Some enthusiasts speculate that eliminating immigration restrictions could double global GDP.
ome 60 years into the “war on poverty,” government welfare programs remain the subject of much scrutiny. As the Trump administration unveils a new tax plan, fresh off numerous attempts to repeal and replace the Affordable Care Act, perennial questions about whether the government is doing enough to reduce poverty have resurfaced.
This debate often focuses almost exclusively on poor Americans, and solutions mostly center around the redistribution of resources via government transfers. On many levels, this makes sense; on the first count, non-Americans don’t vote, and politicians tend not to pay much attention to groups that cannot help them win elections. Secondly, the government’s ability to act on poverty is somewhat limited — it can try to create policies that facilitate wealth, but it cannot actually produce wealth on its own. Spreading around some of the surplus is therefore an attractive option.
But from a utilitarian and humanitarian perspective, this debate represents a missed opportunity. Limiting the conversation to wealth transfers within an already wealthy nation encourages inefficient solutions at the expense of ideas that might do a lot more good for a lot more people: namely, freeing those people, who are not at maximum productivity, to pursue opportunity.
Between the EITC, TANF, SNAP, SSI, Medicaid, and other programs, the United States spent over $700 billion at the federal level in the name of alleviating poverty in 2015. A 2014 census report estimates that Social Security payments alone reduced the number of poor Americans by nearly 27 million the previous year. Whatever your stance on the long-run effects of welfare programs, it’s safe to say that in the short term, government transfers provide substantial material benefits to recipients.
Yet if the virtue of welfare programs is their ability to improve living standards for the needy, their value pales in comparison to the potential held by labor relocation.
Political boundaries are funny things. By crossing them, workers moving from poor to rich nations can increase their productivity dramatically. That’s not necessarily because they can make more products or offer better services — although that is sometimes the case as well — but rather because what they produce is more economically valuable. This is what economists refer to as the “place premium,” and it’s partly created by differences in opportunity costs between consumers in each location.
Median wages of foreign-born U.S. workers from 42 developing countries are shown to be 4.1 times higher than those of their observably identical counterparts in their country of origin. Some enthusiasts even speculate that the elimination of immigration restrictions alone could double global GDP. The place premium effect can be powerful enough to make low-skilled positions in rich countries economically preferable to high-skill immigrants from poor nations.
We have a lot of inequality in the United States, and that often masks the fact that we have very little absolute poverty. Even someone who is poor by American standards (an annual pre-transfer income of about $12,000 or less for a single-person household) can have an income that exceeds that of the global median household. Even with relatively generous government transfers, we probably would not increase their incomes by more than triple.
On the other hand, because they start with lower incomes, this same effect allows low-earning immigrants to proportionally increase their standard of living in a way that can’t be matched by redistribution within a relatively wealthy population. For example, the average hourly wage in the U.S. manufacturing sector is slightly over $20; in Mexico, it’s around $2.30. Assuming a manufacturer from Mexico could find a similar position in the United States, their income would increase by around 900%. To provide the same proportional benefit to a severely poor American — defined as a person or household with an income under half the poverty threshold — could cost up to $54,000.
What’s true across national borders is true within them. Americans living in economically desolate locations could improve their prospects by relocating to more prosperous and opportune areas. Indeed, this is exactly what’s been happening for decades. The percentage of Americans living in cities has increased steadily, going from 45% in 1910 to nearly 81% by 2010. Nor is relocation exclusively a long-term solution. During oil rushes in Alaska and North Dakota, populations within the two states exploded as people flocked to economic activity.
Recently, however, rates of migration have been dwindling. Admittedly, there are fewer barriers to intra-national migration than immigration. But there are still things we might do to make it easier for people to move where the money is.
One obvious solution would be to encourage local governments to cut back on zoning regulations that make building new housing stock less affordable. Zoning laws contribute heavily to the rising costs of living in the most expensive cities, leading to the displacement of poorer residents and the sequestration of opportunity. As with immigration, this poses a bit of a political problem — it requires politicians to prioritize the interests of the people who would live in a city over those of the people who currently live there — the ones who vote in local elections.
Relatedly, we might consider revising our approach to the mortgage interest deduction and other incentives for homeownership. While the conventional wisdom is that homeownership is almost always desirable because it allows the buyer to build equity on an appreciable asset, some studies have found a strong positive correlation between levels of homeownership and unemployment. The upshot is that tying up most of one’s money in a home reduces the ability and desire to move for employment, leading to unemployment and downward pressure on wages. Whether or not to buy a home is the buyer’s decision, but these data cast doubt on the idea that the government should subsidize such behavior.
If the goal of policy is to promote human well being, then increasing mobility should be a priority for policy makers. As a species, as nations, as communities, and as individuals, we should strive for a more productive world. Allowing people the opportunity to relocate in the name of increasing their output is a near-free lunch in this regard.
But while the economic dream of frictionless markets is a beautiful one, we live in a world complicated by politics. It’s unrealistic to expect politicians to set aside the concerns of their constituents for the greater good. I will therefore stop short of asking for open borders, the abolition of zoning laws, or the removal of the mortgage interest deduction. Instead, I offer the humbler suggestion that we land in the middle, striving to remove and lessen barriers to mobility whenever possible. The result will be a freer, more equal, and wealthier world.
Eddie Ferrara writes about policy from a data-driven perspective. He studied sociology at the University of Massachusetts Amherst. He blogs at eddiethoughts.com. Follow him on Twitter @EdwardFerrara_