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Wednesday, June 18, 2003

Isn't Immigration Inflationary?

Joerg is worried about my immigration thesis. I think the arguments he presents are worth considering, even if I don't agree with them. Proposing something so counter intuitive as more immigration for a society already suffering from heavy unemployment (like Germany), certainly needs to be justified.

I do consider your demography thesis seriously, but still do not buy it. To my taste, it is just not pessimistic enough.

Remember Malthus: all the interminable wretchedness came to be viewed as remediable. That will not do. Don´t waste your talents as an economic Cassandra on a treacherous topic like the demography trap that is going to ultimately disappoint you. When it is revealed as a Hitchcockian MacGuffin, you will wish to have agonized about other issues worthier of perennial alarm.

The WSJ supports immigration as a powerful weapon in the fight against inflation. They are right about the disinflationary effects of immigration. I really have no idea why you want to prescribe immigration as a cure against deflation. I am not opposed to immigration, but I sure do know that supporting immigration with unfounded claims will doom it as a policy issue at some point in the future. The argument in favour of immigration has to be derived from political, cultural and moral principles. An economic case could possibly be constructed on the basis of biology nobelist William Hamilton´s ideas about genetic diversity. Economists would have to cooperate with epidemiologists in order to credibly attribute variations in the probability and severity of diseases to variations along the dimension of genetic diversity and could then try to assign a cost to strategies of preserving homogeneity.

The argument about immigration in a biological diversity context is certainly interesting, but I'm afraid my argument is more pragmatic and essentially economic. Joerg and the WSJ are certainly right, the impact of immigration - or read proxy globalisation (since I think it increasingly doesn't matter where much of the labour is located for this argument to work, and in a world where use of 'undocumented' labour is becoming habitual and sytematic, where they actually are physically seems to be less and less important) - is dis-inflationary. Essentially it drives down costs. What it does is change the slope of the labour supply curve, making proportionally more unskilled labour available at ever cheaper prices, and at the same time it displaces it outwards, meaning more 'potential' labour becomes available at every price. This is, I'm afraid to admit, an essentially supply side argument. But isn't this in part what our labour market, flexibility, reforms are supposed to be all about. Reducing costs to foment economic expansion. This is the good kind of dis-inflation. This is supply stimulus.

But then there is the dependency ratio argument. These are early days, and this theory is far from complete, but I feel that there is increasing evidence that a 'healthy' society in the sense of growth potential needs a certain age structure, and a certain 'potential' dependency ratio. This is where the immigration argument really comes in. Immigration helps maintain a stable trajectory by cushioning the dependency ratio blow.

It also adds to the demand side stimulus, since immigrants are predominantly young and liable to borrow against their futures (normally they borrow even to arrive). This can help prop-up eg flagging housing markets, demand for consumer durables etc etc. One of the reasons I am 'getting out of the office' to study the Bulgarians in Valencia is to try to learn more about the reality of immigration. Then I hope I will be better equipped to answer more of these questions.

One last point. Immigration is not a permanent solution. As more and more societies pass through the demographic transition, then we will run out of human resources. But immigration can buy time, soften the blow, and enable us to look for better, more sustainable ways of living. We may be all hooked on growth, but we need time to come off. If we kick the habit too quickly the consequences may not be pleasant.

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