Immigration, Demographics, and Your Livelihood, Part I

The Daily Reckoning PRESENTS: Immigration is a hot button topic right now, with most of the country at odds on the issue. In the first installment of this two-part essay, Harry Dent and Rodney Johnson strip the discussion down to its economic fundamentals. Read on…


While we write this, the National Guard is busily building sections of a wall to separate the United States and Mexico. This comes as a relief to many Americans for whom the steady traffic of undocumented immigrants and the perceived sense of lawlessness and security risk in the region had become a major irritant. Naturally, security (or lack thereof) is a legitimate concern, though we don’t have much to add on the matter that hasn’t already been said. Our beat is demographics and its effects on the economy.

Immigration is an emotional subject that touches on a number of topics we’d prefer to avoid. Instead, we’d like to strip the subject down to its bare economic fundamentals and their implications for your livelihood.

Immigration, along with domestic migration, is highly age driven, just like almost every trend in economics such as inflation, innovation, spending, borrowing, investment and so on (see “Got Demographics” in the DR archives, 3/14/2006). Economically, immigration is a winning proposition for the United States. While immigration does create social costs such as education, law enforcement and medical care, immigrants on average add a net $80,000 more in taxes over their lifetimes above these social costs, according to a recent paper by the National Research Council. Even more significantly, it takes an investment of nearly $300,000 to raise the average American kid these days before they work and become productive – not counting government schooling costs – whereas immigrants come in raised and ready to work, albeit typically with lower educations. Essentially, we bypass the unproductive years of their lives and get them in their primes.

Furthermore, immigrants are an immediate boon to the areas to which they move because many of the things they consume, such as food, clothing, and shelter are purchased locally. As a result, immigrants instantly add consumer demand just by moving to town. Immigrants tend to be drawn to areas that are already booming, because it is in such boomtowns that the best opportunities exist for high paying jobs. This creates a self-reinforcing cycle in which new immigrants are attracted to areas by the growth that has already been partially fed by immigration.

Right now there are estimated to be between ten and twenty million illegal immigrants in the economy. The number of service workers we have that are in this group is obviously in the millions. The unemployment rate of the United States is currently 4.7%, which is a very low number, historically – and we project that it will reach as low as 3.0% to 3.5% by 2010. If we removed millions of service workers from the economy today, two things would happen. First, some jobs would simply go unfilled, and those services would die out. To give an example, in parts of Europe, dry cleaners are almost non-existent, and those that do operate are extremely expensive. European immigration laws, designed to favor labor, place a tremendous burden on employers, thereby making low-end service business unprofitable to operate. Hence, no affordable dry cleaners.

The second eventuality would be higher wages for these jobs, and therefore higher prices for consumers – meaning inflation. It is precisely the flow of workers to our economy, workers who perform services as well as consume goods and services while here, that helps us to grow and to do so without the curse of inflation.

As with domestic migration, immigration is driven by the 20 – 29 year-old age group with the peak age of immigrants being 26. The same forces that encourage new American households to move to a new state also motivate foreigners to move to a new country.

Immigration to the United States has been growing steadily since World War II and peaked in 1991 with a temporary spike that followed amnesty programs in 1986. Note that immigration peaked similarly between 1907 and 1914, two generations or almost 80 years ago, and then fell to near zero in the Great Depression.

Now that immigration rates have seemed to stabilize at lower, but still robust levels, we are proposing to further restrict it and to make the present illegals here earn their way to proper documentation. This will slow growth a bit in the boom, but also means that the bust years in our economy will be all the more severe when immigration comes to a halt, just as it did in the 1930s due to rising unemployment rates after 2010.

In the economic slowdown that we forecast from about 2010 into 2023 based on our demographic analysis (see “Got Demographics”) there should be a significant rise in unemployment, most likely to as high as 15%. We can expect immigration to be restricted dramatically, much as it was in the 1930s, due to a backlash in public sentiment towards immigrants that are “stealing American jobs.” While this will certainly lessen the number of workers chasing jobs, it will have little effect on the problem of a slowing economy. Our immigrant population tends to join the workforce in low-end service jobs. Reducing the number of applicants for these jobs will not do very much to create new opportunities for engineers or MBAs. Nevertheless, anti-immigrant sentiment is already high and will obviously rise more dramatically as our economy slows.

Even now, even in the midst of an economic boom as measured by expansion in GDP and consumer expenditures, our government has already initiated several new policies that make immigration, both legal and illegal, much more difficult. Some of these policies were security/terrorism related, though nearly all reflect a general feeling of unease among Americans about the high levels of immigration in recent decades. In mid-2006, the House of Representatives proposed legislation that would make illegal immigration a felony, and would put criminal penalties on companies that hire workers without documents. The Senate and the president are taking a more moderate approach, but both nevertheless feel the need to “get tough” on immigration in a congressional election year. The proposed Senate bill would allow some undocumented immigrants to stay in the country after paying a $2,000 fine and their back taxes, but it also requires some of the more recent comers to leave altogether. This is only the beginning. When our economy stalls after 2010 and unemployment rises, anti-immigrant sentiment will get much stronger. We would expect the newly elected president out of the crash of 2011 to 2012 to usher in the strongest anti-immigration reforms since the early 1930s.

Partially as a result of the drop in immigration, real estate and growth prospects in high-price, high-immigration coastal cities like New York, Boston, D.C., Miami, L.A., San Francisco, San Diego and Seattle will be the hardest hit after 2010. Again, from our work in demographics, we have found that, on average, younger people move the most. After the echo boom generation (as the children of the baby boomers are called) peaks in its moving cycle between 2015 and 2020 and then plateaus into around 2035, our country will become more sedentary, aging more rapidly, becoming less innovative and less mobile – like Europe and Japan today.

So, in regard to immigration, we have bad news and good news. The bad news is that we are not going to have enough immigrants to boost consumer demand by a meaningful amount once the downturn begins, and this will make the downturn worse. The good news is, at least relative to the other developed countries, we will be far more likely to assimilate our existing immigrants into our system. In the first half of 2006, pro-immigrant rallies brought hundreds of thousands of marchers into the streets, many waving the flags of foreign countries (though many waved American flags as well). Many Americans found that sight to be troubling, but it must be kept in perspective. It might be helpful to compare our situation to the one currently facing Europe. Compared to the problems of our European contemporaries, our “problems” look quite bearable

We’ve made our views on immigration clear. New workers, new consumers, and increased economic activity normally make a positive and immediately noticeable impact on GDP while also helping to offset wage inflation. Immigrants also have higher birth rates, which is a big positive for long-term demographic trends. On the other hand, the negatives can be stressful on infrastructure, social programs, housing, and perhaps other undesirable side effects such as security threats and crime. The overall effect, particularly in the United States, has been overwhelmingly good, as the stream of immigration has contributed to a virtuous cycle of economic growth and new worker demand.

As for the undesirable balkanizing effects of immigration, they tend to disappear with time. With few exceptions, such as, say, the Amish, immigrant families leave the ethnic ghettos and join the cultural mainstream within a generation or two, speaking English, swiping credit cards, and generally joining the cultural mainstream and, more importantly, the financial mainstream. In fact, financial mainstreaming may be the single biggest force for assimilation and national bonding.

But what happens when immigrants don’t assimilate, culturally or economically? In the United States, the question is academic. Waves of immigrants have made their respective impacts on American culture, but we remain a country based on the Anglo Saxon ideals of freedom and individualism. The changes have been largely in form rather than substance. This question of non-assimilation is, however, quite real in Europe. Within the immigrant and ethnic minority communities, large blocks remain unassimilated. Worse, it is the second and third generations that have drifted the furthest from the mainstream, rejecting the culture, economics, and even the rule of law of their hosts. The virtuous cycle of Growth à Labor Demand à Immigrationà Growth has been turned on its head and replaced with a vicious cycle of Stagnation à Unemployment à Despair, Hopelessness, and Violence à Stagnation. The terrorist attacks in the summer of 2005 on London, which were carried out by second-generation immigrants who had grown violently discontent with a system at odds with their beliefs, are a horrifying example of this cycle. What makes this cycle appear across Europe without generating the same results in the U.S.?


Harry Dent and Rodney Johnson
for The Daily Reckoning

Editor’s Note: Harry S. Dent, Jr. is a noted author who has written several books, including two best sellers. Mr. Dent has appeared on “Good Morning America”, PBS, CNBC CNN/Fn, and has been featured in numerous publications including Barron’s, Investor’s Business Daily, Entrepreneur, Fortune, Success, US News & World Report, and The Wall Street Journal. Mr. Dent received his MBA from Harvard Business School where he was a Baker Scholar.

For more information on Mr. Dent’s research, please visit the new H.S. Dent Foundation Web site:

Strange things are happening. Bats were born with two heads in Albania. Turkeys have been reported walking backwards in Transylvania. And in Pennsylvania, tiny mobile phones, found in the entrails of slaughtered lambs, say “sell Goldman” when you push the call button.

In the homeland, 16,900 people were gunned down, strangled, stabbed or beaten to death last year. That’s an increase of 4.8%, the biggest jump in 15 years. No explanation has been offered.

And in the financial world, a curious mayhem seems to be increasing, too, while the “flight from risk” careens on, and still in the wrong direction.

All over the world, stock market investors are taking a beating – especially in emerging markets. Dubai is 58% below its high for the year. Saudia Arabian stocks are selling at a 43% discount from their highs. Indian stocks lost another 5% yesterday, while the Colombian stock market blew a fuse and shut down after stocks fell 10%.

Even sophisticated, first-world markets are dropping. Sweden and Germany are both down 17%. In the United States, the Dow lost nearly another 100 points yesterday and the S&P has now given up all its gains for the year.

The building stocks are getting knocked down. The index is off more than 40% for the year, with many leading stocks cut in half. And yesterday, we noticed something else: the financial stocks are taking some jabs, too. Lehman reported profits in the second quarter up 47%. But the stock still went down. So did Merrill and the world’s richest financial house, Goldman Sachs, which fell $4.89 to $145.

We noticed this last number because our interest in Goldman is increasing by the day. The company earns almost three quarters of its money from “trading.” How does it do that? What does it trade? How come it is so good at something at which goodness rarely counts?

We’ll rephrase that. Trading is notoriously fickle. A large component of success in trading, says mathematician/trader Nicholas Taleb, is nothing more than luck. Over time and space – the more trades, the more time – you’d expect luck to spread itself around fairly evenly and the results to revert to the mean. Not only does Goldman earn a fortune from trading, but also its top men get picked for headliner jobs at the White House and U.S. Treasury. It is rated so highly by investors that it is worth more than any such firm in the world. How come Goldman is so lucky?

We don’t know. But we’re curious enough to ask questions, and we hope to have more answers as the week matures.

Meanwhile, we take it as only a cheerful coincidence that investors seem to have all of a sudden become worried just when Mr. Hank Paulson is called to the Treasury to reassure them. What they are worried about is the risk that comes at the end of a worldwide liquidity bubble. Easy money caused a series of bubbles. Tougher money appears to be causing those bubbles to deflate. Last week, central banks all over the world announced tighter credit conditions – led by Europe and Japan, and echoed in comments by America’s Fed governors. Investors, anticipating an end to the bubblicious good times, retreat to the U.S. dollar and U.S. treasuries.

Even gold they still view with suspicion. Gold went up with lead, but not as much as copper. Now, it is selling off along with the base metals. The price fell again yesterday. In fact, our favorite metal fell below $600 – trading as low at $591 in Asia.

What does this mean, dear reader? Is gold no longer a safe haven for the world’s worried money? Is it no more valuable than lead? Is it useful only for bangles at Indian weddings or as fillings in the mouths of old geezers or to line the walls of public latrines, as Lenin suggested? Is our faith in gold misplaced? Should we join the others aboard the “flight from risk,” hoping for a very soft landing in the U.S. dollar?

We accept the complaint that gold is, over the long term, a very bad investment. It yields nothing. It just sits there.

On the other hand, it yields to no one. Ah, now there is the difference. America’s faith-based dollar yields too readily…and to practically everything. Since 1971 when it was finally cut loose completely from gold, it has lost 80% of its purchasing power. Those who rush to it now must have faith that it will continue losing value at the same, reliable rate. But we’re not so sure. Gold may be a terrible investment most of the time, but it is a spectacularly good investment occasionally. Mr. Paulson’s arrival at the U.S. Treasury – from the richest, most speculative, most secretive, and most powerful finance company in history – tells us that this is one of those occasions.

Over to our currency counselor for more news…


Chuck Butler, reporting from the EverBank world-currency-trading desk in St. Louis:

“Global inflation is now ‘At the Top of the House,’ as far as the markets are concerned. Look at the rot on the global stock market vines. Of course, inflation isn’t any thing a bond market would call ‘friend.'”

For the rest of this story, and for more insights into the currency markets, see today’s issue of The Daily Pfennig


Bill Bonner with more views…

*** Our editors and contributors here at The Daily Reckoning have plenty to say – so much so, that our inboxes were starting to get filled with their various debates.

*** Are we being offered a gift? One last chance to buy gold for less than $600 an ounce? Maybe.

But Richard Russell of the Dow Theory Letters suggests that this consolidation might still have a while to go. His conclusion? “Best to ‘go away’ and not look at gold for another six months to a year. As far as I can see, the first phase of the gold bull market is over. Accumulation time for the second phase lies ahead. And that’s going to take time.”

*** Remember back to February 2004, dear reader? That was when the maestro himself suggested to Americans that they may want to avail themselves of innovative new products from the financial industry – especially adjustable rate mortgages, which would allow them to take advantage of the lowest interest rates in 60 years.

Many people seem to have taken the advice. The Chicago Tribute reports that foreclosures are up 38% over a year ago. But the big increase in foreclosure rates are still, most likely, ahead. In the next 18 months, $2.7 trillion worth of adjustable rate mortgages are to be reset at higher interest rates.

*** Three inmates at Guantanamo hanged themselves.

A public spectacle typically runs through three stages: the lie, the farce, and the tragedy. The war on terror seems to have reached the tragedy phase, but it careens back into farce regularly.

Here we have Rear Admiral Harry Harris, Jr. with an explanation for the deaths (for which he is clearly responsible as camp commander) that is as good as anything ever invented by Soviet gulag chiefs:

“I believe this was not an act of desperation, but an act of asymmetrical warfare waged against us.”

Making war by hanging yourself is a tactic you don’t find discussed by Clausewitz or Sun Tzu. If it has been used at all, we suspect it was unsuccessful. Still, you never know. We assume the troops at Guantanamo are now on high alert…just in case of another attack.

The Daily Reckoning