Louis Johnston on “Immigration in Historical Perspective”

Over the past 75 years, the annual number of immigrants into the United States grew along with the percentage of the population born outside the country. The changes wrought by these trends are visible throughout the country, from the faces of the children in our schools to the religious institutions in our towns, to the items in our grocery stores. Policy debates over immigration restrictions, refugee costs, and border walls rage at the national, state, and local levels.

Rarely do these discussions place the issues at hand into a broader, historical context. In this post, I will take a few moments to introduce you to some key trends in American history that relate to immigration and to describe some of the scholarly research regarding the long-run effects of immigration on the US economy. 

Some basic data 

Let’s start with data on immigration as a percentage of the population for the US from 1820 to 2010:

Graph 1

Source: Abramitzky, Ran and Leah Platt Boustan. “Immigration in American Economic History.” NBER Working Paper No. 21882, January 2016.

The picture shows that the number of people immigrating to the US reached a peak in the early 1850s, when measured as a percent of the American population, with similar spikes in the 1880s and 1900s. Relatively open borders in the 19th and early 20th centuries led to immigration levels that far exceeded current levels as a percentage of the population. (The 1986 immigration reforms created the 1990 spike.)

Next, take a look at how these data played out in terms of the percentage of the population born abroad:

graph

Source: Abramitzky, Ran and Leah Platt Boustan. “Immigration in American Economic History.” NBER Working Paper No. 21882, January 2016.

The foreign-born proportion of the population fluctuated around 14 percent from 1860 to 1910, steadily declined until 1970, and converged back towards 14 percent today.

These two pictures tell an important story: rather than thinking of today as anomalous (i.e. why are there so many immigrants today?) we should consider the fact that the years 1940 to 1990 were atypical in American history. That is, an America with relatively low levels of immigration and a relatively small percentage of the population born abroad is the outlier in American history, not what is going on today.

This brings us to a third piece of historical information, the geographic distribution of the foreign-born population:

Graph 2

Source: Abramitzky, Ran and Leah Platt Boustan. “Immigration in American Economic History.” NBER Working Paper No. 21882, January 2016.

European immigration dominated the nineteenth century. The Immigration Act of 1924 effectively closed the door to new arrivals for forty years and enforced this pattern. In particular, the 1924 act both reduced immigration levels and created a quota system based on the proportion of the population that was born abroad in 1890. This scheme favored immigrants from Europe, generally, and western Europe, in particular.

This began to change with the Immigration and Naturalization Act of 1965. With this Act, Congress removed the quota system based on geography and replaced it with guidelines that promoted family unification. The result was a surge in immigration from Latin American and Asia.

Here is where the past differs from the present. Until the 1970s, European-born immigrants predominated, but since then the face of immigration has changed from white Europeans to people of color from Asia and Latin America.

Long-run effects of immigration on the US Economy

The data we’ve just examined describe the flow of immigrants into the United States. What were the effects of these waves of immigration on the American economy? In a series of studies, David Card of the University of California at Berkeley (along with a number or co-authors) tackled two of the key questions that arise in most debates regarding immigration:

  • Immigration does not depress the wages of native-born workers to any significant extent (2012 paper).
  • Immigration is not a driving force in creating income inequality (2009 paper).

Card’s work focuses on recent immigration, but economic historians have begun systematically addressing a bigger question: what were the long-run effects on the US economy of the big waves of immigration in the past?

In “Migrants and the Making of America: The Short- and Long-Run Effects of Immigration during the Age of Mass Migration,” economists Sandra Sequeira, Nathan Nunn, and Nancy Qian matched up US counties with low shares of immigrants in 1880 with similar counties in 1880 that had high immigrant percentages. For example, in Minnesota they matched up Cass County (17% foreign born) with Douglas County (33% foreign born.) They then traced economic development using a variety of factors over the next 100 years.

The authors report that, “Taken as a whole, our estimates provide evidence consistent with an historical narrative that is commonly told of how immigration facilitated economic growth. The less skilled immigrants provided the labor force necessary for industrial development. A smaller number of immigrants brought with them knowledge, skills, and know-how that were beneficial for industry and increased productivity in agriculture. Thus, by providing a sizeable workforce and a (smaller) number of skilled workers, immigration led to early industrial development and long-run prosperity, which continues to persist until today (p. 44).”

Conclusions: past and present

Do these findings apply to today and the years to come? For instance, the US economy no longer rests on a base of agriculture and industry but produces most of its GDP in the form of services; can we draw lessons about the a service economy from an industrial economy’s experience?

Yes, I believe we can apply this study to today’s debates. Immigrants today, just as in the past, bring skills that are valuable to our economy. These include both physical skills (e.g. immigrants working in agriculture or in food processing) and knowledge (e.g. immigrants employed in high-tech industries.) This benefits the American economy today in ways similar to immigrants setting up their own farms and working in factories a century ago. Further, just as over the past one hundred years, the children of these new Americans will gain the knowledge and skills that will drive our economy for the next century.

The economy is not a static phenomenon, with fixed jobs and industries requiring a stable and unchanging range of skills and technologies. It is a dynamic, ever-changing process with jobs morphing and new industries appearing over time. Immigrants are not the same as they were 100 years ago, but neither is our economy. The new immigrants, like the old, will contribute positively to the evolving economic order of the next 100 years.

Louis Johnston on “QWERTY, Health Care, and Public Policy”

Take out your cell phone. Look at the keyboard. Did you know that it is the same keyboard we have used for over 150 years? Why is that? Why do we continue to utilize such old-fashioned technologies?

Paul David, in “Clio and the Economics of QWERTY,” asked this question over thirty years ago. His answer: many technological standards, ranging from typewriter keyboards to railroad gauge to electrical current, did not come about because they were the optimal method for typing letters, setting railroad tracks, or delivering electricity. Rather, they were the product of a process known as path dependence, a situation in which the set-up costs of a particular technology lead to an early lock-in for a popular standard, even if there are superior alternatives later available. The basic idea is that the costs of switching technologies are higher than the benefits gained from the new alternative.

I have another name for this phenomenon: history matters. Where you start determines, in part, where you will end up.  And, this idea applies to public policy just as much as to technologies.  This is important to keep this in mind as we tackle tough issues such as health care.

How many systems?

Health care reform has been a perennial issue in the United States since World War II. Before Congress and President Obama enacted the Affordable Care Act (ACA), we had four health care systems:

  1. YOYO: You’re on your own
  2. Employer-provided insurance
  3. Single-payer
  4. Government-financed and government-produced

You probably recognize YOYO and employer-provided insurance, but you might argue that we don’t have single payer or government-financed and -produced health care in America. Let’s take a closer look.

Medicare, Medicaid, and the Children’s Health Insurance Program are all single-payer systems. To access this system, you need to meet age and income requirements, but once you qualify the government acts as a single-payer to cover almost all costs.

The Veterans Health Administration runs much like Britain’s National Health Service: the federal government owns the hospitals and clinics, hires the health care professionals, and all who qualify can get care at these facilities. It’s
government- financed and government- produced
health care.

We have these four health care systems because each piece developed organically through time and rather than sweeping away existing institutions, Americans added new ones. Our health care system looks the way it does because of path dependency; again, history matters.

Path dependence: Government-financed and -produced care

The Veterans Health Administration, for example, grew out of Abraham Lincoln’s Second Inaugural Address, when he declared:

With malice toward none, with charity for all, with firmness in the right as God gives us to see the right, let us strive on to finish the work we are in, to bind up the nation’s wounds, to care for him who shall have borne the battle and for his widow and his orphan, to do all which may achieve and cherish a just and lasting peace among ourselves and with all nations (bold added).

Theda Skocpol, in Protecting Soldiers and Mothers: The Political Origins of Social Policy in United States, traces how soldiers’ homes, pensions for Civil War veterans and their families, and a variety of other social policies evolved from the 1870s through the 1910s in the wake of Lincoln’s admonition. Gradually, Americans accepted these arrangements as part of the policy landscape and began taking them for granted.

Path dependence: Employer-provided insurance

Employer-provided health care is the result of price controls during World War II.  As Melissa Thomasson of Miami University documents, limits on wages meant that employers needed alternative methods for attracting much-needed workers. Prepaid hospital plans (such as Blue Cross) and physician plans (such as Blue Shield) had already developed during the 1930s and during the war enterprising employers offered, as a fringe benefit, to pay some (or in some cases all) of these premiums for workers and their families.

After World War II, labor unions and companies negotiated contracts that included employer-provided health insurance. However, it was not clear that health insurance and other fringe benefits were deductible from corporate income taxes; wages and salaries were deductible, and employers argued that fringe benefits were simply another form of compensation and should also be deductible.

So, in the late 1940s and 1950s a patchwork system started to develop. Some employers offered health insurance for which they paid part or all of the premiums without deducting these costs from their corporate income taxes. Others companies offered health insurance, deducted the costs on their taxes, and waited to see if the IRS would allow them to do so. Many firms decided to wait and see how the IRS ruled on the issue.

In 1954, the IRS ruled that employers could deduct the full cost of employer-provided health insurance when estimating their corporate income taxes. Thomasson writes,

The tax subsidy increased the amount of health insurance demanded, and extended access to health care. By fostering an increase in the demand for group insurance relative to individual coverage, it also ensured that health insurance in the United States would evolve as a group, employment-based system (p. 1374)

Thus, early health insurance plans, a demand for war workers, and an IRS ruling all helped to shape our dominant health care sector.

Filling in the gaps

Throughout the 1940s and 1950s, there were obvious gaps in the health care system. Older Americans often lost their health insurance when they retired; low-income Americans often worked for companies that did not offer health insurance; and unemployed Americans could not afford to purchase their own insurance.

President Truman proposed a solution in 1948: a single-payer health care system for all Americans. Democratic congressmen and senators proposed variations on this idea, with a focus on senior citizens and the poor, throughout the 1950s – though none passed.

In 1965, President Johnson succeeded in enacting Medicare and Medicaid to cover seniors and low-income Americans. These single-payer systems supplemented, but did not replace, what already existed.

The Affordable Care Act and lessons for the future

President Obama followed this well-worn path of working with existing systems rather than bulldozing the whole works when he proposed what became the Affordable Care Act. The ACA sweetened the incentives for companies to provide health insurance, expanded Medicaid, and created state-level insurance markets so that individuals (and small businesses) in the YOYO system could purchase health insurance.  Additionally, the ACA mandated that everyone be part of one of these systems in order to help maintain its economic solvency. The ACA did not mandate which system a person must join, only that every American had to choose one of them.

Today’s health care system, including the ACA, is the result of a path dependent process. No single entity planned or created it. However, people and institutions are now accustomed to these systems. They have made important decisions based on these particular systems being in place, for example, changing jobs or moving to another state.

Furthermore, many Amercans now see certain health standards as basic rights, such as coverage availability without regard to pre-existing conditions, keeping their children on their plans until age 26, and a variety of other benefits enacted under the ACA. It’s therefore not surprising that those who oppose the ACA and want to eliminate it are having a tough time.

In other words, to understand our health care debates, and public policy more generally, we need to start from an important premise: history matters.

I thank Susan Riley for extensive help with this column.

Louis Johnston on “Wrong Diagnosis, Wrong Prescription”

banner-of-staffThe Republican Party’s economic policy since World War II has rested on two key ideas: free trade and limited government involvement in picking industrial winners and losers.

Now, the incoming Trump administration promises a new path. According to the Financial Times, the administration will “create a National Trade Council inside the White House to oversee industrial policy and is appointing a China hawk and one of the architects of the populist economic message to run the new group.”

The result is a Republican president embracing Economic Nationalism, an idea that traces its lineage to Alexander Hamilton and his 1790 Report on the Subject of Manufactures. In particular, Economic Nationalism involves restricting a country’s international trade and using government policy to promote particular industries. Continue reading