Thursday, February 23, 2017

Immigration, Demography and the Future of U.S. Economic Growth

While the current focus on immigration has been on illegal immigration (and national security limits on immigration from certain countries, there is also a larger debate now occurring on legal immigration.  Steve Bannon asserted last year that legal immigration was the "real problem." Senators Tom Cotton and David Perdue have introduced a bill to cut legal immigration in half.   As Seattle Times columnist Jon Talton has argued, Trump voters are less concerned with the economic effect of immigration than with the fear that American will no longer be a majority white country, and this concern has as much to do with legal immigration as illegal.

Missing in all of this debate, however, has been the very real demographic consequences of cutting immigration to this country.  Simply put, immigration has allowed us to avoid a demographic challenge facing other countries.  In countries in Europe and Asia, the share of those over 65 is growing rapidly.  This is resulting in both slower growth, and increased costs in carry for the elderly.  As the Pew Research Center explains:

The aging of populations does raise concerns at many levels for governments around the world. There is concern over the possibility that a shrinking proportion of working-age people (ages 15 to 64) in the population may lead to an economic slowdown. The smaller working-age populations must also support growing numbers of older dependents, possibly creating financial stress for social insurance systems and dimming the economic outlook for the elderly.
Graying populations will also fuel demands for changes in public investments, such as the reallocation of resources from the needs of children to the needs of seniors. At the more personal level, longer life spans may strain household finances, cause people to extend their working lives or rearrange family structures. Perhaps not surprisingly, an aging China announced a relaxation of its one-child policy in November 2013.
 As Greg Ip explains quite well in today's Wall Street Journal, Trump can only achieve his economic growth goals if immigration levels are increased, or at least kept at the same levels:

Immigration’s economic significance is greater than even these numbers indicate for two reasons. First, immigrants are usually younger than the native born population: about 65% are working age, between 25 and 64, compared with 52% of the native-born. Also, among immigrants just 5% are over 65, compared with 15% of the native born. Second, immigrants will have children who will bolster the labor force in later decades. The contribution from the children of native-born parents “will simply be outnumbered by the flood of departing baby Boomers,” the NASEM study says.
Consider this: The working-age population grew on average 1.4% per year from 1965 through 2015, when economic growth averaged 3%. The Pew Research Center estimates that at current immigration rates, the working-age population will grow just 0.3% per year in the coming two decades. With half a million fewer immigrants per year it grows just 0.1%, and with 1 million fewer, the working-age population shrink by 0.1% per year.
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Second, they tend to bring skills that are in great demand. A recent National Bureau of Economic Research study by John Bound, Gaurav Khanna, and Nicolas Morales found that the influx of tech workers using the H-1B visa, a permit for skilled workers, during the late 1990s depressed the wages of U.S. computer workers and scientists by 3% to 10% but made the overall country better off by boosting innovation and reducing prices for consumers.

Put simply, if we want to avoid the demographic crisis facing other countries, and we want to ensure an economy in the future for our children that will make social programs like Social  Security sustainable, we need to continue to be a nation of immigrants.

(Greg Ip, by the way has a very interesting report on how demographics drives economics here. And economist John Chilton pointed me to this interesting study that found that "locations with more historical immigration today have higher incomes, less poverty, less unemployment, higher rates of urbanization, and greater educational attainment.")

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