Immigraton Bill to Cut Deficit by Almost $1 Trillion Using Altered Methodology

June 19th, 2013
in econ_news, syndication

The New York Times Headlines claimed Immigration Law Changes Seen Cutting Billions From Deficit.

Congressional budget analysts, providing a positive economic assessment of proposed immigration law changes, said Tuesday that legislation to overhaul the nation’s immigration system would cut close to $1 trillion from the federal deficit over the next two decades and lead to more than 10 million new legal residents in the country.

Then tossed in a quote from one of the bill's backers:

The report was immediately seized on by backers of the bill as a significant boost to its prospects. Senator Charles E. Schumer, Democrat of New York, one of the bill’s authors, said the report “debunks the idea that immigration reform is anything other than a boon to our economy.”

Follow up:

And then added a sour grapes quote from one of the detractors of this bill:

Senator Jeff Sessions, Republican of Alabama, a leading opponent of the bill, said that its authors used “scoring gimmicks” in order to conceal the “true cost from taxpayers.” “As a result, the score effectively conceals some of the biggest long-term costs to taxpayers contained in this legislation, including providing illegal immigrants with Medicaid, food stamps and cash welfare,” Mr. Sessions said.

Econintersect does not take positions on political subjects other than to point out economic issues which accompany them.  Immigration is a partisan subject as Republicans fear a majority of new immigrants will be Democrats. However, The New York Times post failed to mention that the Congressional Budget Office Study deviated from normal budget methodology:

Cost estimates produced by CBO and JCT typically reflect the convention that macroeconomic variables such as gross domestic product (GDP) and employment remain fixed at the values they are projected to reach under current law. That is a long-standing convention—one that has been followed in the Congressional budget process since it was established in 1974. However, because S. 744 would significantly increase the size of the U.S. labor force, assuming that total employment was unchanged would imply that any employment of the additional immigrants would be offset one-for-one by lower employment elsewhere in the population. Because that outcome would be highly implausible, CBO and JCT relaxed the assumption of fixed GDP and employment and incorporated into the cost estimate their projections of the legislation’s direct effects on the U.S. population, employment, and taxable compensation. Nevertheless, to remain as consistent as possible with the estimating rules CBO and JCT follow for almost all other legislation, the cost estimate for S. 744 does not incorporate the budgetary impact of every economic consequence of the bill.

The analysis here provides an estimate of the incremental budgetary effects that would arise from the economic outcomes that are not reflected in the cost estimate. Specifically, it includes some additional budgetary effects stemming from changes in the productivity of labor and capital, the income earned by capital, the rate of return on capital (and therefore the interest rates on government debt), and the differences in wages for workers with different skills. CBO estimates that an increase in productivity and capital income would reduce the bill’s federal budgetary cost but that an increase in the interest rates on government debt—and thus an increase in interest payments—would raise the budgetary cost, as would changes in the relative wages of people at various points in the skill distribution, although only modestly.

On balance, the economic impacts not included in the cost estimate would have no significant net effect on federal budget deficits during the coming decade and would reduce deficits during the following decade. Taking into account a limited set of economic effects, the cost estimate shows that changes in direct spending and revenues under the legislation would decrease federal budget deficits by $197 billion over the 2014–2023 period and by roughly $700 billion over the 2024–2033 period. The cost estimate also shows that implementing the legislation would result in net discretionary costs of $22 billion over the 2014–2023 period and $20 billion to $25 billion over the 2024–2033 period, assuming appropriation of the amounts authorized or otherwise needed to implement the legislation. According to CBO’s central estimates (within a range that reflects the uncertainty about two key economic relationships in CBO’s analysis), the economic impacts not included in the cost estimate would have no further net effect on budget deficits over the 2014–2023 period and would further reduce deficits (relative to the effects reported in the cost estimate) by about $300 billion over the 2024–2033 period.

The reason for fixing macroeconomic variables is to avoid the position of partisanship in estimating the cost of legislation.  Politicians always claim what they are doing is good for the economy. The CBO could have produced the estimate using standard methodology, and then provided an alternate estimate for consideration. The CBO, and economists in general - have a poor record in forecasting GDP.

In this case, Econintersect recommends reading the CBO report, and consider the effect of the changed methodology.

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