[Note to the typographer and reader: The word processor on which this chapter is being written lacks keys for mathematical notation. Therefore, a copy of the paper from which the chapter is adapted is attached for your reference if necessary.] CHAPTER 7 THE EFFECT ON NATIVES' INCOMES FROM IMMIGRANTS' USE OF CAPITAL GOODS INTRODUCTION It is said: Immigrants are a bad deal for natives because they obtain benefits from capital they do not pay for, and thereby either reduce the amount of available capital per native or force natives to pay for capital to equip the immigrants. This is the standard Malthusian objection to additional persons applied to immigrants, and it has been developed at length by Usher (l977).1 ***** By applying to the U.K. the theoretical apparatus (discussed below developed by Borts and Stein (l966) and by Berry and Soligo (1969), together with a complex set of assumptions about the benefits ("returns" to capital obtained by the immigrants), Usher calculated that capital dilution results is a large burden upon U.K. natives. The same conclusion would surely follow for the U.S. and other developed countries if one followed Usher's method, which I also proposed earlier (1976). But that method seems to be fundamentally flawed.2 ***** This chapter proposes a new approach. And the new approach implies much less diminution of natives' incomes in the U.S. by way of the use of existing capital by immigrants than does the earlier approach. The core of the present approach is separating the analysis of "production" capital used by immigrants on the job, from "demographic capital" used in such services as schooling and medical care. A key element in the production-capital analysis is a distinction between the effects in the private and public sectors. And a key element in the analysis of demographic capital is recognizing that the benefits which immigrants obtain from existing public capital are irrelevant to natives unless there is a congestion effect (i.e., unless the capital is not a true public good), because the existing public non-demographic capital's cost is sunk. This approach allows us to avoid several difficult issues, including the assessment of corporate taxes, which render Usher's and my own earlier approach unworkable. The last section of the chapter prior to the summary discusses the effects of immigrants in their role simply as additional people upon the cost of private and social capital, and upon the likelihood that infrastructure such as roads will be created by the society. Throughout most of this book I try to write in such fashion that persons who are not professional economists can catch the drift of the discussion even if some or all the details are obscure. Regrettably, the argument in the present chapter is sufficiently technical that I have not found a way to render it into language that will be accessible to the non-economist, though I hope that the summary at the end conveys the gist of the argument. Before beginning discussion of the effect of capital dilution, we should take note that in an industrial society capital may not be diluted by immigration, in which case the discussion of capital dilution's effect is nugatory. Economists have long speculated that immigration boosts capital investment (Kuznets and Rubin, 1954; Easterlin, 1968; Kmenta, 1966) and have observed a correlation between the two variables. But they did not identify the direction of causation. Baker (1987) effectively used the ARIMA method on Australian data from 1900 to 1975 to eliminate trend and reduce cyclical variation. The raw data are in Figure 7.01. He finds "strong evidence that fluctuations in net migration cause subsequent fluctuations in per capita investment in the same direction" (p. 7). And Baker quantified the relationship: ". . . a 1% increase in population leads to an 8% increase in investment . . . the increase in private non-residential capital stock attributable to a 1% increase in population through migration is a little over l%" (p. 13). That is, production capital is not diluted by immigration, and perhaps it is intensified. Figure 7 - 0.1 THE EFFECT OF IMMIGRANTS THROUGH DILUTION OF PRODUCTION CAPITAL A useful piece of theory which has been explained by Borts and Stein (1964) and by Berry and Soligo (1969) -- B-S-B-S hereafter -- has as its main thrust the distributional effect of immigration. But B-S-B-S also teach this lesson about the aggregate effect: if immigrants do not own the physical capital with which they work, natives as a whole benefit from additional immigrant workers because of the additional returns earned by the capital3 (though "workers" qua workers lose because their wages ***** go down). If the immigrants share in the returns to the capital, however, this source of gain is partly foregone by natives, and may lead to a net loss to natives. Therefore, we must estimate how much of the returns to capital immigrants "capture" through various mechanisms which may give all residents (including immigrants) a share of those returns. ("Capture of capital returns" means simply the receipt of payments made to owners of private productive capital through dividends, interest, and rent). Before proceeding to the B-S-B-S argument itself, let us note that the theory may be unnecessary because production capital may not be diluted much by immigration. Immigrants may bring with them, and then invest, sufficient capital to maintain the level of capital per worker. Some relevant evidence comes from Australia. In fiscal year 1983-84, principal applicants (excluding refugees) brought with them an average of 32,000 Australian dollars (Norman and Meikle, 1985, p. 122). If one excludes "spouses, fiances, dependent children, etc.," the average is considerably higher. And if one considers only non- family-reunion immigration, the average is considerably higher still. "Business immigrants" brought an average of $ Australian 383,600. In Canada, immigrant families other than business immigrants brought a mean of $17,841, and business immigrants brought a mean of almost $400,000 each (Samuel and Conyers, 1985). (For a bit more detail, see Chapter 12.) The mean capital imports into Australia and Canada would seem to be of the same magnitudes as the $30,000-$50,000 bandied about as the cost of the physical capital needed to equip the average worker in the U.S. (The relative cost of physical capital may be expected to fall as the economy is transformed away from heavy manufacturing and as human capital become relatively more important. A campaign by Canada to attract business people from Hong King as immigrants, in light of the future transfer of Hong Kong to China, also is relevant. Such persons can be expected to bring with them enough capital not just to maintain the level of production capital per worker in the economy but to considerably increase it. And Belize in 1986 announced that citizenship can be purchased with a $25,000 bond, half of it "non-refundable." This out-and-out payment of $12,500 to the government surely more than outweighs any government expenditures for social infrastructure on account of the immigrant family, as discussed in the latter part of this chapter. (In this connection one wonders: If it makes economic sense for the state of Kentucky, say, to advertise for businesses to move there from other states, why is it not at least as sensible to advertise for investors from abroad to move to Kentucky?) And while on the subject of capital importation by immigrants, fees as a means of allocating admisstion need mentioning, a subject discussed in Chapter 16). To return now to the B-S-B-S argument: If immigrants do not share in the returns to capital and yet are paid their marginal product, the total returns to capital are increased by more than the sum by which natives' wages are lowered; hence immigrants increase the average income of natives under these conditions. This proposition is shown in figure 7-1, taken from Berry and Soligo, where the triangle X approximates the gain to natives as a whole,4 on the assumption that immigrants do not share in the *****returns to the existing capital. -------------- Figure 7-1 -------------- It is important to note that the B-S-B-S effect is caused simply by there being in the economy more people of the same sort as already make up the labor force; it has nothing specifically to do with the additional people coming from outside the country. (The B-S-B-S theory is discussed more lightheartedly in the concluding chapter.) One wonders how the B-S-B-S theory applies to human capital, along with its application to physical capital. That is, are there returns to native human capital when immigrants arrive in analogous fashion to the added returns to native-owned physical capital? The answer is not simple. On one hand, a native Nobel laureate can increase his/her productivity if there are more excellent immigrant graduate students to work with. On the other hand, a foreign Nobel laureate may immigrate and compete for excellent native graduate students, reducing the native Nobel laureate's productivity. Complication arises from the fact that an immigrant represents "labor" as a producer good that cooperates with native human capital, but also represents "capital" with which native "labor" may cooperate. A full answer would require more delicate analysis than is appropriate here. Estimating satisfactorily the capture by immigrants of returns to the capital with which they work requires that we be very careful about our aim. We must agree that the main subject of inquiry is the creation of additional output by the immigrant, together with the effect of that output upon natives. It is crucial to recognize that the effect of this additional output upon the immigrant him/herself is not part of the inquiry; Usher (l977) implicitly did not see it that way, nor did I earlier (l976), and therefore those analyses simply estimated the proportion of the total capital in the society from which immigrants might receive returns either because the capital is owned privately or because of corporate and other taxes on the returns to capital. And of course the effect on the persons remaining in the land of emigration is not part of the subject here. [Note to typographer: Set Greek letter delta where text reads "delta," etc.] Let us (adopting Usher's notation, diagram and general approach for comparability) begin by noticing that the output with an immigrant present (Q + delta Q) is divided among four types of recipients--the immigrant employee, the native employee, the owner of the industrial capital, and the "government," just as is output without the immigrant (Q). (7-l) Q = Q + Q = wL + rK + Q , where Q = T p g p p g g Q + delta Q = Q + delta Q + Q + delta Q = (w+ delta w)(L + delta L ) + p p g g p p (r + delta r)(K + delta K ) + (T + delta T) p p where Q = native output p = the private sector g = the government sector w = the wage level without immigrants L = labor force without immigrants r = after-tax rate of return to capital without immigrants K = capital stock without immigrants T = total taxes without immigrants delta = an incremental quantity, the difference between the situation with immigrants and to the situation without immigrants. Define private capital's "share" as the amount that owners of capital receive after taxes.4.1 The only way that an immigrant working in the private sector can receive some part of the additional private product (delta Q ) other than his own Pmarginal product is through corporate tax payments. Therefore, we must inquire into the nature of the additional corporate taxes paid due to the immigrant's arrival and consequent additional outputs (delta T ). P The total corporate plus personal additional taxes (delta T) that are paid as a result of the immigrant's entry are as large as, or larger than, the additional expenditures (e.g., on schooling and transfer payments) that occur because of the immigrant. (Chapter 5 finds that immigrant families pay considerably more in personal taxes alone than they receive in services, largely because of their age composition). There seems no reason not to think of the corporate taxes that go toward the extra services for immigrants being in the same proportion to total taxes as they are for all persons' services. That is, delta T T delta T > delta G and _______P = _P. If so, there is delta T T certainly no loss to natives by way of corporate taxes, that is, delta T is at least as large as the cost of any services to P immigrants that it might be expected to cover. Some of the additional corporate tax payments may be thought of as rent on publicly-owned capital used by the corporation, e.g., roads and dams. And part of this rent may be obtained by immigrants, in similar proportion to other citizens. But what matters here is the effect on natives. And the amount of such "rent" obtained by natives is likely to be of a small order of magnitude, by any test, and hence we shall ignore it for convenience (though noting that excluding this factor reduces the apparent benefit of immigrants for natives, because we are ignoring a flow that benefits natives). The argument so far adds up to the fact that because delta T > delta Qg -- which allows us to say that delta T = delta Qg and T = Qg -- we can rewrite (7-l) as (7-la) Q = wL + rK p p p Q + delta Q = (w+ delta w)(L + delta L )+(r+ delta r)(K + delta K ). p p p p p p If all immigrants worked in the private sector, and we could therefore treat the government sector simply as if it were a foreign company that sells inputs to the private sector, the B-S- B-S analysis would now follow without further ado; immigrants would benefit natives as a whole by the celebrated tiny "triangle" in Figure 7-1. (As noted earlier, however, this analysis may be nugatory because immigrants may bring enough capital with them so that private capital dilution may be small or even non-existent, and the damage to "workers" is thereby reduced.) But some immigrants work for the government. In that sector there are no returns to capital that natives capture but that the immigrant in question does not capture. A key magnitude then, is the proportion of immigrants who work for the government. The resulting loss to natives must be compared to the gain from the "triangle" in Figure 7-1 in order to calculate an overall assessment of the impacts of immigrants through their involvement with the capital used in production. Calculation of the Capture of Capital Returns Let us begin by taking notice, as Usher demonstrated by expanding equation (7-la) in a Taylor series, that the "triangle" of additional returns to the owners of private capital is small when the immigration is realistically small; in the context of Usher's Cobb-Douglas production function example the gain is about l/2l9 of the loss in labor income to natives. And in the simulation I made for Israel (l976) I found that a flow to immigrants of less than a 2% share of the returns to private capital is enough to offset the triangle. Therefore we can ignore the B-S-B-S effect for practical purposes. But we must still deal with the public sector, and to do that we must estimate the returns to public capital, by analogy with private capital. Let us make the simplifying assumption that the capital/labor ratio is the same in government as in industry. And for reasons of data availability let us estimate the ratios we need from the non-financial sector and project them to the entire private sector. Let W = the amount paid for their labor to employees in p wages and salaries in industry, $l387 million in l979 R = returns received after corporate taxes by owners for p the use of their capital, $390 million Q = total of employee compensation and after-corporate-tax p returns to capital = W + R = $l777 p p R _p Q = proportion of total returns that go to capital = 22% p On standard neo-classical assumptions we may identify the share received by labor as labor's marginal product. That is, the marginal immigrant receives (l00% - 22% =) 78% of the total additional product due to him or her, and the owners of the capital receive 22%. One could also use Usher's stylized 25%-75% split without changing the result. If there are no returns to native capital owners, and the immigrant receives the returns to both his/her labor and to the capital he/she works with--as is the case in the public sector--there is a loss to natives due to the capital-dilution effect. If we assume the production function is Cobb-Douglas and the quantity of capital is temporarily fixed, returns to natives would fall by an amount roughly equal to the amount implied by the 22% gain to capital owners in the private sector.5 ***** To allow for the immigrants working in the public sector, we must know the proportion working in the public sector. From the cohort of persons who arrived between l965 and l970, there were in l970 38,427 males and 24,256 females, out of 454,872 and 309,090 total persons in the cohort employed of age l6 or over, who worked for the government--that is, 8.22%, which is much lower than the l6.5% among natives (U.S. Bureau of the Census, United States Summary, Table 93. The proportion is not likely to change much from census to census.) For those who arrived l960- 64, l955-l959 and l950-l954, the percentages are 6.8%, 7.8%, and 9.0% respectively, say an average of 8% for all immigrants. (Immigrants arriving more than twenty years earlier are not very relevant to a policy analysis.) If we now assume that the returns to the capital with which the government-worker cooperates are obtained by the worker, and assume also the same capital/labor ratio and average salary as in industry, then 8% of the total returns to private plus public capital due to immigrant production flow to the immigrant. This is a far cry from the 58% figure that emerged from Usher's method applied to the U.K. A more meaningful comparison is the total amount that natives' income falls relative to the total income of the immigrants (or relative to the total additional product caused by the immigration). The effect on natives' incomes may be calculated as Effect on natives = Total income of natives afterwards minus total income of natives before the immigration = total output after minus total output before minus amount going to immigrants in wages and capital capture = (Q + delta Q) - Q - delta L(w + delta w) - phi[K(r + delta r)] = delta Q - delta L(w + delta w) - phi[k(r + delta r)] = delta L(w + delta w) + delta K(r + delta r) - delta L(w + delta w) - phi[R(r + delta r)] where phi is the proportion of the returns to capital captured by the immigrants. [Note to typographer: Greek letters phi, delta, etc.] And because delta K = 0 we can simplify Effect on natives = phi[K(r+ delta r)] which is the total amount from the returns to capital that is captured by immigrants. In Usher's calculation phi = .58, whereas in this calculation phi = .08.6 The ratio of the effect *****on natives to the total wages of immigrants, then, is phi[K(r+_delta_r)]. With Usher's phi this ratio is L(w+ delta w) about .l99, whereas with my phi the ratio is about .028 using Usher's 75% share to labor, or .025 using the above-calculated 78% share to labor. The difference in implications of Usher's calculation and the present calculation is large no matter whether you look at it from the point of view of an average native or an average native worker, or from anyone else's pocketbook point of view. And a major policy implication of this difference appears in a more global analysis of the effects of immigrants. In the U.S. the balance of taxes and welfare expenditures alone is such that natives gain considerably from the presence of the average immigrant family, on a present-value basis. On Usher's calculation, the loss to natives on the production-and-income side would more than off-balance the tax-and-welfare gain. Using the present calculation this is not so; the average immigrant family's net contribution to the public coffers far outweighs the loss to natives through capture of the returns to capital by the immigrants. CALCULATION OF THE BURDEN OF DEMOGRAPHIC CAPITAL-WIDENING DUE TO IMMIGRANTS The above section discussed the dilution of public and private "production" capital as it affects the earnings of natives. We must now also consider that segment of public capital which immediately yields consumption benefits to natives and immigrants and whose use is subject to congestion. This category includes such "demographic capital" as schools and hospitals; more immigrants cause more of such capital to be needed if service standards are not to fall. On the other hand, such pieces of public capital as the Statue of Liberty, intercity highways, and space exploration installations rather clearly are public goods whose use by natives is unaffected by the number of immigrants. Some capital assets, such as new highway construction around cities, and new physics laboratories at universities, are difficult to classify, but luckily most public capital falls pretty clearly into one or another of these two categories. A simple yet satisfactory rule of thumb7 is that most chunks *****of federal capital are true public goods, while most chunks of local and state capital are demographic and are subject to congestion. The state-and-local category corresponds fairly closely to the sub- categories of education and hospitals and local roads. It would probably be possible to work with the latter functional sub-categories rather than with the federal-versus-state-and-local distinction, but the results would not likely be substantially different. It may help to begin with this question: Why does any community allow additional U.S. citizens to move into its tax district without assessing penalties to pay for the public capital the person will use? A church or synagogue or mosque that builds a new building free-and-clear from savings or current assessments is likely, for a number of years after the new building is built, to assess new members a special building fee over and above the dues that old and new members pay. Why does not a city or state do the same (assuming away legal impediments)? The answer would seem to be that new members of a community pay "rent" for the capital they use that is on average enough to cover a considerable part of the additional cost of any necessary capital widening on their account. This is because--in contradistinction to a religious congregation that finances a new building without borrowing--a large part of public capital is built with borrowed money. And with the taxes they pay, new dwellers help cover the service of this debt to an extent that the new dweller is not a burden on old dwellers in this respect. If all schools and hospitals and other local facilities whose size must be affected by numbers of people served-- "demographic construction" (called just "construction" or "structure" hereafter)--were financed by consol bonds, the immigrants would be paying more taxes than if they were to use only structures built for them and were to pay for the entire cost of that construction which they used. (Underlying the latter part of this sentence is a model of constant immigration under simple conditions. For now this is only to be a vague statement of self-financing as the benchmark.) This is simply because immigrants and their descendants would then be paying a full share for all new construction, and would also be paying for some structures that had obsolesced and were no longer in use; in the same way they would be paying more than their share for partly-obsolesced structures. On the other hand, if all construction were paid for on current account, immigrants would underpay for the structures they use, because they would then be paying only a part (on a per person basis equal to natives) for the new construction necessary for them, whereas all of the cost of the new construction would be due only to them (causing increased expenditure by natives for the new construction) while not paying at all for existing structures they would be using. And if the number of immigrants were small and there were little or no physical depreciation, natives would pay almost the entire cost of structures for immigrants. This point comes out clearly if we notice that if all construction depreciated in, say, a year (which would be the same as the tax period), natives would not be paying extra for immigrants; all persons would then be on an equal footing. But because depreciation takes longer than the current period, and since natives have already built and paid for much of the construction they need, the additional construction for immigrants would be more than natives would otherwise need by a proportion greater than the proportion of new immigrants to natives. This last statement has not been stated rigorously, but perhaps it will be made to seem convincing by this third possibility: With respect to construction financed by debt, if the length of life of construction equals the length of time during which the debt is serviced, asssuming equal payments on the debt each year (that is, assuming that the building collapses the day it is paid off), and if the cost of construction and quality of buildings remain constant, then an immigrant would exactly pay for the cost of new construction built on his/her account. S/he would a) pay a full share for new buildings built this year, just as does the average native; b) pay nothing for buildings no longer in use; and c) pay in proportion to the remaining length of life for older buildings still in service. Therefore, we wish to combine the necessary elements--length of capital life, length of bond period, and proportion of capital financed by borrowing, together with the cost of equipping an average immigrant family--into an estimating equation, then develop estimates of the elements and calculate the burden on immigrants per immigrant family. We begin with notation: C = Cost of construction per unit of capital necessary an additional family c = Proportion of construction cost financed by bonds LL = Length of life of a unit b = Bond period P = P = Total number of native families t t-1 Q = Units of capital in existence, and Q/P = l q = Units of capital built I = l = Number of immigrant families E = Expenditures T = Total taxes paid o = Superscript indicating "Without immigrants" I = Superscript indicating "With immigrants" Q = P t t o ( o ) q = 1_ (Q ) in steady state, the number of t LL ( t-1) units necessary to replace units worn out after LL years, o ( ) o 7-l) E = (1_) Q C expenditures each year in steady t (LL) t-1 state without the immigrants I ( ) o 7-2) E = (1_) Q C + C expenditures with the immigrants, t (LL) t-1 because one additional unit is needed for I t ( ) ( ) o ( ) o o o 7-3) T = ( 1 ) cE + ( 1 ) cE ...( 1 ) cE + (1-c)E = E o ( b ) t-b ( b ) t-b+1 ( b ) t t t in steady state, that is, total taxes yearly without immigrants, which includes debt payments on capital financed in the past plus current payments on the portion of current expenditures not financed by debt8 ***** o o T ( 1_ ) Q C o _t_ = ___(_LL_)__t-1__ = ( 1_ ) C because Q = P = P , P P ( LL ) t t-1 t t taxes per person without immigrant in steady state I o 7-4) T = E + ( 1 ) cC + (1-c)C because the first payment t t ( b ) on the financial portion of additional unit will be made in t, plus the non-financial portion's payment I o 7-5) T - T = ( 1 ) cC + (1-c)C increase in total taxes in t t ( b ) t due to immigrant [( 1_ ) PC ] 7-6) ( 1 ) cC + (1-c)C -[( __LL_)______] ( c ) + 1-c - ( 1_ )] C is the ( b ) [ P+1 ] ( b ) ( LL )] increase in burden of taxes to natives in first year because of an immigrant. The total burden over the years to natives is 7-7) b[(1) - (1_)]cC + (1-c)C because of the payment on the finance [(b) (LL)] portion of the increment until the additional unit is paid for. Aside from that, an immigrant henceforth simply constitutes a proportional increase in the society and has no effect on natives. 8) The overall magnitude of the loss to natives (if there is one) depends, of course, upon a) the proportion of capital investment that is funded with debt, b) the cost of the units, and c) heavily upon LL, the length of life of the structure. If LL is very short, the immigrants pay for structures already destroyed, even if the bond period is also short. If the length of life is very long, then the cost to natives approaches the full cost of the structure. Therefore, to estimate the effect, we need to know C, b, LL. I/P may be assumed to be very small. 9) We may estimate C in several rough ways which, if they generally agree, should allow us to have some confidence in the composite estimate. (l) The current replacement value of government capital (structures, inventory and equipment) at the end of l975 was estimated by Kendrick (l976) to be $98l billion. Dividing that total among units of government on the basis of capital outlay figures by the various units of government plus tentative depreciation yields an estimated $78l.5 billion as the value of state and local capital at the end of l975. Its ratio to GNP in the corresponding year was 38.l percent. Therefore, one may assume that it costs an amount equal to that proportion times the representative family's income to equip an additional representative family. A rough check for this magnitude uses the observation that employment in the state-and-local sector is l4.l percent of all employment. If the capital-output ratio is 2 in that sector as in the rest of the economy, and if average income is the same in that sector as in the rest of the economy, then a sum equal to 2 x l4.l% = 28.2% average income is the value of such capital for the average family. The value in l979 for the median primary family (Statistical Abstract of the U.S., l980, p. 45l; the mean value for all families would be better, but will not be sufficiently different to make a difference here) was (.38l x $l9,684 =) $7500. l0) The average bond period b is l0.53 years. The estimate of this quantity as well as the quantities in (11) and (12) below is described in the appendix to Simon and Heins. ll) The average length of life of state-and-local capital is l4.76 years. l2) The value of c, the proportion of the capital that is financed with debt, is approximately .62. l3) Calculating now by inserting the necessary values into (8-7) the average cost to natives of equipping an immigrant family, assuming the family's income and use of services is average, is then $4l72 or 2l% of a year's income for a family, without discounting the future payments. Leaving aside the relatively minor adjustments called for by a variety of factors working in both directions, let us now hit upon one-fifth of the average family's income as the cost of equipping the community for an additional average family's needs. For this to be an appropriate estimate for an average immigrant family requires that it be of the same size and composition as an average native family. This is probably not so far from the fact as to make inappropriate an estimate of 2l% of family income. This cost is certainly not negligible even when the returns to government capital from government immigrant workers are added in. However, it is considerably smaller than the present value of the stream of taxes paid and transfers received by immigrants- -which is perhaps l.5 or 2 times the average native family income (Chapter 5)--and hence the capital effect does not dominate the overall impact of immigrants upon natives' standard of living, which is positive on balance even without considering the positive effect on natives through increased productivity. And the latter element almost surely swamps all other effects in the long run (Chapter 10). EFFECTS ON THE COST OF CAPITAL AND PROVISION OF INFRASTRUCTURE So far this chapter has considered the effects of immigrants by way of "diluting" the quantity of capital available to natives, and also by burdening natives with the cost of increasing the stock of capital made necessary by the immigrants. Now we briefly consider an effect going mostly in the other direction, the effects of immigrants upon the cost of infrastructure capital, private and public. There has recently developed a body of evidence indicating that capital is used more efficiently in larger communities. For example, less capital is needed for a given amount of productivity per person in larger cities (Alonso and Fajans, 1970, summerizing Mera, 1970, and Fuchs, 1967). This jibes with the fact that wages are higher in bigger cities (although it is entirely possible that people are paid more in larger communities because they do more or better work, implying that the "efficiency wages" are the same in all communities; see Chapter 2). Furthermore, interest rates are lower in bigger cities (see Stevens, 1978, for a review and a study of bank rates) which implies that capital is cheaper in bigger cities. In sum, the evidence suggests that one can get more output from a given capital investment where there are more people. And immigrants increase the population. The effect of immigrants on the cost and supply of capital shades into the effect on productivity through economies of scale, a subject which is discussed in the following chapter. The effect of additional persons on the supply of capital is most marked with respect to social-overhead capital such as roads, which are crucial for a country's economic development of all countries; the effect of additional population is sharply positive, especially in less-developed countries. The connection between population density and the system of transporting goods, people, and information runs in both directions. On the one hand, a dense population makes a good transportation system both more necessary and more economical. Having twice as many people in a village implies that twice as many people will use a wagon path if it is built, and that twice as many hands can contribute to building the path. This is what happened in Europe and especially in England, where "the growth of population made it worthwhile to improve and create transport facilities." [Quote ?] On the other hand, a better transportation system brings an increased population, and probably leads at first to higher birthrates because of a higher standard of living, though later the birthrates drop. Furthermore, good transportation connections are likely to reduce a village's death rate, because the village is less vulnerable to famine. The opposite condition, population sparsity, makes traveling slow and difficult. This is how it was near Springfield, Illinois, when Abraham Lincoln was a lawyer "riding the circuit" of courts. ...Traveling was a real hardship--so real that the words of old lawyers, describing early days, become fresh and vivid when the circuit is the subject. "Between Fancy Creek and Postville, near Lincoln," wrote James C. Conkling, "there were only two or three houses. Beyond Postville, for thirteen miles was a stretch of unbroken prairie, flat and wet, covered with gopher hills, and apparently incapable of being cultivated for generations. For fifteen or eighteen miles this side of Carlinville, the country was of a similar character, without a house or improvement along the road. For about eighteen miles between South Fork and Shelbyville, there was only one clearing. I have traveled between Decatur and Shelbyville from nine o'clock in the morning until after dark over a country covered with water, from recent rains, without finding a house for shelter or refreshment." (Angle, 1954, pp. 102-103) Indeed, the economics of transportation and communication systems, as well as those of public safety, have been the main reason why immigrants have been desired in places like the frontier country in the United States, Canada, and Australia. Glover and I (1975) made a cross-national study of the relationship between road density and population density, and we found that relationship to be very strong. Population growth clearly leads to an improved transportation system, which in turn stimulates economic development and further population growth. Population density brings a similar increase in the efficiency of communications, easily seen in a comparison of cities of very different sizes. For the same price to the reader, the daily newspaper is much larger, and supplies much more information, in a big city like Chicago than in smaller Illinois cities like Champaign-Urbana. There are generally more radio and television programs available to people in larger cities. And the price charged an advertiser--whether a department store or an individual seeking employment--is lower per 1,000 readers reached in a large city than in a small city, a clear benefit of a larger population. SUMMARY AND CONCLUSIONS There are three questions about capital and immigrants we must answer: 1) The effect through the private capital with which immigrants work. 2) The effect through the public capital with which immigrant workers work. And 3) The effect through public "demographic" capital used for consumer services by immigrants. The first question, the issue of private capital dilution, can be dealt with swiftly. Borts and Stein, and Berry and Soligo, showed that while workers as workers lose through lower wages due to immigrant workers, owners of capital benefit by something more than the workers lose, and hence per-person native income goes up. The overall effect is small by Usher's and my reckonings, perhaps l% or 2%, small enough to ignore safely. If all immigrants worked in private industry, and if there were no corporate income taxes, we could now also forget about the entire subject of production capital dilution. Usher tackled jointly the second and third of these problems mentioned above by analyzing the properties of public and private capital for the U.K. (I did much the same for Israel, independently.) Usher arrived at the conclusion that 58% of the returns to all the capital they work with are captured by immigrants even if they own no private capital, and therefore immigrants are a major burden upon natives. And of course in Usher's model there is no positive effect of immigrants upon productivity to counterbalance the effect Usher calculated. But this method used by Usher, and by me earlier, is not sound, I argue. In contrast to Usher's large estimate, the method given here estimates that immigrants capture the returns from only 8% of the production capital they work with, which is the governmental production capital only; the result is a loss to natives of perhaps 2% of an immigrant family's income each year, about the same size as the gain to natives through the private capital with with immigrants work. The two factors trade off, and therefore both may safely be ignored. The cost to natives of equipping the immigrant family with "demographic capital"--schools, hospitals, and local roads-- depends upon the cost of such equipment, the proportion financed by bonds, the average length of life of the capital, and the average bond life. Heins and I developed an estimating equation, and calculated that the overall cost to natives in l975 dollars is $4l72, about a fifth of one year's income of an average family. This is not insignificant in magnitude. But this amount is considerably smaller than the benefits of immigrants to natives through their relatively low use of welfare services and their relatively high contribution of taxes, as discussed in Chapter 5. M/D/329 86-83 Captl7 12/30/87 FOOTNOTES 1 The criticism of Usher's work in this chapter is also a criticism of a very similar piece of work that I did independently (1976) with respect to Soviet Jewish immigrants into Israel. 2 Please keep in mind that the effects through capital use are only a small part of the overall impact of immigrants upon natives. Chapter 10 shows that the net balance of transfer payments and taxes is positive and outweighs the negative capital-effects calculated in this chapter. This implies a positive net effect of immigrants'effect on natives, even without including the positive effect of immigrants upon productivity. 3This line of reasoning implicitly assumes that there is only one wage-earning occupation in the economy. If this assumption is relaxed, the analysis is more complex. If there are a variety of occupations in the economy and the immigrants come with the same distribution of skills as the natives, then the result is the same as if there is only one occupation. But if the immigrants come with a different distribution of skills, then the occupations that are disproportionally represented by the immigrants suffer worse wage declines than do the average. The Vietnamese immigrants of the late 1970s and the Cuban immigrants of 1980 seem to have a broad spectrum of occupations, whereas Mexican immigrants seem to be largely semiskilled laborers. If the immigrant brings skills not found in the economy, there are the same sorts of overall gains to trade that occur in international trade of goods. An effect analogous to gains to trade was suggested in conversation by Mark Rosenzweig, and to my knowledge has not been analyzed. I have no feeling for how important it may be, but to the extent that it operates, it has a beneficial effect on the average native's income. 4 In response to a comment by Herbert Grubel, a note is necessary about how the quantity of human capital brought by the immigrants affects the logic and calculation. The key element is the proportion of the total returns that go to native owners of physical and organizational capital with which the immigrants work. This proportion is influenced by the amounts of human capital--and also non-human capital such as tools--that the immigrants bring with them. If human capital is relatively important, and physical and organizational capital are relatively unimportant in an industry--say, civil-engineering consulting-- then natives are affected relatively little from the inflow of immigrants. Presumably the trend in this direction is indicated by the increase in "labor's" share over time. But it does not seem to me that the B-S-B-S model needs adjustment for the explicit introduction of human capital. Even the providers of unskilled labor supply that service out of a stock of human capital. And the organizational capital provided by native firms is really a form of human capital. All this is satisfactorily embodied in the B-S-B-S model. Another point relevent here: The reader may wonder how the representative immigrant's share of capital, and the returns to it, change with years of residence in the United States and whether this is reflected in the model. With time, the immigrant's share rises to 100 percent, of course. But this is counterbalanced by purchase payments by immigrants that are necessarily financed by higher-than-average saving. Hence, the result should be the same whether this is explicitly shown in the model or implicitly, as in the present model. 4.1As is shown by the long but fruitless controversy over the extent to which corporate taxes are passed on to the consumer, it would not seem sensible to discuss whether or not the taxes paid to government--corporate and "indirect"--come out of capital's "full" share; no definition of "capital's full share" would seem to make sense here, as these two considerations show: (l) No economist would like to argue that capital's "full" share is capital's "just" share. (2) The share of the output that capital would receive if government took no taxes is not obviously different (to a first approximation) from the share that capital receives after taxes, because one may assume that capital owners will bid up to the margin for the immigrant's services, and their marginal calculations will include the tax effects of hiring the immigrant. So there is little reason to argue that the share which capital actually receives is different than an idealized "capital's share" or "capital's full share." 5 More generally, valuation of output in the public sector is necessarily a vague concept here, as elsewhere. It is hard to imagine how one would identify the marginal product. Luckily, however, the subsequent analysis is so broad that it would not be affected by any conceivable way of construing valuations here. Distributional effects are not considered here. In thinking about that topic, it is important to keep in mind that the "worker" class actually obtains much of the returns to capital through capital ownership by pension funds. 6Usher's calculation is for the U.K., whereas this calculation is for the U.S., but that difference is a minor matter in this context 7 Fred Giertz suggested this. 8We shall assume that the bonds are amortized at a constant rate over their lives, that is, equal payments in each period until retirement, in the manner of a house mortgage. In reality, a given bond issue is floated with bonds of a variety of maturities, and the tax burden declines as more bonds are retired. But the constant-amortization assumption surely is a satisfactory approximation for our purposes here. 86-83 Captl7 12/30/87 AFTERWORD A TO CHAPTER 7 THE EFFECTS OF IMMIGRANTS' REMITTANCES UPON U. S. RESIDENTS Perhaps the least substantial objection to immigrants is that the remittances they send out of the country cause loss to natives. Yet a Commissioner of the INS writes: "There are other costs which are hidden and unmeasurable. It is estimated that illegal aliens send about $3 billion each year out of the country" (Chapman, 1976, p.7). And the Select Commission staff said: "[L]arge-scale removal of U. S. dollars in the form of remittances constitutes a drain on the economy and adversely affects U. S. balance of payments" (Staff Report, p. 518). A remittance does no more harm to natives than does the same sum spent within the United States, and may under some circumstances cost natives less; on this point I believe that there is general agreement among economists. Consider first the possibility that the remittance is not spent in the home country or elsewhere, but rather is simply hoarded in the form of dollar bills under a mattress. In that case, the U. S. is a clear beneficiary because it has gotten the labor of the immigrant without having to trade any goods for it; if never spent, the dollar bills are simply cheap printed paper. The more likely possibility is that the foreign recipient spends the dollars on imported American goods: the result then is just the same as if the immigrant bought the goods in the U. S. and carried them home. There are no other possibilities than these two. Converting the dollar into other currencies only lengthens the chain of events. One may wonder about the political effect of another country holding a great many dollars. The mercantilist theorists before Adam Smith, and more recently Charles de Gaulle, thought that a stock of another country's money implied power over that country. Such a hoard (and a consequent payment "deficit" elsewhere) may create the basis for righteous jawboning of one country by another. But it constitutes no real power. Rather, the debtor tends to have power over the debtholder, as the world saw in the 1980's with respect to Poland, because the creditor is dependent upon the goodwill of the debtor for repayment. Furthermore, the longer the dollars are held outside of the United States, the more the benefit to the U. S. from being able to have the use of the resources before they are claimed. To dramatize the matter: If you will give me $1,000 in cash now, I'll be delighted to give you a written promise to pay you back any time you like. I can deposit the $1,000 in a money market fund and receive the interest. What will you gain? You have no power to force me to do your will in other ways, because the instant that you ask for your money I will draw the cash from the money market fund and pay you back, leaving me a gainer. And so it is with remittances. They do no harm to the U. S., while enabling less-well-off persons abroad to obtain some purchasing power and assets that they would not acquire otherwise. One might wonder about the effect upon the balance of payments. The analysis must be given because the issue comes up frequently in discussion, but at the end I will conclude that the analysis is not very important because the forces it encompasses with respect to illegals have little effect upon the balance of payments. Therefore, you may sensibly choose to proceed to other topics. If many dollars are sent abroad, and foreign businesspeople do not want to trade other currencies for the dollars because they do not find desirable U. S. export goods at prices set at the current rate of exchange, the dollar will fall in value relative to other currencies. There are two possible ill effects of this fall. First is the psychological effect that the U. S. may seem to be "slipping"; perhaps because a fall in a country's currency may also stem from a relative decline in productivity. If one is terribly concerned about his/her country's image in this way, then one may be willing to pay a price in foregone trade benefits to avoid the image, as de Gaulle apparently was. The other ill effect is that the dollar will not buy as much abroad as if it had greater value. But opposed to these ill effects is the benefit that it is easier to export if the dollar has a relatively low value, an effect sufficiently desirable that at various times countries have gone to extraordinary lengths to reduce the value of their currencies. The simple fact is that some people will wring their hands whether the dollar goes up, and some will wring their hands when it goes down. But the level of the dollar will not depend upon the presence of illegals or their remittances home; it will depend upon monetary and productivity variables in the U. S. and in other countries. The balance of payments simply is not an important issue with respect to immigrants, nor are remittances generally. Table 7-1 PUBLIC CAPITAL INVESTMENT AND FINANCING IN THE UNITED STATES, l977 (from Simon and Heins, 1985?) Authors' Preferred Magnitudes for l977 Billions of Current Dollars (circa 1977) l) Interest on debt, all governments, l977 (Stat. Abs. l979, p. 284) 46.3 2) Education, total capital outlay, all governments (p. 288) 9.237 Highways, total capital outlay, all governments (p. 288) l2.565 3) Health and hospitals, total capital outlay, all governments (p. 288) 2.667 4) Sewerage, total capital outlay, state and local (p. 288) 4.208 5) Local parks, recreation, construction only, state and local (p. 288) .769 6) Housing, urban renewal, construction only, state and local (p. 288) l.085 7) Air transport, construction only, state and local (p. 288) .5l3 8) Water transport, construction only, all governments (p. 288) .57l 9) Local utilities, total capital outlay (p. 288) 6.l07 l0) Miscellaneous ("all other" is source, p. 288), state and local 6.l24 ll) Total, lines 2-l0 43.876 l2) Increase in debt, l976 to l977, all governments (pp. 292 and 254) 73.8 Some Other Magnitudes for Comparison l3) City governments, capital outlay on construction and equipment (p. 307) l0.690 l4) State government, capital outlay on construction (p. 300) l3.620 l5) State governments, capital outlay on equipment (p. 300) l.477 l6) State and local governments, total construction put in place (p. 773) 30.855 l7) Private construction, total, put in place (p. 773) l35.826 l8) Gross private, fixed domestic investment, non- residential (p. 437) l90. l9) Gross private fixed domestic investment, residential (p. 437) 92. 20) Gross private fixed domestic investment, total (p. 437) 282. Note: The capital-outlay data are gross, whereas the appropriate data are smaller net data. References R. Albert Berry and Ronald Soligo, "Some Welfare Aspects of International Migration," Journal of Political Economy, 77:778-94, Sept./Oct. l969. George H. Borts and Jerome L. Stein, Economic Growth in a Free Market (New York: Columbia University Press, l966). Quoted by Usher, l977. John W. Kendrick, et. al., The National Wealth of the United States (New York: The Conference Board, March l976). Julian L. Simon, "The Economic Effect of Russian Immigrants Upon the Veteran Israeli Population: A Cost-Benefit Analysis," The Economic Quarterly, 23, August l976, pp. 244-253, (in Hebrew). Julian L. Simon, "The Really Important Effects of Immigrants Upon Natives' Incomes," in Barry Chiswick (ed.), Conference on Immigration, (Washington: American Enterprise Institute, forthcoming). Julian L. Simon, "What Do Immigrants Take From, and Give to, the Public Coffers?" done for the Selection Commission on Immigration and Refugee Policy, August, l980, to be published in Spring, l98l. Dan Usher, "Public Property and the Effects of Migration Upon Other Residents of the Migrants' Countries of Origin and Destination," Journal of Political Economy, Volume 85, l977, pp. l00l-l026. *Re Chapter 8: I appreciate comments from Herbert Grubel, Warren Sanderson, Oded Stark, Dan Usher, and a Hoover Institution seminar group. This chapter is an abridgement of an article written jointly with A. James Heins (forthcoming), and I am grateful for his permission to use the material in this form. 86-83 Captl7 1/15/87 86-83 Captl7 11/6/86 "Income Dist Chapter?" There is no doubt that workers in some industries suffer immediate injury from the addition of workers in the same category. But exactly the same may be said about those workers if more of the goods that they make are imported from abroad. And in many cases immigration is a substitute for production abroad because of restrictions on imports, as in the case of vegetables grown in the U. S. near the Mexican border. Therefore, it would seem reasonable that the two sorts of complaints for the same special interests should receive the same sort of sympathy--or lack of it. And it might seem appropriate to suggest that one source of melioration of the position of low-skill workers who suffer from increased competition would be an increase in the number of high-skill immigrants which would increase the complementary demand for low-skill workers. Therefore those writers who oppose immigration in general on the ground that it injures low-skill workers (which is not generally true of legal immigration) call their credibility into question if they are not prepared to urge an increase in high-skill or general immigration. Even if some group of persons in the economy suffer loss because of a disproportionate flow of immigrants into their sector, it might be shortsighted even for them as a group to conclude that they would be better off without the immigration. The immediate static "classical" effects are likely to be small relative to the dynamic effects mentioned below, and are likely to be small even relative to the immediate welfare-and-tax effect. It is this orientation away from the shortest run and toward the longer run which is crucial in getting a balanced view of the welfare effects of immigrants upon natives.