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Warning: Immigration Can Seriously Damage Your Wealth

Page 5 of 10

Comparisons with the USA

Another argument to be considered is that of pro-immigration enthusiasts, who point to the USA and state that it is an economy based on immigration and has the highest standard of living in the world – therefore immigration must be beneficial to native Americans. In reality, US economic success is based on its productivity and relatively free economy. The difference between it and the rest of the world was greatest between 1924 and 1965 – during a period of low immigration. If immigration promotes a higher standard of living, then Argentina, which received proportionately even more immigrants than the USA in the late nineteenth century, would be richer than the countries from which the immigrants came, such as Italy, Germany and Spain. It is not. A journalist such as Luke Johnson can castigate Japan for its low immigration rate and state: ‘This lack of fresh blood may be one reason why, until recently, their economy had significantly stagnated for over 12 years.’[16] Apparently, lack of fresh blood had not stopped the Japanese economy being highly successful until 1990. Mr Johnson fails to consider whether it might have been Japan’s economic policies that caused this problem of stagnation in 1990, rather than the need for fresh blood that apparently mysteriously surfaced just then.

Much of the argument suggesting benefits of immigration into the USA is, on closer examination, based on the total growth of the US economy, rather than on growth per head of population:

Thus, the size of the economy, measured, say, by real gross domestic product (GDP) grew more rapidly than it would have without immigration. This is, we think, what historian Maldwyn Allen Jones had in mind when he wrote in his classic book, American Immigration:

‘The realization of America’s vast economic potential has…been due in significant measure to the efforts of immigrants. They supplied much of the labor and technical skill to tap the under-developed resources of a virgin continent...’

But this concept of growth, sometimes called ‘extensive growth’, is not what economists usually mean by the phrase ‘economic growth’. Instead the growth of labor productivity, or the growth of per capita output, or the growth in the standard of living – ‘intensive growth’ – is usually of greater interest… If per capita output is to grow, GDP must grow faster than the population. So the question becomes: Does immigration increase or reduce labor productivity?[17]

There is, in fact, some dispute as to whether, for example, the massive immigration into the US at the end of the nineteenth century did increase the per capita GDP of native Americans. Much of the supporting argument is based on the boost given to the increase in the ratio of the working population to the total population, because most immigrants were young workers; but this is obviously a one-off effect. For this argument to have permanent validity, there would have to be a never-ending immigration of new, young workers.

The second argument put forward is one of increased returns to scale, with large pools of capital and labour reducing costs. This argument seems a reasonable one, but is unproven. There is, of course, the opposite argument of the costs of congestion.

Neglect of wealth effects

To understand why those who advocate free movement of labour are wrong to view free movement of labour as analogous to free trade, it is essential to place discussion of the economics of migration on a proper and full basis, and to include a discussion of the effects on wealth.

It is also useful to clarify the position using some numbers – generally thin on the ground in pro-immigration arguments.

As Professor Borjas states:

Instead, many observers simply discuss the potential sources of the economic benefits, do a lot of hand waving, and often insinuate that these benefits must be very large. On the rare occasions when actual numbers are provided, there is seldom any documentation to substantiate the often-exaggerated claims.[18]

At all times, this study considers a totally free market with no welfare state. It does not consider the fiscal effects of immigration, such as taxation and welfare. It assumes constant returns to scale, and it does not consider the externalities of immigration. It assumes that all existing investment is exactly correct for the native population. It assumes each worker has only one dependant.

The core argument is that any addition to the population, whether through increased fertility or immigration without capital, must require capital and wealth to be provided for the newcomers. Either this is supplied by the newcomers alone (in which case, assuming wages similar to those of natives, they can never catch up with natives, who have already accumulated wealth) or it is appropriated from natives, by a process the NRC calls ‘assimilation’, and apportioned to newcomers, in which case the natives suffer a loss of wealth. In one case, newcomers never catch up with natives and so cannot add to natives’ wealth; in the other, the natives suffer an outright loss of wealth.

The only exception to this, as already mentioned, would be if newcomers were so skilled or so wealthy that they could provide for themselves the wealth the natives have accumulated over generations and centuries. Such newcomers to the USA and Britain do exist, but they are few in number. Only five out of 582,000 new arrivals in Britain in 2004 came under permits issued to persons ‘of independent means’. As for the USA, in The New Americans the NRC quotes data from the US Immigration and Naturalization Service, showing that in 1995 10,465 visas were available for allocation to investors and their families, but only 540 were taken up – within an immigration total of 720,461. In effect, therefore, immigration should only be offered to those who bring with them capital of at least £282,000 for a family of four (according to the calculations below) and who have skills that are better than the average among natives, or who can accumulate the £282,000 of savings in a short time.

In any case, the argument in favour of the free movement of labour is not one of selecting a few, carefully picked, super-skilled or extremely wealthy immigrants: it is an argument for open doors.

There are three points to consider in distinguishing free migration from free trade.

First, as the NRC points out, there is a difference in concept. Immigration, in terms of permanent settlement immigration, is a transfer of stock, while trade is a flow: ‘an immigrant who comes permanently to the United States competes with natives for every year of his or her working life. Trade is a flow, dependent on exchange rates and trade policies…’[19]

Furthermore, an influx of goods has no effect on the accumulated wealth of an economy, such as homes, water supply, schools, roads, etc. An influx of people has an enormous effect.

Second, while some economists quite correctly point out that total world output would increase if factors flowed freely, every government is, by its mandate, focused on maximizing economic gains for the native population. While it can be demonstrated that free trade would benefit a country (albeit with winners and losers within that country), free immigration would mean that nearly the entire distribution of the gains from free immigration would go either to the immigrants or to the inhabitants of the countries from which the immigrants came (apart from the small immigration surplus in production, which ignores the deleterious effects on the wealth of the natives).

After all, various calculations as to the effect on the USA of the arrival of 10 per cent of its workforce from abroad show the immigration surplus – that is, the value to native Americans – to have been in the range of $1–10 billion in 1996. Of course, the benefits to migrants are large, since they earn much greater incomes in the USA than they did in their home countries. The benefits to the native population are conversely tiny and are accompanied by serious distribution problems (as well, of course, as fiscal costs and national identity concerns). As Professor Borjas states, ‘the net gain seems much too small to justify such a grand social experiment’.[20]

Third, and most important, is the effect of immigration on wealth, as well as on production.

Balance-sheet effects are usually neglected in economic theory, and much modern economic analysis concentrates on micro-economic income effects. However, when considering the standard of living of natives, we must take account of the accumulated wealth of a country, and this is not reflected in GDP figures.

Not for nothing did Adam Smith entitle his famous work, An Inquiry into the Nature and Causes of the Wealth of Nations and Karl Marx call his work, Capital.

Income and wealth are, of course, closely interconnected, with more income increasing wealth, and wealth in turn helping to increase income.

Most economic discussion on migration has concentrated on the impact of migration on income or GDP; but this is only part of the picture.

To take a simple point, all that is reflected in GDP figures for housing is the annual addition, which in Britain is around 135,000 houses (net) per annum, plus the cost of repairs, etc. The existence of 20 million houses plays no part in GDP calculations, but does play an immense part in wealth and ‘standard of living’. All other ‘created assets’, such as roads, schools, factories, etc., play the same role.

To consider the standard of living of a country’s inhabitants, we must not only take account of the income and expenditure account, or GDP, but also the wealth or balance sheet. Standard of living does not depend solely on GDP: it also depends on the use of the accumulated wealth, such as houses, buildings, roads, factories, water supplies, power stations and a myriad other items. These are not reflected in GDP, except in the form of marginal annual additions.

The NRC analysis refers to this aspect in just one brief footnote to the passage quoted below:

Similarly, if the children of immigrants born in the United States distribute themselves among the skilled and unskilled labor force and also save and invest in the same way as natives, the effects of an increase in immigration over one generation will be negligible one generation following that.[21]

The footnote reads:

This abstracts from secondary effects, such as the physical capital required to transform immigrant children into skilled workers, which immigrants did not bring with them.[22]

In reality, the capital required is not simply that required to make skilled workers, but is also the social capital or wealth required to bring immigrants up to the standard of living of natives.

And the secondary effects are enormous.

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