Sunday, May 21, 2006

Another bad argument I hear frequently (and which is related to the one in my previous blog entry) is the argument that immigrants who come to the U.S., earn income, and then send dollars home to their families are harming the U.S. economy.

There are several problems with this claim, related to the two uses of dollars in foreign countries:
1) The first use of dollars overseas is as a stable currency. Many countries have irresponsible central banks that grow their money supplies rapidly, resulting in high and unpredictable inflation. People living in such countries would prefer a more stable currency. Sometimes they prefer to carry out exchanges in dollars (or gold, or use barter) instead.

Does this make us worse off? This argument is going to seem counterintuitive, but no, it doesn't. The immigrants come to the U.S. and produce goods and services for us. In exchange we give them pieces of paper. Clearly employers and consumers are benefitting from this transaction. Some workers may be harmed by the competition, but it's generally thought that the gains largely outweight the costs.

But what about the dollars sitting in Mexico (or wherever)? Doesn't the loss of dollars from the U.S. economy hurt us? No, it doesn't. The foreigners have basically decreased the U.S. money supply, giving each dollar remaining in the U.S. economy increased purchasing power. It's as though the Federal Reserve had decreased the money supply.

That brings us to yet another reason this absent money doesn't matter: The Fed can easily counteract any money that leaves the economy and stays out by pumping more money into the economy, if necessary. Controlling the money supply is its job.

2) The second use of dollars overseas is to buy U.S. goods or services, and to invest in the U.S. Clearly this isn't doing us any harm; we're willing to part with the goods, services, and investments for the price the foreigners offer, so we must be better off.

Now, Paul Krugman has made an argument about dollars sitting overseas here (He's specifically debunking the "petrodollar" conspiracy theory about Iraq). He's essentially making the first argument I made in response to 1) above: foreigners are giving us labor, goods, services, and so on in exchange for pieces of paper, which they're holding onto, and for which we're paying no interest. That's like a free loan.

So people who want to oppose immigration, legal or illegal, need to come up with another argument. I think the best argument one can make against illegal immigrants is that they're not paying the same taxes everyone else is compelled to pay, yet they are consuming government services. But then, that's an argument for making them legal, not an argument for keeping them illegal.