Political Economy of Immigration

We have been emphasizing three major forces that are disruptive for investors:  the US policy mix in both absolute terms and relative to other major countries, the escalating trade tensions, and immigration.  Most of our analysis has focused on the policy mix and trade.  We turn to immigration here and share these observations.  

The peak in both US current account deficit as a percent of GDP, and China and Japan's surpluses are behind us.  Similarly, the apprehension of undocumented immigrants along the US southern border last year was the lowest since 1971.  At its peak of the Syrian crisis in 2015, 100k people a month were fleeing to Europe.  Now, the refugees, largely from Libya, are coming at a pace of 4-10k a month, with is about where it was a ten years ago.  

That the challenges may be smaller than previously is not meant to dismiss the disruptive forces at hand.  Rather, it is to suggest that the issue may lie more with the political narrative than the economic dictates.  What the current debate about trade and immigration have in common is they are both expressions of nationalism.  Nationalism is both an inclusionary and exclusionary principle.  

There were two great solutions to the Great Depression.  Nationalism and socialism.  It took different forms in different countries, of course.  Economic and military nationalism are obvious. The socialism was in the redistribution policies and the reluctant acceptance of the government's role in supporting aggregate demand.    

The Great Financial Crisis threatened the economic and political elites in the US and Europe.  Brexit in the UK, the election of Trump in the US, the populist as embraced by one of the two main political parties.  In Europe, what began in eastern and central Europe has grown west to Austria, Italy, and is even knocking on Germany's door in Bavaria.  The language already exists, "lugenpresse" or lying media; "infest" to dehumanize foreigner, and a registry proposed in Italy for Roma with the intent of "mass cleansing, street by street, and neighborhood by neighborhood.   

Why do so many families struggle in the US and Europe?  Why is wage growth slow?  Why will an increasing number of our children not live as good as ourselves?  Blaming foreign people, companies and governments is a unifying force, even if part of the internationalist wing of the elite who have worked with them are sacrificed.   With the disparity between the average American worker and the C-suite is at extreme levels, it is easier to blame the oppression of Chinese workers and China's trade practices then address the domestic challenges.

A Harvard study, recently cited in the New York Times, found that Americans and European exaggerate the immigrant population and the amount of aid they receive.  Americans have the largest gap between the actual share of the immigrant population (~14% vs. perceptions of 36%).  Immigrants account for about 14% of the UK's population but are thought to account for 32%. 

The gap in Italy is significant too.   On average, Italians think that more than a quarter of their population is immigrant,  but the data shows 10%.   In Germany, immigrants account for 15% of the population, but on average are perceived to account for 30%.  On average, the French saw immigrants accounting for 29% of their population, and in reality, they are about 12%.  

Moreover, several statistical regularities are observed.  The overestimates are largest among the least educated, workers in low-skill occupations with many immigrants, and those self-identify on the political right.  The number of Muslim immigrants is exaggerated relative to Christians.   Immigrant's' education is under-estimated and unemployment rates over-estimated.  

What about dependency on welfare?  About one in four in France and nearly one in five in Sweden and Italy, and around one in seven Americans think that the average immigrant gets twice as much government assistance as natives.  In the UK is near one in nine and in Germany, it is about one in 11.  It is not true in any country.  

Immigration has traditionally been a wedge issue in the US.  However, the separation of families on the US southern border may have changed the dynamics, though it is too early to tell.   A Gallup Poll conducted in the first two weeks of June found that a record high 75% of Americans thought immigration was good for the United States, and the number rose to 85% when "legal immigration" was specified.  Still, for those whose business and investment decisions will be influenced by the US mid-term elections, Trump's support within the Republican Party is near a modern record, only eclipsed by George W. Bush after 9-11.  

The US House is expected to vote on an immigration bill that appears doomed.  It wants all companies to certify the legal status of employees, which apparently is controversial for the agriculture sector that the employment of guest workers", it funds the Wall the President has promised on the southern border with Mexico and cuts legal immigration.  Talks suggest there will be another effort shortly.  

Meanwhile, immigration may dominate the European Council, where the EU heads of state meet starting in a few days.  A couple of weeks ago, the euro sold off on fears that Germany's Interior Minister was going to take unilateral action over the wishes of the Chancellor and turn away refugees at the border, who ostensibly should have been registered in other EU countries.  However, a fall in the Germany government is not in anyone's interest (except the AfD), but a resolution in Europe seems as elusive as in the US.  

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