Gordon Hanson, presenting his new book “Why Does Immigration Divide America” at the Institute for International Economics Thursday, referred to a restrictionist policy on illegal immigrants as “politically impossible.” The Wall Street Journal Friday made the same reference in relation to Congress potentially shutting down Fannie Mae’s economy-threatening derivatives operation. Why are apparently plausible policies “politically impossible” and what are the economic consequences of this?

Traditionally, policies thought to be politically impossible had to offend in one of two ways. One was to outrage some deeply held moral or economic belief held by a majority of the public, for example by proposing gay marriage or (in the Supreme Court’s decision in Kelo v. New London in June 2005) widening the scope of eminent domain provisions by which local authorities can seize people’s property for development.

The other was to remove some favored perquisite, long believed by the public to be a matter of God-given or at least constitutional right. The home mortgage interest tax deduction, for example, was a political shibboleth for decades in both Britain and the United States. In Britain successive governments phased it out step by step, beginning by capping it in a moment of economic crisis in 1974, then finally removing it in 1999. In the United States, a whisper of removing the home mortgage interest tax deduction at the time of the 1986 tax reform caused a huge outcry, to the extent that even mortgages on second homes were included in the “reformed” tax code, and no further such attempt has been made.

Traditional popular beliefs and widely enjoyed perquisites may be objectionable to theoretical free market economists, but they have the benefit of reflecting the popular will, supposedly paramount in a democracy. Public choice theory, first propounded by Nobel Laureate James Buchanan, weights political against economic benefits in the decision making of politicians; a policy that may be somewhat economically damaging will under this theory still be appropriate if it conforms to a widely held and legitimate popular prejudice.

This benign view cannot however be taken of “political impossibility” that occurs because of glitches in the political system. For example, until the Voting Rights Act of 1965, African Americans were to a large extent disfranchised in the South, while Southern Senators elected by the white electorate accumulated huge seniority and were consequently able to dominate the major Senate committees, particularly when the Democrats controlled the Senate.

Consequently, the economic development of the South, and economic opportunities for its African American inhabitants, were held back below the level that would have occurred in a free market, and U.S. national wealth was thereby rendered sub-optimal. Only when the “political impossibility” of Civil Rights legislation was overcome in 1957-65 did investment flow to the South in the volume which free market economics would have indicated, and African American standards of living rise to their free market level.

Such a “glitch” now appears to have taken place on the subject of immigration. Hanson reviewed the current literature on immigration policy, which shows that the purely economic benefits and costs of a high immigration of low-skilled workers are finely balanced, with the benefits accruing largely to employers of low-skilled labor (and consequently, to consumers of products and services produced with that labor) while the costs accrue to taxpayers in high immigration states and to domestic low-skilled labor, which suffers a serious erosion in its wage rates and living standards.

Hanson favors legislation along the lines of that sponsored by Senators John McCain (R.-AZ) and Edward Kennedy (D.-MA) which would provide for an amnesty program for the current estimated 10 million illegal immigrants living in the United States, combined with modestly stepped up enforcement of employer controls on hiring illegal immigrants and a modest reduction in the availability of welfare benefits to immigrants in general. Hanson outlined how reduction in immigrant welfare benefits would mollify taxpayer opposition, while the legalization of illegal immigration would benefit employers, and the illegal immigrants themselves.

McCain/Kennedy would however increase the competition from illegal immigrants to low-skilled domestic workers, and Hanson offered no mechanism by which its cost to such labor could be reduced. Since immigration is not in itself economically beneficial overall, the McCain/Kennedy bill would thus bring no economic benefit to the nation as a whole. It would merely favor employers of low-skilled labor, primarily certain business sectors (most of which are domestically oriented and un-outsourceable) and the rich at the expense of the low-skilled domestic workforce.

If the McCain/Kennedy policy, which would very probably in practice increase immigration as did the 1986 immigration amnesty, is not economically beneficial, then the reverse policy, of restricting low-skilled immigration tightly (primarily through vigorous employer sanctions) should not be economically damaging, but would simply redistribute income to taxpayers and low-skilled domestic labor and away from the rich and immigrant-employing business. In a one man one vote democracy, since there are more taxpayers and low-skilled domestic workers than there are rich, and corporations don’t vote, such a policy should be economically neutral and politically a winner.

Hanson stated however, that such a policy was “politically impossible” and there is reason in his view. Politicians depend on big corporations for campaign money, and those corporations employ lobbyists to ensure that politicians vote into effect policies that benefit them. The number of such lobbyists has doubled since 2000, and it appears that the McCain/Feingold campaign legislation of 2002, far from reducing their power, has increased it, since it has blocked most of the ways by which the independently wealthy, a power source separate from the corporate sector, can influence politics directly. As well as in immigration, the power of such lobbyists can be seen in the ability of Fannie Mae, even after scandal, to eviscerate legislation that would greatly restrict or close down the most taxpayer-threatening of its activities.

Labor unions, which traditionally could be expected to favor the interests of the lower paid, see low-skilled immigrants as a potential large new source of membership, since they will be low paid, less able than domestic labor to operate effectively in the U.S. workforce, and mostly brought up in cultures where unionization is higher than in the United States. Hence, in spite of their numbers, low-skilled domestic labor may be effectively disfranchised in this matter, their voice overwhelmed by the interests of employers and the illegal immigrants themselves, and muffled by the agency conflicts of interest in the labor unions that purport to represent them.

This is a clear failure of the political market, and it is a failure that may prove economically expensive, because the reality is that a high level of low-skilled immigration has large second order costs, not considered in a conventional first order economic analysis. The increased inequality caused by high immigration may have no direct economic cost (though you can argue that in the United States, inequality is now approaching the Latin American level at which economic growth is stunted.) However, assuming any type of convex utility function, this increased inequality, without an overall increase in output per capita, decreases the overall economic utility enjoyed by the American people.

Similarly, depressed low-skilled worker wage levels may have no direct economic cost, but it is reasonable to suppose that, if high school dropouts and even high school graduates are unable to establish themselves securely at a traditional working class standard of living, increased drug use, crime, illegitimacy and other social pathologies will result.

Finally, since all economic activity consists of an exchange of information between buyer and seller, and much of the information exchanged depends on a shared culture and knowledge base between the two sides to the transaction, increasing the diversity of a culture is likely to increase the informational costs of economic activity, and the probability of fraud of one kind or another. This effect is difficult to measure, and it may be small, but it is highly unscientific for economic elitists to dismiss altogether the notorious popular opposition to rapid increases in the population’s diversity.

As with Civil Rights legislation, the solution to this political market failure is politically contentious but necessary legislation to reverse the conditions that caused it. Restrictions on campaign financing must be repealed, thus bringing back wealthy individuals as direct political donors. Conversely, tight restrictions on campaign expenditure must be introduced, reversing their recent huge escalation. A low and tightly enforced limit on out-of-pocket campaign expenditure will force politics back to the retail level where it belongs (previous limits, brought in when public campaign financing was introduced in 1972, have been evaded in the last two Presidential cycles as fundraising potential has increased.) Public campaign financing must be expanded in scale, so that it covers at least half the new expenditure limits. Finally “independent” campaign activity, that bane of 2004 produced by McCain-Feingold, must be prohibited, so that all activity on behalf of a candidate must count strictly against that candidate’s expenditure limit.

The precise mechanism by which lobbyist influence is reduced or eliminated is a political not an economic question, over which I am not competent to pronounce. The economic imperative is to reduce drastically the importance of political fundraising, and the power of lobbyists. This will in turn eliminate all the sources of economically damaging political decisions except the only one valid in a democracy: the economically sub-optimal, even economically illiterate prejudices of the voters themselves.

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(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.)

This article originally appeared on United Press International.