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Lead Weight or Gold Mine: What Are the True Costs of Immigration?

By Karl Zinsmeister and Edward Lazear

Over the last generation, not only the U.S. but also other high-immigration countries like the U.K., Canada, and Australia have experienced financial booms amidst strong immigration. Yet gloomy conclusions about the economic effects of immigration continue to surface. For example, a recent paper from the Heritage Foundation suggests that immigrant households in the U.S. cost federal, state, and local governments almost $20,000 per year (benefits paid out minus taxes received).

This claim is far out of line with other research--and with the immigration reform pending in the Senate. Today's bill would leave both future arrivals and the current undocumented ineligible for welfare benefits, Food Stamps, and Medicaid (except for emergency services). Under the new blueprint, one can qualify for those kinds of government transfers only the old-fashioned way: by becoming a citizen (or a Lawful Permanent Resident and then waiting five additional years). And, contrary to popular mythology, those will be demanding processes, taking a minimum of 13-18 years of effort (on either path).

Despite claims to the contrary, immigrants are net contributors to Social Security. The only immigrants able to collect benefits here will be those who contribute to the program under their own Social Security number for at least ten years. And many immigrants return to their home countries before they qualify for retirement, making no claim on our system despite their payments. Since seven out of ten immigrants fall into prime working ages (versus only half of the native population), those who stay will generally have FICA taxes taken out of their paychecks for decades. The bottom line, according to Social Security data, is that immigrants improve the solvency of our retirement system.

The Heritage authors focus entirely on immigrants without a high school degree, rather than the typical immigrant. They are correct in pointing out that people with that level of education often end up costing the government more in benefits than they pay in taxes. The larger reality is that many Americans receive government benefits paid for by those higher up the income ladder (97% of income taxes are paid by the top half of all earners). Low-skill immigrants are actually comparatively self-sufficient compared to low-skill native householders, because they are more likely to be working (67% vs. 37%) and married (66% vs. 45%).

The classic study on the costs and benefits of immigration was produced by a team of prominent economists and demographers for the National Research Council. Those researchers concluded that the long-run cost to all government treasuries of an immigrant with less than a high school degree is around $17,000 (in 2006 dollars). Meanwhile, an immigrant with more than a high school degree produces a surplus of $253,000, and the average for all immigrants was $102,000 more in taxes paid than benefits received.

The reform now before Congress will sharply improve these figures. It's reasonable to criticize the current immigration system as too focused on family connections, and not as selective as it should be to keep the U.S. competitive in science, technology, and economic growth. Presently, about half of all illegal immigrants and a quarter of all legal immigrants arrive with less than a full high school education--not ideal preparation for life in an advanced industrial society.

The new immigration rules backed by President Bush, however, will create a merit system alongside existing family preferences. Individuals chosen through the point system will almost always have a high school degree, with a great many possessing college or graduate training, or certified vocational skills. In addition to stoking U.S. business output, these new high-productivity immigrants will have a very positive effect on treasuries at all levels of government.

But the central point overlooked by many critics is that an immigrant's effect on government treasuries doesn't adequately capture his contribution to the U.S. economy. The private sector, not the government fisc, is what powers our nation. To evaluate the real effect of immigrants, we must look at overall economic activity.

Some indicative research at the state level hints at these larger influences. A 2006 report from the UNC-Chapel Hill business school found that Hispanics in North Carolina contributed more than $9 billion to their state economy as a whole. Another 2006 study, by the Texas comptroller, concluded that 1.4 million immigrants living in Texas increased the size of that state's economy by $18 billion. The benefits from this growth go to the native-born population as well as to the immigrants themselves.

Immigrants enrich our private economy in a variety of ways. Their contributions make viable certain businesses that would otherwise move overseas. They have a stimulative effect as consumers--in a typical county today, 28% of population growth comes from immigration. They increase productivity by adding labor that is mostly complementary to native workers. This is why a recent study of California by U.C.-Davis economist Giovanni Peri found that immigration between 1990 and 2004 "induced a 4% real wage increase for the average native worker."

The National Research Council study attempted to cumulate some of these economic benefits. Updating their approach to 2007 suggests that immigrants to America now increase the total income of their fellow citizens by over $30 billion annually.

When accounting for the costs and benefits of immigrants, it's also necessary to consider the economic contributions of their offspring. The largest immigration-related expense to government is the cost of schooling the new arrivals' children. But this next generation is not just some dead weight--it is, typically, the real payoff from immigration.

Evidence shows that the children of immigrants exceed their parents in income, achievement, and social success at very high rates. Second-generation Americans are 12% more likely to obtain a college degree than other natives, and their median annual earnings are close to $2,000 higher. Those striving successors are immigration's final gift to the United States.

Karl Zinsmeister is President Bush’s chief domestic policy adviser. Edward Lazear is chairman of the Council of Economic Advisers.

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