DeLong On Immigration

Brad DeLong has jumped into the discussion of what economic theory has to say about the long-run gains from immigration to the pre-existing population. In his post, DeLong first quotes something I wrote in an earlier post:

Economic theory predicts that the long-run gains from immigration to the pre-existing population must be zero—-even when there are complementarities between immigrants and natives and even if those complementarities are incredibly strong. In the long run, capital adjusts fully until firms wither away all the excess profits from the initial wage depression...

This is DeLong's reaction:

Now that's simply wrong: "capital adjusts fully" means that more future investments are made in high-productivity areas to which migrants move and fewer in low-productivity areas from which migrants came. Returns on savings are thus higher--and because the pre-existing population are savers, they benefit. So do the migrants.

Soon after DeLong's blog post appeared, my colleague Dani Rodrik emailed me:

I assume the model you have in mind is one where capital is internationally mobile, and the US is relatively small so that the return to capital is fixed in the long run. So when workers come in, there is a short run increase in r, which is dissipated over time as foreign capital moves in. In the end, all natives have same welfare, while the migrants are better off. That in any case is the simplest model in which you are right and Brad is unjustified to say you are wrong, is that the story?

Yes, Dani, that is exactly the story. DeLong is just plain wrong within the context of this model. Perhaps DeLong has a different model in mind. But whatever model he has in mind is not the model that was the basis for the CEA estimates. The underlying model in the CEA calculations defines the long run counterfactual exactly as Dani succintly summarized in his email.

UPDATE: I should have defined the variable r in Dani Rodrik's email; it gives the rate of return to capital.

Comments

[Richard A.]

Professor Borjas,
If immigration leads to increased foreign capital movement into the US -- wouldn't this lead to widening the trade deficit? And if this is true how much of the current trade deficit is caused by US immigration policy?

With the floating exchange in place the trade deficit is certainly not an economic problem -- but it is a terrible political problem which could lead to protectionism.

[Chuck]

Why oh why can't we have a better Delorng?

[Luke Lea]

Is a model really required to reach this conclusion? What's wrong with plain old supply and demand in a neo-classical framework? If the supply of labor increases, the price falls; ergo, the native workers get less. I know academics love their models. But that is a big part of the problem.