Mischief, Politics, and Immigration Reform • The Perils of Capital Controls

Marco Rubio’s constituency of one

It’s been looking pretty good for immigration reform. Big Business and Big Labor, represented by the U.S. Chamber of Commerce and the AFL-CIO, say they have reached a deal to regulate the flow and status of temporary work visas. Democrats and Republicans, represented by Senators Charles Schumer of New York and Lindsey Graham of South Carolina, say they may have legislation within days.

Or maybe not. Republican Senator Marco Rubio of Florida, another member of the bipartisan “Gang of Eight” that has been working on immigration reform, called reports of progress premature. Rubio is at the center of the action on comprehensive immigration reform for one reason only: He placed himself there. But unlike Graham or Schumer, it’s not entirely clear whose interests Rubio represents.

If Rubio’s presidential ambitions are genuine, he surely has more on his mind than his Florida constituents. The fear is that he will use his pivotal position in negotiations not to advance immigration reform but to win the loyalty of conservatives who implacably oppose it. Despite the progress made, opportunities for mischief abound. Three major obstacles remain to viable legislation.

The first is temporary work visas. The interests of labor and capital are simply not well aligned on this issue. The AFL-CIO, especially its construction trades, fears businesses want to import cheap labor to drive down wages. The Chamber of Commerce fears labor wants to strangle work visas in red tape, leaving businesses unable to find workers at reasonable rates.

Second is the fate of the estimated 11 million undocumented immigrants already in the country. There has been no softening against “amnesty” in some quarters. Some hardliners oppose a path to citizenship under any circumstances. Others want to impose so many obstacles — years as resident noncitizens, fines, back taxes, etc. — that they would transform amnesty into purgatory. The U.S. can’t create an official noncitizen underclass without doing permanent damage to both its ideals and its identity.

Third is the issue of border security. One of the more pernicious notions circulating around Washington is a proposal to make citizenship for undocumented immigrants contingent on reaching certain benchmarks in border control. In effect, 11 million people would be held hostage to circumstances beyond their control.

Foes of immigration reform will use each of these vulnerabilities to try to bring the legislation crashing down. Rubio is right: Reform still faces real enemies, real obstacles and, as a result, potentially fatal delays. A march scheduled for April 10 in Washington is a good opportunity for reformers to show strength in numbers. But while 90 percent of life may be just showing up, passing difficult legislation requires considerably more.

Life under permanent, temporary capital controls

Picture not being able to cash a check, transfer money electronically, or withdraw more than $385 a day from your bank. Or imagine being searched by airport gendarmes making sure you aren’t taking more than $3,800 of your own money out of the country.

These are the indignities Cypriots must endure after the country’s $13 billion bank rescue. For the first time in the history of the single currency, a euro country is imposing capital controls, even for transfers within the union. It’s as if California barred residents from moving their savings to banks in Oregon.

The unfortunate rule of thumb on capital controls is that they are easy to impose, difficult to enforce, and almost impossible to lift. Iceland, whose banks ran into similar trouble as Cyprus’s, adopted emergency controls in 2008. They’re still in place.

At first, Cypriot officials pledged that the controls would last about a week but quickly revised that to about a month. Hardly anyone believes that time frame. The minute Cyprus lifts its controls, money will fly to safer havens.

In imposing capital controls, Cyprus has detached itself from Europe’s monetary union. A euro deposited in a bank in Cyprus is no longer worth the same as one deposited in France or Germany. It can’t be easily withdrawn, spent, or converted, and is therefore a second-class euro. The consequences are going to be harsh, with some economists now warning of Greek-like shrinkage of Cyprus’s gross domestic product. As long as capital controls are in force, no one is going to buy Cypriot government or corporate debt or make direct investments in Cypriot businesses.

It’s too late to suggest that Cyprus should have been more prudent. It isn’t too late, though, to warn other countries away from the practices that caused this debacle. The biggest lesson is obvious but worth stating clearly: Don’t let your banks get too big to save.

Both Iceland and Cyprus buckled under the weight of an overblown banking sector. Iceland’s was 10 times the size of its economy; Cyprus’s was eight times, bloated by deposits that came mostly from Russians avoiding taxes. Flush with about $20 billion from Russians, Cypriot banks put much of that money to work in Greek government bonds. When those bonds were written down because of the 2011 Greek debt restructuring, the three largest publicly traded Cypriot banks lost €6.5 billion ($8.35 billion), sealing their fate.

The euro area shouldn’t kid itself: Cyprus’s capital controls, while needed to avert a banking meltdown, are a break from the principle that a euro is a euro, no matter which of the 17 currency-union countries you live, work, or travel in. If depositors in other countries start worrying that their money may one day be similarly trapped in their domestic banking systems, then the whole single-currency project will be in jeopardy.

To read Clive Crook on David Stockman and Jonathan Weil on financial regulation, go to: Bloomberg.com/view


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