The Bear’s Lair: The John C. Calhoun immigration policy

The Trump administration and some Congressional Republicans want to expand the H1B and H2B immigration programs. Under these programs – H1B for skilled labor, H2B for unskilled — immigrants can work only for their sponsoring employers and must leave the United States if that employment ends. They cannot participate in the free U.S. labor market or apply for citizenship. Economically, we have seen before this policy of importing tied workers without full civil rights to undercut the free labor market – it was favored by Senator John C. Calhoun (D.-SC).

Both the H1B and H2B visas effectively came into existence with the Immigration Act of 1990, yet another of the highly destructive pieces of legislation signed into law by President George H.W. Bush, surely America’s worst President. (No, his son was almost as bad, but failed to achieve the record-breaking feat of being even worse.) The Act instituted the green card lottery, whereby 50,000 green cards would be allocated to immigrants at random, with preference being given to countries of origin with few existing U.S. residents – a recipe for minimizing the economic output and maximizing the welfare dependency of the immigrants concerned.

However, economically the lottery was not the worst feature of the 1990 Act; that feature was merely expensive, lowering the living standards of existing Americans and immigrants. The worst feature of the Act was the provision for the vast expansion of the previously limited H1B and H2B visa types, which created a second-class lower-tier labor market. The H1B allows companies to import highly skilled workers on a temporary basis, while the H2B allows the same for unskilled workers. The important feature of both visa types is that they do not allow visa holders to change employers without applying for a new visa, and they are strictly temporary, giving no path to eventual full “green card” immigrant status or citizenship.

The labor market created by the H1B and H2B visas therefore operates on a lower level than the ordinary free labor market for U.S. residents, and does not arbitrage with it. That’s why H1B and H2B visas are much more attractive to employers than a mere additional allowance of ordinary “green card” residence permits. Even if “green cards” could be allocated by a particular employer, they would entitle holders, once in the United States, to look for jobs with other employers. With extra green cards, even “tied” ones, it would be impossible for employers to hold wages of their green card recipients much below the wages of U.S. residents in similar employment. New “green card” holders would thus not be all that attractive as employees compared to domestic residents and would have only a moderate depressing effect on domestic wage rates. An additional allocation of H1B or H2B visas, on the other hand, is exceptionally attractive; an employer would be prepared to pay considerable amounts of money for such an allocation.

Provided adequately qualified residents of poor countries are available and willing to work in the United States, wages can be paid to H1B and H2B card holders that are only modestly above prevailing wage rates in their home countries, often far below those in the United States. For the H1B visa, the 500,000 qualified programmers graduated annually by Indian universities form an immense pool of labor that can be paid far less than U.S.-qualified programmers. The wage suppression this causes to U.S. workers becomes apparent when you compare wages available to young U.S. programmers to wages available to young U.S. lawyers, a field in which the American Bar Association has ensured that foreign-qualified lawyers cannot easily transfer.

Needless to say, the suppression of U.S. programmers’ wages caused by the H1B visa system also ensures that savvy U.S. young people will avoid STEM fields of study like the plague, instead making straight for the nearest law degree. They are simply responding to the market, which is badly affected by the existence of a separate lower-priced market of H1B visa holders.

The same arithmetic also applies to H2B visas for unqualified workers. Here the competitive wage rate that needs to be paid to H2B workers is close to zero, since all 7 billion of the world’s impoverished can be brought in. The jobs they take then become automatically “jobs American won’t do.” Of course they won’t, given the pathetic wages that employers pay their Third World substitutes. If the employers had to pay decent U.S. wages, however, as they did before 1990, plenty of hard-working drug-free Americans would be found to do these jobs.

This two-tier labor market did not exist in the United States in the glory years between 1870 and 1990 when America was becoming the richest country in the world, and by far the best to live in. It did however exist in colonial America, and for the first 80 years after Independence, because free U.S. labor was very expensive. Indeed, at the time of independence the U.S. had the highest wage rates in the world, according to Adam Smith, whose “Wealth of Nations” was published in 1776. The two-tier market then took two forms: indentured servitude and slavery.

Indentured servitude normally applied to British people who, either for reasons of debt or after imprisonment, would be indentured to a U.S. employer for a period of years. They would be paid little, but after their indenture would be freed in the high-wage U.S. market. It was thus a pretty good deal for the young and strong, although indentured workers were notoriously paid badly and suffered harsh working conditions. Some but not all the indentured workers were coerced; it was however more attractive for the worker than H1B/H2B because of the possibility of joining the free U.S. labor market at the end of the indenture. Indentured servitude more or less disappeared after U.S. independence; those who wished to work in the new country could and did simply migrate there.

Slavery was notoriously coerced, and often appallingly cruel. However, it served the same purpose of providing labor at below the prevailing market price, with the discount often capitalized as a purchase price for the slave. In Britain, slave owners after the Somersett decision of 1772 (which abolished slavery within Britain) were generally apologetic about the source of their income and wealth, recognizing its moral taint. In the United States, apologists for slavery such as John C. Calhoun claimed that it was a “positive good” and that “there never existed a wealthy ands civilized society in which one portion of the community did not, in point of fact, live on the labor of the other.” To Calhoun, the wage discount available through the institution of slavery was an essential component in the Southern economy.

There are two differences between slavery and the H1B/H2B system. One morally essential difference is that obtaining an H1B/H2B visa to work in the lower-tier market is presumably a voluntary act (though there may be instances, especially in the highly abusive H2B system, in which it is coerced.) The second difference is that H1B/H2B visas are not normally bought and sold by employers.

The free workers of the North in the 1850s objected strongly to the spread of slavery, partly on moral grounds but also because they correctly saw slaves as competing with free labor and driving down wage rates (they objected to large-scale immigration, for the same reasons.) For the same economic reason, the H1B/H2B visa system is rightly objectionable to the domestic U.S. population, especially the low-skill domestic population. It is now well-known that median wages for men increased little for 40 years after 1973; immigration in general was partly responsible for this but the H1B/H2B visa system, allowing labor to be provided in the United States at below market wage rates has had an even stronger wage-depressing effect.

It is little wonder that a high percentage of Millennials are attracted by the dozy socialism of Alexandria Ocasio-Cortez and her colleagues. They see the capitalist system as having been rigged and they are right. Interest rates have been held at far below market levels for the past two decades, causing urban real estate prices to soar into the stratosphere. That has benefited the Baby-Boomers who bought early but has brought price levels for real estate in most large cities that are far out of reach of most Millennials, especially those with student debt.

Second, since 1990 a flood of H1B/H2B visa holders has created an artificial pool of labor at wage rates far below those for domestic workers, reducing wage rates in the domestic market more than if those workers had simply immigrated. Entry-level salaries for computer programmers are much lower now in real terms than they were in 1998; that is a disgrace in a growing economy and it is almost entirely caused by the H1B system.

Millennials see U.S. capitalism as having rigged both the labor market and the real estate market against them, and they are right. The free market is not generally exploitative, but government meddling has produced unfree markets in labor, higher education and real estate, all of which tend to impoverish Millennials in particular.

John C. Calhoun would doubtless approve of the way in which we have used H1B/H2B visas to re-create a pool of restricted foreign labor at wages below the free market. But John C. Calhoun was not a capitalist – capitalism was Yankee.

(The Bear’s Lair is a weekly column that is intended to appear each Monday, an appropriately gloomy day of the week. Its rationale is that the proportion of “sell” recommendations put out by Wall Street houses remains far below that of “buy” recommendations. Accordingly, investors have an excess of positive information and very little negative information. The column thus takes the ursine view of life and the market, in the hope that it may be usefully different from what investors see elsewhere.)