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Guest Speakers:

Richard Haase, President Latter & Blum, Inc.

Dr. Wade Ragas, PhD, MAI, SRA Real Property Associates, Inc.

Elliot Eisenberg, Ph.D. is President of GraphsandLaughs, LLC and can be reached at [email protected]. His daily 70 word economics and policy blog can be seen at www.econ70.com.

Recently, Senator Tom Cotton from Arkansas and Senator David Perdue from Georgia introduced legislation aiming to reduce legal immigration to slightly more than 500,000/year from the current rate of one million/year.  The explanation given by both senators was that reducing the number of immigrants would shrink the pool of labor, thus raising wages, and hopefully encouraging some of the many Americans who have quit the labor force to return.  While sounding plausible, the data does not support this position.  Moreover, reduced immigration will bring the US perilously close to a situation it has never seen: near-zero population growth.

Per an exhaustive study carried out by the US National Academy of Sciences, immigration does not drive down wages.  Rather, immigration was found to have a "very small" and short-term effect on native-born workers lacking a high school degree.  Another study that looked at non-European immigration into Denmark between 1991 and 2008 found that immigrants didn't reduce wages, and instead freed natives to do more agreeable work.  And when only high-tech immigration is analyzed, at worst, studies find that wages of American computer workers and scientists are depressed by up to 10%, but the overall economy is better off by boosting innovation and reducing prices for consumers.         

While somewhat counterintuitive, these studies demonstrate that rather than taking jobs performed by natives, immigrants create new employment opportunities, and along the way, can push the natives into higher paying jobs.  The mistaken belief that immigrants reduce employment opportunities for Americans is based on a false notion that there is a fixed amount of work to be done, and that job gains made by immigrants come at the expense of natives who are displaced. 

In addition, immigrants often bring skills that are in great demand.  For example, at present, there is a shortage of occupational and physical therapists, nurses, construction workers, engineers, metal workers, etc.  However, wages in these professions do not appear to be rising substantially faster than those in occupations where labor shortages are less severe.  This is because more construction and metal workers simply cannot be found, regardless of the wage offered.  Thus, employers have been forced to cut back on production because of a dearth of skilled labor.  This situation helps no one.    

Separately, ponder this: on average, the working-age population grew by 1.4% per year between the years 1965 and 2015, and economic growth averaged 3%.  Assuming current fertility and immigration rates, the working-age population will grow just 0.3%/year between now and 2037.  With only 500,000 immigrants per year, the working-age population will grow by just 0.1%/year.  And with no immigration, the working-age population shrinks by 0.1%/year.  Under these conditions, we will be lucky to see annual GDP growth of 1.5%/year, not to mention declining house prices.  House prices would be expected to fall in cities in counties with declining populations, as the number of buyers would progressively decline.

While many Americans fear that immigrants -- in particular illegal immigrants -- threaten their employment opportunities and wages, in almost all situations that is not the case.  Frequently, immigrants perform demanding physical work that Americans prefer not to do, and even when that is not so, immigrants often have skills that are in short supply.  Lastly, in an economy that is rapidly aging and slowly growing, immigration is the key to population growth. That growth will allow us to avoid a host of painful problems, including declining property values and rising tax burdens that we would be wise to avoid.

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Elliot Eisenberg, Ph.D. is President of GraphsandLaughs, LLC and can be reached at [email protected]. His daily 70 word economics and policy blog can be seen at www.econ70.com.

The US government can currently borrow at exceptionally low interest rates. After considering inflation, the rates are sometimes zero or even negative, meaning that the government is effectively getting paid to borrow. Under these circumstances and with GDP growth quite anemic, isn't the case for increased borrowing overwhelming? After all, the benefit of public investment in roads and bridges must surely be greater than zero, right? Maybe not! 

If the economy were operating substantially below its potential -- if the unemployment rate were high -- the case for borrowing more and running larger budget deficits would be strong. The added stimulus from the increase in government spending would boost household incomes, which would increase aggregate demand and bring the economy closer to its full potential. That is why governments tend to run large deficits during recessions and why there are many counter cyclical programs like food stamps that ramp up as the economy weakens.

However, at present, the US economy is operating close to full capacity. The unemployment rate is almost the best in ten years, wages are rising faster than they have in years, and inflation, while still low, is clearly picking up. That said, GDP growth remains anemic at just 2%. Wouldn't more stimulus boost GDP? Probably not. At this point in the cycle, more stimulus would not create much more output. Rather, it would primarily create wage inflation, as too many firms looking to grow would chase too few workers, and, in the process, drive up wage growth and inflation, since firms would attempt to pass their higher costs of production to buyers. 

To avoid this destructive inflationary spiral, the Fed would raise interest rates. The rise in rates would depress private investment, which would allow for non-inflationary increased public investment. However, it should now be obvious that the cost of the increased public investment is the reduction in private sector investment. Thus, the opportunity cost of the public investment is not the very low interest rate paid on government bonds; it is, rather, the loss of productivity of the private investment that would never be built, such as a new factory or warehouse. And the productivity of that private investment is certainly higher than the interest rate on government bonds! 

The only case, at present, for deliberately overheating the US economy is if you believe more stimulus can undo some of the long run damage sustained by the economy during the Great Recession. The idea is that by artificially and temporarily pushing the unemployment rate way down, some discouraged workers might be enticed back into the labor force. Similarly, as firms find it harder to hire enough new workers, firms might offer existing workers more hours or convert part-time positions into permanent ones. Firms might even boost labor productivity by investing in workforce training or new equipment. 

While weak GDP growth is a problem, simply running large deficits to stimulate the economy because interest rates are low is unwise given how low the unemployment rate already is. That said, there is a strong argument to be made for a short-term increase in the deficit designed to bring previously discouraged workers who left during the Great Recession and have yet to return. Lastly, rather than a simple tax cut, if deficit spending is carefully targeted to public investment that boosts the productive capacity of the economy, it would bring long lasting benefits to the economy that we would enjoy for decades -- not just today.