Home > Economics, immigration > Immigration— The Congressional Budget Office Report (CBO on S.744)

Immigration— The Congressional Budget Office Report (CBO on S.744)

I will post my little paper on the effects of immigration later today. In preparation for that, I downloaded the CBO report on the Senate bill. I find it unimpressive, except for the clarity of its writing style, which I do commend. Some notes:

1. The analysis assumes that immigration will raise total factor productivity. It alludes to increased specialization because of increased size of the economy, and increased innovation because of having extra high-skilled immigrants. Both are highly speculative. Yes, more Hyderabad programmers will increase innovation; that’s why the billionaires support the bill (they profit from those innovations— which is fine). But it’s dangerous to allow a fudge factor like “increased productivity from innovation” into an estimate— it can drive too much. It would be good to see these estimate with zero change in TFP.

2. I didn’t see anywhere how many of these immigrants are supposed to be high-skilled. I suspect that’s because it’s embarassingly small. If the report came out and said that we’d be adding 9.5 million low-skilled workers and .5 million high-skilled workers and productivity was going to rise as a result, people would laugh.

The report doesn’t have details of whether it separates out skills of labor in its computation of total factor productivity, but my guess is that it doesn’t. If that is true, saying total factor productivity will rise is really a joke.

3. It’s definitely this increase in TFP that is driving the wage increase estimate for 2033, as the report, to its credit,admits. I see that two very good academic economists, Lawrence Katz and George Borjas, provided comments. Maybe they agreed to not to make fun of the report if the CBO put in the right caveats like that. Or maybe the CBO gets the credit. Anyway, notice what this is saying: there is going to be a big increase in the amount of labor in the economy, so big that the return to capital is going to rise and people will invest in increasing the capital stock because of this extra profitability. But at the end of the day, with more labor, and, especially, more *unskilled* labor, the average wage is going to rise. Put a bit differently, if you increase the quantity supplied of a good and reduce the quality, the claim is that the price will rise. Nope.

4. It would be deep in the background analysis, but I wonder whether the report is assuming that the capital/labor ratio will return to its present state eventually because of the increased investment. That’s something to worry about, because I’d expect that the long-run equilibrium interest rate would rise because of the extra labor. Think of it in the extreme to understand why. If we multiplied the labor force by 10, then the return to capital would go way up as wages fell. Suppose the return on the stock market rose from 6% to 20%. Savings would rise because of the high return, so capital would increase, driving down the return from 20% to 18% to 16%,e tc. WOuld it go all the way back to 6%? No. Savers were only willing to have so much savings because the return was 20%. If it went all the way down to 6%, they would unsave, spending all that extra capital. So the interset rate should settle down to, say, 10%. THis is important, because if the K/L ratio ends up smaller than it is today, wages end up lower too.

5. On p. 3 there’s a funny switch from using increases in GDP to using changes in GNP per capita. The footnote explains that GNP is a better measure of national welfare— but why not use it throughout, then?

The footnote is correct because GDP measures what’s produced in the US, whereas GNP measures what’s produced by labor and assets owned by Americans. The footnote says, correctly, that GNP includes earnings by US citizens overseas but excludes earnings by foreigners on their investments in the US. That’s misleading, though. It leaves out what is the key thing with immigration: US GNP excludes remittances by immigrants to their country of origin. I wonder if they include that important reduction of US GNP in their estimates? If immigrants send their paychecks home to Mexico or save them and retire to spend it in Honduras, what they earn is part of US GDP, but it has to be subtracted to get GNP.

6. Point 5 is related to a fundamental problem: The report does not look at how the bill affects the welfare of Americans. Instead, it looks at how it affects output in the US, average wages, return to capital, and so forth. A lot of the effect is on foreigners— Mexican immigrants and European investors.

7. If they’d played it straight, here is what we’d expect from basic economics. The bill will allow a lot of low-skilled foreign labor to enter the United States (or remain here, if we think of the alternative as being enforcement of existing laws). This will drive down low-skilled wages and drive up the return to capital. The effect on middle- and high-skilled wages is unclear, but my guess is that it would increase them. In addition, the immigrants will compete with poor natives in the market for consumer goods and will drive up prices of items with limited supply— for example, low-quality housing. The dollar benefit to capital-owners will exceed the dollar loss to labor. Since some of capital is owned by foreigners, however (Chinese govt., Europeans, etc.), it might be that the benefit to Americans will be less than the loss. Foreign labor will benefit to the extent that US wages remain above foreign wages.

8. All of that pertains to the effects on US markets. What happens to government taxes and expenditure is a separate topic, equally important. Adding lots of poor people to the economy is not going to help national or local budget deficits, whatever handwaving may be going on.

9. This is all on the level of a blog post, or of what I’d have said to the authors of the CBO report if they asked me to comment. The report doesn’t include the background mathematical modelling, and maybe that can address some of these problems. Or maybe I’ve missed something in my reading of it. But I will stand by the basics of supply and demand: the burden of persuasion is on those who argue for the surprising claim that adding more poor people to America will increase American prosperity.

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  1. Thomas Tharp
    June 25th, 2013 at 20:28 | #1

    I agree with your general analysis, but I think there is something more fundamentally wrong with the CBO report. It claims that the maximum increase in unemployment will be 0.1%. Out of a workforce of approximately 150 million, that is only 150,000. How can you add more than an additional million legal immigrants/yr (this does not include those amnestied) to an economy with 20 million unemployed or underemployed without increasing unemployment by approximately 1 million/year? Demand for labor is currently weak and unemployment is far above the frictional level, even farther above if you consider the large number of discouraged workers.
    The CBO may have assumed that the labor market is far more efficient than it is. If you assume an efficient labor market, then neither increase in supply of labor nor decrease in demand for labor causes unemployment, nothing does. The only result is a change in wages. That would be one extremely dishonest way to produce a model that shows hardly any increase in unemployment.
    The other dishonest way would be to assume a much higher rate of economic growth than anybody believes is possible. Either way the economic model must be fraudulent, bent to please the politicians. The CBO should provide all details of their economic model so that independent investigators can evaluate it.

    • June 26th, 2013 at 11:43 | #2

      Unemployment is short-run. Moreover, most immigrants come because there are jobs available, so if unemployment rises, not as many will come. Immigration tends to buffer the unemployment for this reason, raising it in good times and reducing it in bad times. So I wouldn’t disagree with the CBO on this point.

  2. Luke Lea
    June 24th, 2013 at 12:13 | #3

    I guess my comment went unpublished? Or it didn’t get there? About how trade, immigration, and labor-saving technologies all contribute to the same problem of supply and demand for labor relative to capital, and hence the distribution of income in society. Impossible to separate these factors out from each other they are all big. Trade and immigration apologists, in particular, tend to put most of the blame on changing technology because that is so much less controversial.

  3. June 24th, 2013 at 09:57 | #5

    Can I simply say what a relief to uncover an individual who actually knows
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  4. June 22nd, 2013 at 08:55 | #6

    Another thought: One part of the analysis is how much the savings rate responds to an increase in the return to capital. This “elasticity” is crucial in the analysis of the effect on investment of an increase in taxes such as we had earlier this year. Did the CBO use the same value for the elasticity in both analyses? What is that value?

  5. Z
    June 21st, 2013 at 21:09 | #8

    Excellent work, please keep it up. I’d add a few more points:

    1. US citizens own a lot of capital in Mexico, especially indirect through shares in US-owned subsidiaries, which will become less valuable if more Mexicans move to the USA. The same is true of the rest of the world to some small extent, but Mexico is fairly unique in having a very large portion of its native population resident in the USA and a very large amount of US-owned capital. US income will also suffer from reduced exports and US consumers will suffer from reduced output and higher prices of Mexican produced imported goods.

    2. Expanding on your point 8, total federal, state and local spending is ~37% of the US economy, far exceeding corporate income, dividends, rents, and other “capital share” measures. Next to labor income, it is the most important factor.

    3. Declining working-age labor force participation is an increasing economic problem in the U.S. Simply measuring reduced wages cannot capture the worsening of this problem that increased labor force competition would bring to the incumbent US labor force. The CBO report mentions that immigrant men, but not women, have a higher labor force participation rate adjusted for age. Then there is a shaky conclusion that wages would increase starting in 2025, hopefully boosting labor force participation. The reality is that there are many marginal workers, especially low-wage earners and the long-term unemployed, who are because of the depressed economy on the verge of permanently dropping out of the labor force. This means not only lost wages, but increased means-tested transfer payments and especially increased SSI/SSDI expenditures.

    4. Increased inequality that the immigration bill would create has a number of negative economic consequences: higher crime costs, more government spending, reduced social trust, and a more volatile business cycle. The report admits that, for ten years at least, the immigration bill will depress wages, the main source of income for those outside the top 1%. It further admits that even 20 years out relative wages will be depressed than under current law. All this on top of a baseline that is already very depressing. This ever-increasing inequality will likely lead to additional political measures such as increased taxes and increased government transfers. Both of these policies reduce the incentive to work, the taxes reduce the after-tax returns to labor, and means-tested transfers on the other end further reducing the marginal return to labor. There is nothing in this report that even attempts to estimate the serious deadweight losses from changed policy, as well as hedonic losses created by distributing income from poor laborers to our elite, whose desire for consumption is more than fully satisfied by their ever rising rents, and whose desire for relative status is necessarily insatiable.

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