The Economics of Immigration Aren’t What You Think

The Economics of Immigration Aren’t What You Think

May 26, 2010

Waves of new immigrants often spark economic anxiety and cultural discomfort, as well as occasional violence and wide-net crackdowns, on the Arizona model. Even here, a nation comprised almost entirely of immigrants and their descendents, we’ve seen these reactions not only in recent times but also a century ago, when waves of poor immigrants from Europe arrived here. With a hundred years’ distance, however, we can now see that those early waves of immigration were generally associated not with economic dislocation and national decline, but with extraordinary economic boom times and America’s emergence as the world’s leading economy. And for much the same reasons as a century ago, recent evidence indicates that the economic effects of the current waves of immigration are also largely positive.

The New Politics Institute (NPI) asked me to review all of the available data and economic studies of recent U.S. immigration. With my colleague Jiwon Vellucci, we found, to start, that more than one-third of recent immigrants come from Europe and Asia, while less than 57 percent have come from Mexico and other Latin American nations. The popular portrait of recent immigrants is off-point in other respects as well. While more immigrants than native-born Americans lack high school diplomas, equivalent shares of both groups have college or post-college degrees. That finding should make it unsurprising that 28 percent of U.S. immigrants work as managers or professionals, including 38 percent of those who have become naturalized citizens or the same share as native-born Americans.

Many Americans would probably acknowledge that their concerns about immigration lie principally with those who are undocumented. No one likes being reminded that the world’s most powerful nation hasn’t figured out how to effectively police its own borders. But the data also show that these undocumented people, who account for 30 percent of all recent immigrants, embody some traditional values much more than native-born Americans. For example, while undocumented male immigrants are generally low-skilled, they also have the country’s highest labor participation rate: Among working-age men, 94 percent of undocumented immigrants work or actively are seeking work, compared to 83 percent of the native born. One critical reason is that undocumented immigrants are more likely to support traditional families with children: 47 percent of undocumented immigrants today are part of couples with children, compared to just 21 percent of native-born Americans.

The evidence regarding the impact of immigration on wages also turns up some surprising results. First, there’s simply no evidence that the recent waves of immigration have slowed the wage progress of average, native-born American workers. Overall, in fact, the studies show that immigration has increased the average wage of Americans modestly in the short-run, and by more over the long-term as capital investment rises to take account of the larger number of workers. Behind those results, however, lie winners and losers — although in both cases, the effects are modest. Among workers, the winners are generally higher-skilled Americans: For example, when a factory or hotel hires more low-skilled workers, demand also increases for the higher-skilled people who manage those workers or carry out other professional tasks for an enterprise that’s grown larger.
The losers are generally the lower-skilled workers who have to compete for jobs with recent immigrants. But studies also show that immigration reform might well take care of most of those effects. Following the 1986 immigration reforms, for example, previously-undocumented immigrants experienced big pay boosts — as much as 15 or 20 percent — and immigrants who already had legal status saw hefty wage gains, too. But the reforms also led to higher wages for lower-skilled native-born Americans. One reason is that undocumented people who gain legal status can move more freely to places with greater demand for their skills, reducing their competition with native-born people with similar skills. More important, their new legal status confers certain protections such as minimum wage and overtime rules. Today, about one-fourth of low-skilled workers in large American cities are paid less than the minimum wage, including 16 percent of native-born workers, 26 percent of legal immigrants, and 38 percent of undocumented workers. Ending the ability of unscrupulous employers to recruit people to work for less than the minimum wage would not only raise the incomes of those currently paid less than the minimum wage; it also would ease downward pressures on the wages of other lower-skilled Americans, which comes from the below-minimum wage workers.

Looking again at immigrants generally, recent research also shows a strong entrepreneurial streak, with immigrants being 30 percent more likely than native-born Americans to start their own businesses. Nor are immigrants the fiscal drain that’s commonly supposed, at least not in the long term. In California and a few other states, immigrants today do entail a net, fiscal burden, principally reflecting the costs of public education for their children. But studies that use dynamic models to take account of the lifetime earnings of immigrants — most of whom arrive here post-school age and without elderly parents to claim Social Security and Medicare — show substantial net fiscal gains at the federal, state, and local levels.
Political disputes are rarely settled by facts. Nevertheless, it’s reassuring to see that the humane and progressive approach to immigration is also a policy likely to produce good economic results for almost everyone.

A New Plan to Create Jobs—and Address Climate Change

May 20, 2010

The long-awaited climate proposal from John Kerry and Joe Lieberman (minus Lindsay Graham) is now on the table; and it’s clear already that it has no better chance of being enacted than other failed proposals before it. One informal count this past week finds 26 Senators likely to vote yes and another 11 probable supporters — a total of 37, against nearly as many “no” votes and probably no’s (32) and nearly again as many fence-sitters (31). Despite the lessons of Katrina, the global importuning of Al Gore, and the President’s pledge to solve the problem, support for steps to stabilize greenhouse gas emissions at safe levels hasn’t changed much in the last half-decade. The hard truth is, a serious climate program is unlikely to happen unless its advocates shift their legislative approach and retool their political strategy.

You don’t have to be David Axelrod (or Karl Rove) to appreciate why. In a period of widespread economic anxiety and populist anger, congressional sponsors of climate legislation have persisted in pushing a big, new Washington fix that would raise most people’s energy costs in the near term, on the strength of promises by scientists that doing so will lessen the chances of dangerous climatic changes several decades from now — changes which scientists cannot yet specify in any detail.

The cap-and-trade model long pushed by a handful of national environmental groups and adopted by Kerry-Lieberman and by Waxman-Markey in the House has other features bound to repel most Americans, especially the creation of a new, trillion-dollar financial market in federal permits to emit greenhouse gases, all to be managed and potentially manipulated by Wall Street. How many Senators are prepared to explain today, or any time for the foreseeable future, why the only climate plan they can come up with would raise everyone’s energy bills and enrich energy traders and executives at Goldman Sachs and JP Morgan Chase?

The planet needs a different approach. The answer is to marry a plan to create jobs with a funding mechanism to reduce greenhouse emissions. Earlier this year, the CBO reported that the single, most powerful policy tool available to spur job creation is a sharp reduction in the employer’s side of the payroll tax, targeted to new hires who increase a firm’s entire workforce and total payroll. The catch is that since payroll tax revenues are dedicated to fund Social Security and Medicare, we have to replace the foregone revenues. We can finance this job-creating cut in payroll taxes by enacting a new, carbon-based fee which also would address climate change.

To be sure, the new carbon fee — like cap-and-trade or, for that matter, EPA regulation — would drive up most people’s energy bills. But the cuts in the payroll tax would offset the higher energy costs, and the new jobs and higher wages spurred by those payroll tax cuts would leave most of us better off, along with the planet. While the emphasis on jobs would be new, this general approach is not. Most economists and many environmentalists have long held that a fee on energy based on its carbon content is the most economically-efficient and environmentally-effective way to accelerate the development of new, climate-friendly fuels and technologies, and spur businesses and households to adopt them. Such a “tax shift” is also the long-time position not only of Al Gore, but also such groups as Greenpeace, Friends of the Earth, and the U.S. Climate Task Force (which, in full disclosure, I chair with Harvard professor and former Gore aide Elaine Kamarck).

It’s time for climate activists to respect the priorities of most Americans. Congress should enact broad reforms to create new jobs, boost incomes, and strengthen the economy — and pay for these reforms with a new, carbon-based energy fee that would steadily drive down our use of fossil fuels and their dangerous greenhouse gas emissions.

Deciphering the Crisis in Greece and Its Significance for America

May 12, 2010

With the world’s stock and bond markets thoroughly roiled by Greece’s sovereign debt problems, it’s only natural to ask the perennial question, how does it affect us? The outlines of the crisis are certainly familiar. As I’ve been warning in this space for more than a year, governments around the world would inevitably face serious fiscal problems, dealing with the daunting debts accumulated from the huge bailouts for the financial meltdown and the large stimulus programs for the subsequent deep recession. In countries that began with large deficits and national debts, such as Greece, Portugal, Spain and Italy, those fiscal stresses have become very serious. Here, in the United States, we’re just beginning to hear calls for deficit reductions. If recent history is any guide, we will ignore the problem for several more years, until voters finally demand that Washington take real action.

Greece can’t wait, despite the recent violent protests there against budget austerity. Greece is also burdened with a relatively weak and uncompetitive economy, so it cannot generate strong growth to help ease the problem. Moreover, the organization of the Eurozone denies Greece, along with other member-nations with high and fast-rising public debts, two standards measures to boost competitiveness and help countries grow out of their mess. Greece can’t depreciate its currency to make its exports cheaper in foreign markets, since it shares the Euro with many other countries uninterested in a sharp depreciation that would leave them poorer. Greece also can’t cut its interest rates to spur domestic investment and attract capital from other EU countries, since the European Central Bank (ECB) sets the interest rates for everyone in the Euro Area.

That’s why Greece has been headed for a default on its government bonds. The hitch is that a Greek default would shatter the EU’s grand myth, that their (partial) economic union enhances the efficiency and competitiveness of its members enough to protect them from such crises. Moreover, if the EU stood by as Greece sank, international investors would dump the public bonds of other debt-burdened EU countries, starting with Portugal, Spain and Ireland. All of this would drive down the value of the Euro, especially relative to the currencies of the EU’s two major trading partners, the United States and China. By the way, that would be both bad and good news for us. A stronger dollar would make our exports more expensive in Europe, undermining the President’s hopes of relying on exports to help drive growth at home. But a stronger dollar, along with the threat of a sudden crisis for the Euro, also draws more foreign capital to the United States, which helps keep our interest rates low.

So far, the EU and the IMF (prodded by us with promises of a larger U.S. financial contribution) have headed off a Greek default, by unveiling a $1 trillion bailout plan consisting mainly of loans and a pledge by the European Central Bank to accept Greek bonds as collateral for loans to the European banks that buy those bonds from the Greek government. The fund is big enough to rescue Portugal and Spain as well, a smart move since serial debt defaults pose the greatest danger of all.

The announcement of the plan strongly recalls the original TARP bailout. Both plans were pulled together hastily to signal government’s determination to head off a collapse. In both cases, the signal is more important than the actual plan, since neither makes much economic sense. The EU plan depends, first, on taxpayers across northern Europe agreeing to shoulder much of the costs to rescue Greece and, second, on Athens following through with deep spending cuts and sharp tax increases that are bitterly opposed by most Greeks. Even if all of that came to pass, the plan has more fundamental flaws. It purports to respond to Greece’s public debt crisis by expanding the debts of Greek and other European banks as well as other EU governments — as if international investors will generously overlook Europe piling up even more debt than today. And if Greece does follow through on the draconian austerity measures contemplated in the plan, its economy will sink further, requiring even more public debt. In short, the bailout plan is a fantasy; and Greece and Europe will face another round of this debt crisis not long from now.

The improbable shape of the EU bailout does recall our own, original TARP plan. Just as the EU bailout does nothing to address Greece’s lack of competitiveness, the TARP in its various versions has never addressed the forces and factors that drove our financial crisis. So, 20 months later, our large banks are still not strong enough to resume normal lending to American businesses. Their continuing vulnerability also makes Europe’s current debt problems even more serious for us. Greek bonds — along with the bonds of Spain, Portugal, Ireland and Italy — are held mainly by financial institutions. German and French banks are the most exposed, but ours are well in the mix, too. Those bonds have been declining in value for weeks, taking their toll on bank balance sheets. A formal default by Greece would hit all of them; and serial defaults by Greece, Portugal and then Spain — and possibly Italy — would trigger another worldwide financial crisis.

This time, we would have few policy tools left to stop a downward spiral — and Congress almost certainly would fiercely oppose another huge taxpayer bailout, especially Republicans in the midst of a populist purification process that already has purged Bob Bennett in Utah and Charlie Crist in Florida. This is all speculative — thank goodness — but we could find ourselves with very few options to address a crisis that ultimately could lead to another Depression. Our best hope for now is that Greece and the Eurozone will somehow muddle through, much as we did in 2009.

How Toyota and Goldman Sachs Stumbled — and We Could, Too

May 4, 2010

Powerful and wildly-successful institutions sometimes act like teenagers and addicts, unable to recognize their own self-destructive behavior. This year’s top two examples are Toyota and Goldman Sachs. After investing decades to develop a sterling reputation for safety and quality, Toyota squandered its brand not by accident, but by myopic design: In a benighted chase for higher profits, Toyota’s top brass demoted vehicle safety from its long-time perch as the firm’s number one operational measure, to number four. Everyone inside the firm got the message — and now consumers around the world have as well. So, Toyota will spend years working to reclaim part of the worldwide market share it threw away.

Goldman Sachs may pay an even dearer price. It, too, spent a very long time building a world class reputation that married extraordinary market acuity with honest dealing. The self-immolation of that brand probably began with its principals’ decision to jettison their partnership and become a publicly-held company. This shift in the firm’s legal organization not only allowed them to cash in; it also transformed Goldman’s business and culture. Its flagship business of investment banking — giving advice and assembling financing for mergers, buyouts and takeover — receded so sharply that in recent years, it has accounted for just 10 percent of the firm’s revenues. In its place, Goldman became a giant hedge fund that creates and trades exotic financial products for both its clients and itself. What we know now is that once the top brass’s financial positions were no longer tied to the firm’s long-term value, as it would be under a partnership, a seemingly insatiable drive for huge, short-term profits led them to create products which they simultaneously hawked to their largely institutional clients of pension funds, endowments, banks and other financial institutions, even as they took financial positions against the very same products.

Coming back will be harder for Goldman Sachs than for Toyota. Toyota has to reengineer its operations — a serious challenge — in order to restore the core position of safety and quality. But automobile recalls are routine, even if the extent and reasons in Toyota’s case were not; and several years from now, a reconfigured Toyota could be back on top. But Goldman faces years of civil suits by government regulators, their own shareholders and their former clients, as well as possible criminal charges — and not just in the United States. Goldman faces the same treatment in other countries — starting with Greece, whose fiscal problems Goldman allegedly helped to hide using financial maneuvers like those employed by Enron in its final, desperate year. Based on what has happened to other firms that found themselves caught up in extended legal problems, the most important costs to Goldman will not be the legal fees, fines and settlements, but the “distraction factor.” For years, its top executives will find themselves absorbed in defensive moves and stratagems to beat their various raps — while their rivals at other firms focus on the subtle shifts in markets and the economy that can presage large changes. And this doesn’t even count the herculean task of rebuilding a brand that now stands for both self-dealing and double-dealing.

Without realizing it, administrations, congresses and political parties also can turn self-destructive. The GOP brand in economic stewardship, for example, certainly suffered serious damage from the policies of a Republican President and Congress that ultimately culminated in the worst economic crisis since the 1930s. Yet, even with 60 percent of the country still blaming the Bush administration for the bad economic times, and the public directing the worst of their outrage at Wall Street, Washington Republicans remained committed to a “strategy” of stopping the Obama administration from reforming Wall Street.

Then there’s the matter of the national debt. Eighteen months ago, in this blog, I warned that Wall Street’s meltdown was only the first stage. Stage two was the deep recession triggered by the financial meltdown; and stage three would be the fiscal crises created by the bailouts and stimulus used to address the first two stages. That all has come to pass; the open question is how self-destructive our response will be. We pulled the financial system back from a collapse that would have ushered in another Great Depression, with only a normal quota of self-inflicted wounds — like letting Goldman and JP Morgan Chase claim full payment on deals with AIG which the taxpayers rescued, and not forcing them and other bailed-out institutions to use their new, taxpayer-financed capital to expand lending to businesses. The American brand is successful pragmatism: Figure out what needs to be done, and then go do it. But what needs to be done here is to reconfigure the tax system so it produces more revenues while leaving the economy more efficient — think of tax simplification that jettisons lots of special interest tax breaks — and to reshape current “entitlement” spending for not only elderly people, but also for influential industries and for districts and states whose members of Congress have risen to the leadership.

If we cannot get past the partisan warfare, the United States in a few years could find itself in Toyota’s place, with a tainted brand and smaller political market share. Our Treasury bills and bonds are very unlikely to ever default, as Greece nearly did this week (and still could do, if the bailout fails in any significant way). But the normal politics-of-least-resistance will never reconfigure taxes or reshape spending. Instead, it will lead us to a place where we have to pay out more and more to attract foreign investors, and those higher interest rates could consign the American economy to years of very slow growth. That’s what can happen to a great nation that insists on acting like a child or addict, blind to its own self-destructive behaviors.

Read Dr. Shapiro’s related Huffington Post piece: Goldman Scandal Erodes Case for Cap and Trade, April 28, 2010.