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May 7, 2013

What the Heritage Study Does - And Doesn't Do

By

Critics of a study the Heritage Foundation released yesterday looking at the costs of amnesty for illegal immigrants have done something strange — they’ve attacked us for not doing the study they wanted us to do. It is odd that so many politicians and outsiders feel that they should decide what an educational institution such as Heritage should and shouldn’t study.

Proponents of amnesty have, for example, insisted that Heritage should have done “dynamic scoring.”

Dynamic analysis takes into account how policy changes impact the economy, and how that changes individuals’ incomes and the government’s balance sheet. For example, consider a bill with a 100 percent tax rate. Unless you do dynamic scoring, the result would show tax revenues increasing in the following years. The problem is, people don’t work for nothing, so actual tax revenues would drop.

For this reason, economists do dynamic analysis on some issues. Such work relies on the use of economic models with input variables and certain assumptions, and the Heritage Foundation and others have used such models with tax policy.

But dynamic scoring isn’t equally important for analysis of every policy. We believe that dynamic scoring of amnesty — that is, the part of the Senate’s comprehensive bill that we and many conservatives most vigorously oppose — would not change the fiscal results dramatically. After all, unlawful immigrants are already part of the labor supply. An amnesty may increase their wages a little and, perhaps, their productivity slightly. Indeed, our report assumes increased wages. Amnesty certainly would lead to increased tax receipts because of higher GDP, but most of the increase in GDP would benefit the formerly unlawful immigrants themselves. That is reflected in our report, which makes clear that legalized immigrants will pay more in taxes.

One risk with dynamic scoring is that incorrect assumptions will lead to incorrect results. You can always make assumptions that will guarantee you get the results you want. This is why modelers should be as transparent as possible, disclosing methodology and assumptions behind key points.

Economist Doug Holtz-Eakin has become a leading voice demanding that Heritage do a dynamic analysis. Weeks ago, on behalf of the American Action Forum, he issued a four-page “paper” using a dynamic model. Apart from its brevity and back-of-the-envelope feel to it, the assumptions behind it are questionable.

We would like to have a chance to review and understand his methodology; it would be helpful if other leading labor and immigration economists had a chance to look at it, too. With our paper yesterday our lead researcher, Robert Rector, shared with the public his methodology in a lengthy appendix, carefully describing his assumptions and calculations.

Given that much of the immigration literature concludes that immigration has little long-term impact on native income, it is especially important that Holtz-Eakin justify his assumptions, which assume huge economic benefits from higher immigration. How many new immigrants did he forecast? Why did Holtz-Eakin get much higher labor and capital productivity as a result of more immigration? Why does he not take into account the fiscal costs of legalization and higher inflows? Such questions need to be answered.

Mr. Holtz-Eakin was back at it yesterday in this space claiming that the immigration bill would stimulate economic growth to such a degree that our focus on taxpayers is misplaced. NRO’s own Ramesh Ponnuru rightly chided him for putting forth such an argument. If Holtz-Eakin thinks the dynamic benefits of other parts of immigration reform, or amnesty itself, would make up for the fiscal costs we outlined, he should lay out a more detailed case of why this is so.

One goal of immigration and immigration reform should be to raise the post-tax income of lawfully present Americans. Amnesty will not do that. With certain assumptions, like massive inflows of immigrants and large positive effects on worker and capital productivity, some models of immigration reform might show significant economic growth. But, even if they are accurate, these benefits would likely come from other parts of a “benchmark” immigration reform (the term Holtz-Eakin used to describe what he modeled), not amnesty, the specific policy Heritage set out to assess.

— Derrick Morgan is vice president for domestic and economic policy at the Heritage Foundation.

First appeared in National Review Online's "The Corner."

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