Charter Cities Podcast Episode 26: The Political Economy of Immigration and Institutions with Alex Nowrasteh
A largely unexplored counterargument to immigration liberalization is that immigrants who come from countries with worse institutions will make the institutions in their destination country worse
EPISODE 26: The Political Economy of Immigration and Institutions with Alex Nowrasteh
A largely unexplored counterargument to immigration liberalization is that immigrants who come from countries with worse institutions will make the institutions in their destination country worse. In Wretched Refuse? The Political Economy of Immigration and Institutions, Alex Nowrasteh and Benjamin Powell respond to this argument and today we have Alex on the show to elaborate on their findings. Our conversation begins with a discussion on the foundational piece by Michael Clemens, ‘Trillion-Dollar Bills on the Sidewalk’. This paper finds that the marginal immigrant to the United States from a developing country can expect a fourfold increase in their wages, and the result of a global, free migration policy would be to increase global GDP by about 50% to 150%. Alex then unpacks why immigrating would be the most efficient option for improving an immigrant’s life. He responds to the arguments that immigrants should improve their home countries rather than immigrate and that the home countries of immigrants will worsen thanks to ‘brain drain’. Later in our conversation, Alex addresses the deep roots theory which proposes that the ancestry metrics of societies influence their GDP per capita. He then weighs in on whether culture impacts economic production. We hear about the central finding of Wretched Refuse, which is that immigrants don't worsen economic institutions in places where they go and in some cases improve them. Wrapping up, Alex shares his perspectives on changing immigration visa laws in the US and what the next ten years might hold in that respect. Tune in today!
Key Points From This Episode:
• The argument that immigration does not destroy the institutions responsible for prosperity in the modern world to be found in Alex’s book.
• Why immigrants from Yemen will 16Xtheir salary after moving to the US.
• Alex’s response to the ‘Why don’t immigrants fix their home country rather?’ argument.
• The question of brain drain when immigrants leave their home countries and why matters are more complex thanthis.
• Why the overall economic gains immigrants offer to the US outweigh the threat they pose to some salaries.
• Why Alex is a skeptic when it comes to the deep roots argument for prosperity.
• Perspectives on the many reasons for why economic status of a country can change.
• The impacts of culture and trust on economic growth and whether immigrants erode this.
• Examples of mass immigrations to countries with poor institutions that experienced massive economic reforms in a liberalizing direction as a result.
• Alex’s thoughts on shifting H1B visa allocation from a lottery to a wage-based system.
• How the heartland visa system might encourage higher rates of legal immigration.
• What Alex thinks will happen around immigration liberalization in the next 10 years.
Mark: Hello and welcome to the Charter Cities Podcast. I’m your host, Mark Lutter, the Founder and Executive Director of the Charter Cities Institute. On the Charter Cities Podcast, we illuminate the various aspects of building a charter city, from governance to urban planning, politics to finance, we hope listeners to The Charter Cities Podcast will come away with a deep understanding of charter cities, as well as the steps necessary to build them.
You can subscribe and learn more about charter cities at chartercitiesinstitute.org, follow us on social media, @cci.city on Twitter and Charter Cities Institute on Facebook. Thank you for listening.
Jeffrey: Hi. I’m Jeffrey Mason, researcher at the Charter Cities Institute. Today's guest on the podcast is Alex Nowrasteh. Alex is the Director of Immigration Studies at the Cato Institute Center for Global Liberty and Prosperity. Our topic of conversation today is his new book, co-authored with Benjamin Powell, Wretched Refuse? The Political Economy of Immigration and Institutions. Thank you for listening.
Jeffrey: Hi, Alex. Welcome to the show.
Alex: Thanks a lot for having me.
Jeffrey: I really enjoyed reading your book. Can you tell us, explain the central thesis, the central argument that you're trying to advance in Wretched Refuse and why in particular, you're grounding your arguments in the Michael Clemens Trillion-Dollar Bills on the Sidewalk framing?
Alex: Sure. This project is the result of my entire career, the end point, I guess, in my career recently, which is that I study immigration, how it affects the United States and other developed countries. The overwhelming evidence is that immigrants make the US a wealthier country. Every counter argument against immigration is wrong. They're assimilating. They don't lower wages. They're less likely to be criminals, etc. These are really solid arguments.
There's one increasingly common counter-argument that was largely unexplored. That's the subject of this book. That counter-argument is that because immigrants come from countries with generally worse institutions, and by institutions, I mean, economic rules, economic policies, political rules, etc., that they might through voting, or through affecting the culture, or through some other means, worsen America's economic, or political institutions. Thus, killing the goose that lays the golden egg.
Because I think and I think the overwhelming evidence supports this theory, that the reason why we're a wealthy developed country and why other countries are wealthy, that are wealthy and developed that way, is because of these political and economic institutions that allow, that increase productivity. Although emigration is an enormous benefit, currently, it could be that there's a point, where too much immigration will import these really bad institutions and destroy and overwhelm the institutions that make us a productive country.
What we did was we took a look at some of the evidence out there and drawing on academic papers that we wrote, that we've written over the years on this topic, we’re some of the first people to write about this, as well as other research by other scholars, like Michael Clemens, we decided to explore this. The big foundational piece that starts us off is this paper by Michael Clemens in 2011, published in the Journal of Economic Perspectives, about the economic benefits of immigration. What he finds through his work and his literature survey, is that the marginal immigrant to the United States from a developing country can expect a fourfold increase in their wages and the result of a global, free migration policy would be to increase global GDP gross world product by about 50% to a 150%. Trying to find out, whether the potential negative downsides of immigrants affecting institutions on this economic benefit was the goal of this book.
Jeffrey: Yeah, that's quite a lofty project. I think you guys do a great job of presenting that evidence and tackling that. Let's talk a little bit more about how you say, if someone in a low-income country moves to United States, or Germany, or wherever, they can probably expect a big boost in their income. I think the top country in the chart that you present, is that the average person in Yemen is going to 16X their income just by moving to the United States. Can you talk a little bit more about the dynamics that actually make that possible, how that person goes from earning so little to so less just by moving somewhere?
Alex: Wages are determined by the marginal value product of the worker. That's a fancy economist way of saying basically, how much you can produce determines what you can get paid. Workers and the United States, for instance, are much more productive individually than an identical worker in Yemen. Just by moving from a place like Yemen, which is war-torn currently, there’s massive starvation, people aren't that educated, there aren't that many businesses, the institutions are bad, so that even if you start a business, there's a good chance that warlords, or rival clans, or the government will steal your property and production.
Moving from a place like that to say, upstate New York, or a lot of Yemenis immigrants are in the United States, you can take advantage of a much more productive society, much more capital that has been accumulated, that will make you more productive as an employee. You can take advantage of well-developed businesses that are organized efficiently to maximize profits, because we have a economic system here that although it's full of problems and we could talk about those forever, the fundamental economic institutions are pretty good, which is that we have private property that incentivizes businesses and workers and consumers and everybody to try to maximize their own benefits, internalize these benefits, make wise investments and to build goods and services that other people want to buy for the future.
Just by moving from a place, Yemeni immigrant doesn't get stronger, or smarter by moving here, but he does get access to a more productive economy, better capital and more well-managed businesses that just in turn, make him more productive. By virtue of being more productive, his wages go up substantially.
Jeffrey: Interesting. What is the pro-immigration response to – there's an obvious case, let them move here, they can become more productive. Why focus on that, rather than say, trying to improve Yemen? That's a common, I think counter-argument that gets raised here. What is your response to well, why not focus on say, fixing Yemen?
Alex: Yeah. There's nothing wrong with fixing Yemen, right? I don't want to keep Yemen poor. What matters are whether the Yemenis are poor, the people. I don't care about the average economic production on some arbitrary piece of land. What matters is if the people living there are wealthy or not, if they can satisfy their material demands or not. In that sense, their physical location isn't that important.
What matters is whether the people there are living the lives that they want to be able to live. It would be great if Yemen reformed these institutions, if the government instituted some prior property rules and enforce contract rules and have free trade and very low taxes and a tolerable administration of justice.
Even if they were to do that, it would take decades and generations for Yemen productivity to rise to the level of that of say, the United States. A much easier, much more efficient and much more likely to work, frankly, system would be to allow Yemenis who want to to come the United States and immediately go. Within the course of a week, to see their wages go up by 16-fold, rather than that taking a 100 years. In which case, you're not ever going to take advantage of that.
Then there's the second point, which is even if these countries tried to do these reforms, they probably – there's a good chance they'll fail. There's a long history of countries around the world trying to do these reforms and some really succeed, obviously. The world's a lot richer than it was. Some of them succeed. East Asian countries, I think, have done a great job. Some middle-eastern countries, like the UAE and Oman have done a great job of reforming. Israel has. Jordan has. Some countries in South Africa, like Botswana have done a great job. To mention nothing of like Peru, Chile and the list goes on. Lots of countries can do it.
The list of countries that have failed is even longer. Most other sub-Saharan African countries, a lot of countries in South America and Central Asia have just not reformed their institutions to the point where they can get the sustainable, endogenous growth, economic growth that's so important. Not to mention big first-world countries bossing around third-world countries, telling them what to do, like in Iraq and Afghanistan and the United States, total failures. Total embarrassing, brutal, humanitarian, economic and political failures to get those reforms.
If we want to actually improve the lives of people, or allow people to improve their own lives, the most efficient, easiest and most likely to succeed path is to allow these people to move from countries with bad institutions to countries with good institutions.
Jeffrey: When we're talking about people being able to move from one place to another and dramatically improve their well-being, there's this talk of the idea of brain gain and drain, that if a smart person from say, Nigeria moves to the US, that's the United States’ gain and Nigeria’s loss. That the receiving country receives the benefits of having that person, while the sending country loses that person. Let's dig into that story a little bit. Is international migration purely a story of gain and drain, or is there a little bit more to it than that?
Alex: Yeah, there's a lot more to it than that. I mean this is positive sum wealth creation in the same way that trade is. People are moving from places, like say in your example, from Nigeria to the United States. I could take a look in the book about the wage gain from Nigeria to the United States. I don't know off the top of my head, but it is substantial. Let's say, that move – Oh, here it is. It's 15.8-fold increase.
That worker going from Nigeria to the United States, it's a 15.8 or 16-fold increase in wages. That's a guy, or a girl, or a woman who is moving from a place and will be that much more productive in the United States. It's not like just a reallocation of scarce resources, productivity from Nigeria to the United States, it also assists the growth and the value of those resources by growing the productivity.
That's important. You're right. The United States does gain from this, but the biggest gainer from this is the immigrant himself. That Nigerian who moves, captures the vast majority of all those benefits. By a lot of estimates, somewhere around 98% of the benefits of that person moving get captured by the mover, by the migrant himself. There's really no better way to pull Nigerians out of poverty, than by allowing a lot more than to move to the United States. In the same sense, that virtually every Cuban and Haitian who's ever climbed out of poverty has done so by moving to the United States.
Virtually, a lot of these Nigerians who are going to eventually get out of poverty will do so by leaving their home country. Now, there's the aspect you raise about the brain drain, right? A lot of these people who are moving are middle-class, or upper-class people with educations. If they stayed in their home countries, like in Nigeria, they would be more productive than the average Nigerian. They probably will contribute a good amount to the growth in these countries. The thing is, the incentives that these create, the incentive that in order to move, you will do better, if you're a little bit more highly educated, you have more human capital that you can develop, you can save more money and invest it in your new country, gives an incentive for lots of people in Nigeria and other foreign countries to do those things, to get more education, to get more skills, because it will allow them to move, and it will allow them to be more productive in their new countries.
By doing that the evidence shows that there's just a leftover. There's more investment in accruing capital, human capital and physical capital, because there's the possibility of moving than there would be if you couldn't move. You think about it this way, right? If you're born in a poor American city like Detroit, which has suffered tremendously over the last several decades, from economic mismanagement and the city center, as well as just changing economic situations. If you couldn't move from Detroit to another city that's doing well in the United States, why invest in your education? Why invest in building up capital? Why learn new skills? Because you're never going to be able to leave Detroit, and there's no opportunity there. Why leave? Why invest and improve your productivity?
Whereas, if you can move, you're much more likely to do those things, much more likely to improve your skills, because you can move. As a result, a lot of people who do these pursue a higher education, earn more skills. Some of them decide not to leave. The general effect, empirical effect is that the skill level, the human capital level, the capital level increases in these countries, because people having the ability to leave and be more productive elsewhere.
That's to say nothing about remittances. Nothing to say about people sending money and resources and know-how back home after they leave. If you want to think about just in that way, a purely mechanical international trade flow way, these poor countries are exporting what they have a lot of, which is labor, and they are importing through remittances what they don't have a lot of, which is capital.
Jeffrey: We talked about how there are these huge gains at the individual level sitting on the table. Then when we look at immigration research and we try to say, what is the effect of on wages and employment of immigration? What are the magnitudes of those effects? It seems that they're often in an aggregate sense, quite small. George Borjas’s negative numbers are relatively similar to say, Giovanni Perry's positive numbers. Square that circle a little bit. There's these huge gains on the table. Yet, the national level aggregate effects tend to be quite small.
Alex: The Perry research that you mentioned, the Borjas research, what those primarily look at is the changes in relative wages of native-born American workers as a result of immigration. It's not like an absolute decline in wages that Borjas finds. He just finds that relative to workers and other educational categories, the educational attainment, the wages of Americans who are high school dropouts goes down by about 1.7%. It's not like a 1.7% decline. It’s just relative to other workers, their wages are a little bit lower.
They're all up for all these workers over the whole time. It's just they're relatively, they're a little bit lower than what they are relative to other American workers. The net effects on American workers are pretty small in terms of their wages, but the net effect of having additional workers in the United States who are making $30, $40, $50, or a $100,000, even more a year by producing that much more in value is quite high. The effect on total economic production in the United States is enormous.
For instance, the total amount of production by Asians and Hispanics living in United States is over 2 trillion dollars a year; somewhere around, a little bit more than 10% of total production in the United States. Those are people who are either immigrants, or descendants of immigrants, like relatively recent descendants of immigrants in the United States. That won't show up so much, unlike the wages of native-born Americans, they'll show up a little bit on that. Both Borjas and Perry find that American-born wages have gone up a little bit during emigration.
The big, big effects is just there'll be so much more stuff made in the United States and immigrants do capture the majority of those gains, but there will just be so much more production. That is where the big gains are.
Jeffrey: Got it. It’s something that I think is particularly interesting and that you touch on in the book is this deep roots, or persistence literature that has emerged in recent years, that I think it's pretty interesting, this idea that there's these observable long-term differences in outcomes across countries that arise from these long-standing historical, cultural, geographic, institutional other factors that stretch back hundreds, or potentially even thousands of years. Both Nathan Nunn and Leonard Wantchekon have been recent guests in the podcast. They have a very interesting paper about the slave trade and current social trust in Africa.
The recent Clark medalist, Melissa Dell is also doing some interesting work in this area. If you're a little bit of a skeptic when it comes to deep roots and its relationship to the study of immigration. Can you explain what the deep roots and immigration story is, and why you're a little bit skeptical about that effect?
Alex: Very briefly, the deep roots idea is that there are cultural factors and potentially genetic factors in human beings, that due to choices made in the distant past, people are basically locked in to productivity, or to a certain level of living, relative to other countries. It'll be something like, China has always been developed, or richer than other societies on average. Long run, we would expect China to be wealthier than other places. Of course, it really hasn't worked out that way. China has had a lot of fits and starts.
That's basically the big change and the major paper by Putterman and Weil, that is about this, that was published in 2010, makes adjustments, where they basically estimate an ancestry score for the US and all these other countries. They try to find out how long these country, the people who have lived in these countries, how long their ancestors have lived in countries with a centralized state, with settled agriculture, and the levels of where they are and the technological frontier at various points in the past.
They basically say, there's a very strong correlation, where if your ancestors, if that sum total ancestry score of your country is high, then on this metric, then you're much more likely to be rich than if your numbers are poor. It's basically just this persistence of historical factors and it's really hard to break out from this.
There are a number of problems with this. The big one is there are basically, four major outliers, or sorry, three major outliers in here. One is China. China is a lot poorer than you'd think, given its high scores. The second one is India, which is also a lot poorer than you'd think, given the persistence of civilization on the Indian sub-continent. The third outlier is the United States, which is a lot richer than you would expect, given our ancestry scores.
The fact that the three biggest countries in the world are outliers in this research, tells me there's probably something a little funny going on here. Not to mention the fact that countries in the Middle East, like Iran and Syria and Iraq have some of the oldest settlements in the world, as far as we can tell. Some of the highest ancestry scores are in a very, very poor countries. Desperately poor countries.
There are just too many outliers and too much going on here for me to have much confidence in it. The other one is there's a problem with spatial autocorrelation. Now without getting too much in the weeds, we expect places to be similar in their economic outcomes compared to their neighbors. That is exactly what we see. Then there are some ways to account for spatial autocorrelation. When you do so, basically, location around the world and geography explains virtually all the differences amongst these countries. It's just not that convincing.
Furthermore, there are a lot of countries in these places that have escaped the ravages of poverty, without changing their ancestry scores. That makes me a little skeptical. Then lastly, the big thing and we did research on this published in the journal bio-economics, Ryan Murphy and I. The US states have radically different ancestry scores. I mean, if you take a look at a state like Mississippi, for instance, and compare it to West Virginia, and compare it to say, Washington State, radically different demographics, radically different ancestry scores based on histories of American slavery, on settlement patterns on American states and on immigration settlement patterns.
There's differences between American states that are vast in terms of these ancestry scores developed by Putterman and Weil. We find, there's basically no relationship. American scores, American GDP per capita is basically not related to a lot of the ancestry metrics. In a place like the United States, we have a sample size of 50, with radically different outcomes and radically different economic outcomes and radically different ancestry scores, it doesn't work. It could be that Puttermand and Weil this deep root stuff makes a lot of sense, but the econometric problems with it and the counter-arguments and counter examples are so – loom so large and are so important that I'm a bit of a skeptic, that I am not willing to assign a large percentage of the credit for differences in economic activity around the world to merely how well your ancestors did at arbitrary points in the past.
Jeffrey: Right. I guess I'm curious, do you think that – How would you phrase it? Recent political developments that are not long-standing historical trends, but big stopping point events, complicate the story? The tale of India was one example that you brought up that we might have expected would have done better over time, perhaps, than it did in a counterfactual scenario, say it wasn't colonized, or that we didn't have the long license Raj period, for instance. Would you patent out for these specific historical accidents, you might call them. We might expect them to be 2, 3, 4X times wealthier than they are currently.
Alex: My perspective is a little bit different. I think the exception in world history are those places that have developed. The general, the natural state of humanity is extreme poverty. I don't know if, I mean, India has only really underperformed relative to this deep roots theory and relative to countries that have done really well.
If the west didn’t develop, I don't think India would be an outlier in terms of underperforming. I think, it probably just be average in the middle of the pack, like every other country. Maybe even a little bit better. India's economic history is fascinating. They had a well-developed textile industry going back centuries, maybe thousands of years, if I remember it correctly, cotton exports.
It wasn't really until the Portuguese, and to a lesser extent, the Arabs and the English and others came into Indian ocean trade and used a combination of force, as well as just growing European productivity to basically, destroy a lot of those markets. That was a problem. On the other hand, Indian institutions when it came to the accumulation of capital and banking, were quite underdeveloped to the extent where the British came into places like Calcutta and set up shop and started to protect the local Indian bankers.
All the Indian bankers, basically moved to Calcutta and funded the British East India Company and their war against the Mughals and other Indian rebels were seeking to come in and basically, is loot these bankers. William Dalrymple has a fantastic explanation of this in his recent book about the history of the British East India Company. I don't think India would be great, had it not been for colonization. Maybe a little bit better, maybe a little bit worse than some margins. I think definitely, the license Raj, this post-independence obsession with basically, British Fabian socialism is probably the thing that did more than anything else to ruin them.
In a way, if you want to blame colonization, British colonization for Indian poverty, I think the much better argument is to say, Indians learned a bunch of really bad lessons from the British in terms of socialism, rather than the native – rather than the British exploitation of India, which they really didn't make much money on anyway. I mean, Jake economic historian winner did a lot of work on this. The British government lost money managing India.
I would say, I would blame British intellectuals and Fabian socialists and all these other silly intellectual trends for unfortunately, influencing Indians more than anything else. That's a diversion from the key part of your question, I think. One of the other big exceptions, I think, to this is China, right? If you're trying to explain deep roots and you're looking at China, which was long, the most developed and richest society in world history. I think you can make a fair claim that half of recorded human history has occurred in China, including many of the great discoveries.
If you're going to track China over time, up until the 1700s, or maybe even 1800 it's probably the richest country in the world and maybe even per capita. It's very close to the top. Then you have a big divergence between then and basically, till 1990 or 2000. It’s like, hey, what explains that? Is it the native-born Chinese institutions that are gravitated toward communism? Is it foreign wars and invasions, like during the fall of the Ching Dynasty, Boxer Rebellion, things like that? Is it war and invasion from the Japanese? Or is it their turn toward socialism, which might have some roots, which is obviously a European created, idea at least the Marxist variety is European. Then Mao took it in this Confucian, even worse direction.
It's like Marxism with Chinese characteristics was even worse than Marxism with European characteristics. I mean, how do you explain that and square that? These wide century-long deviations with deep roots theory? I mean, it really doesn't explain why people change. Why is it that Botswana went from a very poor country to a very wealthy country in a very short period of time? Why is it that the UAE and some of the other countries are from very poor to very rich. Why is Japan which was backwards for a very long time that intentionally chose institutions to block itself out from the rest of the world for centuries.
Then American warships sailed into the harbor in 1850s, and forced them to change their policies. Why would they choose to intentionally make themselves poor and cut off from the rest of the world? There's just a lot that cannot be explained by deep roots.
Jeffrey: Right. Let's stay on to this topic of culture for a moment, which is the black box of explaining economic outcomes. In the book, you say there's not really any evidence to suggest that freer immigration impacts pro-growth, pro productivity cultural elements in high-income countries. Is there an upper bound to that point that if you have free immigration up to some say, share of the population, there's holes, but at some point, your institutions do start to look like those of lower income countries, or is that the opposite as you approach something approaching open borders, the findings continue to hold?
Alex: We don't really know. Part of the reason we don't know is the economics of cultural literature is frankly, terrible. I'm trained in economics. My bias, my prejudice is that economists do a lot of very good work, and that if there's a well-developed econ literature on a topic, then you need to take it seriously. That's the feeling that I went into researching this chapter for this book. I read a lot of the economics and culture literature, including the most important pieces, and I was struck by how terrible it is, generally. It was shocking to me.
Jeffrey: In what sense? Terrible in what sense?
Alex: There are no macroeconomic models that seek to explain how culture affects growth. There are merely some older and not very convincing regression analyses that seek to link the response to the generalized social trust question, or world value survey to economic outcomes in countries. There is no model that incorporates trust, or incorporates these other cultural perspectives, or things like that, that is incorporating these models.
It's just a hand wavy, look at this correlation type thing. Okay. That might be interesting. Then it turns out, you dig into it. A lot of these correlations are also pretty weak. Based on this trust question from the world values survey. The question is something off the top of my head, it's something to the extent of generally speaking, can most people be trusted? It's yes, you can't be too careful, or don't know.
The correlations between that and per capita income are fairly positive in the world level. In many of these big papers, they're super sensitive to the countries that you put into this metric. The first paper about this in 19 – I believe was 1997 Knapp and Keefer, basically, if you add in one or two countries that they excluded, it goes away. That's just not robust. Then you have the question of endogeneity, right? Does economic growth make people trust more? Because for whatever reason, living in a wealthier society, you have less reason to expect people to steal or something, maybe. There's all these counter-arguments that you can tell, or these counter-stories that you can tell that seemed to also make a lot of sense.
Then, the whole trust and culture argument, there are robust and large number of experiments in the laboratory, with surveys in the laboratory, you play these games, you play different types of trust games that economists have developed. It's really not consistent with the trust literature says. A lot of people who would expect to have low trust, actually have higher trust than a lot of people who really expect to have high trust.
What's weird is some people from East African countries have higher trust than British people, which is not something you'd expect from these experiments. I think, that one of the big problems is a lot of these data are just terrible. We don't know what we're actually measuring with the trust question. Are we measuring whether people are trustworthy, or whether they actually trust? It seems to me like being trustworthy, is much more likely to be true. You change these questions just a little bit and the score is radically reversed.
Japan is a country with high level of trust. You ask people what they mean, when they answer this trust question. It's slightly different than what we think in the United States. In the United States, we get asked this question. We think, “Oh, can you trust strangers?” Japan, other places, I think, can I trust the people that I know?
Alex: People are much more likely to trust people that they know, than they are a stranger. I don't know you that well, Jeff, but I trust you a lot more than some random stranger off the street.
Jeffrey: Thank you.
Alex: Yeah. Well, you've earned it right. You haven’t robbed me yet. You haven't screwed me over in a business deal yet. If I were to answer this question and think about Jeff versus some stranger, that's a radically different answer, in my mind. Not to mention the fact that we have a bunch of very cheap ways to get around not trusting people, like credit card security, which really solves all these problems.
How much trust do we really need for a wealthy society? I think not very much. Basically, enough trust for me to be able to give my credit card to somebody behind the counter, and me to think that there's a really, really low chance that he's going to steal my number, I think is pretty much what we need. Then, to bring it back to immigration, so I don't think culture matters that much, or we just don't understand how culture matters, let me put it that way. Culture may matter, but we just don't understand it.
Then, we take a look at changing cultural characteristics of immigrants and their descendants, they basically change pretty quickly to a lot of American norms. On some norms that measure, such as trust, I don't think generalized social trust matters that much. When you ask people whether they trust specific institutions, whether you trust big business, whether you trust congress, whether you trust the courts, all these things that are really important for trusting American economic institutions, immigrants are much more likely to have confidence in these things than native-born Americans.
If you think trust in specific institutions matter and you're worried that immigrants can undermine that, it's actually immigrants building these things up, rather than from the pernicious opinions of native-born Americans. My immigrant grandfather from Iran has a lot more trust in the US government, merely because he saw dysfunctional government in his youth up close and personal. I remember some comment I made to him in the mid-90s, where I was upset about the Republican congress not liberalizing the country as much as they promised to do and lying. I’m like, “Oh, this government's terrible. They're lying. Blah, blah, blah.”
My grandfather said something to the effect of, “Yeah, they're not good. But man, it's a lot better than the government I grew up with, even with all of its problems.” That perspective, I think is pretty valuable.
Jeffrey: Yeah. Underrated.
Alex: Underrated. My first world privilege, which I’m glad I have. I really need to check that sometimes and I think we all do sometimes to realize in some ways, how good we have it. These things can always be better and I spend my life trying to make them better. That's my job at the Cato Institute. Sometimes compared to Iran, or Mexico, or Nigeria, we're really living the totality of human experience in a country that's pretty close to utopia.
Jeffrey: You put out some interesting case studies in the book that touch on all of these big themes that you hit. I think the Jordan one that you present is really fascinating, because it's one of the few cases where we're looking at what happens with mass immigration from weak institution to weak institution country, rather than from weak institution to high institution country. Tell us a little bit about that research and what you found there.
Alex: Sure. I want to contrast this with another bit of research we did in the paper. We have these cross-country comparisons and we take a look at what's called economic freedom, which is a measure put up by the Cato Institute, in combination with Fraser, which is a Canadian think tank. It's basically a measure of how free market your economy is. It's highly correlated with development, human development, wealth, etc. We took a look at these cross-country regressions and we basically, looking at a 110 countries, find that there's a positive significant relationship, where more immigration in the past means that you have higher income today. By the past, I mean 10 or 20 years ago.
It's not a deep roots argument. It's saying, immigrants once they've had time to settle, they don't undermine your institutions 10 or 20 years later. Now, that's all well and good. As any economist, or econometrician will tell you, it's not the strongest piece of evidence, because cross-country regressions are a little weak.
What we did was we tried to look for what we call quasi-natural experiments. What these are is we take a look at some massive change in immigration to a country that is not caused by anything that country did. What I mean by this is in the example of Jordan, Jordan got an enormous number of Palestinian Kuwaitis coming in the course of a year, that basically increased equal to about 10% of Jordan’s population in the course of a year. This source of immigration was not caused by a change in Jordanian policy, but it was caused by a war that Jordan had no part in. They basically got this huge surge of refugees to their country in one year. By a cork in Jordanian law, they were already allowed to work and live in Jordan. You had a match –
Jeffrey: Which is not the norm for most refugees.
Alex: Which is not the norm, almost anywhere. It’s a big, very important things. You have the Iraqi invasion of Kuwait in 1990, the first gulf war, the Iraqis basically expelling every Palestinian who lived in Kuwait, which was an enormous number. They were able to go to Jordan immediately over the border and start working right off the bat. Huge increase in the population, you would expect, and from Kuwait which had worse economic institutions than Jordan did at the time.
What happened was Jordan at the beginning, shortly thereafter, embarked on a campaign of economic reforms where they went from looking a basically terrible, quasi-socialist middle-eastern Muslim country in terms of economic policy, to looking like an OECD country within about 10 years, with this massive sustained improvement, compared to of course, almost every other country in the middle-east, compared to other Muslim majority countries. Just a huge improvement in their institutions.
The qualitative evidence that we have about why these reforms happened, basically show us that it was the reaction to these Palestinian refugees coming in in such large numbers. The Jordanian government had tried to reform its economic institutions multiple times in 1980s. It failed every time. With this sudden surge, you had a couple things change. One, the Palestinians were generally more pro-business, by especially small business than native-born Jordanians.
Secondly, the Jordanians realized they had to bring Palestinians into their governing coalition, because there are so many of them. At this point, basically, the Palestinian ethnicity had risen to about half of Jordan’s population. They had to bring these folks in to govern. Then third was Jordan had a lot of economic problems, high unemployment and the government realized, we can't sustain our terrible government policies. We need to make sure these people can work, or otherwise, there was going to be some very bad political consequences.
They realized they had to liberalize the economy to get these people working. It was a big combination of things, which basically support the notion that this sudden massive emigration is what caused Jordan to liberalize institutions and to improve them substantially.
Jeffrey: That's fascinating.
Alex: It's really something that I wasn't expecting. We've taken a look at another quasi-natural experiment with Israel, which also had really bad economic institutions in the early 90s. Then the fall of the Soviet Union, Soviet Jews were able to go. There's really not many other countries that have economic institutions as the Soviet Union.
They came in and then it's a very similar story; massive economic reforms and a liberalizing direction. Israel was already a developed country at that time. It had some roots of institution that were fairly okay. They weren't great by our standards, but there were pretty good. At least, they were okay. They weren't as bad as they could have been. Seeing that change in a developed nation that was already pretty much a stable democracy, okay, I could believe that. Seeing it happen in a quasi-authoritarian country with very weak political and economic institutions like Jordan, that was a real eye opener for us when we did this research.
Jeffrey: I’m curious, are there any other potentials, or research cases there that you think maybe haven't been done that might be fruitful?
Alex: Yes, but I’m waiting for some more years of data to accrue. There's two. One is the Syrian diaspora and large parts in the middle east. Now that's not quite as good as the Soviet Jews to Israel, or the Palestinian Kuwaitis to Jordan, because they're basically not allowed to vote in any of these countries, or directly influenced political and economic institutions.
There are a large number of them living in places like Turkey and Jordan and a few other places around there. That might be something worth taking a look at in some detail. The other one that's the huge one right now is Venezuelans, who have fled that country's economic collapse under socialism to its neighbors.
Jeffrey: Colombia has been surprisingly open.
Alex: Surprisingly. Yeah, surprisingly open. Somewhere, I believe it's 5% of Colombia’s population now are Venezuelan refugees. It's a pretty substantial number. Colombia, lets them work, basically, treats them like citizens mostly in terms of their economic, their ability to work and the Colombian economy. You also have a lot of other countries in South America, where it's basically 5% Venezuelan, too, now. Instead of having one country they go to, like in the Jordan or Israel example, we have maybe four or five countries, where the Venezuelans have gone to and roughly similar proportions.
Jeffrey: That sets up a great experiment.
Alex: It is something that I’m so excited, when we have a few more years of data to dig into this experiment. Now what I’ve noticed so far, since the Venezuelans started to leave in very large numbers is countries like Colombia, their economic freedom score is basically flat. It hasn't improved. It also hasn't gotten worse. The whole point of my book, and the big find in my book is immigrants definitely don't worsen economic institutions in places where they go and there is some evidence in some cases that they improve them.
If they don't make them worse and you get all this economic gains from them coming, then there's no good counter-argument against it. I don't need to say, I don't need to say they improve them. I just need to say they don't make them worse, and I win.
Jeffrey: I want to turn a little bit to – you just got some of these few of these things in the book. There's also some that aren't – that I’d like to touch on, some current foreign policy discussions. One thing that you do you mention in the book, talking about H1B visas, the high-skill immigrant work visas that the United States uses. Right now, I believe it was to be implemented and I think has now gone back to a pending status. There's a rule at DHS that would shift H1B visa allocation from a lottery, a random lottery to a wage-based allocation system. Can you talk a little bit about that and do you consider that an improvement?
Alex: Yeah, it's an improvement, but not a big one. If we have to have a numerical limitation on the number of immigrants who can come in, then I think it makes sense to allocate those based on how well they do in the United States. In which case, the expected wages, the higher wage earners, the wages they can expect might be a good proxy. The easy thing to do would just be to auction them. Because then, we can allocate these resources based on people's willingness to pay, then there might be some other things that just can't be measured with wage data, or on applications. For instance, like energy, or ambition. All these people are pretty ambitious, but some are probably more ambitious than others.
There's a lot of things that can't really be measured through wage, expected wages to be paid in the United States. Overall, I think that rule is an improvement if we have to have a limitation on H1B visas, because what happens is if they're allocated via lottery and they give you background on this, for the listeners a background, H1B visa, the temporary work visa for high-skilled workers, there are 85,000 of them allocated each year to private employers. Because so many more apply for it than there are slots, they’re allocated via lottery. This gives an incentive for a lot of employers to enter a lot more applications than they would ideally like to hire.
A lot of those applications are for people who are making the wage minimum in order to enter the lottery, which is $60,000 a year. Let's say, there's two people who have entered the lottery. One person will be paid a $120,000, the other person will be $60,000. The notion that there's an equal chance that those workers could be selected, I think is pretty economically asinine. If we have to choose, like if we can't let them both of them for a gain of a $180,000, then we should at least let in the one who's a $120,000.
Jeffrey: You mentioned in auction, I'm curious, are you talking about from an employer side, or from the immigrant side, because I also wanted to touch on you put forward this idea of an immigration tax, or immigration tariff, where a prospective immigrant could essentially pay for access. Talk about that a little bit.
Alex: Yeah. I think, it could be either and be more efficient. I think a system where employers and the immigrants themselves can combine, or separately either pay a tariff to come in and the quantity is unlimited, the visa quantities unlimited, or they combined to auction. You have to raise that price, I think would be both of those systems would be better. If we have a fixed number of visas, an auction is superior, because you have to allocate a artificially scarce resource. I mean, artificially scarce, because the government limits visas artificially. There's no natural limitation.
In order to allocate that resource scarcely, I think an auction is the best way to do it. If you have a minimum price you have to pay, but have an unlimited number of potential visas at that price, then I think it makes sense for people to just be able to pay that price and come in. Allowing immigrants and employer separately, or together to do that, I think is a good thing, because then we allow – there might be an immigrant who can only really come to the US, because he's being sponsored by an employer.
He might have to bargain with that employer to get them to pay enough of a high price and sign a contract about how many years he'll work, etc., or pay back the option price if he leaves his employer early. There's more opportunities for bargaining and more opportunities for these types of arrangements. I think it's certainly a good thing. More choice for people involved.
My obvious answer to this is, of course, I'd like a free immigration system, where people – where the price is zero for these things. This is an improvement over the current system, where the vast majority of people who want to come here can't come in at any price. Allowing them to come and charging some price, at least, I think is an improvement over the current system, is a more rational allocation measurement than anything else that Congress would design in this sense. I think it raises some revenue for the government, which might be a counter-argument to some people who are anti-immigration.
Jeffrey: Another proposal that I've seen getting floating around a lot more is this idea of community, or what has been called heartland visas, where essentially, some authority over immigration policy is effectively being delegated to sub-national units of government, which I think is particularly interesting to us at CCI, where that's one of the things we're thinking about is can and should a charter city have some authority over immigration? How might that look in coordination with the national government? How might something like this work in practice, where some immigration authority is devolved?
Alex: It's a great idea. I can talk a little bit in some more extreme detail about the state-based visa idea, which has been introduced by Representative Curtis as a bill. He's representing, a Republican from Utah, and Senator Ron Johnson from Wisconsin, basically introduced the same bill in different congresses. What this would do is create a large number of visas that states could basically sponsor on their own. The states would devise the means through which their employers in the state select migrants to sponsor, or the state would select them, or it would just basically allow them to experiment, and for any type of economic migrant that they want; entrepreneurs, real estate investors, workers, etc., for things that federal visas don't even exist.
The way that would work is the state would set up a means to select these workers, and then tell the federal government, issue visas to these workers. The federal government then do their background checks to make sure they aren't violating property criminals, suspected terrorists, that they're healthy, basically, check to make sure they're not inadmissible under current federal criteria. Then issue them a visa to live and work in the particular state where they've been approved to. They could travel across the country, of course. They could drive.
If you're sponsored for a visa by the State of Colorado, you go to Utah, if you want. You just can’t live and work there. Then, of course, in the system states would be allowed to share visas, they want – so Colorado could sign a compact with Utah to share workers. Going to share some workers, to allow to live and work in each other’s states. The way that the number one counter argument to this and sorry, and to go off another benefit, with incentivized states to design visas for professions, or types of investors, or economic development goals that they have that are not supplied by the federal government, because a one size all visa system just might be good for some places, but it's not good for most.
It basically allows more experimentation and type of uses that work. Now, the number one counter argument to this is like, that sounds all well and good, Alex, but a lot of these visa workers are going to come in, they're going to work in Colorado, and then they’ll just work illegally in upstate. How do you monitor this? We create a carrot and stick system that incentivizes states to create enforcement mechanisms and to select migrants who will follow the rules. The carrot is, if fewer than 3% of their migrants in any year break the visa rules and become illegal immigrants, then they get a 10% bump in the next year. That's the carrot.
The stick is if more than 3% break the rules and become illegal immigrants, then their visa numbers are cut in half the next year. If they do it again, they're basically suspended on the program for five years. The big issue is for immigration enforcement, nobody has a real incentive to enforce immigration laws, which is mostly a good thing, because immigration is mostly a good thing, even illegal immigration, unless they're violating property criminals and national security threats, or sick. It's a good thing, even though it's illegal.
That's probably a good thing that those rules aren't in place. To incentivize rule following and to make sure that states create better rules, so that we have more legal immigration in the future, I think creating this type of system is really good. This heartland visa that's been proposed by my friend, Adam Ozimek and others that's been adopted by the Biden administration as a pilot program, would take some version of this, but make it into more local communities. It's different. I think states are probably better, because states have the administrative capacity to run visa programs more efficiently. They already have Department of Labor, state workforce commissions that do this.
Not many counties and local governments do. I still support the experimentation, because other countries have state, or provincial-based visas. Like Canada and Australia, they work very well on these programs. Maybe the American way to get around it and to improve it is to have more local communities do it. I'm all in favor of it. I think it's a great idea and I'm happy the Biden administration is considering it.
Jeffrey: Cool. Yeah, that's interesting. Finally, maybe I'm just not as plugged into migration politics as I used to be, but it feels –
Alex: That's probably a good thing for your sanity.
Jeffrey: It feels from the point of view of an observer, that the heat of the immigration debate has died down a bit. Donald Trump lost his re-election bid, rather decisively. Brexit is, they finally got Brexit done. Not all, but most of Europe seems to have survived the continent-wide tilt towards anti-immigrant populism. Merkel's CDU survived, for instance, in the wake of the 2015 migrant surge there. There's still ongoing issues, of course, large numbers of refugees and displaced people, Europe's hardening of its Mediterranean border and significant arrivals at the US southern border. How optimistic are you say, over the next five years that we'll see any movements, tangible movement towards freer migration and what might those changes be?
Alex: I'm more optimistic over the next 10 years. Next five years, I'm not very optimistic. My number one theory currently about the politics behind immigration reform is that most, when people see or perceive chaos in anything, they turn against that thing. If people see chaos on the borders, chaos with immigration, they turn against legal immigration and become more skeptical of it. The catch 22 is, in order to get control and to reduce perceptions of chaos we need immigration liberalization to drive people from the black market into the legal market.
If you do that, you reduce the chaos. I think that in some ways, you're going to see some relaxation of the chaos naturally on the border of the United States with Mexico. It's going to be through a variety of mechanisms, I think one will be a stealth increase in the number of guest worker visas for temporary workers for Mexicans and central Americans. I think this is going to continue.
I think the reform of asylum laws, or at least asylum practices, so some of these people can gain asylum. The removal of some of these really bad Trump era rules will bring a more of a measure of order eventually to the border over the next five to 10 years, that will allow some liberalization of immigration. Before then, I don't expect congress to be able to do really anything. My big prediction is that in Biden’s first term at some point, he will undertake some very large executive orders to basically legalize all legal immigrants in the United States and to do some liberalization of these rules on its own. Because the bad thing is institutionally, the US president, basically, has total control over immigration and congress is basically a dead institution when it comes to that.
Jeffrey: They've shifted that. They've given up that authority in some ways.
Alex: They have. In terms of statutes passed, they've given the executive a ton of authority and the courts have interpreted these statutes in basically the broadest way possible. The president can essentially block anybody from abroad from coming here and the statutory authority seems to exist that he can let in anybody from abroad if he wants to. We've tested the border closure portion of that with President Trump. My hope is that we will test the border opening portion of that under President Biden.
Jeffrey: With that, thank you, Alex, for joining us.
Alex: Thank you so much for having me.
Mark: Thank you for listening to The Charter Cities Podcast. For more information about this episode and our guest, to subscribe to the show, or to connect with the Charter Cities Institute, please visit chartercitiesinstitute.org. Follow us on social media, @cci.city on Twitter and Charter Cities Institute on Facebook. I’m your host, Mark Lutter and thank you for listening to The Charter Cities Podcast.
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