by Spencer P Morrison, NEE
Applying the Pareto Principle to the Immigration Debate
Have you ever noticed that most of the people you work with are useless? Sure they seem busy, but most of them get precious little done. In fact, some of even them end up making work for model employees, like you—don’t they?
If you’ve experienced this, then you understand how the Pareto Principle works—you just didn’t know it had a name. Also known as the 80:20 rule, the Pareto Principle stands for the idea that causality is not always linear: that is, there is not always a one-to-one relationship between cause and effect; instead, the exceptional few are to thank for producing the majority of output.
In his book Outliers, author and columnist Malcolm Gladwell notes that the business world is dominated by outliers—the exceptional few. Consider how the market capitalization of America’s biggest companies follows a non-linear distribution, ie. the Fortune 500 are worth more than the countless millions of smaller businesses.
Another classic example is the distribution of wealth: the top 20 percent of households own 77 percent of all wealth in America. Interestingly, Pareto distributions are often fractal in nature, meaning that they look the same no matter what scale you view them. For example, the wealth distribution in the top 20 percent of households resembles the distribution of the whole—the top 4 percent of earners control ~80 percent of the wealth, and so on and so forth.
Why am I telling you this? Because the Pareto Principle is a very powerful but often ignored political tool. Let’s apply Pareto to the immigration debate. On the one hand, pro-immigration publications like The Economist argues that immigration grows the economy. This is undoubtedly true, but it’s not the whole story.
The Pareto Principle predicts that only a small fraction of immigrants contribute to the economy—the vast majority of immigrants are either economically neutral, or detract from America’s economy. This means that America should (hypothetically) be able to cut immigration by 80 percent while still retaining all the economic advantages of immigration. If true, this fact
(i) should be enough to broker a compromise between the Democrats and Republicans on immigration reform or
(ii) it will expose the Democrats’ motivations retarding immigration (ie. whether they really care about the economy, or whether this is just a red herring as I suspect).
That’s the theory anyways. But what does the data say?
In 2017 the National Academies of Sciences, Engineering, and Medicinereleased the most detailed study on the economics of immigration in America to date. It is over 600 pages long, and was authored by an interdisciplinary team—it is the “gold standard” of academic papers on the subject. The report found a number of interesting data. For example, the researchers found that nearly 100 percent of immigration-driven economic growth accrued to the immigrants themselves—not to American citizens. That is, immigration grew the economic pie, but did nothing to grow the slices.
The researchers also found that immigration contributes to wage stagnation for American workers. This point should be obvious to anyone familiar with the law of supply and demand: a relatively bigger labor supply means lower wages, just as a relatively large supply of apples means cheaper apples. This is consistent with other studies done by the Center for Immigration Studies, which found that mass (especially illegal) immigration is one of the primary reasons wages for black Americans have stagnated.
Regarding Pareto: the Academies’ research also shows that the economic impact of immigrants follows a non-linear distribution. That is, a few hyper-productive immigrants generate most of the economic growth, while the majority of immigrants break-even, or are actually a net drain on America’s economy.
In fact, roughly 47 percent of immigrants are a net drain on public revenue—they consume more in government services than they contribute in taxes. The study pegs their net present value cost at $170,000.
Net present value (NPV) is a bizarre metric that actually underestimates the real costs of non-economic immigrants. This is because NPV is a measure of how much money the government would need to invest today, at a yield of inflation plus 3 percent, to pay for said immigrant’s tax deficit over the course of their lifetime.
Of course, the government does not do this—it spends only as it receives. According to an analysis done by the Heritage Foundation, each non-economic immigrant more realistically costs a net of $476,000 in welfare payouts. As such, the true cost of immigration is higher than even the Academies’ research leads us to believe.
In any event, half of all immigrants are actually a drain on America’s economy. As for the other half, most of them contribute as much as they receive. In fact, only about 15 percent of immigrants to America contribute to the economy in a meaningful way—this small minority is the economic engine of immigration. These are the people the liberals say America so desperately needs, and on this fact I agree.
America needs immigrants. They grow the economy and enrich our culture. Just think about how different life would be without the contributions of men like Nassim Taleb or Arnold Schwarzenegger. That being said, we must remembers that these men are the exceptional few—they are the Pareto outliers who would not be affected by immigration reform, at least not as it is articulated under the RAISE Act.
If Democrats honestly support immigration for economic reasons, then immigration should be a bipartisan issue in light of this data. If not, Pareto gives Republicans yet another tool to lambaste the left. Either way, conservatives would be wise to begin thinking in non-linear terms.
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