Is Immigration Good for the Economy? No, Not Always
Liberal economists argue (incessantly) that immigration is necessary for the economy to grow. In fact, they imply that without immigration America would crumple into a Third World country in the space of a few years—and no, it’s not hyperbole.
For example, Mark Zandi, chief economist at Moody’s Analytics, says in response to the RAISE Act that “limiting immigration to the U.S. is a grave mistake” and that “the only way to meaningfully increase U.S. economic growth on a sustained basis anytime soon is to increase immigration.”
The argument that immigration grows the economy is an old one, in fact, it’s ancient. But it’s wrong.
Here are three reasons why immigration isn’t necessary for economic growth.
1. Immigration Doesn’t Grow The Economy, Technology Does
Immigration & the Archaic Economic Growth Model
This article could probably just consist of this point, because it’s overwhelming: immigration doesn’t grow the economy, technology does. Period. Here’s why:
Economic growth occurs when, and only when, either more stuff is made, or better stuff is made. For example, America’s economy grows when it produces more cars, or (all other things remaining equal) more fuel-efficient cars. This logic applies to all types of production, whether goods or services. This serves as the axiomatic starting point.
The next question is this: how to make more stuff? There are two options. First, work harder. For example, want more wheat? Plant more fields. Need more legal research? Work overtime. In all cases the common variable is to add more labor.
This is known as the archaic growth paradigm, and it boils down to the simple maxim: more input, more output.
The archaic growth paradigm is, unsurprisingly, how ancient civilizations generally understood economic growth.
For example: when Roman emperors needed more swords, the only solution was to add labor (train more blacksmiths). Of course, doing so displaced labor from elsewhere in the economy, and this caused a cascade of labor scarcity.
To end said scarcity, the Romans, like all ancient societies, ended up waging war to capture slaves and tribute—thereby adding exogenous (non-citizen) labor to supplement their economy. Basically, places like Egypt were forced to ship grain and wine to Rome, so that Romans could focus on war, art, and architecture. This labor made the Romans richer, at their foes’ expense.
The problem with the archaic growth paradigm is that it is zero-sum: Rome only got richer if Egypt got poorer.
A much better way to grow the economy is to, instead, increase productivity; that is, make more stuff in the same amount of time. This is called the industrial growth paradigm. It is how countries truly get rich.
Because industrial growth breaks the link between population and production, and allows economies to grow exponentially.
The best example of this is what happened at the dawn of the Industrial Revolution. In 1785 Edmund Cartwright invented the power loom, which made British textile workers forty-times as productive. By the 1820s, after power looms were widely adopted in British mills, Britain produced as much cloth as the rest of Europe combined.
Not only did this invention make the British exceedingly rich on a per-person basis, but it also changed the way people thought about economic growth: the paradigm switched from being population-driven to productivity-driven. This continues to be true to this day.
Where does immigration fit into all this?
For the most part, immigration falls under the archaic growth model: more immigrants means more people, and therefore more production. Therefore, more immigration will undoubtedly grow the economy, but it will not necessarily make it more productive.
Thus, immigration is theoretically neutral with respect to the industrial growth paradigm: it neither makes Americans richer nor poorer.
Immigration Makes the Country, Not Citizens, Richer
But is economic growth for the sake of economic growth a worthwhile goal?
The size of the economy does not matter; what matters is the size of each person’s share of said economy. Think of it this way: would you prefer to live in Denmark or India? Denmark has a tiny economy, but the average Dane is quite rich. Conversely, India has a very large economy, but each Indian is relatively poor. The answer is obvious: you would prefer Denmark. In short: the size of the pie is irrelevant, what matters is how big your piece is.
This observation dovetails with the immigration debate perfectly: immigration is only economically justified if it makes everyone in the nation richer, not the nation itself richer—immigration for immigration’s sake, just like economic growth for growth’s sake, is a vapid justification. It is irrational. Immigration is a policy choice, it is a means to an end, not an end unto itself.
Simply put: economic and population growth are not dependent variables, and therefore Americans should be skeptical of arguments justifying immigration on economic grounds.
This point is made crystal clear in the below graph, which compares the GDP per capita of the US (high immigration) and Japan (almost no immigration). If immigration indeed caused massive economic growth, one would expect America to have grown faster than Japan, but this is clearly not the case (and this is after Japan’s postwar recovery, by the way).
The same observation can be made in numerous other countries. In fact, if the correlation between immigration and economic growth is to be given credence, then it strongly suggests that countries with higher levels of immigration have slower rates of economic growth.
There is one major caveat worth mentioning: a relatively small proportion of immigrants into America are highly likely to contribute to developing new technologies (scientists, engineers etc.), and therefore improve America’s productivity—they make America richer. This caveat is well-attested to in most policy debates, and easily predictable by anyone familiar with the Pareto Principle. But even importing too many skilled workers can be detrimental. For example, America’s medical schools are atrophying due to easy access to foreign physicians.
To summarize: mass immigration grows America’s economy, but does not necessarily make American citizens richer. Immigration doesn’t cause economic growth. The liberal economists have erred in basing their model on false assumptions.
2. Empirical Evidence Shows that Immigration is a Drain on the Economy
Enough of theory; what does the data say? Basically: immigration doesn’t grow the economy, it’s a net drain (above caveat applies).
There have been a number of comprehensive studies looking at the impact between immigration an economic growth. In America, one of the most thorough was a 642 page study conducted by the National Academies of Sciences, Engineering, and Medicine. The study found that immigration negatively impacted the wages and employment prospects of American citizens, particularly working class Americans. This is not surprising, since more workers means more competition for employment, and therefore lower prices (wages). It is basic supply and demand in action.
Despite this, the report concludes by stating that immigration is good for the economy because second-generation immigrants tend to be better off than their peers. This observation has been noted time and time again, and is readily observable in the raw data. But is the conclusion warranted? Probably not.
Today America trains the same number of physicians as it did in the late 1970s, and would likely train them regardless of immigration levels. However, during this period the percentage of second-generation immigrants enrolled in medical schools has increased dramatically. Therefore, it is questionable whether these second-generation immigrants are actually growing the economy, or are simply displacing American students who would otherwise enter medical school—and I say this as a second-generation immigrant myself.
Regardless, studies conducted in other countries have been much more clear-cut.
A study conducted by Denmark’s Ministry of Finance recently found that immigrants, particularly those from beyond Europe, were a net drain on the nation’s economy. In fact, non-European immigrants, and their descendants, consumed 59% of the tax surplus collected from native Danes. This is not surprising, since some 84% of all welfare recipients in Denmark were immigrants, or their descendants. The bottom line: immigration is a net burden on Denmark.
Another comprehensive study, conducted by the Fraser Institute, found that immigration costs Canadian taxpayers some $24 billion per year—and this was using data from nearly a decade ago. The number has since increased significantly, as Canada has one of the highest immigration rates, adjusted for population, of any western nation. The details are not worth delving into, but suffice it to say that this simply adds more evidence atop the mounting heap.
The final study worth mentioning comes out of the UK, and was conducted by the University College of London. The report found that the value of immigration to the economy was contingent upon where said immigrants came from. This may not be politically correct (no fact is), but it conforms to the data from Denmark. The study looked at the labor government’s mass immigration push between 1995 and 2011. They found that immigrants from the European Economic Area made a small, but positive net contribution to the British economy £4.4 billion during the period. However, during the same period non-European immigrants (primarily from South Asia, the Middle East, and Africa) cost the British economy a net £120 billion. Basically, the type of immigrant matters.
Taken together, the studies prove the theoretical point: immigration does not cause economic growth. At best, mass immigration is a relatively benign force, while at worst it is devastatingly expensive.
3. Mass Immigration Impoverishes Citizens & Distorts the Labor Market
The final point is based on the axiomatic principles of basic economics. Ever hear of supply and demand? It’s how free markets determine prices. If supply goes up (for example, there are more candy bars), prices go down (cheaper candy bars); if supply goes down, prices go up. The same applies to demand.
The market price for labor (wages) is no different. Increase the supply (population) and prices (wages) will go down. Simple.
Of course, there are a few caveats. For example, if America’s economy were growing rapidly enough that it caused a labor-shortage, then immigration could help the economy continue to grow rapidly. Likewise, the immigration of people with the skills needed to grow the economy in the long run is generally beneficial: inventors and scientists are rarely a bad investment.
But are these caveats currently in play? No. America’s unemployment rate is incredibly high—there is no labor shortage.
Right now, immigrants are directly competing with Americans for jobs, which is one of the reasons why wages are stagnating—in fact, they’ve stagnated for most of the period of high immigration. It’s not a coincidence.
Likewise, competition with immigrant workers is also a big reason why the labor force participation rate is declining. Think of it like this: America lost 8.7 million jobs between 2008 and 2010, during the period of the Great Recession. And yet, in that period we accepted over 3 million immigrants. Do you think that helped or hurt American workers?
What do you think happens when the economy sheds jobs, but imports more people? Unemployment rises and labor force participation declines. This is born out in the data:
Immigration is Not Always Good for the Economy
The problem with economists is that they don’t get out much. They see things through the lens of their models, not with their eyes—they rarely look at primary evidence, and when they do it’s tainted. They’re Platonists who spend their days gazing at the forms, never to see their physical manifestations.
This is why economists get it wrong. They got it wrong on trade, and they’re dead wrong on immigration.
Immigration isn’t a panacea, it’s a benign force that is sometimes beneficial, and other times not. The trick is to calibrate our immigration policy adequately, so that we keep up with the times.
Right now, America needs fewer immigrants.