The Trade Deficit vs. Human Capital


By Michael Mandel I'm getting tired of people whining about the size of the trade deficit. Yes, the U.S imported $617 billion more in goods and services in 2004 than it exported. And, yes, $617 billion is an awfully large number, even for a country as big as the U.S.

But get with the 21st century, folks. The trade in goods and services represents only one part of America's connection with the rest of the world. What's equally important -- and what the trade numbers miss completely -- is the incredible flow of people into the country. Each year, the U.S. receives about 700,000 legal immigrants, as well as a host of temporary skilled workers and undocumented immigrants.

REAL WEALTH. And while the U.S. imposed some restrictions in the wake of the 2001 terrorist attacks, it's slowly relaxing them. The government just announced guidelines for granting an additional 20,000 visas to foreign students or workers who earned masters degrees or better from an American university. These visas are expected to be quickly oversubscribed.

No other country in the world enjoys this level -- and kind -- of attractiveness to the rest of the world. When these people come to the U.S. and stay, they bring their education, their skills, and their productive capacity -- their human capital. This is real wealth being given to the U.S., for free.

The benefit of such human capital is crystal clear in the case of, say, the foreign engineer who helps start a Silicon Valley tech company. And the U.S. also gets something from a hard-working landscaper or construction worker who recently came from another country. It's even true for the foreign college graduate who comes to the U.S. to get advanced training, and stays. In each case the U.S. has gained someone who can contribute productively to the economy, without most of the earlier costs of raising or educating that person.

RUNNING THE NUMBERS. This flow of immigrants brings a much bigger value to the U.S. than most people realize. Let's do a back-of-the-envelope calculation. One way to estimate the value of a person's human capital is to look at the present discounted value of his or her future income, adjusted for inflation. That is, what you are worth is what society is willing to pay you over your working life.

So, if you expect to earn an average of $50,000 per year in real terms for the next 30 years, a little twirl of the spreadsheet shows that the discounted present value of your future earnings totals roughly $800,000 (assuming a discount rate of 5%, after inflation). Calculated in this way, PhDs in their 30s possess human capital valued at about $1.2 million, and holders of master's degrees have human capital worth about $840,000. Similarly, the human capital value for a person with a college degree is about $660,000; for a high-school graduate, about $390,000; and for someone who has not graduated high school, about $260,000.

One should regard all these numbers as terribly squishy. (So, for that matter, are the statistics that purport to calculate the number of immigrants and other foreign workers in the country, as the Homeland Security Dept. struggles to put better tracking systems in place.) But if undocumented entrants are counted, one can reasonably assume that the U.S. is absorbing about 400,000 additional prime-age workers from the rest of the world each year.

HOUSING MARKET BOON. Historically, the educational attainment of foreign entrants has split fairly evenly -- about one-third have had college degrees or better, about one-third are high school graduates, and about one-third have had less than a high school education.

Given those assumptions, it follows that new foreign workers are bringing about $200 billion of human capital into the U.S. each year. True, this is a rough estimate -- further refinements could make that number quite a bit higher or lower. But what's important is that even as America is building up bigger foreign debts on the negative side of the national balance sheet, it's also building up bigger human capital assets on the positive side.

The benefits from immigrant human capital spread through the economy in diverse ways, not just on the corporate side. For example, the large number of immigrants partly accounts for the national housing market's strength in recent years.

PEOPLE MAGNET. That rise in housing values has boosted the wealth of American homeowners. Moreover, the strong U.S. property market has made mortgage-backed securities very attractive to foreign investors. This flow of capital has totaled more than $300 billion over the past four years, helping finance the U.S. trade deficit.

We live in an era in which individuals travel around the world more easily than ever before. Hence, one cannot understand the place of the U.S. in today's global economy without understanding its continuing role as a people magnet. Human capital from immigrants certainly doesn't completely compensate for the U.S. trade deficit -- but it makes a big difference.

(Many thanks to Hilda Ochoa-Brillembourg of Strategic Investment Group, for the initial idea for this piece.) Mandel is chief economist for BusinessWeek. He is writing a new blog, Economics Unbound


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