Solve for This Equilibrium

Tyler Cowen’s fond of admonishing us to “solve for the equilibrium.”  His maxim came to mind while reading his Bloomberg column last month:

How’s this for a simple rule: Open borders for the residents of any
democratic country with more generous transfer payments than Uncle
Sam’s.

What would happen?  Many economists and perhaps laymen would expect democratic countries to ferociously jack up their transfer payments to exploit U.S. immigration policy.  But solving for this equilibrium is a lot harder than it looks. 

1. If voters were rational and selfish, the “transfer payments skyrocket” prediction makes sense.  Open immigration to the U.S. have great value – and if transfer payments induce high emigration, sending countries won’t actually have to make good on many of their financial promises.

2. In the real world, however, voters are usually sociotropic but irrational.  A key component of this irrationality is what I call anti-foreign bias – the tendency to underestimate the social benefits of economic interaction with foreigners.  The upshot: Many voters around the world would see the new U.S. immigration policy as nefarious.  While they wouldn’t adopt Soviet-type policies to keep their people from leaving, there would be little popular demand to game the U.S. rules.  Some countries might actually curtail transfer payments, especially if they’re near the cutoff.

3. Would Tyler’s proposal also spur democratization?  If you buy Acemoglu and Robinson, it should: When the benefits of democracy rise, elites who fail to appease the masses risk popular discontent.  But this is also far-fetched.  Even moderately savvy dictators could successful paint Tyler’s reform as an attempt to “destroy our country” with dreaded Brain Drain. 

4. While the political effects of Tyler’s proposal are messy, the economic effects are fairly clear.  Only rich countries can afford higher transfer payments than the U.S. offers, so there would be no flood of desperate Third World migrants.  Still, hassle-free green cards would still look great to millions of overtaxed, fluent English speakers throughout the First World.  Over the course of ten years, I predict 15 million extra immigrants would come – though perhaps only half would stay permanently.

5. This prediction relies on my stereotypes about which countries would qualify under Tyler’s proposal.  I guess Canada, Britain, Australia, Germany, France, and all of Scandinavia fit the bill, but do they?  Any important country I’m missing?

The post appeared first on Econlib.