The Inextricable Link: How Immigration is Both a Symptom and Cause of Our Excessive Debt
A Mad Situation
In the past two weeks, there have been calls from business, government ministers and even the Migration Advisory Committee to let more immigrants in to ease staff shortages.[i]
To any economist, this makes no sense at all.
Interest rates are at rock bottom and the government borrowed £24.3bn a month in May and over £22bn in June! That is the equivalent to the monthly median wage[ii] of roughly 9 million people!
If we assume 50% of that borrowing goes on wages, and a conventional debt multiplier of 2.5x (because government spending itself generates further spending and tax revenues), then unsustainable borrowing is the only thing keeping nearly 12m people (35% of the UK labour force) in a job!
With nearly 12m people in unsustainable jobs, we should absolutely NOT be expanding immigration right now. In fact we should be doing the opposite and tightening rules.
Rather than importing immigrants to do jobs where there are shortages, we should be retraining the millions in our own labour force whose jobs will be lost as we inevitably have to cut borrowing.
Bowing to short-term pressure from business, instead of encouraging a more-proactive solution for the existing labour force will only create a social catastrophe down the line.
There is only a tight labour market because we are borrowing too much unsustainably.
It is crazy to be loosening immigration rules (politically unpopular) when a third of the workforce is only employed because of unsustainable debt growth (also politically unpopular).
This is of course, the basis of the Phillips Curve and Keynesian Economics.
Much like the Bible Parable of seven years feast and seven years famine; when employment gets tight you should not be borrowing! Instead you should be saving for that inevitable rainy day.
As this report goes onto explain, this paradoxical situation is the result of the inextricable link between Britain’s addiction to unsustainable debt and mass immigration. The problem has been building for two decades. It has now reached an extreme.
How Mass Immigration Distorts Monetary & Fiscal Policy
Governments and central banks work hard to keep unemployment to a minimum. High unemployment leads to widespread social problems and is expensive, draining the government of resources.
The theory is that during economic shocks, governments should borrow heavily and central banks slash interest rates. The extra spending creates jobs and puts upward pressure on wages, leading to a recovery.
As the recovery takes hold governments reduce debt and the central bank raises interest rates to prevent the economy overheating and to control inflation. Thus, things are supposed to move in a relatively smooth cycle.
This is right at the heart of macroeconomic theory.
Over the past two decades, this cycle has been broken. Government debt has only gone up, accompanied by massive growth in private sector debt. Meanwhile interest rates have gone down and down to near zero.
There are many negative consequences to this. Including excessive debt, rising inequality, misallocation of capital, government waste, moral hazard and asset price bubbles[iii]. In a damning report, The House of Lords Economic Affairs Committee has called this ‘A Dangerous Addiction’ that is doing far more harm than good. All these problems are not only hurting the economy and our quality of life, but setting us up for more financial crises in the years to come.
In other words, it would be far better if the traditional cycle of expanding and contracting fiscal and momentary policy were reactivated.
A key reason the traditional cycle has been broken is immigration. This is wholly underappreciated but theoretically sound.
When governments and central banks turn on the taps to stimulate demand, the aim is to drive up employment and wages. However, if you have an economy that is open to mass immigration, immigrants also come in, taking many of the newly created jobs and putting downward pressure on wages. The result is to massively dilute the intended effects of stimulus.
Thus, central banks and governments have to spend far more to achieve their aims, creating jobs for millions of foreign nationals as well as domestic nationals. Meanwhile the downward pressure on wages from mass migration means that inflation does not rise as it should. Thus, there is no signal to begin raising rates and tightening monetary policy.
The result of this prolonged stimulus and low rates is excessive debt, even after a recovery takes hold.
That extra debt means the government has less ammo to fight future crises. It also creates an enormous burden on future generations. Meanwhile, the beneficiaries of all this extra debt are not the voters but foreign nationals.
You can see this at work after the financial crisis. Even at the height of the Global Financial Crisis in 2008, The UK and US saw enormous numbers of immigrants arrive, particularly from troubled economies like Greece and Romania. Both the UK and US took on more debt than these other economies. In effect we bailed out the unemployed in other countries by burdening our children and grandchildren with debt.
This is not a good result for those troubled economies either. Rather than facing pressure to complete much needed structural reforms that would solve their unemployment crises and create decent job opportunities, they simply outsource the problem to countries like the UK.
The perfect illustration of this phenomenon are these graphs showing UK net migration and the explosion in UK public sector debt. Both of them began to take off at the same time – around 2001.
It is no coincidence. Imagine a hypothetical mature economy where everyone earns a wage and spends it, but with no debt. Money simply circulates round and there is no excess demand for labour. However, if you introduce growing debt into the equation, you create an excess demand. This is what the UK is doing. It borrows more money each year, creating excess demand, which creates the illusion that we ‘need’ more labour. The labour itself suppresses employment and wages, leading to excessively loose fiscal and monetary policy, and yet more debt.
Thus, as illustrated below we are caught in a dangerous self-reinforcing cycle of excess immigration driving excess borrowing and vice-versa:
When Job Creation Becomes Damaging
Not only is debt-fuelled job creation unsustainable, it can also be damaging to economic growth and resilience. The government, in other words, is creating jobs it does not really need doing with money it does not need to borrow.
These extra non-jobs tend to be middle-manager / bureaucrat roles, bringing nothing but excess regulation and complexity, as is illustrated by the government’s recent handling of excepting key workers from the “Pingdemic.” Rather than just exempting organisations whose business is essential work, each employer has to read fill in pages of paperwork for every single employee they want to exempt ad apply to one of eight departments! This has been roundly criticised as pointlessly bureaucratic, while worsening shortages and key supply chains.[iv]
Bureaucratic excess also makes society less good at handling crises. The extra layers of management make us slower to spot problems, slower to respond to them, and less able to adapt our contingency plans as thing unfold. This is the subject of Niall Ferguson’s recent book, Doom: The Politics of Catastrophe.[v]
Summary – The Inextricable Link Between Mass Migration and Unsustainable Debt
· Mass immigration is both a symptom and a cause of the UK’s consumption of excessive debt.
· It is this excessive and unsustainable debt that creates the demand for labour, and the illusion that we need ever more migrant workers.
· Simultaneously, immigration suppresses employment opportunities for UK nationals and suppresses wage inflation, itself leading to excessive borrowing and damaging monetary policy decisions. In the long-term, this leads to asset price bubbles and financial crises.
· We are caught in a dangerous self-reinforcing cycle of excess immigration and excess borrowing. Both are politically unpopular.
· Slashing immigration would help break the cycle and rebalance the books.
· This would be great news for the long-term future and sustainability of our country.
· Future immigration numbers should be set with regard to monetary and fiscal policy. Net positive immigration should only be occurring during phases when fiscal and monetary policy have been tightened, and employment is still tight.
 House of Lords - Quantitative easing: a dangerous addiction? - Economic Affairs Committee (parliament.uk) [i] Let more workers in to ease staff shortages, says government adviser (telegraph.co.uk) [ii] Roughly £31k, according to the ONS. [iii] https://www.valuewalk.com/infinite-money-destroying-civil-liberties/ https://www.valuewalk.com/endless-qe-covid-blew-hole-central-bank-policy/ [iv] Weekly Briefing: The business of isolation - CapX [v] Doom: The Politics of Catastrophe (penguin.co.uk)