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Economic Theory Really Is Pro-Immigration – Article by Luis Pablo de la Horra

Economic Theory Really Is Pro-Immigration – Article by Luis Pablo de la Horra

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The New Renaissance HatLuis Pablo de la Horra
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In his now-classic work The Myth of the Rational Voter, Bryan Caplan identifies four systematic biases about economics held by the average citizen: make-work bias (an inclination to overestimate the disadvantages of temporary job destruction due to productivity increases), anti-market bias (a tendency to overlook the benefits of the market as a coordination mechanism), pessimistic bias (an inclination to underestimate the present and future performance of the economy), and anti-foreign bias (a tendency to underestimate the economic benefits of interaction with foreigners).

Widespread biases on economics are far from being harmless. Wrong ideas held by voters usually lead to catastrophic policies due to the inherent nature of the democratic process. In other words, in most cases, politicians undertake those policies that they deem popular among voters in order to get reelected. If those policies beget pernicious consequences for the economy, harmless beliefs turn into lower living standards for all.

Of those four biases, the most potentially harmful is the anti-foreign bias. This inclination to underestimate the benefits of economic cooperation with foreigners manifests itself politically in two main ways: protectionism and anti-immigration policies. Despite the recent surge of protectionism in some developed countries, free trade is now the rule rather than the exception in most parts of the world. However, when it comes to immigration, only a few steps have been taken worldwide over the last few decades in a direction of liberalization (even though the consensus about the benefits of more open borders in the economics profession is probably as strong as the consensus around free trade).

As I will show in this series of two articles [see the second article here], anti-immigration policies reduce the well-being of both potential immigrants and host societies, as shown by economic theory and empirical evidence. Or, to put it differently: even a partial liberalization of immigration restrictions would, in the long-term, contribute to improving the standards of living globally.

Economic Theory Supports Immigration-Friendly Policies

The economic case against less restrictive immigration policies rests on shaky pillars. The most common anti-immigration arguments are related to the supposedly negative effects that immigration has on the host country’s labor market, and, more specifically, its impact on employment and wages. According to advocates of immigration restrictions, immigrants do not only take natives’ jobs, but also have a depressive effect on wages.

However, economic theory does not support these assertions. First, the economy is not a zero-sum game: the numbers of jobs available is not finite. As pointed out by Alex Tabarrok (here and here), immigrants are not only producers but also consumers, which implies that an increase in demand triggered by the expansion of the immigrant population goes hand in hand with an increase in total employment. Also – and contrary to conventional wisdom – not only highly-qualified immigrants create positive externalities on host economies. Low-skilled immigrants tend to take lower-productivity jobs (as they often either lack higher education or do not speak the language), allowing the native-born to access higher-productivity jobs (assuming free trade and a flexible labor market).

All said above can be also applied to wages. All else equal, the law of supply and demand says that an increase in the supply of labor would inevitably cause lower wages. However, more immigrants also mean a higher demand for goods and services, which in turn results in a higher demand for labor, preventing a generalized decrease in salaries. Even in those cases when wages in a particular sector are temporarily pushed down, lower wages lead to lower costs for companies, which usually results in lower prices for consumers due to the process of competition.

Immigration-friendly policies can also help tackle the demographic problem that many developed countries have been experiencing over the last years. For instance, the progressive demographic ageing of the American population is already having an impact on the US Social Security system. According to the Population Reference Bureau, the number of Americans over 65 years old will have moved from 15% in 2014 to 24% of the population by 2060. As a result,  the worker-to-beneficiary ratio will decrease by 32%, from 3.4 in 1990 to 2.3 in 2030. This problem could be mitigated by adopting a more flexible immigration policy that increases the working population, reversing the trend that will otherwise end up with significant spending cuts in Social Security benefits.

Benefits for the Sending Countries and Immigrants

The discussion so far has focused on the benefits of immigration for receptor countries. How do the sending countries and immigrants benefit from the migratory phenomenon? Immigrants usually transfer part of their income to their countries of origin with the aim of economically supporting their families and friends. These so-called remittances are flows of capital from developed to developing countries which assist in the economic development of sending countries.

The main beneficiaries of eliminating barriers to labor mobility would be, no doubt, immigrants themselves. This is due to the concept of Place Premium. This concept, first introduced by Michael Clemens, Claudio E. Montenegro, and Lant Pritchettin in a 2008 paper, refers to the automatic increase in earnings (PPP adjusted) that a worker experiences by moving from a low-productivity country to a high-productivity country, without increasing the worker’s human capital. The factors behind this phenomenon are multiple: differences in capital accumulation, quality of infrastructures, technology, proximity to high-productive workers, different legal frameworks, etc. The empirical evidence (which will be dealt with in the second and final article of this series) shows that wage differences among countries due to Place Premium are immense. The corollary is simple: more open borders would bring about a substantial reduction in poverty levels across the world.

Potential Gains from Reducing Global Migration Barriers

What would happen if migration barriers were partially or totally eliminated on a global scale? In his paper Economics and Immigration: Trillion-Dollar Bills on the Sidewalk, Michael Clemens, senior fellow at the Center for Global Development, reviews the academic literature on the topic. If all barriers to labor mobility were to be removed, world GDP would increase in the range of 50% to 150%.

Even partial liberalizations would bring about considerable gains. For instance, a reform that allowed 7% of the population to emigrate to higher-productivity countries would result in an efficiency gain of 10% of world GDP. To put this into perspective, if all remaining trade barriers were eliminated, world GDP would grow by just 2% or 3%. As shown, the impact of relaxing migration barriers on the world economy would be extremely positive, especially for the poorest segments of population.

The theoretical analysis above clearly supports the adoption of more immigration-friendly policies as a way of increasing economic growth and improving the welfare of millions and millions of people, including those in receptor countries. However, economic theory needs to be supported by facts. In my next article, I will provide empirical evidence in support of eliminating barriers to immigration.

Luis Pablo de la Horra is a Spanish finance graduate from Vlerick Business School.

This article was published by The Foundation for Economic Education and may be freely distributed, subject to a Creative Commons Attribution 4.0 International License, which requires that credit be given to the author.

Illiberal Belief #17: Democracy is a Cure-All – Article by Bradley Doucet

Illiberal Belief #17: Democracy is a Cure-All – Article by Bradley Doucet

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The New Renaissance Hat
Bradley Doucet
May 14, 2013
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I know it is sacrilege, but that is all the more reason to say it, and say it loud: Democracy is not the be-all, end-all, Holy Grail of politics that many imagine it to be. It is one, but only one, of the ingredients that make for good societies, and it is far from the most important one. Why point this out? If democracy is a good thing, why stir controversy by questioning just how good? Because the widespread, quasi-religious devotion to democracy in evidence today has some very nasty consequences. Democracy means “rule by the people.” The people usually rule by electing representatives, a process which is called, simply enough, representative democracy. Sometimes, as in the case of a referendum on a specific question, the people rule more directly, and this is known as direct democracy. Actually, though, “rule by the people” is a bit misleading, since “the people” are never unanimous on any given question, and neither are their chosen representatives. In practice, democracy is rule by majority (i.e., 50% + 1), or even mere plurality (i.e., more than any one other candidate but less than half) when three or more candidates compete.
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Long before any nation had experienced anything even approaching universal suffrage, people concerned with human liberty—thinkers like Alexis de Tocqueville and John Stuart Mill—expressed concerns that the fading tyranny of kings might merely be replaced by a “tyranny of the majority.” They worried that majorities might vote away minorities’ hard-won rights to property, freedom of religion, freedom of expression, and freedom of movement. Majorities with a hate on for certain minorities might even vote away their very right to life.

History has given these worries ample justification. Democracy by itself is no guarantee of peace and freedom. Adolf Hitler’s victory in democratic 1930s Germany is only the most glaring example of popular support for an illiberal, anti-human regime. The people of Latin America have a long and hallowed tradition of rallying behind populist strongmen who repay their fealty by grinding them (or sometimes their neighbours) beneath their boot heels, all the while running their economies into the ground. Their counterparts in post-colonial Africa and certain parts of Asia have shown similarly stellar political acumen.

As writers like Fareed Zakaria (The Future of Freedom: Illiberal Democracy at Home and Abroad) point out, in those parts of the world that have successfully achieved a respectable degree of freedom and prosperity (basically Europe, the Anglosphere, and Japan and the Asian Tigers), sheer democracy has been supplemented—and preceded—by institutions like the rule of law, including an independent judiciary; secure property rights; the separation of church and state; freedom of the press; and an educated middle class. Indeed, instead of supplementing democracy, it is more accurate to say that these institutions limit the things over which the people can rule. It is enshrined in law and tradition that neither the people nor their representatives shall be above the law, violate the lives or property of others, impose their religious beliefs on others, or censor the freedom of the press. These checks on the power of the people have created, in the most successful parts of the world, not just democracies but liberal democracies.

According to Zakaria, societies that democratize before having built up these liberal institutions and the prosperity they engender are practically doomed to see their situations deteriorate instead of improve, often to the detriment of neighbouring countries, too. Liberty is simply more important than democracy, and must come first. We who are fortunate enough to live in liberal democracies would do well to remember this when judging other nations, like China, and urging them to democratize faster.

We would do well to remember it when thinking about our own societies, too. Thinkers like economist Bryan Caplan, author of The Myth of the Rational Voter: Why Democracies Choose Bad Policies, argue that even in the most liberal countries, democracy often works against liberty. Economists have been saying for a few decades now that political ignorance is an intractable problem that undermines the beneficial effects of democracy. The argument is that since a single vote has practically no chance of affecting the outcome of an election (or a referendum), the average voter has no incentive to become informed. Defenders of democracy have replied that ignorance doesn’t matter, since the ignorant essentially vote randomly, and random ignorant votes in one direction will be cancelled out by random ignorant votes in the opposite direction, leaving the well-informed in the driver’s seat.

Caplan agrees that if average voters were merely ignorant, their votes would cancel each other out, and the well-informed would be in charge and make good decisions. His central insight, though, is that voters are not merely ignorant, but irrational to boot. Voters have systematically biased beliefs, to which they are deeply attached, and those biases do not cancel each other out. Specifically, the average voter underestimates how well markets work; underestimates the benefits of dealing with foreigners; focuses on the short-term pain of job losses instead of the long-term gain of productivity increases; and tends at any given time to be overly pessimistic about the economy. These biases lead voters to support candidates and policies that undermine their own best interests.

The alternative to democracy, Caplan emphasizes, is not dictatorship, but markets. The market is not perfect, but it works a lot better than politics, because in my daily life as a producer and a consumer, I have an obvious incentive to be rational: my pocketbook. This incentive is lacking when it comes time to go to the polls, because of the aforementioned near-impossibility that my vote will determine the outcome. Given this asymmetry, we should favour markets over politics whenever possible. For those things that must be decided collectively, democracy may be the best we can do, but we should strive to decide as many things as possible privately, resorting to politics only when no other option is feasible. In other words, we should recapture the wisdom of the American Founding Fathers, rediscover the genius of constitutionally limited democracy, and reclaim some of the liberty previous generations fought so valiantly to secure. If we don’t, it might not be too much longer, in the grand scheme of things, before the Western world ceases to be a model worth emulating.

Bradley Doucet is Le Quebecois Libré‘s English Editor. A writer living in Montreal, he has studied philosophy and economics, and is currently completing a novel on the pursuit of happiness.