Senator Grassley of Iowa has expressed concern recently about the conjunction of huge increases in the size of the endowments of many universities (and colleges--for the sake of brevity, I shall use "universities" to denote colleges as well) with continued increases in tuition. Both types of increase have far exceeded the rate of inflation in recent years. The senator urges that investment income generated by the endowments be used to reduce tuition, and he threatens to introduce legislation that would require (as a condition of the universities' retaining their favored tax status as charitable institutions) that universities spend a minimum of 5 percent of their endowment every year. That is a condition already imposed on foundations, but universities are exempt. Several major universities have announced recently that they will reduce tuition substantially to children of nonwealthy, though modestly affluent, families. I do not know whether these announcements are a response to Senator Grassley or to the concerns of the public that may have inspired his proposal.
The 5 percent rule makes less sense for universities than for foundations. Foundations normally derive all or most of their income from investing their original endowment, and so they are not in competition with each other. Nor have they the spur of profit maximization. They are governed by self-perpetuating boards of trustees; so there is no democratic check either. The idea behind the 5 percent rule is to prevent the hoarding of endowment income, perhaps to provide high salaries and generous perks to staff and to prod the trustees to seek additional grants and thus compete with other foundations. But the prod is slight so long as the average return on investing the endowment is at least 5 percent a year. With inflation currently running at 4 percent, a 5 percent return is easily achieved.
Higher education, in contrast to the foundation sector, is a highly competitive industry, even though most universities are nonprofit. They compete vigorously for students, faculty, and grants, which include alumni donations, foundation and other third-party donations, and government grants; state universities also receive money appropriated by the state legislature, but this is a diminishing source of the revenue of major state universities such as Berkeley, UCLA, Michigan, and Virginia. The different sources of income are complementary: good students attract good faculty and vice versa, and a university's academic standing attracts donations and grants. The universities' principal income consists of tuition plus donations and grants plus endowment income, but some universities have income from television contracts for their athletic teams, and others have income from patents developed by members of their faculty. The major universities not only have large endowments but also receive large annual gifts from alumni and others. Generally, wealthier universities are better, or at least more prestigious, than poorer ones, and so they can and do charge very high tuition even though they could "afford" to charge lower, or even zero, tuition; but that would not make economic sense for them.
Given the competitive structure of higher education, it is hard to see why government should step in and try to limit tuition. The universities have a competitive incentive to provide financial aid to highly promising applicants who cannot afford full tuition; why those who can afford to pay for it should not be asked to pay for it escapes me. Forcing abolition of tuition would be a subsidy for rich kids. If universities were somehow prevented from charging tuition, moreover, applicants and their families would not have to think carefully about educational options. A free university education would be attractive to many people for whom it would be a poor investment if they had to pay stiff tuition, though it would not be completely free in an economic sense because they would have to forgo income from working. And a 5-percent-fits-all solution would make no sense for universities that had very small endowments and good reasons for wanting them to be larger.
The difficult question involves the federal income tax exemption for donations to universities. It is a legitimate question why the federal taxpayer should be subsidizing Harvard, with its $35 billion endowment. The only justification would be if the type of research and teaching that goes on at Harvard or the other major universities generates external benefits that, were it not for the subsidy, would be smaller by more than the subsidy. This seems unlikely. The cost of the scientific research and graduate scientific training conducted in these universities is already heavily subsidized by federal and corporate grants and contracts; and increasingly the scientific research done by universities is applied rather than basic and so is eligible for patent protection. The contribution of nonscientific fields to welfare is not negligible, but one does have a sense that in many of them the marginal product is slight or even negative--is there really social value in having 400 English-language philosophy journals (the approximate number today) rather than 50? Because universities, though competitive, are not profit maximizers, because of age-old uncertainty concerning the effectiveness of various methods of teaching and the value of various forms of scholarship, and because of a tradition of faculty autonomy reinforced by the tenure system, universities have much the character of workers' cooperatives, which are not notably efficient enterprises.
Conservatives, who inveigh against big government, should not ignore tax subsidies. There is no economic difference between giving universities federal money and allowing donors to universities to deduct their donations from their federal income taxes. If the exemption were repealed, tax rates could be reduced without any increase in government spending, and in fact government spending would be reduced, since the cost of administering the exemption and the higher cost of collecting taxes when tax rates are higher would be eliminated. Hence all tax subsidies deserve close scrutiny. I am not convinced that the tax subsidy for donations to universities would survive that scrutiny.
A few peripheral points merit brief comment. First, the endowments may not be as large, realistically, as they seem. In recent years, a number of universities have been reporting annual increases in endowment in the 18 to 20 percent range. Unless the endowment managers are geniuses, there are only two ways in which they can obtain such returns. One is by generous year-end appraisals of endowment assets that are not frequently traded, so that their market value must be estimated. The other is by leverage, which generates above-average returns in a rising market--and above-average losses in a falling one.
Second, the universities' argument, contra Grassley, that many contributions to university endowments come with restrictions that might make it hard for a university to spend 5 percent of its endowment every year is unconvincing. Suppose 50 percent of the endowment could not be spent (or the earnings on it); then to meet the 5 percent requirement the university would have to spend 10 percent of the unrestricted portion of its endowment. That would not be a hardship.
Third, Senator Grassley's concern that increased endowment income is being squandered on high salaries for university presidents is also unconvincing. The reason those salaries are soaring is that universities are becoming increasingly large and complex, requiring management skills comparable to those required by substantial corporations.
The agitation about the fraction of endowment that colleges spend is driven in large measure by the rapid rise in tuition since the late 1970's. The increase in tuition has been much faster than the rise in consumer prices over the same time period. However, the benefits from a college education in the form of higher earnings, better health, better educated children, and many other aspects of life have grown much faster than tuition has. The result is that benefits net of all college costs have increased at an unprecedented fast rate during the past 30 years. College-educated persons increasingly have achieved elite status not only in the United States, but in other countries as well, including developing countries like China, India, and Mexico.
So it is hard to feel sorry for college students despite the rise in college tuition.
To be sure, high tuition makes it more difficult for students and their parents to finance a college education. To make that easier, especially for students with few financial resources, colleges have been engaging in greater price discrimination by increasing financial aid to students with limited resources while they are sharply raising tuition to students from more well to do families. This price discrimination policy has enabled many more students from poorer families with good high school records to go to colleges where they pay little tuition. Students also can help finance their college costs with student loans when they do not receive sufficiently large support from their colleges. The debts of students who borrow a lot by the standards of what the average student borrows is still usually not large relative to the earnings most students receive after working for several years. I believe students in need of financial support often do not borrow enough. By borrowing more, they would be able to work less, and thereby concentrate on their studies and finish school more rapidly.
I do not deny that colleges invite criticism when they increase tuition while their endowments are increasing by a lot. Although it seems much more natural and appropriate for colleges to lower tuition when their endowments grow, there is a powerful reason why endowment growth is often accompanied by a growth in tuition. A rapid increase in endowments, even by schools that spend a small fraction of their endowments, enable schools to spend more resources on increasing the quality of the college education they offer. They would tend to attract better teachers and researchers, provide smaller classes, enlarge their libraries and other information storage and dissemination facilities, and provide better athletic facilities and other amenities. These improvements in what a college offers in turn helps attract students who are willing to pay higher tuitions. Since American colleges are in a highly competitive environment, they tend to raise tuition when they can attract good students who are willing to pay more.
Although I disagree with Senator Grassley and other Congressmen about whether we should be concerned by the sharp increases in tuition, I do agree with him and other critics that colleges should spend a larger fraction of their endowments. However, my reasons are very different from theirs, and I certainly do not believe that schools should be required by law to spend a larger fraction of endowments. The problem I believe with the governance of many schools is that their boards of directors believe they are managing financial assets that should be maintained, and preferably increased, in perpetuity. In my judgment the major goal of presidents and boards should be to improve teaching and research, and that may well mean spending much more than the income from endowments.
Of course, the persons in charge of a college's governance should be concerned about the effects of spending down endowment on the college's future financial strength. However, colleges that compete well against their peer schools generally attract more generous private and public contributions. As a result, schools that spend wisely higher percentages of their endowments may well increase, not decrease, future endowments. Likewise, schools that refuse to spend more than a rigidly fixed percent of their endowments may experience a decline in their competitive position that will tend to reduce their ability to attract contributions in the future. Therefore, boards of directors that do not allow greater spending because they want to maintain, or increase, their schools' endowments could be responsible for reductions in future endowments.
In arguing this I am partly influenced by the experience of the Olin Foundation. This was a large foundation that explicitly decided to spend down its endowment in order to better accomplish its goals. The Olin Foundation did spend all its endowment on law and economics and other programs, and has essentially now closed its doors. During the relatively short time of its existence the Olin Foundation accomplished far more than most other large foundations do over many more years. I am not suggesting that all colleges follow Olin's example and plan to go out of business- some of them should, however. Rather, I suggest that they should copy Olin's example of trying to be successful now, even if that means spending more than their incomes on attracting and teaching good students, and in producing path-breaking research.
The shooting recently of 10 innocent persons at a retail store and a university in Illinois has highlighted once again the issue of gun control in the United States. Five customers and employees were murdered at a Lane Bryant clothing store in a robbery attempt that got out of hand, while a former student killed other students at Northern Illinois University, and then killed himself. The question raised by these shootings once again is how to control the use of guns?
I will take for granted in this discussion that effective gun control laws are desirable, and mainly consider how to make them effective. So I bypass the lively controversy among economists over whether gun control laws are desirable-for two strong and opposite conclusions drawn from limited empirical evidence, see Mark Duggan ("More Guns, More Crime", ,Journal of Political Economy, 2001), and John Lott ("More Guns, Less Crime", University of Chicago Press, 2000). Effective gun control laws that prevent guns from getting into the hands of mentally unstable individuals and criminals are surely desirable, but present laws do not achieve that.
The main issues in gun control legislation are 1) many people, mainly men, want to own guns for self protection because they live in bad neighborhoods, or because they fear that criminals may invade their homes, or because they just like guns. In addition, shopkeepers want guns to protect themselves if attempts are made to rob them, and criminals want guns in order to commit crimes more successfully. 2) The number of guns in the United States is huge, probably well over 100 million. Many were purchased legally, but probably most were obtained in the active black market in guns. Individuals who want to own guns but are prevented from acquiring them legally will often buy them illegally. Clearly, the black market in guns is strong, even though many law-abiding persons do not know how to go about getting guns illegally. Sellers of guns underground are generally criminals since they can function more effectively than honest sellers in illegal markets where contracts and other attributes of legal transactions are difficult, if not impossible, to enforce except by the use of force.
A close analogy is with drugs. That drugs like cocaine are illegal shifts the market for drugs underground. The higher price in the underground market offsets the risk of punishment to traffickers, which attracts sellers who are willing to bear the many sizable risks in this market, including imprisonment. These traffickers engage in violence against competitors and others, and they corrupt police and other officials to protect the considerable profit they make when they can avoid being apprehended.
One criticism of many state gun control laws is that they are too lax in allowing some persons to purchase guns legally who should not be eligible to buy guns. For example, the killer of the 5 students had a history of mental illness, yet he only recently had been able to legally buy a pistol and a shotgun. He made these and some prior legal purchases of guns in Illinois, even though this state has a rather stringent gun control law that requires a background check for a criminal record, registration by gun owners, and a cooling off period before purchases can take place. If gun laws were greatly tightened, individuals who badly want to have guns but cannot obtain them legally would try to turn to the underground economy, just as those who badly want to consume drugs get their drugs underground. Pretty much all men who want guns for criminal purposes now obtain their guns illegally in the underground economy. That economy would become still more important if gun law were tightened.
Still, several steps can be taken to have much more effective gun control. The first would be to impose a high tax on legal gun transactions, which would greatly raise the price of guns purchased legally. Like the tax on gasoline, cigarettes, and some other goods, a gun tax should be several hundred percent of the untaxed price to discourage purchases of guns by those with less strong demands. Individuals who strongly want guns for legitimate purposes might still prefer to get them legally, if they can, since they would then avoid the various punishments and other risks of buying guns illegally. For this reason, gun control laws should allow persons with legitimate needs for guns to buy them legally at the very high prices caused by the high gun tax.
The second step is to punish substantially traffickers in the illegal gun market to discourage individuals who could get guns legally from buying them in the underground market. A sizable punishment to illegal suppliers would raise the price of guns in the illegal market in order to compensate sellers for the risks of punishment. One criticism of present gun laws is that sellers of guns in the underground economy are not punished enough when they are caught. (Unfortunately, higher gun prices in the illegal market would attract sellers who would be good at avoiding apprehension since the profits could then be huge for sellers who can avoid punishment.)
Since a high tax on gun sales and substantial punishments to illegal seller of guns would greatly raise the price of guns in both the legal and illegal markets, the demand for guns would be reduced in both markets. The magnitude of the fall in the number of guns purchased would depend on how responsive purchases are to higher gun prices-this response is what economists call the elasticity of demand. I have come across little evidence on this elasticity for guns. Yet one would expect that the demand for guns by individuals is likely to be significantly higher when other persons have more guns, partly because of the desire to protect themselves, and partly because of the culture this creates to own guns. As a result, the overall response of purchases to high gun prices might be quite large. For under these conditions, a higher gun price lowers the demand for guns by some individuals, and that in turn reduces gun demand by others. These ‚Äúsocial interaction‚Äù effects on gun demand would tend to greatly raise the overall price response of the demand for guns.
The illegal market would cater mainly to persons with criminal and other questionable backgrounds that could not readily buy guns legally. Of course, even with active enforcement against sellers in the underground gun market, some individuals will be able to buy guns illegally. Hence the third prong of the desirable approach to gun control would be to add a large extra sentence, larger than is common in many states, to the prison sentence of criminals who used guns to commit crimes. Such greater punishment for using guns to commit crimes would encourage criminals to shift away from guns toward knives and other less lethal weapons.
I became acquainted with Bill Gates when some years ago I mediated (unsuccessfully) the Justice Department's antitrust suit against Microsoft. I was reassured to discover that the world's wealthiest person is extremely intelligent and surprisingly unpretentious. But I am disappointed by the recent speech on "creative capitalism" that he gave at the World Economic Forum in Davos last month.
Almost half the world's population is extremely poor, subsisting on less than $2 a day; a billion are thought to subsist on less than $1 a day. Most of the very poor live in sub-Saharan Africa and in southern Asia. Gates argues that the key to alleviating their poverty is "creative capitalism," whereby private firms in the United States and other wealthy countries seek both profits and "recognition" (praise) in serving the needs of the poor, for example by developing technologies designed specifically for their benefit. C. K. Prahalad, a business school professor admired by Gates, notes that Microsoft is "experimenting in India with a program called FlexGo, where you prepay for a fully loaded PC. When the payment runs out, the PC shuts down, and you prepay again to restart it. It's a pay-as-you-go model for people with volatile wages who need, in effect, to finance the purchase."
If there are good business opportunities in poor countries, however, it does not require Gates's urging for businesses to seek to exploit them. So the only meat in his concept of creative capitalism is his proposal that businesses accept subnormal monetary returns in exchange for getting a good reputation as do gooders. But if a reputation for good works has cash value, then, once again, there is no need for Gates to urge businesses to serve the poor; self-interest will be an adequate motivator. If it is true as he says in his speech that "recognition enhances a company's reputation and appeals to customers; above all, it attracts good people to the organization," then creative capitalism pays because it enables a firm to charge higher prices to its customers and pay lower quality-adjusted wages to its employees. Whether this is true of a given firm's customers and employees is something that the firm is better able to gauge than an outsider, even so distinguished a one as Bill Gates.
If on the other hand reputation does not have cash value, or enough cash value to offset the reduction in financial returns that would result from conducting one's business in such a manner as to obtain a reputation for altruism, then the motivation for creative capitalism would have to be businessmen‚Äôs feeling good about helping the disadvantaged. But which businessmen--corporate managers or investors? Do shareholders--the corporation's owners--feel good when corporate management picks objects of charity, unless the charitable giving feeds the bottom line (as when a firm makes charitable donations to activities and institutions in the places in which it has its plants or offices)? Unless shareholders are eager to see their corporations give massive amounts to charities that are chosen not by the shareholders but by management and that do not contribute to corporate profits, it is hard to see how urging businesses to be disinterestedly charitable can have a significant effect. A business that fails to maximize profits places itself at a competitive disadvantage relative to businesses that do maximize profits. Only if charity contributes to profits is it a plausible investment for an investor-owned firm.
There is a hint in Gates's speech that profit maximization is the real goal, and the question for "recognition" a veneer. When he talks up "business models that can make computing more accessible and more affordable," it sounds as if he may be trying to develop new markets for Microsoft. That is also the implication in Prahalad's statement that I quoted. Gates talks about "markets that are already there," that is, in poor countries, "but are untapped." In other words, there are business opportunities in poor countries, and business opportunities require imagination rather than altruism to exploit.
A curious omission in Gates's speech is a theory of why so many people are desperately poor. When he says that "diseases like malaria that kill over a million people a year get far less attention than drugs to help with baldness," he does not pause to inquire why that is so. It is so, first of all, because people in wealthy countries do not suffer from malaria, and, second, because cheap but highly effective methods of combating malaria, such as mosquito netting and indoor spraying of DDT (which would have few negative environmental effects, unlike outdoor spraying), are somehow not provided, but for reasons political and cultural rather than financial. We know that a nation doesn't have to be rich in natural resources to be prosperous. The essential ingredient of economic growth is human capital, and it depends primarily on the existence of a political system that prevents violence, enforces property rights, provides a minimum level of public goods, and minimizes governmental interference in the economy. Without such institutions, economic growth will be stunted; altruistic capitalists will not cure their absence.
Gates has discovered the Adam Smith of The Theory of Moral Sentiments, where Smith argued that people are not purely self-interested, but instead are actuated, to a degree anyway, by altruism. But modern studies of altruism find it concentrated within the family and trace it back to the "selfish gene"‚Äîhelping someone who shares one's genes may increase the spread of those genes in subsequent generations, and if so there will be natural selection for a degree of altruism. And so as the relationship between people attenuates because of distance, race, and other factors, the degree of altruism declines. That is one reason that Gates's argument that "recognition enhances a company's reputation and appeals to customers; above all, it attracts good people to the organization" falls short. Few customers will pay more, and few skilled workers will accept lower wages, to benefit poor people in distant lands.
Finally, I take issue with Gates's assumption that alleviating world poverty is an unalloyed social good. He calls himself an optimist, but some might describe him as a Pangloss, when he says that "the world is getting better" and will be better still if there are no more poor people. If Gates said that prosperity, longevity, and other good things have increased in most of the world, he would be right. But there is no basis for predicting that these trends will continue, given such threats to peace and prosperity as international terrorism, political instability, nuclear proliferation, and global warming. And if creative capitalism does succeed in lifting billions of people out of poverty, the problem of global warming will become even graver than it is because the world demand for fossil fuels will soar.
In the past few decades, economists have analyzed the competition from companies motivated solely by the desire for profits against companies truly motivated in part by other considerations. These considerations include altruism toward consumers, discrimination against minority employees, and a desire to help the environment by using carbon offsets to own carbon emissions. A main message from this analysis is that companies that forego some profits to pursue other goals have trouble competing against profit-maximizing firms. An example is the competition between firms that hire workers solely on the basis of their productivity and cost, and companies that give up profits to avoid hiring African-Americans or other minorities because they are prejudiced against these types of workers. Since firms only interested in profits will hire minority workers when that is profitable, and prejudiced firms will not, discriminating firms will be under a competitive disadvantage (for the details of the analysis, see my The Economics of Discrimination, 2nd Ed.,1973).
Companies that combine the profit motive with environmental and other concerns can thrive in a competitive environment only if they are able to attract employees and customers that also value these other corporate goals. Then the added cost of pursuing non-profit goals would be partially, if not entirely offset, by having customers who pay more for their products, such as fair-traded coffees. Or these companies may be able to attract high level employees relatively cheaply perhaps because the employees are excited by the prospects of spending some of their working time developing vaccines that can treat diseases common in poor countries. These appear to be the types of companies that Bill Gates wants at the forefront of his "creative capitalism" since he is encouraging companies to pursue recognition as well as profits.
How successful can this form of capitalism become? Gates quotes with approval the opening discussion in Adam Smith's great 1759 book The Theory of Moral Sentiments on the importance of altruism in human motivation. While this book does deal with motives like concern for others, and the desire for recognition and acclaim, Smith was skeptical not about the strength of altruism, but about its scope or reach. For example, he uses an example in this book that is highly relevant to the present and to Gates' quest. He asks "how a man of humanity in Europe: would respond to hearing " that the great empire of China‚Ä¶ was suddenly swallowed up by an earthquake‚Ä¶"? His answer was that "If he [this man] was to lose his little finger tomorrow, he would not sleep tonight; but, provided he never saw them [i.e, the people of China], he would snore with the most profound security over the ruin of a hundred million of his brethren, and the destruction of that immense multitude seems plainly an object less interesting to him than this paltry misfortune of his own" (Part III, Chapter 3).
Globalization has brought the situations in China, India, Africa, and other poor parts of the world much closer to the concerns of men and women in rich countries than they could ever have been in Smith's time. Still, essentially for the reasons given by Smith, it would be quite difficult to get many companies in richer countries to be highly motivated by the desire to find cures for diseases that are not profitable because they only afflict persons living in Africa and other poor countries who cannot pay much for the cures. It would not be any easier to get companies to spend significant resources to help lower carbon emissions, unless these expenditures were forced by governments, or compensated by governments and private philanthropies.
Nevertheless, unlike the well-known negative position on corporate responsibility taken by my great teacher and close friend, the late Milton Friedman, and apparently also by Posner, I do not see anything counterproductive with Gates and others giving encouragement to corporations to be more concerned with goals like distinction along with an interest in making profits. The real test is how viable such motives are in a competitive market environment where the competition also includes companies motivated only by profits.
My own belief is that there are far more effective ways to help poor nations of Africa and elsewhere speed up their rates of economic development and reduce the impact of malaria, Aids, and other devastating diseases. Probably the single most important step is to encourage much more market-friendly policies by African and other governments in poor countries. In addition, it would help to reduce, better still eliminate, tariffs by rich countries on the agricultural and other exports from developing countries, encourage more widespread use of DDT and mosquito netting in combating malaria (see my post on deaths from malaria on Sept. 24, 2006), and provide private and perhaps public subsidies to the development of new drugs that help fight diseases mainly found in poor countries.
No one knows for sure how many illegal immigrants are in the United States, Europe, and other countries, but there are surely many millions. Figures for the US, the country with the largest number, vary widely, but The Department of Homeland Security estimates that this country in 2006 had close to 12 million illegal residents. There is even greater disagreement about what should be done about these residents. This can be seen from the widely different stances taken by the presidential candidates and others.
At one extreme are those who call for the apprehension and eviction of as many illegal residents in the US as is possible. Yet this seems a very unrealistic goal when there are so many illegal residents; the US will not apprehend and return millions of persons to Mexico, or wherever else illegal residents came from. Nor is it desirable to go to the other extreme, and just give blanket amnesty to all illegal residents, for amnesty now would encourage future illegal immigration since they too would expect amnesty. Complete amnesty just makes a mockery of immigration laws, and rewards those who came to the US illegally, as opposed to the many potential immigrants who wait years for the right to immigrate legally.
I argued earlier on this blog that selling the right to immigrate would be the best approach to legal immigration (see my post on May 28, 2007 for details of this proposal). This approach would lead to acceptance of greater numbers of legal immigrants, perhaps by a lot, since the revenue from the payments by immigrants could replace other taxes. Paying for the right to immigrate would also negate the argument that immigrants get a free ride because they gain access to health care and other benefits. Moreover, making immigrants pay for to come attracts the type of immigrants who came much earlier in American history: younger men and women who are reasonably skilled, and who want to make a long-term commitment to the United States. These types would be more willing to pay a perhaps sizable price for admission because they would stand to benefit significantly from migrating. To prevent the price from excluding young and ambitious men and women who would like to immigrate but do not have the financial means, the US government could encourage a loan program to help finance the cost of immigrating that would be similar to the loans available to college students. The analogy to college students is close since immigration is also an investment in human capital.
One great advantage of selling the right to immigrate is that the same approach can be used to deal with illegal residents, so that it also helps solve the vexing problem of illegal immigration. Instead of offering free amnesty to illegal residents, this approach gives them an opportunity to legalize their status without giving them advantages over those who wait to come as legal immigrants. Illegal residents would be able to come forward and pay to change their status to that of legal residents. Many illegal residents would gladly pay for the right to become legal since that would open up enormously job and other opportunities available to them. The ability to buy the right to stay would be especially attractive to immigrants who want to make a long term commitment to this country since gaining this right stabilizes the future not only for them, but also for their children. Even though children of illegal immigrants born in this country are automatically citizens, younger children would tend to return with their parents if the parents are sent back.
Allowing illegal residents to convert their status to legal residents by paying the price to immigrate should satisfy both the hawks who do not want to give free amnesty to illegal residents, and the doves who do not want to force illegal immigrants to leave the country when they have been working and contributing to the economy. Under this proposed system, illegal residents would not get free amnesty since they would have to pay for the right to stay. Neither would they be forced to return to the countries they came from since they could buy the right to stay. Illegal residents should be required to pay more than those coming legally to punish them for having come illegally.
To be sure, the problem of illegal immigration would not go away even if all illegal residents could convert their status by paying the immigrant price (plus something extra). Some residents here illegally would try to avoid paying this price by remaining in the underground economy. These would be mainly illegal residents who only plan to work for a short while, accumulate a nest egg, and return to their home countries. If these immigrants were apprehended and want to stay, they should have to pay a higher penalty to stay than illegal residents who came forward voluntarily. If they refuse, they should be returned to where they came from, with possibly other penalties as punishment.
If one of the present immigration quotas prevented a person from coming legally, he can then either wait possibly a long time for a chance to come legally, or he could try to enter immediately as an illegal immigrant. A market for immigration gives these persons a legal alternative to immigrate when they want to because they can buy the right to immigrate legally. For this reason, an approach that sells the right to immigrate should greatly reduce the numbers of persons who come illegally, or remain as illegal residents. Effective policies have to be developed to cope with the remaining illegal residents and immigrants, but they will be a much smaller problem when many illegal residents would be able to legitimatize their status by paying for it. I do not believe that the problem of illegal immigration when everyone can buy the right to immigrate legally will be much more serious than is the black market in cigarettes, alcohol, and gasoline that has emerged in order to avoid the high taxes on legal transactions of these products.
The proposal I have made to sell the right to immigrate has been criticized as "repugnant", and contrary to the tradition of free and unlimited immigration to this country in the 18th and 19th centuries. But the immigration issues at present are also very different from those in earlier times. Immigration is no longer unlimited, for it is severely constrained by various quotas. Is selling the right to immigrate as repugnant as forcing millions of hardworking illegal immigrants to return home to countries they left possibly years ago? Or is a sale of immigration rights as repugnant as giving free amnesty to millions of persons who violated US laws by coming illegally? Selling the right to immigrate is a contemporary solution to a major contemporary immigration problem that has created deep divisions within the American population by pitting persons of different ethnic and skill backgrounds against each other. Instead of mindlessly using the word "repugnant", critics should concentrate on whether selling immigration slots to illegal residents as well as to immigrants who enter legally is a good way to help resolve these immigration conflicts. I believe it is.
There are four basic alternatives for dealing with illegal immigration: do nothing; do nothing about the illegal immigrants who are already in the United States but take measures to stop future illegal immigration; amnesty the existing illegals; deport them.
The first three alternatives are plausible; the last is not. The United States does not have enough police and other paramilitary personnel, or sufficient detention facilities, to round up and deport 12 million persons (our prisons and jails are bursting with 2 million inmates), and even if it did, the shock to the economy would be profound, as the vast majority of the illegal immigrants are employed. The mass deportation would create a serious labor shortage, resulting in skyrocketing wages and prices.
The first alternative, which is to do nothing, has a number of attractions, though doing nothing in response to a perceived problem is not in the American grain; fatalism is alien to American culture. Most illegal immigrants are hard-working, many will return to their country of origin after accumulating some savings (but be replaced by others), most do pay taxes but do not receive social security and other benefits, they are less prone to commit crimes than the average American (the reason is that if convicted of a crime they would be deported after serving their prison term), and they consume less health care than the average citizen or lawful resident. Their children attend public schools, which increases the costs to taxpayers, but the parents compensate by working hard for wages that may be depressed because of an illegal worker's precarious status, paying taxes, and receiving few other public benefits besides a free public education for their kids. The fierce hostility that many conservatives feel toward illegal immigrants appears to be a compound of hostility to unlawful behavior (they are illegal immigrants, after all) and of fear that immigrants from Mexico and Central America will alter American culture, which is still primarily northern European. The fear is similar to what many Americans felt about Irish and southern and eastern European immigration in the nineteenth and early twentieth century. The fear proved to be unfounded.
Concerns with congestion externalities and national security support the second alternative, that of trying to stem further illegal immigration; in particular, there is a strong national security interest in reducing the porousness of our borders, which terrorists might take advantage of. But this alternative is unstable, in the following sense. It is infeasible to build and man, at reasonable cost, a wall or fence that would actually close our border with Mexico; and anyway we cannot literally close it because a great deal of lawful traffic in persons and goods moves back and forth across the U.S.-Mexican border. The only way to block illegal immigration is to require all persons in the United States to carry biometric identification and to impose meaningful penalties on all employers (including household employers) of illegal immigrants, since no longer could an employer plead that he had been fooled by a false I.D. But these measures would be equally effective against existing illegal immigrants, as well as newcomers, so that alternative two would in practice approximate alternative four (expulsion of all illegal immigrants), unless the measures were enforceable only against new immigrants--but how would an employer know whether a new applicant for a job was a recently arrived illegal immigrant or one already living here?
So in practice any measure for closing off future illegal immigration would have to be coupled with an amnesty for the current illegal immigrants. The word "amnesty" is anathema in political debate over immigration, but the concept is inescapable. Illegal immigrants are--illegal. They are not supposed to be in the United States. If we let them stay, on whatever terms, we are forgiving the illegality of their presence. The grantor of the amnesty may demand a quid pro quo, but that does not make it any less an amnesty. A tax amnesty is conditioned on the taxpayer's paying the taxes that he owes. Similarly, an immigration amnesty, which would convert the illegal immigrant's status to that of a lawful resident eligible for eventual citizenship without having to leave the country, could be conditioned on the immigrant's paying a fine and learning English. (Illegal immigrants who had committed crimes should not be eligible.) Of course, the fine must not be set so high, or other conditions of regularizing one's status made so severe (such as requiring the illegal immigrant to return to his country of origin and "stand in line" for a U.S. visa), that most illegal immigrants would decide to remain illegal.
It is true that some amnesties come without conditions, such as President Carter's 1977 unconditional amnesty for Vietnam War draft dodgers. Opposition to an amnesty for illegal immigrants may be colored by a failure to distinguish between conditional and unconditional amnesties. The distinction is important. The conditional amnesty that I am proposing is functionally the equivalent of Becker's proposal to sell to illegal immigrants the right to become lawful residents.
The objections to an immigration amnesty, even in its conditional form, are threefold. First, it rewards illegal behavior. But that is something done all the time without controversy. A criminal who agrees to rat on an accomplice may be given a break in sentencing; that is the equivalent of rewarding an illegal immigrant for coming forward and paying a fine to regularize his status. Second, it is argued that an amnesty would create an expectation of a future amnesty and thus encourage further illegal immigration. But the argument just shows that the amnesty would have to be coupled with efforts, which as I have explained are feasible, to prevent further illegal immigration. Third, it is argued that an amnesty would be unfair to those foreigners patiently waiting in line for permission to immigrate legally to the United States. But why the United States should care about these people is obscure. They are not Americans; we do not owe them anything. If an amnesty solves our problems, the fact that it is in some global sense "unfair" to another set of foreigners deserves, in my opinion, no consideration.