Reihan Salam

The one budget proposal worth seizing

Reihan Salam
Mar 5, 2014 00:02 UTC

President Obama’s new budget for fiscal year 2015 is almost entirely free of surprises. The Obama administration supports a number of large tax increases, most but not all of which target high-income households, and so the budget assumes that revenues will grow faster than expenditures over the coming decades and that debt levels will decline. One key reason the White House is able to paint so rosy a picture is that its economic assumptions are different from those of the more buttoned-up Congressional Budget Office. Specifically, the Office of Management and Budget, which is responsible for crafting the president’s budget proposal, maintains that the U.S. economy will be 2 percentage points bigger in 2024 than it will be in the CBO’s projection.

This might not sound like a huge difference. But it matters more than you might think. The CBO has devoted considerable time and effort to understand why its 2010 prediction of a robust economic recovery failed to materialize, and it found that the post-crisis recovery really has been as dismal as it feels. Sluggish capital investment has contributed to sluggish productivity growth, and the labor market recovery hasn’t been strong enough to draw the long-term unemployed back into steady jobs.

With this sobering picture in mind, the CBO has lowered its estimate for America’s economic growth potential over the next decade to a mere 2.5 percent, far lower than the 3.3 percent that’s been the average growth rate for the U.S. economy since 1950. CBO projects that real GDP growth will actually fall to 2.2 percent in the second half of the next decade, which is to say they assume things will get worse rather than better. It turns out that even quite small changes, on the order of a 0.1 percentage point difference in the average annual growth rate, can have enormous fiscal consequences. So it’s very noteworthy that between 2010 and 2014, the CBO’s forecast for average real GDP growth over the next decade has gone from 3 percent to 2.5 percent.

How does the White House justify its more optimistic assessment? It seems that the Obama administration is counting on comprehensive immigration reform to deliver large economic benefits. The CBO has estimated that immigration reform could increase the size of the U.S. economy over the next decade by as much as 3 percentage points. It remains to be seen if the benefits of the immigration reform favored by the president will outweigh the benefits. I’m skeptical. It is easy to imagine that a more selective, skills-based immigration policy could be an enormous boon to the U.S. economy, as the economists Xavier Chojnicki, Frédéric Docquier, and Lionel Ragot have suggested. Yet the president favors a substantial increase in less-skilled immigration that could prove quite expensive in an era of rapid technological change.

Regardless, there is no question that factoring in the potential benefits of immigration reform is a new development in presidential budgeting. It could speak to the fact that realistic estimates of America’s growth potential have fallen so much over the course of the Obama presidency that the president’s staffers felt an obligation to get creative.

Pushing the immigration debate to the next level

Reihan Salam
Jun 21, 2013 17:08 UTC

It is often said that America is “a nation of immigrants.” But that’s not true in the strictest sense. As of the 2010 Census, the foreign-born share of the U.S. population was 12.9 percent, and so 87.1 percent of Americans that year were native-born non-immigrants. Granted, the nation of immigrants line tends to be used figuratively, to indicate that virtually all Americans come from somewhere else if you go back far enough. That includes the members of the indigenous communities that had settled in what is now the United States many centuries ago, and the descendants of the enslaved Africans who were brought to the Americas against their will. Yet when we use nation of immigrants so loosely, it loses all meaning.

And when you compare the foreign-born share of the U.S. population to other countries, you soon realize that while the absolute number of immigrants living in the U.S. is very large, we’re nowhere near countries like tiny Qatar, where over three-quarters of the population consists of foreign-born individuals, most of whom are guest workers, or Canada, where the foreign-born share is a robust 20.6 percent. The U.S. is roughly in the same ballpark as countries like Germany and Sweden, which have become major destinations for immigrants only in recent decades.

So what would it mean for America’s foreign-born population to dramatically increase in the coming decades? That is the question we ought to be asking ourselves in light of the new Congressional Budget Office analysis of the Senate immigration bill. At first, many observers focused on CBO projecting that because the Senate immigration bill will tend to increase the U.S. working-age population while not increasing the number of retirees, at least not yet, it will tend to increase economic growth, raise tax revenues, and cut the deficit. Over the first decade, the CBO projects that deficits will decrease by $200 billion relative to the current law baseline, while they will decrease by $700 billion over the second decade.