How Will the Wall Be Funded?

Donald Trump has reaffirmed: “One way or the other Mexico will pay for the wall.” At the same time, as recently as today, Trump threatened a government shutdown if Congress did not provide funding for the wall. Time to consider how these points are — or are not — internally consistent, even allowing for the possibility that Mexico might “ultimately” pay.

Back in February, I examined the options for funding the wall built at the US-Mexico border. Since the cost is estimated at $12-$40 billion, this funding issue is a serious one. (That figure does not include annual maintenance and repair costs.)

At the time, there was speculation of a Destination Based Cash Flow Tax (DBCFT), or “Border Adjustment Tax”, would provide funds. However, those proceeds would be derived from all countries, not just Mexico.

Now that the prospects for a Border Adjustment Tax have dimmed, how can Mexico be forced to pay? Mr. Trump has again threatened an end to Nafta, despite ongoing negotiations. As I discussed in this post, and end to Nafta and reversion of treatment of imports from Mexico to MFN rates implies something like $11.8 billion of tariff revenue annually, under plausible assumptions regarding trade elasticities. However, in a deeper sense, the funding coming from Mexico is even less, as some portion of the $11.8 billion would come from American consumers (via higher import prices).

Given these calculations, Mexico funding the wall would only occur if the Mexican government were to effect the fiscal transfer. However, the Mexican government has stated [1]:

“As the Mexican government has always stated, our country will not pay, under any circumstances, for a wall or physical barrier built on U.S. territory along the Mexican border.”

So, to summarize: (1) Congress is unlikely to fully fund in the near term [2], (2) the Mexican government is unlikely to fund by way of fiscal transfer, and (3) ending Nafta will only provide sufficient revenues over the course of several years (if the revenues can be dedicated to wall building instead of going into general funds), at the cost of higher prices for American consumers and producers.

This leaves certain other options, which under other circumstances (such as when the rule of law obtains), would not be considered: expropriation by military means, i.e. “gunboat diplomacy”. The current Administration, however, has stated a desire to move beyond traditionally defined bounds of international diplomacy.

17 thoughts on “How Will the Wall Be Funded?

  1. Steven Kopits

    You are spending way too much timing criticizing Trump and way too little time proposing something new. Economics is not mute on this topic. From the profession’s perspective, the solution is straight-forward and should be championed by economists as such.

    A Winning Immigration Strategy for the US

    Forget Mexico—Here’s who should pay for the wall (CNBC)

    How Trump can end illegal immigration right now—without a wall (CNBC)

    1. Menzie Chinn Post author

      Steven Kopits: I’ve elsewhere discussed the implications of revising immigration policy — however, the menu of options is delimited by the political process.

      You want to tax the undocumented crossing the border? I think you misapprehend the issue — a large number of undocumented involve people legally entering via ports (including airports) and overstaying visas. You’ve focused on the part that excites the political sphere (and no surprise hits a certain group). And you cite FAIR as a source for estimates? Hmmm.

  2. Steven Kopits

    Let me start with the political process.

    The process begins with someone standing up and saying they have a better idea. Economics has a better idea. Illegal immigration is nothing more than a black market in labor. Black markets are among the easiest of policy problems to fix because they can only be sustained by direct government support. Stop the government from preventing trade, and the black market disappears. This is a very simple concept, and any economist is familiar with it. Thus, the economics profession knows the right answer and has confidence in its prescription.

    So that’s the beginning.

    As the next step, the economics profession — and that includes you — needs to stand up and be counted. If we succeed, 700 migrants, who otherwise would have died trying to cross to the US this year, will live. Economists need to speak up. We know how to fix this problem.

    Now, I agree that this constituent process has to start in the grassroots, and it must start with Trump supporters. Absolutely. But here too we have some initial data.

    When I wrote the two CNBC articles, I did them based on my experience in post-communist Hungary, which I can assure you gave me real empathy for undocumented Mexicans. I wished at the time that Hungary had a simple gate fee program that would allow nothing more than a legal presence, with no access to any services beyond ordinary police and fire. I drafted the articles on this basis; they were really just throw-it-out-there thought pieces. But CNBC offered to publish them.

    And then a funny thing happened. Readers looked up my email address and starting send me letters, even letters on paper. And the gist of these were: “We like it. Go do it.” This was shocking in its own way. Having stood up, I had apparently volunteered.

    The more time I spend on the topic, the more I have come to appreciate that the fate of those who would die in the desert is in my hands. Not some generic person’s, not the government’s, but mine alone. There is no backup to me, no generic social force which will solve the problem. There is nothing deterministic about the outcome, save that thousands more will die in the desert and perhaps 100,000 will end up as the victims of human trafficking in forced labor and prostitution if the current system endures. And a wall will not change that. If anything, deaths may well rise if Mexicans — like North Africans drowning in the Mediterranean en route to Europe — are forced into the water to make the transit.

    The feedback I have received tells me this concept has legs. The average Joe gets it: If you want entry into the club, you’ve got to pay the gate fee. There is a large public willing to give this approach a try.

    But it is a long road. I certainly need allies and help. If you want to help, help. You can make a difference.

  3. Steven Kopits

    I did not misapprehend the problem.

    From the very first linked article:

    “The Pew Research Center estimates that 5.6 million undocumented Mexicans live in the US. According to the Center for Migration Studies, 42% of these over-stayed their visas rather than coming undocumented over the border. For those who came on visas, the wall is irrelevant.

    “Could illegal immigration by visa overstays be prevented? Probably not. Almost 19 million people entered the US from Mexico last year on tourist visas. Even if every illegal Mexican were deported and the wall built a mile high, the entire undocumented Mexican population could be reconstituted from visa overstays, theoretically, in as little as four months. If there is work and a material wage differential to Mexico, workers will come, on foot, with tourist visas, by water or air. But they will come.”

    The program as originally envisioned applied to resident undocumented Central Americans from Mexico, Guatemala, El Salvador and Honduras. The intent was to provide status, not citizenship. With status, you can do everything a citizen can except 1) you cannot vote, and 2) you are not entitled to social benefits.

    I later realized that the program also had to cover a good chunk of the 19 million Mexicans who come in and leave on valid tourist visas (another lesson from post-communist Hungary). A large percentage — 80% of would not surprise me — will come to the US to work on their tourist visa and go home when their assignment is completed. I would guess this adds another 3-5 million persons (individuals) to the illegal workforce, with an average workdays equivalent to 1-1.5 million full time undocumented laborers in the country (albeit with sharp seasonal swings).

    So, yes, the program is addressed primarily towards these two groups: undocumented residents from Central America and non-resident Mexican tourists working in the US illegally.

  4. Steven Kopits

    As for FAIR, I needed a set of baseline numbers, and FAIR had them.

    I think FAIR’s tax revenue numbers are pretty firm, as are some of the expense numbers, for example, on healthcare expenditure.

    The outlay for education is probably pretty solid. I cross-checked some Arizona numbers and they held up.

    Public assistance should also be pretty knowable.

    The contested numbers would be law enforcement and ‘general’. These could be over-stated. However, we do keep a veritable army of agents on the southwestern border.

    In any event, I used the FAIR number as a baseline and worked my own numbers as an increment. I have run the numbers several different ways, and it still comes out that a market-based work visa program for 75% coverage of all Central Americans swings the Federal budget by about $35 bn. If you cover 100% of Central Americans, the swing is about $45 bn. Not chump change. Enough to get Obamacare reform over the hump, I would guess.

  5. Bruce Hall

    There are two issues involved here: 1) legal/sovereignty and 2) economic. There is little doubt that the first issue presently supports Trump despite the second issue providing support to those who say that all forms of immigration (legal or not) benefit the U.S. The wall may or may not be an appropriate response to the assault on the first. But there is also a question of just how much benefit does the U.S. receive from illegal immigration.

    Professor George Borjas of Harvard’s Kennedy School weighs in on that:

    As with many issues in economics, Dr. Borjas relies on models and theory to reach his conclusions among which is:
    Of the $1.6 trillion increase in GDP, 97.8 percent goes to the immigrants themselves in the form of wages and benefits; the remainder constitutes the “immigration surplus” — the benefit accruing to the native-born population, including both workers, owners of firms, and other users of the services provided by immigrants.

    He further refines that:
    Although the net benefits to natives from illegal immigrants are small, there is a sizable redistribution effect. Illegal immigration reduces the wage of native workers by an estimated $99 to $118 billion a year, and generates a gain for businesses and other users of immigrants of $107 to $128 billion.

    This may be part of the reason why corporations like immigration, illegal or not, while blue collar workers feel betrayed by the “workers” (Democratic) party and rallied around Trump.

  6. Steven Kopits

    Honestly, Bruce, I have no idea how Borjas gets there.

    There are many, many immigrants to the country. I am one of them. Do I count in Borjas’ calculus?

    For now, let’s keep the discussion to illegal immigration.

    According to Pew, there are 8.3 million undocumented illegals in the US workforce (of which 73% comes from Central America). The average wage would be around $28,000 per year, or about $200 bn overall.

    Of this, about $60 billion — or about 1/3 of total wages — leaves the country in the form of remittances. The rest is spent locally.

    Illegals are generally employed in low productivity work, such that their wages in their total output is typically 33-40%. Thus, the total GDP generated by illegal immigrants is about $600 bn, of which $200 bn is paid to the workers, and of which 2/3 is spent locally and 1/3 sent back to Mexico.

    The other $400 bn is paid to other factors, US employers, US employees, the rest of the supply chain, a portion for imports, etc. Thus, illegals enable GDP about three times their own activity and of this, 2/3 is captured by US factors.

    The counter argument here is that the labor of illegals is purely displacement, and that the undocumented are taking jobs away from real Americans. As it turns out (and it always turns out this way), we have data, in this case from Arizona.

    Arizona cracked down on illegals a few years ago, causing a major outmigration (to Texas). Of the jobs formerly held by illegals, 90% went unfilled. Thus, the level of displacement appears to have been around 10%, in other words, negligible. And that’s no surprise. Employers do not hire Mexicans because they hate Americans. They hire Mexicans because few Americans want to pick berries under the hot California sun where a Porta Potty counts as an amenity. Not many Americans want to turn down beds at the Red Roof Inn, clean houses, mow lawns, or engage in low level construction muscle work. For the record, Mexicans don’t like these jobs either, but as they can earn 3x their wage in Mexico, they take on the work. If you could make $200k picking berries in Guadalajara, I can assure you plenty of Americans would dump burger flipping and sneak over the border to Mexico. It’s all about the wage differential, and that tells us that the wall will fail, with physical structures as ever defeated by the laws of economics.

    I’ add that the economic impact of illegals is even less than suggested above, because remember that illegals spend 2/3 of their income locally. Thus, the eviction of illegals not only reduced the available labor force, it also reduced local demand. The impact on Arizona’s GDP was estimated at -2%.

    From the GDP perspective, the primary impact of evicting illegals will be to restrain certain industries and convert domestic production into imports.

    1. Bruce Hall

      Steven, I agree with you and Dr. Borjas (although you each have a different set of numbers and reasons) that immigration has always been a part of America’s growth… both population and economic. That is not to say that the benefits/costs are distributed uniformly throughout the U.S. economy and workforce.

      I also agree with you that a uniform process of bringing immigrants into the country is greatly preferable to chaos over the border. The wall, I believe, has come to symbolize frustration with the inability/unwillingness of federal/state government to provide and enforce a uniform process. The consequences are certainly more felt along the swath from Texas to California.

      It is difficult to have confidence in the numbers being bandied about supporting/refuting various positions. For example: (the melding of legal and illegal immigrants distorts the picture)

      They both can’t be correct (we’re going to ignore the fact that being in the U.S. without proper process is a crime).

      Neither can the assertion that illegal immigrants displace/do not displace U.S. workers from jobs. (may be an issue of mobility)

      Given the contentiousness of economic arguments pro/con, perhaps your 8-step screening along with a strict enforcement of immigration laws and a re-examination of the humanitarian issues is necessary on the political/legal side of the equation.

      1. Steven Kopits

        Black markets bring criminality, to the best of my knowledge, without exception. Here’s how:

        1. Border jumping is illegal, and being arrested a problem, so jumpers has a reason to flee or resist, or say, break and enter into someone’s home to avoid border patrols.

        The very act of coming over undocumented is illegal, and may lead to consequent acts which are also illegal.

        2. Drug cartels control the human smuggling trade
        Consequently, border jumpers may be coerced into being drug mules. A simple math estimate from border control suggests 12% of illegals carry drugs. The governor of Arizona thinks it’s 50%. I think it’s probably between 12-25%. Thus, illegal border jumping is comingled with the drug trade — but many of those drawn into it are not committed drug smugglers, but rather berry pickers who have walked eight days through the desert and forced to carry drugs to finish their journey.

        3. Lack of documentation leads to onward crimes in the interior. Most common is probably driving without a driver’s license.

        4. Poor people commit more crime. It was true in historic England, too.

        5. A black market draws in those more prone to take risks and break the rules, ie, a proto-criminal element.

        In general, however, I think the experience of many sanctuary-type places, like here in New Jersey, is that illegals are hard-working, nice, family people on the whole. We have no systematic issue with illegals here.

        Nevertheless, I would not at all be surprised if a substantial number engaged in what would be considered fairly serious drug crimes on the way in.

        So yet another lesson from Hungary: no one can make an honest person into a criminal as fast as a government with idiotic policy and enforcement.

        This again is the reason to end the Prohibition on Immigration. For exactly the same reasons we ended it on alcohol, and we will see the same result: a dramatic decline in criminality.

      2. Steven Kopits

        I have read a good bit of Borjas.

        There are a couple of notable differences between Borjas’ and my approach.

        Borjas uses a ‘textbook’ formula to determine the immigrant contribution to GDP:
        Immigration surplus / GDP = -1/2 s*e*p*p,

        Using this formula, Borjas calculates the total GDP of illegal immigrants at $472 bn. Using more contemporary numbers and based on a labor expense / share of total sales approach, I calculate output from illegal immigrants at $500-600 bn, not that far from Borjas’ number.

        However, Borjas calculates the payments to illegals at $461 bn, and we know the actual payments are about $200 bn. In this number, Borjas is just dead wrong.

        In such an event, the immigration surplus is not $10 bn, but rather $270 bn. A big difference.

        Much of this could be explained by the non-substitutability of labor.

        Borjas argues that illegal immigrant labor is highly substitutable for native labor, concluding “the evidence suggests that within-group complementarities between foreign- and native-born workers are not an important factor in an assessment of the labor market impact of immigration in the United States.”

        This flies in the face of anecdotal evidence, from the LA Times article:

        U.S. workers filled just 2% of a sample of farm labor vacancies advertised in 1996, according to a report published by the Labor Department’s office of inspector general. “I don’t think anybody would dispute that that’s roughly the way it is now” as well, says Philip Martin, an economist at UC Davis and one of the country’s leading experts on agriculture.

        Indeed, Chalmers R. Carr III, the president of Titan Farms, a South Carolina peach giant, told lawmakers at a 2013 hearing that he advertised 2,000 job openings from 2010 through 2012. Carr said he was paying $9.39, $2 more than the state’s minimum wage at the time.

        You don’t need a deep analysis to understand why farm work wouldn’t be attractive to young Americans. He hired 483 U.S. applicants, slightly less than a quarter of what he needed; 109 didn’t show up on the first day. Another 321 of them quit, “the vast majority in the first two days,” Carr testified. Only 31 lasted for the entire peach season.

        To which Borhas responds, in the next paragraph:

        “Believe me, if the wages were really, really high, you and I would be lining up,” Borjas says.

        Or perhaps farms are just not a place where native-born Americans want to work. The job is seasonal, so laborers have to alternate between long stretches without any income and then months of 60-hour weeks. They work in extreme heat and cold, and spend all day bending over to reach vegetables or climbing up and down ladders to pluck fruit in trees.

        “You don’t need a deep analysis to understand why farm work wouldn’t be attractive to young Americans,” says Martin, the agriculture expert.

        If farmers upped the average wage to, say, $25 an hour, people born here might think twice. But that’s a pipe dream, many argue.

        All this speaks to non-substitutability of labor. True, the crackdown in illegal immigration has raised wages–but the vast majority of the gain seems to be going to resident undocumented aliens! The most ridiculous thing in the world is paying huge sums on enforcement and then paying a premium to undocumented labors in the country to reward their impudence.

        And yet that is exactly what black market theory would predict.

        In any event, it looks to me that Borjas has his numbers wrong. The immigrant surplus equation is providing numbers which do not correspond to observed actuals, and Borjas is grossly over-estimating the substitutability of labor, at least across key sectors of the economy.

        However, even if Borjas were right, it wouldn’t matter, because the border cannot be effectively closed. If wages went to $25 / hour, that would be 10x the Mexican wage and 25x the Guatemalan wage. In US terms, that would be the equivalent of $500k – $1.25 million. Do you really think the wall would act as a barrier under the circumstances? I doubt it.

  7. Steven Kopits

    Let’s talk about sovereignty, which I will handle as a conservative hierarchy of needs (similar to Maslow).

    Here is the hierarchy, lowest to highest:
    1. Safety: Is the entrant (immigrant) a physical threat to the group or its members?
    2. Permission: Does the immigrant have approval to be physically within the group’s territory?
    3. Identity: Do we know who the immigration is?
    4. Self-sufficiency: Does the immigrant support himself and his family?
    5. Standards and mores: Does the immigrant speak our language and comport himself appropriately?
    6. Contribution: Is the immigrant contributing financially (or in some other form) to the group and/or paying the group for services used?
    7. Demographic affinity: Is the immigrant like the group in terms of race, ethnicity and religion?
    8. Social affinity: Is the immigrant like the group in terms of education, political and socials views?

    If you hit all 8 requirements, welcome to the group!

    But note that, from a conservative perspective, race and religion (item 7) — the items the media keys on almost exclusively — are neither the most important item on the list, nor the entirety of the list.

    In sanctuary cities, the bar in reality is set pretty low: safety (1), some effort toward self sufficiency (4), and observing social mores (ie, you can’t let a cow walk around unattended in your neighborhood) (5). It doesn’t take that much to be accepted into society.

    By contrast, a market-based immigration program gets you all of 1-6. It really hits all the most basic conservative needs.

    It does not, however, deliver either 7 or 8. It doesn’t remove Mexicans (although it does make possible to manage their numbers within certain parameters), nor does it make them college-educated, suburban progressives.

    But neither does a wall!

    A wall will give you
    – a very modest improvement in 7 and 8,
    but at
    – a significant sacrifice of 1 (the more the enforcement of a black market, the higher the degree of violence);
    – the complete loss of 2, 3, and 6; and
    – an adverse selection problem on 4.

    Thus, a market-based immigration program will deliver substantially greater benefits to conservatives than will a wall. That’s important to keep in mind. It’s not just about race and ethnicity.

  8. dilbert dogbert

    More important than funding for the wall is how to get the Mexicans to pay for repairing Houston!!!!!???

  9. Erik Poole

    I played Trump’s Wall in the markets earlier this year.

    With Trump’s election and the Wall rhetoric, the Mexican market sold off. I bought EWW — iShares MSCI Mexico Capped ETF on the dip and then rode it for less than a 15% gain. EWW has done much better since I sold it.

    But I did not want to hang on too long as I fully expected Trump to defiantly stick to his promise. It could very well be that equity markets know that Trump is all vacuous cheap talk but I did not want to take a chance.

    At this point, if I could I would bet that American birders and other conservationists living along the border block Trump’s Wall.

  10. noneconomist

    Personally, I want the whole promised wall enchilada: modular concrete walls, 35 feet high. I want everything top dollar, all union labor, everything prevailing wage. Teamsters, Operating Engineers, et. al., rejoice. This wall’s for you.
    That means nothing non-American, certainly including all materials and all labor. That includes the new infrastructure- necessitated by building the wall where there are no existing roads or much of anything else to get the necessary labor and equipment on site
    Nothing short of a spectacular made and built in the USA will do.
    And that means, as promised, Mexico paying, totally. It appears we’ll need the $40 Billion this wall would otherwise cost U.S. taxpayers for work that’s actually needed.

  11. Beeker25

    To pay for the wall, the House has cut FEMA’s budget in order to put money in the DHS to set a down payment for the wall before Harvey came ashore.

    However we do have walls already built during the Bush administration and that includes some areas in the middle of the desert. One of the problem not included in the argument is wildlife. Where are the animals going to go in order to migrate between seasons.

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