Sowell Applied Economics Thinking Beyond Stage One (revised and enlarged ed)

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lowlanders who went into agriculture in Australia came from an agricultural background in Scotland, whose agriculture was advanced by the standards of its time. But most of the Scottish shepherds in Australia were highlanders, repeating in their new homeland their occupational patterns in Scotland.

Although there were complaints back in the Scottish highlands that emigration had taken away the cream of the local working population, in Australia the complaint was that the highlanders were the dregs of the Scottish immigrant population. Given the circumstances of the times, there is no reason why both complaints could not be true. With the passing years, the proportion of highlanders among the Scottish immigrants to Australia declined, so that eventually more than 90 percent of the Scots arriving in Australia were lowlanders.

With immigration, as with so many other things, a crucial distinction must be made between causation and blame. No one can choose whether to be born in the uplands or the plains, either in Scotland or anywhere else. No one can choose what language or culture to be born into, though both can have profound effects on people’s prospects in life, whether at home or abroad. The inescapable facts of geography can likewise limit or promote opportunities. There was no way that an industrial revolution could have originated in either the Scottish highlands or in the mountains of the Balkans, since the raw materials needed were not present and high transportation costs made it prohibitively expensive to carry those raw materials there.

What this means more broadly is that there is little point in trying to analyze, or set legal policies for, “immigrants” in general— because there are no immigrants in general. Even groups that outside observers may lump together, whether Scots in the past or Hispanics today, can differ greatly from one segment to another. The economic history of Cubans in the United States has been very different from that of Puerto Ricans, just as the economic history of highland Scots and lowland Scots differed in the past. Moreover, the whole immigration process itself can change very substantially over time, so that the circumstances of twenty-first century immigration cannot be dealt with as if the issues that immigration raises

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today can be settled by referring to what happened with the immigration of a hundred or more years earlier.

Most immigrants to the United States prior to the middle of the twentieth century crossed an ocean from Europe and most had neither the means nor the desire to go back, so that the die was cast for them to become Americans. In the twenty-first century, however, the overwhelming majority of immigrants come from either Asia or Latin America and the latter, especially those from Mexico, can go back and forth innumerable times, never having to make a commitment to a new language or culture. The American society that receives immigrants today is itself very different from that of a hundred years earlier, not only in its technology, but also in its welfare state policies and in its social attitudes. The welfare state is even larger and more generous in Europe. According to The Economist:

Advertise for a cleaner in London at twice the minimum hourly wage, and you will get no response from local school drop-outs or Liverpool’s unemployed. More probably, the applicants will be from Ukraine, Colombia or Poland.

At one time, it was common for nations to make distinctions among the immigrants it would admit and those it would not, even subsidizing the immigration of people they deemed especially useful to their society and economy. Thus Brazil, though first settled by Portuguese immigrants, deliberately sought immigrants from outside the Iberian peninsula, notably Germans who pioneered in developing part of that country’s vast wilderness in the nineteenth century, as immigrants from Japan to Brazil were also to do. Canada, Argentina, and Australia have also been among the many nations which have subsidized the immigration of selected immigrants. In medieval Eastern Europe, whole enclaves of immigrants were recruited from Western Europe, mostly Germans, in order to bring to the less developed eastern regions of the continent some of the agricultural and other advances from the west.

After the Second World War, the policy of differentiating among immigrants from different countries tended to fall into disfavor, perhaps in reaction to the tragic consequences of the Nazi’s emphasis on race. The

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“white Australia” policy was repealed, for example, and in the United States the new 1965 immigration laws moved away from the restrictive national quota laws of the 1920s. Various nations in Western Europe likewise began opening up immigration from regions of the world with large nonEuropean populations, including many people from the former colonies of Britain and France. These new immigration policies brought both new benefits and new costs to the countries receiving this less restricted stream of immigrants.

Income Differences

Studies of both the mass migrations of European emigrants in the nineteenth century and of mass migrations of emigrants from Asia and Latin America in the twentieth and twenty-first centuries found that income differences between the country of origin and the country of destination were key factors in determining the direction and magnitude of migration. For example, during the era of mass migration from Europe, emigrants from the British Isles tended to settle in countries where real wages were, on average, 69 percent higher than in the United Kingdom. Over time, however, the transfers of millions of workers from Europe to the Western Hemisphere affected wage rates in both places, as the supply of labor fell in Europe and rose in the Western Hemisphere, leading to rising wage rates in Europe, while inhibiting the growth of wage rates on the other side of the Atlantic. A study of this era found “substantial per capital real income and real wage convergence in the late nineteenth century.”

The convergence of wages, brought on by mass emigration, became in turn a reason for reduced emigration as the pay differential declined. Emigration from Ireland, across the Irish Sea to England, across the Atlantic to Canada and the United States, and as far away as Australia, led to pay differentials between all these places and Ireland declining substantially in the nineteenth century, as pay in Ireland rose dramatically in the wake of large-scale emigration. As economic principles would suggest, the loss of labor relative to land and capital, led not only to an absolute increase of labor’s rate of pay but also to a rising share of Ireland’s national

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income going to labor and less going to the rent of land and to the return on capital. The net result was that Irish emigration declined.

A somewhat more complicated pattern in Italy highlights other economic factors involved in decisions to emigrate. Although there was also a declining pay differential between Italy and the various destinations of Italian emigrants abroad during the nineteenth century, emigration continued to rise. While the pay differential provides an incentive to emigrate, the cost of emigration is a deterrent, especially for the poorest of those who would like to emigrate. As pay rose in Italy in the wake of an exodus of workers, that put emigration within the financial reach of more poor people, who now added to the tide of emigration. The fact that the share of Italian emigration represented by people from the poorer south of Italy increased over the years reinforces this point.

These patterns of rising wages in countries experiencing massive emigration— which was typically an emigration of young adults with high labor force participation rates, whose departures had an especially strong effect on the labor supply— were not confined to Ireland or Italy. Wages rose dramatically in Sweden, as labor flowed out and capital flowed in. For Western European nations as a whole, a statistical analysis showed “the real wage gap between Old World and New fell 36 percentage points over the 25 years up to 1895, and by 49 percentage points over the 43 years up to 1913.” However, in the poorest Third World countries today, a rise in income may have an effect similar to that in nineteenth-century Italy— that is, it may enable more of the poorest people to be able to afford to emigrate.

Economic Benefits to Recipient Countries

On the whole, there have been both benefits and costs to the immigrants and to the countries that received them. These have varied greatly, depending on which immigrants, which countries, and which periods of history.

Whole new industries have been created by some immigrants. There was, for example, no watch-making industry in England before the Huguenots fled religious persecution in seventeenth-century France and

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brought with them to London their skills as watch-makers. This turned England into one of the world’s leading watch-making centers, much like Switzerland, to which many other Huguenots fled. Virtually the entire modern industrial, commercial, and financial sectors of colonial Malaya’s economy were created by foreigners— immigrants from China and India supplying most of the labor on the rubber plantations and tin mines, as well as setting up small-scale retailing and money lending businesses, while enterprises requiring large-scale investment, such as shipping, were financed and run by Europeans. German immigrants built the first pianos in Russia, as well as in England, France, and colonial America.

Lebanese immigrants created retail networks in the West African hinterlands of Sierra Leone and the Ivory Coast, as immigrants from India and Pakistan dominated retail trade in both the hinterlands of East African nations such as Kenya and Uganda and in urban centers such as Nairobi. Jews have for centuries dominated the apparel industry in countries as different as Argentina, the Ottoman Empire and the United States, as Germans have dominated beer production from the United States— where all the leading brands were created by people of German ancestry— to China, where that country’s famed Tsingtao beer was also created by Germans. Similar examples of immigrant contributions could be cited for many other immigrant groups and many other countries in which they settled.

At one time, it was common to openly recognize the particular skills, talents, or work habits of particular groups, and even to selectively subsidize the immigration of such groups, for the benefit of the receiving country. Japan deliberately imported Scottish engineers in the nineteenth century to aid their industrialization, so much so that there was a Scottish church in Japan at one time. Other specialists from Europe and the United States were also brought in to help establish various industries in Japan, as sojourners there during Japan’s rise from an agricultural to an industrial and commercial society.

The Japanese, however, have never encouraged or permitted large numbers of immigrants to stay in their country on a long-term basis. Japan has thus remained one of the most racially homogeneous of modern

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industrial nations. One of the few comparable examples would be Australia during the era of the “white Australia” immigration policy that ended in the latter part of the twentieth century. However, even during the era of the “white Australia” policy, that country permitted immigration from many countries across the European continent. But Japan’s more narrowly exclusive and still continuing policy has never provoked the kind of international condemnation that Australia’s immigration policy once provoked.

Isolated episodes in history do not provide as general or as reliable an account as hard statistical data on immigrants. In the United States, for example, the approximately 10 million immigrants who entered the country between 1820 and 1880 were largely from Western Europe or Northern Europe, while most of the 26 million immigrants who entered between 1880 and the legal restrictions on immigration in 1924 were from Eastern Europe or Southern Europe. Another major change in American immigration law in 1965 was followed by an even more dramatic change in the geographic origins of immigrants, as most thereafter came from either Latin America (51 percent by the year 2000) or Asia (26 percent). Immigration from Europe fell to about 15 percent of all immigration to the United States, that whole continent now sending fewer immigrants than Mexico alone (28 percent). The change, however, was more than geographic.

In the years preceding the changed immigration laws of the 1960s, the average immigrant earned higher pay in the United States than the average native-born American. But, thereafter, successive cohorts of immigrants fell successively below the income of the average American. One factor was that the education gap between post-1960s immigrants and the average American widened. By and large, both had growing amounts of education but native-born Americans much more so than immigrants. Not only geographical origins but social origins had changed and that was reflected in widening pay differences. By 1990, the average pay of immigrants from Mexico was 40 percent below that of the average American.

In short, the changing American immigration laws led to a changing mix of immigrants, letting in more people with lower levels of skills and

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education at precisely the time when the American economy’s growing demand was for more people with more skills and more education, and when the differential pay of people with more education and less education was widening, for both domestic and immigrant workers. That this was a result of immigration laws is underscored by the very different experience of Canada during the same era. Canadian immigration laws gave preference to those who had more education, had fluency in English or French, and who were in occupations deemed more important to Canada. The net result was that immigrants to Canada had higher skills and higher wages than immigrants to the United States. The mix of these immigrants’ countries of origin were also different, as a consequence of different economic and cultural criteria, rather than national quotas as such.

During the second half of the twentieth century, Western European nations pioneered in creating “guest worker” programs for immigrants who would come in and take jobs that were not attracting sufficient applicants from the native-born population— at the existing pay scales. Employer benefits were often represented politically as net benefits to the nation, implicitly assuming that the unskilled vacancies would go unfilled otherwise, rather than simply leading to higher pay scales, as in other cases of temporary imbalances between supply and demand. The combination of employer self-interest and the philosophic commitments of multiculturalists proved to be powerful, and those opposed to more open immigration policies were marginalized, often as “xenophobic” or “racist.” While a poll conducted by the Chicago Council on Foreign Relations showed that 60 percent of the American general public ranked the large numbers of immigrants and refugees coming to the United States as a “critical threat,” only 14 percent of elite opinion-makers saw it that way.

Typical of the new attitude toward assimilating immigrants was a comment by the head of the U.S. Bureau of the Census during the Clinton administration: “Without fully realizing it, we have left the time when the nonwhite, non-Western part of our population could be expected to assimilate to the dominant majority. In the future, the white Western majority will have to do some assimilation of its own.” Such views— and the condescending and peremptory tone in which they were expressed—

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have become fairly typical of elite opinion across the political spectrum, from liberal or radical publications like The Nation magazine to conservative publications like the Wall Street Journal.

Similar views prevail among elites in Britain, Australia and other Western nations, and the public backlash in a number of countries in Europe, as well as in America and Australia, is often discussed dismissively by the elites. In Britain, a 2007 article in The Economist magazine discussed immigration without a single mention of riots or terrorism committed by immigrants and treating resistance to more immigration as sheer inexplicable narrow-mindedness:

Cast your eye around Europe, and you find a funk about foreigners. Denmark’s voters have given the anti-immigration Danish People’s Party its fourth successive rise in voting share. The Swiss gave 29% of their votes to the xenophobic Swiss People’s Party. An anti-foreigner party is the second-biggest in Norway. A fifth of Flemish voters in Belgium back the far-right Vlaams Belang.

Over the years, public opinion has proven to be more subject to change in the light of changing facts than has elite opinion. In Australia, for example, in 1961 only 16 percent of the public thought the country was accepting “too many” immigrants. But, thirty years later, after Australia had accepted so many immigrants that one-fourth of the entire population of the country was born in some other country, 73 percent of the public said that “too many” immigrants had been admitted. Moreover, in Australia as in other Western nations, these new immigrants often do not seek to become part of the larger Australian society. As an Australian scholar, himself an immigrant, put it:

To a much greater extent than previously, migrants now come from a growing diversity of cultures and failing economies. Some display hostility to Western values and mores and adhere to modes of behaviour that are counterproductive in a Western context.

In Australia, as elsewhere, the same scholar noted that debates about immigration policy are often marked by “a tendency to cast open

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immigration and official multiculturalism as a position that distinguishes the ‘right-minded’ from the ignorant, ignoble rest.”

In a number of prosperous Western nations, demographic trends reinforced the arguments for “guest workers” from poorer countries. As the median age of the population rose in Europe, exceeding 40 years in Germany and Italy, while many Third World countries had median ages of around 20, or sometimes even lower, as in Yemen or Afghanistan, the argument was made that someone had to provide the services usually provided by young people. Another economic argument was that someone had to pay into the government pension systems, which were financed by taxes on the working population to pay older people who were retired. Thus the welfare state, multiculturalism, employer interests, and underfunded pension systems combined to make more open immigration policies seem not only desirable but imperative.

The real question is not have particular interests or institutions benefitted from immigration but have the countries as a whole benefitted economically from immigration. The Economist advanced a familiar argument: “Clearly immigration makes the economy bigger by adding to the workforce,” leading to more total output. However, that does not say that this increased output adds to the real per capita income of the existing citizens. Recognizing that this is “what matters,” The Economist estimated that an increase in the Gross Domestic Product per capita as a result of immigration “will probably be around an eighth of a percentage point” for Britain. The question is whether the costs imposed by immigration are enough to offset that, whether for Britain or in other countries.

Costs to Recipient Countries

Various attempts have been made to calculate the net costs or net benefits of immigrants to the United States by counting the taxes they pay, the contributions they make to Social Security, and other benefits they provide, versus the costs they entail through increased welfare spending, the costs of schooling their children, and the disproportionate numbers of immigrants among prison populations. Different studies have arrived at

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very different conclusions, some concluding that immigrants have a net positive effect economically of some billions of dollars, while other studies conclude the opposite, that immigrants impose billions of dollars of additional burden on American taxpayers. Much depends on the implicit assumptions behind the analysis of the relevant statistics. Similarly conflicting conclusions have come from attempts to determine whether immigrants tend to cause American workers in general, or low-income workers in particular, to have lower pay levels than they would have had otherwise.

Considering the strong evidence on the effect of massive nineteenth century European emigration in narrowing the gap between wages in Europe and wages in the countries to which Europeans were immigrating, it might be expected that there would be similarly clear evidence on the effect of contemporary immigration to the United States on either the incomes or unemployment rates of American workers in general, or lowincome workers in particular. But here, again, studies have reached conflicting results. Part of the problem in this case is that many of the studies have been local area studies in places with large concentrations of immigrants. While workers in those particular areas may not be much affected, if ample supplies of immigrant workers have kept wages low in a particular area, that provides an incentive for American workers in similar occupations to avoid moving to such areas or to leave such areas if they lived there before. Thus a lack of a substantial pay differential between immigrants and those native-born workers remaining within the locality does not necessarily mean that immigrants have had no effect on American workers as a whole.

Part of the problem of determining the net economic effect of immigrants in general is that there are no immigrants in general and that the economic and cultural characteristics of immigrants from different countries and different regions of the world differ greatly in such things as education and job skills. Moreover these differences have varied greatly over time. Before the 1960s, immigrant men had higher pay levels in the United States than the pay levels of native-born American men. But, since the changed immigration laws of that decade led to changed origins of