The Senate immigration bill predicts one future; microeconomics predicts another

For various reasons, I’ve been on the sidelines regarding S. 744 (otherwise known as the “Gang of Eight” immigration bill), which the Senate passed last week. The biggest reason, frankly, was that Plan ’13 From Outer Space largely occupied my time on the policy front.

However, I have seen the Congressional Budget Office’s reports on the bill (on the government budget effect and on the economic effect), and I must say I am highly unimpressed. Based on the flaws in these reports alone, the bill should never get out of the House of Representatives alive.

I’ll start with the budget report, which was trumpeted by the bill’s advocates as showing an overall deficit reduction over ten years. However, most of the government’s fiscal improvement is off-budget, due largely to increases in the payroll tax (which is supposed to cover Social Security and Medicare). The on-budget deficit would actually increase over the next years, albeit by an insignificant $1.4B per year on average (that would be less than 1%). Even if one combines off-budget and on-budget, the result is less than $20B a year in deficit reduction over ten-years (which would be about 3% of the projected 2013 deficit). More to the point, the CBO bases this figure on assumptions that fly in the face of microeconomics.

Usually, the CBO doesn’t take into account economic effects of a policy, preferring to keep the economy “static” (hence the term “static scoring”). This time, however, they bent their own rules. Now, to be fair, I think static scoring is ridiculous, but the assumption to which the CBO leapt was just as bad, if not worse…

Relative to CBO’s projections under current law, enacting S. 744 would increase the size of the labor force by about 6
million (about 3.5 percent) in 2023 and by about 9 million (about 5 percent) in 2033, CBO and JCT estimate. Employment would increase as the labor force expanded, because the larger population would boost demand for goods and services and, in turn, the demand for labor.

That comes from the budget report, but the economic report has a similar paragraph (almost word for word). The problem is this: the CBO bases the economic effect on a retrograde Keynesian assumption about the modern economy, an assumption which is already being challenged by economists across the globe.

One of the biggest flaws in the Keynesian outlook is that it pays almost no attention to the cost of doing business (hiring labor, buying capital, etc.). Thus it forgets critical effects that microeconomists do not. The biggest one is this: if you tax something, you will get less of it.

I noticed the same flaw when Europe demanded that Greece crack down on tax evasion – a major change from the previous policy of enforcement neglect. The result was to dramatically increase the effective tax rate (i.e., what’s actually paid), and the damage to the Greek economy was as painful as it was predictable.

In this case, the CBO reveals it falls for the same reign of error thusly….

In addition, JCT expects that the bill would result in increased reporting of employment income by people who, under current law, are not legally present or allowed to work. Moreover, JCT expects that wages for those workers would increase relative to their wages under current law as a result of their attaining legal status under the bill. That increase in reported wages would yield increases in receipts from both individual income taxes and payroll taxes (most of the additional payroll tax receipts would be from Social Security taxes and thus would be categorized as off-budget).

The CBO apparently failed to notice that increased reporting and higher wages mean higher taxes on businesses, who will likely respond by reducing labor cost to compensate – or, in plain English, cut wages or fire people.

So we can expend at least some downward pressure on wages and employment, especially among legal immigrants (keep in mind, the CBO projects that the inflow of illegal immigrants will only be reduced by 25% – although given the nature of this post, I can’t and won’t ask you to take that at face value either). This matters because the economic “benefits” of this are on the razor’s edge….

Compared with GDP, gross national product (GNP) per capita accounts for the effect on incomes of international capital flows and adjusts for the number of people in the country.
Relative to what would occur under current law, S. 744 would lower per capita GNP by 0.7 percent in 2023 and raise it by 0.2 percent in 2033, according to CBO’s central estimates. Per capita GNP would be less than 1 percent lower than under current law through 2031 because the increase in the population would be greater, proportionately, than the increase in output; after 2031, however, the opposite would be true.
CBO’s central estimates also show that average wages for the entire labor force would be 0.1 percent lower in 2023 and 0.5 percent higher in 2033 under the legislation than under current law. Average wages would be slightly lower than under current law through 2024, primarily because the amount of capital available to workers would not increase as rapidly as the number of workers and because the new workers would be less skilled and have lower wages, on average, than the labor force under current law. However, the rate of return on capital would be higher under the legislation than under current law throughout the next two decades.

In other words, under the Pollyannaish economic assumptions of the CBO, we still have GNP per capital falling in ten years, and rising less than a quarter of one percent in twenty years. In a similar vein, wages would be lower in ten years, and less than one percent higher in twenty.

More likely, the economic and budgetary assumptions (and remember, the latter is dependent upon the former) are already overoptimistic. What we do know is that economic growth won’t keep up with the population by 2023, and neither will wages.

Whatever one thinks of illegal immigration, legal immigration, and assimilation, it should be clear that S. 744, whatever its intentions (and I don’t rule out that some of them could be noble), is illogical in assumption, impractical in implication, and likely to be more damaging than beneficial.

Cross-posted to the right-wing liberal

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