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Warning: Immigration Can Seriously Damage Your Wealth

Page 3 of 10

Free market economists

One other group is also in favour of immigration – the free market economists who believe in the analogy between free migration and free trade. This academic and intellectual backing for immigration is influential, especially with ‘conservative’ opinion formers. It is associated with such diverse bodies as the Wall Street Journal, which calls for open borders in the USA, and the Centre for the New Europe and Open Europe, both of which call for an open door to immigration into Britain from all EU countries.

It is their stance – incorrect, in the opinion of this study – that has hamstrung the emergence of a respectable questioning of the foundations of the pro-immigration economic arguments.

Nevertheless, the bulk of this study will deal with their analysis.

In the view of these free market economists, classic economic theory shows that if all factors of production (excluding land) are allowed to flow freely worldwide, this will produce the most output in the world. (This entails free trade and free movement of capital and labour.) According to this theory, migrants will flow across the world until the wages on offer in migrant-receiving countries are at the level of the wages on offer in the migrants’ original home countries, plus the costs and disbenefits of migration.

Their analysis of the impact on production is perfectly correct – in a narrow sense. But this paper argues that it is an incomplete analysis and ignores much of the economic impact of immigration.

In the USA – unlike in Britain – a great deal of work has been done on the economics of immigration, and the free migration argument is put by the National Research Council (NRC) of the National Academy of Sciences in its much-quoted work, The New Americans, which was commissioned by the US Congress:

The primary effect of both immigration and international trade is to allow us to specialize in producing those things we are good at and to consume something other than what we can produce ourselves.

Exactly the same reasons that explain the net national gain from trading with other countries explain the net national gain from immigration. First, a gain arises from shifting productive resources towards more valuable activities. Another gain flows from shifting consumption towards commodities whose cost has fallen. Although some people in the trading countries may be harmed by this specialization, the important lesson, as we have seen, is that the gains from trade outweigh the losses.[10]

And, further:

Broadly speaking, immigration and international trade are alternative ways to achieve the same goal. Through either mechanism, we can obtain inputs that are relatively more abundant overseas than they are in our own country. Given the high level of human capital (skill) in the United States, we can import low-skilled workers (through immigration) or we can import the goods such workers make.[11]

The NRC did introduce the caveat that this analysis referred to a static situation, a moment-in-time analysis.

But, despite being correct in its narrow, static analysis of production, it is not a proper and full economic analysis of immigration, as it ignores the impact on wealth, with its major effects on the standard of living and overall economic well-being. In other words, the NRC work covers only part of the economic picture. It concentrates on income effects and ignores wealth effects.

It will be shown later that both the NRC and Professor Borjas avoid saying that immigration will provide increased wealth or higher per capita GDP for natives. They simply assume, with little or no analysis, that capital adjustment at the expense of native wage earners will restore the capital–labour ratio in GDP to its pre-immigration level.

Furthermore, it is apparent from close study that, when both the NRC and Professor Borjas refer to capital, they are referring to what Henry Hazlitt calls ‘the tools of production’, and not to the whole wealth of a country. Neither the NRC nor Professor Borjas discusses the effects of immigration on wealth, or how immigration can restore the wealth–labour balance to its pre-immigration level. This study makes an (admittedly rough) effort to do so and shows how unlikely it is to return to its previous level.

In The New Americans, the NRC studied the fiscal effects of immigration, and included there the impact of immigration on taxes and benefits. Some of these benefits, such as education, health and public service provision by government, included additions to wealth. The NRC assumed these additions to wealth would maintain the level of wealth that existed in these areas prior to the arrival of immigrants. The results showed that, in the two states on which the data were based, California and New Jersey, there was a great shortfall between the taxes paid by immigrants and the benefits received by them. The analysis did not provide a breakdown to disentangle capital additions from current spending and transfer payments, and it is far from certain that, when the basis for the analysis was set up, all the costs of capital spending to provide for immigrants were allocated solely to immigrants. Moreover, these estimates have a large number of assumptions built into them. Many of these assumptions have been questioned by experts such as Professor Borjas. It therefore seems simpler to approach the subject from a different angle: to establish the existing wealth of natives and then show that immigrants cannot generate the same wealth for themselves.

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