David R. Henderson  

Rogoff's Alternative to the Wall

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Cash also plays a role in the illegal immigration problem that bedevils countries like the United States. It is incredible that some politicians talk seriously about building huge border fences, yet no one seems to realize that a far more humane and effective approach would be to make it difficult for U.S. employers to use cash to pay ineligible workers off the books and often below the minimum wage. Jobs are the big magnet that drives the whole process.
This is from the introduction to Kenneth S. Rogoff, The Curse of Cash. Rogoff is a prominent economics professor at Harvard University and former chief economist at the International Monetary Fund.

At a recent Liberty Fund conference in San Antonio where I was the discussion leader, and where chapters from Rogoff constituted 30% to 40% of the readings, I highlighted Rogoff's thoughts on immigration. I had missed this passage above until my friend Jeff Hummel pointed it out.

Here, though, are the parts I did highlight in the discussion questions I suggested. They cover the same territory:

Whatever one's position on legal immigration, few would argue with the proposition that under normal circumstances, countries have a sovereign right to control their borders and to determine their immigration policy. The issue is becoming increasingly prominent across advanced economies. Some US politicians are proposing extreme measures, such as building a giant razor wire fence across the US-Mexican border, much as Hungary has done and other European countries are considering. Yet there seems to be precious little awareness of how much more difficult and risky it would be for employers to routinely hire illegal workers if they could not pay in cash, and how phasing out paper currency might prove a far more effective remedy than the alternatives being considered.

To be clear, I strongly favor allowing increased legal migration into advanced economies. Any economist who takes income and wealth inequality seriously realizes that, despite the enormous progress of the past three decades, differences across countries simply swamp the within-country inequality that Thomas Piketty and others worry about. The 2015 Nobel Prize winner Angus Deaton, author of the 2013 book The Great Escape, has forcefully made this point. International migration from poor countries to advanced ones create massive welfare gains for the immigrants. The issue is likely to become an even more important humanitarian concern if, as likely seems the case, climate change makes some parts of the world that are now densely populated uninhabitable. One can hope that enabling countries to better control their borders might lead to a more rational debate on immigration policy, though I admit that might be optimistic.

Rather than ask the question I asked the participants, I'll lay out the tension between these two passages.

On the one hand, Rogoff favors the right of the U.S. government to decide who enters and who stays. On the other hand, he favors more legal immigration and makes the case for it beautifully and succinctly. But he wants to cut down on illegal immigration and sees the elimination of $100 and $50 (and possibly $20) bills as an effective way to do so.

Here's the problem. If Rogoff is right that eliminating these high-denomination bills will substantially reduce illegal immigration, then his policy will also substantially reduce the "massive welfare gains for immigrants." The only situation under which the massive welfare gains would continue is if legal immigration increased a lot. He and I can both hope that we would have a more rational debate on immigration policy that would lead to, say, an additional one million or two million people a year allowed to immigrate to the United States. But Rogoff admits that that is optimistic.

So, realistically, where are we? Either the U.S. government does not eliminate high-denomination bills and that facilitates illegal immigration along with the huge gains to immigrants from being able to work at higher-wage jobs or the U.S. government does ban those bills and those massive gains become smaller. Much as Rogoff might hope for more legal immigration, it's clear that if choosing between the two alternatives I have laid out, he would choose the one that reduces those gains and, therefore, preserves some of the massive inequalities.

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COMMENTS (11 to date)
Thomas Sewell writes:

Other issues with taking the approach of making it more difficult for illegal immigrants to work for cash are:
1. Illegals who get a job are the ones we should be least worried about. Illegals who are career criminals or terrorists seem to be the ones people express the most concern about crossing the border and reducing employer jobs doesn't target the right groups.
2. Identity theft (usually SS#) by illegals is one of the issues, but getting paid in cash avoids the need to engage in it. If you reduce the ability to pay in cash, you increase the incentives to engage in identity theft instead in order to get a job.
3. Cash jobs is one way for people to work around non-optimal regulations. The growth of oppressive regulations is constrained by the inability to effectively enforce them while a cash alternative exists.

Personally, I'm in favor of a massive increase in legal immigration and focusing resources on the people we actually want to keep out. There are plenty of ways to fix that process while addressing everyone's concerns, but not many in D.C. appear to be interested in that.

Matthias Goergens writes:
Illegals who get a job are the ones we should be least worried about.

Agreed. A real simple way to let in the most efficient migrants (for any given target) is to simply is to simply auction off all the slots to the highest bidder. Every winner pays a dollar more than the highest losing bid, in full upfront.

(The private sector can deal with the case of currently poor people who have high earnings potential.)

That mechanism would turn immigration into a direct money spinner for the government, and every migrant would be very easy to justify to native tax payers.

Alas, we are probably never going to see such a system.

Anon writes:

Well, either you want government policy to be decided by the democratic process, or you want a cabal of fat-cat elites deciding policy for everyone regardless of what they want. I might disagree with the outcome of democratic processes but I still prefer them to being railroaded by political insiders.

Thaomas writes:

Rogoff seems to be making a second best argument: IF the government is going to restrict immigration, eliminating big bills is better than building a wall.

That is not inconsistent with an estimate that on the margin, additional immigration is beneficial to current US residents and the immigrants themselves.

And recognizing that sovereign states do control their borders is a recognition that there are some non-marginal migration flows that could become welfare destructive for current residents.

Radford Neal writes:

There is a "tension" between Rogoff's two positions, as you note, but I think Anon above resolves it - Rogoff presumably believes that preserving the institution of democratically enacted laws, that are then enforced, is more important than the particular policy issue of immigration. You might like the idea of subverting current immigration laws, but you should think about the consequences of shifting social attitudes in the direction of ignoring laws one doesn't like.

But there's a similar issue with Rogoff's position, in that he would shift society in the direction of greater enforceability of laws, putting financial transactions under greater control of the government, by eliminating cash. Perhaps he likes making kidnapping for ransom harder, and other good things that he sees as the immediate consequences of getting rid of cash.

But has he thought ahead? What will happen once the ability of the government to enforce laws is greater? I think one can anticipate more laws, which may be the type that we really would not want to be enforced...

Hazel Meade writes:

@Thomas Sewell:
Excellent post. The problem is that people aren't being 100% honest about their reasons for opposing immigration. They may talk about welfare or terrorism, but the real reason is that immigration threatens working class labor. It really all is about competition for jobs.

Also, I find the argument in favor of getting rid of cash as a way to control immigration kind of distrubing. It's pretty much straight out of Hayek's Road to Serfdom in the way that it uses increasing expansions of government power to regulate the economy in response to the economies efforts to resist regulation. Restricting cash transactions would also allow the state to control a lot more than just illegal immigration as well.

Hazel Meade writes:

Well, either you want government policy to be decided by the democratic process, or you want a cabal of fat-cat elites deciding policy for everyone regardless of what they want.

Or we can let the free market decide. The free market being made up of the decisions of millions of individuals acting independently.

Why is is that letting millions of people independently make their own decisions is constantly equated to "a cabal of fat-cat elites"?

Noah Carl writes:

Better make sure you select those additional 1-2 million immigrants carefully:


Michael J Raymond writes:

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Billy Kaubashine writes:

The first rule of government should be "Never pass a law that cannot - or will not - be enforced". It makes a mockery of the entire process and makes fools of those who are law abiding.

We don't need to build a wall or track down and deport illegal residents. All we need to do is make it more difficult for them to exist comfortably here. E-Verify should be used to deny some variety of benefits to ALL illegals regardless of their ethnic background, country of origin, or means of entry.

Rather than addressing only employment, we should make access to some combination of rental or purchased housing, electric service, water service , education, or telecommunication subject to an E-Verify check. If we do that, deportation and a wall won't be necessary.

The Left has given us the formula.......Background Checks... ... If we can be required to undergo background checks before exercising our 2nd Amendment rights, background checks can certainly be required before signing a lease, etc.

MikeP writes:

The first rule of government should be "Never pass a law that violates individual rights except to protect a compelling public interest". It makes a mockery of the words in the founding document of the United States that the purpose of governments is to secure unalienable rights.

But you are correct about background checks. Just as Second Amendment rights should be abrogated only for those trying to possess weapons who pose a clear danger to the public, so the right of free migration should be abrogated only for those trying to enter the country who pose a clear danger to the public.

Hence laws that enact border controls are just. Laws that impose quotas, duration limits, and employment restrictions on immigrants -- the very laws that make almost all of today's illegal immigrants illegal -- are not.

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