Wall Street Journal - July 22, 1999
How to Keep Growth Alive: Welcome More Immigrants
By Stephan-Götz Richter and Daniel Bachman. Mr. Richter is president of TransAtlantic Futures Research Institute. Mr. Bachman is the institute's chief economist.
In today's Humphrey-Hawkins testimony, Federal Reserve Chairman Alan Greenspan will tell Congress what, in his view, is the greatest threat to the U.S. economy. The likely villain? A depleted labor market, which could cause a dangerous rise in wage inflation. But if this really is the economy's Achilles' heel, then the Fed chairman can relax. Not only is there no shortage of labor, but so long as the U.S. maintains or increases its current immigration levels, there never will be one.
You don't have to be a historian to appreciate how crucial immigrants have been to America's economic growth. Less widely appreciated is the salutary effect immigrants have had on inflation. Between 1990 and 1998, 12.7 million jobs were created in the U.S. Of these, some 38%--about 5.1 million--were filled by immigrants. Immigration opponents say newcomers are "stealing" American jobs. In fact, had it not been for these immigrants, the Fed would long ago have had no choice but to tighten monetary policy in order to stem wage inflation. The result would have been a slowing of the economy--and more unemployment.
What this means is that, in the future, the proper conduct of immigration policy must become an integral component in the formulation of monetary policy. For now, though, very little needs to be done. The U.S. already has a mechanism for attracting skilled immigrants in the form of the H-1B visa system. Although currently too restrictive, this system helps alleviate serious shortages of highly educated workers--engineers, management consultants, computer programmers and so forth.
It is these people--along with the much larger number of low-skilled immigrants who also make it to these shores--who constitute the front line in the war against wage inflation. Why do they come? The answer is not far to seek. Elsewhere in the world, young people face dim economic prospects. They are fatigued by overregulation, high taxes, stifling career paths and barriers to new enterprise. Young Swedish executives, for example, have told company management in no uncertain terms that with personal tax rates in the 60% bracket, they see no future in Sweden. The same is true in Germany, Italy and France.
Open the pages of any business magazine in Europe, and you'll read sagas and how-to stories about the riches of U.S. Internet entrepreneurs. Better yet, you will read features about Frenchmen and Germans who made it big in Silicon Valley. You will read how they bought a one-way ticket to San Francisco and traveled there with nothing but an idea. Upon arrival, they worked feverishly to hook up with a venture capitalist and, in the wide-open U.S. marketplace, soon achieved success of a type impossible in the old world.
The same holds true for many young Asians. They often arrive here as graduate students--and have little inclination ever to head back home. Nearly one third of start-up companies in Silicon Valley are headed by an Indian or Chinese immigrant. Evidently, equity ownership has global allure. And, for now, there's only one place where it is really possible to start your own company and get rich: America.
Of course, all this could change. Policy makers in Europe and Asia might at last get serious about liberalizing their economies. And the U.S. economy might head south, especially through spendthrift fiscal measures and excessive taxation. But these are unlikely scenarios. What remains to be done is to ensure an adequate labor market, for which we need a smartly pursued immigration policy. With that, Mr. Greenspan can sleep tight.