Economists talk about the "hidden hand" of an efficient, free market. They are referring to the collective effect of market participants negotiating value in open trade based on supply, demand and the information associated with the risks and rewards of the transactions. There's another "hidden hand" at work in our economy, however, that may not be fully appreciated.
If you separate out the population increase in the United States due to legal immigration alone, our census would have remained essentially flat or slightly declining over the last 30 years or so. The per capita GDP has also been declining, in inflation-adjusted dollars. Our growth in total GDP has been due to the added contributions of people who have entered this country legally. The illegal immigrants, numbering somewhere around 10-12 million, have also added to our GDP, however, since their output creates economic value that legal residents benefit from, in the form of lower prices on goods and services due to lower wages commanded by these workers. I'm not arguing for the allowance of illegal immigration, I'm just noting a fact. With the downturn in our economy, we are seeing a reversal of the immigration flow by unskilled and semi-skilled workers. This will help alleviate unemployment pressures over time, and it will reduce our GDP growth.
Since World War II until the last decade, there was a "brain drain" from other parts of the world to the United States. The most gifted people who could make their way to this country wanted to come here to get an education. Most of the time they stayed, bringing their talents and future contributions to our science, technology and economy. In the late 1980's, fully half of the life science Ph.D. graduates were foreign born, for example. But in the last decade that trend has changed significantly. Gifted people still come here for our excellent universities, but they are returning home because their own countries increasingly represent higher opportunities for economic and social success than they used to. The result is that the United States is lagging in the creation of scientists and engineers. Our rate of innovation is therefore likely to decline, as measured by scientific discoveries, patents, new technologies, and the transference of that knowledge to students within our country.
America has been since its inception the land of opportunity for immigrants. That flow of immigration has been the secret of our success to date. As the Great Melting Pot, we enjoyed the benefits of biodiversity, and the challenges of mixing often incompatible cultures. The hot cauldron of creation that America represented produced the most successful socio-economic system that the world has seen. Now we are at a choice point for our future. If we assume that the rest of the world will continue to rise in ability to produce, to consume and to invent, narrowing the historical gap between the developing world and the United States, we have to ask ourselves what our future will be if America is not viewed as the preferred destination for the most gifted, the hardest-working and the most ambitious immigrants from around the world. Let's think about the impact of that.
At a little over 300 million in population, without immigration, our GDP will be dependent upon increased productivity per capita because our population will be flat or slightly declining. (Incidentally, this same dynamic is true of Europe, Canada, Australia and other highly developed countries.) Since our economy is about 65 percent based on services, we can't rely on manufacturing automation and new technologies alone to propel that increase in per capita productivity. As our economy continues to adjust to the impact of this Great Recession's fundamental shift, the service sector will shrink in absolute contribution to GDP, causing higher unemployment in those jobs and a decrease in per capita GDP. Without immigration, we will see sustainable increases in GDP only when our manufacturing and raw materials and agriculture sectors grow, and grow efficiently. We could grow if we somehow increased immigration, but then we have to face the same problems from population pressures that the whole world is suffering from, including climate impact, food scarcity, water supply shrinkage, etc.
So if sustainability from a national and a global perspective relies upon reducing population growth, but GDP is driven by that same growth, what is the solution? To me, our prosperity seems arbitrarily tied to GDP growth. Why isn't a flat GDP rate a good thing? Isn't it more about the mix? If we held at 300 million people in our country, and our GDP was similarly flat over time, wouldn't our economic health be dependent upon our balance of trade accounts, a balanced federal budget and balanced personal financial obligations, i.e., living within our means? Wouldn't our pursuit of happiness be more fruitful if we provided the right mix of livelihood opportunities for the demographics of our populace? Growth, for its own sake, is the wrong target.
We are facing a future where immigration will no longer fuel our economic engine, when maintaining a stable population will increase our chances for sustainable prosperity. We need to be thinking about this new paradigm as we set economic, legislative and social policy.
Sewitch is CEO of KI Investment Holdings LLC, conducting an investment experiment in long-term principles. He can be reached at email@example.com.