This article was first published in Perspectives on the
BY JOHN PRICE
The growing populist sentiment in the United States against illegal immigration likes to point out that not only do these migrants steal U.S. jobs, they also send $50 billion back to Latin America each year instead of spending it in the United States. In fact, the approximately $2,000 per year sent home by the average working illegal migrant is less than 15 percent of what he earns in the United States and far less than what he contributes to the U.S. economy. A lesser known fact is that wealthy Latin Americans hold $1.9 trillion in U.S. assets and inject more than $100 billion in new investment each year into the U.S. market, more than all remittances, direct foreign investment and aid combined that flows from the United States to Latin America.
The notion that the U.S. government or the American consumer is subsidizing Latin America and its émigrés is factually wrong. The truth is the reverse - Latin America and its migrants are subsidizing the American way of life, not to mention the U.S. federal government deficit.
THE UPSIDE OF CHEAP LABOR
The economic impact of illegal immigration in the United States is a debate that has simmered for more than a decade. It is largely accepted that the discounted wages earned by illegal migrants serve to depreciate or freeze the wages of America’s lowest-skilled labor. Ostensibly, those lower wages raise the profitability of the labor-intensive industries where they work and provide significant savings to all American consumers when those savings are passed on by business.
In 2004 the Washington-based Center for Immigration Studies published what many regard as the most objective and quantifiable study of the economic costs of illegal immigration. The High Cost of Cheap Labor – Illegal Immigration and the Federal Budget provides a detailed analysis of the direct taxes paid and federal budget costs borne by American households headed by illegal immigrants. The study concludes that the average illegal household costs the federal government $2,736 more in federal outlays than it produces by way of direct tax revenue, or in aggregate terms, a $10.4 billion federal tax deficit.
The cost side of the study’s analysis is very thorough and includes the attribution of indirect federal costs, such as infrastructure (i.e., road building, ports) and the justice system, to these households. The cost analysis demonstrates that households led by undocumented workers cost the government more than the average U.S. household in food assistance, welfare programs, treatment for uninsured and education, all reflecting the higher number of children born into an undocumented household versus the U.S. average. What the study fails to point out is that a large percentage of those children are U.S. citizens, having been born here, even while their parents are illegal immigrants. Furthermore, those children will grow into tax-paying adults, a vital ingredient in the future viability of the U.S. tax system, given the low birth rates among American-born parents.
The study goes on to point out that undocumented workers tend to shun many of the federal spending programs such as social security, cash welfare programs, Medicaid and veteran benefits, even while contributing to each.
The most glaring critique of undocumented workers that emerges from the analysis is the fact that they cost the U.S. taxpayer $791 per undocumented household in terms of Immigration and Naturalization Service enforcement, court proceedings and jail time. Most of these costs, however, come from the very enforcement of an outdated and unrealistic immigration policy.
Last but not least, the study presumes that legal households generate a balanced budget, in contrast to the $10.4 billion deficit caused by illegal immigrants. Yet, in 2002, the U.S. federal budget recorded a $158 billion deficit, equal to $1,450 per household.
Even with its obvious flaws in detail, the study fails to address the strongest fiscal and financial arguments in support of the role of immigrant labor, which fall outside the cost side of the tax ledger. The tax revenue contribution attributed to undocumented workers misses the mark precisely because it focuses exclusively on taxes paid by these people, who in large numbers work in the untaxed cash economy. It fails to recognize the additional taxable business profit generated by the discounted wages of 7.2 million productive illegal immigrants or the additional savings to consumers that is spent on taxable goods. Excluding the positive economic impact of lower undocumented migrant wages from the equation is like declaring the 8.1 billion hours of free service by America’s 61 million volunteers as economically irrelevant.
Illegal migrants work mostly in the agriculture and construction industries. The National Homebuilders Association reported that in 2002, the average new American home cost $298,412, of which $68,000 was spent on the labor portion of the house. In a study by Barry Chiswick of the University of Illinois in 2003, he estimated that the 14 percent of the construction labor force made up of illegal workers provides a $5,000 per household savings to homebuilders. In 2002, 1.6 million homes were built in the United States, so roughly $8 billion in additional profit was realized by home builders or saved by consumers, equal to 7.3 percent of the labor cost of U.S. home building (i.e., undocumented construction workers cost employers half the normal rate). In the $118 billion U.S. agriculture industry, illegal immigrants, who make up 24 percent of the labor force, helped save U.S. farmers and/or consumers approximately $6.8 billion.
Illegal immigrants provide a significant bottom line impact on many service industries across the country. They represent 15 percent of the cleaning workforce and 12 percent of the food preparation workforce but reach as high as 47 percent of the meat-packing industry and 44 percent of the horticultural sector. Wherever present, illegal workers push down the cost of menial labor, providing savings to business and consumers. According to the Pew Research Center, America’s 7.2 million illegally immigrated workers make up 4.9 percent of the nation’s workforce. Assuming that illegal labor normally works for ½ of the fully burdened cost of documented workers (including employment taxes and insurance), then their collective work effort generates an estimated $64 billion in savings, the spoils of which are divided between business and consumers. If employers hoard the savings for themselves, they pay an additional $12.9 billion in business taxes to Uncle Sam. If all those savings are passed onto consumers, then every American can thank their Mexican handymen and gardeners, Ecuadorian kitchen staff, Colombian nannies, and Honduran fruit-pickers for approximately $215 per year the hard work of those people saves them.
What these numbers reveal is what hard-working Latino workers have always known – that they contribute far more to the U.S. economy than they cost.
LATIN CAPITAL FEEDS U.S. BUSINESS
Most U.S. consumers and even lawmakers think of Latin America as a desperately poor region that exports people and sucks aid monies out of Washington. As the debate on Capital Hill reaches a fever pitch, the rhetoric is beginning to emulate the likes of Pat Buchanan who in 2004 infamously remarked:
Half the 100 million Mexicans are still mired in poverty. Tens of millions are unemployed or underemployed. Because of devaluations, real wages are below what they were in 1993. Thus the great migration north continues. Some 1.5 million are apprehended every year on our southern border breaking into the United States. Of the perhaps 500,000 who make it, one-third head for Mexifornia, where their claims on Medicaid, schools, courts, prisons, and welfare have tipped the Golden State toward bankruptcy and induced millions of native-born Americans to flee in the great exodus to Nevada, Idaho, Arizona, and Colorado. Ten years after NAFTA, Mexico's leading export to America is still—Mexicans.
Not only are Buchanan’s facts distorted, but he and others fail to recognize the financial input of Latin America’s wealthy, who more than their counterparts in any region in the world continue to invest in the United States. The 2006 CapGemini / Merrill Lynch World Wealth Report showed that Latin America’s High Net Worth Individuals (HNWIs) held $4.2 trillion dollars of financial wealth, or 12.6 percent of global financial wealth attributed to HNWIs, defined universally as individuals with more than $500,000 in investable assets. Latin America may be poor but it is simultaneously the source of great, albeit concentrated, wealth.
Latin America’s history of economic volatility marked by treacherous devaluations has taught the region’s wealthy to protect their future by investing abroad. An estimated 46 percent of financial wealth held by Latin American elites is invested in U.S. financial assets, a relatively conservative portfolio of equities (30 percent), U.S. treasuries and other fixed-income instruments (21 percent), cash and deposits (13 percent), real-estate (16 percent) and alternative investments including hedge funds, REITs and others (20 percent). Unlike European and Asian elite investors who moved a large portion of their portfolios out of the United States over the last five years thanks to stronger growth in Asia and an appreciating Euro, Latin American investors are the most loyal of all foreign investors to the U.S. market. No one, save the Americans themselves, invests more of his or her wealth in the United States than Latin Americans. In spite of moderate growth in U.S. equity markets in recent years, the United States still captures one-third of non-American wealthy individual financial investment, about $8 trillion dollars, slightly more than the combined U.S. assets of American HNWIs ($7 trillion). Incredibly, Latin America supplies one-fourth of that international financial lifeline to the U.S. economy. That portion may grow over the next two years given that HNWI from Latin America are expanding their wealth at a faster pace (26 percent in 2006) than any region in the world.
DO NOT TIE THE HAND THAT FEEDS
As U.S. lawmakers struggle to design an immigration policy that functions in the 21st century, they would do well to abandon both the nostalgia of Ellis Island and the paranoia of isolationists and instead treat immigration, including illegal immigration, as an integral component of economic globalization. Immigration is vital to a country like the United States where a generation of low birth rates and under-funded math and science education has left the labor pool with holes at the top and bottom. U.S. business needs to import both highly skilled and menial labor in order to compete internationally. Without immigration, our two most competitive industries, information technology and agriculture, will lose market share abroad and jobs at home.
By restricting high-skilled work visas, limiting travel freedoms and generally failing to woo Latin America’s wealthy investors, U.S. immigration policy risks shunning a vital and loyal source of foreign capital. The estimated $2 trillion of U.S. investments held by Latin America’s wealthy classes is essential to a U.S. economy running on twin fiscal and trade deficits. U.S. equity markets have lagged behind others for the last three years. Surely this is not the time to be turning back at the door the single most important source of foreign investment capital (i.e., the savings of Latin America’s elite). Without access to U.S. travel, residence and investment, global investors will send their money elsewhere; funding businesses that promise to compete against the United States. Latin America has proven to be a valuable partner to the American economy, as a contributor of hard-working, unskilled and semi-skilled labor and an invaluable foreign investor. If the United States turns its back on its neighbors, it will only be doing itself a disservice.
John Price is the president and co-founder of InfoAmericas, an independent business intelligence firm in