Let Them In_ The Case for Open Borders - Jason L. Riley [40]
Even if you accept the Borjas model that shows that low-skilled immigrants sometimes depress the pay of low-skill natives, it means they’re also increasing profits, other things being equal. Greater profits tend to raise rates of return on investment, which leads to a larger supply of loan-able funds, lower interest rates, and more capital formation. Nativists ignore these secondary and tertiary effects, preferring static-model half-truths to more dynamic assessments. But conservatives know better, or should.
Supply siders have for decades been critical of the way federal agencies like the Congressional Budget Office and the Joint Committee on Taxation estimated, or “scored,” the effects of tax cuts on revenue without figuring in their effects on the overall economy. And rightly so. Under static modeling, for instance, if a state doubles its cigarette tax, it will double its revenue from that tax. But that doesn’t take into account, as a dynamic model would, the fact that the tax increase will affect behavior. Some smokers, for example, may quit or smoke less. The tobacco taxes they previously paid would be lost to the state, offsetting some of the additional revenue anticipated by increasing the tax rate. Similarly, a tax cut might not result in a revenue reduction if it stimulates more economic activity.
The debate came to a head in the 1980s during the Reagan administration. Due to budget rules, it was difficult politically to advocate tax cuts because they represented revenue losses, according to static scoring. Conservatives became vocal proponents for a more dynamic analysis of the proposed Reagan tax cuts. The Gipper got his tax cuts and proved the static scorers wrong. The top tax rate in the United States fell from 70 percent in 1980 to 28 percent in 1988, while income tax revenues swelled by more than 54 percent. When President Bush halved capital gains taxes in 2003, the static models once again predicted disaster, yet another revenue surge ensued. Receipts in 2005 were the highest in more than twenty years.
When it comes to the economic impacts of immigration, however, some conservatives toss dynamism out the window. It doesn’t matter if immigrants, who are both potential employees and potential customers, help expand the economy. Robert Rector, the welfare scholar at the free-market Heritage Foundation, has published a number of influential papers arguing that the measure of a Manuel is the difference between what he pays in taxes and receives in public benefits. Period. Rector maintains that low-skill immigrants are layabouts who “assimilate to welfare,” generation after generation with no hope of upward mobility, and his reports and testimony before Congress in 2007 became grist for talk radio and cable news populists.
The Wall Street Journal editorial page picked apart Rector’s arguments, as did free marketers like Daniel Griswold of the Cato Institute. Census data, among other indicators, show that immigrants significantly increase their earnings after arriving in the United States, which suggests they’re assimilating to the workforce, not welfare. Even liberals can see this, and they didn’t hesitate to critique Heritage’s scare mongering by employing a dynamic approach to the readily available fiscal data. Ultimately, the think tank was hoisted by its own analytic petard.
But first, some background. Along with other conservative outfits like the National Center for Policy Analysis and the Institute for Policy Innovation, Heritage helped pioneer the use of dynamic analysis. Whether the issue was trade liberalization or tax policy, free-market conservatives regularly mocked economic studies that took into account only static impacts. “[No] matter how many times a ‘static’ analysis is disproved,” Heritage Foundation president Ed Feulner once wrote, “Congress keeps doing business in the same wrongheaded way.” When President Bush’s 2007 budget proposal included a plan to create a Dynamic