It is the year 2060, and global warming has turned Britain’s climate warm and sunny — rum rather than whiskey is now distilled in Scotland, using sugar cane grown in the Outer Hebrides. Realising that true British culture could not thrive without year-round cold drizzle and grey skies, in 2020 a farsighted government launched Brexit-Ultra, the plan to quit Europe for good and gradually resettle the British population in Antarctica as that continent’s climate shifted from frozen to one that is familiarly chilly and damp. Now the last contingent of colonists has departed, they too having sold their homes, at considerable profit, to new arrivals — people better able to cope with sunshine and blue skies.

What does Britain (soon to be renamed New Australia) look like in 2060? What levels of public debt are being bequeathed to the incoming population, and what is the state of the roads, rail and power grid they will inherit? Once upon a time, voters were forced to balance the need to fund the government’s spending against the discomforts of paying for expenditures with taxes. True, they occasionally succumbed to temptation and supported politicians who promised to postpone the pain and borrow the money instead, or voted for parties who campaigned to make life better or more equitable in the here and now rather than investing in infrastructure that would be needed in the future (this was called ‘investing in people’).

Yet the desire to indulge in the short term was always tempered by the knowledge that either the voters themselves, or their children, would ultimately pay far higher taxes if the debt accumulated without end, and that their future prosperity could not be ensured if the government only invested in free bus passes and triple-lock pensions. The moment the legislation surrounding Brexit-Ultra was passed, many of these trade-offs no longer mattered; both the debt and the roads would soon be left behind. So the former soared and the latter were left to crumble.

Under these circumstances it is hard to imagine the citizens of any country not behaving in the same selfish manner. And indeed, from the vantage point of 2019 it would seem these policies are what the British public, and indeed the citizens of nearly every major Western democracy, have consistently voted for over the previous forty years, in response to a less dramatic but still unprecedented period of demographic change.

Historically, people migrate. It is very unusual for a human population, even on the remotest of islands, to remain demographically isolated forever. What makes the surge in migration to the West in the last decades different this time is the way it has been accompanied by sharp declines in fertility. The result is that 28 per cent of births in England and Wales in 2017 were to mothers born outside the UK. The figure for the United States is 23 per cent (in 2016). In 2015, first- and second-generation immigrants already accounted for 26 per cent of the US population, and this number is projected to increase to 36 per cent by 2065.

Governments mostly generate the revenue they need by taxing economic activity, which affects people’s welfare both directly and indirectly. Directly it shifts resources from private individuals to finance public needs or to redistribute. Indirectly, welfare is affected, nearly always negatively, by distorting prices and incentives. These distortions — what economists call deadweight loss — rise at ever-increasing rates as the rate of tax increases.

This is why, notwithstanding the desire to engage in countercyclical fiscal policy, economists prefer to see taxes smoothed across time rather than fluctuate wildly. Once rapid demographic change means society no longer resembles what in 1790 the Anglo-Irish philosopher Edmund Burke called a “partnership not only between those who are living, but between those who are living, those who are dead, and those who are to be born,” minimising deadweight loss in the distant future loses at least some of its salience as a political issue.

In a recent paper, I demonstrate how the levels of deficit finance that best serve the interests of a country’s incumbent population and their descendants grow as the pace of immigration rises. People in this model are neither myopic nor selfish towards their own progeny. In fact, the opposite is true. Thanks to immigration, the lower taxes they pay in the present afford them the opportunity to leave larger bequests or invest more in their children’s education, which more than indemnifies these children from the ill effects of the higher taxes they will ultimately have to pay later. Calibrated for the US economy, the predictions of the model closely resemble the rise in US federal government debt over the course of the last four decades as well the further increases projected by the Congressional Budget Office till 2054. A similar pattern can be observed in the UK and in nearly every Western country — rapid demographic change accompanied by rising debt-to-GDP ratios and even greater increases in unfunded liabilities.

Empirical research suggests that the direct impact of immigration on the income of natives is small and mostly transitory (see National Academy of Sciences report (2017)). This is largely because the arrival of new workers induces adjustments to the country’s capital stock that quickly restore the balance between labour and capital (see Ben-Gad (2004) and Ben-Gad (2008)). Immigrants also pay taxes and use services, but the net effect is also relatively small and highly dependent on the skills and education immigrants bring with them (NAS report (2017) again).

Far more important than any economic impact is the effect immigrants have on the culture and politics of the receiving country. Once naturalised, immigrants vote, usually to the benefit of some political parties and to the detriment of others. Their arrival also generates changes in the political behaviour of the native population. The recent rise in populism is one reaction. The choice to defer taxation and allow the debt burden to rise to levels unprecedented in peacetime is another. Financing that debt burden will require high taxes on Scottish rum and much else besides.

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Notes:

This blog post is based on the author’s paper On the Political Economy of Deficit Bias and Immigration, Economic Journal, 2018.

The post gives the views of its authors, not the position of LSE Business Review or the London School of Economics.

Featured image: Sunset in Clyde, Scotland, by louiepastore, under a Pixabay licence

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