How to Accurately Estimate the Economic Impact of the Senate Immigration Reform Bill

shutterstock_76160683One of the most important questions being asked about the Senate immigration reform bill (S. 744) is how it will impact the economy. There is already a broad consensus among economic experts that immigration reform would be a net economic benefit in terms of jobs, wage levels, tax revenue, and Gross Domestic Product (GDP). As reported in Politico on May 8, for instance, a new study by the Social Security Administration estimates that “by 2024, the immigration bill will have created 3.22 million jobs, and boost GDP by 1.63 percent.” However, the most widely awaited estimate is that of the Congressional Budget Office (CBO), which will soon be “scoring” the bill in terms of its fiscal consequences.

In a sign of the high stakes involved in scoring an immigration bill in the current political climate, Rep. Paul Ryan, Chairman of the House Budget Committee, requested from the CBO an explanation of how it would analyze the economic impact of immigration reform legislation. CBO Director Douglas W. Elmendorf responded to Rep. Ryan in a May 2 letter, which he also summarized in a post on the CBO’s blog. Elmendorf wrote that the CBO would adopt the same approach to analyzing the Senate’s current immigration reform bill that it had used when examining the 2006 immigration reform bill.

As Elmendorf explains, the cost estimates usually produced by the CBO are based on “the assumption that macroeconomic variables such as gross domestic product (GDP) and employment remain fixed.” However, the 2006 bill, like the current one, would have “the direct effect of significantly increasing the size of the U.S. labor force,” meaning that—to come up with an accurate estimate of the bill’s fiscal impact—the CBO would have to account for the increase in the “U.S. population, employment, and taxable wages.” In the case of the 2006 bill, the CBO concluded that “the bill would increase federal revenues by $66 billion and direct spending by $54 billion over the 2007–2016 period.”

Just as important as what the CBO did include in this baseline estimate is what it did not include. Namely, as Elmendorf describes:

“CBO also prepared a supplemental analysis encompassing a broader set of macroeconomic effects, concluding that enacting the bill would have increased GDP, on average, by between 0.3 percent and 0.4 percent from 2007 through 2011 and by 0.8 percent to 1.3 percent from 2012 through 2016. CBO estimated that those effects would improve the budgetary impact of the bill by a total of $20 billion to $30 billion over the 2007–2011 period and $60 billion to $130 billion over the 2012–2016 period.”

In other words, the more of the “ripple” effects one accounts for, the greater the fiscal benefits of immigration reform turn out to be.

This point is emphasized in a May 7 paper by Raúl Hinojosa-Ojeda and Sherman Robinson, which concludes that “immigration unambiguously generates additional labor for GDP expansion, productivity, and real-asset wealth effects, all of which must be included in a proper fiscal scoring of immigration reform legislation.” Moreover, the authors emphasize that even the most expansive scenario contemplated by the CBO is focused on future flows of immigrants into the United States and does not include the economic benefits stemming for creating a pathway to legal status and eventual U.S. citizenship for the millions of unauthorized immigrants already living in the country. If the CBO adopts this sort of approach in scoring the immigration reform bill now in the Senate, “entirely missing would be the economic benefits associated with legalization, which are likely to be substantial and which have important impacts on exactly the economic variables the CBO is seeking to capture.”

Put simply, immigrants—be they newly arrived through legal channels or newly empowered through legalization—do not simply pay income taxes and consume public benefits. They are workers who add value to the economy through what they produce. They are consumers and entrepreneurs who create jobs through their purchasing power and the businesses they establish, both of which sustain U.S. jobs and generate new streams of tax revenue. The CBO should keep all of these variables in mind as it scores the immigration reform bill now making its way through the Senate. This is the only way to accurately gauge what the impact of the bill is likely to be.

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