How Latin America Subsidizes the U.S.

Times Square, New York - one of the leading commercial areas in the United States. Latin America's wealthy invest in the US, while Latin American workers help Americans save $215 per year, the author points out. (Photo: New York City Economic Development Corp)

The estimated $2 trillion of U.S. investments held by Latin America’s wealthy classes is essential to a U.S. economy.

THE UNIVERSITY OF MIAMI

The growing populist sentiment in the United States against illegal immigration likes to point out that not only do these migrants steal U.S. jobs, they also send $50 billion back to Latin America each year instead of spending it in the United States. In fact, the approximately $2,000 per year sent home by the average working illegal migrant is less than 15 percent of what he earns in the United States and far less than what he contributes to the U.S. economy. A lesser known fact is that wealthy Latin Americans hold $1.9 trillion in U.S. assets and inject more than $100 billion in new investment each year into the U.S. market, more than all remittances, direct foreign investment and aid combined that flows from the United States to Latin America.

The notion that the U.S. government or the American consumer is subsidizing Latin America and its émigrés is factually wrong. The truth is the reverse - Latin America and its migrants are subsidizing the American way of life, not to mention the U.S. federal government deficit.

THE UPSIDE OF CHEAP LABOR

The economic impact of illegal immigration in the United States is a debate that has simmered for more than a decade. It is largely accepted that the discounted wages earned by illegal migrants serve to depreciate or freeze the wages of America’s lowest-skilled labor. Ostensibly, those lower wages raise the profitability of the labor-intensive industries where they work and provide significant savings to all American consumers when those savings are passed on by business.

In 2004 the Washington-based Center for Immigration Studies published what many regard as the most objective and quantifiable study of the economic costs of illegal immigration. The High Cost of Cheap Labor – Illegal Immigration and the Federal Budget provides a detailed analysis of the direct taxes paid and federal budget costs borne by American households headed by illegal immigrants. The study concludes that the average illegal household costs the federal government $2,736 more in federal outlays than it produces by way of direct tax revenue, or in aggregate terms, a $10.4 billion federal tax deficit.

The cost side of the study’s analysis is very thorough and includes the attribution of indirect federal costs, such as infrastructure (i.e., road building, ports) and the justice system, to these households. The cost analysis demonstrates that households led by undocumented workers cost the government more than the average U.S. household in food assistance, welfare programs, treatment for uninsured and education, all reflecting the higher number of children born into an undocumented household versus the U.S. average. What the study fails to point out is that a large percentage of those children are U.S. citizens, having been born here, even while their parents are illegal immigrants. Furthermore, those children will grow into tax-paying adults, a vital ingredient in the future viability of the U.S. tax system, given the low birth rates among American-born parents.

The study goes on to point out that undocumented workers tend to shun many of the federal spending programs such as social security, cash welfare programs, Medicaid and veteran benefits, even while contributing to each.

The most glaring critique of undocumented workers that emerges from the analysis is the fact that they cost the U.S. taxpayer $791 per undocumented household in terms of Immigration and Naturalization Service enforcement, court proceedings and jail time. Most of these costs, however, come from the very enforcement of an outdated and unrealistic immigration policy.

Last but not least, the study presumes that legal households generate a balanced budget, in contrast to the $10.4 billion deficit caused by illegal immigrants. Yet, in 2002, the U.S. federal budget recorded a $158 billion deficit, equal to $1,450 per household.

Even with its obvious flaws in detail, the study fails to address the strongest fiscal and financial arguments in support of the role of immigrant labor, which fall outside the cost side of the tax ledger. The tax revenue contribution attributed to undocumented workers misses the mark precisely because it focuses exclusively on taxes paid by these people, who in large numbers work in the untaxed cash economy. It fails to recognize the additional taxable business profit generated by the discounted wages of 7.2 million productive illegal immigrants or the additional savings to consumers that is spent on taxable goods. Excluding the positive economic impact of lower undocumented migrant wages from the equation is like declaring the 8.1 billion hours of free service by America’s 61 million volunteers as economically irrelevant.

Illegal migrants work mostly in the agriculture and construction industries. The National Homebuilders Association reported that in 2002, the average new American home cost $298,412, of which $68,000 was spent on the labor portion of the house. In a study by Barry Chiswick of the University of Illinois in 2003, he estimated that the 14 percent of the construction labor force made up of illegal workers provides a $5,000 per household savings to homebuilders. In 2002, 1.6 million homes were built in the United States, so roughly $8 billion in additional profit was realized by home builders or saved by consumers, equal to 7.3 percent of the labor cost of U.S. home building (i.e., undocumented construction workers cost employers half the normal rate). In the $118 billion U.S. agriculture industry, illegal immigrants, who make up 24 percent of the labor force, helped save U.S. farmers and/or consumers approximately $6.8 billion.

Illegal immigrants provide a significant bottom line impact on many service industries across the country. They represent 15 percent of the cleaning workforce and 12 percent of the food preparation workforce but reach as high as 47 percent of the meat-packing industry and 44 percent of the horticultural sector. Wherever present, illegal workers push down the cost of menial labor, providing savings to business and consumers. According to the Pew Research Center, America’s 7.2 million illegally immigrated workers make up 4.9 percent of the nation’s workforce. Assuming that illegal labor normally works for ½ of the fully burdened cost of documented workers (including employment taxes and insurance), then their collective work effort generates an estimated $64 billion in savings, the spoils of which are divided between business and consumers. If employers hoard the savings for themselves, they pay an additional $12.9 billion in business taxes to Uncle Sam. If all those savings are passed onto consumers, then every American can thank their Mexican handymen and gardeners, Ecuadorian kitchen staff, Colombian nannies, and Honduran fruit-pickers for approximately $215 per year the hard work of those people saves them.

What these numbers reveal is what hard-working Latino workers have always known – that they contribute far more to the U.S. economy than they cost.