Immigration 4:Fiscal Impacts

Development and immigration

Economic DemographyDemog/Econ C175Prof. Ryan Edwards

April 21, 2020

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Plan today

• Schedule

• Current events (or threats? Who knows)

• Fiscal impacts of immigration

• Development and immigration24/21/20 10:54 AM demog/econ c175

Schedule• Last class meetings:

– Today, 4/21: finish immigration– Thursday, 4/24: start health & mortality– Tuesday 4/28: health & mortality– Thursday 4/30: health & mortality

• Final exam online on bCourses around about Thursday 5/14 with flexibility

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Current threat level: Trumpy

• Who knows! what this means• My apologies to anyone who may be affected• One thing is clear: neither the President nor his aides have

taken C175

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Foolish Economics• A little economics can hurt you?

• If you’re powerful, then your knowledge of a little economics might hurt a whole lot of people

• A “Foolish Economics” How-To

– Take a theoretical prediction about the sign of something, like demand curves slope down, or the moral hazard of insurance

– Make an argument using only it

– Ignore empirical magnitudes, overlapping effects, and total derivatives. Instead, assume all other things are equal

– Profit!4/21/20 10:54 AM demog/econ c175 5

Examples of foolish• Peter Thiel, billionaire venture-capitalist, and seat belts:

– “I oscillate on the seat-belt question,” he said.

– I asked what the poles of the oscillation were.

– “Well, the pro-seat-belt argument is that it’s safer, and the anti-seat-belt argument is that if you know that it’s not as safe you’ll be a more careful driver.” He made a left turn and fastened his seat belt.

• Human Papillomavirus (HPV) vaccinations and

– Risky sex? No, statistically insignificant

– Reductions in Pap test? No, actually increases

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Immigration foolishness

• Demand curves slope down

– Will reducing immigration raise wages and reduce unemployment?

• Processing refugee applications is costly to governments

– Will raising costs to refugee families by separating them at the border reduce flows of refugees?

– (Or will it just increase everyone’s shame and/or anger?)

• Good policy is evidence-based, not dogmatic

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Clemens, Lewis, and Postel (AER, 2018)

• The bracero program (“manual laborer”) began in 1942 and allowed Mexican migrant labor to work in the U.S.

• JFK, 1963: “The adverse effect of the Mexican farm labor program as it has operated in recent years on the wage and employment conditions of domestic workers is clear.”

• LBJ ended the program on 12/31/1964

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• Ending the bracero program removed Mexican labor

• But it did not raise farm wages

• Afterward, farm wages actually rose faster in “no-exposure” areas

Why?

• Mechanization

• Technology for harvesting tomatoes existed but hadn’t been adopted

• Until it was very profitable to do so, once braceros were excluded

• (And it does not appear that agri-business lobbied for the policy change in order to profit from their technology)

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Fiscal impacts of immigration

“[I]f immigrants are assigned the marginal cost of public goods, then the long-run fiscal impact is positive and the short-run effect is negative but very small (less negative than that of natives).”

– Pia Orrenius (Dallas Fed WP 1704, 2017)

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Fiscal impacts of immigration• We mean the additional government spending minus the

additional government taxes that are incurred — here, by an extra immigrant

• Natives also have fiscal impacts

• Why are fiscal impacts of immigration a big focus?

• “In Schools Across U.S., the Melting Pot Overflows,” New York Times, August 27, 2006

– 55 million K-12 students enrolled now, reaching 56.7 million by 2014

– The bulge is partly due to kids of Baby Boomers, partly due to immigration

– We saw earlier how in some states, like California, kids with moms who are foreign born comprise almost 50% of all school-age kids!

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What does government finance & how?

• Federal government spending

• Defense

• Social Security, Medicare

• Medicaid, food stamps, social assistance, unemployment insurance

• State

• K-12 education, subsidies for colleges & universities

• Police, roads, utilities

• But some of these categories are public goods, where additional usage doesn’t degrade them much

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Fiscal impact of an immigrant = additional spending – additional taxes

• Public goods like U.S. defense spending probably don’t have to rise

• Private government spending on pensions, Medicare, and schooling probably does — for authorized immigrants

• Tax revenue probably rises

• Immigrants pay sales taxes

• It’s possible but hard to avoid paying income taxes14

The characteristics of immigrants suggest what fiscal impact might be

• Immigrants tend to be younger than the average native, and there are many immigrants with low education

• Most taxes are based on income, which is higher when education is higher

• Thus: Taxes paid by immigrants are probably lower vs. a native of the same age; may be higher relative to the average native, who is older and less likely to be working

• Benefits are based on age and need; Immigrants have young kids in school and can be economically needy, natives less so

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But the net fiscal impact of immigration also depends on the timeframe

• Do you count the impacts of the children of immigrants, who are natives (i.e., second-generation immigrants)?

• If you do that, do you count fiscal impacts only today, only today and tomorrow, or into the infinite future?

• New immigrants have a fiscal impact that is probably negative, because they have kids who go to public school

– During working ages, you pay far more in taxes than you take up in benefits

– A possible exception: if you are low-education, you may have a part-time job, or two or three, that has no health insurance. Maybe then you use Medicaid

– But immigrants are also typically healthier than natives!

• If we are going to count kids, when do we stop counting?

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Suppose you count only right now. Kids matter.

• If we do NOT count second-generation immigrant children, who are citizens (natives), then each immigrant is a net BENEFIT to government finances of $1,800

• If we DO count second-generation immigrants who are citizens, then each immigrant is a net COST of $400

• Immigrants themselves tend to be workers who pay taxes; but their children, who may be natives, go to public school

• But suppose you count the net present value of all present and future fiscal impacts —

– Each one of those children in school today will grow up to work and pay taxes

– Current working immigrants will also grow old and take up benefits

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How do you do this? Calculate the Net Present Value of all taxes and benefits

• How do you forecast taxes and benefits?

• A standard way to do this is to assume that taxes and benefits by age are stable, growing with incomes over time

• Net Present Value is the discounted sum of future cash flows, because you could put cash in the bank today and earn interest on it

• The Net Present Value of taxes T and benefits B from time tto t + 2 is

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Comparing immigrants to natives

• The shape and level of age-specific benefits are very similar for immigrants and for natives

• But age-specific taxes paid are substantially lower for immigrants than for others

• This is because immigrants earn less, and our governments primarily tax earnings

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Mechanics of the forecast• Start with an immigrant of given age and given education

• Project forward over the life cycle

– Benefits and taxes move along the age profiles

– But the profiles shift upward over time as incomes grow

• Take into account fertility, those kids’ own fertility and survival, etc., and do the same for all descendants and their costs and taxes

• Calculate the Net Present Value at time of immigration for each age-education group

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The NPV varies by age at arrival, education level, and by level of government

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• If you arrive before age 35-40, you have a positivenet impact on the federalbudget, because you are working and paying Social Security and other taxes

• But you also have a negative impact on state and local budgets, because you are a kid or you have kids who go to school

On average, what’s the net present value of an immigrant?

• For an average immigrant arriving in 1996:

– The total net fiscal impact of your arriving, which includes you and all your descendants, is +$80,000

– Your net federal impact is +$105,000

– Your net state and local impact is –$25,000

• What can we say about these numbers?

– They’re small relative to other things. Immigration is maybe 0.25% of the population, so each year you gain maybe $200 per person

– There is clearly a reason why immigration is a hot-button issue at the state and local level. Immigrant children are costly!

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• Here we see pretty big differences in the NPV by education

• The net fiscal impact is also largely due to future generations

• Only in the case of immigrants with more than a high school education are they “worth” more to the U.S. than their kids in present value

Should the federal government subsidize high immigration states?

• The net fiscal impact of immigration is positive for the federal budget

• But it’s negative especially for high-immigration states

• This is mostly due to the costs of education

• Should the federal government shoulder more of the burden by subsidizing state education more heavily?

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Fiscal impacts of unauthorized immigrants• Two big differences:

• Unauthorized immigrants typically don’t stay in the U.S. after age 65 because they don’t qualify for Medicare

• Unauthorized immigrants face the risk of deportation, so young immigrants might not finish school, and thus might not pay as much later in taxes as authorized second generation

• Net effect? Unclear, but doesn’t appear to be hugely negative (negative = costly for government)

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Development and migration

Why do people migrate? If their countries were more developed would they stay?

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Notes on confusing terms

• “Immigrants” could mean the stock of foreign born, or the flow of new foreign-born entrants

– U.S. stock is about 45 million or 13-14%

– U.S. documented flows are about 1 million per year

• Immigrants are folks who enter

• Emigrants are folks who leave

– A Mexican emigrant is somebody who leaves Mexico

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Clemens: Migration as a function of development is an inverted-U

• Contradicts the traditional view (or hope?) that development would lead to less migration

• Empirical evidence on this is mixed,

• But Clemens argues that the time-series studies are too short to show the inverted-U, which might happen over 200 years!

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Stocks and flows both show the same thing: ∩

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What’s going on?

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Review: A thumbnail sketch of the Demographic Transition

Crude Birth Rate

CrudeDeath Rate R

Time Time

Crude Growth Rate (R)

Note crude rates are per capita (e.g., CBR = births / population)

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Clemens’s 6 reasons Why migration could increase with development

1. Population growth via Demographic Transition, sticky wages, and unemployment

2. Credit or liquidity constraints

3. Information asymmetries & enclaves

4. Structural change: agricultural workers gone searching

5. Rising inequality during development

6. Legal barriers to migration might penalize poorest countries most

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1. Demographic Transition

• At onset of development

– Mortality falls before fertility

– Faster population growth & big swell of young workers

• If prices and real wages can adjust, then in the short run, the economy can absorb these workers

• What if nominal wages are sticky and inflation is subdued? Unemployed young workers, emigration

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2. Credit or liquidity constraints

• In early stages of development, credit markets are really poor

• With development, improvements in credit could finance fixed costs of emigrating

• Because credit markets still aren’t great, a strategy of emigrating, earning, saving might be dominant

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3. Information asymmetries

• Local information in receiving countries is salientand not freely available:

– Jobs, earnings, cost-of-living, migration mechanisms, marriage markets

• More immigrants can share more information

• If immigration takes off, it spreads information and reduces risks and lowers costs for more immigrants

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4. Structural change at home

• "The onset of modernization ... Brings with it a great shaking loose of migrants from the countryside" (Zelinsky 1971)

• Development “displaces many people from traditional livelihoods and past ways of life ... Most become internal migrants ... [b]ut some always migrate international, seeking wider opportunities in more dynamic economies abroad” (Massey 1988)

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5. Increasing inequality at home

• We often index development with per capita income, but that could mask great inequality

• If development increases inequality, it could raise ambitions (”reference level of satisfactory income”) more than it improves every-day life

• Desire for economic mobility might translate into geographic movement

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6. Legal barriers to immigration

• If destination countries require skills and diplomas, these might restrict migration early in development and then loosen up

• Nursing example

– If a country doesn't have an accredited nursing school, then it’s hard to send nurses.

– Philippines: accredited nursing associated with U.S. colony status after 1898

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Bottom line• Income gaps are a motivation for migration

• You’d think this would predict less migration as countries get richer

• But enough other factors are important that development can increase migration

• Clemens: “In the language of calculus, the partial derivative of emigration with respect to income can be negative—all else equal—while the total derivative is either positive or negative—because all else is not equal.”

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