We are winning the war on Mexican drug smuggling

With all the vitriol expended on illegal immigration and the drug trade, it is worth noting that we are actually winning on an important front: marijuana smuggling from Mexico.

Marijuana has historically constituted more than 99% by weight of drugs smuggled to the US from Mexico away from official crossing points.  

Marijuana smuggling to the US is down by 84% since 2009. 

Why the collapse?  It is not enforcement.  As the graph below shows, Border Patrol seizures of hard drugs have actually risen in recent years, most notably of methamphetamine and of small, but deadly, volumes of fentanyl.

Instead, the collapse of marijuana smuggling can be almost entirely attributed to legalization in the US.  From 1996 to 2012, nineteen states either decriminalized marijuana or permitted it for medical use.  Since 2012, ten states  have legalized recreational cannabis , interestingly, all but Vermont by ballot.

Collectively, these measures have led to the creation of the organized marijuana production and processing industry in the US.  

With it, Mexican producers are being squeezed out.  US marijuana is of greater potency and quality.  As a result, smuggled marijuana volumes from Mexico are declining by 25% per year.  With legal marijuana going on sale in Massachusetts in the coming months and legalization pending in New Jersey, Mexican exports will continue to decline.  They will be finished off when Texas wakes up to the reality that its citizens are generating $100 million of marijuana tax revenues annually to the governments of Colorado and California.  When Texas legalizes marijuana, it will make no more sense to smuggle pot than to buy a case of Corona in Mexico, put it in a backpack and lug it across the border in the hopes of selling it in the parking lot of a Houston Chevron.  Those images of smugglers jumping the wall with backpacks of drugs will be a thing of the past, very possibly before 2025. 

That’s how we close the border to drug smuggling.  Not enforcement.  Not a Wall.  We end smuggling through legalization and taxation.

We can achieve the same result, the same way, with illegal immigration.

Interview with Graham Ledger on One America News

Kopits interview with Graham Ledger

China's Governance Options

Governance form and GDP per capita are closely correlated.  Very few poor countries can sustain democracy, and virtually no rich countries can exist without it.  

On the graph below, we rank countries by GDP / capita and assign to them a form of governance, from 'dictatorship / anarchic' at the low end to 'advanced democracy' at the high end.  Specifically, countries as classed as

• Chaotic countires or Dictatorships like Sudan, Eritrea, Chad, Zimbabwe and Yemen.  
• Authoritarian, including Russia, Vietnam, the 'stans and China. 
• Oil Autocracies, some of which are quite wealthy but are properly classed as dictatorships, even at very high levels of per capita GDP.
• Weak Democracies, like El Salvador, Sri Lanka, Bulgaria, Hungary, Poland, India or Mexico.
• Established Democracies like Chile, Croatia, the Baltics and Slovakia
• Advanced Democracies including Great Britain, the US, Switzerland and other western economies, and
• Asian City States, notably Hong Kong, Macau and Singapore, all of which are wealthy but only weakly democractic at best

If we rank countries by GDP per capita, we can see a pattern emerge.  Almost all very poor countries are chaotic or dictatorial.  Governance is poor to non-existent, human rights are routinely trampled, civil unrest is common.

Around $2,000 of per capita GDP, countries start to take on more formal authoritarian regimes accompanied by greater political stability.  Individual rights are not honored.  Corruption and cronyism are likely to be endemic.

Around $4,000 / capita GDP, we begin to see the emergence of weak democracies characterized by extensive corruption and electoral fraud, weak governance and a penchant for slipping back into non-democratic rule from time to time.  Nevertheless, representatives are chosen by contestable elections.

Source: IMF. Princeton Policy governance classifications

Established democracies begin to appear around $12,000 / capita GDP.  These countries may not have a long experience with democracy -- perhaps a few decades -- but elections are generally clean and fairly contested.  Governance is adequate if not brilliant, and corruption, although present from time to time, is not a fundamental characteristic of the political system.  The Baltics, Slovakia, Uruguay and Chile fall into this category.

Also, around this level, $10,000 / capita, we see autocracies essentially disappear.  Those which remain are principally oil autocracies, whose governments retain power through disbursement of oil revenues to buy public support.

The advanced economies begin around $20,000 / capita GDP.  All these countries have highly functioning democracies, solid governance, and limited or non-existent corruption.  

The exception to the rule are three city states: Singapore, Hong Kong and Macau, all of which have been know recently for low corruption, a high level individual liberty and protected property rights in the economic -- but not political -- sphere.  Governance has been outstanding, certainly in the case of Hong Kong and Singapore.

China now occupies a precarious space.  Even today, its per capita GDP puts it at the high end of the Authoritarian range.  Many countries with similar income are already weak democracies.

At a 6% GDP growth rate, by 2025 China will occupy a governance space where it will be the sole authoritarian regime surrounded by weak and established democracies.  By 2030, at a 6% growth pace, China will be knocking on the door of the advanced economies.

What are the implications for China's governance?

China's options appear to be one of the following:

1. Remain an autocracy.
2. Institute democratic reforms and transform into a weak democracy.
3. Emulate the City States

Source: IMF, Princeton Policy classifications, analysis

In autocratic form, Chinese politics will see increasing stresses, as an ever better educated and prosperous citizenry seeks greater certainty of their property rights and greater freedom to act autonomously.  Remaining an autocracy will likely require slowing the economy, and possibly turning inward, as China has many times in the past.  Whether this can be achieved without a financial crisis and resulting civil unrest remains to be seen. 

In virtually every other country in the region, the ruling party has faced a crisis at some point, and ceded power to democratic forces.  This has to be considered the most likely path of development for China over the long run.

Finally, China could seek to emulate the City States, granting limited political rights but establishing highly developed economic rights.  Whether such a plan could be implemented in a country of China's size is an open question, but if it could be achieved, would represent the Communist Party's best hope to dominate Chinese politics without a societal crisis into the 2030's.

Unlike many other analysts, our view holds that China is coming to a crossroads of governance.  At some point in the coming years, China will face a crisis which will either take it forward towards advanced country governance or turn it back and lead that great nation to withdraw from the world, as it has without fail throughout its long history.

America's $2 trillion illegal immigrant liability

A Princeton Policy Advisors research note

Much of the focus regarding illegal immigration has centered on those eligible for DACA and the Dream Act.  The qualifications for eligibility are arcane, involving age, education, and date of entry, among others.  

A more simple approach considers only years in residence.  According to  Pew Research data, most undocumented migrants came to the US after the promised enhanced border enforcement of the 1986 Immigration Reform and Control Act--which by itself is probably responsible for 3-4 million of the illegal immigrants in the US today. The strong economy of the Clinton years also drew migrants in large numbers.  In all, most undocumented immigrants came to the US between 1986 and 2000, that is, 18-32 years ago.  Very few have arrived since trough of the Great Recession in 2009.  Thus, the problem in recent years is not surging migrant numbers, but rather migrants who have become entrenched in US society over a very long period of time.

The question is what to do with them.  

According to a Monmouth University poll, Americans believe, by a margin of nearly 4-to-1, that "illegal immigrants who have lived and worked in the U.S. for at least two years...should be given a chance to keep their jobs and eventually apply for legal status."  Market-based visas would allow them to do just this.  Notwithstanding, Americans over time will be far more likely to grant permanent residency status to migrants than to support their deportation--particularly for migrants who have been in the US not two, but twenty, years.  Put another way, sooner or later, long-term undocumented immigrants are going to end up eligible for government programs.  

As these are long-term residents, the benefits in question will be those associated with retirement.  Very few undocumenteds have reached retirement age, but some will by 2025, and a large number will as we enter the 2030s.  And it will be pricey.

In 2018, the average Social Security benefit per retiree will amount to $16,428 for the year.  Of course, migrants granted permanent residency will probably receive far less, in part because their average wages are lower and because they started paying into Social Security later.  On the other hand, the specter of permanent resident migrants facing 18th century levels of destitution is unlikely to be stomached by the US political system.  By one means or another, the government will fork over a sufficient amount to keep retired migrants afloat, and a $6,000 / year subsidy might represent the lower end of what politicians' magnanimity is likely to deliver.

Add to this Medicare costs.  Eligibility is similar to that for Social Security, but again, just one story in the New York Times about a destitute, elderly Hispanic woman with a broken hip may create a climate sufficient to extend generous Medicare benefits to permanent resident migrants.  On average, Medicare spending is around $10,000 / year per Medicare enrollee.  

One might think that undocumented Hispanic migrants with low educational attainment, meager incomes and years of hard physical labor on their bodies would exhibit some fiscal discipline and die young.  But no.  Hispanics actually outlive whites by about eighteen months.  Their life expectancy after the age of 65 is 20.6 years, two decades to receive retirement and healthcare benefits.  On the other hand, older Hispanics, including low income groups, are notably healthier than whites, largely attributable to lower rates of smoking and alcohol use.  

We estimate, based on Pew Research data, that six million undocumented migrants have been resident in the US at least fifteen years, and of those, about 4 million have been here at least twenty years.

Do the math, and 6 million long-term undocumented residents averaging $6,000 / year in Social Security payments and another $10,000 / year in Medicare outlays translates into roughly $2 trillion of government benefits over the balance of their lives, some of which will be offset by Social Security and Medicare taxes paid.  It is a steep bill.

One would like to close a piece like this on a comforting note, but the sobering reality is that, if the government allows undocumented migrants to stay for decades, sooner or later these individuals will become 'common law' citizens, to be formally documented when the political stars align.  Given the progressive nature of taxation in the US and natural human empathy towards those in need, providing for retired migrants will prove a costly exercise indeed.  

Paradoxically, US taxpayers may be better off providing migrants permanent residency sooner, as it would allow a greater period of time for them to pay into Social Security and Medicare before their retirement.  In addition, some costs could possibly be reduced by entering into cooperative agreements with Mexico to pay a lesser amount to those who relocate south of the border.

Be that as it may, a majority of the US public will likely desire -- or at least condone -- granting green cards to long-term resident migrants.  Given the nature of US politics and government programs, it will be an expensive proposition.

Minimum Wage and Pct of Hourly Workers at or below Min Wage

In real terms, the Federal minimum wage has varied within $0.60 / hour of its current level in the last thirty years.  

The percent of hourly workers earning Federal minimum wage or less has steadily declined from 6.5% in 1988 to 2.3% in 2017.  This could drop below 2% in 2018.  

Source: FRED

If terms of number of workers, it looks like this:

There are about 155 million employed persons in the US. Of these, 80 million are hourly workers.

Of all workers, about 2.2 million earn the Federal minimum wage or less.

However, about 1 millon of these are under the age of 24, and half of those are age 19 or less.

Only 882,000 full time workers earn minimum wage or less. And of these, 700,000 earn less than minimum wage, that is, the vast majority of these are in businesses with tips, ie, waiters.

Only 183,000 workers work full time and earn minimum wage. Thus, the notion that there is some large cohort of adult, full time workers not in businesses with tips who earn the minimum wage is simply untrue. Only about 1 in every 1,000 employed persons in the US is both working full time and earning minimum wage without tips.

A market-based solution to the DACA problem

Originally published in The Hill on Feb. 5, 2018

*****

The Republican’s ever-changing plans to deal with illegal immigration are a study in dysfunction. Conservatives, already annoyed at being strong-armed into a DACA deal for 700,000 undocumented immigrants, now have to contemplate President Trump’s plan to extend amnesty to a full 1.8 million Dreamers.

But do not fret, conservatives are told, because amnesty will be traded for the Wall, a wall which will secure our southern border and end illegal immigration forever. This will be the last amnesty.

Just as it was in 1986. At the time, President Reagan offered amnesty to three million undocumented aliens in return for — you guessed it — heightened border security. The result: Those granted amnesty were entirely replaced by new illegals within five years, and the illegal population had doubled its post-amnesty lows within eight years. So much for border control.

A wall will not secure our border. As I pointed out in an earlier article, the incumbent illegal population could theoretically be rebuilt from visa overstays in less than a year. Further, the construction of the Wall would have the effect of sending migrants into the water to cross by boat, just as it has done in Europe. Moreover, migrants can always fly to Canada and simply walk across our currently undefended northern border. And keep in mind that a quarter of illegals come from outside the Americas from places like China, India and the Philippines. If work is on offer, bodies can be recruited from regions for which the Wall is irrelevant.

But perhaps the Republicans can defeat the black market in unskilled labor by creating “a workable agricultural guest worker program to grow our economy,” as proposed in the Securing America’s Future Act. Consider the numbers. In 2017, USDA issued about two hundred thousand H-2A agricultural worker guest visas. To cover the entire market served by H-2A and H-2B (non-agricultural guest worker) visas — essentially the undocumented labor force — the number of such visas would have to be increased by thirty fold, and that is excluding three million non-working dependents. There is no way in hell that conservatives would simply sign off on a freebie of an additional eight million work visas.

Market-based immigration can make all this go away quickly. As I have noted elsewhere, such an approach would allow on-demand access to the U.S. labor market for background-checked migrants from Mexico and Central America in return for a market-based fee. Of course, illegals would like amnesty, a green card, and eventual citizenship. But that’s not what they need. They need status, the right to work unmolested, if unsupported, in the U.S.

To end the black market and all its pathology, we still need enough visas to cover the market. If we expect conservatives to approve, we had better make it worth their while. That means charging a market rate for access to the U.S. Much of the difference between the Mexican and U.S. wages, adjusted for higher costs here, rightly belongs to the U.S. government. If we are to ask conservatives to help create order in the market, we must deliver to them commensurate value.

We need our undocumented workers. They are not just a bit of our service economy. They are about one-third of it at the low end, and almost the entire workforce tackling our "dirty jobs." In 1986, 8.8 percent of U.S. hourly workers earned the Federal minimum wage, in real terms the same as today. By contrast, only 2.7 percent of U.S. workers were at or below Federal minimum wage level in 2016. Despite all the stories of economic gloom, our society has progressed in important ways, notably, that our dirty jobs are struggling to find domestic takers.  Undocumented workers have stepped up to fill the gap. They are here because we need them.

Let’s acknowledge that. But let’s also acknowledge that we need a means to select those migrants to work here. It cannot be done administratively by volume, because the politics are not viable. It can, however, be accomplished by the market using a visa price, which would let in those who work the smartest, the longest, the hardest or are willing to sacrifice the most to be in the U.S. Those people are, after all, the ones we want in our country.

The Republicans need to climb down off the window sill before jumping to their political deaths trying to defend a stillborn approach to illegal immigration. Let’s instead use the market to allocate resources, which it does fairly and efficiently, by and large.

That’s a Republican notion, too, after all.

There is a way to make illegal immigrants pay for Trump's wall

Originally published in The Hill January 16, 2018.

******

The president, and the Republicans in general, continue to twist in the wind on DACA and illegal immigration. Mexico still refuses to pay for the president’s Wall. In its absence, he has been forced to alternative ideas like raising visa fees as funding source. Properly implemented, that idea could be a winner.

Illegal immigration across the Mexican border is really a black market labor problem. Border jumpers can triple their net wages compared to Mexico, and earn almost ten times as much as they would in Guatemala. They come for the money.

Black markets are always created by government. They arise when government tries to keep willing sellers from willing buyers, ostensibly for our own good. Drugs are the biggest black market goods, and the banning of alcohol during Prohibition is the most notorious. We have been pursuing the ‘wars on drugs’ for fifty years, and yet today, the street price of a dose of heroin is less than a pack of cigarettes. The war on drugs has been, as was Prohibition, a striking failure. Black markets are almost impossible to eradicate.

So will be the case with illegal immigrants — and why I forecast that illegal immigration would be near ten year highs in 2018. There are many ways to circumvent a wall when jobs are waiting on the other side.

For example, migrants can simply overstay their visas. According to the Center for Migration Studies, 42 percent of all illegal residents over-stayed their visas rather than coming undocumented over the border. For those who came on visas, the wall is irrelevant. Almost 19 million people entered the U.S. from Mexico last year on tourist visas. Even if every illegal Mexican were deported and the wall built a mile high, the entire undocumented Mexican population of 6.7 million could be reconstituted from visa overstays, theoretically, in as little as four months. If there is work and a material wage differential to Mexico, workers will come, on foot, with tourist visas, by water or air. But they will come.

As with tobacco, legalizing the migrant market and taxing it would make more sense. Here’s how it might work. In a market-based approach, an eligible Central American – one with a clean criminal record — could purchase a work visa at a market rate in return for on-demand access to the U.S. labor market. This visa would provide no rights to any social programs in the U.S., but would allow the conduct of daily business, for example, opening bank and mobile phone accounts, renting property and allowing holders to obtain U.S. driver’s licenses. Our estimates put the value of such a permit around $10 per day, representing an effective tax rate of 13 percent for the typical unskilled Central American worker. Fees from such visas would net the federal budget more than $30 billion annually.

The market would be managed by matching the price to the volumes of visas issued. If the price goes down, the number of visas could be reduced. If the value goes up, more visas could be issued. By this means, the government could insure that prevailing U.S. wages are maintained and unemployment among migrants is minimal.

Visas would not be tied to the individual as such. Rather, they would act more like airline tickets. At the market price, anyone can buy a seat. But no seat is reserved for any particular individual. If you want to get on the plane, you have to pay for the ticket. By analogy, a Mexican with a clean record could always work at will in the U.S. if it makes economic sense. If not, that visa will be available for another Mexican to purchase, with the system optimizing the price and revenues much like, say, Southwest Airlines manages its seat capacity.

If visas are always available on demand, Mexicans will have no need to sneak over the border. Why risk your life on an eight day March through the desert and pay a coyote $4,000 when you can pay the U.S. government $3,600 and come and go as you please? Every year, as many as 700 people on the two sides of the border die trying to get to the U.S. These deaths would be all but eliminated.

Sanctuary cities would disappear. If a Central American immigrant can purchase a visa on demand, the ability to stay is simply a matter of money. There is no one to protect. And if a migrant is not eligible for a visa, they are not worth protecting, because they have disqualified themselves through criminal behavior.

Nor would we need a wall or 17,000 border agents to man it. We would need excellent detection and high speed helicopters to intercept those very few trekking across the desert, confident that they are up to no good. The vast majority would enter through official crossing points. If Trump wants to use the visa proceeds to build a wall, go ahead. But with market-based system, we would not need one.

The average middle class voter gets it. They know that illegal immigrants are here because employers need them to do jobs that most Americans reject as too hard, too distasteful or too menial. Even so, the average citizen wants to get control over the immigrant flow, be properly compensated for granting market access, and have the ability to quickly identify and expel problem migrants. A market-based approach does all that.

Only Trump — not Hillary Clinton or Jeb Bush — could even propose market-based immigration. It requires a business mentality not beholden to generations of ossified left and right dogma. If Trump could pull it off, he would be a hero to almost all moderates, many conservatives and Hispanics, and not a few Democrats. It is a huge opportunity for a President looking to make his mark.

Trump can win on deficits, solve the debt ceiling and own Congress forever.

Originally published in The Hill, December 11, 2017.

*****

As the Republican tax plan grinds through Congress, President Trump has an opportunity to offer a few changes which could alter the legislation to make it more acceptable to fiscal conservatives, permanently eliminate recurring debt ceiling debates, and put him firmly in control of the congressional agenda for years to come.

The central problem today is Congress’s propensity to spend money the country does not have, and spend too much of it on favored interests and too little on economic growth. As Jake Novak complains in a recent CNBC op-ed:

It’s becoming more and more clear to that disapproving public that members of Congress from both parties see holding office as a means to control the power of the purse to reward friends and attack enemies. Cutting spending means cutting what they see as their rightful power. So they’ll never really do it. Our money and wealth is theirs to use as they please, even against us.

What can we do? How do we motivate legislators to treat taxpayers’ money with the same care as taxpayers do themselves?

The answer is simple. Align the incentives.

Whether the economy does well or poorly, whether policy initiatives tank the economy or blow out the deficit, the wages of senators and congressmen are the same pitiful, fixed amount — about as much as a first year associate makes at a leading law firm. (Indeed, just to push the point home: NBC’s Megyn Kelly makes more than the entire Senate combined.)

If we instead want legislators to maximize growth and minimize debt, we need to pay them for doing so. That simple. An incentive plan would not necessarily stop the negative effects of the pending tax legislation. It would not prevent legislators from voting for new entitlements or force them to balance the budget. Indeed, no one would be precluded from voting their party or conscience. But members of Congress will incur a real cost to themselves and their families if the underlying policies are profligate or hurt the economy — and that will influence behavior. It is one thing to be generous with the taxpayers’ money, another to be generous with one’s own bonus.

With it, the whole debt ceiling debate would disappear. Increasing debt will mean dwindling bonuses, so if legislators need to increase the debt ceiling, voters will know they really mean it. For the first time, politicians will have some skin in the game, which is far more important than the kabuki theater surrounding regular increases in the federal borrowing limit.

How big a difference could incentives make? As with so many seemingly innovative policies, Singapore shows the way, having successfully implemented performance-based pay decades ago. The results are striking. In 1985, GDP per capita (in purchasing power parity terms) of the US, Germany, Italy and Singapore were all clustered within a narrow range. Singapore held the bottom slot at $26,000, with the US at the top at $34,000. Today, Singapore’s per capita GDP is $83,000, well ahead of the United States at $54,000. Singapore’s output per person is nearly twice that of Germany. Italy is a third world country by comparison. The West has fallen behind. Far behind.

The lesson is clear. If politicians are allowed to use taxpayers’ money for generations without any personal incentive to use it well, over time, government spending will become bloated, inefficient, and drag down GDP growth to pitiful levels. That is exactly how Germany managed to become a woefully second class country in Singaporean terms.

Economists have fretted over low productivity growth and an aging population in the U.S. Perhaps the private sector will rebound with new technologies and save the day. But if it does not, those who follow policy have the sense that the easy reserves of economic growth are to be found in improving the efficiency and effectiveness of government spending and taxation. Incentive-based pay would unlock that potential, paving the wave for a generation of healthy economic growth, and restoring faith in government and confidence in America as a country with a future.

For Trump, it is a unique opportunity. No ordinary politician would ever conceive of suggesting that self-interest could possibly motivate politicians’ behavior. However, Trump has spent decades motivating politicians with cash. He knows better. If you want your bonus, Mr. Representative or senator, get to work and create legislation that puts the country back on a path to solid growth and reduces borrowing at the same time. In such a world, neither conservatives nor liberals would get everything they want, but both would have a huge incentive to work together towards fiscal sanity and prosperity.

This is how to drain the swamp. Steve Bannon is not alone in pinning the hopes for a more effective Congress on a change of personnel. But it is not about people. It is about incentives. Change the incentives, and there is no need to change the people. Without a change in incentives, however, incoming politicians will ultimately be claimed by the swamp, just like their predecessors. Rather than railing against venality, we need to use it as a tool to create faster growth and a more balanced budget.

President Trump has asserted that he “can be more presidential than any president that's ever held [the] office.” Here is an unparalleled opportunity. No other president in history, not one, would have had the guts to change the system at its roots. Here is the chance. Take it, Mr. President.

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

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

*****

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

*****

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.

*****

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.

*****

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.