Immigration policy poses an unusual challenge for the Congressional Budget Office and the Joint Committee on Taxation. If Congress allows more people into the United States, our population, labor force, and economy will all get bigger. But CBO and JCT usually hold employment, gross domestic product (GDP), and other macroeconomic variables constant when making their budget estimates. In Beltway jargon, CBO and JCT don’t do macro-dynamic scoring.
That non-dynamic approach works well for most legislation CBO and JCT consider, with occasional concerns when large tax or spending proposals might have material macroeconomic impacts.
That approach makes no sense, however, for immigration reforms that would directly increase the population and labor force. Consider, for example, an immigration policy that would boost the U.S. population by 8 million over ten years and add 3.5 million new workers. If CBO and JCT tried to hold population constant in their estimates, they’d have to assume that 8 million existing residents would leave to make room for the newcomers. That makes no sense. If they allowed the population to rise, but kept employment constant, they’d have to assume a 3.5 million increase in unemployment. That makes no sense. And if they allowed employment to expand, but kept GDP constant, they’d have to assume a sharp drop in U.S. productivity and wages. That makes no sense.
Because increased immigration has such a direct economic effect, the only logical thing to do is explicitly score the budget impacts of increased population and employment. And that’s exactly what CBO and JCT intend to do. In a letter to House Budget Committee Chairman Paul Ryan on Thursday, CBO Director Doug Elmendorf explained that the two agencies would follow the same approach they used back in 2006, the last time Congress considered (but did not pass) major immigration reforms.
In scoring the 2006 legislation, JCT estimated how higher employment would boost total wages and thus increase income and payroll taxes, and CBO estimated how a bigger population would boost spending on programs like Medicaid, Food Stamps, and Social Security. They found that the legislation would boost revenues by $66 billion over the 2007-2016 budget window and would boost mandatory spending by $54 billion; various provisions also authorized another $25 billion in discretionary spending subject to future appropriations decisions.
I remember that estimate well since I was then CBO’s acting director. At the time, I thought this was a pretty big deal, doing a dynamic score of a major piece of legislation. I expected some reaction or controversy. Instead, we got crickets. It just wasn’t a big deal. The direct economic effects of expanded immigration—bigger population, bigger work force, more wages—were so straightforward that folks accepted this exception from standard protocol. I hope the same is true this time around.
Note: The approach CBO and JCT will use in scoring immigration legislation is only partially dynamic. It accounts for the direct effects of increased immigration, such as a bigger population and labor force, but not indirect effects such as changing investment. In other words, it follows the standard convention of excluding indirect changes in the macroeconomy; the innovation is accounting for the direct effects. We used the same approach in 2006, analyzing indirect effects in a companion report separate from the official budget score. CBO and JCT will take the same approach this time around.
Not estimating the effect on wage levels seems a little naive. Those big-hearted tech companies want more skilled visas so they won’t have to pay more or train the workers now available, as would be the baseline case.
Oops, I misremembered that item. Now corrected above. Here’s the key quote from the companion study: “In its revenue estimate, the Joint Committee on Taxation (JCT) included taxes on wages earned by additional immigrants, as well as well as the revenue implications of reductions in average wage rates due to additional workers.” The companion piece provides some background on the size of the net vs. gross wage effects. Thanks.
Economics is magic just wish hard enough. What is your desired goal? then manipulate the data and the model to produce the desired results. . Its the same technique used to prove we are in an economic recovery, whilst food stamp useage is now nearly 50 million or about 20 per cent of the pop;ulation. Gdp is flat and wall street is going gangbusters thanks to the fed destroying the currency. In the midst of madness an economist can prove it is all sane and rational as long as he receives a considerable paycheck for his effort. The dismal science proves an apt tag for economics.
I trust your studies on the economic impacts of immigration as much as I trust the federal reserve’s ability to stop subsidising wall street.