How Immigrants and Foreigners Keep Prices Low

If one accepts the basic free-market concepts of comparative advantage and division of labor, it naturally follows that free trade and liberal immigration—the hallmarks of globalization—are good things. Virtually no economists dissent from this premise, and yet so much of the American public remains hostile to globalization. Why is this the case?

Many people erroneously believe that immigrants steal American jobs, and free trade results in lower living standards. Not only are these beliefs contradictory to widely accepted economic theories, but they’re objectively false as well. Study after study shows that immigrants—even illegal ones—benefit the U.S. economy, and the same can be said of expanded international trade.

Many anti-globalists also complain that immigrants “take money out of the economy” by transferring U.S. dollars to Mexico and elsewhere. While this is undoubtedly true, taking money out of the domestic supply diminishes the inflationary effects of the Federal Reserve’s monetary expansion, thus keeping prices lower than they would be otherwise. Furthermore, international transfer promotes the global acceptance of the U.S. dollar which is another artificial bulwark against domestic price inflation. If total immigration were cut back to levels currently allotted for legal immigrants, not only would prices rise due to the higher wages demanded by Americans for doing unpleasant work, but the money these Americans were paid would remain in domestic circulation, causing even further price inflation. The logic of this is fairly straightforward, and yet there are still blue-collar nationalists calling for confiscatory taxes on international money transfers. It’s like they’re demanding to pay higher prices!

U.S. Debt Purchases

A similarly off-base argument is made against allowing foreign governments to purchase U.S. debt. When the federal government spends more than it takes in—as it always does—it has to issue debt instruments (bonds, bills and notes) to cover the shortfall. These instruments are sold on the open market, and about a quarter of them are purchased by America’s own central bank, the Federal Reserve. Americans then pay taxes to cover the interest paid to the Fed, which pays its expenses (including a 6% divided to its mysterious shareholders), and then dumps what’s left—the profit—back into the Treasury. This is really a shell game. What’s essentially happening is the federal government is printing money to fund about a quarter of its deficit. How do you imagine this affects the price of groceries and gasoline as denominated in dollars?

We are very lucky that China and other producer nations trade us real goods in exchange for paper debt obligations. After all, if China did not step to the plate, just think about what would happen:

1. With less demand for government bonds, prices would rise. This would mean the effective interest rates of the bonds would be higher, and since most private interest rates are based in large part on the yields of U.S. Treasury securities, this would result in higher interest rates across the board; slowing economic growth. Or…

2. The Federal Reserve would have to buy more than a quarter of the government’s bonds, thus expanding the supply of money and causing additional price inflation. After all, when the Fed buys a bond, it simply creates the money to purchase it out of thin air. This money then circulates throughout the economy causing the prices of all goods and services to rise.

China, by contrast, cannot print U.S. dollars, so any money it spends on U.S. bonds is money that already existed. China’s role in the U.S. economy is to keep prices down, both through the production of cheap exports and through the acceptance of U.S. debt obligation in return for those exports.

Putting Things in Perspective

The truth of the matter, however, is that the anti-globalists are on to something. The welfare state, which they blame immigrants for putting undue strain on, is unsustainable, as is the U.S.’s trade deficit. But the former is something we need to contend with irrespective of immigration, and the latter is a result of America’s widely accepted fiat money. After all, under the gold standard, long-term trade imbalances are impossible, since countries have to produce something of value in order to trade it—they can’t just fire up the printing presses to purchase foreign goods.

Immigrants and foreigners are often turned into scapegoats during times of economic uncertainty. Today, many Americans know something is not quite right, but they incorrectly blame others rather than looking in the mirror. It is our welfare state and monetary system—not immigrants or foreigners—that threaten our continued prosperity. We can close our borders to trade and labor if we want, but we shouldn’t expect a different outcome from when President Hoover did the same thing—right before the Great Depression.

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