View From Chicago

Citizenship for Sale

The “immigrant investor” program is unfair, ineffective, and way too cheap.

Shirley's Heights, Antigua and Barbuda, 2014.
Numerous countries—including Antigua and Barbuda (above)—offer citizenship to foreigners who donate to or invest in them.

Photo courtesy Andrew Moore/Flickr

A recent spate of newspaper stories has revealed that several countries around the world have started selling citizenship to foreigners. Some of the stories imply that this is a scam, possibly a dangerous scam that could benefit only money launderers and terrorists. The idea of governments hawking citizenship to the highest bidder makes people queasy. But the programs make sense for the countries involved and don’t pose a danger to anyone.

If you want to find a real scam involving a country that sells citizenship to foreigners, you don’t need to look overseas. Here at home we do just that with a ludicrous program for “immigrant investors.” It’s the worst combination of bad economics, political cronyism, and unfairness—and it has been endorsed by saints of capitalism Warren Buffett and Bill Gates.*

First, let’s start with the fake scandal. Numerous countries—all of them small, most of them poor—offer citizenship to foreigners who donate to or invest in them. According to a Bloomberg article, these countries include Antigua and Barbuda, Bulgaria, Comoros, Cyprus, Dominica, Grenada, Malta, and St. Kitts and Nevis. The people who buy citizenship rarely want to live in these countries. Some of them think (probably wrongly) that citizenship in one of these countries would reduce their tax burden in their home country. The real reason appears to be that these countries have agreements with the United States or the EU that allow people to travel back and forth without obtaining visas. Foreigners from countries without these visa privileges can, by buying citizenship from Antigua or St. Kitts, take advantage of these programs.

So the countries are not really selling “citizenship” to rich people. They are selling them the right to avoid having to apply for a visa if they want to travel to the United States or Europe. This would be worrisome if the countries in question didn’t screen for terrorists and criminals, but because of international pressure, they do. The United States can block St. Kitts passport-holders at the border if it does not trust St. Kitts’ screening process. We don’t mind if harmless rich people visit our country and buy Rolex watches in boutiques, and so all that is going on is that St. Kitts is saving us some of the cost of evaluating visa applications.

And while it might seem unpleasant that rich people can obtain yet another benefit with their wealth, the money that they give these countries can be put to good use. These are mostly poor and vulnerable countries that can use whatever money they can get.

Now let’s turn to the United States. Under the EB-5 visa program, foreigners can obtain a green card and then citizenship by making a small investment—$1 million, or $500,000 if it’s in an area with high unemployment—that will create or preserve 10 jobs for U.S. workers. Foreign investors can funnel their funds through “regional centers,” which are private organizations that finance commercial projects. These centers spare investors the trouble of figuring out for themselves whether an area suffers from high unemployment and whether a specific investment would generate the requisite 10 jobs.

The program is a mess. The government “is unable to demonstrate the benefits of foreign investment into the U.S. economy” under the program, in the words of the Inspector General of Homeland Security. Among other things, it’s almost impossible to figure out whether a specific investment generates jobs rather than reshuffles them from one place to another. There have also been examples of outright fraud and political cronyism. Part of the problem is a lack of documentation but the real problem is that the program is misconceived.

When we think about investment, the starting point is that investors don’t need citizenship or any other inducement to put money into a project when they will earn higher than the market rate of return. So given the risk and other opportunities, someone will invest $1 million or more in a mall complex or housing development if the expected return is, say, 10 or 15 percent. Many foreigners make such investments, and the vast majority of them make them not to obtain citizenship but to make money. In 2013, they ponied up $236 billion. Meanwhile, Americans invested another $2.5 trillion in the economy. At most $10 billion can be attributed to foreigners who seek visas, and probably a lot less.

The EB-5 program, then, just pumps up aggregate foreign investment in the United States by a few tenths of a percent per year. Given the size and liquidity of capital markets, the program has reduced the cost of capital by an infinitesimal amount, basically zero. A tiny reduction in the cost of capital might produce a tiny increase in the number of jobs, but most likely it will produce a tiny increase in profits for other investors or tiny reductions in price for consumers. It’s a bit like saying that you can immigrate to the United States if you buy a few cars from a domestic auto dealer at a price slightly higher than what the dealer is charging.

It’s also worth pointing out that the price we charge for citizenship is extraordinarily low. A $500,000 investment requirement is not a $500,000 price tag. If you invest in a high-unemployment area which other investors avoid, you might sacrifice some return on your investment, but you’ll probably get your investment back. A shrewd investor will find an investment that pays a couple percentage points below the market rate. If he invests $500,000 in order to obtain, say, a 6 percent return rather than an 8 percent return, then the true price he pays for U.S. citizenship is $10,000 in foregone return.

Foreigners have figured this out. While the program started off slowly in the 1990s because of bureaucratic hurdles that were later dismantled, in 2014 the visas ran out before the end of the year, thanks to a surge in demand among Chinese, who snatched up 85 percent of them.

Gary Becker, the late University of Chicago economist and Nobel laureate, once proposed that the United States should sell citizenship to foreigners for a flat fee. The EB-5 program approximates Becker’s proposal, albeit in the most inefficient way possible. Becker argued that citizenship is a scarce good just like tomatoes and hula hoops, and is thus subject to the law of supply and demand. America owns visas and should sell them to willing buyers at the market-clearing price. We would attract immigrants who are skilled enough to earn wages that would cover the fee, and we would gain again from the tax on their wages once they began work in this country. These types of immigrants—the ones who could afford the fee—would be least likely to burden the public fisc by needing welfare payments. (Criminals and terrorists would be screened out.)

Becker’s scheme is a lot better than the EB-5 program. At least it would generate cold cash for the U.S. Treasury rather than randomly scatter poorly thought-out investments across the country. And it would produce few opportunities for political opportunism and fraud. But it has flaws as well. Becker’s plan would benefit not just talented, productive people who can pay for citizenship out of future wages, but the idle rich of other countries—the rentiers and the trust-fund babies—who we may not want as fellow citizens. Meanwhile, it would do nothing for poor people who could obtain low-paying jobs in the United States Americans refuse to take, which would nonetheless vastly increase their income relative to what they get in their homeland.

Moreover, Becker’s scheme doesn’t address the politics of immigration. Once immigrants obtain citizenship, they can use the vote to influence policy. If they don’t share American values, then they might use their votes to change our laws and institutions in ways we don’t like. In Europe, tensions between liberal natives and newcomers with conservative religious values have sparked a backlash among the public, and soul-searching among the elites, who have scrambled to figure out ways to assimilate immigrants or screen out those who can’t be assimilated.

Malta and St. Kitts needn’t worry about this problem because people who buy citizenship from those countries don’t want to live in them. Where crowds are banging at the gates, like United States or Australia (which is considering a money-for-citizenship proposal), traditional methods for selecting immigrants are wiser.

Correction, May 13, 2015: This article originally misspelled Warren Buffett’s last name. (Return.)