Bryan Caplan  

How More Immigration Can Save California

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I highly recommend Kerr and Kerr's NBER Working Paper, "Economic Impacts of Immigration: A Survey."  Most of the paper just compiles a lot of evidence with which I was already familiar:

1. Immigrants have very little effect on native wages.
The documented wage elasticities are small and clustered near zero. Dustmann et al. (2008) likewise found very little evidence for wage effects in their review of the UK experience. This parallels an earlier conclusion by Friedberg and Hunt (1995) that immigration had little impact on native wages; overall, their survey of the earlier literature found that a 10% increase in the immigrant share of the labor force reduced native wages by about 1%.
2. Immigrants are a moderate fiscal burden in the EU thanks to the welfare state and labor market regulation, but have little net fiscal effect in the U.S.  Even Borjas agrees:
The earliest studies on fiscal effects of immigration for the US yielded conflicting results.  Passel and Clark (1994) calculated that immigrants paid $27b more in taxes than the benefi…ts they derived from the US social and education systems. By contrast, Huddle (1993) argued that immigrants represented an annual net cost of $40b in 1992. Borjas (1995a) criticized the earlier studies for making unreasonable assumptions. He estimated the net impact of immigration to range from a $16b cost to a $60b bene…fit depending on the assumptions made... In a later study, Borjas (2001) argued that the positive effects of immigration are created by improved labor market efficiency, with gains accruing to natives between $5b and $10b. More recent US studies have calculated that the average net cost or bene…fit of a single immigrant is very small.
There's also a great diagram estimating the fiscal effect of immigration as a function of an immigrant's age:
immage.jpg

And notice that these are estimates using status quo policy.  With more restrictions on eligibility for services, we can easily turn the young and old into positives, too.

3. The biggest news to me was the evidence on immigration and real estate markets.  I've often argued that immigrants help natives by boosting housing prices, but I had no idea that the estimated elasticities would be this large:
Saiz (2003, 2007) showed that US housing prices rise with immigration at the city level. Moreover, the elasticity is about one, or ten times larger than that found in comparable labor market studies.  Evaluations of immigration and housing prices within Europe would help collaborate and extend these US fi…ndings. The estimated elasticities may even be stronger, for example, due to limited building space in small countries vis-a-vis the US.  Gonzalez and Ortega (2009) fi…nd a similar effect in Spain, calculating that immigration could account for a third of Spain's recent housing boom.  This would suggest enormous effects of immigration on the economy through a very understudied channel.
Opponents of immigration will no doubt treat this result as a negative.  But notice: In virtually every other context, Americans regard rising housing prices as good.  Psychological craving for scapegoats aside, why should this case be any different?  In fact, if you primarily care about Americans' well-being, you should be especially happy about immigration-induced appreciation.  After all, the nationality of the owners of virtually all residential real estate in America is... American

The upshot is that immigration is a big net wealth transfer from foreigners to natives.  Californians should keep this in mind the next time they tell themselves that mass deportation would turn their whole state around.  If Californians really wanted to bring back the prices of 2007, they'd welcome Latin America with open arms.  Dear Mexico: Palmdale needs you!


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COMMENTS (24 to date)
Chris writes:

Mass immigration shifts politics massively leftwards. There is no way that California's politics would be so dysfunctional and its policy so socialistic if there hadn't been millions of poor immigrants over the past few decades.

California-style immigration will only mean that Cesar Chavez style politics gains ground elsewhere too.

Andreas writes:
Saiz (2003, 2007) showed that US housing prices rise with immigration at the city level.

This is the only good argument against immigration I've ever seen. Rising housing prices is no more a good thing than rising electronics prices or food prices or what have you. It's not a good enough argument to be opposed to immigration though.

GG writes:

Interesting to see Caplan use a cost-benefit argument in favor of immigration. Usually libertarians simply assert that immigration is a basic human right, and it therefore invalid to think about the costs and benefits to U.S. citizens. Is a cost-benefit analysis acceptable, then? If so, can we please include the costs associated with the leftward shift in average voter preferences that result from most types of immigration?

Steamer writes:

Why do I think that a Victor Hanson-esque cultural argument should also be included in a cost-benefit analysis?

But then again, Bryan Caplan and so many other libertarians have already shown that they do not really care about their culture and their ethnic groups - so why even bother?

Finch writes:

This is your best post ever on immigration issues. It still falls way short of an analysis, but it shows a willingness to intellectually engage.

Data >> Rhetoric

Ted Craig writes:

Again, are we talking about legal or illegal immigrants? Huge difference.

MikeP writes:

Again, are we talking about legal or illegal immigrants? Huge difference.

Yes. Illegal immigrants are cheaper.

That's why Bryan notes...

With more restrictions on eligibility for services, we can easily turn the young and old into positives, too.
Steve Sailer writes:

"I've often argued that immigrants help natives by boosting housing prices, but I had no idea that the estimated elasticities would be this large:"

So, how'd the cheap labor / expensive housing economy work out for California and its spillover states of Nevada and Arizona in the last decade?

Is this post self-parody?

mdb writes:

One thing I have wonder, how are our current immigration laws affecting income distribution. In the past large numbers of low wage immigrants would come in near the bottom and work their way up. Now the restrictions place most of the immigrants in the top 50%, not to mention there are a lot less of them.

Ted Craig writes:

With more restrictions on eligibility for services, we can easily turn the young and old into positives, too.

Yeah, that'll happen.

MikeP writes:

Yeah, so will open borders.

The best we can hope for in the near term is nonenforcement of today's bad immigration laws.

Steve Sailer writes:

"Gonzalez and Ortega (2009) fi…nd a similar effect in Spain, calculating that immigration could account for a third of Spain's recent housing boom."

By the way, how'd that housing bubble work out for Spain, anyway?

Last I heard, the unemployment rate for young Spaniards was 42%

M. Stern writes:

[Comment removed for supplying false email address. Email the webmaster@econlib.org to request restoring your comment privileges. A valid email address is required to post comments on EconLog.--Econlib Ed.]

joe Cushing writes:

I'm tired of people saying that rising real estate prices is a good thing. Rising prices only help sellers who don't plan to re-buy or those who are downsizing. Rising prices hurt everyone else. If you never plan to move, your taxes go up. If you do plan to move, --even at the same value--you pay higher fees. If you are a 1st time buyer or an upgrader, your wealth is lowered by high prices.

Another way of saying this is that it does you no good for the value of your home to go up because you still have to live somewhere and costs go up as values go up.

Why is it, that we can understand this about all markets except housing? Nobody would be happy if the real price of cars, gas, water, food, computers,etc sudenly went up.

David O writes:

For anyone else who was wondering, the local maximum at 60 is due to the fact that if one doesn't work 10 years, one is ineligible for Social Security benefits.

Good post, Bryan.

Evan writes:

@Joe Cushing,


Why is it, that we can understand this about all markets except housing? Nobody would be happy if the real price of cars, gas, water, food, computers,etc sudenly went up.

There's a difference between prices going up due to increased demand, and prices going up due to decreased supply or increased production costs. If house prices go up because termites eat half the wood in the country, or because half the houses in the country burn down, that is bad for everyone, no question. But if the house prices go up because there are more people who want to buy houses, I think that is either neutral or good.

To use gasoline as an alternate example, it's bad for all if the price of gasoline goes up because a refinery burned down, or an oil well dried up. But if you got mad at people for raising the price of gasoline by consuming more of it, you must be furious at my family. Last summer we took a vacation and drove a quarter of the way across the country, using far more gas than we would have had we just stayed home. That drove up the price of gas slightly, which in your view means we harmed others.

In fact, you could argue that increased demand increasing prices is the engine of progress. People buy more stuff, which raises the price, which causes people to make more stuff, which lowers the price, which causes people to buy more stuff, and so on.

Right now we're having a Recalculation because the market accidentally produced more houses than people really wanted. Introducing more people to use those houses could be a way to alleviate some of the more painful aspects of the recalculation.

@Steamer

But then again, Bryan Caplan and so many other libertarians have already shown that they do not really care about their culture and their ethnic groups - so why even bother?
I can understand caring about the values of your culture, but caring about your ethnicity is just plain silly since no one can control what their ethnicity is. And it's even sillier since everyone's ethnicity will be "cyborg" in another couple centuries. I do care about my culture, I think mine has the fittest memes, so it will survive in the end. Who knows, it might even be strengthened by picking up a couple good memes from the immigrants.

@GG and Chris

Is a cost-benefit analysis acceptable, then? If so, can we please include the costs associated with the leftward shift in average voter preferences that result from most types of immigration?

Latinos are really unmotivated voters. It would take hundreds of millions of them immigrating here before they started to make a difference on more than the local level. And remember there only about 580 million people in Latin America.

Ted Craig writes:

"Right now we're having a Recalculation because the market accidentally produced more houses than people really wanted."

No, the amount of houses was just right. The household formation numbers were wrong due to illegal immigration (undocumented, whatever). The National Automobile Dealers Association found the same issue in car sales years ago.

MikeP writes:

Homeownership rates peaked in 2004 at 2% higher than today. How on earth does that jibe with illegal immigration/outmigration rates?

And looking at homeowner rates by ethnicity doesn't show anything terrifically different about trends for Hispanics versus other ethnicities.

Mercer writes:

Bryan wants people to have more children. He also thinks higher home prices is positive. I see a conflict between those two values.

I think higher home prices are not good if you want people to have more children. People marry later and have fewer kids when home prices are high.

agnostic writes:

Here is Bryan in his best "man of system" voice, from Adam Smith's Theory of Moral Sentiments:

"With more restrictions on eligibility for services, we can easily turn the young and old into positives, too."

Easily, eh? Even though policy, reflecting the desire or at least acceptance of the median voter, has been blowing in the opposite direction since, roughly, forever?

We keep on watering down or eliminating restrictions on eligibility for government services and even private services like -- just to take an example purely at random -- easy credit and home loans and higher ed loans. And what could ever go wrong with that?

joe Cushing writes:

Let me state it differenly. All human progress is realized in lowe real prices. Reguardless of the reason-upply or demand--higher prices act to reduce human well being. There is something else good going on when demand pushes up prices. The high prices are still pushing people down.

Surre there are signaling features to high prices but that signal is to get people to act to lower the price.

If we slashed home prices in half today and started on a long run trend of real home prices falling every year--like computers--we would all be wealthier over time.

MikeDC writes:

As best I could tell from skimming the article, it limits its discussion of the fiscal impact of immigration to provision of social benefits.

It does not address several obvious costs immigration opponents point to, which are increased expense on law enforcement, jails, and loss due to crime associated with illegal immigration.

Five Daarstens writes:

I very much agree with Joe Cushing, lower prices for real estate and other things are a good thing and a sign of a healthy economy. We need to get away from the idea that high real estate prices are good, that kind of thinking created this bubble we are recovering from.

Nick Bradley writes:

@Evan: I agree with you that an increase in prices due to increased demand is not a bad thing. A higher housing price would simply send a signal that more houses are needed.

And right now there is so much slack capacity in housing that an increase in immigration would not put significant pressure on prices at all -- there are a lot of unfinished subdivisions all over the country that can be developed.

Land is very, very cheap in the Sun Belt as well, where most of the growth is/will be occurring. The marginal cost of turning Phoenix and Tucson into one large city is very low, as is building Las Vegas all the way to the California border (~25 Miles).

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