Eli Dourado

Immigration as fiscal externality

Many rich-country governments are heavily in debt. Some are on the verge of default; for others it’s a matter of time. One trivially simple way to lower the burden of national debts is to let in a lot of immigrants. Since the amount that the government owes does not vary with population, debt per capita and debt/GDP would decrease.

At any moment in time, population is zero-sum. More net immigrants to the US, say, means fewer people living in other countries. This means that the US can only lower its debt per capita through immigration only by raising the debt per capita of some other country.

My intuition is that this would lead to downward spirals in the fiscal situation of second-movers. The process could look like this:

  1. The US opens its borders.
  2. Lots of people from all over would move to the US.
  3. Debt/GDP falls in the US.
  4. Debt/GDP goes up in some heavily-indebted countries such as Greece.
  5. Faced with higher taxes and unemployment in Greece, more Greeks move to the US.
  6. Repeat steps 3-5 multiple times.

In the end, the US fiscal picture looks quite rosy and the Greek government ends up defaulting.

What is bizarre is that this has not happened yet. If there is a huge first-mover advantage to open borders, one would expect that governments would be eager to open their borders. In terms of a Prisoner’s Dilemma, governments are not defecting when it is in their interest to do so. They are playing the cooperative equilibrium with no outside enforcement, providing a local public good (globally, of course, immigration restrictions are a huge deadweight loss). Each government is sacrificing its own fiscal position for the fiscal position of the others.

I’m all for the study of non-coercive provision of public goods, but in this case none of the usual factors that accompany cooperation are present. It is not the case, as with Coase’s lighthouse, that this public good is tied to private goods. Nor does the repeated nature of the game seem to be the factor that holds the cooperative equilibrium together; governments do not seem to want to defect. The glue that makes immigration restrictions possible is probably just plain old xenophobia.

This makes me more optimistic about the long-term future of the world. On one hand it sucks that voters are such racists. But our fiscal/immigration equilibrium is unstable. If it is at all disturbed, it will probably unravel. If one heavily-indebted rich-country government decides to open its borders, others will almost certainly have to follow suit. In the long run, governments will have to be more open to immigrants and more fiscally responsible. Getting to the long-run stable equilibrium could be tumultuous, though.