Ezra Klein Strikes Out Big on Immigration and Demographics (link fixed)

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Saturday, 02 February 2013 08:17

Ezra Klein usually can be counted on for good insights on politics and the economy, however today's piece on immigration is the sort of thing that could have been on a press release from Fix the Debt. The basic point is to tout the virtues of immigration. While there are benefits of immigration that Klein rightly highlights, much of the piece veers off into the sort of pablum readers expect from the non-Klein portions of the Post.

This is especially the case where Klein dives off into demographics.

"The economic case for immigration is best made by way of analogy. Everyone agrees that aging economies with low birth rates are in trouble; this, for example, is a thoroughly conventional view of Japan. It’s even conventional wisdom about the U.S. The retirement of the baby boomers is correctly understood as an economic challenge. The ratio of working Americans to retirees will fall from 5 to 1 today to  3 to 1 in 2050. Fewer workers and more retirees is tough on any economy."

Klein then adds, "there’s nothing controversial about that analysis."

Actually everything about that analysis is controversial, including the basic facts. (Actually, these are just wrong.) The current ratio of workers to retirees is 2.8 to 1, it hasn't been 5 to 1 since the early 1960s. It is projected to fall to 2.0 to 1 by the mid 2030s.

This is not just a gottcha, it shows the fallacy of Klein's basic point. We have already seen a sharp decline in the ratio of workers to retirees, yet even people who follow the economy and economic policy closely, like Klein, were apparently not even aware of this fact. Since this decline is never cited as factor causing our current economic problems, why would we think the comparatively mild decline in this ratio projected for future decades will be a large burden?

The reality is that the benefits from even modest productivity growth swamp the negative impact of a declining ratio of workers to retirees. This graph compares the benefits of productivity growth to the negative impact of the projected demographic change over the next two decades. 

 

alt                                Source: Author's calculations.

These calculations assume that retirees benefits are equal to 85 percent of the average wage, an amount that is much higher than is actually the case in the United States. It is also worth noting that 2035 is the worst possible year for demographics, since after that date the ratio of workers to retirees stabilizes for the rest of the century. On the other hand productivity keeps growing.

Even in this worst year, in the worst case scenario where productivity growth averages just 1.0 percent (roughly the rate during the 1973-1995 slowdown), the gains from productivity growth between now and 2035 will be more than three times as large as the burden from the decline in the ratio of workers to retirees. In the case of 1.5 percent productivity growth, which is closer to what we have actually been seeing, the ratio of benefits to burden is 5 to 1. And, if we got back to our 2.0 percent golden age rate of productivity growth the ratio of benefits to burden would be over 7 to 1. In short, the arithmetic doesn't support the demographic disaster story.

There is a deeper issue on this one that just reflects a bizarre worldview. Many of us have noticed global warming and other ways in which the planet is straining from the impact of humans. As a general rule, fewer people will mean less strain. Why should we be troubled by a stagnant or declining population? It is especially bizarre that people claim this is a problem for Japan, which is a very densely populated country. 

It's true that a declining population means that labor will be in shorter supply. That means that the least productive jobs will go unfilled. That is the way economies develop and the reason that half of our workforce is no longer employed in agriculture. In the U.S. this would mean that we might have fewer restaurants and the convenience stores won't be open all night. In Japan, perhaps they won't be able to find workers to shove people into the subway cars in Tokyo. What's the problem?

Klein is correct that the arguments he lays out tend not to be controversial in Washington policy circles. But this is not a very thoughtful group of people. Remember these are the people who could not see an $8 trillion housing bubble. They have not gotten any more curious or creative in their thinking in the last 5 years.

This is not to argue against immigration or immigration reform. The way we treat people who came to this country to work, in accordance with policy (sorry, the folks in Washington knew we had immigrants working in the country off the books -- this was policy) is an outrage and is bad for the economy. However readers deserve a more serious discussion of the issues involved.

Some immigration to the country undoubtedly provides economic benefits. However in nearly all cases there will be winners and losers. For example, a large flow of immigrants at the low-end of the labor force will hurt the people who have recently immigrated to the country. Some of us may not consider that a good thing. On the other hand, a large flow of very highly educated immigrants, such as doctors, can get the wages of these workers more in line with the wages of professionals in other wealthy countries and provide large savings in areas like health care. (This is a great way to go for people who are worried about those long-term deficit projections.)