As I wrote yesterday, I was very pleased to participate last week in the American Enterprise Institute's World Forum. This blog posting summarizes the comments I made on a panel about immigration policy.
CBO has done two types of analyses of immigration legislation in the past year: We've produced cost estimates that show the expected budgetary effects of a number of bills. We've also produced an analysis of the economic effects of the comprehensive bill that was considered by the Senate. Based on our analysis, there are two aspects of immigration legislation that are generally most central to its budgetary and economic impact.
For example, we estimated that the Senate bill (S. 744) would lead to a net increase in the number of people living in this country by 2023 of more than 10 million. An increase in the population of that magnitude would have a significant effect on the labor force, boosting both employment and earnings.
From a budgetary perspective, the additional earnings imply greater tax revenue. At the same time, the greater number of people in the country means that there would be more beneficiaries of federal programs. The net effect on budget deficits depends on the relative sizes of those effects. We estimated that the Senate bill would reduce budget deficits.
From an economic perspective, the increase in the labor force would generate a significant boost in GDP. That boost would be partly the direct result of more workers. In addition, the increase in the number of workers would make the existing stock of capital relatively scarce (compared with the number of workers) and thus encourage businesses to undertake more capital investment, which would raise GDP as well.
Whether the increase in GDP would be proportionally more or less than the increase in the population—and thus whether output per person would rise or fall—is less clear. We estimated that the Senate bill would lower real GNP per person for more than a decade but raise it thereafter. (GNP differs from GDP through its treatment of income earned in one country and received by residents of another country; U.S. GNP is a better indicator than U.S. GDP of income earned by people living in this country.)
For example, we estimated that the Senate bill would notably increase the number of workers with lower skills and the number with higher skills but would have less effect on the number of workers with average skills. As a result, the wages of lower- and higher-skilled workers would tend to be pushed downward slightly relative to the wages of workers with average skills.
More generally, legislation that shifted the composition of people entering the country toward those with higher skills and income would tend to increase tax revenue and decrease spending for federal benefits, reducing budget deficits. Moreover, an increase in immigration of highly skilled immigrants would tend to generate additional technological advancements, such as new inventions and improvements in production processes—thereby making both workers and capital more productive and providing a greater boost to GDP.
By contrast, legislation that shifted the composition of people entering the country toward those with lower skills and income would tend to result in lower tax revenue and higher spending for federal benefits, increasing budget deficits. And productivity would not be raised to the same extent either.
I've focused on those aspects of immigration legislation—the change in the number of people, and the change in the number of people with different levels of skill—because they seem to matter the most for the budgetary and economic impact of the legislation. Other aspects of such legislation matter as well. For example, legislation can limit new residents' access to certain federal benefits—or not. That choice affects the increase in federal spending that would arise from having a larger population. As another example, legislation can strengthen the enforcement of immigration rules, but that generally has a federal cost. An amendment to the Senate bill that was adopted on the Senate floor would lead to the hiring of almost 20,000 more Border Patrol agents and the construction of substantial extra fencing along the southern border of the country—at a cost of nearly $40 billion.