CHAPTER 1 INTRODUCTION Each chapter's conclusions may be found at its end. And the main conclusions are summarized in Chapter 17. Here I shall try to present the key ideas in the form that economists have come to call a "parable," that is, a simplified analogy. I hope this mode of presentation will illuminate the logic of the analyses as well as the empirical assessments which together are the fruit of the book. After the parable, some of the other key ideas are stated in simplified form. THE PARABLE Consider an idealized farming "nation" composed of a hundred identical farmers, each with the same amount and quality of farmland, each working the same hours and producing the same output. Along comes a foreigner who offers himself as a hired laborer to the first farmer he meets. (For now this is entirely a male community, with no other family members.) The "rational" farmer is willing to hire the foreigner as long as the wage will be even a bit less than the value of the increase in output that the foreigner produces. A shrewd bargainer, however, the farmer offers the foreigner a wage considerably less than the amount the foreigner asks. Not less shrewd, the foreigner proceeds to offer his labor to all hundred farmers, going back and forth until he can strike the best deal. He eventually settles for just a tiny bit less than the value of the additional output if the "market" works well. This is his "market wage". Let us assess the economic impact of the entry of this immigrant into the community. The farmer who employs the immigrant increases his own income by just a tiny bit, but that tiny bit is preferable to no increase at all. The "nation's" citizens as a whole are better off, because 99 farmers have their incomes unchanged whereas one has his income increased slightly, and hence the average income goes up just a tiny bit. If we include the immigrant "laborer" in the calculation, computed mean income goes down, however, because the immigrant laborer's income is lower than the average farmer's; in the very short run, and assuming the number of hours worked per person stays the same, the incremental output of the second person working on the farm is not as great as that of the first worker -- the famous "law" of diminishing returns. But that decline in the average masks the fact that each person's income has gone up -- including the immigrant's, because we assume he would not immigrate here unless his income is higher than in the country which he left. The parable so far portrays the logic of the Borts-Stein- Berry-Soligo theory set out in Chapter 7. A word about the impact during the first moments that the immigrant is in the hypothetical society: Any simpleton can--and a great many do--show conclusively that a new immigrant or a new baby has an immediate negative effect upon the country's standard of living. Before the new person begins to work, s/he reduces per person income purely by arithmetic. (To paraphrase Peter Bauer, when a new calf arrives, per person income automatically increases, but when a new person [baby or immigrant] arrives, per person income automatically decreases.) Of course the changed statistical measure does not necessarily hurt the rest of us, but it surely sounds bad. And if the new entrant gets any help from the society before he or she goes to work, then there is a real negative effect upon the rest of us, as well as the apparent effect. Now let us change the story by moving ahead to a moment after considerable immigration has occurred, when there is one immigrant laborer working for wages on each farm, a hundred in all. The wage of each will be just about the same as the market wage that the first immigrant got. And let's say that each immigrant now has been made a new citizen. But the new citizens have not yet had time to buy any land, so the old citizens still have higher incomes than the new citizens. Now along comes still another foreigner looking for a job. He goes back and forth until he strikes the best deal, which will be for a wage just a tiny bit below the value of the increase in output his employer will obtain from the third person working on his farm. And then another 99 more foreigners follow, so on each farm we now have one native-citizen owner (who also does farm work), one naturalized-citizen laborer, and one new-immigrant laborer. But now something else happens, too: The wage of the naturalized-citizen laborers falls to the level of the new- immigrant laborers. The reason is that all 200 of the landless laborers are now competing for the same jobs, and no owner needs to pay more than the incremental output of a second laborer on the farm in order to hire two laborers, because the amount of work done by all the laborers is the same. And the farm owners are now making a bigger profit than before, because they only have to pay the "first" laborer the value of the "second" laborer's output; the fact that some laborers are citizens while others are not does not affect their wages. The overall results of the second wave of immigration may now be seen as follows: The native owners are better off than before. The new-immigrant laborers are better off than in the country from which they came. The naturalized-citizen laborers are better off than in the old country, but worse off than before the second wave of new-immigrant laborers came. And therefore, the naturalized-citizen laborers will (in advance of the event) surely make a political protest against letting the second wave enter the country, although some of them will, for sentimental reasons, wish to have more of their compatriots enter the country even though the wage does fall. Let us again change the facts. Assume that the one hundred naturalized-citizen laborers have been in the country long enough to buy half-ownership in each farm from the native-citizen original owners. The total yearly proceeds from each farm are now split between the native citizen and the naturalized citizen. Along come the hundred new-immigrant laborers. Assume that all three workers on each farm receive as wages only the value of the incremental output of the third worker. The native-citizen and naturalized-citizen owners are no worse off, however, because the drop in their "wages" is equal to their gain in "returns to capital". If this is so, the naturalized citizens are not injured by the entry of the second wave of immigrant laborers. It seems, then, that whether the existing stock of workers is or is not injured by the new wave of immigrants depends upon who gets the returns to the capital with which the workers work. And here we may refer back to the realistic world of the United States in 1987. The "workers" -- that is, people who earn wages and salaries -- own a very sizable portion of the productive capital of the country, to a considerable extent through pension funds. This means that the situation is not simply one in which "labor" loses and "owners" gain by immigration. The extent to which a working person gains or loses by immigration depends upon the actual facts about the extent to which that working person has an ownership stake in the capital of the country. Now let us complicate the situation just one bit more before we leave this analysis of the effect of immigrants through the labor market. There is also some additional benefit to natives from immigrants because the immigrants do not arrive in such neat one-to-a-farm waves as assumed above. If a given farm successively employs two new immigrant laborers at a wage equal to the incremental output of the "last" of the two (the "marginal" worker), then the citizen owner(s) of the land will obtain the difference between the wage of the next-to-last immigrant -- which now equals the incremental output of the last immigrant -- and the incremental output of the next-to-last immigrant. But this quantity is not of much practical importance and therefore can be disregarded, though it is very neat theoretically. The main conclusion to be drawn from the model so far is that in the short run, additional immigrant workers do not damage the welfare of citizens taken altogether by diluting the capital stock, but may damage "workers" if as a class the workers do not get most of the returns to capital. This effect is transitory, however, and in the long run it is likely to be dominated by many other dynamic effects --especially the effect of immigration upon productivity, and the effect through welfare transfer from and to, and tax transfers to, the public coffers -- even for classes of people who might be hit hard by this particular effect. This model (as is the propensity of such models) has operated frictionlessly and instantly. But real markets do not operate so perfectly, and this leads us to the question of unemployment. Instead of assuming all the original hundred citizens to be farmers producing the same output, let us assume that they constitute a self-contained community producing a variety of goods and services which they then consume -- grain, laundry service, transportation, religious services, meat, and the like. Each business is composed of one citizen owner and one citizen laborer. Along comes an immigrant looking for a job. But there are no laborer's jobs open. So the immigrant goes to one of the farmers whose barn obviously needs painting, and says, "I'll paint your barn for a cheap price, and do a good job." The farmer thinks about it for a few minutes, and decides that at the price the immigrant has set, the farmer's own time is more valuable -- either for other work or for recreation -- than that amount, and he therefore tells the immigrant to go ahead. So unemployment is not increased by the immigrant's arrival. The immigrant spends her resulting income for goods and services in the community, while the farmer spends an equal amount less because he has that much less to spend. So total income to businesses remains the same, though some businesses will lose as others gain if the immigrant buys different goods than would the farmer. If the farmer uses the time to paint a picture instead of the barn, average income of the community (including the new immigrant who is now included in the calculation) goes down because total income remains the same, and now is divided among more persons. But everyone is better off, or at least no worse off, than before the immigrant came. (The reader will note that the pictures the farmer paints are not counted as income even though the farmer is getting benefit from them.) If instead of painting the barn the farmer uses the time to paint pictures that he sells to others, total income goes up, and average income might either go down or go up. But perhaps one of the citizen laborers is out sick, or meditating in the woods on unpaid leave, at the moment the immigrant arrives. The immigrant latches onto that citizen's job. When the previous occupant of the job gets back, he cannot immediately find another job and classifies himself as unemployed. Another possibility: The immigrant arrives, goes to the nearest business, and says: "I'll work harder and cheaper than the laborer you now employ." And the owner promptly fires the citizen and hires the immigrant. These are the cases that the labor unions worry about most, and which constitute the strongest political objection to immigration now and always. And it undoubtedly does happen this way sometimes. Another possibility: After she finishes the farmer's barn, the immigrant goes around to all the other farmers, points to the fine job that she did, and makes deals to paint four other buildings. She realizes that she cannot do all the work by herself, so she hires three footloose citizens, and brings over her cousin from the old country as well. Presto, a new business, and increased total employment; unemployment might then be either less or more than before. As noted above, some "displacement" of particular natives from jobs by immigrants takes place, just as some new creation of jobs by immigrants and on account of immigrants, surely takes place. But the job-creating forces must typically operate at least as strongly as displacement, because on balance immigrants do not cause much if any native unemployment (see Chapter 12). The newest immigrants themselves do at first suffer from relatively high unemployment when times are bad, but that suffering by immigrants provides something of a buffer for natives. Now let us add to the original farmer model that each farmer has a wife, two aged retired parents, and two dependent children. Each farm family pays (say) 20% of its income in taxes to provide stipends for the aged and schooling for the children, along with standard family welfare services. The immigrant laborers come without aged parents, though wives, single women, and some children do come with them. The immigrants also pay 20% of their income as taxes at first. But it is soon found that there is a surplus in the public coffers because most of the taxes go to support aged people, the cohort of which remained the same while tax collections rose as the immigrants arrived. So the tax rate to natives (and to immigrants) would thereby be reduced below 20%. Hence the tax-and-transfer mechanism results in benefits to natives because, as the data show (and contrary to popular belief) immigrants use less rather than more of the standard family welfare services than do native families. (See Chapter 5.) BEYOND THE PARABLE What about the supply of farmland and other natural resources as immigrants swell the population? Will that phenomenon not eventually cause income to be lower than otherwise? The answer is clear-cut, though difficult to explain. The short answer is that the element of land and other capital in the production process benefits the owners of capital when more immigrants arrive because the value of their capital goes up. And natives benefit even if they sell some of their land to new immigrants because the sale price is higher than it would otherwise be; that higher sale price reflects the expected higher demand for food and fiber in future years due to the presence of the immigrants. The land sales give the natives wealth in other forms from which they benefit later on. And the new immigrants who buy a share of the land are better off than in the old country. But will not average income fall over the years due to the restricted supply of land and other capital, if immigrants swell the population larger than it would otherwise be? This is the heart of the Malthusian nightmare. And the nightmare will become reality, at least in part, if the society does not quickly expand the supply of capital. But countries do expand the capital base, as even did China throughout much of her millenia (Perkins, 1969; Jones, 1981). Throughout earlier history, communities have responded to tightness of the land supply mainly by reclaiming wasteland through a variety of techniques (Simon, 1977; 1981). And the new land has not been poorer land than the old land, on balance, just as the Middle West of the United States after it had been developed was not poorer land than was New England. Of course there were heavy costs to be paid in building the land. But the "new people" paid the price while their descendants reaped the benefits, and eventually all persons were better off because the price was paid by the early comers and a bigger and better supply of capital was built. This resource-creating mechanism is a central element in the history of humanity. It is part of the story of problems being caused by additional demand flowing from more people and higher income, and the solutions leaving us better off than if the problems had not arisen. The story is different -- and less problematic -- in a modern economy such as the United States is today, where land and other natural resources are relatively unimportant. (Consider the small share of agriculture and other natural resources in total national output, even though the U. S. is the greatest agricultural producer in the world; the incredulous may consult Simon, 1981, Chapter 6; or Simon, 1988.) Even more astonishing to some -- but an indubitable economic fact -- natural resources are increasingly less important with each passing decade. The crucial capital nowadays is "human capital" -- people's skills plus the stock of knowledge -- and migrants bring this human capital with them. Furthermore, nowadays much physical capital is created sufficiently quickly so that, even considering only the effect through the supply of such capital (apart from the beneficial aspects of immigration), an immigrant with average skills and earnings probably has a negative (partial) effect on natives' computed per-person income for only a short time. Additionally, the longer-run dynamics of the creation and replacement of physical capital are such that the whole community is eventually caused to be better off by additional capital being needed, and the newest existing capital therefore being bought and inventions made; this process causes the stock of capital to be more up-to-date than it otherwise would be. In short, whatever the relevance of the Malthusian production- capital nightmare in earlier times and other places, in a modern country the concern lacks reality and should not disquiet natives. Human capital is the main element of production in a modern country, and the supply of physical capital is normally expanded relatively easily and quickly. The availability of wilderness is not essentially different than the supply of productive capital and natural resources; in the short run more immigrants mean more people visiting existing parks, but in the long run more people create more wilderness areas and greater access to them, as the history of the U.S. throughout this century illustrates. Immigrants do burden natives through increased demand for schools and hospitals, and also through the use of public production capital by government workers, though to a considerable extent immigrants finance their share of the facilities through the pay-as-you-go bond system used by most localities. These are exceedingly complex issues, and the interested reader can struggle with them in Chapter 7. The conclusion arrived at there is that these negative effects upon natives are relatively small compared to the positive tax-and- transfer public-coffers effect, as well as compared to the productivity effect. If some immigrants are, on balance, a benefit, then why shouldn't even more immigrants -- and a completely open door --be even better? There are two possible negative effects of immigrants that could come more strongly into play with much higher immigrant levels: congestion, and negative educational externalities. We do not have experience with these effects at very high levels of immigration -- that is, levels much higher than the rates at the turn of the century, which were much higher than now -- and therefore, prudence would dictate moving up to much higher levels slowly rather than all at once. But in any case, a jump to much higher levels of immigration is most implausible politically, and hence not worthy of much attention. Nevertheless, these two negative effects are interesting theoretically, and worth a bit more mention now. It is reasonable that a billion, or even ten million or two million immigrants in a year, would on average be absorbed more slowly than one million or 100,000 immigrants, simply because at any given moment there are a fixed number of potential employers looking for workers, a fixed number of empty stores looking for new shopowners, and a fixed amount of housing. During the period that capital and organizational structure are relatively fixed -- that is, before they have a chance to adjust -- more people working with the same capital leads to less output per person. Additionally, there is congestion. Additional people make it more difficult for the original persons to do the work they were doing before, just as a great many additional trucks in a market place may prevent all of them from moving except with extreme difficulty. This gridlock congestion effect is different than Malthusian capital dilution, which does not operate more strongly at higher levels of immigration than at lower levels. A second possibly important drawback to very large-scale immigration -- which has not appeared in previous technical discussions of immigration -- is a force which we may call "human capital externalities." A person's output depends not only on the person's own skills and the quality of the machines one works with, but also on the quality of the skills of the people one works with. Immigrants from poor countries possess poorer productive skills than do people with the same amount of formal education in richer countries; this is almost definitionally true, and the effect can be seen in the lower incomes of those immigrants in the countries from which they have come than in the incomes they expect in the U.S. (which is exactly why they come). So until they improve their informally learned skills -- handling modern communications systems, for example, or getting used to doing things by telephone and computer rather than in person and with pencil and paper -- they represent lower-quality human capital for American workers to cooperate with. And this would reduce the productivity (and growth of productivity) of American workers until the immigrants -- in perhaps 2 or 5 years -- pick up the informal learning, after which time they likely forge ahead of natives. (There also is a linked positive effect, the beneficial impact of working with someone from a different culture. Immigrants cause new ideas to arise, even when higher-skilled persons are exposed to more "primitive" ways of doing a job.) The size of the negative human-capital externality effect must depend upon the proportion of immigrants that natives work with. If your work companions are one percent new immigrants, the negative effect surely is small, and outweighed by the positive effect. But if you work with immigrants 50% or 90% of the time, the outcome might be quite different. But such scenarios are wholly unlikely. The most important effect of immigrants almost surely is their impact upon productivity. This occurs partly through increased demand, which leads to learning-by-doing productivity increases. Even more important is the gain in productivity through the immigrants' new ideas which enlarge technology and thence improve production technique. This productivity effect cannot be captured in simple theory. But we should not allow difficulty of description to cause us to slight the phenomenon. It is this phenomenon that literally makes our world go round, and advances our civilization. It is this contribution to our nation and to the rest of the world that enters when the United States opens its doors to immigrants. And it is thus that we inadvertently do so well while our intentions are mainly to do good. This progress is a happy unintended consequence of our better impulses. It is a product of the skill, courage, and humanity of the immigrants who bless us with their presence and the fruits of their work, as we bless them with freedom and opportunity. THE SCOPE AND VIEWPOINT OF THE BOOK The book does not discuss refugees, in small part because they are likely to differ in nature from "economic" immigrants in ways that affect their economic performance, but in larger part because the political discussions concerning the admission of refugees adduce different sorts of arguments than discussions of non-refugee immigrant admission; decisions of refugees are apparently affected by "humanitarian" motives instead of, or in addition to, the effect upon natives' economic lot. The book also does not discuss the effect of immigration upon the immigrants themselves. Neither of these matters affect the policy decision about how many immigrants to accept, which is the book's central interest. The book attempts to address both interested laypersons and professional students of immigration, which makes for some difficulties. The technical material that is necessary to persuade professionals of the validity of the arguments and of the conclusions tends to make a book unattractive and inaccessible to the layperson. But writing separate books for lay and professional audiences would not be feasible. Therefore the tactic chosen is to present the occasional blocks of technical material in smaller print. These sections may be omitted by the reader unless more support for the argument is desired, or unless the reader has a professional interest in the scientific procedures used. This technical material is presented mainly in those chapters where the analysis is the author's own research rather than others' research that is already available in the professional literature. I hope this device proves to be only a minor inconvenience. Though the discussion is framed to apply to the U.S., most of the theory and much of the empirical material should apply to other developed countries as well. There are, however, some differences among countries that heavily influence the analysis and conclusions. Two examples should suffice: (1) The relative level of family assistance for children is much greater in European countries such as West Germany than in the U.S. This must affect any cost-benefit analysis of additional immigrants. (2) Ethnic variation is now much greater in the U.S. than in most other developed countries. This mostly relates to social rather than economic adjustment, but it can also affect the benefits as well as the costs of an additional person coming from a given area, e.g., the value of having an additional immigrant citizen who is a native speaker of another country's language is less for commerical purposes when there already are many such persons. The findings may be more relevant for Canada and Australia than for other countries, even for Great Britain. These countries seem to share many common cultural elements, including being traditional countries of immigration. The fact that so many of the data in Chapters 3 and 4 are similar for these countries likely is the result of this common culture, and is testimony to the existence of the commonality. (The uncanny correlation in the ups and downs of their fertility behavior over the years also is evidence of this commonality.) A crucial analytic element is the time horizon that we apply. If one asks only whether additional immigrants today will help us economically tomorrow or next month, the answer probably is "no," just as a baby is a burden at first. But if we extend our time horizon so that we put heavy weight on the longer-run economic future of the country--months and years and decades in the future--then the answer is the opposite of the answer for the short run, and more immigrants are then seen to be good for the standard of living. Often in a discussion of whether immigrants are good or bad for the standard of living, one arguer focuses upon the long run whereas the other focuses upon the short run, in which case different values are at the root of the disagreement -- though of course the disagreement might also be about facts, as we shall see. Though the book focuses on the economic welfare of U.S. natives, this does not imply that the author believes that the welfare of a country's citizens ought to be the be-all-and-end- all of economic and immigration policy. The "sovereign" nation is just one among many possible communities whose members one might reasonably wish to consider -- the neighborhood, the city, the state, the region, or humanity at large. To elevate the nation to a pre-eminent position is either to implicitly make a nationalistic value judgment or to err by equating what is with what ought to be. It is true that nations can control who crosses their borders, and there is international sanction for nations doing so in what they believe to be their own self- interest. But that does not mean that nations ought to try to maximize the economic or other welfare of their present or future citizens. The book focuses on the nation simply for practical reasons rather than as a matter of principle. The book aspires to consider all of the important economic mechanisms by which immigrants affect natives, while paying little or no attention to theoretical developments which are elegant but bear little upon the contemporary situation. Yet it is an open question whether any of these factors have much influence in national decision-making, even though they are often given as arguments for and against immigration. It may be that non-economic factors really are most influential; certainly they enter as strongly into discussions of immigration policy as they do into almost any other economic policy issue. For example, one of the most powerful non-economic elements is the desire that one's society not become less homogeneous. As a case in point, Prime Minister Margaret Thatcher of Great Britain declared in a television speech that the British fear "being swamped by people of a different culture", and she said that Great Britain therefore "must hold out the clear prospect of an end to immigration" (Intercom, May 1978, p.3). This illustrates how non-economic factors can predominate in immigration policy -- even in a situation where net migration is negative, as it was in 1977 when Thatcher gave the speech quoted above. True, this particular non- economic factor probably is more important elsewhere than in the U. S., where the society is relatively heterogeneous ethnically.1 But this and other non-economic *****factors cannot be dismissed as irrelevant or irrational. If we believe that people's tastes are important in social decisions, then tastes about national culture can also claim attention. It would, however, seem reasonable for people to at least make clear their real motivating reasons when they argue for or against immigration, rather than putting forth economic reasons as apparently-acceptable justifications for the policies they seek for other reasons. 86-88 Conclusi 1/4/88