Is immigration deflationary?

Long time readers already know what I’m going to say, but since Tyler Cowen asked the following:

Let’s say more migrants arrive in a country.  One view, held by Bryan Caplan, is that (ceteris paribus) the monetary base is fixed, so now the monetary base per capita has decline.  Thus immigration is deflationary.  There are more people and not more money, alternatively you could say that the demand to hold money has gone up.  (I am, by the way, blogging this with Bryan’s permission.)

Another view, mine, is that the new immigrants shift out both the aggregate demand and aggregate supply curves, and the net effect can be either inflationary or deflationary.  Even given a fixed monetary base, M2 likely will go up, as for instance banks will find they have more desirable loans to make, for instance to the new arrivals.  Optimal reserve requirements and money multiplier variables are likely to change, so the fixed monetary base need not choke off a demand increase.

Who is right and under which conditions?

My first response is that immigration probably won’t impact inflation, as the Fed targets inflation at 2%. Thus the monetary base (and IOR) will be adjusted as needed to keep long run inflation at 2%. But what if we assume a fixed monetary base? Who’s right in that case?

I’d say that Bryan is probably correct in the long run. (And long run effects are presumably what we care about with immigration.)

But Tyler’s reasoning is correct; immigration would likely provide a one-time boost to base velocity. Thus at cyclical frequencies you might well get higher inflation. Think of it this way:

1. Suppose an extra 3 million immigrants per year permanently boosts trend RGDP growth by 1%. As a result, US real interest rates rise by 75 basis points.

2. Suppose that a 75 basis point increase in interest rates permanently boosts base velocity from 10 to 11.

In that case, with a fixed monetary base you get a roughly 10% one-time boost in NGDP (and inflationary boom) followed by a permanent reduction in trend inflation of 1% (due to faster RGDP growth.)

In my view, we should not assume that the monetary base would actually be fixed, and the baseline assumption should be no effect on inflation due to monetary offset. But if the economy is currently out of equilibrium (as it is today), then more immigration might affect inflation in the short run. Surprisingly, I suspect it might actually reduce inflation by boosting the economy’s supply side so much that the Fed can bring inflation down more easily without creating a recession. By that’s highly speculative, and you could also argue that it would trigger a Fed expansionary policy mistake by boosting the natural interest rate by more than the Fed estimates. If the Fed doesn’t raise rates, inflation would rise.

When thinking about the merits of more immigration, I’d put inflation near the bottom of the list of factors we should consider.

PS. FWIW, high immigration Australia has generally had relative high base velocity, which fits the model.



29 Responses to “Is immigration deflationary?”

  1. Gravatar of Sara Sara
    6. May 2023 at 10:31

    You are missing the point entirely.

    A vast influx of immigrants lowers real wages significantly for blue collar workers.

    This is economics 101, and you still fail to grasp it.
    The supply of jobs in this country is teetering on the edge, and so the last thing the blue collar need is 3M immigrants a year; the labor department is jumping through hoops to convince you that we added 250,000 jobs (very unlikely). But even so, there is enough unemployed in this country to fill the availability; not to mention, the balance sheets across the board are not good, which already tells us that there is likely a significant downturn coming. Everyone knows it, including the most powerful CEO’s, yet the economists are staring blankly, obtusely, and unintelligently at their nonsense blackboards.

    Furthermore, you told us a few months ago how the U.S. should immediately accept 10M Chinese (only Chinese) for some bizarre reason, presumably so that our engineers can be replaced by the superior Chinese engineers. Now you are telling us we need 3M immigrants a year. Who is going to give them jobs? You? You don’t own anything. You couldn’t even hire one of them. You are useless.

    Even Robert F. Kennedy jr, a pretty left wing guy, understands the concept of practical immigration; not open border lunacy.

    It’s time for you to admit the truth. You are a radical destructivist.

  2. Gravatar of ssumner ssumner
    6. May 2023 at 12:28

    Sara, Yes, real wages were so much higher when only the Native Americans lived here.

  3. Gravatar of Solon of the East Solon of the East
    6. May 2023 at 15:07

    The Native Americans perhaps did not benefit from succeeding waves of immigration.

  4. Gravatar of Solon of the East Solon of the East
    6. May 2023 at 16:13

    RBA Governor Says International Border Closure Could Fuel Surge in Wages 7/7/2021 WSJ

    Australia could face a surge in wages growth and inflation if the closure of the country’s international borders to foreign workers continues for some time, Reserve Bank of Australia Gov. Philip Lowe said Thursday.

    In a speech to economists, Mr. Lowe said the most significant challenge to labor supply in the country was the closed border, which has normally been a major source of skilled workers for the economy over many decades.


    Fascinating. It is interesting that Australia concentrates on importing skilled workers…and also that Aussie’s skilled workers must have zero politico-economic clout.

    Should the US, like Aussie, largely limit immigration to skilled workers (and those with money)?

    Seems like a great way to transfer real wealth—people into which years have training have been invested—into one’s own nation. Vulgar nationalism on steroids?

    Why is importing the world’s talent—a brain drain—not nationalistic? The ultra-nationalists argue that importing valuable labor is good the US, not foreign nations.

    The US model—essentially no border controls—is the better model? Good for the upper quarter, but bad for the bottom quarter (on socioeconomic scales)? Seems likely.

    Nations such as Canada, Australia and the US, with exploding housing costs—do they need a moratorium on immigration until housing production issues are solved? Are property owners the impetus behind the calls for more immigration?

    As usual, are the theories are overrun by practical realities?

  5. Gravatar of ssumner ssumner
    6. May 2023 at 18:41

    Solon, “The Native Americans perhaps did not benefit from succeeding waves of immigration.”

    They certainly benefited from much higher wages. Are you predicting that today’s immigrants will bring smallpox? That’s the primary way that we hurt the Native Americans. Or that they will shoot us and take our land?

  6. Gravatar of Solon of the East Solon of the East
    6. May 2023 at 23:53

    Well, counterfactuals are always hypothetical.

    Even if European immigration had been peaceful and disease-free…the scale may have overwhelmed and eventually eclipsed the aborigines…making them marginalized strangers in their own land.

    The aborigines might have benefitted from strict immigration enforcement.

  7. Gravatar of rick white rick white
    7. May 2023 at 05:52

    ceteris parabis? who pays for their health care? I am not anti-immigration but how is health care provided and paid for?

  8. Gravatar of ssumner ssumner
    7. May 2023 at 07:45

    Solon, The aborigines might have benefitted from strict immigration enforcement.”

    “Of course that has no bearing on the current situation.

    Rick, Immigrants pay taxes. Immigration is the best solution to the problems of financing Social Security and Medicare.

  9. Gravatar of Solon of the East Solon of the East
    7. May 2023 at 15:25

    Californians might have benefited also from immigration controls after 1960.

    My impression is that in California, living standards and the quality of life are lower than in the 1960s.

    There is no gainsaying that certain technical advancements have been made, such as a smart tablet I am using right now, or certain medical procedures.

    But those technologies could have been imported, while saving California’s easy lifestyle and environmental qualities.

    For Californians, immigration has been a negative.

    It is also interesting to ponder the granting of political rights to immigrants who then vote as a block.

    Certainly one could consider that outcome—if a nation allows the equal of 5% of the population to immigrate every year and they vote as a block….

  10. Gravatar of ssumner ssumner
    7. May 2023 at 20:05

    Solon, You said:

    “My impression is that in California, living standards and the quality of life are lower than in the 1960s.”

    Your impression is wrong. In any case, if you had done that then millions of people would have been denied the right to live in this wonderful state. Why would you wish to do that?

  11. Gravatar of Doug M Doug M
    7. May 2023 at 22:33

    Increasing immigration while keeping the monetary base fixed…

    The answer is either, you will get the result your model says you will get. Or, don’t be rediculous.

    You are talking about spherical cows.

  12. Gravatar of Solon of the East Solon of the East
    7. May 2023 at 23:29

    Scott Sumner:

    Re California. I grew up in CA, born in 1955.

    Sure, you might have higher pre capita incomes today, as measured.

    But housing costs have exploded, whole environments severely degraded (desert areas near L.A. for example) commute times became soul-draining, quality of public services and spaces radically declined.

    The air quality improved, and ocean-water quality (AFAIK). Restaurants, if not better, are more varied.

    Poverty and homelessness became manifest. People living in garages, once rare, is common in L.A. How is living in what was once a garage a higher standard of living?

    From what I saw, by 2000-2020 it took a married couple each working 60 hours a week to live like their stay-at-home mom families did.

    I am merely observing what California, if an independent nation, should have done for its citizens. It would have been “selfish” in some regards. But a nation exists to serve the citizens–not to serve the people of the world.

    I expect a Japan or China or Germany or Ghana to serve its citizens.

    Any of those nations, admitting a foreign population equal to 5% of the population every year for 10 years—well what makes a nation?

    A Ghanian walks around and notes that more than 50% of the population is not Ghanian, prefers another language and may regard Ghanian culture with mild contempt? And if newcomers vote, or demand equal right as citizens? Feel they are mistreated?

    Immigration is an issue much larger than simple economics.

  13. Gravatar of Anish Anish
    8. May 2023 at 06:51


    The economy cannot support 3M a year. Not even close to that. It’s way too many. Have you seen the oil futures? Have you seen the banks lately?

    Have you seen the currency crashing, and the tech layoffs?

    We will see a big crunch later this year, and 2024 through possibly 2030 is looking like rocky times. If the government stays out of the market then maybe faster recovery in 2026 and 2027, but they won’t. They will try to nationalize and it will make it even worse.

    Adding 3M a year is economic suicide for the middle class.

  14. Gravatar of ssumner ssumner
    8. May 2023 at 08:05

    Solon, I live in Orange County. Up in Anaheim and Santa Ana you have lots of houses that were viewed as middle class in the 1960s. Say 1200 sq. feet, 2 or 3 bedrooms and one bath. Now those are viewed as lower income Hispanic neighborhoods, and their kids live in 3000 sq. foot homes in south Orange County. Living standards are dramatically higher.

    “Restaurants, if not better, are more varied.”

    LOL, “if”? They are so much better that it’s as if they come from a different planet. Bland meat and potatoes vs. high end Asian food? Are you serious?

    Anish, On a per capita basis that’s well below current Canadian levels. Is Canada’s middle class committing suicide? We can easily accommodate 3m/year, indeed it would lead to a booming economy.

  15. Gravatar of Edward Edward
    8. May 2023 at 08:44

    Let’s assume the worst happens, and those maniacal imbeciles in Congress refuse to extend the debt ceiling and Biden for whatever reason doesn’t invoke the 14th Amendment. (Just because it worked out 10 years ago, doesn’t mean it will again)

    How would the Fed offset an extended default?

  16. Gravatar of Student Student
    8. May 2023 at 09:01

    It would be interesting to charter a new city somewhere and let immigrants come and go almost at will. Decriminalize drugs. Minimal zoning laws. No social saftey net… and just see what would happen. It’s a wild idea but even Trump seems to be advocating something like this (though I don’t think he understands what he is talking about or why).

    Maybe it’s an area where liberals open to immigration could come together with libertarians. The trumpians will do whatever dear leader tells them to so maybe it’s something we could actually do in this get nothing done political environment we have become locked into over the last 15-20 years.

  17. Gravatar of Student Student
    8. May 2023 at 09:08

    Just let it rip there like that area in Amsterdam where people build their own houses out of old pallets and what not. Let’s see how many of these rules we really need lol.

  18. Gravatar of Student Student
    8. May 2023 at 09:15

    Get Paul Romer and the charter city types with experience in this area involved with Elon and some of the moon shot whackos and run a national experiment. I really have no idea if it would turn into a hellscape or the next great American city. I would bet it would start out as a hell scape like the five points in Gangs of New York, but work out well in the long run.

  19. Gravatar of Student Student
    8. May 2023 at 09:19

    Enforce property rights but that’s about it. Let people grow their own weed or hemp or tobacco or mushrooms. Let men dress up like women. Don’t require kids to go to school. Let the weirdos and immigrants that want to flee violence and war do what they do. No zoning no nothing. Lol.

  20. Gravatar of Carl Carl
    8. May 2023 at 10:33

    I think it depends on the skills of the immigrants and our capacity to educate those who need to acquire skills (this, of course, includes the children of immigrants).

  21. Gravatar of Solon of the East Solon of the East
    8. May 2023 at 18:22

    Scott Sumner:

    Don’t underestimate the restaurants of yesteryear in L.A.

    There were always Asian, Latin, European and American restaurants, and many were excellent.

    In the 1960s it was possible to eat at diners run by European immigrants offering “true” fare, and those have largely faded way. The idiosyncratic mom-and-pop diners have been replaced by fast-food. There were great Italian restaurants, really tops.

    In any event, restaurant food everywhere has gotten better. Indeed, with a recipe anyone can cook in any style–it is easy to engage in “cultural appropriation” and cook Thai food, for example.

    You don’t need immigrants to make great restaurants. You just need cultural appropriation.

    You might need a lot of immigrants to keep restaurants low-priced…which is why some people want immigration….

  22. Gravatar of A A
    8. May 2023 at 21:13

    So surely the most likely fed response is in the right direction but insufficient. In that case you are predicting inflation. I am surprised you are expressing this in rate terms. i find TCs agg supply vs demand more intuitive. It sounds like you are saying short term demand effect dominates (immediate v boost). Id expect supply effect to dominate as immigrants have high saving rate (short term fall in r?)

  23. Gravatar of Solon of the East Solon of the East
    8. May 2023 at 23:32

    Old joke in L.A.:

    You can eat in a high-class Vietnamese, Chinese, Thai, Armenian, French, Italian or German restaurant in Los Angeles, and eat the best food cooked by Mexicans anywhere on the planet…

  24. Gravatar of Spencer Spencer
    9. May 2023 at 02:35

    Why do you think Hispanics build fences in the front yards?

  25. Gravatar of ssumner ssumner
    9. May 2023 at 08:02

    Edward, I have no idea.

    A, I don’t like talking in rate terms, but everyone else does so sometimes I need to follow along just to be understood.

  26. Gravatar of Solon of the East Solon of the East
    9. May 2023 at 15:11

    Should Japan encourage immigration equal to 5% of the islands’ population for the next 10 years?

    In 10 years time, the majority of people living in Japan would not be Japanese.

    By globalist standards, such an immigration policy would probably be rated a success. Japanese per capita income might actually rise. Tokyo might get better restaurants.

    But does any sane person really think that would be a good outcome for the average Japanese?

    Does Japan have something worth protecting that the US does not?

  27. Gravatar of Michael Rulle Michael Rulle
    10. May 2023 at 03:11

    Definitely agree concerns about inflation given increased immigration is near the bottom of the list ——or off the list of concerns entirely—(unless,bla bla.)

  28. Gravatar of ssumner ssumner
    10. May 2023 at 10:32

    Solon, I’ll let the Japanese decide what level of immigration they’d be comfortable with.

  29. Gravatar of Solon of the East Solon of the East
    10. May 2023 at 17:19


    Kevin Erdmann’s latest post on inflation is interesting.

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