How Trump can end illegal immigration now -- without a wall

This piece was orginally published by CNBC on Jan. 26, 2017

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During his presidential campaign, Donald Trump promised not only to 'build a wall' to seal the southern U.S. border, but to make Mexico pay for it, at a cost of some $10 billion to $38 billion. Mexico on Thursday reiterated it's refusal to foot the bill.

Yet, a market-based immigration policy allowing Central Americans who passed a background check to purchase work visas at market rates (instead of paying thousands to human smugglers) could generate revenues for the federal government in excess of $40 billion, or more than enough to pay for that wall. You can read the details in an earlier article I wrote for CNBC.

But here's the best part: With a market-based visa system, President Trump could materially end illegal immigration within a month or two, even without a wall. Here's how it would work.

Illegal immigration is a variety of black market. Black markets always arise as the direct result of government policy, when governments either cap prices or restrict volumes. For example, during Super Storm Sandy, a number of East Coast governors put price caps on scarce gasoline, creating a black market within a matter of hours.

Young men with gasoline cans would stand in line at gas stations and wait their turn. As soon as they filled up, they would walk around the corner and sell the gasoline to motorists at a 200 percent profit. When governments allowed market prices to prevail again, black market activity disappeared just as fast. The black market existed only because of government policy.

In the case of immigration, the sorry truth is that the government provides only about one third as many visas as needed by U.S. businesses, primarily in agriculture and construction, even as these businesses are unable to find Americans to fill these jobs.

President Trump argues that Americans want 'good jobs'.  Well, illegal immigrants do not get 'good jobs'. They are taking the jobs no one else wants. This includes almost anything outdoors (not involving a football), for example picking fruits and vegetables, dairy and other agriculture, construction, lawn work, and indoors, house cleaning. Most of these jobs pay around the minimum wage, and often involve travel and difficult working conditions. Very few Americans aspire to these jobs anymore—that's how we know we're a rich country.

"The system does not have to be perfect. As long as Central Americans can buy visas at will and U.S. employers can obtain low-end labor on demand—even if it may be a bit costly at some times—both Mexicans and the U.S. businesses sectors would have an incentive to use the system."

But the need for labor hasn't gone away. Indeed, about half of the farm workers in California are undocumented. Illegals are not a nice-to-have, they are an essential component of the agricultural business model in the U.S.

Now, Mexicans have no love manual outdoor labor, either. But the reality is that US farm work pays about four times as much as those Mexicans could make in Mexico. If lawyers or investment bankers in New York could earn four times their wage picking strawberries in Guadalajara, there would be no shortage of recruits.

The black market in labor therefore exists because certain businesses in the U.S. are desperate for low-end labor and because unskilled Mexican workers can earn multiplies of their income by coming to the U.S. The U.S. government has, for decades, actively tried to prevent these two sides from coming together by enforcing the border. After all, if the border were open, conservatives argue, we would be inundated with Mexicans. And that's absolutely true.

However, if we issued an appropriate number of visas, then we would cover domestic needs and Mexicans would no longer have an incentive to jump the border. We could do that by selling visas at market rates to eligible Mexicans and other Central Americans and monitoring the prices of visas and field wages to get the number more or less right.

The system does not have to be perfect. As long as Central Americans can buy visas at will and U.S. employers can obtain low-end labor on demand—even if it may be a bit costly at some times—both Mexicans and the U.S. businesses sectors would have an incentive to use the system.

This would eliminate the need to jump the border. The decision to come to the U.S. would come down to economics. An eligible Mexican could go online—in Mexico—and check available U.S. jobs and the cost of a visa. If the numbers work, they could apply for the job and buy a visa. If not, they stay home.

If entering the U.S. legally is easy—as long as the applicant has passed a background check and has the money to pay for the visa—then virtually every Central American migrant will be using a visa. Why risk your life in the desert if you can pay a fee and hop on a bus? It is the ease of complying with the law—not enforcement—which guarantees compliance. But once compliance is universal, companies will not hire workers who fail to comply. If employers can obtain documented labor, they will avoid illegals.

Undocumented immigrants will find their situation untenable. Not only will employers will shun them, President Trump can declare that any immigrant caught crossing the border illegally will be ineligible to purchase a visa in the future. Border jumping will be quickly transformed into the single worst way to enter the U.S.

If legal entry for a fee is easy and border jumping disqualifies an applicant from the legal labor market, then illegal entry by economic migrants will all but cease. A wall will not be necessary. To make it all happen, Trump needs only signal his credible support for a fee-based visa system and tweet that crossing illegally will disqualify an applicant from obtaining a visa. If Mexicans believe a reasonable market-based visa system is coming in relatively short order, many will defer a difficult, risky and illegal desert crossing. It's that simple.

Many Americans regard President Trump with a mixture of hope and fear. If the President chooses to focus on making deals, on applying business principles to policy problems, he could be a great success. He has the flexibility to look at programs in terms beyond the sterile left-right vocabulary which has ossified the Washington political class.

Want to work in my backyard? You've got to pay an entry fee. Any businessman could understand that. So can any immigrant. A market-based visa program could generate $33 bn in net revenues, and create value for U.S. business, migrant labor and social conservatives at the same time. It could be a spectacular win for the Trump administration.

Forget Mexico -- Here's who should pay for the Wall

The piece was orginally published by CNBC on Jan. 25, 2017

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During his presidential campaign, Donald Trump promised not only to 'build a wall' to seal the southern US border, but to make Mexico pay for it. Mexico has demurred for now, and in the meantime, the President-elect has instructed Congress to find the funds to build the wall, estimated to cost $10-38 billion.

Nevertheless, a better source of funding is available: the illegal immigrants themselves.

Most undocumented immigrants come to the U.S. to work, and for a simple reason. Wages are higher here. Farm work in the U.S. typically pays $10-12 per hour, while a gardener in Mexico might earn $2-3 per hour, only a quarter of U.S. wages. The differential is even higher in places like Guatemala or Nicaragua, which are substantially poorer than Mexico. For a Guatemalan border jumper, the pay differential can be a factor of 10 or more. That serves as an enormous inducement to come to the U.S.

We can value the size of the inducement through the price of an illegal border crossing. Havoscope, a group tracking black market prices, estimates that human smugglers charge $4,000 to bring a Mexican to the U.S. and $7,000 for a Guatemalan. This corresponds to anecdotal evidence, for example, from a 2010 VOA article:

One [undocumented immigrant] says he paid a Mexican smuggler two thousand dollars to transport him across the U.S.- Mexico border. He walked across the desert for eight nights and slept by day before making his way to Virginia.

If we allow this worker traveled for two weeks to reach his U.S. destination, and that his daily value in the U.S. is about $100, then his total travel cost exceeded $3,000. Crossing the border has substantial value.

We can compare the cost of border crossings with Federal tax revenues actually received from undocumented immigrants. According to the PEW Research Center, about 11 million undocumented aliens reside in the U.S., of which 8 million are in the workforce. A study by the Federation for American Immigration Reform (FAIR) calculates that undocumented workers in 2010 generated approximately $5.3 billion in Federal tax revenues, excluding Medicare contributions.

Thus, the average undocumented working immigrant generated less than $700 per year in Federal revenue. At the same time, the typical immigrant works 60 hours per week and earns perhaps $28,000 per year. Do the math, and the effective Federal tax rate for undocumented immigrants is 2.5 percent.

The current system –and we do have a current system—is the cause. Today, the system works like this. An undocumented immigrant with an appetite for risk tries to jump the border. If he succeeds, he gets a free pass in the U.S. Employers will not require documentation because they desperately need the help.

Municipalities do not ask for papers, because Mexicans are backbones of the service economy in places like New Jersey and California, and because mayors fear that driving illegals underground just creates more crime. Consequently, many Americans today accept a de facto system which holds that, if a Mexican can get over the border, he can live and work in the U.S. without paying taxes, as long as he keeps his nose clean. The unfortunate implication is, however, that almost all the taxable value of illegal immigrants is lost at the border.

If the border were treated not as a fence, but as a gate, then we might expect undocumented immigrants to be willing to pay to the U.S. government that which they otherwise would pay to human smugglers and lose in travel time, that is, about $4,000 per year in visa fees and related taxes. If all undocumented workers did so, Federal revenues would increase by $33 billion. Even so, this would constitute an effective tax rate of only 14 percent for the typical working immigrant.

And government revenues could be higher still. The lack of legality has many hidden costs. For example, an illegal immigrant could be robbed or die in the desert. They may fail at entering the U.S. and have to try again. They may be cheated out of wages by U.S. employers. They may become sick without coverage.

They can be deported at any time, or may be unable to return to see their families for long stretches. Conducting daily business—opening bank accounts, obtaining a mobile phone, renting an apartment—is a challenge. Further, a lack of papers disqualifies immigrants from higher value-added jobs in management or the trades. Valuing the benefits of legality is inherently tricky, but it is probably worth $2,000-$4,000 per year per worker beyond the value of actual border crossing itself.

Thus, undocumented immigrants might be willing to pay $6,000-$8,000 in visa fees and taxes per year if they could enter the U.S. on short notice at will. Even at the higher end, the effective tax rate would only average around 30 percent. Put it all together, and the Federal government is probably leaving revenues in excess of $40 billion on the table every year.

And that's not all. Dealing with illegal immigrants is actually quite expensive. FAIR estimated the annual cost in 2010, excluding healthcare expenditures, at $22 billion. Much of it is spent on enforcement at the border. If Mexican immigrants with clean criminal records could enter at will for a fee, then the entire need for a wall disappears.

Our analysis suggests that Federal outlays could therefore be reduced, perhaps by as much as $10 billion per year. Thus, the total swing in the Federal budget could be as much as $50 billion per year. That's a lot, enough not only to pay for the wall, but with a good bit left over to make a dent on Obamacare reforms.

Many Americans are understandably fed up with illegal immigration. We can try to solve it with a wall and deportation. Nevertheless, this has many downsides, including the potential collapse of the U.S. agricultural sector; the risk of shutting seasonal workers in the U.S., rather than shutting them out; spending vast sums on an initiative which proves no more successful than the war on drugs; and precipitating extraordinary social tensions at a time when illegal immigration is not the only priority on the Trump administration's plate.

Alternatively, we can consider a market-based approach which not only addresses most of the concerns about illegal immigration, but generates substantial funds for the U.S. government. There is a better way.

Rise of Illegal Immigration was all in the forecast

The story was originally published in The Hill on January 19, 2018.

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The last few weeks have seen dueling headlines on illegal immigration. On Dec. 5, Forbes posted an article entitled “U.S. Border Patrol Reports Illegal Border Crossings At Record Low.” In it, the U.S. Customs and Border Protection (CBP) reported that “[i]n FY17, CBP recorded the lowest level of illegal cross-border migration on record, as measured by apprehensions along the border and inadmissible encounters at U.S. ports of entry.”

Victory, then? Can we relax, finally having defeated those pesky border jumpers?

Not so fast. Last week, the Washington Times  argued just the opposite:

The gains President Trump made early in his tenure have worn off. Nearly 40,000 illegal immigrants were nabbed attempting to sneak in at the border in November, which was up about 12 percent compared to October, and more than twice the monthly numbers from March and April, when Mr. Trump touted his early accomplishments.

Perhaps just as worrisome for officials is the rise in families traveling together, which surged 45 percent last month, and unaccompanied minors traveling without parents, which rose 26 percent in November.

What is going on? Are we being misled?

In fact, both news stories are factually correct. The Forbes article refers to fiscal year 2017, which ended in September. The annual data were heavily influenced by the few months immediately after President Trump took power, bringing the annual average down.

On the other hand, illegal immigration — as measured by apprehensions and inadmissibles — has been rising steadily since April. Just as the Washington Examiner notes, interdictions at the southwest border are now back at Obama era levels. Their data, however, refer to fiscal year 2018, while the Forbes data pertain to the earlier fiscal year. Both are true, but the Washington Times’ take is the one which rightly reflects the current state of affairs.

The numbers come as no surprise. The data are right in line with forecasts I made previously:

Expect a banner year for illegal immigration in 2018. With the ebbing of the Trump effect, crossings should return to typical norms, representing about 30,000 arrests per month. To that, add the crossers who deferred this year and will probably make an attempt next year, another 10,000 per month. These two factors alone would more than double the apprehension rates of 2017. 

As I note in my article, illegal immigration is likely to continue to rise. This is mostly good news, in the sense that illegal immigrants come for the work. As such, the rate of illegal immigration is a measure of the strength of the U.S. economy — and right now it’s quite strong. We expect the economy to be stronger still in 2018. Add to that the residual clean-up and reconstruction work from the fall’s hurricanes and the recent California fires, and illegal immigration will come in big in 2018. By the time the numbers settle, we may see the highest number of illegal crossings in a decade.

Expect the statistics to also record the greatest number of deaths in the desert in a long time. Enhanced enforcement coupled with a strong incentive to jump the border means that illegals will be taking ever bigger risks to get into the U.S., and they will increasingly die trying.

U.S. immigration policy remains dysfunctional, and next year we will see the worst of both worlds, both a surge in illegal immigration and a historically high percent of crossers dying in the attempt — perhaps the highest on record.

We can do better than that.

Expect Illegal Immigration Across the Mexican Border to Double Next Year

This piece was originally published in The Hill on October 27, 2017.

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President Trump has promised to reduce illegal immigration to the United States. More likely, however, 2018 will see one of the biggest waves of illegals from Central America since the start of the Great Recession.

The number of undocumented border crossings, which are unknown, can be inferred from arrest rates, which are well documented. Therefore, discussions of border jumping inevitably focus on apprehension rates, and we do here as well.

A new study by the Department of Homeland Security puts the border patrol’s interdiction rate at the Mexican border in the 55-80 percent range. The same study notes that smuggler fees to “coyotes,” who help migrants avoid the border patrol, appear to have increased by more than half since 2011, suggesting that law enforcement has indeed tightened.

On the other hand, arrests have remained range-bound around 500,000 annually since 2010, suggesting that the smuggling business has adapted. The statistics do not speak of an impenetrable border, but rather one that requires more planning and money than it used to.

For analytical purposes, a 55 percent interdiction rate seems about right. Just under half of those who try to cross the border, and are not deterred along the way, make it through. With that ratio assumed to be constant, we can draw conclusions about border crossings from apprehension rates.

Before the Great Recession, apprehensions at the U.S. border with Mexico often exceeded one million per year, at times by a considerable margin. With the collapse of the U.S. economy in 2008, however, the work prospects for migrants in the U.S. diminished, and arrests in the border zone fell by more than half, where they remained from 2010 until Trump took office.

As Trump took power, however, border apprehensions collapsed. Much of this was attributed to enhanced enforcement, which may have played a part. The numbers, however, suggest that intimidation from the president’s oversized personality played a decisive role. In fact, Trumpian intimidation took hold even before the elections.

Illegal crossings are seasonal. In a typical year, border crossings peak in the spring to early summer, as migrants cross for outdoors work in construction and agriculture. Crossings in the second half of the year are usually fewer, typically running only three-quarters the pace of the spring months. Last year was a clear exception to the pattern. As usual, the spring saw a peak in apprehensions, but rather than subsiding, the pace picked up afterwards and remained seasonally elevated until January — when Trump took office.

The pattern strongly suggests that Mexicans follow the news, too, and decided to bring forward their crossings in anticipation of stricter enforcement in the new administration. Thus, by Trump’s inauguration, border patrol had arrested perhaps 70,000 more crossers than seasonally expected. On the other hand, from Trump’s election to the end of this year, we project that 130,000 fewer crossers will be arrested than anticipated for 2017. In other words, much of the decline in 2017 can be explained by crossers advancing their border attempts into 2016.

Even so, Trump can personally take credit for deterring 110,000 putative crossers, of which perhaps 50,000 would have succeeded in entering the U.S.

The Trump effect, however, is not lasting. If not buttressed by action, the force of personality will fade. And so the data shows. Border apprehensions bottomed in April and have been climbing steadily since. They should be back at typical levels now.

And that’s not all. Expect a banner year for illegal immigration in 2018. With the ebbing of the Trump effect, crossings should return to typical norms, representing about 30,000 arrests per month. To that, add the crossers who deferred this year and will probably make an attempt next year, another 10,000 per month.These two factors alone would more than double the apprehension rates of 2017.

These trends will be exacerbated by a handful of critical economic developments. First, hurricanes Harvey and Irma and the recent California fires will require up to 250,000 man years for clean-up and reconstruction. And this comes at a time when the National Association of Housing Builders reports that an unprecedented 82 percent of construction firms are anticipating labor shortages.

Further, the restrained pace of crossings this year has meant that farm workers are in short supply in California, with wages of up to $16 per hournow offered, but few U.S. citizens interested in the work. For migrant workers, the prospect is all but irresistible. In Mexico, unskilled labor will earn $2.50 per hour, so an increase in U.S. wages from $10 to $15 per hour is the equivalent of increasing net U.S. wages from three times that of Mexico, to five times that of Mexico — which provides both the funding and incentive for elaborate and creative means to circumvent the wall and border patrol.

The Trump administration can unquestionably claim credit for reducing illegal immigration this year, which will come in at half the level of 2016. But the victory will be fleeting, and by next year, the border zone will return to business as usual, and then some. In 2018, the U.S. promises voracious demand for unskilled labor, and a willingness to pay a hefty premium to get it. As ever, undocumented migrants will respond to the call, by whatever means necessary to circumvent border controls.

Enforcement in a Market-based Visa System

In an immigration system, there are essentially two points of enforcement: the border and employers.  

The current system focuses on the border, as eight million undocumented migrants have managed to get over the border and find employment.  Conservatives want a crack-down on employers.  However, industries like agriculture, food processing, construction and hospitality services depend intrinsically on migrant labor, and given a choice between bankruptcy and hiring undocumented labor, employers will go with the latter every time.  By default, therefore, border enforcement is the central focus of Trump administration policy.

A market-based visa (MBV) system, by contrast, relies on employer enforcement.  This is feasible if

1. The number of visas materially covers market demand (say, +/- 7% of actual), and
2. Employers can access an unlimited number of background-checked workers on short notice, subject to a visa price set by the market

Under these conditions, employers--and the migrants themselves--will enforce the system.  

Let's demonstrate by analogy.  The US does, in fact, have a sector with thousands of jobs openings, good pay and yet minimal black market labor.  That sector?  Trucking.  Today, there are 100,000 open trucker jobs in the US paying $45-75k, but with minimal black market activity.  Virtually all the drivers in the US hold commercial driving licenses.  Why?

The answer is simple.  A driver's license is comparatively easy to get.  Many trucking companies would even pay a driver to get one.  On the other hand, if an applicant cannot get a license, he is almost certainly not fit to drive a truck.  That is obviously an important consideration for, say, FedEx, both because they do not want their trucks in accidents and because they rightly fear liability.   Thus, an individual needs a commercial license to drive a truck not because of heavy-handed government enforcement, but because the license actually conveys information to the employer, and because it represents a reputational and liability risk.  In that sense, the system is self-enforcing.

If there are enough work visas to cover the market, then the same logic applies to migrant labor.  If a migrant who is not a criminal can purchase a visa anytime, anywhere, then the only migrants ineligible for visas are criminals.  Employers do not want to hire criminals.  Why would an employer do that, when a million non-criminal Mexicans would willingly take the work on a day's notice?  And imagine that an employer hired a criminal -- someone he knew could not obtain a work visa (which he would, using a smartphone-based system) -- and that migrant committed a serious crime.  That could constitute aiding and abetting, with unlimited legal liability.  Under the circumstances, an employer would have a substantial incentive to reject an applicant without a visa, just as FedEx will not hire a driver without an appropriate license.

Nor would legal migrants permit it.  A legal migrant who just paid $4,000 for a visa would actively resist their employer hiring people off the books.  So in this world, the migrant workers themselves will be a key driver of enforcement.  For both these reasons, dangerous criminals will be frozen out of the legal job market. 

And this can be achieved while leaving the border essentially open.  Back in Mexico, experienced migrants will say, "Well, the US system is terrific.  But it's expensive to pay the fee and hang out there if you're not working.  So you want to get work lined up as soon as possible, and you'll do really well if you're working ten hours a day, six days a week, because the visa fee is fixed either way.  If you're not working, though, it's best to come back to Mexico.  It's cheaper anyway, you can see all the jobs on offer and apply over the internet, and you can go back anytime you want.  But whatever you do, don't get caught without a visa.  Employers will not hire you without one, because there are a million legal migrants lining up to take your job.  And if you're caught by the authorities, you are cooked.  You won't be able to work again in the US for years.  Moreover, if the other migrants find out you don't have a visa, they will inform on both you and the employer to the authorities.  They paid good money for their visa, and they expect you do the same.  So, just follow the procedures.  Go through the bureaucratic background check, and become visa-eligible.  After that, work the internet and your circle of friends and family and jump in legally when you get an opening.  If you work long, smart and hard, you'll make good money."

That's how enforcement works in a market-based system.