Who Will Pay for the Wall?
By Pierre Lemieux
When we say that a good or service A is “paid for” by X, we mean that X is releasing the resources (ultimately the real resources: machines, labor, and other inputs) necessary to produce A. If we say that A is paid for “indirectly” by Y, we mean that Y is releasing the resources to X who in turn releases them to produce A. If one means something else by “paid for,” he either does not have a consistent and understandable theory of cost, or he is trying to mislead those to whom he is talking.
In his January 8 speech on the Wall, President Trump said:
The border wall would very quickly pay for itself. The cost of illegal drugs exceeds $500 billion a year. Vastly more than the $5.7 billion we have requested from congress. The wall will also be paid for indirectly by the great new trade deal we have made with Mexico.
This is from the New York Times transcript of the speech. I could not find the text on the (very information-poor) website of the White House.
I don’t know where the figure of $500 billion comes from. If it comes from somewhere, I suspect it is a public-health estimate whose main component would be the lost productivity of drug consumers—as if “society” had a right to what they produce. Assuming that the Wall is built and (heroic assumption) stops all drugs from flowing to Americans who demand them on the market, the weaned addicts are very unlikely to release resources to build the Wall by voluntarily sending $5.7 billion to the Treasury. If the U.S. government taxes $5.7 billion from the recovered addicts, it is the latter who will have paid for the Wall, willy-nilly. The Wall will not have “paid for itself” like a toll bridge can be financed by its users.
The last sentence of the quote represents perhaps an even worse instance of intellectual fraud. How can the USMCA—“the great new trade deal we have made with Mexico”— indirectly pay for the Wall? One way Trump might imagine this happening is if USMCA impoverished Mexican consumers or workers compared to the previous NAFTA. This is to be expected. Mexican consumers will be poorer because of higher prices (cars, for example). Some Mexican workers will be poorer because they will lose their jobs to the minimum wages mandated by the pact. (On the USMCA, see my article “Is NAFTA 2.0 Better than Nothing?” in the current issue of Regulation.) But note that these Mexicans would not, even indirectly, pay for the wall in an economic sense: they are punished by USMCA, but don’t in any way release resources to be used in the Wall construction.
American consumers will also be punished by “the great new trade deal we have made with Mexico.” The way this will happen is that, like Mexicans, they will have to pay more for some goods because of the restrictive clauses of the new arrangement: more steel and aluminum purchased in North America, higher wages for Mexican autoworkers, etc. But again, this is a punishment, not a payment that finances anything.
So it is the U.S. government and, indirectly, the American taxpayers, current or future, who will pay for the Wall. Moreover, since USMCA is more protectionist than NAFTA, Americans will generally earn (slightly) lower real incomes than they would otherwise have earned, so they will pay for the Wall out of lower incomes.
To speak bluntly, President Trump’s declaration quoted above makes no economic sense at all. He is apparently trying to show his supporters than his electoral promise of having “Mexico” pay for the Wall made some sense. I recommend listening to one of his electoral speeches on this matter (it’s only 3:22 minutes): it teaches more than who will pay for the Wall.