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Heritage’s Flawed Immigration Analysis

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This post was originally published on the Cato-at-Liberty blog here and is republished with the permission of the author.

In the Washington Post today, Jim DeMint and Robert Rector of the Heritage Foundation invoke the free-market pantheon in arguing their anti-immigration stance: “The economist Milton Friedman warned that the United States cannot have open borders and an extensive welfare state.”

They’re halfway right about that. What Friedman actually said was that immigration is “a good thing for the United States…so long as it’s illegal.” He meant that open immigration is highly beneficial to the economy, provided those productive but inexpensive laborers do not have access to welfare. Friedman later wrote that, “There is no doubt that free and open immigration is the right policy in a libertarian state.” Friedman’s problem was with the welfare state, not immigration. His remarks are fundamentally at odds with the position Heritage is trying to argue.

It’s not the first time that I’ve questioned the free-market credentials of my friends at Heritage lately, and that’s making me sad.

On Monday, Heritage released a new study entitled “The Fiscal Cost of unlawful Immigrants and Amnesty to the U.S. Taxpayer” by Robert Rector and Jason Richwine, PhD. I criticized an earlier version of this report in 2007, arguing that their methodology was so flawed that one cannot take their report’s conclusions seriously. Unfortunately, their updated version differs little from their earlier one.

I’m joined in this view by a host of prominent free-marketeers. Jim Pethokoukis at AEI, Doug Holtz-Eakin at American Action Forum, Tim Kane at the Hudson Institute, and others have all denounced the fundamentals of the Heritage report.

The new Heritage report is still depressingly static, leading to a massive underestimation of the economic benefits of immigration and diminishing estimated tax revenue. It explicitly refuses to consider the GDP growth and economic productivity gains from immigration reform—factors that increase native-born American incomes. An overlooked flaw is that the study doesn’t even score the specific immigration reform proposal in the Senate. Its flawed methodology and lack of relevancy to the current immigration reform proposal relegate this study to irrelevancy.

Even worse, the Heritage study recommends a “solution” to the fiscal problems it supposedly finds. It suggests:

Because the majority of unlawful immigrants come to the U.S. for jobs, serious enforcement of the ban on hiring unlawful labor would substan­tially reduce the employment of unlawful aliens and encourage many to leave the U.S. Reducing the number of unlawful immigrants in the nation and limiting the future flow of unlawful immigrants would also reduce future costs to the taxpayer.

Professor Raul Hinojosa-Ojeda of UCLA wrote a paper for Cato last year where he employed a dynamic model called the GMig2 to study comprehensive immigration reform’s impact on the U.S. economy. He found that immigration reform would increase U.S. GDP by $1.5 trillion in the ten years after enactment.

Professor Hinojosa-Ojeda then ran a simulation examining the economic impact of the policy favored by Heritage: the removal or exit of all unauthorized immigrants. The economic result would be a $2.6 trillion decrease in estimated GDP growth over the next decade. That confirms the common-sense observation that removing workers, consumers, investors, and entrepreneurs from America’s economy will make us poorer.

Would decreasing economic growth by $2.6 trillion over the next ten years have a negative impact on the fiscal condition of the U.S.? You betcha.

Do the authors consider the fiscal impact of their preferred immigration policy? Nope.

For those of us who “grew up” on the fine policy analysis long produced by Heritage, the immigration report is a supreme disappointment. No one has done more than Heritage to promote the importance of dynamic scoring, which is critical to understanding the true effects of government activity on the marketplace. For that organization to have seemingly abandoned its core principles for this important debate is a stinging blow to those of us who crave an honest, data-driven debate on the fiscal merits of policy.

Heritage Immigration Study Fatally Flawed

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This post was originally published on the Cato-at-Liberty blog here and is republished with the permission of the author.

There are indications that The Heritage Foundation may soon release an updated version of its 2007 report, “The Fiscal Cost of Low-Skill Immigrants to the U.S. Taxpayer,” by Robert Rector. That 2007 report’s flawed methodology produced a grossly exaggerated cost to federal taxpayers of legalizing unauthorized immigrants while undercounting or discounting their positive tax and economic contributions – greatly affecting the 2007 immigration reform debate.

Before releasing its updated report, I urge the Heritage Foundation to avoid the same serious errors that so undermined Mr. Rector’s 2007 study. Here is a list of some of its major errors:

  1. Count individuals, not households.[1]  Heritage counts household use of government benefits, not individual immigrant use. Many unauthorized immigrants are married to U.S. citizens and have U.S. citizen children who live in the same households. Counting the fiscal costs of those native-born U.S. citizens massively overstates the fiscal costs of immigration. 
  2. Employ dynamic scoring rather than static scoring. [2] Heritage’s report relies on static scoring rather than dynamic scoring, making the same mistake in evaluating the impact of increased immigration on welfare costs that the Joint Committee on Taxation makes when scoring the impact of tax cuts. Instead, Heritage should use dynamic scoring techniques to evaluate the fiscal effects of immigration reform. For example, Heritage should assume that wages and gross domestic product are altered considerably because of immigration policy reforms. In contrast to that economic reality, immigrant wages, gross domestic product, and government welfare programs are unrealistically static in Mr. Rector’s study. His study largely ignores the wage increases experienced by immigrants and their descendants over the course of their working lives, how those wages would alter after legalization, and the huge gains in education amongst the second and third generation of Hispanics.[3] Heritage is devoted to dynamic scoring in other policy areas – it should be so devoted to it here too.[4]
  3. Factor in known indirect fiscal effects.[5]  The consensus among economists is that the economic gains from immigration vastly outweigh the costs.[6] In 2007, Mr. Rector incorrectly noted that, “there is little evidence to suggest that low-skill immigrants increase the incomes of non-immigrants.” Immigrants boost the supply and demand sides of the American economy, increasing productivity through labor and capital market complementarities with a net positive impact on American wages.[7] Heritage should adjust its estimates to take account of the positive spill-overs of low-skilled immigration.
  4. Assume that wages for legalized immigrants would increase – dramatically.[8]  Heritage did not assume large wage gains for unauthorized immigrants after legalization.  In the wake of the 1986 Reagan amnesty, wages for legalized immigrants increased – sometimes by as much as 15 percent – because legal workers are more productive and can command higher wages than illegal workers.  Heritage should adopt similar wage increases to estimate the economic effects of immigration reform if it were to happen today.[9] 
  5. Assume realistic levels of welfare use.[10]  Vast numbers of immigrants will return to their home countries before collecting entitlements,[11] the “chilling effect” whereby immigrants are afraid of using welfare reduces their usage of it, and immigrants use less welfare across the board.[12]  100 native-born adults eligible for Medicaid will cost the taxpayers about $98,000 a year.  A comparable number of poor non-citizen immigrants cost approximately $57,000 a year – a 42 percent lower bill than for natives.  For children, citizens cost $67,000 and non-citizens cost $22,700 a year – a whopping 66 percent lower cost.  Heritage should adjust its estimates of future immigrant welfare use downward. [13] 
  6. Use latest legislation as benchmark.[14]  The current immigration plan, if rumors are to be believed, would stretch a path to citizenship out for 13 years.[15]  Most welfare benefits will be inaccessible until then, so Heritage’s report must take that timeline into account.
  7. Remittances do not decrease long term consumption.[16]  Remittances sent home by immigrants will eventually return to the U.S. economy in the form of increased exports or capital account surpluses.  Heritage should recognize this aspect of economic reality rather than assuming remittances are merely a short-term economic cost.  
  8. Factor in immigration enforcement costs.[17]  Heritage did not compare costs of legalization and guest workers to the costs of the policy status quo or increases in enforcement.  The government spends nearly $18,000 per illegal immigrant apprehension while the economic distortions caused by forcing millions of consumers, renters, and workers out of the U.S. would adversely affect income and profitability.[18]
  9. Use transparent methodology.[19]  Heritage’s methodology should replicate that of the National Research Council’s authoritative and highly praised – even by immigration restrictionists – study entitled The New Americans.[20]  That study is the benchmark against which all efforts at generational fiscal accounting – including Heritage’s 2007 report – are measured.  If Heritage deviates from their methods, it should explain its methodology in a clear and accessible way that states why they altered practice.[21]
  10. Don’t count citizen spouses.[22]  Heritage counted U.S.-born spouses of unauthorized immigrants as fiscal costs.  Counting the net immigrant fiscal impact means counting immigrants and perhaps their children at most,[23] not native-born spouses who would be on the entitlement roles regardless of whether they married an immigrant or a native-born American.
  11. Suggest changes to the welfare state.  Heritage has elsewhere called low-skill migrant workers “a net positive and a leading cause of economic growth”[24] and accurately reported that “[t]he consensus of the vast majority of economists is that the broad economic gains from openness to trade and immigration far outweigh the isolated cases of economic loss.”[25]  Instead of arguing against low-skill immigration, Mr. Rector should instead suggest reforms that would, in the words of Cato’s late Chairman Bill Niskanen, “build a wall around the welfare state, not around the country.”[26]

It is imperative that the economic costs and benefits of increased immigration be studied using proper methods and the most recent data.  A previous report by the Heritage Foundation in 2006 entitled, “The Real Problem with Immigration … and the Real Solution,” by Tim Kane and Kirk Johnson roundly rejected the negative economic assessments of Mr. Rector’s 2007 study.[27]  Not only does Mr. Rector not speak for the broad conservative movement; it appears that economists who have worked for the Heritage Foundation also disagree with Mr. Rector’s conclusions. 

For decades, the Heritage Foundation has been an influential intellectual force in conservative circles.  Its economic analyses have been predicated on consideration of the dynamic effects of policy changes as opposed to static effects.  Unfortunately, Mr. Rector’s past work has not been consistent in this regard, employing the same static scoring conservatives have traditionally distrusted in other policy areas. 

Many conservatives rely on the Heritage Foundation for accurate research about immigration’s impact on the economy.  Before releasing another study assessing the net fiscal impacts of immigration reform, Heritage should correct the errors outlined above to guarantee the most accurate information on this important topic is available.

[1] Rector and Kim, “The Fiscal Cost of Low-Skill Immigrants to the U.S. Taxpayer,” Heritage Special Report, SR-14, May 21, 2007, p. 1.

[2] Rector and Kim, “The Fiscal Cost of Low-Skill Immigrants to the U.S. Taxpayer,” Heritage Special Report, SR-14, May 21, 2007, p. 14.

[3] Fry and Lopez, “Hispanic Student Enrollment Reach New Highs in 2011,” Pew Hispanic research Center, August 20, 2012.

[4] Beach, “It is Time to Include Dynamic Economic Analysis in the Process of Changing Tax Policy,” Heritage Testimony on the Economy, October 6, 2011. 

[5] Rector and Kim, “The Fiscal Cost of Low-Skill Immigrants to the U.S. Taxpayer,” Heritage Special Report, SR-14, May 21, 2007, pp.19-20.

[6] Kane and Johnson, “The Real Problem with Immigration … and the Real Solution,” Heritage Institute Backgrounder, No. 1913, March 1, 2006, pp. 2-3.

[7] Borjas and Katz, “The Evolution of the Mexican-Born Workforce in the United States,” in Mexican Immigration to the United States¸NBER Book, May 2007, Lewis, “Immigrants-Native Substitutability: The Role of Language Ability,” NBER Working Paper 17609, forthcoming in David Card and Stephen Raphael, eds., Ottaviano and Peri, “Rethinking the Effects of Immigration on Wages,” Journal of the European Economic Association, 2012.  Peri and Sparber, “Task Specialization, Immigration, and Wages,” American Economic Journal: Applied Economic, 2009, Peri and Sparber, “Highly-Educated Immigrants and Native Occupational Choice,” Centre for Research and Analysis of Migration Discussion Paper Series No. 13/08, November, 2008.

[8] Rector and Kim, “The Fiscal Cost of Low-Skill Immigrants to the U.S. Taxpayer,” Heritage Special Report, SR-14, May 21, 2007, pp. 19-20.

[9] Amuedo-Dorantes, Bansak, and Raphael, “Gender Differences in the Labor Market: Impact of IRCA,” American Economic Review, 2007, Rivera-Batiz, “Undocumented Workers in the Labor Market: An Analysis of Earnings of Legal and Illegal Mexican Immigrants in the United States,” Journal of Population Economics, 1999, Kossoudji and Cobb-Clark, “IRCA’s Impact on the Occupational Concentration and Mobility of Newly-Legalized Mexican Men,” Journal of Population Economics, 2000, Kossoudji and Cobb-Clark, “Coming Out of the Shadows: Learning about Legal Status and Wages from the Legalized Population,” Journal of Labor Economics, 2002, Baker, “Effects of the 1986 Immigration Reform and Control Act on Crime,” SSRN Working Paper, 2011.

[10] Rector and Kim, “The Fiscal Cost of Low-Skill Immigrants to the U.S. Taxpayer,” Heritage Special Report, SR-14, May 21, 2007, p. 8.

[11] Alden, The Closing of the American Border: Terrorism, Immigration, and Security Since 9/11, New York, NY: HarperCollins Publishers, 2008, p. 74.

[12] Ku and Bruen, “Poor Immigrants Use Public Benefits at a Lower Rate than Poor Native-Born Citizens,” Economic Development Bulletin, Cato Institute, No. 17, March 4, 2013.

[13] See Ku and Bruen, “Poor Immigrants Use Public Benefits at a Lower Rate than Poor Native-Born Citizens,” Economic Development Bulletin, Cato Institute, No. 17, March 4, 2013.

[14] Rector and Kim, “The Fiscal Cost of Low-Skill Immigrants to the U.S. Taxpayer,” Heritage Special Report, SR-14, May 21, 2007, p. 21.

[15] Bennett, “Senators Agree on Path to Legal Status for Illegal Immigrants,” Los Angeles Times, March 11, 2013.

[16] Rector and Kim, “The Fiscal Cost of Low-Skill Immigrants to the U.S. Taxpayer,” Heritage Special Report, SR-14, May 21, 2007, p. 30.

[17] Rector and Kim, “The Fiscal Cost of Low-Skill Immigrants to the U.S. Taxpayer,” Heritage Special Report, SR-14, May 21, 2007, p. 20.

[18] Nowrasteh, “The Economic Case against Arizona’s Immigration Laws,” Cato Institute Policy Analysis, No. 709, September 25, 2012.

[19] Rector and Kim, “The Fiscal Cost of Low-Skill Immigrants to the U.S. Taxpayer,” Heritage Special Report, SR-14, May 21, 2007, pp. 8-9, 23.

[20] This advice is based on praise of those methods by the Center for Immigration Studies, a restrictionist think-tank in Washington, D.C.: Camarota, “The High Cost of Cheap Labor: Illegal Immigration and the Federal Budget,” Center for Immigration Studies, August 2004.

[21] See Smith and Edomnston, eds., The New Americans: Economic, Demographic, and Fiscal Effects of Immigration, Washington, D.C.: National Research Council, 1997.

[22] Rector and Kim, “The Fiscal Cost of Low-Skill Immigrants to the U.S. Taxpayer,” Heritage Special Report, SR-14, May 21, 2007, p. 9.

[23] Kandel, “Fiscal Impacts of the Foreign-Born Population,” CRS, October, 2011, R42053, p. 8.

[24] Kane and Johnson, “The Real Problem with Immigration … and the Real Solution,” Heritage Institute Backgrounder, No. 1913, March 1, 2006, p. 3.

[25] Kane and Johnson, “The Real Problem with Immigration … and the Real Solution,” Heritage Institute Backgrounder, No. 1913, March 1, 2006, p. 3.

[26] Niskanen, “Build a Wall Around the Welfare State, Not Around the Country,” Cato Institute Blog, June 15, 2006.

[27] Kane and Johnson, “The Real Problem with Immigration … and the Real Solution,” Heritage Institute Backgrounder, No. 1913, March 1, 2006.

Immigrants Are Attracted to Jobs, Not Welfare

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This post was originally published on the Cato-at-Liberty blog here and is republished with the permission of the author.

Unauthorized and low skilled immigrants are attracted to America’s labor markets, not the size of welfare benefits.  From 2003 through 2012, many unauthorized immigrants were attracted to work in the housing market.  Housing starts demanded a large number of workers fill those jobs.  As many as 27 percent of them were unauthorized immigrants in some states.  Additionally, jobs that indirectly supported the construction of new houses also attracted many lower skilled immigrant workers.

Apprehensions of illegal crossers on the Southwest border (SWB) is a good indication of the size of the unauthorized immigrant flow into the United States.  The chart below shows apprehensions on the SWB and housing starts in each quarter:

 

Fewer housing starts create fewer construction jobs that attract fewer crossings and, therefore, fewer SWB apprehensions.  The correlation holds before and after the mid-2006 housing collapse. 

What about welfare? 

Here is a chart of the national real average TANF benefit level per family of three from 2003 to 2011 (2012 data is unavailable) and SWB apprehensions:

 

Prior to mid-2006, TANF benefit levels fell while unauthorized immigration rose.  During the housing construction boom, unauthorized immigrants were attracted by jobs and not declining TANF benefits.  After mid-2006, when housing starts began falling dramatically, real TANF benefit levels and unauthorized immigration both fell at the same time.  If unauthorized immigration was primarily incentivized by the real value of welfare benefits, it would have fallen continuously since 2003.   

The above chart does not capture the full size of welfare benefits or how rapidly other welfare programs increased beginning in 2008.  As economist Casey Mulligan explained in his book The Redistribution Recession, unemployment insurance, food stamps (SNAP), and Medicaid benefits increased in value and duration beginning in mid-2008.  Including those would skew welfare benefits upward in 2008 and beyond, but unauthorized immigration inflows still fell during that time.

In conclusion, housing starts incentivize unauthorized immigration while TANF does not. 

New Cato bulletin on immigrant welfare use in the United States

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We at Open Borders: The Case have not blogged much about the empirics of the welfare state/fiscal burden objection. We do have some thoughts on the matter which we hope to blog in the future. But one reason why this is a low priority, at least for me, is that I think that whatever the specific truth regarding welfare use by immigrants (under the status quo, modest variations thereof, or open borders), the keyhole solution of building a stronger wall around the welfare state to prevent immigrants and non-citizens from accessing it is politically feasible. Other keyhole solutions, such as immigration tariffs and DRITI, often run against opposition from voters across the political spectrum, but denying immigrants benefits seems to be quite politically popular. At any rate, (open borders + strong wall around the welfare state) seems no less feasible than (open borders without strong wall around the welfare state).

Nonetheless, the empirics of welfare usage, both under the status quo and under open borders, are important in so far as these allow us to better understand and prepare for the impact of open borders. With this in mind, I link to Economic Development Bulletin No. 17 put out by the Cato Institute. The bulletin is Poor Immigrants Use Public Benefits at a Lower Rate than Poor Native-Born Citizens and it is authored by Leighton Ku and Brian Bruen. It is a shorter version of a Cato working paper by the same name. Here is the conclusion of the bulletin:

Low-income non-citizen adults and children generally have lower rates of public benefit use than native-born adults or citizen children whose parents are also citizens. Moreover, when low-income non-citizens receive public benefits, the average value of benefits per recipient is almost always lower than for the native-born. For Medicaid, if there are 100 native-born adults, the annual cost of benefits would be about $98,400, while for the same number of non-citizen adults the annual cost would be approximately $57,200. The benefits cost of non-citizens is 42 percent below the cost of the native-born adults. For children, a comparable calculation for 100 non-citizens yields $22,700 in costs, while 100 citizen children of citizen parents cost $67,000 in benefits. The benefits cost of non-citizen children is 66 percent below the cost of benefits for citizen children of citizen parents. The combined effect of lower utilization rates and lower average benefits means that the overall financial cost of providing public benefits to non-citizen immigrants and most naturalized immigrants is lower than for native-born people. Non-citizen immigrants receive fewer government benefits than similarly poor natives.

These results seem to be at odds with research and findings published by the Center for Immigration Studies, one of the relatively more respected think tanks on the restrictionist side. The authors of the Cato bulletin explain the discrepancy as follows (I’ve removed the internal footnotes in the quoted text):

A study by the Center for Immigration Studies (CIS)found that immigrant-headed households with children used more Medicaid than native-headed households with children and had higher use of food assistance, but lower use of cash assistance. The CIS study did not examine the average value of benefits received per recipient.

There are several reasons why our study differs from CIS’s study. First, CIS did not adjust for income, so the percent of immigrants receiving benefits is higher in their study in part because a greater percent of immigrants are low-income and, all else remaining equal, more eligible for benefits. Non-citizens are almost twice as likely to have low incomes compared with natives. We focus on low-income adults and children because public benefit programs are means-tested and intended for use by low income people. It is conventional in analyses like these to focus on the low income because it reduces misinterpretations about benefit utilization.

Second, CIS focused on households headed by immigrants while we focus on individuals by immigration status. Our study focuses on individuals because immigrant headed households often include both immigrants and citizens. Since citizen children constitute the bulk of children in immigrant-headed households and are eligible for benefits, CIS’s method of using the immigrant-headed household as the unit of analysis systematically inflates immigrants’ benefit usage. For example, 30 percent of U.S children receiving Medicaid or CHIP benefits are children in immigrant-headed families and 90 percent of those children are citizens.

Third, CIS focused on immigrants in general, including naturalized citizens, while we also included non-citizen immigrants. Naturalized citizens are accorded the same access to public benefits as native-born citizens and are more assimilated, meaning their opinions of benefit use are more similar to those of native born Americans. Separating non-citizens from naturalized Americans gives a clearer picture of which immigrant groups are actually receiving benefits.

I haven’t had time to study the data carefully, but the most obvious counter-response seems to be that even if immigrants use benefits at a lower rate than natives, the fact is also that on average they pay less in taxes, so that they are still bigger net fiscal drains than natives. A related argument is that even if they do better than low-income natives, this is too weak an argument, because low-income natives are even bigger fiscal drains. But low-income natives are here to stay, while immigrants can be denied entry, so it makes sense to admit immigrants only if they are net fiscal pluses. In this view, immigrants performing better than low-income natives, even if true, is not a good enough argument to support more immigration. The “net fiscal burden” argument is one that we will take up on this blog some other time for more detailed discussion.

Another related point that is highlighted by this paper is what relevant groups one should look at when studying the effects of immigration. The position taken by the CIS is that the relevant groups to look at are all foreign-born people, including citizens and non-citizens, as well as the minor children of the foreign-born. Others have taken the position that we should look only at the proportion of the population that comprises non-citizen immigrants, and that it would be cheating to include their citizen children in the calculation. I tend to be agnostic on this question framed generally, since a lot depends on what specific aspect is being studied. For this reason, I like the fact that the Cato paper explicitly separates naturalized citizens and non-citizen immigrants, as well as separating children based on both their own and their parents’ immigration status, and dutifully reports all numbers.