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Tuesday, March 21, 2017

Immigrant Spending: Frosting on the Economic Cake?

And does it matter how they spend their dollars?

When immigrants, legal or illegal, earn money by working in the United States, what happens to the dollars?  One possibility is that they spend them on goods and services sold in the United States, not necessarily on the things that they are producing, but on the wide variety of items necessary to living.  Another possibility is that they send the dollars back to their families and friends in their home countries.  Finally, the immigrants might stash some of the dollars in their mattresses or some other “safe” place.

Impact on Americans

Does it make a difference to resident Americans’ living standards what immigrants do? In my many years of confronting economics students with this question, there has been virtual unanimity that resident Americans are best served if immigrants spend their dollars in the United States. Reasons vary, but the predominant one is that when immigrants spend their dollars in the United States, it keeps the money at home and maintains overall demand for goods and services in the United States. Methinks that the response among Americans at large (including my students’ parents) would not be much different.

Those U.S. things immigrants buy should be viewed as the cost Americans incur to obtain to obtain the things immigrants produce.

It turns out, however, that immigrants spending their dollar earnings on goods and services available in the United States is the option least favorable to resident Americans! The things immigrants purchase will become things unavailable to resident Americans. In fact, in the best of all worlds for resident Americans, dollar-earning immigrants would stash all their dollar earnings in the proverbial mattress. That way resident Americans would have the goods and services that would be available in the immigrants’ absence plus those things produced by the immigrants.

Is the latter likely? Dream on. In such a scenario immigrants end up ill-clothed, ill-housed, ill-fed, and dead. Those U.S. things immigrants buy should be viewed as the cost Americans incur to obtain to obtain the things immigrants produce. Resident Americans “import” what the immigrants produce and “export” what the immigrants buy while in the United States.

What if immigrants send some of their dollar earnings to families and friends in their home countries? The answer is that it all depends on what the family members and friends do with the dollars. If they use the dollars to buy things from the United States, the result, as far as resident Americans is concerned, is the same as if the immigrants had spent the dollars themselves on things in the United States.

However, should families and friends hoard the dollars in their own mattresses, or should the dollars end up circulating in the home countries, resident Americans gain in the same way that they gain were immigrants to stash some of their dollar earnings in the mattress. That is, more goods and services will be available to Americans as a result of the presence of the immigrants.

Cost of Production

What about my students’ worry that dollars might be leaving the country? Not a problem. If there’s one thing the U.S. government and the Federal Reserve System can do easily, it’s increase the number of dollars. It’s a privilege that it guards jealously.

Giving up less means having both what resident Americans were formerly producing and more of other things.

Before signing off, I would be remiss if I didn’t point out that working immigrants benefit resident Americans in ways that go beyond what happens to the dollars they earn. Immigrants who secure employment have underbid resident Americans for jobs. This means immigrants reduce the cost of producing whatever goods and services are at issue.

Cost tells us what we as a nation give up to obtain goods and services. Giving up less means having both what resident Americans were formerly producing and more of other things. Those competing with immigrants obviously lose, but what they lose goes to resident Americans buyers of the affected products, not the immigrants. In addition, the fall in the prices of the affected products will mean resident Americans will have the opportunity to put the affected products to new uses, uses that were previously uneconomic.

What working immigrants do with their dollars should be viewed as potential frosting on the cake of this latter gain.

  • T. Norman Van Cott, professor of economics, received his Ph.D. from the University of Washington in 1969. Before joining Ball State in 1977, he taught at University of New Mexico (1968-1972) and West Georgia College (1972-1977). He was the department chairperson from 1985 to 1999. His fields of interest include microeconomic theory, public finance, and international economics. Van Cott's current research is the economics of constitutions.