CBO Scores the Immigration Reform Bill and Finds…(wait for it)…It Reduces the Deficit

June 18th, 2013 at 6:20 pm

Well, would you look at that: CBO just released their analysis of the fiscal impact of the immigration reform legislation from the Senate and it turns out that the bill is expected to lower the budget deficit by $197 billion over the next decade.

That means that opponents who wanted to make the case that comprehensive reform of our current “system” would be a net cost—e.g., the Heritage folks—just got some pretty bad news.

Nor will the CBO score help them in their quest to kill the bill through fiscal alarmism if they want to tell a longer term story about immigrants raising deficits once they’ve been here for awhile.  The CBOs guesstimate of the bill’s impact over its second decade—2024-2033—is $690 billion in deficit reduction (and by $300 billion more if you’re willing to include the impact of their predicted GDP growth impacts on the deficit; the agency avoids this type of “dynamic scoring” on their deficit impacts–they do include population and employment effects but not, e.g., the revenues spun off by faster GDP growth–but this too is a serious slap at opponents who’ve argued that the dynamics go strongly the other way).

What’s going on here is that the budget agency expects immigration to generate more costs but even more revenues.  Between health programs, entitlements, SNAP, etc., they expect spending to go up about $260 billion over the next ten years.  But they estimate revenues to go up about $460 billion.  The net difference, about -$200 billion, is the projected impact on the deficit.

What’s also interesting here is the CBO’s analysis of the economic impact of comprehensive reform.  Here are their topline findings:

–the increase in immigration would increase real GDP by 3.3% in 2023 and 5.4% in 2033;

–but per capita income would be slightly lower through 2031 “…because the increase in the population would be greater, proportionately, than the increase in output; after 2031, however, the opposite would be true.”

–The CBO estimates that average wages would be 0.1% lower in 2023, because the capital/labor ratio (which boosts average wages in economic models) would fall and “…because the new workers would be less skilled and have lower wages, on average, than the labor force under current law.”

–But average wages would be 0.5% higher ten years later.

–They stress, however, that the wage and per capita income results do not “necessarily imply that current U.S. residents would be worse off, on average, under the legislation than they would be under current law. [These predictions] represent differences between the averages for all U.S. residents under the legislation—including both the people who would be residents under current law and the additional people who would come to the country under the legislation–and the averages under current law for people who would be residents in the absence of the legislation.”

Those projected economic impacts are interesting and important, and I’ll have more to say about them.  But for now, it’s the deficit numbers that matter.  I know people will find lots more reasons to oppose the bill, and the bill itself will change, but for now, CBO has spoken on this critical aspect of the deal.  It may not change the minds of those who are just fundamentally opposed to reform with a pathway to citizenship, but it certainly takes away a potentially damaging critique.

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3 comments in reply to "CBO Scores the Immigration Reform Bill and Finds…(wait for it)…It Reduces the Deficit"

  1. smith says:

    Reduces the Deficit? That’s not all it will reduce.

    http://www.cbo.gov/sites/default/files/cbofiles/attachments/s744.pdf

    “Under current law, 140,000 immigrant visas are granted each year through employment-based preferences.”

    “S. 744 would make several major changes to employment-based preferences”

    “CBO estimates that those changes would increase the number of employment-based visas from 140,000 in 2013 to about 400,000 in 2023.”

    http://www.epi.org/publication/bp359-guestworkers-high-skill-labor-market-analysis
    “the supply of graduates is substantially larger than the demand for them in industry”
    “Wages have remained flat, with real wages hovering around their late 1990s levels.” (downwardly nominal wage rigidities!)

    http://www.bls.gov/ooh/about/projections-overview.htm#totaljobopenings

    “54.8 million job openings between 2010 and 2020″ (new jobs and replacements)
    “Nevertheless, because many of the occupations require a high school diploma or less, they will account for the majority—63 percent—of new jobs between 2010 and 2020″ (new jobs only)
    “Generally, replacement needs are greatest in the largest occupations and in those with relatively low pay or limited training requirements.” (63% of openings)

    Only 2 million openings/year need more than high school, 2.5 million college grads/year.
    http://blogs.wsj.com/economics/2013/03/30/number-of-the-week-college-grads-in-minimum-wage-jobs/

    Really? 400,000 employment visas/year? This is in addition to new 200,000 merit based visas who are not as strictly tied to the whim of their employer. (employment probably adds points)

    Indirectly it affects everyone, not just STEM or IT. I favor immigration, not corporate welfare.


  2. Kevin Rica says:

    I have to say, not much of a degree of difficulty on this one. The flaw in the analysis (and most of these studies) is right out in the open. This is what you get when politicians hire people to justify their legislation by assumptions-driven models.

    Let’s begin with a story in this morning’s newspapers.

    http://www.washingtonpost.com/local/7-eleven-store-owners-in-va-ny-accused-of-exploiting-immigrants/2013/06/17/0dc2db58-d78b-11e2-9df4-895344c13c30_allComments.html?ctab=all_&

    Fourteen 7-Eleven stores in Norfolk and Long Island got raided for hiring fraudulently-documented immigrants. Feds shut them down and seized the franchises (returned them to the parent company). Guess what, in a few days or a few weeks, all these stores will be open again and staffed with ICE-screened legal workers, doing the jobs “that Americans won’t do.” (That’s a quote from G.W. Bush – one more thing he got wrong, even if the Post pretends to believe that one).

    Now when those replacement workers (native born and legal immigrants) obtain work, their dependence of the social safety net will decrease, they will contribute to social security, but probably won’t make enough to qualify to pay income tax (but maybe earn the EITC). Thus, ICE just reduced the deficit at the State and Federal levels. Go ICE!

    This is completely ignored by CBO in this study. They make no mention of displacement of current and legal workers! Oooops! Sorry Mrs. Lincoln, but how did you like the play? Unemployment increases the deficit by increasing dependence on social safety net. See:

    http://jaredbernsteinblog.com/revisiting-snap-rolls-and-the-economy/

    And the tax payments attributed to the immigrants are not a net contribution if a previous worker was displaced. In that case, it’s just a wash.

    So the big issue is the displacement ratio. In the 7-eleven case, it’s probably close to one-to-one. CBO’s analysis is based on a heroic assumption: zero displacement. That is clearly unrealistic: People fleeing brutal unemployment in their home countries don’t magically create jobs in the U.S. Whatever the real displacement ratio is, it’s not zero. In today’s economy, I suspect it’s much closer to 1:1.

    And I haven’t even addressed yet the effect of wage depression and increased income disparities. If you have a progressive tax system and a social safety net, lower income households will pay less tax than upper income households. That is clearly the case in the U.S. The budget is in balance when the sum of the net benefits collected by poorer households + the fixed overhead of government (defense and interest on debt) = net taxes paid by upper income households. At the state and local level, the fixed costs are negligible. So if an immigrant household with a poverty level income is a net tax contributor, it would be just plain impossible for state and local governments EVER to have to worry about deficits. Governments would always run surpluses. Exactly what states have been burdened by huge fiscal surpluses as a result of low wage immigration? If it were happening, it would be pretty hard to miss. It sure wasn’t California!

    The secret to a sustainable social safety net is to make sure that as many people as possible of working age has a decent paying job and can support their own families. Low unemployment and high wages at the bottom of the scale is key. That’s why mass unemployment of low-skilled, low-wage workers is bad.

    Do I catch these things because I am so much smarter than everyone else? No. I wish that I was being modest, but that’s really not it. At least I know that there are much better mathematicians than I am.

    I catch these errors because I think about the displaced workers more than others and recognize the displacement effect. It’s a question of focus. I’m a Truman Democrat! (Wish we had a fourth for bridge.)


  3. Fred Donaldson says:

    Unemployment of “legal” workers is too high. The government plan is to make illegal jobs into legal jobs, so the workers will pay taxes, but also qualify for government assistance. The CBO claims the balance will be to revenue, not expense.

    Since the CBO has no way to measure how many actual illegal jobs exist and only guess how many potential workers versus non-workers are in the country, the conclusion is that some premises are just assumptions based on little real evidence.

    An employer who now hires non-citizens will probably not hire these same people when they seek to become citizens, because he will have to pay more and pay taxes on them. Instead, he will find new non-citizens to replace the ones seeking citizenship. There will be many folks to take these jobs, including those who will enter the country illegally, or are here now and will not seek citizenship in order to get or keep these under-the-table jobs.

    We then end up with many more people looking for work, the same number of illegal jobs, and lower wages as the labor pool continues to increase against a stilted job growth.

    The winners are not the government, not the workers, not the idealists who dream of employers with big hearts. The reality will be more for the one percenters as labor costs drop.


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