Do Migrants Drain Wealth from America When They Send Money Home?
In 2017 migrants in America sent a whopping $148 billion to recipients in their home countries, with Mexico receiving the most ($30 billion) and China coming in second ($16 billion). Some Americans are understandably alarmed by this massive flow of remittances to foreigners, worrying that it siphons wealth away from our country and/or reduces jobs for Americans. These fears are unfounded, but it’s useful to analyze the phenomenon to better understand the economics of international trade.
We will focus on remittances specifically, rather than the broader question of immigration. Specifically, we’ll assume that certain immigrants have come to the United States and are working. Now the question is: if they send some of their pay back home, do their decisions make other Americans poorer than they would have been if immigrant workers had kept their money in the U.S.?
We can think this through more clearly if we assume that workers are paid in kind rather than in dollars. Suppose Luis is originally from Mexico and now works in orange groves in California. At the end of every day, Luis is paid with boxes of oranges, corresponding to the higher total harvest that his labor contributes to the operation. (So long as there is competition in the labor market, workers tend to be paid their “marginal product,” that is, how much they add to the bottom line.)
Once Luis has the oranges, does it matter to anybody else in America whether he eats them himself or ships them to his parents back in Tijuana so they can consume the fruit? Clearly, whatever he does, the economic welfare of other Americans is identical.
Now let’s make the example more realistic. Rather than being paid in oranges, Luis is paid in dollars. Then he goes to the store and buys various food items, clothes, toiletries, and other household goods. Once again we can ask: when Luis converts his dollars to goods, is any other American harmed economically if he consumes only some of those goods himself and sends the rest back home? Here, too, the answer is clearly no. Whatever the economic position of the rest of America when Luis spends his wages on products in the U.S. and consumes them all himself, surely it is the same if he instead only consumes (say) 75 percent of the products himself and ships the other 25 percent back home. (We’re not considering here the resources used up in the process of shipping physical goods because that’s not what people are worried about when it comes to remittances.)
Finally, we come to the most realistic scenario. Rather than using his dollars to go to American stores and buy products that he then ships to his parents, Luis instead takes the much more convenient approach of sending the money directly home. This has the advantage of avoiding the shipment costs and also of giving his parents discretion over what they buy, in the same way, that a $100 Target gift card bestows more options than a $100 video game purchased from Target.
Now, this is the scenario that understandably worries some Americans because Luis literally sends money out of the country! But as I’ll argue, this scenario is roughly equivalent to the previous one, except that, as noted, it is more efficient because it eliminates shipping costs and gives Luis’s parents more control. The impact on the rest of America from Luis’s sending dollars abroad is the same as if he had spent them on items he consumed personally while standing in California.
Let’s follow the money to see why. Suppose Luis goes to a bank or other institution to wire $100 to his parents. The bank takes 100 U.S. dollars and buys Mexican pesos, which are then electronically transferred to a bank or other business in Tijuana where Luis’s parents can get them. So what happens to the original 100 U.S. dollars?
Well, the person or institution on the other end of that foreign-exchange transaction had been looking to buy U.S. dollars with pesos because he or it needed dollars to buy U.S. goods or financial assets. Either way, those dollars are ultimately going to be spent on items from American sellers just as surely as if Luis had spent the dollars himself.
Before we conclude, let’s consider one last possibility. Because the U.S. dollar is the world’s reserve currency (though that status is gradually eroding), it’s conceivable that Luis literally mails U.S. greenbacks to his parents and they spend them in their own community. In other words, it’s possible that the 100 dollars never come back.
Does this worst-case scenario justify fears about remittances? On the contrary, this is the best outcome for the rest of America. It means that Luis came to the country and worked for virtually nothing because he bought nothing. It barely costs Americans anything to take rectangular pieces of paper and print symbols and numbers on them. The situation would be economically equivalent to Luis’s coming to the U.S. and picking fruit just as a favor to the owners of orange groves. Giving some Americans free labor services certainly doesn’t make America poorer.
The reason it seems as if sending dollars out of the U.S. makes America poorer is that we individually consider cash as part of our wealth holdings. But the economic value of a given amount of money depends entirely on its purchasing power, that is, the prices (measured in dollars) of the goods and services we want to buy. If Luis’s parents and their neighbors decided to hoard dollars, yes, fewer dollars would be available to be spent on American goods. But that wouldn’t make Americans poorer; it would just mean that U.S. prices were slightly lower. In this “worst case” scenario, no physical goods are shipped from the U.S. to Mexico. Literally sending over some green paper rectangles doesn’t make Americans poorer, and a full economic analysis confirms that commonsense assessment.
Every year migrants working in the United States send an enormous amount of their earnings back to their home countries. This transfer doesn’t directly affect the economic welfare of other Americans differently than in a scenario where migrants spent the money domestically. Rather than scold migrants for making America poorer, we should, if anything, applaud them for their financial discipline and devotion to family.