Evan Soltas
May 29, 2013

Immigration's Economic Benefit

(Originally published here.)

While the controversy over the Heritage Foundation's recent report holding that increased immigration would cost U.S. taxpayers billions of dollars has died down, understanding the economic effects of reform remains vital to enacting legislation. So I spoke with Tim Kane, chief economist at the Hudson Institute. From 2004 to 2007, Kane was the director of Heritage’s Center for International Trade and Economics, where he wrote a far more favorable report on the impact of immigration reform. Kane has since done extensive research on the impact of immigrant entrepreneurs for the Kauffman Foundation, where he was a senior fellow until 2012.

(This interview has been condensed and edited lightly for clarity.)

Evan Soltas: In 2006, you and Kirk Johnson wrote a report for Heritage and found substantial long-run economic benefits to immigration, as well as real fiscal gains for the government. Where did those come from?

Tim Kane: From a fiscal perspective, the studies we have seen over the years point to real gains. The demographics of a low birth rate severely exacerbate the fiscal situation of programs like Social Security. It's a problem we see in European countries. But in the U.S., immigration allows us not to face the same burden. That keeps entitlement programs healthier than they would otherwise would be -- something that is really desirable given the other trouble facing these programs.

But the big gains come on the economic side. Having more people in the labor force brings more economic activity, at the basic level, but it also enhances productivity and specialization. This is where the benefits become really significant. For example, imagine having to tie down Einstein with some work in whatever low-skilled function. Is having more low-skilled immigrants going to hurt Einstein? Is it going to hurt economic output? There's a real case for more low-skilled immigration, not just high-skilled, that comes from this perspective on the division of labor. Increased specialization generates higher productivity levels across the board. I think it's a mistake to differentiate between skill levels -- to say we'll let high-skilled immigrants in, but not low-skilled ones.

There's another big source of gains not in the Heritage report, but which I've found in my more recent work. What we somehow forget, as a nation of immigrants, is that immigrants tend to be far more entrepreneurial than natives. In the data, we see many more startups. Vivek Wadwha, for example, found that an astounding share of all the co-founders for Silicon Valley firms is immigrants. And given that this outsize proportion of entrepreneurship does come from immigrants, a shift to "Fortress America" is really betraying 200 years of history.

Soltas: What are the major differences in methodology between your 2006 report and Heritage's most recent, done by Robert Rector and Jason Richwine?

Kane: The biggest problem that I had with the Rector-Richwine study is that it didn't do a very good comparison of the status quo to the prospective changes in an actual reform. It made some incredible assumptions to ratchet up the cost. One example was how they answer the question, "How much health care do immigrants use?" The Heritage assumption was zero under the current policy. It's only in a later footnote that they point out that this assumption is wrong, and that this really skews their cost analysis.

Another example is that the report assumes that under the current system, immigrants return to their home country at age 55, so they don't put any costs on the government, but that they will stay en masse if "amnesty," as Heritage calls it, passes.

The second issue here is that this report abandons a lot of the normal ways conservatives analyze policy. Most important, that's a dynamic evaluation of economic benefits. The Heritage report is not consistent with that conservative approach. It's an isolationist report written from a static approach.
Soltas: How should we understand that inconsistency of Heritage using a dynamic approach for ideas like tax reform and then not applying it to immigration reform?

Kane: I think what gets lost in this discussion is that Heritage is a big-tent organization. For example, you have the Center for Data Analysis inside the Institution itself, where they specialize in just this sort of thing. This report wasn't written by CDA. I think it's a credit to Heritage that they allow for a diversity of voices, and at the end of the day, it's one bad report from an organization that produces a lot of research. I don't think this should be seen as a black eye for the whole organization.

Soltas: What is your take on the current immigration-reform legislation moving through Congress? What would you like to see done differently?

Kane: I think what frustrates any economist or topical policy expert in Washington is at least in 50 percent of the cases that these reform proposals are put forward, the politicians don't really want to pass legislation. They want an election issue. I hope it's different this time, but I'm very suspicious about whether this comprehensive legislation can become law. What I would like to see is a series of smaller bills. Bloomberg Government director of research Bob Litan and I surveyed every single major mainstream think tank, and we found that every single group supported more high-skilled immigration. My view is: Let's do the things we all agree on first. Then we can work on our disagreements.

Soltas: You also have a new book with economist Glenn Hubbard, "Balance: The Economics of Great Powers from Ancient Rome to Modern America." Is there anything from your research for that informing your perspective on immigration reform?

Kane: One of our big themes in the book is that America is not faced with an existential threat in the form of "barbarians at the gate." It's not terrorists; it's not hostility or intense competition from other nations. When we survey history, what tends to bring down great power is almost always problems of internal domestic politics.

I think that's led me to see immigration reform as not an issue between left and right, but between a "Fortress America" mentality and one of expansion and globalism. What brings these powers down is that they become economically imbalanced. Rome didn't understand inflation; Spain didn't understand productivity growth. The meta-issue here, I think, is that behavioral economics teaches us that we have a strong risk aversion of losing what we already have versus getting an equal amount more. In the book, we apply that idea to great powers. Their politics become infused with a feeling of loss aversion. We see real historical tendencies to counterproductive "wall-building" and a paranoia of leaking economic power, something we see in quite a bit of rhetoric against China and, on immigration, to South and Central America. The assumptions behind the risk aversion are incorrect, but hopefully our great power can overcome them where others stumbled.