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Heritage Study Ignores Growth

Article by Matthew Denhart May 11, 2013 //   5 minute read

A report released this week by the Heritage Foundation claims that the fiscal costs associated with legalizing the 11.5 million immigrants currently living in the U.S. would total some $6.3 trillion. This is an alarming figure, but one that suffers from a number of methodological problems that render it too pessimistic and ultimately unhelpful in answering the question of how immigration reform would affect economic growth.

Estimating the likely effects of any public policy can be quite difficult for even the most experienced researchers. No matter how careful an economic analysis is conducted, there is always room to quibble over any number of the study’s assumptions or details. The Heritage report is no different. Others have pointed out several problems that have a net effect of substantially inflating the $6.3 million fiscal cost estimate. (Especially insightful analyses are available here and here.) Rather than re-hash these same criticisms, I’ll focus on the two major problems with the Heritage study that I find most significant. Both have to do with the static nature of the study’s approach.

First, the Heritage researchers use the current rates at which undocumented immigrants report using government benefit programs to estimate the rates at which this same cohort of immigrants will use such programs in the future. The problem with this approach is that it assumes that immigrants are static. That is to say, it does not account for the fact that immigrants tend to move up the economic ladder the longer they have been in country. For example, 19.6% of all immigrants lived in poverty in 2011. However, only 13.1% of immigrants who had arrived in the U.S. prior to 1990 were in poverty. Clearly, immigrants are not static beings. They strive to make better lives for themselves and their families, and in so doing contribute more and more to our country and economy.

The second, and even bigger, problem with the Heritage analysis is that it does not take into account how the proposed immigration law, currently being reviewed in Congress, would affect other economic variables. Most consequentially, the study ignores the fact that comprehensive immigration reform would have the net effect of greatly increasing economic growth. Other studies that have used a more dynamic approach to analyzing the impact of increased immigration suggest that immigration reform is one of the most promising way to speed economic growth.

In a recent Bush Institute study, the economist Richard Vedder finds that if the U.S. had adopted a pro-growth immigration policy framework in the 1960s, real GDP growth would have averaged approximately 3.1% in the years 1970 to 2011, a rate substantially higher than the actual average growth rate of 2.8% during those years.

In another recent study, Douglas Holtz-Eakin — a former director of the Congressional Budget Office — estimates that:

A benchmark immigration reform would raise the pace of economic growth by nearly a percentage point over the near term, raise GDP per capita by over $1,500 and reduce the cumulative federal deficit by over $2.5 trillion.

Finally, in a December 2012 paper published by the Cato Institute, Raúl Hinojosa-Ojeda finds that:

Comprehensive immigration reform generates an annual increase in U.S. GDP of at least 0.84 percent. This amounts to $1.5 trillion in additional GDP over 10 years. It also boosts wages for both native-born and newly legalized immigrant workers.

Are these three analyses perfect? Almost certainly not. As mentioned, measuring the effects of public policy is a frustratingly difficult exercise. Other researchers, no doubt, might come up with different estimates of growth. But what is notable about these three studies that use a more dynamic approach is that they all report overwhelmingly positive economic effects relating to increased immigration.

It is important to remember, as Holtz-Eakin notes explicitly, that faster economic growth translates into increased tax revenue, shrinking the size of the national debt. Any economic assessment of the costs and benefits of immigration reform must keep this in mind. By ignoring the dynamic growth-enhancing effects of immigration reform, the Heritage study offers an incomplete and grossly pessimistic estimate of the fiscal impact of immigrants. Ultimately, immigration reform is one of the surest ways to secure faster economic growth, and faster growth should be our country’s top priority. After all, with faster growth, even the toughest budget hawks might be surprised by how quickly fiscal pressures subside.

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