What You Need to Know About Immigration and the Deficit

President Barack Obama (center) delivers remarks during an event in support of the Senate's bipartisan immigration reform bill at the White House in Washington, D.C., June 11, 2013.
President Barack Obama (center) delivers remarks during an event in support of the Senate’s bipartisan immigration reform bill at the White House in Washington, D.C., June 11, 2013.

Photo by Jim Watson/AFP/Getty Images

Yesterday afternoon’s Congressional Budget Office score of the Senate immigration legislation is big news, but at the intersection of political controversy and complicated economic modeling lies a lot of confusion. Here’s are some questions and answers:

Will the Gang of 8’s bill reduce the deficit? Yes. The official score in the official scoring window is for $197 billion in deficit reduction over the next 10 years.

Isn’t it a cop-out to do a 10-year estimate? Aren’t we just pushing costs into the long term? No. Ten-year scores are canonical for procedural reasons, but the CBO also offered a provisional score for the next 10 years and found increasing deficit reduction punch, to the tune of about $700 billion.

Is the CBO actually any good at estimating these things? Shouldn’t I feel free to ignore scores that contradict my prior partisan commitments? Feel free to do what you like! But here’s the truth. The CBO’s 10-year point forecasts of where the deficit will be are terribly inaccurate because to do these forecasts accurately you would have to do 10-year macroeconomic forecasts accurately. Nobody knows how to do this and if you did figure out a way to do it accurately you’d quit your job at the CBO and go work on Wall Street. My suspicion, however, is that it’s actually impossible. But if you look back at the CBO’s track record, they’re quite good at scoring the budgetary impact of legislative changes. Long story short, there’s considerable uncertainty about these things but this counts as real evidence.

What’s all this I’ve heard about “dynamic scoring”? Mostly it’s just people being cute. Standard CBO practice when evaluating legislation is to look at pure budgetary impacts without considering the impact on economic growth. But since the essence of immigration reform is to alter the number of people residing in the United States, applying a pure static score would be nonsensical. In a static score all you’d get is the cost of extra border enforcement minus the revenue generated by guest worker application fees. Obviously the real fiscal costs relate to the presence of extra people in the country and the real revenue benefits also relate to the presence of extra people in the country, so the CBO has to account for the fact that immigration reform grows the population and the tax base.

So is this the same “dynamic scoring” conservatives like when it comes to taxes? No. The canonical dynamic scoring controversy is that conservatives don’t like static scores of the fiscal cost of tax cuts because they believe tax cuts induce economic growth that boosts revenue. To do the kind of dynamic scoring conservatives want, you’d need to be able to accurately and comprehensively model the systemic economic consequences of a change in tax policy. Or, in this case, immigration policy. And then you could look at the budgetary impact of those systematic changes. But this is not the way the CBO scored the immigration bill, and it’s not the way they score tax bills either.

But did they look at the larger economic consequences? They did in this exciting annex. It’s worth emphasizing that the ferocious immigration debate tends to obscure the extent to which immigration economics is not actually controversial. Read the work of restrictionists’ favorite economist and even he concedes that increased immigration raises average nominal incomes for native-born Americans. It is also beyond dispute that the price impact of immigration tends to raise real incomes for native-born Americans. The controversies are about exactly how are the gains distributed and what is their scale.

So this means the CBO is underestimating the level of deficit reduction, right? Right. In addition to making the economy larger by adding people, reform will raise average incomes. Since America has a progressive tax-and-transfer system, higher average incomes reduce the deficit.

And aren’t we supposed to calculate deficits as a share of GDP? Yes. A law that increased GDP in the 10- and 20-year horizons improves the deficit picture as long as it grows the deficit more slowly than it grows the economy. In other words, if you look at the deficit impact of immigration reform as a ratio it looks even better.

Deficit blah blah blah—isn’t this a terrible way to think about the issue? Sort of. Deficits are in, so we’re talking about deficits. But the important thing is that this legislation decreases the deficit by growing the economy. It’s not an austerity measure. It’s a growth measure. And it’s structured in a sustainable way. Another way to think about it is this. Between population aging and rising health care costs, the status quo U.S. welfare state does not appear to be fully sustainable over the long term. The CBO is telling us that this immigration bill will increase the sustainability of the welfare state. That’s important because the key economic criticism of the bill is its allegedly malignant distributional impact on working-class Americans. The fact that comprehensive immigration reform will make it easier for working-class Americans to get generous Social Security and Medicare benefits when they retire is an important counterpoint to this narrative. It’s not a genuinely Pareto Optimal legislative proposal that will benefit every single person in the country, but the existence of federal retirement programs ensures that the benefits are quite widely spread.

What’s missing in this analysis? Two things. One is the fiscal impact on state and local governments. This could be positive following the same basic logic as the positive fiscal impact on the federal government, but it also might be negative. The other is the impact on the labor supply of native-born workers. There is some research indicating that an influx of working-class immigrants led to an increase in educated women’s labor force participation—presumably more working moms due to a greater supply of maids and nannies. The economic benefits of this are potentially quite large, but I haven’t seen the issue comprehensively studied.