DRI-166 for week of 4-19-15: What’s Wrong With the Immigration Laws?

An Access Advertising EconBrief:

What’s Wrong With the Immigration Laws?

One of the perennial items on Washington’s reform agenda is “comprehensive immigration reform.” Everybody claims to favor it, although the two major parties differ radically on the content they assign to the term. Indeed, there is vast intra-party difference as well, particularly among Republicans. And yet economists – the people who supposedly can’t agree among themselves about anything – align very closely on the subject of immigration.

Why does the subject of immigration trigger this startling role reversal? It should come as no surprise that economic logic and theory play a starring role in the explanation. But the co-star is the existing corpus of immigration law, which is a leading contender for the title “worst existing body of law.”

The Four Paths to Legal Immigration

Prior to the 20th century, there were almost no barriers to immigration into the United States of America. The sole exception was the anti-Chinese laws passed to placate fears over the “yellow peril” in the 19th century. But beginning in the 1920s, organizations like the Ku Klux Klan successfully agitated for laws broadly restricting immigration into the country. Thus began a gradual accretion of immigration law that has worked its way into the fiber of American society.

Today, restrictions on immigration are so severe that it is easier to talk about the relaxation of barriers to entry than it is to talk about restrictions on entry. The question isn’t “Is immigration restricted?”; it’s “How can anybody get in legally?” There are basically four paths to legal immigration into the U.S. today. We will discuss each in turn, together with the economic logic (or lack of it) underlying each.

Legal Path #1: The Visa Lottery

Foreigners who reside in the U.S. legally are called aliens. In order to obtain legal status, an alien must be issued a visa, a document that attests to the alien’s fulfillment of one of the conditions for valid entry. Every year, a certain number of visas are issued to applicants on a random basis by means of a visa lottery. This lottery is sometimes referred to colloquially as the “green-card lottery” because the green card is the document attesting to an alien’s status as a permanent resident of the United States. The green card is sometimes mistakenly viewed as a document permitting an alien to enter the country, but it is the stamp affixed to the card by the Bureau of Customs and Border Protection (CBP) at the port of entry that accords this privilege.

The official name of the visa lottery is the “Diversity Immigrant Visa Program.” It is held annually by the State Department in accordance with Section 203c of the Immigration and Nationality Act, as amended by Section 131 of the Immigration Act of 1990. This created a quota of 55,000 visas open to foreign nationals from countries “deemed to have low rates of immigration to the U.S.” in the 5 years previous to the lottery. The purpose of the program is to “diversify the immigrant population” of the U.S.

Residents of countries whose total number of legal immigrants to the U.S. in the preceding 5 years exceed 50,000 are ineligible to apply for participation in the lottery. Among the countries whose residents have recently been ineligible are included Mexico, Canada, the Dominican Republic, El Salvador, India, South Korea, the United Kingdom (but not Northern Ireland) and Vietnam, among many others. The entry period for the 2015 lottery lasted from October 1 to November 3, 2014.

Typically, there are millions of applicants – over 13 million in 2008, for example. Despite the selectivity involved – and the fact that eventual lottery winners withstand scrutiny from various government agencies – at least one notorious terrorist is known to have entered the country legally via the lottery. (One minor technical note: Excluded from the 50,000 five-year exclusion threshold are refugees admitted as legal immigrants, about whom more will be said later.)

Economic evaluation of the visa lottery: The visa lottery illuminates the central significance of the immigration laws; namely, that their purposes are entirely political rather than economic. And since politics all too often runs counter to the logic of economics, we can expect the immigration laws to be economically perverse. So they are.

First, the visa lottery imposes a quota upon visa awards and stringent conditions upon applicants. In contrast, economic logic imposes no quota upon the mobility of individuals in response to economic conditions. Just the opposite, in fact – economic efficiency demands either that people move in response to geographic price and cost differentials or that goods and services move. Sometimes it will be more economic for people to move; sometimes it is more efficient for the goods to move. (Sometimes services can move, too – particularly financial services – but this is less common.)

These days, we are implored to seek “diversity” in all things, particularly in the makeup of populations. But there is no economic reason to “diversify the immigrant population.” In practice, economics will almost surely argue against it. All other things equal, geographic distance should be inversely related to the propensity to emigrate, so we should expect to see more immigration from countries closer to the U.S. But the visa lottery actively discourages this with its five-year/50,000 immigrant disqualifier. Indeed, any factor favorable to immigration – distance, language, cultural congruity, education qualification, et al – will tend to put a country above the 50,000 threshold over time and thereby disqualify its citizens from the lottery. And, as we will see, each of the other three paths to legal immigration has its own limiting factors. So the visa lottery clearly violates the precepts of economic logic.

Why does the quota exist, then? Why, to thwart economic efficiency and protect domestic workers particularly vulnerable to foreign competition. This anti-competitive effect comes at the expense of – well, just about everybody else in the two countries involved. Because it is particularly obvious to the import-competing workers that they gain from the restrictive quota and much less obvious to the rest of the world that they are harmed, the government is not called to account for this egregious behavior. Imagine New York State devising a lottery to determine how many people it will accept from the other states and excluding people in Pennsylvania, New Jersey and New England from participating!

Legal Path #2: Refugee Status Visa

The second means of obtaining a legal immigrant visa is by applying for status as a refugee from harm in the resident country. This protected status is known as “asylum.” Each year, roughly 10% of legal immigrants fall under this rubric. Since 1980, over two million aliens have taken refuge in the United States. That would average out to somewhat fewer than 70,000 per year, but the variance around this average has been substantial. The current system of granting visas to refugees establishes quotas by dividing the world into regions and setting a quota for each one, then including a small additional quota for an “unallocated reserve.” The 5 regions (and their quotas as of 2009) are: Africa (12,000), East Asia (19,000), Europe and Central Asia (3,500), Latin America and the Caribbean (4,500) and the Near East and South Asia (37,000). The unallocated reserve quota is 5,000, bringing the total refugee quota to 80,000. Total refugee admissions in 2010 were 73,293; this is the only case we discuss where a quota was not completely filled.

From the applicant’s perspective, the problem with the application for asylum status is that acceptance is not automatic. There is a veritable laundry list of possible reasons for the denial of that application. This is the official list:

  1. Possession of a communicable disease of public-health significance.
  2. Possession of a serious physical or mental disorder.
  3. Status as a drug abuser or addict.
  4. Status as a former U.S. citizen who renounced citizenship for tax purposes.
  5. Status as a criminal guilty of “moral turpitude.”
  6. Violation of laws pertaining to controlled substances.
  7. Status as a criminal twice convicted of felony crimes.
  8. Having been convicted of prostitution within the previous 10 years.
  9. Having gained immunity from criminal prosecution to avoid penalty.
  10. Having the intention to practice polygamy in the U.S.
  11. Having the intention to violate (or abet the violation of) the immigration laws.
  12. Having been involved in international child abduction in any way.
  13. Having the intention to commit a crime.
  14. Status as someone whose admission would have adverse foreign-policy consequences for the U.S.

By far the most important element of an application for asylum, though, is the showing of a need for protection. There are 3 elements of this need:

  1. The applicant must demonstrate a fear of persecution.
  2. Government must be either the cause of the persecution or shown to be ineffectual in counteracting it.
  3. The basis of the persecution must be race, religion, nationality, political opinion or social group.

Economic evaluation of the refugee status visa: Once again, the particular of this section of the law betray its political intent. While some of the disqualifiers make sense, such as the communicable disease, criminal conviction and child abduction provisions, others seem obviously designed as pretexts for exclusion. The latter include the provision denouncing tax exiles and those referring to the intentions of applicants rather than their past deeds. In the criminal law, the principle of mens rea (literally, a “bad mind” or evil intent) plays a key role. This makes sense because proving commission of a crime will ordinarily involve a showing of intent. But in this case it is not clear exactly how the United States Customs and Immigration Service (USCIS) are to go about determining intent on the part of would-be immigrants. Equally dubious are provisions putting the finger on those with “mental disorders” and those guilty of “moral turpitude.”Then there is the provision excluding would-be refugee polygamists, which inserts a much-needed note of comic relief into the proceedings.


The easiest way to visualize the significance of this list would be to apply it to the passenger list of the Mayflower and the other pioneering voyages to the American colonies in the early 1600s. How many would-be colonists in early Virginia and Massachusetts could have passed this test? How many people who settled the American West could have run the above gauntlet unscathed? Throughout mankind’s history, immigration has been the leading means of making a new start in life, getting a second chance. Today, the U.S. immigration laws seem determined to foreclose this option. Just as the age-old saying holds that the best time to apply for a loan is when you don’t need one, the U.S. government apparently holds that people who are already successful are the only people who are genuinely welcome to come to the U.S. But if they’re already successful, what is their motivation to pick up stakes and move to a new country?

The persecution provision of the refugee provision is further proof of the political nature of the immigration laws. It is one thing to say (or imply) that the very nature of “asylum” implies protection from a threat, and that simple economic necessity is not a threat posed by human beings against other humans but rather a fact of nature and scarcity. That much is true enough. But this attitude implies that the immigration laws will have a section – somewhere – specifically devoted to legal immigrants who come to the U.S. solely to make a better life for themselves and their families. Well, this obviously isn’t the lottery visa or the refugee visa. Later, we will see that it doesn’t apply to the H1-b visa or the immediate-relative visa, either. In other words, the motivation spelled out on the Statue of Liberty, the one that impelled most new arrivals to America and made this country what it is today… is now absent from the immigration laws. Is it any wonder that illegal immigration swelled to epidemic proportions until dampened by the onset of the Great Recession?

Legal Path #3: The H1-B “High Skills” Visa

For at least two decades, U.S. employers have complained about the shortage of job-seekers with polished science, technology, engineering and math (STEM) skills. Congress responded to these complaints by creating a category of visa catering to applicants with those specific job-related skills. And once again there is a quota attached to this visa category. There is annual quota of 85,000 visas for this H1-b category, which has a minimum education requirement of a bachelor’s degree or the equivalent in a STEM subject.

Each year, this “high skills visa” attracts an oversupply of applicants. In 2013, there were 124,000 applicants for the 85,000 vacancies. In 2014, the oversupply increased again. And for 2015, some 233,000 applicants have applied. Given this burgeoning response to a crying longtime demand, the question arises: Why not at least bump up the quota? A bit of legislative history suggests that the answer lies exactly where an economist would expect to find it – with politics.

In 2012, a bill sponsored by House of Representatives Lamar Smith proposed increasing the quota by 55,000. But it also proposed to abolish the visa lottery, which many widely view as arbitrary and unfair – indeed, that was precisely how the 55,000 figure was arrived at. At the same time, Democrat Representative Zoe Lofgren has a bill to extend the quota by exactly the same number, 55,000 – but without abolishing the visa lottery. One would expect these bills to be reconciled, given only that single discrepancy. But it wasn’t – and nothing was done. In early 2013, a Senate bill was developed to raise the quota to 300,000. But various Republicans outside Congress, notably Jeb Bush, rejected its provisions in favor of “comprehensive immigration reform.” Either alternative would have had the virtue of doing something to promote legal immigration – but nothing was done. Later in the year, the Senate put together a comprehensive bill in response to the earlier demand for comprehensive reform. Now, though, House Republicans rejected this bill in favor of piecemeal immigration reform, claiming that comprehensive reform was bound to include objectionable features that would compromise security and play politics with the issue. And, predictably, nothing was done.

It is now obvious that the H1-b visa is the economic bait allowing politicians to switch away from action on immigration to politically inspired inaction. If politicians and legislators were really serious about aiding economic efficiency by encouraging immigration of skilled migrants, why have a quota at all? Just allow anybody with the skills to apply for a visa and accept applicants who can demonstrate the relevant skills, either in the form of academic credentials or work experience.

As it now stands, the H1-b visa is merely a blind permitting members of both parties to pretend to narrow – or rather, pretend to be always on the verge of narrowing without ever actually doing it – the yawning gap between the demand for skilled labor and its supply.

Legal Path #4: The K (Immediate Relative) Visa

U.S. citizens may petition the U.S.C.I.S. for a temporary immigrant visa (K visa) for spouse, fiancées and unmarried dependent children of those spouses and fiancées who are currently foreign nationals. (This is done via an I-130 form.) This temporary visa gives the recipient a maximum of 1 year to transform their status into that of a permanent legal resident. For example, fiancées have 90 days to marry the petitioner and apply for adjustment of status to that of legal permanent resident. Failure to comply will “subject them to removal proceedings;” e.g., deportation. (By the way, there are limits on the number of K-visa applications a petitioner can file without seeking a waiver of limitation.)

To obtain a V visa, signifying legal permanent status, a spouse filed an I-485 application for adjustment of status to that of legal permanent resident (LPR). This is accompanied by an I-693 (Medical Examination of an Alien) andG-325A (Biographic Information). These forms verify that the alien relative has not acquired undesirable medical conditions or bad habits (idleness or shiftlessness) since arrival. A date is set for fingerprinting, photographing and signature-gathering by the FBI, which runs a background check on the petitioner. All personal information is introduced into the U.S.C.I.S. database. The final step is an interview with a U.S.C.I.S. officer.

Economic evaluation of the immediate relative (K) visa: If there is anything at the opposite pole from economics, it is emotion – and that is the foundation of this section of immigration law. It exists to counter the specter of families and loved ones torn apart by the exigencies of economic necessity and the toils of bureaucracy. “See?” The K visa is supposed to whisper in the public’s ear. “The government does have a heart after all. When the husband has to labor in foreign vineyards, his wife and children are not left to pine away at home.”

The first thing to notice is that only U.S. citizens can petition for a would-be K visa holder. Thus, illegal immigrants cannot use this section to summon their relatives or loved ones to the U.S. Second, to the degree that the petitioner is an immigrant, this will reinforce the geographic patterns established by the other sections of the immigration laws. Wives, fiancées and children of permanent resident aliens will be predominantly nationals of the same country. Since the other sections of the law are inimical to economic efficiency, this one will be, too. Third, a close reading of the provisions banishes any notion of government as a sympathetic matchmaker who is reuniting spouses and lovers torn apart by cruel circumstance.

The minute the spouse or fiancée steps down from the gangplank or jetway, the government starts the clock ticking on the time available to them. Fiancées have 90 days to get married – or else get moving back where they came from. Wives have a year to get started on the road to full citizenship – or else. And for five years everybody is watched like inmates on parole. Then they get an examination worthy of an astronaut – or an applicant for a top-secret security clearance. And the rewards for enduring this endurance test include membership in one of our great involuntary clubs, a national database chock full of your own personal data. Doesn’t all this just call up strains of “Isn’t It Romantic?”

The Economic Purpose and Value of Immigration

The first thing that college students usually learn in an economics course is that “cost” is a real economic variable, not merely a monetary one, and that it is represented by the highest-valued foregone alternative in any human decision. The second thing is that resources (or inputs, or factors of production) should flow to their highest-valued uses. When economists say this, they do not qualify it by saying, “but this applies only when the resources exist within a household, or a neighborhood, or a city, or a region, or a state, or a country.” The statement is global in scope; it applies worldwide.

How important is it? Well, suppose we applied it in a limited way – only to global labor markets. According to Alex Nowrasteh, the Cato Institute’s specialist in international trade: “What would happen… if we took a radical policy – global open borders – and introduced it tomorrow? What would happen, in other words, if anybody could move to any other country and work legally? The estimate is that global GDP would increase between 50 and 150 percent, which is 35 to 105 trillion dollars in annual extra growth per year.” Nowrasteh estimates the present value to the U.S. specifically over the next 20 years at about 800 trillion dollars.

Ho hum. To paraphrase the late Everett Dirksen: A hundred trillion here, a hundred trillion there. Pretty soon you’re talking about some real money.

The upshot is that we want people to move between countries in response to the signals provided by money prices and costs. These signals are stand-ins for the underlying real tradeoffs in production and consumption. In particular, money wages are a stand-in for real wages, or wages relative to productivity. They affect the production decisions made by firms and the actions of workers – both domestic and foreign. It is vital that workers be allowed to move in response to wage differentials favorable to their interests, because this allows firms to take advantage of potential productivity enhancements. In turn, this enables the productivity enhancement to be passed along to consumers. That is what has happened in America ever since colonial days, when global-high wages first began attracting a steady stream of immigrants. Over time, the burgeoning supply of labor was more-than-counterbalanced by an increasing supply of productive capital goods that made existing labor more productive and kept wages high.

In the U.S. today, people routinely move from one neighborhood to another in search of a better job. People who live near a state line think nothing of crossing it to go to work. They will relocate within a country if the new job is sufficiently remunerative.

So why shouldn’t we cross international boundaries to pursue job opportunities? As a matter of fact, Americans take jobs abroad fairly often. Nobody thinks anything about that, other than to speculate on how much they will miss living here. But when an immigrant crosses the border to take a better job – or look for one – that is somehow… different. The same people who take American emigration completely for granted start looking for reasons to object to foreign immigration into America.

There is a standard list of those objections in every textbook on international economics. All of them are bogus – or rather, they apply with equal force to immigration within a country, just as objections to free international trade in goods and services are exposed as bogus when they are applied to intranational trade within countries. We would be crazy to restrict immigration between Missouri and Kansas, or between Kansas City, MO and Independence, MO, or between different neighborhoods in Kansas City. And it’s just as crazy to restrict immigration between the U.S. and foreign countries.

If anything, it’s crazier. Natural barriers to trade always exist. These include geographic distance, geographic obstacles such as mountains, oceans and climate, and language and culture. On net balance, these natural barriers loom larger between countries than within countries. Such barriers can allow very large productivity differences to arise and temporarily persist between nations. This makes it even more important to allow the natural corrective forces of free markets to overcome them.

When we factor in the artificial barriers created by quotas like those embedded in U.S. immigration law, the inducement to illegal immigration can become irresistible. At various times, estimates have appeared (in The Wall Street Journal and elsewhere) suggesting that low-skilled Mexican labor was worth five times more in the U.S. than in Mexico – that is, its productivity was five times greater here than in its native country. It is no wonder, then, than when economists Stephen Moore and Julian Simon surveyed a roster of economists, almost all of them said that the benefits of illegal immigration were the same as those of legal immigration.

This speaks inferential volumes about the value economists place on the U.S. immigration laws. In Charles Dickens’ Oliver Twist, the character of Mr. Bumble is accused of stealing jewelry belonging to Oliver’s mother. Bumble denies guilt, placing the blame on Mrs. Bumble. He is informed that this would actually increase his liability, “for the law supposes that your wife acts under your direction.” Indignant, Bumble responds that “If the law supposes that, then the law is a ass, a idiot!”

When it comes to the U.S. immigration laws, economists are prone to agree with Mr. Bumble that “the law is a ass.”

DRI-183 for week of 12-7-14: Immigration and Economic Principles

An Access Advertising EconBrief:

Immigration and Economic Principles

1776 marked the founding of a new nation and a new intellectual discipline. The Declaration of Independence announced the creation of a United States of America and proclaimed the individual’s right to life, liberty and the pursuit of happiness. The Founders – specifically, the Declaration’s author – relied heavily on Adam Smith for the intellectual underpinnings of their document.

Smith’s Wealth of Nations, published in 1776, identified the purpose of all economic activity as consumption. Today, economists view consumption as the source of happiness. But in 1776, that notion was radical indeed. The reigning philosophy of government was mercantilism, which taught that government should accumulate gold (or specie generally) as a store of wealth by promoting the export of goods and discouraging imports. The resulting net inflow of gold would enrich the nation. Of course, even mercantilists knew that food was necessary to human survival – they coexisted with a primitive school of economists known as the physiocrats, who believed that land was the only source of economic value and agriculture the only productive economic activity.

Smith’s work began the tradition of modern economics by overturning both his fallacious predecessors. The mercantilists were wrong on two counts: they were wrong to stress exports at the expense of imports and wrong to imply that a “favorable” export surplus was a stable outcome. Imports are the beneficial part of international trade because they enhance consumption; exports are the cost of international trade because they connote a sacrifice of goods sent abroad to obtain imported goods for consumption. Even if an export surplus were to prevail temporarily, it could not persist. Building on the work of his contemporary David Hume, who developed the famous “price-specie flow model,” Smith pointed out that the net inflow of money (either gold or silver) resulting from the export surplus would raise domestic prices, causing exports to become less desirable to domestic residents and foreign imports to become more desirable.

Smith also pointed out that human labor created goods for consumption not only by working the land but in factories as well. His discussion of a pin factory is still studied today as a pioneering analysis of productivity.

Thus did the modern study of economics and international trade begin life together. International economics has stayed in the spotlight ever since. Currently immigration occupies center stage; President Obama has seized the political initiative from the Republicans by proposing to temporarily suspend enforcement of immigration laws against large numbers of undocumented immigrants.

Unfortunately, the accidental historical precedence given to international economics has contributed to the misapprehension that this field of economics is sui generis. The truth is that international economics is subordinate to general economic theory. The truths of basic economics apply internationally as well as intranationally. In fact, most international issues would be clearer if they were reconfigured in intranational form. This applies just as strongly to immigration as it does to every other aspect of international economic theory.

Migration and Marginal Productivity

When students take their first economics course, the principle of marginal productivity is one of the first lessons they learn. But first things first. In the beginning, there is scarcity – and it is pervasive. The “economic problem” is the outgrowth of scarce resources and infinite wants. There is no end to the number of good things that the human imagination can dream up. Unfortunately, virtually all of those good things are created using “inputs” – human labor, natural resources and produced goods. Inputs are available in limited quantities; they are “scarce.” Consequently, the good things – “output” – are also scarce. The science of economics has devised a pure logic of choice enabling us to make the best use of scarce inputs in producing scarce output to satisfy unlimited human wants.

The principle of marginal productivity deals with input allocation. It says to allocate inputs so that all marginal productivities are equal. That sounds mind-blowingly simple, and it is. In practice, what it boils down to is that business managers – indeed, all of us, if you want to view each individual as their own manufacturer of happiness – are on the lookout for situations in which some inputs are highly productive. For example, we are all looking for jobs in which our own labor specialties are highly valued. If we are teachers, we keep a weather eye peeled for highly paid teaching vacancies. Movie actors flock to auditions for desirable parts. Computer programmers look for programming jobs that offer the highest salaries.

Input prices, such as the wages paid for human labor, reflect the productivity of the input at the margin. The more productive the input, the greater the demand by managers and the higher the price they are willing to pay it. The more people supply the input, the more sellers compete to offer input services and the lower the price will be, all other things equal.

Input supply and demand determine the market prices for all inputs, from human labor to land to capital goods. The principle of marginal productivity governs the productive allocation of inputs – it tells us whether it makes sense to use more or less of each input in producing the various outputs. It also tells us whether it is efficient to shift inputs between different outputs by using more labor to produce one good and less labor to produce another one.

When we talk about changing input amounts and shifting inputs, we are talking not just about one particular place and one particular point in time. We are also talking about different places at the same time and about different points in time as well. That is, it may also make sense to shift labor from one place to a different place. The same is true of natural resources and capital goods. We also shift input use from today into the future and vice-versa. Differences in input prices and productivities are the keys to these shifts, too.

Migration is one of the most fundamental examples of all economic adaptive response. Differences in input price and productivity between geographic regions create an opportunity for gain by input reallocation. Let us assume that low-skilled human labor is more productive in Kansas than in Missouri. This will tend to make wages for unskilled labor in Kansas above those in Missouri. The most practical response to this discrepancy is for unskilled labor to migrate from Missouri to Kansas. This will tend to lower wages of unskilled labor in Kansas and raise them in Missouri, thereby reducing the wage discrepancy in the two states. The migration will also tend to reduce the marginal productivity discrepancy in the two states by lowering marginal productivity for unskilled labor in Kansas and raising it in Missouri.

Migrations of this kind happen throughout the U.S. on a daily basis. Nobody thinks much about them, let alone takes measures to prevent them. But if I were to replace the word “Kansas” with the word “Texas” and the word “Missouri” with the word “Mexico,” the whole passage would suddenly become controversial and subject to debate. While intranational migration has occurred throughout American history without attracting unfavorable comment, international immigration has been heatedly debated since at least the 1920s.

Our discussion is the tipoff to the falsity of most of the debate. There is little economic difference between intranational migration and international immigration. The mere fact that the migratory movement crosses an international boundary does not invalidate it. It does not rob it of its economic value. Of course, it does change its superficial character. But that is all; the change is superficial only. The gain from immigration is the same as that from migration – more efficient use of scarce resources. It is one of the most basic, bedrock principles in economics.

Opportunity Cost and Comparative Advantage

The very first subject undertaken in the very first course in economics taken by college students is the subject of economic cost. What is special about economic cost, as opposed to (say) accounting cost? Economists view cost in a special way. Because all of us live our lives exchanging goods for money and vice versa, we are completely habituated to denominating prices and costs in monetary units. And that’s good, because it gives us a common denominator for valuing thousands of things whose heterogeneity would otherwise make comparative valuation a nightmare. Can you imagine a life in which we had to trade goods and services directly for other goods and services, without a medium of exchange to intermediate each transaction?

The thought sends shivers up and down your spine. But economists conceptually do just that when they explain microeconomic theory or, as it is sometimes called, price theory. That theory treats money prices only in relative or real form. A relative price reveals the implied sacrifice of one good involved in the purchase of one unit of another. For example, if the Px = $10 and the Py = $5, then the relative price of X (its real price) is the ratio of X’s price to Y’s price. That is, the purchase of one unit of good X implies the sacrifice of 2Y. While the money price of X is $10, its real price is 2Y. In a two-good world, this relative price is the opportunity cost of consuming X.

Why do economists go to all the trouble of jolting students out of their comfortable familiarity with monetary valuation and into the retrograde world of direct barter exchange? Not because barter trade has much practical application, certainly, although it does arise occasionally in special contexts. No, the purpose is expressed in an aphorism by the great 19th-century English economist John Stuart Mill, who characterized money as a veil that obscures but does not completely hide the underlying reality. That reality is that indirect monetary exchange substitutes for direct barter exchange, and this accounts for the concept of a relative or “real” price. When we pay money for goods we are really trading alternative consumption – specifically, the highest-valued alternative consumption purchase equal in monetary amount. This is a tipoff to the fact that the real value we derive from goods and services is the happiness they bring; money is merely a placeholder (or unit of account) that facilitates comparison and exchange.

We penetrate the monetary veil because it’s the only way to learn the underlying truths about opportunity cost and comparative advantage. In 1815, an English stockbroker named David Ricardo assumed Adam Smith’s mantel as the world’s leading economist by developing a revolutionary model of international trade. Ricardo’s model stipulated two hypothetical countries. He could just as well have called them “A” and “B,” but with an eye to the headlines of his day he called them “England” and “Portugal.” He specified two produced goods, wine and cloth, both produced using human labor. (He treated all labor hours as equivalent.) No chauvinist, he assumed that Portugal was capable of producing both goods using fewer labor hours than was England. He began by assuming a condition of autarky; that is, no international trade between the two countries. He also stipulated (arbitrary) price and production levels for both goods in each country.

Up to this point, Ricardo had done nothing remarkable by contemporary standards. But now he hit his audience with a thunderbolt. He asserted that opening up the two countries to international trade would benefit both of them by allowing them to consume more than each country could produce and consume in the absence of international trade.

First, Ricardo pointed out that the true economic cost of production for wine and cloth in each country was not the (unspecified) monetary cost of employing labor. It was not even the amount of labor hours used to produce each good. (Up to this point, classical economists such as Adam Smith had favored a ‘labor theory of value”; the value of any good was determined by the amount of labor required to produce it.) No, the true economic cost was the opportunity cost of production – except that Ricardo called it the “comparative cost.” Based on the labor coefficients of each good in each country, Ricardo calculated the opportunity cost of one unit of wine and cloth production in both England and Portugal.

And lo! The results shocked the world. In fact, they still do. Even though Portugal appeared to be the more efficient producer of both goods, it had a lower opportunity-cost of production for one good only – wine. Portugal was the more efficient wine producer because its opportunity-cost of production was lower than England’s.

The implications of this finding were – and are – world-shaking. England should specialize in its most efficient good, cloth, by producing more cloth than it did under autarky. Portugal should produce more wine than it did under autarky. (Actually, Ricardo’s model prescribed complete production specialization by each country, an artifact of the super-simplified assumptions built into his model.) Then the two countries should trade internationally – England should export cloth to Portugal in exchange for wine produced by Portugal, thus allowing both countries to consume both goods. The terms of trade should represent a ratio of prices intermediate to that existing under autarky.

Sure enough – Ricardo’s model generated a result in which both England and Portugal achieved consumption levels for wine and cloth that exceeded the possibilities open to them under autarky. At the time, this seemed to the general public like a magic trick. To some people today, it still does. Some people have never learned it and others refuse to believe what they learned. Then there are those who insist that Ricardo’s conclusions apply only in textbooks and not in reality, for a host of reasons.

There are two key insights behind Ricardo’s theory. The first is his notion of comparative cost. Modern economists have broken this term in two. They have modified the term “comparative cost” to “opportunity cost” in order to stress its alternative element. To bring out the comparative or relative element, they have devised the term “comparative advantage” to encompass situations like England’s in Ricardo’s theory. Despite being less productively efficient in both goods in the absolute sense, England nevertheless had a comparative production advantage in cloth because its opportunity-cost of production was lower.

But merely identifying the locus of comparative advantage is purely academic unless we act on it by specializing in production, which creates the extra output that allows us all to consume more by engaging in international trade. Thus, specialization and trade is the second key element in Ricardo’s theory.

Thus far in this section, we have said nothing whatever about immigration. But immigration is the proverbial elephant in the room. For thousands of years, civilization has been following this principle of specialization and trade according to comparative advantage. That is what we do when we grow up, go to school, get a job, work and earn money – then use the money to support our lifestyles. We did it for millennia without realizing what we were doing or why, like the character in Moliere’s play who had been speaking prose all his life without realizing it.

David Ricardo developed his theory in terms of international trade for the same reason that Adam Smith began the modern study of economics by focusing on international trade: that was where the action was in terms of money, public interest and government activity.

It is only very recently that economic textbooks have tentatively begun to point out that the same insight they have been flogging for centuries while teaching the theory of international trade is valid in intranational trade. In fact, this is exactly the insight that has accounted for human productivity since the days when human beings left their hunter-gatherer bands and formed individual families residing in villages, towns and cities.

And how does immigration fit into this implicit theory of everyday production, you ask? The answer would be too mundane to need mention were it not for the fact that so many people ferociously resist it even now. In order for specialization and trade according to comparative advantage and trade to work, people have to specialize in their comparative-advantage line of production, just as England and Portugal had to specialize in Ricardo’s model for those countries to realize the gains from international trade.

And they can’t very well specialize when they aren’t allowed to work at what they do best, can they? Yet Mexicans who are five times more productive working in Texas than in Mexico are nevertheless barred from working legally in the U.S.! The basic fundamental principles of markets are designed to achieve maximum productivity by assigning all of us to our highest-valued uses, where our marginal productivity is highest. And U.S. immigration laws allow people to move across international borders only according to their national origin, which has as much to do with their marginal productivity as the color of their eyes does.

Is this any way to run a railroad? Is it any wonder that the greatest economists, like Milton Friedman, constantly stress fundamental principles rather than niggling about esoteric mathematics or econometric models?

Cost Minimization

The standard microeconomic theory taught in college courses is divided into three subject areas: the theory of consumer demand, the theory of cost and production and the theory of marginal input productivity. The theory of cost and production is sometimes called “the theory of the firm” because its usual application is to business firms. That theory explains the optimal logic behind the production and sale of output to consumers by businesses.

A key principle of this theory is cost minimization. The theory of the firm assumes that the firm’s goal is profit maximization. (“Profit” might be viewed in instantaneous terms as the residual of total revenue from the sale of output minus all costs of production, including the opportunity cost of capital and/or the owner’s labor time, or it might be viewed intertemporally as the discounted present value of expected future net revenue.) The firm’s manager(s) will choose the rate of output that maximizes profit and will select the combination of inputs that minimizes the cost of producing that rate of output.

It goes without saying that the firm will purchase any quantity of (homogeneous) input at the lowest possible price. Alternatively, the firm will purchase the highest quality of any heterogeneous input at a given price.

Well, it’s supposed to go without saying, anyway. But when it comes to immigration, suddenly it’s a crime even to say it out loud. When employers want to hire foreign workers because they can pay lower wages than they are paying to domestic workers for the same work, that turns out to be illegal, or immoral, or fattening or otherwise verboten. But if this is not only allowable but even downright de rigeur in an intranational context, why should it be unthinkable in an international context?

Of course, the answer is that it shouldn’t. It is just as beneficial to minimize costs by hiring cheap foreign labor as it is to hire cheap domestic labor. It is just as beneficial to hire cheap labor from any source as it is to purchase cheap raw materials or cheap land or cheap machinery.

Did a reader respond by inquiring “beneficial for whom?” Well, the answer is “beneficial in the first instance for business owners, but beneficial in the long run for everybody, because lower costs ultimately are reflected in lower prices and everybody is a consumer – including all the owners of inputs who are paid the lowest prices.” We can’t always guarantee that every single person benefits from every efficient economic activity – such as immigration – more than they suffer from it. But that has to be true for most people – otherwise, how did civilization advance as it has over the millennia? How did the U.S. become the U.S.?

What About “Fiscal Cost” or “Net Job Creation” or …

We now know that the concept of free and open migration – whether inside the boundaries of a nation or across national boundaries – is fundamental to the efficiency of markets. It is inextricably interwoven into the fabric of our everyday lives, so much so that we take it completely for granted. Thus, when we protest against immigration by foreigners into our country we are engaging in the most blatant contradiction.

How many times have readers of this EconBrief previously seen this issue framed in these clear, straightforward terms? Chances are, the answer is: Zero. Instead, we are presented with a variety of alternative arguments against immigration.

For example, a fairly recent anti-immigration tactic is the “fiscal cost” scam. We are urged to restrict immigration – or ban it altogether – because it is unaffordable. Supposedly, immigrants cost the government more in various forms of transfer payments (welfare, Social Security, emergency medical and more) than they generate in receipts (various tax payments). Thus, on net balance they flunk the criterion of “fiscal cost.”

The non-economist might suppose that this is a key test of economic worthiness, perhaps tabulated quarterly or annually on every American by a government bureau and kept on file. What a laugh. Fiscal cost is a term made up by anti-immigrationists in order to discredit immigrants. The easiest way to appreciate this is to recall that half of the American population now pays no income tax. It has recently come to light that most Americans stack up even worse by the fiscal cost standard than do immigrants! This is hardly surprising; immigrants are not eligible for most forms of welfare and tend to be younger than the average American, so get less medical treatment than average as well. They are more entrepreneurial and tend to work harder, so are more productive as well. This follows because, far from being the tired, dispossessed, tempest-tossed, ragged poor of the Emma Lazarus poem, immigrants tend to have more initiative and smarts than the average person. They have to be better than average in order to contemplate traveling to another land, speaking a foreign language, coping with another culture and starting another life. The anti-immigration stereotype of a lazy bum who somehow runs the border gauntlet in order to live off the fat of the U.S. welfare state is a particularly egregious myth.

Calculating fiscal cost is no easy task. Why would a researcher engage in laborious calculations to produce estimates of aggregate effects whose meaning is so obscure? Actually, complexity and obscurity are what make concepts like fiscal cost attractive to anti-immigrationists. The last thing they want to do is join a debate on fundamental economic principles, where the issues are so straightforward and clear-cut. Why start a fight they are destined to lose? Instead, they want to pick a fight they can pretend to win because the public will not know how to judge it. We are so used to hearing economic issues outlined in complicated terms, so accustomed to watching with glazed eyes and hearing without comprehending that we fall back on our emotions rather than our reason.

Now the anti-immigrationists have us where they want us. The immigration debate takes us back to the days of pre-history, when mankind first began to break up the ancient bands and form families. Outsiders were looked upon with suspicion. Trade and specialization were forbidden; economic activity was geared to benefit the band, not the individual household. Today, the nation state has taken the place of the ancient hunter-gatherer band as the extended family. The state dispenses welfare benefits and rules over us with an iron fist. It wants to control economic activity for its benefit and the benefit of its acolytes. It inflames those ancient, instinctive antagonisms toward outsiders that still reside within the citizenry.

We can revert to the savage, instinctive atavism of mankind’s primitive past. Or we can embrace the reasoned productivity of freedom and free markets. The choice should be easy, for the record of history shows that markets have lifted mankind out of the muck and mire to the prosperity of today.

The last thing we should do is judge immigration by perusing the latest pseudo-study by a think-tank dedicating to obfuscating clear thought. The simplest, clearest, most basic of all economic principles tell us that immigration is vital to freedom and prosperity.