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Warning: Immigration Can Seriously Damage Your Wealth

Page 6 of 10

Henry Hazlitt – the importance of capital

As the great American economic journalist, Henry Hazlitt, wrote:

Almost the whole wealth of the modern world, nearly everything that distinguishes it from the preindustrial world of the seventeenth Century, consists of its accumulated capital.

This capital is made up of many things that might better be called consumers’ durable goods – automobiles, refrigerators, furniture, schools, colleges, churches, libraries, hospitals and, above all private homes…

The second part of capital is what we may call capital proper. It consists of the tools of production...[23]

British wealth – how much is it?

Now seems a good time to flesh the argument out with some figures.

The wealth of the British people was estimated by National Statistics to total £4,245 billion in 2004[24] (this excludes consumer durables, except houses, and it also excludes land). Strictly speaking, it is the value of ‘created assets’ at replacement cost, at 2003 prices. It has been calculated that the national wealth in 1948 – for a considerably smaller population – was £1,005 billion, again using 2003 prices. It should probably be noted, as an example of the neglect of wealth issues, that the National Statistics tables on the value of ‘created assets’ state quite erroneously that these were calculated at 1995 prices. This makes quite a difference, but National Statistics has not noticed the error. Nevertheless, the increased wealth per head means that wealth effects become more and more important in any consideration of the effects of migration in the modern era.

The accumulation of capital is dependent on many sources: the intensity of the labour force, numbers, skills, time, efforts, technology, entrepreneurial skills, etc. What we have to do is isolate the impact of migratory labour on capital accumulation.

Total fixed capital formation in 2004 was £190 billion, and capital consumption was £123 billion. This meant a net addition to capital stock of £67 billion, or 1.58 per cent of wealth. In other words, the wealth of the UK amounts to roughly sixty years’ worth of capital additions.

Some of this wealth – for example, machinery – depreciates quickly, but other capital stock has been accumulated over centuries, such as Oxbridge colleges, railways, dams, sewage works, etc. In the case of dwellings, there were 20.9 million in 2003, including a net addition of 134,000, or an addition to the capital stock of 0.64 per cent, which means the capital stock is about 150 years’ production. The Independent newspaper once calculated – and it seems a realistic estimate – that 95 per cent of British roads were laid down before 1900, and, of course, the same applies to railways.

With 30 million workers in Britain, one can say that the total wealth per worker is £4,245 billion divided by 30 million, which is £141,000 per worker. In the following calculations, each worker is assumed to have one dependant.

Each worker contributes £2,235 per annum (£67 billion divided by 30 million) to improve the country’s capital, taking his share of capital additions either direct or via enterprises he works in.

Obviously, higher earners contribute more, as most lower wage earners save little; but £2,235 is the average.

The impact of immigration

The arrival of a migrant worker means that he instantly requires £141,000 of capital in order to bring his stock of wealth into line with that of natives, yet he contributes (assuming he is an average worker) only £2,235 per annum to capital formation. If the newcomer does not instantly supply the £141,000 capital, there is wealth dilution for natives. (Note that, for a family of four, including two workers, this actually means a requirement of £282,000, as all the calculations are done on the basis of the current labour force distribution of one worker to one dependant.)

A further point is that overseas remittances from Britain totalled £3.8 billion in 2003. If the foreign born constitute 10 per cent of the workforce, as estimated by the Home Office, they should contribute 10 per cent of £67 billion to capital formation, which is £6.7 billion; however, if the £3.8 billion of remittances is attributed solely to the foreign born, then their contribution to capital formation is only 44 per cent of the £2,235 required, or £988 per worker.

One can consider the matter like this. A native worker has a capital bank account of £141,000, and adds £2,235 to it each year. A migrant worker has a capital bank account of nil and adds £988 per annum. It takes the immigrant 150 years (ignoring interest effects) to accumulate the capital the native has at the outset. In those 150 years, the native adds a further £336,000 to his capital bank account, making a total of £477,000.

The Economic Institute of the Dutch government has done some useful work on the effects on GDP when an immigrant arrives without capital.[25]

With a fixed capital stock and an immigration workforce of 5 per cent of the whole, total GDP is increased by 2.4 per cent if all immigrants are unskilled; 2.9 per cent if the skill mix of immigrants is the same as that of natives; and 3.2 per cent if all immigrants are highly skilled. In all cases, the average per capita GDP of natives and immigrants combined falls below the per capita GDP of natives before immigration, because there is less capital per worker. In all cases, the wages of skilled and non-skilled workers fall and the return to capital increases. And, of course, the wealth of natives is reduced, because more people are trying to use the same amount of wealth.

Of course, a small number of high-earning migrants will pay for their requisite stock of wealth of £141,000 immediately or over a very short period; but the average immigrant, who, according to Home Office estimates, earns the same as natives, contributes only £988 per head per annum to the £141,000 required to bring him up to the native’s wealth. Moreover, the native worker is already backed by £141,000 and is adding £2,235 per annum, so the wealth gap is widening.

This study concludes, therefore, that only those immigrant workers who a) bring in £141,000 of capital per worker with them, b) make no foreign remittances, and c) have at least the mean average skills of natives do not dilute the wealth of natives. This runs counter to the statements both of the Labour Party and of the Conservative Party.

A word of warning here for those who advocate the immigration of skilled workers.[*] We have already seen that natives cannot benefit from the immigration of workers who have a skill and capital profile that is identical to that of natives. The arrival of workers who have higher skills but little or no capital can only be beneficial if their skills are so high that they can generate the requisite capital within a short time. We can see that the requisite capital is estimated to be at least £282,000 for a family of four, when the average capital generated per worker is £2,235 per annum. The benefit of skilled immigrants, therefore, depends on whether the £282,000 can be quickly generated, and (ignoring foreign remittances) this depends on the level of capital generated being several multiples of the £2,235 capital generated by the average worker. In other words, for skilled workers to be beneficial, they would have to be very high earners indeed – and high personal savers – certainly in the top 20 per cent of the workforce. The interest implications of providing £282,000 of instant capital for two immigrant workers plus two dependants means that the payback period must be short, or else the £282,000 will be freighted with high interest costs.

An interesting illustration of the importance of wealth effects (and one that demonstrates that GDP is not the only measurement to be taken into account) is supplied by the arrival of British retirees on the Spanish Costas. They, of course, do not work and do not contribute to GDP as workers. It is assumed that each individual has one dependant. For them to be of economic benefit to Spain, they would have to bring with them an income stream that produces sufficient taxes to take care of the fiscal costs to Spain, plus, of course, an adequate income to live on. They also have a wealth effect, as they use Spanish roads, hospitals, houses, public buildings, etc. Assuming the same wealth backing as the average Briton, they would need to invest £141,000 per head in Spain, plus a further £2,235 per annum in addition to their financial contributions. This £141,000 could be in loan form, assuming there were no descendants living in Spain.

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