New Zealand Initiative on immigration: Part 6 The economists

Chapter 4 of the New Zealand Initiative’s immigration advocacy report is headed “It’s the Economy, Stupid”.   In opening it, they note

While the effects of immigration are broad, the economic impacts often receive the most focus.

That is certainly true of economists, although I’m less sure it is generally true.  But my background is in economics, and I came to thinking about immigration, and immigration policy, in the context of thinking about New Zealand’s disappointing long-term economic performance.

In my previous couple of posts I’ve touched on the Initiative’s treatment of the impact of immigration on government finances and house prices.  But chapter 4 gets to what many economists will think of as the most important economic dimensions of immigration: what it does for productivity and for material living standards.  Economists often get queasy about distributional questions, but since we are talking about policies made by national policymakers I have no problem in narrowing down these questions mostly to the impact on the people already in the country (“natives”), rather than to the latest/next wave of migrants.    As an economic matter,in any particular country policy-controlled immigration of non-citizens should benefit “natives” as a group.  If it doesn’t, the policy should be reconsidered. But answering that question, in any specific country or even more generally, isn’t easy.  There aren’t that many countries that have had significant inward non-citizen immigration, and of course some of the most successful emergent economies of the last century have had very little immigration at all – Taiwan, Japan, and South Korea.   Sample sizes get very small very quickly.  Time and place probably matter quite a bit too.  Most economic research suggests that emigration from Ireland in the 19th century materially benefited those left behind.  But the dominant economists’ argument today would assert that the Irish are now benefiting from substantial inward migration.

As the Initiative notes

By and large, economists favour immigration….

The Initiative’s interpretation on this is that

…as migrants benefit the countries they move to through knowledge spill-overs and global connectedness. Growing the population through immigration also produces ‘economies of agglomeration’ (i.e. the abilities of larger, denser populations to support more commerce and knowledge exchange).

Their prior seems to be not only that non-citizen immigration will benefit natives, but that a growing population –  whether from immigration or natural increase – will also raise productivity.  And the impression I’ve taken is that they seem to believe this is necessarily (or at least almost certainly) true wherever the immigration occurs.

As a descriptive statement, I think there is little doubt that economists generally do favour a fairly open approach to immigration.  But not all the evidence the Initiative adduces even on this point is quite as persuasive as it might first appear.  For example,

An open letter emphasising the benefits of immigration to the US president and Congress in 2006 had no difficulty amassing more than 500 signatures, the majority from practising economists.

Which sounds quite a lot, but the US is a country of around 320 million people.  In New Zealand –  with 4.7 million people –  the equivalent of that 500 signature open letter would be one signed by seven people.    In the New Zealand Initiative’s own offices they just about muster that number, “the majority from practising economists”.   I could probably find seven people, mostly practising economists, in New Zealand to sign letters for or  against free trade, for or against capital gains taxes, for or against almost anything.

But there is better data than that.

The IGM Economics Experts Panel regularly surveys economists on policy questions. Almost all experts agree that high-skilled immigration benefits existing residents, and the majority agree unskilled immigration would benefit existing residents.

It is worth remembering that these surveys are of economists at US universities, answering in a US context.  Looking through the list, many of the respondents are themselves immigrants, likely predisposed to believe their own migration was mutually-beneficial.    And, in the US, of course the overall rate of legal non-citizen immigration is much smaller than that in New Zealand, and the selection criteria are strongly skewed towards family reunification, rather than emphasising skills.

I’ve seen three IGM questions about immigration.

The average US citizen would be better off if a larger number of highly educated foreign workers were legally allowed to immigrate to the US each year.

Of the respondents, 89 per cent agreed, and none disagreed.  Of course, even sceptics of immigration might be inclined to favour more highly educated immigrants, if it were at the expense of the current family focus.

In asking about low-skilled immigrants, there were two questions.  The first was

Question A: The average US citizen would be better off if a larger number of low-skilled foreign workers were legally allowed to enter the US each year.

52 per cent of respondents agreed (and most of the other responses were “uncertain”)

Question B: Unless they were compensated by others, many low-skilled American workers would be substantially worse off if a larger number of low-skilled foreign workers were legally allowed to enter the US each year.

Note that the phrasing is “substantially worse”, not just “slightly” worse.   50 per cent respondents agreed with this proposition, and against most of the other responses were “uncertain”.

There was a more recent poll specifically about the immigration of people with advanced degrees in science and engineering, again a two-parter.

Question A: Allowing US-based employers to hire many more immigrants with advanced degrees in science or engineering would lower (at least temporarily) the premium earned by current American workers with similar degrees.

71 per cent agreed with that proposition.

Question B: Allowing US-based employers to hire many more immigrants with advanced degrees in science or engineering would raise per capita income in the US over time.

86 per cent agreed with that proposition.

So that even among this panel of economists, who believe that US natives generally benefit from immigration to the US, there is quite clear recognition that low-skilled immigration would be likely to disadvantage substantially many low-skilled American workers.   Consistent with this, they also appear to believe that importing lots of any particular type of worker will lower the relative returns of Americans working in that field (if it is true of people with advanced degrees in engineering and science, it is no doubt true to a greater or lesser extent in other specialities –  including perhaps chefs and aged care workers?)

My point here is not to dispute that most economists are quite sympathetic to immigration.  And even most sceptics of immigration won’t have much problem with genuinely highly-skilled migrants.  But when the reality is that the average migrants (and perhaps more importantly the marginal migrant) isn’t that skilled at all, then even in the US context, the views of economists suggest that distributional considerations matter.  As Professor George Borgas, a leading researcher on the economics of immigration, at Harvard University’s Kennedy School, put it in a recent New York Times op-ed, in thinking about immigration policy a key  question for policymakers is “who are you rooting for?”  Borgas reckons there are small overall gains to natives as a whole from immigration to the US, but that the distribution of those gains is such that people at the bottom of the skill distribution are clearly worse off.

In typically flamboyant style, the Initiative talk of economists “loving” immigration, and pose the question “Why do they love it so much?”.      New Zealand doesn’t get much specific attention in the Initiative’s report, but it is as well to remember that in this country there was a long tradition of leading economists being really quite sceptical of the economic gains from immigration to New Zealand –  I wrote about one prominent example here.

But lets stick with the current overseas perspective for now.  The Initiative seek to explain:

To understand why economists generally favour immigration, think of the opposite. If immigration was not generally beneficial, why stop at the national level? Migration flows occur far more significantly within than across nations. Would stemming these domestic flows improve outcomes? Would Wellington’s economy improve if we prevent Christchurchians and Aucklanders flooding in?

And, of course, there is an important element of truth in this argument.  The ability of people to leave Taihape or Invercargill as the economic opportunities declined in those places, relative to other places in New Zealand, has been an important part of internal adjustment.    There is no actual evidence that natives of Wellington or Christchurch benefited from people migrating from Taihape or Invercargill, but we can be pretty sure the migrants themselves benefited (or they wouldn’t have moved), and there are reasonable grounds to suppose that the people who stayed behind in those declining towns also benefited.  One of the other basic insights of economics –  not, I think, mentioned in the Initiative report at all, but strongly backed by empirical research on, say, pre World War One migration –  is that mobility of resources encourages what economists call “factor price equalisation”.   In other words, wages in Wellington or Christchurch might actually be a bit lower than otherwise as a result of the internal migration.

Of course, we don’t stop internal migration, because that is what being a country (or at least a free country) means.  We share some sense of common identity across Auckland, Dunedin, Kawerau and Westport, that we mostly don’t share with people in other countries.  It is the similarities that matter –  we are ‘New Zealanders’, whatever that means when one digs down –  and in particular it is the right to dwell in this land that is common to us all.    It is an arbitrary line to some extent, but little different in concept to the notion, practised by us all, surely, in which we treat family differently than we do outsiders.

As the Initiative notes, economists (rightly) emphasise the potential gains from trade.   Winding up the rhetoric they argue

Larger and more diverse markets of potential traders have more opportunity for specialisation and greater advantages from trade.  These insights lead economists to broadly favour free movement of goods, capital and money – so why not labour, too?

Indeed, the arguments are similar – immigration improves economic performance for much the same reason international trade improves economic performance. Individuals vary in their capabilities, and freedom of movement allows people to move to where their skills are needed most. The fewer the constraints on labour mobility, the more countries prosper. So large is the potential prosperity gain that open borders are estimated to double world GDP.  The implications of economic theory are clear: New Zealand can benefit from those who are like us and those who are not. Those  who have skills similar to those of New Zealanders can help sectors that hold comparative advantage to reach efficient scale. Those with different skills can improve the market at the micro level by creating new industries or rejuvenating old ones with new ideas.

New Zealand benefits by embracing those who can offer new and challenging ideas and perspectives.  Simply by being from another country, migrants help bridge the gap between New Zealand and the rest of the world. Global connectedness is vital for
prosperity, and welcoming migrants can help New Zealand improve those connections.

There is a lot one could unpick here.  Even if they won’t actually call for it as policy, the New Zealand Initiative want us to think of “open borders” as the natural default, which only fear, racism, selfishness or whatever holds us back from.

But note that the exercise in which open borders –  no immigration restrictions anywhere –  could double world GDP assumes that massive numbers of people (hundreds and hundreds of million) migrate, and yet in doing so they do not change what it was  –  the culture/institutions etc –  that made the country they migrate to rich and successful.  No one takes that very seriously.  People bring their cultures with them –  which isn’t just tastes in food, but views about how things are and should be done.  That the ancestors of today’s European citizens of New Zealand did so is a big part of why New Zealand is a fairly wealthy country today.  But that migration involved people moving from the then-richest, and most economically successful, culture/country to lightly-populated temperate New Zealand.   In small numbers, there is little doubt that migrants from poor countries to rich countries benefit, often very considerably, and in doing so they don’t change the recipient country/culture much.  In large numbers, one simply can’t make the assumptions the authors of that exercise did.

Note too that there is no sense in any of this that fixed factors of production might matter.  Land and natural resources are the most obvious example.    They may not be overly important in some places –  one might think of Singapore or Hong Kong as examples, or at a city level somewhere like London.  On the other hand, no one doubts that natural resources are hugely important to the prosperity of Norway or Australia –  not the only factor of course (the human capital to exploit the resources matters a lot), but hugely important nonetheless.  From memory, Norway had about twice as much North Sea oil and gas reserves as the United Kingdom, but with less than a tenth of the population of the UK, that natural resource might much more difference to the living standards of the average Norwegian, than it did to the average Briton.   The economics of adding lots more people to a particular place depend a lot on what that place has going for it.    And yet the New Zealand Initiative pay no attention to this consideration at all –  barely mentioning that New Zealand is the most remote significant economy in the world, and demonstrably still heavily dependent on fixed natural resources.  There is simply no obvious reason why the economics of immigration should look quite the same for the United Kingdom or the Netherlands as for Kuwait or New Zealand.

Perhaps large-scale immigration to New Zealand –  of the sort the Initiative champions – has been, and will be, beneficial to New Zealanders, but you can’t just get away with asserting it, while largely ignoring key facets of the New Zealand economy.

Should alternative perspectives be welcome?   Well, mostly yes.  And so to that extent I’ll agree with the Initiative when they claim that

New Zealand benefits by embracing those who can offer new and challenging ideas and perspectives

But the proportion of migrants who will actually offer “new and challenging ideas and perspectives” is inevitably pretty small –  as no doubt it is for natives –  and most ideas and knowledge simply aren’t transmitted primarily by immigration.  I’d be happy to see us welcome leading researchers as migrants, but mostly you’d have to ask yourself –  what no doubt they’ve already asked themselves –  why would they come (to a small, remote, not-overly-prosperous corner of the world), rather than staying nearer global centres of knowledge-generation and dissemination.  Typically they won’t.

The Initiative goes on

Simply by being from another country, migrants help bridge the gap between New Zealand and the rest of the world. Global connectedness is vital for prosperity, and welcoming migrants can help New Zealand improve those connections.

Silly extreme examples illustrate how empty this rhetoric is.  Half a million Syrian immigrants or Turkmen, Bolivian or Zambian immigrants would be exceptionally unlikely to strengthen our “global connections” in ways that enhance our national prosperity (they’d happily come, to a much richer country).   In considering national policy, you simply can’t –  or shouldn’t –  operate at this sort of high level of generality.  Evidence abour New Zealand, and analysis of New Zealand, illuminated by perspectives from other similar countries is surely critical to reaching robust policy perspectives on what immigration policy we should adopt.

I should stress, as I have noted for many years, that my main interest is New Zealand (as I hope the New Zealand Initiative’s is).  So my main interest is not whether immigration is sometimes good for natives, or even generally good for natives, in some or most other countries. My interests is in whether modern (say, post-war) immigration to New Zealand has been, and is likely to be, good for New Zealanders.  Since places differ, and location oftenr matters in economics, one cannot simply assume that what is good in some places (even most places) is good in all places.  As I noted, the number of countries with large scale immigration programmes (and hence the effective sample size in any study) is small.   In an age when personal connections seem to matter more than ever, particular on the production of things other than natural resources,  and when more and more production is done through global supply chains, there is at least a reasonable prima facie case for why conclusions one might reach about immigration to the Netherlands or Singapore might be different from those for New Zealand.

And all that is even before considering New Zealand’s actual economic experiences over the decades of high non-citizen immigration, including the (barely mentioned in the Initiative report) huge exodus of our own citizens over recent decades.  In my next post, I’ll look at some of the papers the Initiative cites in their report, and look at their response to my own arguments,  but it is worth remembering that in no other country I’m aware of has there been both a huge exodus of natives, and a huge policy-controlled influx of non-citizens.  A diagnostician would usually pay some attention to the voluntary market-driven outflow of natives in considering the prospect that government-led large inflows would benefit the natives who remained.