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The Economics of Immigration

November 14, 2013

“I pity the poor immigrant
Who wishes he would’ve stayed home
Who uses all his power to do evil
But in the end is always left so alone.” – Bob Dylan, 1967

The immigration debate has been bubbling below the surface for years. Every now and then our esteemed representatives in Washington get serious about rationalizing our chaotic patchwork gauntlet that confronts new arrivals. It is a delicate dance for the two national parties. The key political objective if you are a Republican or Democrat is to ensure that if the millions of illegal immigrants become legal voters, then they will arrive at the polling place with kind thoughts about you and your brethren.

The other tricky part in welcoming these new citizens is ensuring that current citizens don’t get upset about the increased competition. The natural human tendency is to pull up the economic ladder once you’ve ascended to the top. So we see the odd dance of the trade unions that are happy to have more immigrants so long as they’re well compensated union members.

Before I get much further with this, and in the interest of full disclosure, please note that all four of the author’s grandparents found their way here via that famous redoubt in New York harbor, Ellis Island.

With the exception of the moral outrage of slavery, one of the common features of U.S. immigrants from all eras is that they are risk-takers. If they had been on top of the heap in the old country the probability of them picking up stakes and willingly heading into the uncertainty of the New World would be close to zero. Sure we got our fair share of dukes, earls, and shahs, but they usually arrived only after life hit a decidedly rough patch back home. It is those other millions that greatly enhanced our economic gene pool.

Consider a country that for three hundred years has attracted the most aggressive, creative, hungry risk-takers from every corner of the earth. Is it any wonder that Americans work with a single-minded focus on their pursuit of life, liberty and happiness? Isn’t it always the newest arrivals that are the most intent on success? And just when those third generation descendants of the original wealth creators are ready to inter-marry themselves into a sedentary ignominy, a new wave arrives to push them off their perch and take the lead into the future.

National economies are pretty simple. For all their complexity, billions of transactions per day, guided by Adam Smith’s invisible hand and the much more visible hand of government, boil down to a combination of workers, capital and technology. As these three elements change and adjust to each other over time, the national output or GDP can grow or shrink. The size and quality of the population – what economists refer to as “human capital” – is a critical growth factor.

What happens to the pool of human capital in the U.S over time? As the chart below portrays, the number of potential workers in the 45-60-age cohort actually declines over the next 12 years. That matters because their years of experience make that cohort the most productive.

U.S Demographic Forecast  2105-2045
US Demographic Forecast
Since GDP is a function of the number of people working and their productivity, increase one or the other and GDP will grow. The U.S. GDP is about $15.7 trillion in current dollars and productivity has been increasing an average of 2 percent per year since 1980. We have 144 million workers generating $15.7 trillion in output per year or about $109,000 per person. If we return to a normal growth trajectory of 3.3 percent, GDP should rise to $24 trillion by 2025.

That 45-60 demographic gap means we will miss that target by a whopping $3-4 trillion (ceritas paribas). Some analysts have already pointed to this problem as a component of the current economic malaise.

The bottom line is that we need to add 1.5 million additional productive workers per year just to meet our normal expectations for economic growth. Or productivity has to jump dramatically.

After 45 years we now know that Paul Ehrlich’s math in The Population Bomb lost its relevance due to new technology and his rather simplistic assessment of human behavior. Despite that, the zero-growth mantra is still popular among environmentalists and other groups. But rarely does anyone actually consider what zero growth looks like.

The problem is that the distribution of a zero-growth population is not even. The youngest cohort shrinks rapidly while the upper age brackets expand (see the geezer spike in the graph for 2045). Zero growth means a smaller work force and shrinking GDP. As demand shrinks, prices and wages fall. Lower tax rolls result in reduced services and entitlements at a time when the aging population needs them most. Detroit is a perfect example, but here we’re thinking more about Japan, Russia and even Germany. All are expected to lose 10 to 30% of their population by 2050.

Alan Greenspan repeatedly warned our befuddled and largely innumerate Congressmen that the economy would need to create assets at a prodigious rate to generate the wealth necessary to support all those boomers in the retirement lifestyle that they anticipate.

Fortunately the solution is simple. We just need to recruit an additional 1.5 million working age people from other countries every year for the next 12 years. The public policy question is – which ones?

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