No matter what happens next, last week’s stunning “LEAVE” vote on Brexit has permanently disrupted the status quo ante.
Both the Conservative and Labour parties are facing major leadership changes; conservative Prime Minister David Cameron has resigned, and Labour’s Jeremy Corbyn has been besieged by his shadow cabinet for his tepid support of the REMAIN option. Stock markets worldwide continue to tumble and the British pound has taken a beating.
The Sunday New York Times lead story took a somewhat hysterical tone when it announced that the Brexit vote “is already threatening to unravel a democratic bloc of nations that has coexisted peacefully for decades.” And the strong supporters of REMAIN are now determined, it seems, to predict the worst, perhaps in the hope that Great Britain will take the opportunity to “reconsider” its decision in light of the global economic hit that occurred the day the Brexit vote was announced.
As I recently argued, the Brexit vote was complicated, given the pros and cons on both sides. But now that the voting has occurred, the correct response is to put the fear-mongering aside and to think hard about the two major issues, so central to the Brexit debate, which will continue to vex Britain and the EU—trade and immigration. On this score, it is important to realize that those two issues are distinct. The argument for free trade is pretty clear—but with the much murkier issue of immigration, it is virtually impossible to come up with a knockdown argument in favor of either fully open or fully closed borders.
Let’s start with free trade. Here, the basic economic principle of comparative advantage works with equal force in both domestic and international markets. The most efficient form of production comes through a division of labor in which all parties provide those goods and services at which they are, relatively speaking, better at producing than anyone else. Thus, even if nation A were better than nation B at all forms of production, it hardly follows that nation B should remain idle. Instead, it should produce in that area in which it has the smallest disadvantage relative to nation A. So long as trade between the two nations remains open, both nations should on balance be better off than they would have been if each kept tariff walls high against any imports. The mutual exchange produces higher outputs across the board, and thus fuels growth in both nations. The principle is scalable, so that the more nations that come to the table, the greater the gains from trade, in both the international and domestic arenas. The substantive goal is to make the borders among sovereign nations porous.
The strength of this free trade position was evident in the recent discussions over Brexit. It was easy for the opponents of Brexit to denigrate their supporters as “little Englanders” who want to stick their heads in the sands by disengaging from Europe. But that gross mischaracterization misses a key point: being in the EU prohibits Great Britain, and its other member nations, from negotiating trade deals unilaterally with other nations, such as between Britain and India and the United States, where the potential gains are enormous. It is odd, as Paul Gregory writes, that professional economists think that Brexit is likely to lead to a systematic catastrophe, as if its only consequence is the loss of unfettered British access to the sclerotic European markets, whose systematic slow growth stems from the foolish assumption that uniform restrictions on labor and capital markets are better than no restrictions at all.
Unfortunately, just that misconception is the view of Glenn Hubbard, the Dean of the Columbia Business School, who has treated the British vote as a narrow form of populism driven by people who have a “deep distrust of the benefits of the global economy.” But it is all too clear that he has not paid any attention to the writings of the most articulate defenders of Brexit, such as Daniel Hannan, whose entire pitch runs in exactly the opposite direction. Britain is a small maritime nation with few natural resources that has to make its way by trade to the far corners of the globe. The difficulty with the EU is that Great Britain had to take the bitter with the sweet. To gain access to the stagnant EU, it had to accept the power of the EU to block the trade deals that Britain could make with Canada, India, and the United States—at least so long as President Obama refuses to back off his foolish threat to put Great Britain at the back of the queue. Indeed, if all went well, Britain could enter into a free trade agreement with the EU.
To be sure, the case for free trade is not without its drawbacks. The usual complication from free trade is the massive dislocation in domestic markets as workers lose out to cheap goods and services from foreign competition. These jarring social and political complications make it clear that even with trade we live in a second-best world. But again, it is critical to draw the right inferences. Free trade is a tonic that can unlock strong domestic competition by allowing local consumers and firms to cast a wider net for appropriate trading partners. The ability to both enter and exit local markets is a powerful prod toward internal improvement that loses its sting if outsiders are kept at bay. Even in domestic markets, the only way in which consumers can benefit is if incumbent firms are subject to displacement by newer and superior rivals.
The same rule applies in the international market. Job placement programs are often thought of as a political necessity, but that common conclusion should be tempered for two reasons. First, no such program will ever allow displaced union workers who enjoyed some element of monopoly rents to replicate their higher wages even after they get new jobs in the competitive economy. Second, scaling back this program lowers taxes and thus increases the prospects of overall domestic growth, giving all workers, including displaced workers, better opportunities. The best approach here is not to ratchet the current system of unemployment benefits to give greater protection to workers who lose out to foreign instead of domestic competition, even if these two could be kept in separate compartments. At all times, the primary effort is to keep up the flow of goods and services across the national and state lines.
That relatively clear prescription, however, does not hold with respect to immigration. The source of the contrast is all too obvious. The full range of adjustments to new people streaming into a country in the hundreds and thousands are far greater than those required with respect to goods. Goods do not have to be housed and fed. They are not capable of committing crimes. They do not have divided loyalties to their home country. They do not demand the right to vote or to participate in political affairs. They do not intermarry with local citizens or with immigrants from other lands. They do not have to receive driver’s licenses or social security or education for their children—the very issues that led a divided Supreme Court in United States v. Texas to deny President Obama the opportunity to unilaterally rewrite the U.S. immigration laws. Goods and services are not, in a word, people. Immigration was always easier in a small government state, because strong property and contract rights are scalable, but positive rights to housing, education, or health care, are not. All transfer payments must be recalibrated to take into account how new population flows.
The powerful anti-immigration forces play on these negatives, which become especially acute with mass migration borne of political oppression and economic desperation. There is no doubt whatsoever that fears of mass immigration played a critical role in the Brexit decision, and there is little wonder why, given the looming influx of immigrants and refugees from the Middle East.
Yet there is another side to the story. Immigrants have often proven to be positive sources of vigor and innovation for the countries to which they come. They should not be seen only as competitors for scarce British or American jobs and homes. They should also be regarded as potential sources of new businesses that create jobs and homes for current British and American citizens. These immigrants often display fierce loyalties to their new home countries precisely because they have suffered under the lash of tyranny, which makes them willing to go to any lengths to defend their new freedoms. As Fraser Nelson wrote in the Wall Street Journal, Brexit in part was fueled by a conscious uneasiness about the loss of British identity, coupled with a sense that the British could not open their doors to productive people from anywhere, but had to take in, no questions asked, anyone who had the requisite papers from some other EU nation.
So therein lies the rub. It is often difficult to know whether the benefits of immigration outweigh the costs. Immigration from unstable and war torn countries may well carry greater perils than immigration from more stable places. Yet, by the same token, it is just those people from war torn areas that may work hardest to preserve the set of local freedoms. So what strategy is to be used to separate the good from the bad effects? Should nations have strong checks to make sure bad immigrants do not come in, even if it means keeping desirable immigrants out? Or should the doors be opened wider to let more people in, knowing that they can be deported with relative ease? The choices come in infinite gradations that makes consensus hard to achieve. Differences in national and regional cultures may matter, but it is hard to say in which direction.
In light of these considerations, it is possible to defend free trade, but not free immigration, in relatively categorical terms. The Brexit debate on immigration resonates in the United States, where gridlock is the order of the day. To break that impasse, it is best to begin where the ripest fruit is easiest to pick, namely, by reforming the rules that keep the best and the brightest from around the world, often with graduate training in the United States, out of the country. But the President and Congress have shown little interest in removing the tight lid on the number of H-1B visas issued to skilled foreigners who seek employment in the United States. The list of stated entry qualifications is filled with anticompetitive restrictions. Potential applicants are told that “you must have an employer-employee relationship with the petitioning U.S. employer”; that you must meet educational requirements in your specialty set by the federal government; and, of course, that “you must be paid at least the actual or prevailing wage for your occupation, whichever is higher.”
It is all too clear that these regulations are not adopted to protect consumers or to promote their welfare. They are just another in the endless set of anticompetitive restrictions that cripple a nation in order to protect incumbent workers. There may be no general solution to the immigration question. But we should allow more skilled workers into the United States, with the explicit understanding that their time in the United States does not move them forward on the path toward citizenship. And it might be wise to grant temporary asylum to persons from war torn lands on the same terms. Perhaps, best of all, it makes sense to reduce trade barriers with poorer nations so that their citizens can improve their own position without having to leave home. The basic lesson applies with equal force to the Great Britain, the EU, and the U.S. The more free trade among nations, the less pressure there is on the immigration systems whose shortcomings are not likely to be resolved either here or anywhere else anytime soon.