EU immigration: how to maximise the benefits and minimise the costs

In welfare states, the economic benefits from immigration may be eroded by the additional costs of government handouts and public services. This problem has been particularly evident with some refugee populations. For example, according to one estimate, just one in ten working-age Somalis in the UK is in full-time employment, while the vast majority are dependent on subsidised housing, much of it in high-cost London. Indeed, the welfare system may be largely to blame for such poor outcomes, due to the high effective marginal tax rates imposed on those moving into work.

Outcomes for EU migrants have tended to be more positive, with northern and central Europeans in particular exhibiting high employment rates. Nevertheless, the large numbers in low-paid work that pay relatively little tax may still impose significant costs, particularly households with children that receive child benefit, child tax credits, possibly housing benefit and/or social housing, childcare subsidies, and state education, which costs taxpayers around £5,000 per pupil.

In addition, there may be significant ‘externalities’ from migration, such as increased congestion on transport networks, crime and anti-social behaviour, disruption to settled communities and difficult-to-predict long-term effects on culture (both positive and negative). The strong tendency for BME groups to support the Labour Party is an example of a long-term impact on the UK’s political environment.

However, the costs identified are to a large extent not the consequence of immigration per se, but result from its juxtaposition with an extensive welfare state and government provision of services. In a truly free society, by contrast, support for low-income households and services such as education would be provided voluntarily. Taxpayers would not be forced to pay for them. At the same time, property owners, whether individually or in voluntary communities, would be far freer to decide how their land was used and would also enjoy freedom of association or dissociation. In other words, they could decide who would be allowed to enter their property, which, as well as residences and workplaces, might also include roads and other ‘public spaces’ currently owned by governments.

Various rules of entry could be adopted (see these case studies). For example, existing residents might vote on whether to allow individual applicants to move into their community. Alternatively, restricted covenants could require residents or workers to meet certain requirements before gaining entry. In some cases, simple rules of thumb might be used in order to minimise transaction costs. A completely open policy would of course be another option.

Rather than a one-size-fits-all policy imposed by government, different models would compete with one another, allowing market segmentation. Such voluntary associations could therefore be tailored to individual preferences. Cosmopolitans preferring a diverse cultural mix would be free to choose a community with an open approach. Conservatives placing a high value on their own traditions might prefer a model with far more restrictive rules of entry. The latter approach could prove popular with religious and cultural minorities wishing to preserve practices under threat from the influence of wider society.

Under such a system, property owners and voluntary associations would bear the lion’s share of the costs of their policies towards incomers. A market discovery process would ensue, with successful models attracting more business and unsuccessful ones declining. In this way, rules of entry would gradually evolve, tending to increase the benefits of migration and reduce the costs, while adjusting to changing conditions.

Contrast this with the one-size-fits-all policies imposed by governments. Politicians cannot obtain the knowledge required to set efficient quotas or entry requirements (such as points-based schemes or charging immigrants a fee), and such measures cannot be tailored to suit the wide variation of preferences on immigration. The transaction costs of state systems may also be high, with poor incentives to reduce them. Moreover, immigration policy will tend to be influenced by concentrated interests, for example ‘key’ sectors seeking special favours.

Despite the obvious flaws of immigration policies based on central planning by governments, the prospects for a voluntary system are slim. In the UK, there are very strict state controls over land-use, most transport infrastructure is government-owned and in both the UK and EU there are strict prohibitions on freedom of association/dissociation. Given the dominant political culture, it is difficult to envisage that these constraints will be removed in the near future.

This raises the question of which immigration policies should be adopted post-Brexit if a free-market model is off the table. The most straightforward way of increasing benefits and reducing costs would probably be to reduce substantially migrants’ entitlements to welfare benefits, social housing and government services such as childcare and education, while at the same time removing barriers to low-cost private provision, which eventually could be adopted by the whole population. In addition, market pricing could be introduced on transport networks to address congestion issues. Other things being equal, this approach would be likely to cut numbers significantly, while addressing directly the issue of costs imposed on taxpayers and pressure on public services.

It would avoid the central planning problems, special-interest capture and high administration burden of points-based rationing. But it would also contravene current European Economic Area rules on equal treatment, with implications for the deal between the UK and the EU. Nevertheless, because it would maintain freedom of movement, EU institutions and member states might consider it less objectionable than the alternatives.

Is there a free-market solution to overfishing?

Overfishing is often presented as a classic example of market failure. When individual fishing enterprises are competing, the benefits of winning the ‘race to fish’ accrue to the successful ones, while the costs of depletion are shared among all the fishermen in the fishery. There are therefore poor incentives for conservation – the so-called ‘tragedy of the commons’.

This is a simplistic interpretation, however. Market feedback mechanisms offer some protection to stocks. Declining yields will tend to force less efficient fishermen out of business, for example. Providing there is free trade in fish and substitutes are available in food markets, the combination of increasing costs and declining catches may not be offset by higher fish prices. The outcome will partly depend on the species in question. Its scarcity value, reproductive behaviour and migration patterns may affect the probability that overfishing leads to a collapse in stocks.

The history of the fishing industry shows overfishing has been hugely exacerbated by government intervention, in particular subsidies for uneconomic fishing businesses. These handouts have undermined the market mechanisms that would have helped to conserve stocks. The resulting overcapacity – too many vessels chasing too few fish – has strengthened the rationale for costly and bureaucratic regulation of the sector, as exemplified by the EU’s Common Fisheries Policy. As public choice theory would predict, such regulation has inevitably been subject to politicisation and lobbying by special interests, which has meant problems with overfishing have persisted. The creation of artificial property rights by governments, such as the Individual Transferable Quotas used in Iceland, has tended to deliver superior allocative efficiency compared with other forms of regulation, but has not been immune to special-interest influence or indeed discarding.

These problems raise the question of whether an unhampered market could solve the problem of overfishing. Clearly the removal of direct and indirect government subsidies would go a long way towards resolving the issue. However, it would not remove the tendency entirely and both yields and efficiency could still be suboptimal. While collapses would be less likely, they would not be impossible – and there are indeed examples that pre-date direct state subsidies to the industry.

There would therefore appear to be a trade-off between competition and efficiency. This is the case in many sectors, for example due to the ‘transaction costs’ resulting from competition, or because competition means economies of scale are lost (the rail industry is a classic example). Indeed it is a common misperception that unhampered markets inevitably produce a high level of competition. It depends on the characteristics of the sector concerned. One way markets can reduce transaction costs and capture economies of scale is through mergers and acquisitions.

In the fishing industry there are potentially major efficiency losses from competition in the form of the ‘race for fish’, both in terms of wasteful duplication of equipment, fishing effort and the depletion of stocks to suboptimal levels. There may therefore be strong incentives for fishing enterprises to merge or evolve into one large business (which could perhaps be some kind of cooperative) that held a near monopoly over fishing in a particular region. This dominant enterprise would then determine catch levels to maximise returns.

If fisheries remained ‘open access’, how could this structure be sustained? The market solution may be vertical integration. The dominant firm would merge with the harbours and/or the distribution operations in the region and perhaps even the fish processing industry, enabling it to exclude local competitors and to capture economies of scale that would act as a further market-based barrier to entry. Competitors from further afield would face much higher costs to reach the fishery. Nevertheless, initially the dominant firm might choose to deter them by deploying some of its vessels in a ‘race to fish’ in order to drive them elsewhere. Clearly there would be strong incentives to develop agreements between neighbouring firms not to stray into each other’s area of operation, to avoid the costs of such behaviour, and possibly also rules regarding migrating fish.

Subsidies from foreign governments to their own industries could upset this market outcome by artificially sustaining the ‘race for fish’, which raises issues regarding state protection of territorial boundaries within the current system of Exclusive Economic Areas. However, in principle there is no reason why these dominant firms or associations should not straddle existing national boundaries, with their geographical extent evolving according to market conditions.

This analysis also suggests that the state ownership/subsidy of fishing ports and associated distribution infrastructure (resulting again in substantial overcapacity) is likely to be a key factor in hindering a market solution to the problem of overfishing. In some countries there could also be problems with competition rules.

Finally it is important to consider the impact on consumers. The ‘market power’ of the vertically integrated firms would be severely limited. Under free trade they would be competing with fish suppliers from around the world, including produce from fish farms. Moreover, fish can be substituted for other foodstuffs and make up only a small percentage of the overall food supply. And the benefits would be substantial. A market solution to overfishing would deliver major benefits for consumers, with higher yields leading to lower prices and improved quality. At the same time, the inefficiencies, subsidies and special-interest influence associated with state-imposed fisheries policies would be avoided.