer without any intention of buying. We all may pay a hefty price for your “savings.” Empty storefronts don’t help a neighborhood.

Then again, the Times signs him off as:

Jay Goltz owns five small businesses in Chicago.

Okay, cheap shot! But I couldn’t resist… This is like a cry against efficiency and consumer surplus. For one, by selling in a public space using institutions funded by the American taxpayer, we have a right to cordially browse goods. And it’s not as if “local” stores don’t benefit from the likes of Amazon. Local shops need inputs, too, and I’m quite confident the long-run supply side effects of online retailing has brought that price down, allowing said shop to earn a greater margin on each product.

And think about the reviews! When a retailer is thinking about long-term inventories, it would be absurd if he or she didn’t use the rich information available on Amazon to better serve the local client base.

And if local businesses price their goods so fairly after all, implying a high level of competition, standard micro tells us that if Amazon were to raise prices too high, they’d just pop back into existence. Because if barriers to entry and exit aren’t low, then they’ve been earning rents this whole time, and are just upset that big, bad Amazon is making things fair. And if they are, well, Amazon can’t do much to keep them out.

Of course it’s a mix of both. Which is why we gotta think in terms of contestability. Yglesias is very correct: an evil Amazon will not stay in power for long. Network effects are rapidly eroded (see this), which forces digital “monopolies” to operate under the constant threat of competition.

Mark Thoma takes us to new research by Drs. Armin Falk and Nora Szech suggesting that markets erode moral values. He’s not quite sure what to make of it. Neither am I, but having gone through the authors’ notes (reading the whole thing) I think it’s important to note a few crucial points thereof. First, let me admit this is a very important study. If we can understand the particular situations in which markets corrode morals, perhaps reforming the excesses on Wall Street will be easier. (Or getting people to buy energy-efficient light bulbs, for something more mundane.)

That all said, the catchy title (and, retrospectively, the whole concept behind the study) is misleading. Let’s look at what the study found:

“Our results show that market participants violate their own moral standards,” says Prof. Falk. In a number of different experiments, several hundred subjects were confronted with the moral decision between receiving a monetary amount and killing a mouse versus saving the life of a mouse and foregoing the monetary amount. “It is important to understand what role markets and other institutions play in moral decision making. This is a question economists have to deal with,” says Prof. Szech.

The market as an institution is very different from what the study tests. When we think of the market as a concept and philosophy perhaps images of Adam Smith go through the mind, or maybe the New York Stock Exchange. The words “capitalism” and “trade” are surely not far off. Also, and this isn’t a joke, in a very carnivorous culture, I cannot take seriously an experiment that associates markets with killing mice.

And in the buzz of economic crisis and general discontent, it is easy to use a study like this to argue that the market system somehow engenders immorality. This study tests nothing of the sort – indeed it would be very hard to prove this at a significant level either way. It captures the microlevel reaction humans have when monetary incentives are introduced in a bilateral transaction.

It is important to note that the participants already exist within a market framework. That is, our culture and way of life is, principally, market oriented. Those who question capitalism (note, I’m not saying the authors are) would be served better proving a significant difference in reaction to the same experiment in a primitive society. This would certainly be limited by the lack of currency as a medium of exchange but, perhaps, coconuts would not be a bad substitute.

Joke aside, let’s see what they did:

A subgroup of subjects decided between life and money in a non-market decision context (individual condition). This condition allows for eliciting moral standards held by individuals. The condition was compared to two market conditions in which either only one buyer and one seller (bilateral market) or a larger number of buyers and sellers (multilateral market) could trade with each other. If a market offer was accepted a trade was completed, resulting in the death of a mouse. Compared to the individual condition, a significantly higher number of subjects were willing to accept the killing of a mouse in both market conditions. This is the main result of the study. Thus markets result in an erosion of moral values. “In markets, people face several mechanisms that may lower their feelings of guilt and responsibility,” explains Nora Szech. In market situations, people focus on competition and profits rather than on moral concerns. Guilt can be shared with other traders. In addition, people see that others violate moral norms as well.

It’s hard for me to believe this means something, even if causal. How many of the participants were vegetarian? I’m guessing not many. Before you pooh-pah me, think about it. We don’t live in a society that thinks killing cows – let alone “surplus” mice – is bad. If people are incentivized to not save one, obviously there will be a “significant” association when markets are implemented. It’s almost tautological.

And this isn’t even to speak of the huge difference between a transaction (what this is) and market (an ideology). In fact, Montesquieu long ago noted that the latter is instrumental for social and moral development:

Commerce is a cure for the most destructive prejudices; for it is almost a general rule, that wherever we find agreeable manners, there commerce flourishes; and that wherever there is commerce, there we meet with agreeable manners.

Racism and homophobia, corporate titans will tell you, is bad business. Alex Tabarrok (link above) goes on to an experiment that suggests this isn’t just anecdotal:

Using randomized control, we find evidence that priming markets leaves people more optimistic about the trustworthiness of anonymous strangers and therefore increases trusting decisions and, in turn, social efficiency. Given the general mechanisms by which priming affects behavior–that an individual’s mental representation of markets is the result of the individual’s experiences with markets–we can interpret our results as evidence in favor of the hypothesis that market participation increases trust.

…Absent markets, economic interactions with strangers tend to be negative. Market proliferation allows good things to happen when interacting with strangers, thus encouraging optimism and leading to more trusting behaviors. Participation in markets, rather than making people suspicious, makes people more likely to trust anonymous strangers.

Rightly, they warn:

Our results seem therefore to corroborate the idea of doux commerce….We stress, however, that this is cautious evidence; a wider array of evidence is necessary for the solidification of this conclusion.

The institutional value of markets – the real question at hand – was demonstrated almost fifteen years back by Paul Zak and Stephen Knack (other evidence exists, but this team has the best name combo – by far):

Why does trust vary so substantially across countries? How does trust affect growth? This paper presents a general equilibrium growth model in which heterogeneous agents transact and face a moral hazard problem. Agents in this world may trust those with whom they transact, but they also have the opportunity to invest resources in verifying the truthfulness of claims made by transactors. We characterize the social, economic and institutional environments in which trust will be high and show that low trust environments reduce the rate of investment and thus the economy’s growth rate. Further, we show that very low trust societies can be caught in a poverty trap. The predictions of the model are examined empirically for a cross-section of countries and have substantial support in the data. Trust is higher in more ethnically, socially and economically homogeneous societies and where legal and social mechanisms for constraining opportunism are better developed. High-trust societies, in turn, exhibit higher rates of investment and growth.

These are real studies. That don’t make the big assumption that people think killing mice is immoral. Trust is an infinitely more cross-cultural and intrinsic measure of morals. Remember, morality is not in anyway universal. Nor is it binary. Many of us believe carbon dioxide emissions are bad for the planet, and support aggressive environmental policies. That doesn’t mean we never use a car. We take that the value of a business meeting might just be more important than the principled adherence to morality at a given point. That is life.

And an important point many have made. The Hindu-Muslim communalism is just far tamer down in South India than up north. A leading reason is that many Muslims came down as merchants and traders which is bound to form relationships based on trust. Markets are moralizing.

The objections to the important study become strikingly clear the more I think about it. The assumptions,  limited scope of experiment, and arbitrary (and probably highly inaccurate) definition of morality makes this, unfortunately, rather irrelevant. These constraints partly derive from the incredible difficulty of a real scientific experiment – let alone in the social sciences. I don’t want to take away from the value of this paper, and I think we can learn a lot about human interactions and monetary transactions. I am just a little more skeptical on the connection to the market as a mechanism.

P.S. Here’s Brad DeLong on the same:

But even Smith’s self-interested and calculating market agents are sociable ones: they exchange, and perhaps they cheat–they don’t kill, rape, burn, and steal. Which is odd, given that fifty years before Smith was born not far from his house there were lots of people who saw others not as potential partners in acts of mutually-beneficial commerce but instead as either (i) clan allies, (ii) clan enemies to be killed, or (iii) strangers to be robbed.

Good point. That’s why we have laws. I don’t think DeLong would agree this study by itself can credibly tell us anything about “markets”.