Ending Remittances Is Not A Good or Sustainable Idea


This post is by Jeff Carter from Points and Figures


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Chris Kobach the former Secretary of State in Kansas wants to end remittances from the US to Mexico to stop the crisis on the border. I get where he is coming from, but ending remittances is not a good idea. It is guaranteed to fail.  It is pure desperation.

It reminds me of what Senator Barney Frank said about the oil market.  Oil prices were high and he wanted to rig the market to have low oil prices.  He wanted to regulate the heck out of futures, cash, and over the counter trading.  The problem with that idea is all oil trading would go underground and no one would have a clue on what was going on.  The lack of price transparency would cause more dislocation in the market, making the commodity even more expensive.  Barney was desperate and didn’t believe in supply and economics.

Immigration and remittances are a bit different, but the sentiment is the same.  There isn’t a big difference between Kopach and Frank.

I think we do need strong borders in the US. I think you can be for strong borders and be pro-immigration like I am. Our social safety net is very large and our country cannot afford any illegal immigration.  Birthright citizenship is a problem.  There are plenty of other issues wrapped up in immigration as well.  Is it a crisis?  “Crisis” is a strong word that gets tossed around a lot these days to instill fear in people and motivate them.  It is certainly a very large and thorny problem and Trump is correct that the first step is stopping illegals.  Stop the bleeding, then treat the patient.

It’s pretty clear our immigration system is broken badly. Establishment Republicans and Democrats have shown no incentive to fix it. Their proposals don’t do anything.  Trump is trying to put up physical and verbal barriers but hasn’t proposed any sustainable fixes for immigration either.  The politics around it are horrible with no one willing to think out of the box, clearly or in a manner of compromise.

Gary Becker’s plan is the best way to fix it.

That being said, remittances are huge between the US and Mexico. $20 Billion gets earned in the US and remitted south of the border. This is not a horrible thing and detracting from the American economy. As a matter of fact, a worker getting paid for productive labor is a good thing. A worker that sends money home to a family member so they can improve their lot in life in their hometown is a good thing and takes away one immigration incentive.  Remittances are not going away, and they will increase across borders over time.

I am invested in companies who have engineering teams in countries outside the US.  It saves them money and decreases their burn rates.  In some cases, it’s because a co-founder was from there and wants to live there.  In a digital economy, a lot of things do become borderless.  It makes no difference where I live.

We did a bit of research on cash remittances between countries when we invested in PipIT. Worldwide remittances are measured in the trillions of dollars.  PipIT is based in Galway, Ireland. What they do is amazing. Creditworthy immigrants often cannot set up bank accounts. For example, if I immigrated to the UK, I couldn’t set up a bank account because I am not a citizen. Anti-money laundering and know your customer (AMLKYC) regulations would prohibit a bank from doing business with me.

If the bank had PipIT software, they could do business with me.  When I got legal status, I might be pretty likely to open up an account there and become a long term customer.

Banks are adopting the PipIT platform.  The remittance market between places like the UK and India are extremely large and this is a way to solve that problem in an efficient manner which costs immigrants a lot less than using Western Union or American Express.

Take it one step further though.

Suppose Kobach got his way and we shut down all remittances between people (not businesses) between the US and Mexico.

The remittance market would move underground a la Barney Frank and oil.  My guess is immigrants would use a system like PipIT on the blockchain and remit cash that way.  It would be a boon for cryptocurrency.  Instead of having a transparent view of remittances we wouldn’t have any clue how much was moving from one country to the other.

Kobach’s idea is a temper tantrum.  It’s not one that deserves any sort of consideration because the economic incentives are just too strong.   Sort of like what Milton Friedman told President Richard Nixon when he wanted to start a war on drugs.