Is unwelcoming immigration law choking the US economy?

4th October 2012

Research by the Kauffman Foundation argues that the country's "unwelcoming" immigration system has led to a "reverse brain drain" that is hampering entrepreneurship in vital areas of the economy.

Another study demonstrates how action to remove illegal immigrants from the workplaces of one US state ending up damaging its economy.

A critical election issue

President Barack Obama has stressed his commitment to "fixing [the] broken immigration system", aiming to boost the country's economic competitiveness by encouraging innovation to be based in the US and not other nations.

Obama gave hundreds of thousands of undocumented immigrants, who were brought into the country illegally as children, the temporary right to live and work in the country earlier this year as part of the reforms.

"It makes no sense to expel talented young people … who want to staff our labs, or start new businesses, or defend our country simply because of the actions of their parents – or because of the inaction of politicians," the president said in June.

Meanwhile Mitt Romney, the Republican candidate in the presidential race, recently softened his stance on immigration.

"The people who have received the special visa that the president has put in place, which is a two-year visa, should expect that the visa would continue to be valid. I'm not going to take something that they've purchased," Romney told the Denver Post.

Previously, the candidate called for "self-deportation" and opposed efforts by Obama to legalise the status of anyone brought to the US as a child by illegal immigrant parents.

However, the debate is confined to the issue of dealing with illegal immigrants already in the country. Less time is spent discussing the growing need to open up the country to greater numbers of incoming migrants.

Is entrepreneurship suffering?

Despite moves by the Obama administration and a change in direction by the Romney campaign, critics maintain that the US' immigration system is turning away potential entrepreneurs – especially those in important areas of the economy such as technology.

A study by the Kauffman Foundation, a think-tank specialising in entrepreneurship, found the proportion of immigrant-founded companies has dropped from 25.3% in 2005 to 24.3% today. In the technology sector – a driving force behind the country's economy – the share has dropped from 52.4% to 43.9%.

Kauffman Foundation director of research and policy Dane Stangler says: "To maintain a dynamic economy, the US needs to embrace immigrant entrepreneurs.

For several years, anecdotal evidence has suggested that an unwelcoming immigration system and environment in the US has created a ‘reverse brain drain'. This report confirms it with data."

The US neglecting its entrepreneurial spirit

Declining rates of immigration is just one factor highlighted as being behind the decline in America's entrepreneurial spirit in Robert Litan and Carl Schramm's new book Better Capitalism.

According to a review of the book by The Economist, America used to boast one of the most business-friendly immigration systems in the world. In addition, 18% of the Fortune 500 list as of 2010 were founded by immigrants – including Google, Kraft and Procter & Gamble – while immigrants obtain patents at double the rate of US-born people with the same education.

"But America's immigration policies have tightened dramatically over the past decade, a period in which some other rich countries, such as Canada, have continued to woo skilled immigrants, while fabulous new opportunities have opened up in emerging markets like China and India," the review says.

"Why endure America's visa obstacle course when other countries are laying out the red carpet?"

Add to this the difficulty in securing venture capital funding in the US market and the apparent fading in the university-business boom, which was responsible for many technology and pharmaceutical developments, and it becomes clear that the US needs to do whatever it can to bolster its entrepreneurial spirit.

Tough immigration policy and the economy

Sometimes immigration policy has been tightened with the aim of strengthening an economy by clamping down on illegal workers in the hope that their jobs will be taken by residents. But the example of Arizona suggests this may not be effective.

In 2008, the Legal Arizona Workers Act came into force. This law attempts to force "unauthorised aliens" out of the workplace by applying sanctions to their employers. It was later complemented by the 2010 Support Our Law Enforcement and Safe Neighbourhoods Act, which gives local police powers to enforce Arizona's immigration laws outside of the workplace.

However, research by public policy research organisation the Cato Institute argues that the legislation has increased the cost of hiring, pushed businesses to re-locate out of the state and exacerbated the effects of the Great Recession.

Alex Nowrasteh, immigration policy analyst at the Cato Institute's Center for Global Liberty and Prosperity, says the consequences "serve as a warning to other states seeking to enact Arizona style immigration laws".

"The laws have forced unauthorised immigrants out of the state, and the regulatory mechanisms have diminished economic growth, incentivised the creation of a larger informal economy, created uncertainty for businesses, and depressed property values," he writes.

So tightening immigration regulations may get a few more US-born workers into jobs. But it does little to nurture meaningful economic growth, let alone encourage the innovation that the country prides itself on.

Throwing open the doors

Writing in The Atlantic, Stony Brook University assistant professor of finance Noah Smith puts forward the case for the US actively encouraging immigration from Asia and Africa.

"The United States still needs people — to start new companies, to keep our pension systems funded, and to keep our domestic market large in order to attract investment," he argues.

"America should be a home not just for people seeking a job, but a refuge for free thinkers and iconoclasts seeking to escape the invisible fetters of tradition. These people tend to be entrepreneurs, innovators, and agents of positive change here in America."


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