Immigration Reform Will Boost the Economy, Shrink Budget Deficits

The economic analysis shows that the bill would expand the economy by increasing the population and labor force.

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The Senate's immigration reform bill will produce a larger economy and smaller budget deficits, according to the nonpartisan Congressional Budget Office and Congressional Joint Committee on Taxation.  Dyed-in-the-wool opponents will surely remain unconvinced, but CBO's analysis shows that immigration reform will be the opposite of the economic and budgetary disaster that its critics predict.

The analysis comes in two parts: a formal "cost estimate" and a report on the economic impact. Together, these reports show that the estimated additional economic activity and tax revenues from allowing greater lawful entry of noncitizens and granting legal status to currently unauthorized residents would substantially outweigh the economic and budgetary costs.

The cost estimate plays an important role in the budget process, informing lawmakers about how the legislation would change revenues, spending and deficits compared with CBO's "baseline" budget projections. The bill would expand the size of the population and workforce significantly, which in turn would directly increase the size of the economy, the revenue base and spending for federal benefit programs. CBO accounted for these direct effects in its official cost estimate of the bill's budgetary impact, which shows that the bill would reduce deficits by about $200 billion in the first decade (2014-2023) and about $700 billion in the next one (2024-2033). 

[ See a collection of political cartoons on immigration.]

The companion economic analysis provides CBO's estimates of additional budgetary effects from further changes in the economy that are not reflected in the official cost estimate, including changes in interest rates, business investment, productivity and differences in wages for workers with different skills. The economic analysis suggests that immigration reform will have a positive effect on economic growth beyond what's reflected in the cost estimate, generating an additional $300 billion of deficit reduction over the 2024-2033 period.

CBO has sound reasons for not incorporating, into its formal cost estimates, any budgetary effects from the "macroeconomic feedback" effects like those it found in the economic analysis. These include the time-consuming nature of the analysis and the high degree of uncertainty surrounding the results. Nevertheless, the finding of additional budget savings reinforces the message of the official cost estimate – immigration reform is good for the budget.

The economic analysis shows that the bill would expand the economy by increasing the population and labor force, thereby boosting gross domestic product by about 3.3 percent in 2023 and about 5.4 percent in 2033. (These percentages are the midpoints in CBO's range projections.) Average wages would grow slightly more slowly in the short term than otherwise, as the economy adjusted to the larger workforce. This partly reflects the fact that the immigrants who would come in under the bill will have lower wages, on average, than current residents, and does not necessarily imply that current residents would be worse off. By 2025, however, the bill would raise average wages above what they would otherwise be across the wage distribution. 

[ See a collection of political cartoons on the budget and deficit.]

As we at the Center on Budget and Policy Priorities point out in our analysis of the CBO reports:

Importantly, CBO estimates that average wages in 2033 would be higher for workers "in all quintiles of the skill distribution."  That is, low-, medium-, and high-skilled workers would all see higher average wages as a result of the [Senate immigration reform] bill by 2033.

As CBO notes, the effects of the Senate immigration bill on the economy and the budget are "complicated and highly uncertain." Nevertheless, their nonpartisan economic and budget analysis strongly suggests that immigration reform will be good for the budget and good for the economy.

Chad Stone is chief economist at the Center on Budget and Policy Priorities.