Immigration, Economic Growth, and the Welfare State

Philadelphia Society Benjamin Powell

Miami, Florida. April 30th 2005.

I am honored to speak to you today about immigration. You just heard an argument to restrict immigration and even close our borders from Peter Brimelow, a man with strong free market credentials. Unfortunately, Peter’s proposals will fail to save American culture and values and may serve to undermine them. His problems stem not only from faulty economic estimates but also from a failure to address the underlying problems that America faces. The problems we observe with immigration are only symptoms of our perverse institutional environment not the underlying problems themselves.

I want to be clear from the outset that I do not support America’s present immigration policy. Our current immigration problems stem from both our mixed interventionist economy and our current system of immigration rules. I agree with Peter that the 1965 law and subsequent acts create problems and should be eliminated. However, instead of restricting immigration completely, I favor opening the borders to all immigrants, in any quantity, from any location, so long as they are free of disease and demonstrated criminal activity, and that some private party is willing to provide a place for them to stay.

I do not advocate this because I believe in any special “right” to immigration. For that matter, I don’t believe that “multiculturalism,” “diversity,” and other politically correct buzz-words that liberals use are necessarily good. I favor open immigration because it is the right policy for Americans who live here today.

Let me begin with some economic reasons. Peter bases his economic consequences of immigration on the work of George Borjas. Borjas uses what economists call a Harberger triangle to estimate the gains from immigration. His latest estimates in David Henderson’s Concise Encyclopedia of Economics find that immigration increases GDP growth by about 0.2%, or $22 Billion per year. While 0.2% sounds small, compounded over time this is still a significant gain for our economy.

Anti-immigration advocates try to trivialize the size of the gain, but there are hundreds of government regulations in our economy that conservatives and classical liberals oppose that have much smaller effects. I doubt anyone in attendance would be against abolishing rent controls in Berkeley, California, even though the economic gains would be far smaller than those from immigration. Virtually every estimate agrees that immigration has some positive economic impact. Even if the gain is $22 billion, a gain is a gain, and it’s a heck of a lot better than a loss.

Borjas and Brimelow, however, grossly underestimate the size of the gain. The Harberger Triangle method they use is also used by economists to measure the net loss to society from monopolies. In the 1960s some economists estimated these losses and found that the triangles were relatively small and began to conclude that government sanctioned monopolies do not introduce too big of an inefficiency into the economy.

It took the public choice economist, Gordon Tullock, in a 1967 article that he is still awaiting his Nobel Prize for, to point out that it was not just the triangle that could be lost but the area economists previously considered a transfer. Since a grant of monopoly privilege is a political favor bestowed upon a producer, producers have an incentive to engage in economically unproductive activities such as lobbying to try to obtain the transfer. Some of the value of what economists previously considered a transfer from consumers to producers would also be a net loss to society.

Since that article was published a large literature in public choice has emerged that describes the various conditions under which the rectangle (transfer) will be exactly dissipated into loss, over dissipated and under dissipated. The one conclusive result is that under all of their plausible models, there will be very significant deadweight costs in addition to the triangle.

Brimelow completely leaves this out of his estimates of the benefits of immigration. He assumes all that will be lost is the triangle and that the rectangle you see would be transferred from U.S. workers to U.S. owners of capital and land. For this to be even partially accurate immigration would have to move from current policy to his vision of complete restriction with essentially no political fight. How likely is that? Quoting from his book Alien Nation,

”It will be resisted hysterically. It will be sabotaged in every possible way. It will probably require repeated legislation… It could quite easily destroy the present political party system.” P.267.

That’s going to be a big cost.

In trade policy, an article in the Journal of Political Economy estimated that once you count the political lobbying costs of trade restrictions, the losses to the economy increase by a factor of 10 compared to just the triangle. That would make the $22 Billion loss from immigration into $220 billion. This is not at all unreasonable given the passion of the fight that will likely ensue.

This is not to claim some workers won’t lose, some who compete for the same jobs as the immigrants could lose at least in the short run. Though a survey of the economics literature published in the Journal of Economic Perspectives concluded that “Despite the popular belief that immigrants have a large adverse impact on the wages and employment opportunities of the native-born population, the literature on this question does not provide much support for the conclusion.”

However, even if it could be shown that wages of some groups of native-born workers decrease, I don’t think conservative and classical liberal supporters of markets should abandon support of immigration. Virtually any policy that restricts competition benefits some workers at the expense of the vast majority and overall efficiency. Unless we can conclusively argue that these displaced workers had some special positive “right” to a job or particular wage that no one else does, a classical liberal should not advocate restricting competition.

Although immigration has overall economic benefits there are also costs that current tax-payers bear. The most obvious cost occurs when an immigrant receives welfare.

Critics of immigration point out that immigrants are more likely to go on welfare than the general population. Some even claim that this trend is increasing, though research by Vedder, Gallaway, and Moore shows that these claims are grossly overstated. Once they control for other factors, they find little change in the proportion people on welfare who are immigrants since 1970.

Despite this, there clearly should be concern about people migrating here to receive welfare. A two child family in California is eligible for a $7,200 welfare cash benefit, an additional $3,000 in food stamps, and up to $6,500 in Medicaid for a total benefit of over $16,000. These benefits exceed the average per capita incomes in many countries around the world by a substantial margin.

Milton Friedman has said, “It’s just obvious, that you can’t have free immigration and a welfare state.” Conservatives and classical liberals should agree with a resounding “here, here,” and it’s time to abolish the welfare state.

I doubt there are many supporters of the welfare state in this room. But it is a mistake to take the welfare state’s existence for granted and use it as an excuse to condone government interventions in immigration. This is the problem Ludwig Von Mises famously pointed out in his book The Dynamics of Interventionism. One government intervention in the economy produces undesirable and unintended results and planners are confronted with the choice of making further interventions or repealing prior ones. All too often, government chooses the former.

Mises points out that we must fight to roll back existing interventions, so that the economy will not keep tending down what Hayek famously called “the road to serfdom.”

Almost everybody in this room is opposed to rent control. But if rent control exists, land lords have an incentive to turn apartments into condos and sell them off at higher prices, leaving the poor with even fewer apartments available. Clearly this is an undesirable result. But almost no one here would advocate restricting the ability of land lords to convert their property to condos as a solution. We would instead focus our efforts repealing the first intervention, rent control, that caused our problem in the first place.

The same should be true of the welfare state and immigration. Conservatives and classical liberals should focus energy on rolling back the welfare state instead of trying to limit immigration. If a case to eliminate immigration is to be made, it must be independent of the existence of the welfare state.

Some may reply that it’s not politically likely that we can eliminate the welfare state right now. Well, it’s also not politically likely that immigration can be completely restricted right now. If we are going to have a political fight, it might as well be for real conservative and classical liberal value, not a marginal step away from classical liberalism by restricting immigration.

Even if the political situation were different, I don’t think we should advocate restricting immigration. In The Intellectuals and Socialism, Hayek wrote, “The main lesson which the true liberal must learn from the success of the socialists is that it was their courage to be Utopian which gained them support…We need intellectual leaders who are willing to work for an ideal, however small may be the prospects of its early realization.” This is the position we should be fighting for on immigration, not one that assumes a welfare state.

Of course, there are other spillover costs of immigration in our economy. Public schooling, especially with bilingual education, is one example; crowding on public roads is another. But here, too, we have features of our economy that are not consistent with free markets. Our fight should be to eliminate public schooling and to privatize roads by allowing owners to charge for their use directly, not to stop immigration.

Virtually every economic cost of immigration is a product of an interventionist government and a welfare state, or a tragedy of the commons. In either case, the solution to the problems is private property reform and free markets.

In fact, immigration restrictions not only create a new intervention, they fail to reform these underlying problems at all. Restricting immigration doesn’t change all of the spill over costs that current native citizens place on each other. Immigration puts pressure on us to reform underlying problems and therefore should be welcomed.

In the correct institutional setting immigration is an unambiguous economic gain for existing citizens. Reform towards those institutions are what we need to agitate for.

Moving beyond economics—what about our culture? American values… self reliance, hard work, individual initiative? Couldn’t bringing in people from other cultures undermine those values, or—even worse—pervert our politics?

American values have changed over the last two hundred years. Most of the public has moved away from these traditional values and come to believe that our nanny state is necessary. People have learned that instead of serving consumers to get ahead they can lobby the government for transfers; use the court system for fraudulent law suites; beg the anti-trust regulators to limit their more efficient competitors; take government handouts between jobs or, even worse, take handouts nearly permanently.

Values have changed as our institutional environment has changed. As acts of congress and court decisions have eroded our original constitutional environment they have distorted the incentives facing people in our economy. As the benefits to unproductive entrepreneurship—what economists call rent seeking, or basically seeking transfers of wealth—have increased, more people engage in transfer seeking. This has eroded our culture. The costs and benefits people face have influenced our cultural values over time. This is true of both immigrants and natives.

The post-1965 immigrant wave IS different than prior immigration waves. It is partly distorted by government policy that prevents Europeans and others from coming, but it’s also different, NOT because the immigrants are fundamentally different, but because OUR culture is different than before.

Before, immigrants assimilated into a culture of hard work and self-reliance. Those who failed here often had to go home. Few go home today because of failure today. Instead, they are taught to assimilate into a system of government reliance where failure and laziness are not punished. The post-1965 immigration wave is the first that has come once we had a welfare state in place. Unfortunately, that welfare state not only makes them less productive, it also teaches them to undermine our old culture that made America successful.

This problem is not unique to immigrants though. All American culture is being perverted by the welfare state. Culture is influenced by the economic incentives facing actors—it is not something wholly determined by place of origin or ethnicity.

Look at the many natural experiments: China, Taiwan and Hong Kong; North and South Korea; Ireland and Northern Ireland—places with essentially the same geography and ethnicity where the political and economic cultures are completely different.

In each case, one group was able to adopt a system of free market principles like those of the U.S. Their economy flourished and their culture grew to support it, while an otherwise similar group of people adopted different institutions and stagnated.

In both cases, the cultures have carried on. Ethnicity alone doesn’t determine what values a group will support. Culture evolves to respond to costs and benefits over time. We need to focus on creating the right institutional environment in the U.S. so the immigrants who come here will assimilate into the old American values, not our new perverted ones created by the nanny state.

Another concern is security. What about a wave terrorists trying to immigrate? Just because we should have an open immigration policy doesn’t mean we can’t exclude criminals and known terrorists. People with criminal records should not be free to roam our streets, immigrant, native, or otherwise.

By moving to a system of open immigration we would slow the flow of the current illegal border crossings. As long as it was predictable that we would let anyone immigrate who enters through legal checkpoints and who does not have a criminal record, most immigrants would come through these channels. This would free up our resources devoted to monitoring illegal crossings so that they were concentrating on a smaller group, most likely criminals and terrorists, so they could better prevent them from entering.

Right now we do a horrible job of preventing illegal crossings because there are just too many attempts relative to enforcement resources. If we completely cut off immigration there would likely be even more illegal attempts. By opening our borders and concentrating resources on the fewer attempts that occur, we would actually be more safe, not less.

Finally I think there is an important ethical argument that needs to be considered in immigration policy: The rights of current American citizens to freedom of association.

Our fundamental American cultural values were a right to life, liberty, and property. Those rights imply a freedom to sell or rent your property, to associate in business with, or to have as a guest on your property, anyone you desire.

Immigrants have no special “right” to come here just as I have no special “right” to walk on your private property. The right is with our property owners in the U.S. to associate with whomever they please, be they an American citizen or not.

Current immigration policy unjustly puts a filter on our own right of freedom of association. The government has no just reason to place a blanket filter on whom we associate with. The only people who should be filtered out are those who have demonstrated that they have no respect for our rights of life liberty and property—namely criminals. And these people should be filtered out whether they are natives or immigrants. Any filter beyond that is an unjust restriction on our very American freedoms we used to hold so dear.

Thank you.

Benjamin Powell

Benjamin Powell is Research Fellow at The Independent Institute and assistant professor of economics at Suffolk University. Dr. Powell received his Ph.D. in economics from George Mason University. He has been assistant professor of economics at San Jose State University, a fellow with the Mercatus Center's Global Prosperity Initiative, and a visiting research fellow with the American Institute for Economic Research.