As readers know, we advocate for a legalize-and-tax system to close the southwest border to illegal immigration, just as it has for marijuana smuggling. At the same time, we are witnessing the collapse of the legal marijuana system in California, and that carries important lessons for a market-based system to end illegal immigration.
An article from this weekend's San Francisco Gate decries a “mass extinction event” for California’s legal marijuana industry, with thousands of companies expected to go out of business this year. The Gate flags the obvious reason: “You can't make any money in this market.”
The state’s complicated cannabis regulations and high taxes add costs to legal operators, while widespread illegal farms and retailers undercuts legitimate companies. Limited access to banking means these companies pay exorbitant fees for simple banking services and have almost no access to loans. Federal law blocks pot companies from deducting most business taxes from their federal taxes, making pot businesses pay an effective federal tax rate as high as 80%.
Clearly, the authorities in California never bothered to conduct an analysis of the marijuana business to determine the maximum compliance costs and taxes which the market would bear. This is not a hard number to calculate, and as always, we start with the consumer. At issue is the premium the California consumer is willing to pay for legal marijuana. Even a brief review of the literature suggests that the maximum viable premium is about one-third over the price of street marijuana, in dollar terms about $75 / ounce. To appearances, the authorities never set $75 / ounce as the maximum burden the legal industry could bear and instead just piled taxes and compliance costs onto legitimate producers and resellers. As a result, legal pot costs $230 / ounce more than the street variety. That mark-up is three times the number Californians are willing to pay. No surprise, customers are returning to black market marijauna, and the legal industry is imploding. California botched marijuana legalization because it ignored the economic realities of producers and consumers.
These risks also apply to a legalize-and-tax system for illegal immigration.
Given the strength of the US labor market, the value of a one-year work visa for a Mexican day laborer is probably in excess of $9,000. That is, an unskilled Mexican worker would gladly pay the US government $25 / day for the right to work in the US on demand. If background-checked migrants could purchase such a visa for $9,000 (not $1,000 as GMU professor Bryan Caplan would have it), the border would be effectively closed to illegal immigration.
The border is not the issue. We ended alcohol smuggling from Canada and Cuba with a legalize-and-tax regime, that is, with the repeal of Prohibition. We have ended marijana smuggling over the southwest border with only partial legalization of marijuana on the state level. We can end the smuggling of migrant labor over the border the same way. That's not the problem.
Rather, the challenge is visa renewal. If the incumbent black market is allowed to operate in parallel with a legalize-and-tax system, then migrants who paid $9,000 will be working shoulder-to-shoulder with undocumented immigrants who entered the US earlier and are paying nothing for the right to work here. The risk is that legal migrants will allow their visas to lapse and join the undocumented: $9,000 is a big incentive to become illegal.
Therefore, the existing black market in labor must be addressed when a legalize-and-tax system is introduced. There are two options: deport the incumbent undocumented or, alternatively, legalize them with a work permit.
For conservatives, deporting illegals is the preferred option. After all, these people are breaking the law and should be punished accordingly. Much as this might provide moral satisfaction, it won't work, for several reasons.
First, any such proposal will fall to garner Democratic support. Nor will it find sympathy with Republican moderates like Susan Collins (Maine), Lisa Murkowski (Alaska) and Mitt Romney (Utah). Any initiative built on the deportation of 10 million undocumented migrants will never make it out of committee.
Second, mass deportation is unacceptable to the American public. Readers will recall the migrant poultry raids of 2019 under the Trump administration. These were widely condemned. The US public is simply not prepared to stomach the arrest and expulsion of otherwise law-abiding people working at regular jobs and trying to provide for their families. Such efforts will be criticized as "inhumane", "cruel" and "Gestapo actions". Not surprisingly, these sorts of raids were quietly deprioritized following the uproar -- over only a few hundred migrants. Imagine the challenges of trying to deport 10 million.
Third, employers will not release their labor until they know they have a replacement. Entire industries depend on undocumented labor, and if ICE attempts to remove illegals at scale, the managers, owners, lobbyists and lawyers of those same industries will descend on Congress, the White House and the various bureaucracies like a plague of locusts. And given that these same businessmen are prominent members of their local communities and important political contributors, politicians on the Hill, both Republican and Democrat, may be expected to fold like lawn chairs. They have in the past.
Finally, apprehending undocumented workers fearing deportation is not easy. They will flee and hide and arresting even ten thousand will prove a formidable task.
As a result, the likelihood of dismantling the black market in migrant labor through deportation approaches zero. It is not worth trying. This has nothing to do with justice, fairness, or the sanctity of law, principles which I will readily concede to my conservative readers. Instead, it is all about real world considerations. The issue is not the best policy in abstract, but rather the best that can be achieved given realities on the ground.
The existing black market can only be dismantled, as a practical matter, by legalizing it, that is, by issuing work permits to those workers who have not otherwise committed serious crimes like murder, assault, theft or rape. Workers will face a choice: take a work permit or be deported. This is not a hard decision, nor is it hard for the employer. Managers, as a rule, prefer to follow the law. It has both lower criminal and career risk. Human resources and operating managers will be grateful for legalization as long as it does not reduce their workforce or materially increase their costs, and legalization should do neither. A legalize-and-tax system can 'drain the swamp' of illegal labor, but will only succeed by legalizing most of the long-term undocumented in the country.
As the precedent of California's botched marijuana legalization shows, closing the border to contraband -- whether marijuana or undocumented labor -- is not enough to end the internal black market, in our case, the employment of undocumented residents without work permits. The prohibition on both new and existing migrant labor must be lifted to regain control over the border and bring order to the internal US labor market.