Economic Consequences of Immigration Reform at Best Mixed; Amnesty Highly Negative

The “in way over my head” disclaimer: My original goal was to understand if there should be any financial market repercussions from political action on immigration. This was clearly a ridiculous undertaking for an issue of this complexity. I spent the better part of a week reading research papers, reviewing immigration data, trying to understand how the economic models result in, at times, widely disparate projections of the potential economic and fiscal impact of immigration.

Luckily there is some excellent research from several highly regarded  U.S. and international sources which broadly agree on the consequences of immigration, though their economic impact estimates vary due to the sensitivity to underlying assumptions. What follows is my best attempt to distill fact and reasonable projection from misleading headlines regarding the fiscal impact analysis of:

1. Recent legislation that would enact comprehensive immigration reform (Senate bill S.744); and 
2.  Executive action which would potentially grant amnesty to some large subset of unauthorized immigrants.

All mistakes and misunderstandings are entirely my own, and not the fault of the source materials (which are cited extensively, as they are the experts, not myself).

Ignore the extremes: Like most political issues in the US, the fringe views are polarizing. The “social debate” over immigration is bracketed on the far right by barely disguised xenophobia – often with a palpable undercurrent of a particularly hostile brand of religious fundamentalism; and on the left by a My Little Pony fantasy of progressive liberalism, where diversity and inclusion naturally leads to peace, harmony and economic prosperity for all (see: people who have not read Animal Farm).  

Immigrants are us: The following facts are culled directly from A Description of the Immigrant Population - 2013 Update by the Congressional Budget Office (formatting added, edited for brevity). 

• The resident U.S. population in 2011 was about 312 million.
• In 2012, about 40 million foreign-born people lived in the U.S., making up about 13% of the U.S. population – the largest share since 1920. 
• Naturalized citizens (foreign-born people who have fulfilled the requirements for citizenship) accounted for about 18 million.
•  Non-citizens accounted for about 22 million.
• Of these 22 million non-citizens, about half (11.5 million) were people without authorization to live or work in the U.S., either temporarily or permanently.
• This is 3 million more illegal immigrants than in 2000.
• Of non-citizens unauthorized to live in the U.S., an estimated 59% (6.5 million) were from Mexico, and 14% (1.5 million) were from El Salvador, Guatemala or Honduras.
• The foreign-born population tends to be less educated than the native-born population. In 2012, 27% of the foreign-born population between the ages of 25 and 64 had not completed high school, compared with 7% of the native-born population. 
• That difference was even larger among foreign-born people from certain regions of the world. A majority of people from Mexico and Central America, for example, had less than a high school diploma. However, foreign-born people from Asia, Canada and Europe, and Africa and Oceania are more likely than their native-born counterparts to have a bachelor’s degree or more.

Immigration economics in a nutshell: There is loud, and at times deliberately misleading, clamoring that (a) immigration increases economic growth; and (b) it is therefore a net benefit to the country. All serious research and analysis supports part (a); unfortunately that in no way implies the conclusion in (b). In fact, the net economic impact on the native born population can be heavily negative and a fiscal drain to the country, primarily depending on the composition of the immigrant population.

This seeming contradiction is well summarized in research from the Dallas Federal Reserve, in its paper Immigrants in the U.S. Labor Market , September 2013; excerpts below (formatting added, edited for brevity):

The United States is the world’s top destination for migrants. It is home to 19 percent of the world’s migrants and between 40 and 50 percent of the world’s unauthorized migrants. No other nation takes in as many immigrants. On the benefits side, immigration boosts the U.S. economy, enhances productivity, spurs innovation, helps consumers by keeping prices low, and enriches U.S. society and culture. On the costs side, there are at least two important caveats to consider. 

• Immigrants to the U.S. are disproportionately low-skilled and, hence, low-wage. Low-wage immigrant households have an adverse fiscal impact, receiving more in public services than they pay in taxes, on average.
• The economic gains from immigration are not distributed equally among natives. Competing low-skilled workers, for example, may suffer wage losses, and poor households will not benefit as much as rich ones from lower prices for immigrant-produced goods and services since they consume less of those products.

The positive economic impact is greatest for high-skilled and employment-based migration, particularly of science, technology, engineering and math (STEM) workers, who can directly influence innovation and, hence, productivity growth. 

However, U.S. policy allocates only a small fraction of permanent resident visas to employment-based immigrants, who are overwhelmingly high-skilled, reserving most so-called “green cards” for family and humanitarian cases—people who frequently have much less education than employment-based immigrants. In other words, quotas restrict the most economically-beneficial immigration by awarding permanent residence primarily on the basis of family ties. 

The large number of unauthorized immigrants and the shortage of high-skilled visas, along with a host of other issues, have prompted calls for comprehensive immigration reform.

What is the “reform” in immigration reform? Immigration reform is in some respects like tax reform. Congress is attempting to update an archaic system that has been patch-worked with special interest duct tape and line item silly putty until it has nearly collapsed from the weight of complexity and post-9/11 obsolescence. Drastic overhauls of immigration law are routinely proposed by Congress and either die in committee or are ignored by the opposing chamber. From Congressional Research Service report of February 2013, a Brief History of Comprehensive Immigration Reform Efforts (formatting added, edited for brevity):

The Immigration and Nationality Act (INA), which was first codified in 1952, contained the provisions detailing the requirements for admission (permanent and temporary) of foreign nationals, grounds for exclusion and removal of foreign nationals, document and entry-exit controls for U.S. citizens and foreign nationals, and eligibility rules for naturalization of foreign nationals. Congress has significantly amended the INA several times since 1952, most notably by the Immigration Amendments of 1965, the Refugee Act of 1980, the Immigration Reform and Control Act of 1986, the Immigration Act of 1990, and the Illegal Immigration Reform and Immigrant Responsibility Act of 1996.

During the 109th Congress, both chambers passed major overhauls of immigration law but did not reach agreement on a comprehensive reform package. Leaders in both chambers of Congress have listed immigration reform as a legislative priority in the 113th Congress. Most policymakers agree that the main issues in “comprehensive immigration reform” (CIR) include, 

• increased border security and immigration enforcement, 
• improved employment eligibility verification, 
• revision of legal immigration (this generally includes expansion of permanent legal immigration, also supported George Bush), and 
• options to address the millions of unauthorized aliens residing in the country.

Then—as well as now—the thorniest of these issues centered on unauthorized alien residents of the United States.

The latest version of immigration legislation is contained in the bill S. 744 The Border Security, Economic Opportunity and Immigration Modernization Act, which was passed by the Senate on June 27, 2013. President Obama has urged  the House to vote on it “or else.” The “or else” being that the White House is now preparing to use executive power to possibly grant amnesty and/or slow down deportation proceedings for some large subset of unauthorized alien residents.

The economic impact of S.744. The federal fiscal projections of any new legislation are, as always, done by the usually reliable and staunchly non-partisan Congressional Budget Office (CBO). The complete report can be found here. The incredibly brief summary is as follows:

• The CBO estimates that enacting S 744 would lead to a net increase of 9.6 million people over current projections by 2023. 
• Federal revenues would be higher due to the increased size of the labor force, as would the costs of federal benefit programs, direct spending for enforcement and other discretionary spending relative to immigration activities. 
• On a net basis the CBO projects that the federal budget deficits would shrink by about $158 billion over the 2014-2023 period from enacting S.744.

Well, that’s great, right? Immigration reform is projected to shrink the federal deficit over 10 years. Given that federal deficits are running at $500 billion a year and projected to climb towards $700 billion per year by 2023, or roughly $6 trillion over the 10-year period, that $158 billion is a drop in the proverbial bucket. But hey, at least immigration reform is not a net negative. Not quite so fast.

The issue is that the CBO is mandated only to consider the fiscal effects on federal revenues and spending. Much of the cost of low-skilled immigrants, both legal and illegal, are born by state and local governments. Back to the research from the Dallas Fed:

High-skilled immigrants, generally well educated with substantial incomes, pay more in taxes than they consume in publicly-provided services. By comparison, low-skilled immigrants are a net fiscal drain because of their low wages, large families and lack of employer-provided health insurance coverage. In 2010, about 31 percent of immigrant-headed U.S. households participated in a major means-tested public assistance program, compared with 19 percent of native-headed households.

It is important to note that higher welfare participation among immigrants in the U.S. is

not related to lower employment among low-education, foreign-born household heads (which is often the case in other advanced economies). In the U.S., low-education immigrants actually have much higher labor force participation rates than similar natives. Rather, the difference is due to greater immigrant participation in public health insurance programs, such as Medicaid and CHIP (the Children’s Health Insurance Program).

With regard to unauthorized immigrants, most attempts to calculate their net fiscal impact

conclude that they also pay less in taxes than they receive in services, on average. Like low-education legal immigrants or low-education natives, they receive more in government benefits than they pay in taxes, on average. However, since they are not eligible for most welfare programs, illegal immigrants have a smaller adverse fiscal impact than low-wage legal immigrants. In both cases, the fiscal burden is particularly heavy for state and local governments, which bear a large share of costs for schools and health care.

There are several studies which incorporate the total federal, state and local government costs for low-skilled immigration. Suffice it to say these estimates vary widely but are uniformly negative, and the cost of such immigration can only be offset by including large proportions of high-skilled immigrants. Significantly larger proportions of high-skilled immigrants than what the U.S. admits now.

The economic effects of an amnesty for unauthorized workers. I’m getting tired and this is way too long already, so I’ll keep this brief since I’m sure the outcome is already obvious. Studies project that granting widespread amnesty to unauthorized immigrants – who we already know are predominantly low-skilled with a roughly 10^th grade education – would probably produce a brief positive impact in revenues as income and payroll tax collections increased.

Unfortunately over the longer term this likely turns negative – perhaps profoundly negative - as benefit rolls and the cost of services increased. Legal immigrants qualify for many more benefit programs than illegal immigrants.

There’s also a second problem with amnesty that we’ve already experienced – it produces a tidal wave of new, unauthorized immigration. There was a large-scale amnesty program included in the 1986 IRCA immigration reform bill. Conclusions from an INS report in 2000: 

• Amnesties clearly do not solve the problem of illegal immigration. About 2.7 million people received lawful permanent residence ("green cards") in the late 1980s and early 1990s as a result of the amnesties contained in the Immigration Reform and Control Act (IRCA) of 1986. But these new INS figures show that by the beginning of 1997 those former illegal aliens had been entirely replaced by new illegal aliens, and that the unauthorized population again stood at more than 5 million, just as before the amnesty.

• In fact, the new INS estimates show that the 1986 amnesty almost certainly increased illegal immigration, as the relatives of newly legalized illegals came to the United States to join their family members. The flow of illegals grew dramatically during the years of the amnesty to more than 800,000 a year, before dropping back down to around 500,000 a year.

The irony of granting amnesty is that it’s hardest on the native born population that competes with immigrants for jobs – the young, low-skilled and poorly educated. Most of the gains are transferred to the immigrants as higher wages at the expense of consumers and these other groups. 

Closing remarks. Comprehensive immigration reform is certainly needed and long overdue. Done correctly – and I will leave it to the experts to argue particulars - but a bi-partisan bill like S.744 is probably worth a vote in the House (looking at you, Boehner). Amnesty is not a solution. Not for low-income Americans who will pay the highest price, not for high immigrant states that will bear an outsized fiscal burden. My opinion only, as always.