Cuccinelli: Wrong guy for the job

Per the LA Times:

President Trump is expected to appoint Ken Cuccinelli II, an immigration hard-liner who is one of the president’s strongest cheerleaders on cable news, to oversee administration efforts to crack down on both legal and illegal immigration, a White House official said Wednesday.

Cuccinelli, who enjoys a reputation as a right-wing firebrand, has no immigration experience and would take responsibility for a politically explosive issue that crosses multiple federal departments and is probably key to the president’s 2020 reelection chances.

[Cuccinelli] has few friends in Congress after leading a far-right group that backed insurgent candidates against Republican incumbents. Senate Majority Leader Mitch McConnell (R-Ky.) has vowed to block him from any post requiring Senate confirmation.

Once again, there are only two reasons to hire Cuccinelli:

  1. He can see legislation passed

  2. He improves the president's electoral prospects

He won't do either.

Let's start with the second item.

Supporting the President's Electoral Prospects

As we head into election season, Cuccinelli must achieve two electoral goals: hold the faithful and convert the wavering.

As we have noted before, the faithful stick with the president through thick and thin, and therefore tactics are limited to not alienating them. The president does not need Cuccinelli to achieve this goal. As long as Trump stays on message -- within very wide bounds -- the faithful will stay loyal and the president can count on their votes.

Instead, Cuccinelli's principal job should be to improve the president's approval ratings. Specifically, Cuccinelli has to be laser-focused on getting the president's approval rating from 41% to about 50%, a difference of approximately 9 percentage points. Without this, the president's electoral hopes are essentially dead. Biden currently leads the president by 11 percentage points in Pennsylvania, a huge gap, and likely to be mirrored in much of the Midwest. If the president can't close that number significantly, the election won't even be close.

Source: 538

Source: 538

Consequently, Cuccinelli's key job is finding a theme on immigration which both holds the faithful and appeals to moderates. An 'immigration hardliner' and 'right-wing firebrand' is exactly the wrong person for the role. He is most likely to just carry the torch for the faithful, unnecessary under the current circumstances, even as he alienates that nine percent of voters essential to the president's re-election prospects.

Legislation

Cuccinelli has no experience with immigration policy and seemingly minimal policy and Hill experience. To appearances, Mitch McConnell loathes him. Therefore, the odds of Cuccinelli shepherding any kind of legislation through Congress is essentially nil.

And that's bad, because legislation will be passed in the near future. As we know, Lindsey Graham is working on asylum-related legislation. And so is -- or will be -- Nancy Pelosi. From Breitbart, a week ago:

“What is happening at the border is tragic and we hope to address some of that in the disaster supplemental,” the California Democrat [Nancy Pelosi] added. “And we understand our responsibility to secure our border.”

We predicted that the surge of asylum seekers would force Hill Democrats to seek a solution by July, and that appears to be the case. Nevertheless, with Cuccinelli seemingly persona non grata on the Hill, the White House may be meaningfully deprived of credit for such reforms.

Thus, Cuccinelli offers no help to the president either on the Hill or with the electorate. For those reasons, he is the wrong guy for the job.

Kushner Plan: DOA. No surprise

Yesterday afternoon, President Trump took to champion the latest White House immigration plan, prepared and announced by Jared Kushner last week. The plan has been poorly received and poorly reviewed. No surprise.

I had been asked a couple of months back by different groups if I wanted to contribute analysis to the Kushner plan. I demurred, because there are only two reasons to propose legislation:

  1. Because it will pass

  2. Because it helps your electoral prospects

The Kushner plan wasn’t going to do either.

It wasn’t going to pass

Any proposal which cuts green cards for family reunification while providing no relief to Democrats on DACA was going to be a non-starter. Here’s Chuck Schumer:

“Exclusion of DACA?” Mr. Schumer said. The idea that for every immigrant they help, they “hurt one, all of that is no good.” NYT

On the other hand, trading a reallocation of green cards for DACA amnesty at this point in the political cycle would be suicidal for the president and the Republican members of Congress. So that deal wasn’t going to happen, either.

Even leaving the DACA issue aside, the proposal failed to gain traction in key Republican circles:

On Wednesday, Sen. Lindsey Graham, who chairs the Senate Judiciary Committee, introduced legislation that would, in part, change the asylum process, saying that "the White House's plan is not designed to become law."

"The White House plan is trying to unite the Republican Party around border security and merit-based immigration. I am trying to get some relief to our Border Patrol agents," the South Carolina Republican told reporters. "I'm trying to put a dent in the smuggling business and keep kids from going on a journey that's got to be hell." CNN

It was clear well in advance that the Kushner plan risked being viewed as irrelevant by key Republicans — another reason why I felt the initiative was headed in the wrong direction.

The key issues on the table are the asylum surge and illegal immigration more broadly. By failing to address those, the Kushner plan made itself moot.

It hurts the President’s electoral prospects

Had the proposal come from, say, a President Jeb Bush, it might have received a better reception. It is primarily a technical initiative reallocating visas in ways that fail to move most conservatives. There is not going to be any “Fight for 33” — 33% being the the proposed share of green cards intended for family reunification, versus 66% currently. Just to visualize: Imagine two Texas oil roughnecks, and one says, “Yeah, that Trump didn’t reduce immigration a bit, but boy, that green card allocation just makes my day. 33%! Can you believe it!”

No, they’re not going to say that.

But it’s worse than that. It’s a swamp proposal. Republican voters elected Trump to “burn the house down.” This Kushner plan is almost the diametric opposite. It’s a green eye shades proposal that only an accountant could love. The proposal is not bad per se, but it is largely what you might expect from the inside-the-beltway crowd. That this is the best the White House could conger so late in the game is devastating to the president’s image. If the pinnacle of the administration’s imagination is a Jeb-worthy proposal, conservatives would have done better with Jeb, who would have carried so much less baggage.

And finally, the very worst part of the proposal is its timing. It represents absolutely terrible clock management. Trump has about seven months left in the legislative cycle. That’s it. Meanwhile, the first five months of the year will have been consumed with exhaustive preparations for a predictable non-starter. Reloading becomes increasingly difficult, particularly if the Kushner plan remains in play until, say, Labor Day.

If that happens, is this the immigration initiative the president intends to take into next year’s election? A poorly conceived proposal from the swamp that had no hope of passing? One that makes the White House look bereft of fresh ideas, ready to capitulate to Washington insiders? The plan is not going to rally the troops, and it has already flopped with the left. This was a bad play for the president, and time is running very short.

And that’s what I told people three months ago.

Dump the right

So why was the plan proposed at all?

I have heard now in several circles an intent to move the president to the center and jettison his more rabid supporters. To be clear, this is not coming from the president, to the best of my knowledge, but from members of the Washington crowd. They hope that by dumping his far right supporters, Trump can broaden his appeal.

And there’s more to it.

The Washington crowd has a deeper antipathy towards the gun-totin’, Bible-thumping rural conservatives who comprise Trump’s base. The beltway insiders — both Democrat and Republican — don’t want to make peace with these conservatives, they want to make them go away, to marginalize them completely. And that’s the plan for Trump: dump the rural conservatives and make-up with suburban used-to-be Republicans and independents.

As I argued months ago, this is a terrible idea. The numbers tell us why. The graphs below show the president’s net approval ratings versus his six predecessors. Now, Trump’s net approval ratings are below all of the others, and no president has ever been re-elected with Trump’s ratings. That explains the strategy to move to the center or even center-left.

Source:  538

Source: 538

But the numbers tell us even more. Trump’s net approval ratings have held remarkably steady. Take any other president, and his popularity rating has moved up and down. But not Trump. Trump’s approval and disapproval ratings have remained rock solid within a narrow range, with neither victories nor defeats much changing public sentiment.

For Trump’s supporters, he is a cult figure. He is their guy, and objective reality does not matter as much as team loyalty. But the flip side is also true. Most of those who hate Trump, really hate him. And therefore even positive achievements — arguably the tax cut, the First Step Act, and certainly the economy — go unrecognized. Trump’s not like George Bush Sr. Bush’s enemies did not hate him so much, nor his friends have such rabid loyalty. He was a bit like oatmeal, generally tolerable but unlikely to generate either enthusiasm or antipathy. For that very reason, though, he could see his approval numbers move up and down. Events could influence the electorate’s views of Bush.

For Trump, it is primarily personal and less about policy. Were Trump to dump his devoted followers, he would very likely find himself on an island with narrowed support, not moving up into a widening band of acceptability. There is no moderate electorate waiting with open arms to embrace the president.

Therefore, for Trump to reject his devoted support is electoral suicide. He must hold them or lose.

At the same time, if that’s all he holds, he will lose. The numbers make that plain.

Therefore, any policy initiative must not only enhance Trump’s appeal with lapsed Republicans and independents, it has to appeal to his conservative base. Trump has to expand his church, not move to the next county. And that was never going to happen with the Kushner plan.

If Trump is to be re-elected, he has to be something more than conservative, and certainly not swampy. He needs an idea that’s big, bold and beautiful—one that appeals to conservatives and draws raves from the main stream media. There are actually any number of initiatives that come to mind, market-based visas among them. If Trump is to survive, though, he needs to be more than just conservative or moderate. He has to be Trumpian.

Illegal Immigration Forecast for Calendar Year 2019 - May Update

Although we know the numbers of migrants detained by Border Patrol with some precision, we have less insight into the numbers successfully crossing into into the US interior.

Estimating successful entries has become much more complicated recently. A year ago, we were able to focus on single adults who were attempting to cross into the US undetected, prompting us to key principally on apprehension rates. While this activity continues, the primary form of illegal entry today is family units crossing the border without authorization, presenting themselves for apprehension to Border Patrol, and claiming asylum. Given that these family units are released in short order, claiming asylum today is the primary conduit to the US interior.

The classification of those claiming asylum is problematic. Conservative analysts have presumed that most migrants seeking asylum correctly appreciate that it will not be granted and therefore do not intend to show up at related hearings. Nathalie Asher, the acting chief of U.S. Immigration and Customs Enforcement’s deportation branch, recently made just this point to Congress, noting that 87% of released families in a pilot program are skipping their court hearings. Therefore, from the conservative perspective, the recent surge of asylum seekers may be considered just the latest manifestation of illegal immigration.

On the other hand, until their cases are heard — perhaps as much as three to five years into the future — asylum seekers typically have the right to remain in the US. During this time they do not count as either illegal or undocumented. Ultimately, however, historical precedent suggests that only 12% of those seeking asylum are likely to have it granted. So how should the others be treated? From the conservative perspective, they would probably be considered illegals, or perhaps illegals-to-be. For purposes of this analysis, we treat 88% of the apprehended asylum seekers as illegal and 12% to be considered legal by being granted permanent status in the US.

In some respects, the distinction is irrelevant. From the conservative perspective, the 12% granted asylum represent roughly the same impact as those who are ultimately slated for deportation—although asylum seekers are allowed to work pending the disposition of their cases. For presentation purposes, they are treated as a single group of migrants entering the country. The average US citizen will be unable to differentiate between legitimate and illegitimate asylum claims, and will instead focus on the very real number of new Central American students showing up in their public school system. The aggregate headcount is likely to matter more than the ultimate status of those seeking asylum.

Determining the number of migrants entering the US starts with apprehensions. We have forecast southwest border apprehensions month by month for 2019, assuming April represents the peak of the year, with May close behind and then a gradual decline to the end of the year, but at substantially elevated levels compared to last year. This yields total annual apprehensions for calendar year 2019 at 931,000, the highest since 2006 and double 2018’s level. Forecasting apprehensions in such a rapidly changing environment is inherently tricky, but we believe the ultimate tally for calendar year 2019 may reasonably be expected in the 750,000 - 1,000,000 range. This assumes no major change in US asylum policy; that the April inflection point reflects the underlying trend rather than just an aberrant data point; and that the volume of asylum seekers tapers, but does not collapse in the second half of the year.

Because Border Patrol provides monthly apprehensions data by family status, we can forecast the share of total apprehensions which will represent unaccompanied minors (UACs); persons in family groups; and adults traveling without family members. As the graph below shows, border apprehensions of family units have rocketed up since last July when Judge Dana Sabraw deemed the administration’s Zero Tolerance policy unacceptable. Judge Sabraw decried “government conduct that arbitrarily tears at the sacred bond between parent and child.” “Such conduct,” he wrote, “is brutal, offensive, and fails to comport with traditional notions of fair play and decency.”

Appre Trend.png

Had the apprehensions continued at the seasonally adjusted pace of January to June, we estimate Border Patrol would have apprehended 393,000 migrants in 2018.

However, with Judge Sabraw’s ruling preventing the deportation and separation of families claiming asylum, family units began to flood in. From August, the numbers began climbing quickly, and based on the last four months of the year, would have led to 598,000 apprehensions at the southwest border for the calendar year 2018 as a whole, 200,000 more than apprehensions at the January to July pace. As it was, apprehensions in the August - December period were about 70,000 higher than expected for that five month stretch, and this can be considered the impact of the Sabraw ruling through year-end 2018.

The bigger numbers, however, came with the signing of the omnibus spending bill (the Consolidated Appropriations Act of 2019) in mid-February, which essentially prohibited the deportation of any adult from the Northern Triangle countries traveling with an unaccompanied minor and claiming asylum. March and April each saw nearly 100,000 apprehensions, almost twice the pace of the last quarter of 2018 after the Sabraw ruling.

Attributing rising family unit apprehensions to rulings and legislation over-simplifies causality to an extent. However, it is clear that the Sabraw ruling and the omnibus bill represented turning points in apprehension trends. For practical purposes, we attribute the post-July surge to the Sabraw ruling, and the post-February surge in apprehensions to the appropriation bill itself, even if the gains cannot be definitively allocated between the two, or indeed, to other factors.

Our current apprehensions forecast of 931,000 for 2019 includes a rise of 333,000 over the level which would have been anticipated from the Sabraw ruling by itself. That is, the omnibus bill can be credited with an increase in border apprehensions of more than 330,000 for calendar year 2019.

* Annualized based on Jan.- July 2018 data, using Jan-July 2014-2016 precedent, seasonally adjusted  ** Annualized based on Sept. - Dec. 2018 data, using Sep-Dec 2014-2016 precedent, seasonally adjusted  Princeton Policy estimates and forecasts based on Customs and Border Patrol data

* Annualized based on Jan.- July 2018 data, using Jan-July 2014-2016 precedent, seasonally adjusted

** Annualized based on Sept. - Dec. 2018 data, using Sep-Dec 2014-2016 precedent, seasonally adjusted

Princeton Policy estimates and forecasts based on Customs and Border Patrol data

Based on our apprehensions forecast, we can estimate successful illegal entries into the US interior for calendar year 2019.

Because minors and families cannot be held more than twenty days or deported, the vast majority of those entering the country are likely to gain admittance to the US interior. We estimate approximately 75% of those arriving as minors and 70% of adults arriving in family units will be released into the US. While their entry was illegal, their release into the US interior is not. However, as noted above, we treat 88% of them as illegal immigrants, assuming that they will remain in the US in most cases even if they fail in their asylum claims.

Of course, not all crossers are giving themselves up. We assume that adults traveling alone — who can be detained and deported — will continue to attempt to enter the US undetected. Generally, apprehension rates have recently been thought to be in the 55-70% range. We use 60%, under the assumption that adults traveling alone are more savvy than families and minors, on the one hand, and that Border Patrol is too distracted with the tsunami of asylum seekers to properly focus on traditional border jumpers.

We forecast the apprehension of 302,000 adults traveling without children in 2019. This is the highest since 2016, but does not represent a particularly exceptional pace. A 60% apprehension rate, and assuming three tries per migrant, yields just under 200,000 adults without dependents who will succeed in entering the US this year.

* Annualized based on Jan.- July 2018 data, using Jan-July 2014-2016 precedent, seasonally adjusted assuming 60% apprehension rate for adults alone and 75% and 40% entry rate for minors and adults in families, respectively. assumes one month lag from apprehension to release  ** Annualized based on Sept. - Dec. 2018 data, using Sep-Dec 2014-2016 precedent, seasonally adjusted assuming 60% apprehension rate for adults alone and a 75% entry rate for minors and and 70% rate for adults traveling in family units, assumes a one month lag from apprehension to release  Princeton Policy estimates and forecasts based on Customs and Border Patrol data

* Annualized based on Jan.- July 2018 data, using Jan-July 2014-2016 precedent, seasonally adjusted assuming 60% apprehension rate for adults alone and 75% and 40% entry rate for minors and adults in families, respectively. assumes one month lag from apprehension to release

** Annualized based on Sept. - Dec. 2018 data, using Sep-Dec 2014-2016 precedent, seasonally adjusted assuming 60% apprehension rate for adults alone and a 75% entry rate for minors and and 70% rate for adults traveling in family units, assumes a one month lag from apprehension to release

Princeton Policy estimates and forecasts based on Customs and Border Patrol data

To this we can add 260,000 minors and about 185,000 adults in family units who will gain admittance to the US this year, of which 53,000 are projected to secure protected status over time.

For calendar year 2019, we anticipate 643,000 successful migrant entries into the US, including all of unaccompanied minors, minors and adults in family units, and adults traveling without dependents. US authorities are projected to release 1,220 persons / day into the US interior, versus a reported release rate of 1,230 / day in mid-May. Of the 643,000 anticipated to enter into the US, a bit less than 600,000 can be deemed ‘illegal’.

Pew Research estimates the unauthorized Hispanic population in the US in 2016, the latest year for which data is available, at 7.3 million. Thus, an increase of 600,000 would represent a 8% increase in the unauthorized population of Hispanics in the country — quite a large gain in percentage terms. More than 260,000 of the anticipated increase in border migration in calendar year 2019 can be attributed to the omnibus bill, and another 130,000 to the Sabraw ruling.

Migrants raise American Wages

The detrimental impact of migrants on US wages is a recurring theme, with a visibly frustrated Ann Coulter last week offering to support Bernie Sanders if he returned to his prior position to limit immigration to raise US wages.  Similarly, our friends at CIS argue that there is no ‘labor shortage’.

Immigrants, and in particular, illegal immigrants can indeed depress wages.  However, their impact depends heavily on the phase of the business cycle.  If there is ample unemployed labor, then an incremental migrant may be doing nothing more than taking the job of a US citizen.  Forget depressing wages, illegal immigrants can deprive US workers of their livelihood entirely during a recession.

Nevertheless, with initial unemployment claims at fifty year lows, and black and Hispanic unemployment at historical lows, it's hard to make the case that low-end jobs are hard to get.  To go by help-wanted signs in New Jersey, one can find an entry level job at just about any retail establishment in the state.

Tester.JPG

In this world, migrants help increase output and leverage the productivity of natives.  (For the record, 'natives' here means white and black Americans, not just the native, native Americans.)  When migrants are hired, they are often part of a larger organization. Typically, the sales value of the final product to which a migrant contributes is 2.5-3.3 times the migrant's wages.  Take, for example, the poultry processing industry.  In this industry video, natives are doing all sorts of work, some on the line, but also logistics, management, quality control and testing.  Within the same supply chain, native farmers are raising chickens for processing in the plant.

This video, however, reveals that most everyone on the line is Hispanic.  They are doing the work not shown on the industry video: stripping the fat and cutting up the birds.  (It is well worth a watch to consider whether these are 'good American jobs'.)

All hispanics on the line.JPG

In reality, were it not for migrant labor, industries like poultry processing would simply be exported.  We have not assembled TVs or manufactured shoes in large volume in the US for decades.  And those are better jobs than butchering chickens.  The presence of migrants enables the poultry industry -- and the meat processing, dairy, fresh fruit and vegetable sectors -- to sustain themselves domestically.  Those migrant workers are enabling the rest of the business.  

The math looks like this.  A migrant paid $20,000 / year enables output of about $50,000 / year.  About 60% of economic activity in the US ends up as wages.  Thus, $50,000 of economic activity implies about $30,000 of wages, of which $20,000 will go to the migrant and $10,000 to other employees in the firm (or supply chain), including farmers, supervisors, testers, logistics managers and the rest--most of which actually are good American jobs.  Of the migrant's wages, about $5,000 will be remitted back to Mexico and is lost to the US economy.  But the migrant will spend $15,000 locally in the US, principally on housing, food, and utilities, of which about $10,000 will ultimately find its way to native labor.  Thus, the $20,000 of migrant wages creates another $20,000 paid to native labor both inside and outside the company employing the migrant.  Far from lowering wages, in an economy near full employment, hiring a migrant will increase US wages by about as much as the sum paid to the migrant himself.

Migrant impact on wages.png

Now, not all those wages gains will go to unskilled US labor.  But at least some should.  Therefore, although we cannot claim that migrant labor will have no impact on US natives (now including illegal immigrants who arrived years ago), the overall effect is positive, and substantially so, both on US labor and owners of land and physical and financial capital.  

In the interest of completeness, let me close by conceding a few points.  First, labor force participation by lower educated groups, notably of whites, has fallen in recent decades and this is a issue of concern requiring a closer look.  But that's not the fault of hardworking Hispanics.  Second, although migrants add to GDP, they tend to be a fiscal drag, due to the progressive nature of taxation in our system.  Third, under the current black market and H2 visa system, the US government -- and by extension, conservatives -- are grossly under-compensated for providing labor market access, and the current system does tend to reduce native wages across the business cycle by failing to charge a market-rate entry fee to the US.  Finally, the current asylum crisis is not about migrant workers.  By our count, we have perhaps 2 million open migrant-segment jobs.  We could probably let in 100,000 workers per month for well over a year and not even notice the effect on the labor market.  On the other hand, the asylum crisis is a crisis of children, whose education, feeding and healthcare will be significantly provided by US taxpayers.  And they will add nothing to US output for a long time to come.

Migrants, in a down market, can reduce US wages, in significant part by taking jobs.  In a tight labor market as today, however, migrants both increase output and increase US wages.  For every $1 paid to an incremental migrant, an additional $1 will be paid to native labor.  When times are bad, migrants represent just more mouths to feed.  When times are good, though, we need their hands to help with the work.  

And times are good now.

Demand Impact of Legalization on the Migrant Population

Princeton Policy treats illegal immigration as a black market problem resulting from the government attempting to prevent Latin American migrants from selling their labor to US employers. Instead of an enforcement-based policy, we advocate a legalize-and-tax approach to manage illegal immigration. This proven, textbook solution typically reduces black market pathologies by 95% and closes the issue from the political perspective.

In the case of illegal immigration, legalize-and-tax is achieved through a market-based visa (MBV) system, which allows a background-check migrant to enter and work in the US on-demand in return for a market-based fee.

Such a system must meet the needs of three distinct stakeholders:

• Hispanics and Democrats

This stakeholder group is principally interested in gaining status for seven million undocumented Hispanics and assuring better treatment of economic migrants from Latin America. An MBV solution must facilitate status for at least some undocumented immigrants and provide a legal pathway for migrant labor, with an emphasis on reducing predation and victimization associated with the dangerous journey to the United States across Mexico and worker exploitation in the US.

• Fiscal Conservatives

Fiscal conservatives, including organizations like FAIR, care about the fiscal impact of illegal immigration. An MBV solution must improve the fiscal position of the federal government, and lessen the impact on local governments, particularly with respect to fiscal burdens related to education of minors.

• Social Conservatives

Social conservatives are interested in maintaining social cohesion and cultural norms. They place high value on public safety, propriety and accountability and maintaining a political culture which emphasizes tradition and sovereignty. Conservatives typically seek to limit the number of foreigners who reside and work in the country and reduce the abuse of jus soli to obtain legal rights by undocumented immigrants. An MBV solution must demonstrate that it can close the border, end the black market in migrant labor, and limit the migrant headcount while reducing birth tourism and insuring a safe, transparent, and accountable system to handle migrant workers.

An MBV system can meet all of these objectives far better than today’s migrant policy.

From time to time, we explore specific aspects of an MBV system. In this analysis, we focus on one aspect of the migrant issue: the increase in demand for migrant labor resulting from a transition to a legalize-and-tax system.

An Introduction to Black Markets

We treat illegal immigration principally as a black market – and not immigration – problem.

All black markets are artificial and created by governments. They arise as a result of prohibitions or price or wage controls imposed by the government to prevent buyers and sellers of goods or labor from coming together and voluntarily agreeing a price and consummating a transaction.

The most well-known black markets today are in Venezuela, where the government has decreed that a wide range of goods must be sold below cost. This has had the effect of stripping store shelves of stock and creating a black market in goods as mundane as toilet paper. These goods will trade well above their normal market value among individuals in shady transactions – often literally in back street alleys.

A similar effect can be found when minimum wages are set well above their market value. If the difference is large enough – and the $15 minimum wage in New York City probably is, for example – a black market will arise in discounted labor, with workers accepting longer, unreported working hours nominally at the minimum wage, or going off the books entirely and working undocumented for cash.

Black market.png

In the case of the traditional vices – alcohol, gambling, prostitution, marijuana, hard drugs and migrant labor – the prohibition is set with volumes, not prices. In the case of wage and price controls, the manufacture, warehousing, distribution and consumption of a good or service is not illegal. Only transacting at market prices is prohibited. A New York restaurateur can hire an employee and the employee can provide all the services required, just not at a price below the minimum wage floor. Nor is it a crime to possess or manufacture, say, toilet paper in Venezuela. Only its sale at a market value is illegal.

By contrast, volume constraints usually arise because the government believes a given good or service is inherently detrimental. Thus, US government policy seeks to prevent the consumption of heroin or cocaine because policy-makers believe it results from involuntary addiction and is unhealthy for the consumer. Therefore, all of the production, transport, storage, sale and consumption of prohibited items are illegal. Migrant labor falls into this category: an unauthorized immigrant in the US is illegal by definition, as it is to employ or provide certain services to such migrants.

Markets subject to prohibitions or below-market prices will be supply-constrained. Labor or goods will always be in shortage in a supply-constrained market. This means customers who are willing pay above-market rates for goods or services are easy to find. The key to entering the market is a willingness to take risk, break laws and protect one’s turf with force to get supply to market. It is all about supply, whether smuggling drugs over the border or crossing the border illegally in the hopes of find a job.

Supply-constrained markets always involve government force to keep buyers and sellers from willingly coming together to transact for the given good or service. In the case of drugs, this implies drug seizures and arrests of drug dealers and fines and jail times for purchase, possession or usage for drug users.

In the case of migrant labor, the government attempts to prevent sellers of labor from entering the country via border control, including an army of border patrol agents, hundreds of miles of wall, and the agency ICE, tasked with finding migrants and deporting them. Employers are to be formally sanctioned for failing to use E-Verify and employing undocumented labor.

Ending Black Markets

Black markets can be addressed with three different approaches.

• Suppress Supply

As we note above, governments without fail try to suppress black markets by focusing on supply, arresting drug dealers or detaining hotel maids and berry pickers attempting to sneak across the US border. Supply suppression is politically attractive because it externalizes the problem. The problem is the fault of Colombian or Mexican drug dealers or tricky Hondurans enlisting children in fake asylum claims to gain entrance to the US labor market.

Supply suppression has never worked, because enforcement provides the incentive for its own undoing. When supply is suppressed, prices go up, sales opportunities are plentiful and competition is reduced. The effect is much like pressing on a spring. The harder one presses, the greater effort required, the greater the resistance and the more violent the rebound when pressure is released.

Enhanced enforcement increases black market suppliers’ incentive to bring contraband to market. This results in the most extraordinary creativity, certainly in drug smuggling, which has employed ‘mules’ with marijuana-filled backpacks, disposable aircraft, high speed boats, catapults, tunnels, swallowed packets, or drugs canned or hidden in fruits vegetables or manufactured goods – the list is endless.

In the case of migrant labor, options can include walking across the unsecured border; fake papers; tunnels under or ladders over the border; disabling border barriers; fake asylum claims; visa overstays; conveyance hidden in trucks, boats, aircraft; transit over the Canadian border and other means. The very worst, and perhaps the most common, means to circumvent enforcement is bribery, or as the case may be, intimidation and violence. It is the corruption of law enforcement, the bribery of politicians and judiciary, and the intimidation of the press which wreak the greatest damage on society.

Because supply suppression creates the economic incentive for its own undoing, it has virtually no track record of success. True, supply suppression has historically reduced the flow of illicit goods by 10-15%, but this is merely a dent in the business and very far from a meaningful prohibition. Much blood and treasure is spilt for a near meaningless reduction in supply.

• Suppress Demand

Demand suppression is as effective as it is unpopular.

Cold turkey detention of drug addicts vastly reduced addiction rates for hard drugs in Japan and Singapore.

Arizona’s hard line on migrants has also shown notable success. The state brought in tough anti-illegal labor laws in 2007 and reduced their undocumented population by half. Not only that, they have kept the numbers down by closing businesses that use undocumented labor.

Of course, this internalizes the problem. Rather than blaming migrants, enforcement focuses on their US employers. The question is whether such an approach is politically viable.

Nor is it clear that Arizona’s approach achieved its intended goals. On the one hand, Arizona did manage to materially reduce education and health expenditures associated with its undocumented population.

On the other hand, Arizona is the poster boy for unintended consequences with respect to its labor market. When Arizona implemented its tough anti-migrant policies in 2007, Arizona had the 16th best unemployment rate among the states. Today, it is in 45th place. In fact, Arizona has the second worse relative record (change in rank) of all the states since 2007. Moreover, six of the seven states which enacted restrictive laws regarding use of undocumented labor have seen their relative rank, in terms of unemployment rate, deteriorate compared to the other states.

Coercive interventions in markets have a habit of backfiring, and this includes actively preventing businesses from operating by depriving them of employees. Still, demand suppression is a viable option for the conservative purist to the extent the politics are palatable.

• Legalize and Tax

The classic remedy for a black market is to legalize and tax it. The US chose this route with alcohol, gambling and more recently, marijuana. Rather than trying to prohibit a good or service entirely, demand is regulated by a tax regime, with the goods legalized otherwise.

Historically, this approach will eliminate 95% of the criminal pathology associated with prohibition, For migrants, this includes illegal border crossing, murder, rape, kidnapping, human trafficking, theft, corruption, intimidation, smuggling and tax evasion. Domestically, it will materially reduce wage theft, workplace sexual harassment and worker exploitation.

Importantly, legalization does not end all the problems associated with prohibited goods. Alcohol consumption remains the third leading cause of preventable death in the US and is associated with a loss of $250 bn in GDP annually. Nevertheless, the public has accepted these as ‘costs of doing business’. Similarly, the legalization of gambling created much anxiety at the time, but since then, the capital of gambling, Las Vegas, has been transformed into an adult amusement park. Gambling addiction remains a problem for some people, but “what happens in Vegas stays in Vegas” has risen to a selling point, rather than a cry to shutter the city.

Marijuana legalization has – and continues – to cause consternation among politicians, with New Jersey’s attempt to legalize now stalled. And yet, society has not collapsed in those states where marijuana is now legal. Colorado government has prepared a report on its experience at the five year mark for recreational marijuana legalization. (The summary is well worth a read.) There are issues, but far from being a disaster, marijuana legalization has actually improved some statistics (and underscores again that legal alcohol is an order of magnitude more dangerous substance than cannabis).

Migrant workers – primarily interested in mowing lawns or making up the hotel beds in decadent Las Vegas – represent a far lower risk to society than any prohibited drug or traditional vice. Legalization will not make all associated problems go away. Migrants, as the rest of society, will still occasionally commit crimes of various sorts. Notwithstanding, the history of legalization shows that this sort of anti-social behavior will fall to a fraction of its current level.

Moreover, legalization closes the topic as a political issue. Despite the adverse effects of alcohol and gambling, no one is calling for a new prohibition. So it will be with migrant labor. If a well-ordered, fair, transparent and accountable channel for migrant labor is established, and if the government is appropriately compensated for providing labor market access, history shows that illegal immigration will disappear as a political issue of major importance.

Comparing Supply Suppression and Legalize-and-Tax Approaches

As luck would have it, the US is currently running a natural experiment on the unsecured southwest border with Mexico. Three types of contraband are coming over the border: economic migrants, hard drugs and marijuana.

Despite the most aggressive efforts of the Trump administration, both hard drug seizures and border apprehensions have more than doubled compared to the last years of the Obama administration. Not only is a crackdown not slowing traffic, it is actually associated with a doubling of flows!

Smuggling People Drugs.png

By contrast, even though recreational marijuana has been legalized in only ten states, marijuana seizures over the unsecured border will have dropped in 2019 by 80% – 80%! – Since President Trump took office. Smuggling is down 95% since its peak in 2009. This is the singular success of the Trump administration at the southwest border, and yet it was not achieved with hardcore enforcement, but through legalization and taxation.

This same effect could be achieved with illegal immigration, with the difference that the border could be closed much more quickly and completely.

The Hispanic Migrant Worker Market Today

If we allow that the migrant market is primarily economic in nature, and as a consequence best treated as a black market, then the transition to a market-based system merits close attention.

We use basic economics and a few concepts to help understand how to think about the liberalization process of migrant labor.

On the graph below, we show the supply and demand for incremental Hispanic, specifically Mexican, migrant labor, based upon our own estimates for supply and demand curves at a medium term horizon of approximately two years.

To this we add two important concepts:

The Relocation Wage

Our analysis suggests that the Mexicans require about $6.50 / hour to induce them to work in the US. This includes

  • $2.50 / hour to match for unskilled labor rate in Mexico, plus

  • $2.50 / hour ($500 / month) to offset a higher cost of living in the US, plus

  • $1.50 / hour as a relocation bonus to compensate them for having to leave their home countries. This would represent their “profit” for coming to the US, a premium of 60% over their home wage.

The total Relocation Wage, as we refer to it, amounts to about $6.50 / hour.

If Mexicans were allowed unlimited entry to the US labor market, then the migrant population would expand until wages in the migrant sector fall to $6.50 / hour, either due to lower wage levels or lower utilization rates (higher unemployment).

The Prevailing US Unskilled Labor Wage

Although Federal minimum wage is $7.25 / hour, not many people are employed at this level. On the other hand, about 20 million Americans work for roughly $10 / hour, and this represents the unskilled wage in the US as we interpret it.

The alternative to a migrant laborer is an unskilled US worker. Given the large number of workers in the unskilled pool, we assume that employers, in a market-based system, are prepared to pay around $10 / hour to migrants.

The Visa Value

Given a Relocation Wage of $6.50 / hour and a prevailing wage of $10 / hour, a Mexican migrant should be willing to pay $3.50 / hour for on-demand access the US unskilled labor market.

Relocatoin Wage.png

Effect of Legalization on Demand

One of the concerns of transitioning to a market-based system is that demand will expand, increasing the inward flow of migrants. Employers, who otherwise would not have considered hiring illegal migrants, would now seek to employ legalized Latin Americans.

Such concerns have always been present when black markets are to be legalized. Because the US has lifted at least three prohibitions historically, the increase in demand can be estimated by reference to experience, in this case, with alcohol and marijuana. US per capita alcohol consumption, for example, declined by 9% from 1915, five years before Prohibition, to 1929, three years before Repeal. Marijuana legalization is associated with an increase of consumption in the range of 5-15%. In Colorado, adult marijuana use increased by 12.5% from 2014, the year after legalization, to 2017. These two precedents suggest legalization would increase demand by 10-15%.

Pew Research’s latest population estimates for 2016 imply approximately 5.4 million undocumented Hispanics in the workforce. Assuming legalization increases demand by the historically observed 10-15%, the migrant worker population could grow 0.5-0.8 million persons over the two years following the implementation of a market-based program.

However, both alcohol and marijuana were legalized with a fixed tax approach. In our proposed MBV system, prices would be actively managed to reduce the incoming headcount and meet conservative goals.

Using a Conservative Objective Function

Conservatives worry about the number of migrants working in the US, as their number is deemed material for issues of safety, social cohesion, and political culture. The attractiveness of an MBV system in part must rest on its promise to restrict migrant and (formerly undocumented) resident Hispanic numbers to materially no more than would have occurred under the next best, viable policy alternative. In this case, the alternative is the current system with 5.4 million undocumented Hispanics (7.2 million including dependents) and an additional 250,000 – 450,000 migrant workers per year.

To achieve conservative goals, we use a price-managed system in which the price of the visa is set by the lowest volume which closes the southwest border and eliminates the black market in resident migrant labor. Rather than setting the volumes directly and administratively – as is the practice today – volumes are set by the price which limits migrant Hispanic numbers to no higher than would have been achieved under the best alternative policy. We deem this a ‘conservative objective function’, as the objective is to restrict migrants numbers to a level consistent with conservative goals while acknowledging that supply suppression does not work for ending black markets, including those in migrant labor.

15 Percent.png

The graph above illustrates the dynamics. With legalization, demand is 15% higher at any given wage level. In a fixed fee system with a $3.50 / hour visa cost, demand would increase from 5.4 million to 6.2 million workers. With a price-managed system, the value of the visa is allowed to edge up modestly and additional visas are issued with the intent to prevent the re-emergence of a black market in labor. Assuming an unlimited supply of Central American labor at $6.50 / hour, the Hispanic migrant workforce would increase from 5.4 million to 5.75 million and the price of the visa would increase by about $0.30 / hour (+8%). Therefore, in a price-managed system – and assuming our supply and demand curves are approximately valid – the number of visas would increase by 350,000 ceteris paribus. Even with these additions, the Hispanic migrant workforce would only return to the levels of 2011 and remain 500,000 below its 2007 peak.

Both of these numbers should be workable from the perspective of migrants and conservatives alike.

A ‘High Case’ Alternative Scenario for Increased Demand

As a sensitivity test, we can also consider a ‘high case’ scenario in which demand increases by 50% with legalization. With a fixed fee approach, the migrant population would grow by 2.6 million to 8 million Hispanic workers, assuming that an unbounded number of migrants are willing to come to the US at the Relocation Wage of $6.50 / hour.

50%.png

This outcome would appear to be unlikely, however. We currently count 2 million jobs openings in the migrant category based on our analysis of JOLTS labor market data. Available jobs provide an upper limit on purchases of guest worker visas. Still, assuming a 50% increase in underlying demand due to legalization, the impact could be substantial. But this is easily prevented.

In a price-managed system, the visa price would rise by $1 / hour to $4.50 /hour. Assuming our supply and demand curves are approximately correct, the number of Hispanic migrant workers would increase by 1 million, to 6.4 million, even with the higher price of visas.

A $4.50 / hour visa fee translates into an $11 / hour unskilled wage. That is, 6.4 million migrant Hispanics would be earning more than perhaps 15 million US citizens earning $10 / hour and who are fluent in English and are mostly high school graduates. This outcome would appear to be unlikely. Wages in the much larger indigenous US unskilled labor market probably constitute a cap on wage appreciation for migrant labor. Put another way, US employers are not going to pay more for migrants than they do for US citizens, and this puts a cap on demand for migrant labor in a price-managed system.

As a consequence, we believe 10-15% demand growth is probably closer to reality. Overall, therefore, we might expect liberalization to result in perhaps 350,000 additional visas and an increase in the visa price around $0.30 / hour. Both of these numbers should fall into the respective tolerances of the undocumented Hispanic and conservative communities.

Enforcement

Paradoxically, a seemingly open, price-based system could restrict incremental visa issuance and migrant population increases more than anticipated above.

Illegal immigration today is a strangely asymmetric proposition. Consider the case of the family depicted in the documentary Border Hustle (a must-see video for those interested in understanding the current border crisis). In this story, a Honduran man leaves for the United States with his daughter, whom he is using as a ploy to circumvent US border control.

In the US, the Honduran will likely earn seven times his net wage at home. In the three to five years which will pass before his asylum claim is adjudicated, he will have earned the equivalent of twenty years’ work in Honduras. If he is deported subsequently, he essentially returns to the status quo ex-ante, having earned a substantial nest egg in the meanwhile.

On the other hand, if he chooses to stay as an unauthorized immigrant, he can continue to work with a 3% annual chance of deportation if he lacks a criminal conviction otherwise. He can also expect a solid public school education for his daughter and a well-founded hope that she will become a US citizen in a DACA-style amnesty in the late 2020s.

If he is caught in the future, he will be deported and return to his previous life in Honduras, albeit with some readjustment challenges. He may spend some time in US detention, but probably not too much.

The logic for the economic migrant is all to the upside. The only downsides are in the risks of the journey to the US itself. But otherwise, both migrants’ financial and security situation are likely to improve in the United States, and even if they are ultimately deported, the visit should have proved well worth it.

As a result, the US lacks either a carrot or a stick to deter border crossers. There is not much downside to being caught by Border Patrol and a huge upside in making it into the US interior.

An MBV system changes this calculus. In this world, passing an H-2 visa class background check is sufficient to establish eligibility to work in the US. After that, the key issue is finding a US job that pays well enough to meet personal financial objectives and pay the visa fee. Otherwise, the MBV system is envisioned to allow unrestricted access to the US labor market and rights to all the necessary prerequisites like bank accounts, driver’s licenses and utility and rental agreements.

But this right is not without conditions. Apprehension coming across the desert – now close to a 90% probability – would terminate eligibility for the guest worker program. The loss of access to a market-based visa would therefore become a powerful deterrent. If the migrant labor market in the US is near equilibrium, that is, if there is no great pool of black market work opportunities in the US, then being caught coming across illegally becomes a very expensive proposition indeed. Paradoxically, an open labor market offers much greater potential for border control and restrictions on visa numbers than the current enforcement-based approach.

Demographic Trends

Demographic trends also suggest that legalization of migrant labor should not bring uncontrolled Hispanic migrant population growth.

Unauthorized Population.png

The undocumented population from the Mexico, Guatemala, Honduras and El Salvador – the four countries anticipated to be first round participants in a market-based program – peaked at 8.25 million in 2007, and has since declined by more than one million, to 7.2 million in 2016.

The Mexican population has taken the brunt of the adjustment, down 1.5 million during that period. The populations of the Northern Triangle countries have grown, but only by perhaps 50,000 per year, according to Pew Research estimates.

On the face of it, therefore, with a visa price filling the gap between the Relocation Wage and the US unskilled wage, the trend data since 2007 suggests no unmanageable surge on the horizon.

This, of course, is not true when the visa price is effectively set to zero, as it is in the case of Northern Triangle residents claiming asylum currently. In such an event, the upper limit on new entrants could approximate the lesser of 4 million – including 2 million adults to fill current job openings and as many dependent children – or the population of the Northern Triangle countries willing to migrate north over the next few years.

Summary

Historically, because supply suppression has been largely ineffectual, whether in drugs, gambling or migrant labor, consumption has fallen by only 10-15% during prohibitions compared to a liberalized system. Therefore, the end of a prohibition does not typically bring a vast surge in consumption, although a medium term increase of 10-15% is well within expectations.

This would imply an increase in the resident migrant population, in a price-managed system, of approximately 350,000 or so with a relatively modest increase in the visa price. With these additions, the Hispanic migrant workforce would return to the levels of 2011 and remain 500,000 below its 2007 peak.

March Border Apprehensions: Almost Worst Case

Customs and Border Patrol reported March apprehensions at the US southwest border at 92,607.   This represents an increase of 25,723 (+38%) over February and 55,217 (+148%) over March last year.  It is 7.6x the level of March 2017.  

On the other hand, it is less than the 100,000 number which had been floated by DHS.

It is virtually impossible to make a reasonable forecast at this point, in part because the pace of apprehensions appears to be increasing at an increasing pace.  Consequently, on the graph below, our April forecast represents our best guess based on current trends, representing 1.285 million apprehensions for calendar year 2019.  

March appre.png


The Impact of Asylum Seekers on State School Budgets, Elections

A market-based visa program can be run as a lucrative profit center if it is limited to migrant workers, who are usually in their prime years and good health.  They require little from the state beyond occasional acute care for an accident or illness.

Not so for migrant children.  Aside from not generating income, migrant children will, by and large, enroll in the public school system at taxpayer expense.  Their cost averages $11,000 / year nationwide and far exceeds any tax contribution their parents, typically earning $20,000-$25,000 / worker, could make.

The unusual feature of the current wave of asylum seekers is that half are children, as they are literally the ticket into the US interior.  As a result, we estimate that up to 300,000 school age minors could enter the US claiming asylum in 2019 to the beginning of the school year in September.  Educating them will put pressure on the school systems in those states with the largest Hispanic populations, because that is where their parents will have the best social networks to assist in re-settling and finding work.  If historical trends hold, 60% of all asylum seekers will end up in just seven states, in order: California, Texas, Florida, New York, New Jersey, Georgia and Illinois.  

On the graphs below, we show the indicative enrollment and associated public school spending on these students, assuming 80% end up in public school and are ultimately distributed according to Pew Research's estimates of the unauthorized population by state.  Again, we highlight that these are not forecasts, but rather scenarios which may be helpful in understanding the indicative impact of a large number of asylum seeking minors on the public school systems of key states.

For the 2019-2020 school year beginning in September, and including asylum migrants arriving from Jan. 1 - Aug 30, the California system would see the biggest influx of students at around 50,000.  Texas would see 36,000; Florida 18,000; New York, 17,000 and New Jersey, 11,000.  These represent 0.5 - 0.8% of the enrolled population.  New Jersey, for example, would see about 4 asylum students per school, roughly one every other grade.  This is not a tragedy and could reasonably be absorbed by the respective school systems.  Still, most students would know about 'the asylum kids'.  It would a meme, but it would not fundamentally change the way students or schools operate.

Princeton Policy estimates based on various sources

Princeton Policy estimates based on various sources

If we roll the numbers forward a year, this is no longer true.  Should the situation not be resolved and asylum seeking continue at the pace we anticipate for the coming year, by September 2020, nearly 1,000,000 asylum children could be in the US (arriving Jan. 2019 - Aug. 2020).  California's public school system would see 168,000; Florida, 59,000; and New Jersey, 36,000.  In New Jersey, every grade would have at least one, typically one every other homeroom.  This will be a big deal in terms of funding and voter perception.  California, New York, New Jersey and Illinois are all scraping pennies together to cover state budgets.  At average cost, New Jersey would have to pony up $700 million for the 2020-2021 school year to cover the asylum surge -- a political problem heading right into the 2020 election.

Princeton Policy estimates based on various sources

Princeton Policy estimates based on various sources

For Democrats, the current asylum policy may provide a kind of grim satisfaction in striking a blow at the Trump administration.  But it is a dead-end.  Twenty-one of the forty House seats the Democrats took from the Republicans in 2018 come from the seven states listed above.  These were moderate Republican seats mostly, and the Democrats will lose them all. The asylum surge in Florida -- a critical swing state in the presidential election -- will push that state back towards the Republican column next year.  And Democratic governors in California, New York, New Jersey and Illinois will be none too happy with their Congressional representatives.

As a consequence, Congressional Democrats will climb down sooner or later.  In doing so, they will hand a victory to the White House, and in particular, to anti-immigration hawk Stephen Miller.  The later the Democrats act, the more they will be forced to assume responsibility for unleashing a flood of asylum seekers on the US.  Just as for the White House, there is no upside in delay for the Democrats.

Why President Trump will close the border with Mexico

President Trump has once again threatened to close the border with Mexico.  Such threats have proved unfounded to date, but this time will be different.

The omnibus spending legislation passed in mid-February has gutted border control by preventing the government from detaining adults traveling with children for more than three days.  This has precipitated an entirely foreseeable crisis.  As Jessica Vaughan of the Center for Immigration Studies tweeted: “ICE may not remove any sponsor or *potential sponsor* or *member of a household* of a UAC [unaccompanied minor].  That's de facto sanctuary for anyone near a UAC.  Ridiculous.”  But true, unleashing the all too predictable torrent of illegal immigration.

We have forecast the pace of border apprehensions to continue to rise, both quickly and materially.  Various polls by Gallup and Pew Research have found that about one-third of all Latin Americans would like to move to the US.  Applied to the 30 million people of the Northern Triangle countries, up to 10 million of their citizens could come to the US.  Indeed, one study categorizes 50% of Hondurans as living in 'extreme poverty'.  That's 5 million people in Honduras alone with ample motivation to come to the US.

Now, not all those with a stated desire to leave would, and not all at the same time.  Nevertheless, one to two million could likely be induced to move, notably as current US asylum law probably represents a once in a lifetime opportunity to emigrate to the US.  As migrants are well aware that the opportunity is certainly fleeting, most will come in the next few months.   

This in turn is creating a surge of illegal immigration, rising from 48,000 in January, to 66,000 in February, and to 100,000 expected for March.  By mid-summer, another 500,000 could claim asylum in the US.  

What should the Trump administration do?

Doing nothing is always the most under-appreciated option.  Trump could wait for the situation to deteriorate so badly that a public outcry forces Congress to act.  On the other hand, the outcry could be directed at the President rather than Congress.  Moreover, the timing of public reaction is unpredictable, even as 100,000 or more migrants pour over the border every month.  Most of those claiming asylum will ultimately remain in the US, legally or illegally.  Therefore, delay amounts to expanding the permanent undocumented population.  Even worse, US asylum law is so perverse that half of those entering are minors, each of whom will cost taxpayers an average of $15,000 / year.   While the President might delay a response for a few weeks, there seems little benefit in waiting and more reason to act now.

But what steps should the President take?  

He can withhold foreign aid to the Northern Triangle countries, but this hardly makes those countries more desirable places to stay or provides additional resources to local governments to stem the outward flow. 

Perhaps Customs and Border Patrol can marginally change the way illegal immigrants are handled, but that is certainly not evident yet.  

That leaves the Mexican border.  Closing the border will not prevent migrants from entering illegally and claiming asylum.  Nor is the border crisis of Mexico’s making – although Mexico can certainly try harder to prevent migrants from crossing that country.  

Instead, the real intended audience for closing the border is the US Congress.  Closing the border is the equivalent of shutting down the government, just in a different venue.  It escalates the crisis, putting the onus back on the Congress to provide the administration the tools to properly control the tsunami of illegal immigration.  In political terms, this is a kamikaze tactic, but what other option does the President have?  

Congress would be well advised to act preemptively.  Democrats have no surer way to lose moderate districts than to be seen as the purveyors of chaos, lawlessness and impotence.  They would be far better served by reiterating their support for the humane treatment of migrants, but acknowledging that the bar has been set too low and that standards needs tightening.  

In the meanwhile, if you have a hankering for Mexican food, best indulge it this week.  And if you are in the business of trading with Mexico, you might want to call House Speaker Pelosi’s office and tell her to fix the colossal mess the Democrats have made at the border.

Socialists rebuked, Trump on track to lose, immigration window slamming shut

The hard left of the Democratic party had a miserable few days last week.  It could be a harbinger of worse to come.

Alexandria Ocasio-Cortez and other party socialists were slammed in a procedural vote on the Green New Deal in the Senate.  The vote failed, 57-0, with 43 Democrats voting 'present'.  While Democrats decried the vote as a sham and a political stunt, the impression is nevertheless left that the Democrats will tack to the center and the hard left will be marginalized.

Polling data support this view.  According to a Monmouth University poll, "a majority of 56% [of Democrats] prefer someone who would be a strong candidate against Trump even if they disagree with that candidate on most issues.  Just 33% say they would prefer a nominee who they are aligned with on the issues even if that person would have a hard time beating Trump.  Democratic women (61%) are more likely than men (45%) to say they would put their policy positions aside in order to get a nominee who could beat Trump."  Women played a pivotal role in last November's elections.

The numbers are in line with our expectations.  We have stated that the effects of the 2008 economic depression were on the decline after mid-2017, with more traditional median voter tendencies beginning to re-appear, just as we saw in last November's elections.  The Senate GND vote and polling results suggest that moderate forces in the Democratic Party are beginning to gain the upper hand.  AOC and the radical left is poised to lose.      

This is bad news for President Trump.  

Trump's approval ratings are below every post-war president except Carter at this point in their term, and no sitting president has ever been re-elected at the President's current approval levels.  Nor has he received a bump in popularity from the release of the findings of the Mueller report.  Rather, Trump's approval ratings are both steady and consistent with those of presidents during recessions—at a time when the economy is still strong.  And that may not last.  The odds of a pending recession look reasonably high, with yield curve inversion observed last week, generally a leading indicator for recession by 12-18 months -- right into the teeth of the 2020 election season.  

Consequently, on the current trajectory, the Democratic center looks likely to hold and unless the economy remains resilient and the President improves his approval rating to 50% vs 42% currently, history suggests the President will lose in 2020.  Indeed, a Fox News poll sees Joe Biden winning by 7 pp points over Trump.  Bernie Sanders, second in the polls, would beat Trump by 4 pp.  

For fiscal and social conservatives interested in meaningful immigration reform, this is well nigh a disaster.  Ordinarily, US presidents are re-elected if they have done a reasonable job.  Assuming Biden wins the 2020 election, his re-election would typically be expected.  This means a Democratic White House would control immigration policy until 2029.  This matters because time is ticking on undocumented immigrants.  According to Pew Research, in 2016 approximately 7 million undocumented immigrants had resided in the US at least 10 years.  By 2029, most of those immigrants will have been in the US more than 25 years.  Their claim on amnesty and citizenship gains every day they remain in the country.  If the Democrats are to hold the White House until 2029, then at some point, the balance of public opinion will swing in the favor of a broad scale amnesty -- a Republican and Democratic Congressman from New York suggested just such a proposal last week.  Conservatives are likely to walk away with vague promises of enhanced border enforcement, but in practice will cede a large scale amnesty for very little in return.

This leaves the balance of 2019 for Republican immigration initiatives, as 2020 will most likely be consumed with election campaigning.  A proposal likes ours -- perhaps the only major initiative with any hopes of raising the President's popularity ratings -- requires many months of preparation.  As a practical matter, if the White House has not expressed an interest in the approach by Easter, it will be off the table for a decade, and the President may well have to do with the approval ratings he has carried for the last two years.  These are unlikely to win the day in 2020.

Border Apprehensions in 2019 could well exceed 1 million

Last week, the Washington Post took the President Trump to task, claiming he exaggerated when he stated that, "We’re on track for a million illegal aliens to rush our borders.”

In fact, it could be worse.  A lot worse.

*****

Last Monday, the 18th, DHS Secretary Kirstjen Nielsen stated that March southwest border apprehensions would approach 100,000 persons.  This is well ahead of our forecast of 82,500, but given that Secretary Nielsen's speech was made more than halfway through the month, the 100,000 apprehensions mark is likely to stick.

The graph below shows apprehensions including the presumed 100,000 March value, with the tan baseline representing the comparable, 'business as usual" numbers based on 2018 before apprehensions started accelerating last August.  It is quite a scary graph.

Appre March Potential.png

Since the beginning of 2019, apprehensions have been increasing by 20,000 / month.  The situation is likely to deteriorate further.  The graph below extrapolates 2019 based on the first three months' trend.  (For our friends in the press, this is a scenario, not a forecast.)  This would deliver calendar year apprehensions of just under 2.0 million, eclipsing the all-time high of 1.6 million attained during the dot.com boom in CY 2000.

Appre Trend.png

Is this at all possible?  The relevant countries -- Guatemala, El Salvador and Honduras -- have a combined population of approximately 30 million, so on paper at least, there is plenty of migrant firepower for months to come.  The reality is this: The numbers clearly show that the word is out that the US border is open and unprotected, and that anyone who can muster a child will be granted free entry into the US.  Unlike the US Congress, migrants may be poor and uneducated, but they are not stupid.  They clearly understand that the current system will not last, and that uncontrolled crossings will sooner, rather than later, lead to a political crisis in the US which will sharply curtail asylum rights.  For Northern Triangle migrants, therefore, it is do-or-die time.  Many will seize the opportunity. Consequently, we should expect apprehensions to accelerate into the summer months, and if nothing is done, into the fall, until all those with a desire to migrate to the US have actually done so.  High-end projections for the next few months therefore look all too plausible.

Our political expectations are unchanged.  By mid-July at the latest, the US will be facing a full-blown political crisis over soaring apprehension rates, and the Democrats will ultimately agree to limits on asylum rights.  The question is how much political damage they will incur in the interim.  The moderate Republican seats which the Democrats won in November will be at stake.

Human and Drug Smuggling Trends under Trump

Historically, two major types of 'contraband' come over the unsecured southwest border: economic migrants and marijuana. Any initiative predicated on closing the border using a market mechanism -- including ours -- has to deal with both people and drugs.

As luck would have it, cannabis legalization is crushing the marijuana smuggling business. Seizures of marijuana by Border Patrol over the unsecured border in 2019 will have dropped by 80% -- 80%! -- since the start of the Trump administration. This year, marijuana seizures will stand at only 5% of their 2009 high. That's incredible progress, and exactly the effect we're looking to achieve using an analogous legalize-and-tax system for economic migrants.

Smuggling Trends.png

But is it enough?  As the graph above shows, although marijuana seizures have plummeted, both border apprehensions and hard drug seizures will be nearly double the level of the last years of the Obama administration.  Even if legalization ends marijuana and human smuggling, wouldn't hard drug smuggling continue?  

By and large, no.

Legalizing and taxing a prohibited item reduces related black market activity by 95% historically.  Thus, border apprehensions per our model would fall from about 2,000 / day at present to 150 / day in a market-based system.  This small band of residual border jumpers would face off against 26,000 Border Patrol agents, a laugh-out-loud ratio of 100 agents to every illegal crosser (on a daily basis at least).  Smuggling hard drugs is not easy with those kind of odds.

Nor have hard drugs historically come across the open border.  If apprehension rates of border jumpers are 55-70%, as we have discussed earlier, then smugglers would presumably lose that percentage of their contraband.  By contrast, we estimate the interdiction rate of hard drugs at official crossing points in the range of 4%.  That's why 85% of hard drugs come through official crossing points, not over the unsecured border.  With a 95% reduction in illegal border crossings, virtually all of the hard drug smuggling trade will be driven to official crossing points.

The legalization of marijuana demonstrates that we can close the southwest border using a market mechanism.  We can end illegal immigration the same way.

The Impact of New York City Minimum Wages on Professional and Business Services Employment

In addition to job losses in the restaurant sector, minimum wage hikes in New York City may also have claimed 36,000 jobs in professional and business (P&B) services.

P&B services cover essentially everything that might ordinarily happen in the private sector in an office building: management, HR, financial services, office administration, information technology, consulting, legal and professional services, and building related services like security and custodial care.

Historically, the pace of P&B employment increases with a slight exponential curve during the business cycle, that is, the rate of hires gradually increases as the economy continues to grow.

Source: FRED (SMU36935616000000001SA)

Source: FRED (SMU36935616000000001SA)

In fact, the growth of employee numbers can be fitted with a very nice exponential curve. On the graph below, we can see a curve fitted to the data from January 2010 to October 2015. The curve carries an R2 of .9965, which is a better fit than a straight line and falls very, very close to the actual data. Doing so, however, shows that employment growth deviates from trend beginning in October 2016, about three quarters of a year after the minimum wage is raised to $10.50 / hour.

And the gap continues to grow as the minimum wage moves up to $13 / hour, which effectively terminates growth in P&B employment after mid-2018. Keep in mind that this includes all P&B employment — investment bankers, lawyers, consultants, hedge fund managers and other highly paid professionals — not just minimum wage P&B employment. The implication: At $13 / hour, the minimum wage is capable of stopping growth in professional and business services employment altogether.

Source: FRED, various for Minimum Wage

Source: FRED, various for Minimum Wage

We can compare predicted to actual employment in order to estimate the impact of minimum wage hikes on P&B headcount. As the graph below shows, a 2010-2015 trend line shows no job losses until the fourth quarter of 2016, about 6,300 for that year. The losses grow in 2017, adding another 8,100. The wage rise to $13 / hour seems to do the real damage though, with job losses in 2018 (including Jan. 2019) at just below 22,000. Add it all together, and New York City professional and business job losses — those we would have expected to see less those actually attained — total 36,000 from the point that the minimum wage was raised to $10.50 / hour through Jan. 2019.

Source: FRED

Source: FRED

These losses are large enough to be visible on a graph without the aid of statistics, and they are large enough to stop growth of professional and business services entirely. Further, the job losses seem to occur with a lag, six to nine months after a given minimum wage increase. If this is the case, then P&B employment may continue to unwind in 2019 and see a difficult stretch in the first half of 2020.

The Devastating Impact of New York's Minimum Wage on its Restaurant Sector

A survey of the effects of minimum wage increases on the New York City restaurant scene, prepared by the NYC Hospitality Alliance, has prompted a sharp debate at the popular economics blog, Econbrowser.

Menzie Chinn, Professor of Economics at the University of Wisconsin and the chief poster at the blog, thinks New York City’s stiff minimum wage hikes have had no effect on restaurant employment. We disagree. Wage hikes have set the full service restaurant industry back by more than any recession has in the last quarter century.

The Data Sources

The NYC Labor Market Information Service (NYCLMIS) provides labor market analysis for the New York public workforce system. One of their reports describes the New York restaurant business, including employment levels. These correspond to employment figures given by

  • Industry Groups: Full-Service Restaurants (NAICS 7221), or SMU36935617072251101SA in the code used by the US Federal Reserve database, FRED, and

  • Limited-Service Eating Places (NAICS 7222) , or SMU36935617072259001SA in the code used by the US Federal Reserve database, FRED.

We use these numbers in our analysis below.

Restaurants and Employment

Restaurants have been a growth business in New York City — predominantly Manhattan — for a very long time. Employment in the sector has more than doubled since 2000, rising from 132,000 to 278,300 in late 2017. By contrast, New York City’s population has grown less than 8% during that period. As incomes increase, a greater share of New Yorkers’ budgets has been devoted to eating out.

Rest Emp.png

All is not well, however, in the restaurant business. New York government’s decision to raise the minimum wage to $15 / hour by steps has eviscerated the full service restaurant sector.

From the end of the Great Recession in 2009 until mid-2015, the full service restaurant sector added approximately 8,600 jobs per year. The increase of the minimum wage to $10.50 / hour in 2016, however, slowed growth to 4,300 per year.

When the minimum range was raised to $13 / hour from the beginning of 2018, the full service sector cratered, with employment falling by 8,000 (-4.6%) from its November 2017 high through January of this year. By contrast, the full service restaurant sector lost only 2,700 jobs (-2.4%) during the Great Recession. Put another way, the effect of raising the minimum wage in 2018 was twice as bad as the harm incurred in the biggest economic downturn since the Great Depression.

The cost is greater than just the jobs losses, however. Under normal circumstances, we would have expected the full service sector to grow by 6,000 - 8,600 jobs in 2018, which was the strongest year for the economy in quite some time. Consequently, these forgone jobs have to be added to the total. In all, an increased minimum wage can be credited with the loss of up to 16,000 jobs in the full service restaurant sector from late 2017 through January of this year. That’s two-thirds of the total employment Amazon promised to New York City over a number of years.

NY Restaurant Employment.png

Interestingly, the limited service restaurant sector, including establishments like McDonald’s and Chipotle, has not been hit as hard. This is not altogether surprising. With wage hikes raising meal prices, some customers have no doubt moved down-market, from full service to a limited service restaurants. As a result, sales losses to full service establishments may have resulted in sales gains to limited service eateries.

Further, many limited service restaurants are already staffed lean. A typical Subway sandwich restaurant, for example, may have only two or three counter employees, hard to reduce and still retain a reputation for ‘fast food’. As a consequence, limited service restaurant employment fell for only two months, in late 2017, and actually grew during 2018. Notwithstanding, growth was less than the historical average. We estimate that the limited service sector grew by 2,600 fewer employees than expected.

The impact on the fast food sector may be longer in coming, but ultimately more profound. If restaurant chains determine their business model does not work at a high minimum wage, they may eventually exit certain locations in the city altogether.

Taken together, New York’s $13 / hour minimum wage has cost approximately 16,000 - 19,000 jobs in New York City’s restaurant sector since November 2017. This, of course, excludes reductions in hours and restructurings of pay packages.

Nor is the outlook brighter. With a $15 / hour minimum wage in effect from the beginning of the year, the New York City restaurant sector can look forward to a grueling 2019.

Three Ways to End Illegal Immigration

Migrant labor constitutes a black market: Central Americans want to sell their labor to US employers; the US government is trying to stop it. This conflict creates a black market in labor.  Whether in alcohol, gambling or migrant labor, there are three approaches to try to beat a black market.

Suppress Supply

Without fail, governments try to suppress black markets by focusing on supply, arresting drug dealers or detaining hotel maids and berry pickers attempting to sneak across the US border.  Supply suppression is used because it externalizes the problem -- it's the Mexicans' fault! -- and there is nothing more politically expedient than blaming someone else.

Supply suppression has never worked, because enforcement provides the incentive for its own undoing.  When supply is suppressed, prices go up and competition goes down.  For example, on the coastal areas of the Carolinas, restaurants are so short on labor that they are both cutting hours and increasing wages, up to $16 / hour for unskilled labor.  That's 16 times the Honduran wage, the equivalent of paying an American $500,000 to wash dishes in Acapulco.  Would there be any shortage of takers, even if they had to cross the border illegally?

Nevertheless, prohibitions are as politically stable as they are socially destructive--because whatever bad is happening can be billed as someone else's fault.  

Suppress Demand

Note to conservatives: Suppressing demand actually works.  It worked for hard drugs in Japan and Singapore.  And for undocumented labor in Arizona.  Arizona brought in tough anti-illegal labor laws in 2007 and reduced their undocumented population by half.  Not only that, they have kept the numbers down.  How?  By closing businesses that use undocumented labor.  

But is it a good idea?  Unlike alcohol -- which was banned during Prohibition -- migrants actually add to GDP.  Alcohol today is the third leading cause of preventable death in the US and leads to a loss of $250 bn / year of GDP.  By contrast, undocumented migrants directly add $200 bn of GDP in their wages alone and nearly $500 bn in enabled economic activity.  

So how did Arizona's enforced prohibition on migrant labor work out?  In terms of employment, it's a train wreck.

Back in 2007, Arizona had the 16th best unemployment rate among the states.  Today, it's in 45th place -- even worse than perennial laggard Mississippi, for example.  In fact, Arizona has the second worse relative record (change in rank) of all the states since 2007.  Moreover, six of the seven states which enacted restrictive laws regarding use of undocumented labor have seen their relative rank, in terms of unemployment rate, deteriorate compared to the other states.

Unemployment rank.png

Only South Carolina has bucked the trend, and indeed, done so spectacularly, with the most improved unemployment rate since 2007 in the country.  But look for enforcement there, and one finds less than enthusiasm: Only 2 percent of businesses in South Carolina were audited in 2017, and 17 percent of that sample were found not to be using the system. None of the scofflaws, however, were fined. 

Google can find no mention of the respective South Carolina law in the press in the last five years.  Indeed, the only story which turns up is a Republican-backed initiative to provide in-state tuition for long-time South Carolina undocumented residents.  So much for conservative resolve.

If conservatives want to take a principled, hard line stance against illegal immigration, then they need to take a hard line against employers using that labor.  Conservatives like Dan Bognino or Chris Buskirk should call to shut down meat and poultry processing, much of the dairy business, virtually all US fruit and vegetable production, and half of construction.  We import our TVs, why not our meat, fruit and dairy?  If you're a conservative -- and you really believe that migrant labor is bad -- then you should go after the employers.  Arizona -- and the history of black markets otherwise -- show that it can work.

But it's not free, neither in terms of the economy or national politics.

Legalize and Tax

Once again, the standard prescription for a black market is to legalize and tax it, as we did with alcohol, gambling and now, marijuana.  It does not make all the problems go away -- alcohol is still a huge health issue -- but it eliminates the related black market pathology, which is inevitably far worse than the contraband item itself.

Although a legalized system will not end all the problems associated with poor, unskilled Latin American migrants, it can vastly reduce their impact.  For example, a market-based system can greatly reduce the number of dependents and effectively end birth tourism (for non-tourist migrants) -- these two items represent the major fiscal burdens of illegals today.  And such a system can ensure the US is properly compensated for providing labor market access, instead of being grossly under-compensated as it is today in the current H-2A visa system.  

A legalized, market-based system is unambiguously the right approach, and one which could help the Trump administration score some much needed points.

*****

If you want to end illegal immigration, there are three ways to do it: suppress supply, suppress demand or legalize and tax the activity.  Suppressing supply, by building a wall for example, is politically attractive but will inevitably result in policy failure.  Suppressing demand by shutting down employers will work, but it is not cheap in either financial or political capital.  And finally, black markets can be finished by legalizing and taxing the activity.  While such an approach will not solve every problem, it will solve most major issues and close the matter from the electorate's perspective, just as we note in our white paper.

The Southwest Border is Open and Unprotected

Apprehensions data from US Customs and Border Patrol speak to a rapid increase in attempts to cross the US southwest border illegally.

But more than that, they speak to distinct trends by migrant type. Adults apprehended by themselves have increased only 20% over the last year--in line with expectations given the strength of the economy. Unaccompanied minors have increased sharply, +54% over the first five months of FY 2018. Most critically, the number of families apprehended has skyrocketed, up an astounding 338% in a single year.

Appre trends.png

The differences among categories cannot be explained by either the strength of the US economy or safety concerns in the migrants' home countries. Rather, the data speak to the wholesale collapse of immigration control for minors traveling alone and, especially, for adults traveling with children. With Judge Sabraw's ruling in last June preventing the separation of minors from their parents and the recent omnibus bill cutting funding for detention beds, migrants can enter the US on demand if accompanied by a child--and they know it. They are taking advantage of the opportunity, with the rate of apprehensions of family units rising since last summer by almost 3,000 / month, and nearly 4,000 / month in total if unaccompanied minors and single adults are included.

By any measure, this constitutes the collapse of immigration control at the southwest border, and the numbers could -- and most likely will -- deteriorate further. The Washington Post writes: "The number of migrants taken into custody last year jumped 39 percent from February to March, and a similar increase this month would push levels to 100,000 detentions or more." This seems like hyperbole -- our forecast for March apprehensions is already absurdly high at 82,500 -- but it is not inconceivable. Migrants will surely believe the opening will not last and therefore will make every effort to enter the US before Congress and the administration can act. This in turn could drive a major increase in monthly crossing attempts heading into the summer. In this context, the Washington Post forecast may well prove accurate.

Oddly, neither the Congress nor the President seem to be focusing on the issue. The President continues to call for a border wall, when in fact a wall would have no impact on families presenting themselves for arrest by Border Patrol and subsequently claiming asylum.  Meanwhile, Democrats’ imagination appears limited to haranguing DHS Secretary Nielsen about whether fenced detention areas constitute 'cages' that are somehow inferior to walled or barred jail cells.  Democrats’ ire appears to be directed principally at the detentions of 245 children the New York Times identifies as having been removed from their families since the court ordered the government to halt routine separations under last spring’s “zero tolerance” border enforcement policy.  This constitutes 0.2% of those apprehended in family units during the period in question.

All this misses the point. Immigration control over the southwest border has collapsed, and the US is being overrun principally by economic migrants abusing US asylum law. This will be apparent to the US public -- Republican and Democratic voters alike -- by July. President Trump is correct in deeming this a 'national emergency', but it is not related to the wall, but to a catastrophic failure of US asylum policy. To restore order, the US has a handful of options, but the gist has to be preventing migrants from entering the US interior before their asylum claims can be adjudicated. This should be the focus of the President's efforts. Meanwhile, the Democrats should understand that just now the President is looking like a genius for highlighting the perils of illegal immigration and that the voters will likely -- and justifiably -- blame the Democrats for this rapidly evolving fiasco.

February Border Apprehensions: At Crisis Levels

In February, Border Patrol apprehended 66,450 persons attempting to cross the unsecured border between official crossing points. This was an increase of 18,557 (+39%) over the previous month and 39,784, a whopping 150%, over the same month last year.

We have updated our annual forecast for apprehensions for calendar year 2019, which stood at 606,000 as of last week. Based on the first two months of the year, our 2019 calendar year forecast is raised to 841,000. This would be the highest since 2006, almost double last year's level, and more than three times the number of apprehensions in 2017.

Feb appreh.png

The sudden increase in crossing is driven entirely by a surge in family units. While there a jobs aplenty in the US, current legislation and judicial rulings have created a highly permissive environment for migrants from the Northern Triangle countries traveling with children. As a result, the rush is on, and month after month, more and more family units are attempting to cross the border and claiming asylum if they are caught.

Feb families.png

Crossings are now clearly at crisis levels, and the pressure will be on Democrats in Congress to tighten asylum laws if they intend to hold the House in 2020. I would note that migrants are also certainly aware of this, and therefore apprehension numbers could rise substantially heading into the summer months as migrants rush to cross the border before new legislation can be prepared. My advice to Nancy Pelosi would be to block out some time over the weekend and have a bill ready on Monday morning. This doesn't get better, and very likely could get a lot worse, with the Democrats rightly blamed for this fiasco.

Turning to February inadmissibles: These numbers remain elevated, but nothing too out of the ordinary.

Feb inad.png