Monday, 20 May 2013

Immigration Tariffs vs. Auctions, or Becker vs. Peri

Ashok Rao has a new post laying out a proposal for an immigration permit auction, as suggested by prominent immigration economist Geovanni Peri. This is a great idea, and it would definitely be a major improvement for public policy, especially if the number of visas auctioned was substantially higher than current immigration levels.

That said, it isn't the only way you could do market-based immigration policy. One alternative would be to have an immigration tariff, as advocated by Gary Becker. Instead of auctioning a fixed number of permits, the government would sell as many permits as demanded at a fixed price. The benefits of this kind of system are broadly the same as the benefits of an auction Ashok describes in his post. However, there are a few subtle differences that for me suggest a tariff might be a better way to go.

The first reason to prefer a tariff is that it means the market is more responsive to shifts in supply and demand. In a boom, more people want to come to the country and the economy ‘wants’ more immigrants. In a recession, the opposite is true. Using the auction system, the same number of people come – all that changes is the price. Under a tariff regime, on the other hand, the number of migrants is free to fluctuate according to the needs of the economy. This is true on a micro as well as a macro level.  If a new computing technology creates a sudden need for hordes of Indian programmers, or demand for immigrant builders goes up following a huge natural disaster, then the policy responds by allowing more immigrants. Yes, the government could adjust the number of auctioned permits according to economic circumstances, but it is better that changes in the number of migrants be market-driven, rather than decided by bureaucratic assessments of ‘need.’

Having a fixed tariff price, or at least a planned price schedule, also gives a level of certainty to the market. If I live in Mexico and my family is saving up to buy my way into the USA, I want to know how much I’m going to need to squirrel away. With an auction, the price will vary from year to year, perhaps dramatically, and there will be no guarantee that my savings will prove sufficient to get me a permit this year, or even next year. Tariffs solve this problem.

A criticism of immigration tariffs are that it is difficult to know how many people will come. If permits are auctioned, then the government knows what the level of immigration will be. There will be no concerns about a ‘flood’ of immigrants driving up house prices, overwhelming public services and so forth. Under a tariff system, things are much murkier – immigration is very difficult to forecast, as the UK government found to its embarrassment in the mid-noughties. However, that might serve as a feature and not a bug. It’s difficult for a politician to stand up and say that he wants millions upon millions of immigrants to be allowed in every year. It might be easier to sell to the public the policy of letting in anyone who coughs up £20000, even though the two policies might be equivalent. Voters are also reassured that every immigrant who arrives will ‘pay their way,’ whereas under an auction system there is the possibility (however unlikely) that the price will fall very low, creating the fear that people might get in ‘for free.’

A final, practical point is that tariffs would be far easier to administrate. It’s obviously feasible to design a working auction system, but it would be complicated. There’s a lot of room for the government to screw up, and there would almost certainly be teething problems to start with. It might also be simpler to verify the buyer’s identity and administer a background check under a tariff system.

Ultimately, I think the parallel with international trade holds – tariffs are better than quotas. An immigration tariff would be more sensitive to the needs of the market, less bureaucratic, in some ways more predictable, and maybe even more politically palatable than an auction system.

1 comment:

  1. it certainly is all interesting, but a lot of things unclear from this article is left, it is necessary to study the issue