Countries as clubs: open borders and debt/GDP ratios

Don't think of a country as an area of land. Think of a country as a club, to which a group of people belong. Nomadic tribes were not attached to any particular area of land. Settled agriculture on scarce land is a recent and contingent fact.

Clubs provide club goods to their members. Club goods are (at least partly) non-rival and (at least partly) excludable. Mutual defence is the most obvious club good that countries provide their members, but they often provide others too.

Membership of a club brings with it both rights and obligations. Membership of a club is itself a good. It's an asset that provides a future flow of benefits (and costs). Membership of a successful club, that non-members want to join, is a very valuable good. Should that very valuable good be priced at zero?

Open borders is not about free trade in land or labour. It's not about physical geography. Open borders is a proposal that membership of a club be a non-excludable good, and must therefore be priced at zero. Anyone can become a member of any club, without the club being required to give its consent. Countries may not charge non-members a one-time enrolment fee (or cherry-pick applicants) to become a member. Anyone who applies for membership must be granted membership, and pay exactly the same annual schedule of dues (taxes) as existing members to benefit from using the club goods.

Making club membership a non-excludable good may create problems. Just like making any valuable good a non-excludable good may create problems.

For example: suppose a club were deciding whether to undertake a risky investment, and how to finance that investment.

With closed borders, where the club has the right to demand a one-time entry fee for new members, the club could use equity-finance. Existing members of the club pay higher dues to finance that investment. They buy newly-issued shares in that investment. If the investment is successful, new members cannot join the club and benefit from that investment without paying extra. They don't get the equity for free.

With open borders that won't work. The club would have to use debt-finance, so that both old and new members would pay equally the full costs of the investment. Borrow the money, and add the interest to the annual membership dues (taxes).

But 100% debt-finance does not work for risky investments. (And investment in mutual defence is risky; you might win or lose the war.)

Suppose the UN announces that, starting next year, open borders will be the rule. Canada is a wealthier country than most. Many people would want to join the Canadian club. If the UN made that announcement, I would recommend an immediate major change to Canadian fiscal policy. I would recommend an immediate large increase in the Canadian debt/GDP ratio, used to finance an equally large one-time lump-sum transfer payment to existing Canadian citizens (helicopter bonds). That would be a good way to get around the future UN prohibition of restricting membership (charging an entry fee) to the club. Existing club members (and their heirs) would be paying interest to themselves; but new club members would be paying interest without having benefited from the helicopter bonds. It's a way to charge new members an under-the-table initiation fee.

Stuff like that happens, when you have price controls.

I was trying to do a back-of-the-envelope calculation of how high a debt/GDP ratio would be needed for wealthy countries to get around the UN prohibition, and charge a market price for membership in their clubs. Distortionary taxation, and multiple countries, make it tricky to do that calculation. But if we assume one small rich country, that has a per capita income 10 times bigger than the rest of the world, and lump-sum taxes, and 5% interest, I reckon a debt/GDP ratio of around 1,800% should be enough to equalise after-tax incomes. Sounds about right.

Sometimes I hate economics. This is one of those times. (Driverless cars is another.)

Comments

[primedprimate]

Great post, Nick - thought-provoking as always. And depressing too, since I think you and I have very different priors when it comes to migration. But I think you have a point - my accident of birth which gave me membership to club India rather than club Sudan or club Canada is no more or less unfortunate than the fact that I was born to middle class rather than poor or affluent parents. The moral imperative behind your proposed UN rule, then, is no different from the moral imperative behind re-distributive economic policies or economic policies that aim for greater equality of opportunity.

Of course, from an economic standpoint, many argue that Club Canada, Club India, and Club Sudan would gain from MORE open membership (i.e. a price less than the current price), but while that may be true, a quick glance at the visa lines is enough to also suggest that the optimal price for membership should be greater than 0.

On a related note, I wonder if there is evidence of real-world clubs changing their financing structure and annual membership fees when they were opened up by law to non-whites. Perhaps some data can be recovered from whites-only clubs in the US south that were subsequently forced to desegregate by law. In India too, during the Raj, most elite country clubs were all-white (with infamous 'Indians and Dogs not allowed' signs) but some were forced to change their operating practices by law.

On another note, wouldn't optimal pricing policy also include a membership fee for new members who are born into families of current members since not all members will have equal numbers of children?

[primedprimate]

Also, while a market demand curve for Club membership (whether through birth where parents pay or through migration where the migrant/migrant's family pays) is easy enough to determine hypothetically, I can't think of an easy way to theoretically determine a supply curve (may be we could just ask each citizen how much they would need to be compensated for each additional migrant/newborn and hopefully competition between clubs would give us an efficient outcome rather than a monopoly outcome with deadweight losses). In this context, maybe the propsed UN policy is like anti-trust laws.

Also we need to worry about whether there are externalities that lead to inappropriate market prices.

In any case, it does seem complicated to determine the appropriate price/quantity.

Nick, do you think the optimal quantity transacted should be zero? It seems to me that you determined the price such that quantity demanded would drop to zero.

[Nick Rowe]

primed: thanks!

Really, the "thought-provoking" bit was all I am intending to do. My thoughts themselves are not at all clear on the migration question. I just think that the Open Borders people are missing some important stuff. They think of open borders as something like free trade (they say in labour, but I would say in land). But countries are a lot more than just land. Even thinking of countries as clubs seems to me to be leaving out a lot of what is important. Countries are also homes, and extended families. We are born into one, and changing countries is a big deal, both for the migrant and for the hosts (if there are a lot of migrants). Either the elite/economists wise up fast, or the rabble/members/shareholders will force them from power. Europe is a case in point. Canada does not have a National Front (as far as I know) because although immigration is very large, it is controlled in a roughly sensible manner. We cherry pick. And don't have too many too quickly of one type that is too different. (Though the recent minor kerfuffle over wearing the niqab during the citizenship ceremony became an election issue, and shows there are limits.)

I'm a migrant myself. My views have changed over the years. I have become more small-c conservative. I don't like too much change, and I can respect others who don't like too much change either. Countries, and communities, and social institutions, don't just create themselves overnight.

My guess is that regular clubs, unlike countries, don't have a lot of equity. They operate on a pay as you go basis. So scaling them up is not a big deal. New members don't get lots of free equity, and help spread the costs of the debt.

"On another note, wouldn't optimal pricing policy also include a membership fee for new members who are born into families of current members since not all members will have equal numbers of children?"

Good point. But if you see each member as having a random number of children/heirs, you could think of this as an optimal insurance policy (especially for the right debt/GDP ratio, so those with large numbers of kids subsidise those with small numbers of kids).

[Nick Rowe]

primed: "Nick, do you think the optimal quantity transacted should be zero? It seems to me that you determined the price such that quantity demanded would drop to zero."

Fair criticism. Probably setting P such that Qd(P)=0 is not optimal for the existing members. My mind wasn't fully clear on that. But does my "small rich country" assumption allow me to evade that one? Not sure.

[Nick Rowe]

Actually yes. I think my assumption that the rich country is small, relative to the rest of the world (faces an infinitely elastic demand curve for membership) let's me weasel out of answering "what is the optimal point on that demand curve?".

[primedprimate]

I am not sure I understand your last point about optimal price. As a small country facing an infinitely elastic demand curve, can Canada set the price at all?

Or are you suggesting that in aggregate (I love how insightful you are about aggregate/general equilibrium results), with each club acting like a "small" monopoly (wouldn't this be a monopolistic competition instead or are you suggesting some other structure?), the optimal price would lead to closed borders everywhere?

Could zero revenues really be optimal?

And from a moral/economic/contractual standpoint, how would you distinguish between birthing/adopting children and adopting/"sponsoring" an immigrant? I believe one could find a few Canadian open borders advocates who would be glad to adopt/sponsor me and hundreds of other potential immigrants (especially if some simultaneous transfers/side payments at below the legal Price are allowed).

[Nick Rowe]

primed: let's see. Assume an epsilon cost of migration (in either direction). If the small rich country sets debt/GDP at 1800%, there is no migration, and member's full income (income - tax + transfer) stays the same. If it sets debt/GDP more than an epsilon below 1800%, there is unlimited migration until income-tax falls by 90% due to congestion. Which I think means that income-tax+transfer must fall, because the transfer will be less than 90% of original income. So the original members will prefer the former.

I *think* that's right.

(If the Open Borders people were right, BTW, in equilibrium the richest country would be the only country, because all the others would be depopulated. Open borders is equivalent to imperialism. Migrants are voting (with their feet) for the richest country to take over the world. Landowners would vote to move their land to the richest country too.)

"And from a moral/economic/contractual standpoint, how would you distinguish between birthing/adopting children and adopting/"sponsoring" an immigrant?"

Dunno. In practice this becomes a big issue with arranged marriages, especially cousin marriage (which is very common in a lot of the world, and not unknown, ahem, in my own family tree). Marry your foreign cousin, and both of you live in the rich country, and you don't need to charge a price for creating and selling a passport, because the benefits stay in-family.

[Nick Rowe]

primed: I've now had coffee. It's more complicated (and interesting) than I thought, because high debt/GDP can create multiple equilibria. Set the initial debt/GDP ratio a little above 1800%. No individual will migrate, but a large coalition of individuals might migrate, because they would reduce debt per capita. It all depends on the elasticity of congestion.

[Nick Rowe]

If migrants arrive one at a time, the optimal strategy would be to issue new debt, as each migrant arrives, to capture nearly all the consumer surplus of each additional migrant. Sort of like price discrimination.

[Nathan W]

Interesting thought experiment, but if you check the UN Charter, national sovereignty is nearly at the top of the list and the UN could never announce open borders as the rule. The UN is designed for dialogue and collective action, not for forcing anything on sovereign nations.

I suggest posing the thought experiment as a unilateral action in the future, as some folks are rather touchy about what authority they think the UN might (impossibly) try to usurp.

[Nick Rowe]

Nathan: agreed. And countries would just disobey the UN anyway. Maybe the EU instead? Or some new people-smuggling technology which makes it impossible to police borders and citizenship?

[primedprimate]

Why would there be any congestion if a club good is non-rivalrous? Or is the congestion a result of the club good being only partly non-rivalrous?

I think open borders advocates argue that "congestion" from more migration is in fact negative (i.e. more migration leads to greater income - tax + transfers for natives).

I would like to think that both a current US citizen and I (a migrant) help similarly to increase income - tax + transfers for fellow US residents, but I must confess to motivated reasoning. It would appear from your framework that self-deportation (encouraged by at least one previous presidential candidate) and suicide (whether by a citizen or a migrant) would lead to the same gains for all existing club members and the optimal size of the club is one person. (Or equivalently, gains from deportation and the death/murder of a resident (regardless of whether the resident is citizen or a migrant) should be the same.)

Recently I happened to see Danish ads where the government was encouraging its citizens to procreate by providing various innovative incentives (very interesting viewing!); but if income - tax + transfers were to fall with the addition of new club members, then governments should actively try to discourage reproduction.

Perhaps I am missing something more fundamental...

[Nick Rowe]

primed: it depends on (some of them) them being only partly non-rival. Otherwise in equilibrium all Canadians would live in one province (except maybe a few farmers and loggers). Open borders would lead to only one country/club.

My guess is that the relationship between welfare and population is inverse-U-shaped. But I think we need to recognise that most people care not just about population numbers/density, but also who they are in the club with. Going on a foreign holiday or working abroad is nice for a short time, but so is coming home, other things equal. Different people want different club goods. So we don't all want to be part of the same one big club.

"Perhaps I am missing something more fundamental..."

I'm totally confident we all are...

[Andy Harless]

Am I right in intuiting that the issue is largely about the distinction between true rents and quasi-rents? On the margin, in the short-run, immigration restrictions are inefficient, because immigration benefits immigrants without harming natives. But you (Nick) are arguing that this is not necessarily true in the long run, because immigration restrictions are a way of capturing quasi-rents, thus creating an incentive for efficient capital investment.

[primedprimate]

My own prior too has been that the relationship between welfare and population is inverse-U-shaped with disagreements being primarily about the location of the maximum. Of course, I think that would influence the optimal price too.

I also agree that people care about who they are in the club with; for some reason it is more socially acceptable to have different preferences with regard to the place of birth of (current and potential) members while it is no longer socially acceptable to have different preferences with regard to the race of members.

Good discussion, Nick - thank you. I think figuring out the optimal price for an immigrant visa is hard but exciting work and I am hopeful that it could provide some fodder for my own research.

[gofx]

NICK, Great post. I'very always thought about immigration in this way, and two-part pricing etc. What is interesting is to extend the model to the issue of progressive taxation. A flat income tax rate for all already implies that a higher-income person is paying a higher share of "club costs" than someone with lower income. This is seemingly lost on all those obsessed with having the rate be progressive.

[Nick Rowe]

Andy: "Am I right in intuiting that the issue is largely about the distinction between true rents and quasi-rents?"

Hmmm. I think you might be. Though even true rents, if they need an investment to protect, become quasi-rents.

primed: "I also agree that people care about who they are in the club with; for some reason it is more socially acceptable to have different preferences with regard to the place of birth of (current and potential) members while it is no longer socially acceptable to have different preferences with regard to the race of members."

Yep. Though even by automatically granting citizenship to children and grandchildren of citizens, who were born off the club premises, countries recognise "blood" as well as "soil". (And Germany goes much further than this.) And if you think of countries as nomadic tribes, "soil" becomes irrelevant. We want our children to inherit our rights.

And "culture" comes somewhere in between.

The Swiss have just voted 30% for a party that wants to stop/reduce immigration from the EU.

Thanks primed. I appreciate your comments.

[Redwood Rhiadra]

Nick: And countries would just disobey the UN anyway. Maybe the EU instead?

Doesn't the EU already *have* an open border policy, at least within the EU? And yet we do not see large numbers of Greeks moving to Germany...

The cost of changing "clubs" is not just that imposed by entrance/immigration policies. And it's apparently quite high.

[rsj]

This is what happens to economists: They start modeling the use of their lawn as a rival good, and then do a free-rider analysis of their neighbors' kids.

Labor is valuable. Returns to scale are generally increasing in the relevant quantity ranges. Someone emigrating to a nation is adding to the wealth of that nation. The only thing standing in their way is conservatives who fear racial and cultural change. You can put whatever gloss you want on it, but not liking change is the only "con" when it comes to immigration, particularly for large, empty nations such as Canada and the U.S.

[Nick Rowe]

Redwood: yep. It seems most people don't like too much change, and don't want to live in a "foreign" country, with foreigners, unless there are major offsetting benefits.

rsj; spoken like a true economist. Which is where the last line in my post is coming from. It's not all about GDP/capita. And even GDP/capita isn't all about labour/land/kapital ratios and technology.

[rsj]

I get that some people obtain disutility from having other people of different races/creeds/politics move into their neighborhood.

I just don't believe that this is a legitimate claim that government should try to address.

If I don't like what you consume or do for a living or what language you speak, then that's my problem. It's not your problem. And if I make it harder for you to live near me, then I'm the one imposing an undue burden on you, not the other way around; It's those who impose higher costs of entry that should compensate others, not be compensated.

[Nick Rowe]

You decide you want to live with someone. You offer to pay half the rent, and do your fair share of the dishes. Does she/he have to give her/his consent? Does she/he have to move out, or lump it? If she/he moves out, can you follow her/him? Does she/he have any rights, about who she/he lives with, if anyone?

Now suppose she/he bought or built the home, it's mortgage-free, and the only annual expense is the hydro bill. You offer to pay half the hydro bill. Can she/he ask you to pay a lump-sum in addition? Who determines that lump-sum price? Can she/he ask you any price she/he feels like?

If she/he can't ask for a lump-sum price, wouldn't she take out a 100% mortgage on the house?

[rsj]

Immigrants pay taxes, too. They increase national tax revenue, national production, and make expenditures on infrastructure more efficient. The moment they enter the country they pay for services, just as you did.

A better analogy is that you buy land and decide who gets to live on your land. But your neighbor sells his land (or rents it) to someone else that you don't like. Now you want to prevent your neighbor from being able to do that -- you want to impose a lien on his property that only people of a certain national origin can live on his property, because they will be living next to you, and that bothers you. The anti-immigration crowd is the same NIMBY crowd that opposes development and other changes to their neighborhood. And they shouldn't be able to do that. Immigrants engage in voluntary exchange with existing landholders in order to purchase property on which to live, and should be allowed to do that. Moreover if someone is willing to emigrate and passes certain basic competency tests, then they should be able to do that as well. It's a voluntary exchange.

I hate that JJ Abrams destroyed my beloved Star Trek. I hate that Windows 10 is becoming smart-phonified. I have a problem with a lot of changes that negatively affect my life, but I also understand its not my call. I don't get to decide who my neighbor is. If they can afford to live there, and if whoever owns the property is willing to sell/lease it to them, then they should be able to be my neighbor.

[rsj]

I grew up surrounded by immigrants, and I'm myself an immigrant. In the university and grad school most of my colleagues were immigrants, and my first start up was created by an immigrant and run by immigrants. In my current workplace, maybe 15% of my colleagues were born in the U.S. All of these people are contributing an enormous amount to this nation and are paying a ton of taxes. Most of them work and pay taxes for a decade before they get the right to vote. If they break any laws, they can be deported. Immigrants subsidize native residents, and pay much higher costs, because incumbents generally arrange things so that newcomers subsidize them. When they arrive they don't own land, don't have a social network, don't have the same levels of accumulated wealth, etc. That's OK, it's OK that immigrants pay more and prop up the assets of incumbents, but at least give them credit for paying more and don't suggest that they pay less.

[rsj]

...And yes, they get to use already built roads and schools and national defense, but they also inherit the national debt. They inherit both the good and the bad. Not to mention propping up land prices and asset prices for the current generation of retirees. From the day that they enter the country and enjoy the services provided by that country they are also contributing back. On net, immigration has been a great boon to both the U.S. and to Canada.

[notsneaky]

Why focus on countries? Why not states? Or counties? Or cities? Or maybe even neighborhoods. Those are all also clubs. (And perhaps that's why most local finance is via bonds? I think)

[Gus]

Hi Nick. Interesting post. I've never heard this problem phrased in terms of club goods before. Very interesting. A few half-baked thoughts:

1. These clubs are forced to accept children of existing members. (eg. Once you take on a tenant, you are obliged to take on all her descendants until the end of time.)

2. Many goods are provided *only* by clubs; there is no option to acquire those goods via non-club means, even when that would be a more efficient way to allocate them.

3. The open borders intuition is that anyone willing to provide for herself should have freedom of movement and association. (eg. If she can afford to rent a flat here then she ought to be free to do so.) Seems like a no-brainer. But when clubs have a monopoly on certain goods it is very expensive to "provide for herself" because that requires buying a proportion of the clubs assets (eg. a share of all our club's baggage) before she gets access to the goods she actually wants (eg. land, freedom, property rights). I guess that's an argument that the optimal level of clubization of goods is much, much lower than in current nation clubs.

4. Compare with a private golf club, which is owned by a single entity with incentive to maximize profits, which often leads to "open borders" in the sense that anyone willing to pay the club's fee is free to join. A nation club has the familiar misaligned incentives, in which the (few) costs of open borders are borne by concentrated interests but the (many) benefits are diffuse or enjoyed by not-yet-members of the club.

5. It's only an accident of history that nation clubs are defined by land, which is unfortunate because almost all the nation club goods have little or nothing to do with land. (It's ridiculous that it's easier for Toronto to trade with Vancouver or Thunder Bay than with Buffalo.)

6. The transaction costs of entering and exiting bloated nation clubs saps the benefits of competition among clubs. By comparison, if some bigoted golf club won't accept black members, another golf club is happy to pick the low-hanging fruit.

[notsneaky]

Also, the standard answer to the question "Should that very valuable good be priced at zero?" in the case of non-rival goods is yes. Efficiency means marginal cost pricing, not marginal utility pricing here.

[Nick Rowe]

notsneaky: "Why focus on countries? Why not states? Or counties? Or cities? Or maybe even neighborhoods. Those are all also clubs."

Good question. I think it's like the fixed vs flexible exchange rate question, which was better re-phrased as "What is the Optimal Currency Area?" Open Borders People are like those who want one world currency; they want one big world country. The rest of us want multiple countries, but not an infinite number. (Though we also recognise homes, as well as countries, where families can close the borders to their homes.)

"(And perhaps that's why most local finance is via bonds? I think)"

Interesting. I was wondering about the extent to which local government debt/equity ratios get capitalised in land prices, via restrictions on development. ("You can't immigrate unless you buy a house/passport from someone who emigrates") Which means that increased net immigration is good for landlords but bad for tenants.

"Also, the standard answer to the question "Should that very valuable good be priced at zero?" in the case of non-rival goods is yes. Efficiency means marginal cost pricing, not marginal utility pricing here."

Yep. But that creates no incentive to build the non-rival investment good in the first place, because latecomers can free-ride. Which is why clubs exist. Also, most/many club goods are only partially non-rival. Eventually the road gets congested and needs to be widened. But charging a toll holds up traffic and is inefficient.

Gus: Thanks!

" I've never heard this problem phrased in terms of club goods before."

I was wondering about that. This is really not my area of economics, so I have no idea if any of this is at all original. But it seems to capture something (not everything, but then models never do) important about countries.

" It's only an accident of history that nation clubs are defined by land, which is unfortunate because almost all the nation club goods have little or nothing to do with land."

Yep. Though if countries are clubs for mutual defence, it's hard to do mutual defence without members living close together, preferably on an island or with some physical barriers like rivers or mountains on the border. If land were not scarce, things would be very different. Nobody would attack or defend land. Borders in the geographical sense would be irrelevant.

[Frances Woolley]

Nick: "My guess is that regular clubs, unlike countries, don't have a lot of equity."

Equity has another meaning. Regular clubs tend to be characterized by a high degree of equity in the sense that members tend to be fairly equal. They usually charge all members more or less the same price for more or less the same services (exceptions exist, but this is the tendency). This is because clubs are voluntary associations - if a club tries to institute a redistributive pricing schedule, those who end up contributing more than they benefit will leave the club.

Countries have much less equity in the sense of equality of members' incomes. For a country to achieve equity, it has to redistribute from rich to poor - which is always going to tempt the rich to leave and the poor to flood in.

It's no coincidence, I think, that the Libertarian party, which advocates open immigration (in Canada anyways) also advocates a 15% flat tax and hardly any income support (I can't find any in their party platform.

Open immigration as a policy makes more sense when it's possible to create clubs within countries - a Libertarian might think of them as communities. So, sure, you can come to Canada, but you can't move into my neighbourhood, or join my country.

[notsneaky]

I don't think the analogy with fixed vs floating exchange rates works. Any country can, if it chooses, unilaterally peg its currency or adopt the others' currency (El Salvador) and get most of the benefits of "joining" the club in this way; more trade, lower transaction costs etc. Of course the country won't get any say in how the monetary policy is conducted;it doesn't get a say in how the club conducts its business. In this way fixed exchange rate/CU's are actually more analogous to a open-borders-but-no-citizenship (voting) situation. I don't know what floating rates are analogous to here.

Currency areas are clubs and I think it's good to analyze them in that way (I've actually trying to write down a model of that sort for awhile but I get stuck on trying to hammer it into the "New Keynesian" framework). But they're a different sort of clubs.

(Also, I think the proper analogy to joining a currency area is that of purchasing a swap contract)

[Nick Rowe]

Frances: yep. There's a conflict between Open Borders and (steeply) progressive taxation. To my reading, Open Borders libertarians recognise that conflict, and lean towards keeping open borders and ditching redistribution. But I'm not sure how more lefty fans of open borders would respond to that conflict. Maybe advocating One Big World Government, so you can't escape?? (We don't need a Berlin Wall to stop people going to Mars.)

notsneaky: OK, the analogy with fix/flex is not exact. But the analogy with how Mundell re-framed the question is I think fairly close.

rsj: OK, you are an immigrant, and so am I. That gives us a different perspective on this question. But we should nevertheless try to look at it from the other's perspective, as well as our own. Would we insist on demanding membership of a First Nations band? Or would we say only with their consent, and understand that they might want to protect their culture. Suppose a couple of million Brits like me (*real* Anglais, from Angleterre) immigrated to Quebec, told them that change was good, and that they would soon get used to everybody around them speaking English, and they shouldn't be silly conservatives, and insisted on a different set of club goods. Would we be surprised if some of them weren't too happy about it? Social cohesion and trust are real things, and the countries that people want to emigrate to are desirable destinations precisely because they have those things. But there are limits. Either we recognise those limits, or the National Front will force us to recognise those limits, and a lot worse besides. Again, 30% of Swiss voted last week for the party that wants to severely restrict immigration from the EU. And the Swiss are themselves an amalgam of 3(4?) European linguistic groups. The elites have their heads in the sands, trying very hard not to see or hear these things, hoping they will go away. Then we get the horrible consequences of Merkel's U-turn.

[rsj]

Nick,

We have to remember that immigrants are a net gain to their host country and subsidize incumbent residents. Incumbents always levy costs on new comers, whether we are talking about seniors hazing freshman, or retirees living off rising asset prices bid up by young savers, senior workers getting paid more than junior workers, or existing landholders benefiting from rising rents from new comers.

In addition to levying costs on new comers, the incumbents insist that they are doing the new comers a favor by admitting them to the club, and the newcomers better not rock the boat until they, too, become incumbents and can proceed to haze the next generation of new comers.

But it is a stylized fact that in modern social democracies, it is the young subsidizing the old, not the other way around. It's the new entrants that subsidize incumbents.

Immigration is no different, and is just a special case of this larger theme.

For the most part, immigrants are willing to pay these subsidies to incumbents because their own country is even more screwed up. This allows wealthier nations to capture the best/brightest/most motivated people from the rest of the world while at the same time lecturing the immigrants who are piled up in a room and work harder than the natives about how lucky they are to be here.

When you talk about "clubs", the notion of hazing must be kept firmly in mind, as well as the fact that the club would very quickly die out if new comers were not allowed, and that the members are the greatest resource of the club. Both the U.S. and Canada were built on immigrants.

The reason why I don't have a lot of sympathy for the anti-immigration crowd is that this just isn't something you should have a say over. You shouldn't get to veto who your neighbor is.

Even if you ban all immigrants, there's still lots of other things to be cranky about. That's the problem with these parties. If tomorrow all immigration would be banned, then these people would remain as angry as they are now, except that their sense of injustice would be directed at some other hand that is feeding them.

So while I understand the sentiment, I disagree with it. To me, this is an ethical question, and goes far beyond just immigration. While I recognize that every wealthy nation is going to have a subculture of intolerance, that doesn't mean that we should adopt bad economic and social policies in order to placate them. If they somehow become the majority, then they can steer the country according to their values, at which point they can start experiencing emigration instead of immigration.

[Frances Woolley]

rsj "We have to remember that immigrants are a net gain to their host country and subsidize incumbent residents."

No. Some immigrants are a net gain to their host country, others aren't. Some incumbent residents gain from immigration, others don't.

Immigration has real redistributive consequences. Now that may be a really strong equity argument for having widespread immigration on a global scale.

But it's insulting to tell, for example, people who are facing downwards wage pressure as a result of labour market competition from temporary or permanent immigrants, that their concerns about the negative impacts of immigration are misplaced. There are winners and losers from more open immigration policies. Honesty compels us to recognize this fact.

[rsj]

"No. Some immigrants are a net gain to their host country, others aren't. Some incumbent residents gain from immigration, others don't."

Of course. Just as with native residents. We are talking about averages here.

"Immigration has real redistributive consequences."

Yes, generally causing income to flow to native residents, on balance.

"But it's insulting to tell, for example, people who are facing downwards wage pressure as a result of labour market competition from temporary or permanent immigrants, that their concerns about the negative impacts of immigration are misplaced."

Yes, it would be, but that's not what people face. People face downward wage pressure from *outsourcing*, immigration is not a big player here -- particularly for nations like Canada that accept primarily skilled immigrants.

[rsj]

Also, I'd say it's pretty irresponsible to perpetuate to say that a growing population somehow puts downward pressure on wages. That is a lump of labor fallacy.

Whether you are talking about new entrants into the labor market due to young adults entering the workforce or whether you are talking about immigrants entering the workforce -- these people are in the economy and are both consumers and producers of goods and services. Their presence in the economy increases both the supply and demand for labor. Outsourcing, on the other hand, is much more likely to decrease the demand for domestic labor.

[rsj]

Here is some data on the U.S. system -- which has a very different immigration policy from Canada:

http://www.epi.org/publication/immigration-facts/

"There is broad agreement among academic economists that in the long run, immigration has a small but positive impact on the labor market outcomes of native-born workers, on average.11 There is some debate about whether, within the overall small positive effect, certain subgroups are harmed, in particular native-born workers with low levels of education.

The evidence shows that in the long run, immigrants do not reduce native employment rates. But some evidence suggests that in the short run, immigration may slightly reduce native employment, because the economy takes time to adjust to new immigration. Importantly, this effect varies according to the broader economic environment. In particular, when the economy is growing and the labor market is adding jobs, new immigration creates enough jobs even in the short run (and even for the less-educated) to cause no harm to the net employment of native-born workers. But during economic downturns, things do not adjust as quickly. When the economy is weak, new immigration has a small negative impact in the short run on the employment of native-born workers.12

The United States could benefit enormously from an immigration system that is more responsive to broader economic conditions. In our current immigration system, legal immigrant flows are essentially unresponsive to the business cycle."

[rsj]

And here are the public finance trade-offs (again for the U.S. -- situation for Canada may be different) also from http://www.epi.org/publication/immigration-facts/

"There is a fairly broad consensus that the present value of the long-run net fiscal impact of unauthorized immigration, at all levels of government combined, is small but positive—meaning that immigration reduces overall budget deficits.[15] The long-run fiscal impact at the federal level is strongly positive; however, the impact at the state and local levels is negative. There is also a clear understanding that while the negative state and local impacts are largely concentrated in the states and localities that receive most of the new immigrants, the federal impact is shared evenly across the nation.

Unauthorized immigrants are a net positive for public budgets because they contribute more to the system than they take out.[16] "

[rsj]

One way to think about this -- here again I'm referring to the US: There are 40 million americans that are foreign born, of which about 1 million legal and 400,000 illegal immigrants entered in the current year.

The effect of immigration on the economy is not just that due to the 1.4 million people that entered here in the current year, but of the entire population of 40 million. Would a low skilled worker in the U.S. be better off if those 40 million people weren't in the economy? Without that 40 million, the economy would be smaller and so less productive due to economies of scale, the budget deficit would be higher or the amount of government services per capita would be lower since these 40 million spend more of their working life in the nation compared to native born people.

It's a fallacy to say "education is waste of resources because students don't contribute to the economy as much as working people". When measuring the costs/benefits of educating a worker, you have to measure the effects over the lifetime of the worker. In the same way, measuring the effects of immigration -- of adding a worker to the economy -- needs to be measured over the lifetime that that worker is in the economy. It is hypocritical to enjoy the benefits of the 40 million immigrants while at the same time criticizing the 1.4 million new entrants.

[Lord]

The inference is clear. Open borders people value only private resources and values and completely discount public ones, and are psychologically stunted. They can only see in black and white.

[rsj]

The psychologically stunted ones are those who believe, in contravention to thousands of years of history and sociology, that new entrants take advantage of incumbents, that outsiders exploit insiders, those with fewer social and financial resources are taking advantage of those with more, and that those without the ability to vote or represent themselves are stealing power from those who can.

The very fact that we are focusing with laser like attention on the potential unease felt by incumbents at the mere presence of others in "their" land reveals the massive biases here.

It's absurd. And offensive. Sure you can find examples of whites being taken advantage of by blacks, or those who can vote being occasionally penalized by those who can't, but it's an absurd line of reasoning. That's not what happens. That's not the world we live in.

[rsj]

One time I needed to find temporary accommodation for a friend, so I got an SRO -- Single Resident Occupancy, a type of longer term stay hotel -- and was shocked at the 15% hotel tax that was in addition to other taxes. SROs are used mostly by the poor and transient who are on the edge of homelessness, and they can least afford to pay this tax the least.

The problem is that hotel taxes are very popular, because they are levied by cities and paid for by outsiders. Outsiders don't get to vote. Everyone loves to soak the tourists as much as possible. In some cities, measures like football stadiums are paid with hotel taxes, convention center taxes, etc. This is a large part of the hidden story of Uber -- cities levied so many taxes and fees on the cab business because it was disproportionally used by tourists. As car use begins to stall and more locals begin to use taxis, they're discovering how unreasonably expensive governments have made this.

When you don't have a say there is no one to advocate for you and the fees and disadvantages pile up. No social network, no credit, no land ownership, little savings. You pay more for everything and don't qualify for many services. At the same time, the slightest inconvenience -- maybe there is a convention and it causes a local to have to wait an extra 6 minutes in traffic -- is railed against as if this was the grossest human rights violation. "Oh my God, it's a bit more *crowded*" complains the landowner as his property values shoot up. "These people are ruining my quality of life!" he cries from the window of his house as the immigrants are piled up 3 to a room in the apartment complex next door. Occasionally he might be forced to stand in line next to them in a coffee shop. My God, what an inconvenience! Even as millions are pouring into the local economy. We take their money and then complain about how they slight us.

[Lorenzo from Oz]

rsj: you are assuming that what makes the country so productive is simply arrangement of factors of production. Actually, there is a whole lot of other stuff people have to be socialised into -- accepting rule of law, accepting different but equal, not nepotistically colonising institutions, etc.

I refer you to the recent history of the Balkans and the current history of the Middle East to strong evidence that lots of folk don't begin to accept those things. If you bring people in at a slow enough rate to be socialised into the social capital which makes productive societies work as well as they do, it's fine.

28% of Australia's residents are foreign born, and the place works rather well thanks, but we pretty ruthlessly cherry pick our migrants (we are the only Western country whose migrants are somewhat better educated on average than the residents), make sure they are diverse and make them jump through some hoops to develop some commitment to their choice.

If you open the borders, then there is no guarantee that the necessary level of social capital will be maintained. If you are Israel, for example, such a choice would be literally suicidal.

[Lorenzo from Oz]

And if you want to read some really depressing social science, try this:
http://www.umass.edu/preferen/You%20Must%20Read%20This/herrmann-thoni-gachter.pdf

Experiments in various WEIRD (Western educated industrialised rich democratic) societies had identified three types of folk:
knaves (self interested), saints (automatic cooperators) and moralists (cooperate with punishment, or pro-social punishers) -- using Peter Turchin's terminology. The persistent experimental result was that if punishment was allowed, cooperation would increase. If not, it tanked.

Extending such experiments to various non WEIRD societies identified a fourth group in significant proportions: "anti-social punishers" (folk who punish those who contribute "too much"). Their existence has the effect of flat-lining social cooperation.

Really, socialising folk in to the necessary levels of social capital matters.

[Nick Rowe]

Lorenzo: I really liked your recent open borders post BTW, and tweeted it.

[Lorenzo from Oz]

Nick -- Thanks! I should have added in the results of some work I did a few years ago which showed a strong correlation between the proportion of a local US housing market which was foreign born and how expensive housing was. I suspect strongly that it was the "non voting entrants make regulating to restrict (land) supply easier" effect.