The Magically Vanishing Slice of Pie: Shockingly Bad Methods behind the Heritage Foundation’s Estimates of the Fiscal Costs of Unauthorized Immigration

May 07, 2013

Robert Rector and Jason Richwine of the Heritage Foundation have written a report claiming that regularizing unauthorized immigrants in the United States will cost American taxpayers trillions of dollars. Neither Rector nor Richwine are trained economists and the methods that they use to arrive at this number are not economic analysis.

There is widespread condemnation of Rector and Richwine’s work across Washington. Conservative analysts, in fact, have been the loudest in slamming Rector and Richwine’s inferior methods. When the American Action Forum, Americans for Tax Reform, the Cato Institute, and Rep. Paul Ryan (R-WI) are roundly trashing Rector’s methods, the problem is not Rector’s politics; it’s his methods.

The long list of errors made by Rector and Richwine has been ably discussed by Alex Nowrasteh of the Cato Institute, so I will not repeat them. I will focus on the single most egregious, baffling mistake that Nowrasteh does not discuss at length. Rector and Richwine simply omit any analysis of the chief way that both unauthorized and regularized immigrants benefit public coffers: by creating the economic activity that is the basis of all fiscal revenue.

Rector and Richwine include no analysis of the impact of unauthorized immigrants on the US economy. They just assert without basis that those 8 million workers only add 2% to US GDP, because their wages amount to 2% of US GDP. Then comes this statement:

“[T]he immigrants themselves capture most of the gain from expanded production in their own wages. Metaphorically, while unlawful immigrants make the American economic pie larger, they themselves consume most of the slice that their labor adds.”

Unless either Rector or Richwine have access a secret source of information documenting that all unauthorized immigrants spend their income exclusively on goods and services produced by other unauthorized immigrants, the above idea is impossible.

In the real world, unauthorized immigrants who earn money in the United States spend the large majority of their income on US-produced goods and services. Those goods and services are produced by Americans. Of the people who own the grocery stores, restaurants, phone companies, and apartment buildings where unauthorized immigrants spend their incomes, almost none are themselves unauthorized immigrants. The large majority of unauthorized immigrants’ incomes go directly into fueling the US economy; it does not magically disappear like the eaten slice of pie in Rector and Richwine’s metaphor. And not only does each of those dollars add a dollar to the US economy, it adds more than a dollar—because the grocery store owner, too, spends it. And so on. These effects are among the fundamental concepts taught in introductory economics courses.

Second, and separately, Rector and Richwine’s analysis omits the effect of unauthorized workers on the productivity and profitability of the firms and farms and families who employ them—above and beyond the wage. Labor’s share of income is roughly half in the US economy broadly, and that’s certainly lower for unauthorized workers, who have less negotiating power than other workers. That means that unauthorized workers add value to the US economy amounting to at least double their wages.

Additionally, that direct effect also is augmented by multiplier effects, because owners of capital likewise spend most of that additional income on US-produced goods and services, whose providers do the same, and so on. Large portions of that income likewise enter public coffers through various excise, income, and property taxes. There is no inkling of this analysis in Rector and Richwine; they casually dismiss these colossal effects with their metaphor of the magically vanishing pie slice.

Rector and Richwine’s methods are equivalent to analyzing the economic impact of General Motors by 1) totaling up the wages of GM employees, ignoring the effect of those workers’ work on the incomes of GM shareholders, and 2) asserting that even that sum has no broader economic effects, because it all goes to GM employees, assuming they never spend it on anything made by other people. GM workers would then have no benefit the US economy, and therefore provide nothing to public coffers besides what they themselves pay in taxes.

Rector has a history of this lack of rigorous analysis. Six years ago, he did the same thing, producing without methodological basis exaggerated estimates of the cost of regularizing people who had entered the country illegally. He did some arithmetic that yielded a cost to US taxpayers in the trillions of dollars. Back then, the respected and non-partisan Center on Budget and Policy Priorities debunked Rector’s opinions, demonstrating that the “the effect of the immigration bill on future deficits is likely to be close to zero.” The non-partisan Congressional Budget Office likewise showed that Rector’s omissions were fatal to his conclusions, since the fiscal benefits of immigration reform were at least enough to offset the costs of regularizing unauthorized workers. Now, six years later, Rector is back with the same methods.

Conservative politicians and voters considering whether to support current immigration reform proposals have a right to know the genuine fiscal impact of those proposals. The Congressional Budget Office has not done that analysis for the 2013 Senate bill yet, but it has published this statement on how such analysis should be done by any qualified analyst. It describes how a full accounting would need to include numerous ways that immigration reform would raise fiscal revenue by stimulating the overall economy—such as through “the impact on private saving, capital flows, and interest rates, and the resulting effect on wages”.

Rector and Richwine’s methods reject any such technically sound, nonpartisan method. Once the Congressional Budget Office releases proper nonpartisan analysis by qualified technical analysts, the policy debate should proceed on that basis.


CGD blog posts reflect the views of the authors, drawing on prior research and experience in their areas of expertise. CGD is a nonpartisan, independent organization and does not take institutional positions.