Discount Rate Arbitrage: Migration Edition

My excellent friend and mentor Bryan Caplan takes George Borjas to task for some elementary errors in economic reasoning, reminding him that the profession had what we call the "marginal revolution" in the 19th century thanks to economists like W.S. Jevons, C. Menger, and L. Walras. In doing so, he raises an interesting question. Quoting Borjas:

The "breakeven" cost of migration given in the last row of Table 7.3 is around $140,000. In short, the entire present value [emphasis added SLW] of the global gains is wiped out even if the costs of migration were only half of what is typically reported in existing studies.

"Present value" is shorthand for the uncontroversial observation that holding money instead of spending it has an opportunity cost. All else equal, it's better to have a dollar today than to have a dollar tomorrow. That's one reason you have to pay lenders when you borrow money.

However, just like value, costs are personal and subjective, and that includes the costs of deferring consumption. I don't have a copy of his book yet, so I don't know if Borjas went to the trouble of re-estimating gains using heterogeneous discount rates, but it occurs to me that this could be a useful exercise.

Consider the possibility that migration is one way people match discount rate preferences. Even inside free-migration zones like the US, citizens tend to cluster according to relative profligacy and thrift. Indeed, that's most of Charles Murray's theme, and even if the R-squared doesn't quite approach 1 in the limit, it's not outrageous to claim that people do better when they can more easily associate with others of like mind. Hard-working people with the gumption to pack up and head for greener pastures display advantageous time preferences. Similarly, bucolic spendthrifts face much higher up-front migration costs and severely curtailed discounted future cash flows. If you la-la-la-la-la-la-live for today, the incentives to move to a high-productivity region are naturally much lower, regardless of the legal regime. The bugaboo of the immigrant coming to leech off the American welfare state is theoretically suspect, and empirically unsupported.

There's another wrinkle, though, an objection if you will. Suppose that under more liberal immigration policy, the wealthy nations do attract all these scrupulous, long-time-horizon folks. Wouldn't that rob their home countries of the opportunity to transmit time preferences? Isn't there something to the story that keeping up with the Joneses could include mimicking the prosaic savings behavior of the well-to-do? If prudent folks leave, to whom shall the imprudent look for guidance? It's easy to dismiss this objection as silly. After all, we don't force prudent people in the US to live on the wrong side of the tracks, but there's still an empirical question of how well time preferences can be transmitted and to what extent this transmission is effective and durable. I can think of ways to test efficacy in the lab, but the durability question is a harsh mistress. What are the actual components of folks' discount rates? How sensitive are they to treatment? How important is local knowledge? Lots of interesting questions there.

I'll also add that the $140k figure may conflate costs and transfers. When I move, I don't burn my house down. I sell it, so part of my loss is someone else's gain. It's erroneous to count private costs as social costs. We live in a world that grasps the simple concepts of double-entry accounting. Write-offs are a problem, sure, but one man's liability tends to be another man's asset. Focus on the Harberger Triangles and the Tullock Rectangles, yo. Migration restrictions are a political rent, and competition over rents tend to dissipate their value. Waste not, want not, you guys.

At any rate, migration may not be euvoluntary, but if we take seriously the possibility that matching discount rate preferences by geography is an undervalued benefit of migration policy, some minor revisions to Borjas's analysis should strengthen, rather than weaken the case for freer international migration policy.