The Human Capital Imperative

The Human Capital Imperative: Bringing More Minds to America

By Nick Schulz Scholar, National Chamber Foundation DeWitt Wallace Fellow, American Enterprise Institute

2012

The Human Capital Imperative: Bringing More Minds to America Nick Schulz Scholar, National Chamber Foundation DeWitt Wallace Fellow, American Enterprise Institute Nick Schulz is the DeWitt Wallace Fellow at the American Enterprise Institute (AEI) where he researches issues of political economy and technology. He is editor-in-chief of American.com, AEI’s influential online journal of ideas focusing on business, economics, and public affairs, as well as the National Chamber Foundation’s (NCF’s) Scholar. Schulz is also a columnist for Forbes.com. There he writes the Economics 2.0 feature in which he examines technology-led economic growth, politics, and public policy.

Schulz is the co-author with Arnold Kling of From Poverty to Prosperity: Intangible Assets, Hidden Liabilities and the Lasting Triumph Over Scarcity (Encounter Books, 2009), an acclaimed book on modern economic growth and development. Schulz is frequently invited to discuss the research and findings in the book at various events in the United States and abroad.

During the mid-2000s, Schulz was the editorial director of TechCentralStation, a pathbreaking online think tank and magazine. Prior to that role, he was the politics editor of Fox News online in New York where he coordinated coverage of the 2000 election, post-election deadlock, and September 11 attacks. He was also the politics and opinions editor for Voter.com, a start-up political website and portal.

In addition to his work in online media, Schulz was an award-winning television producer with multiple credits on PBS and elsewhere. He also produced or co-produced several documentaries, including The Stockholder Society, The First Measured Century, and Déjà vu All Over Again: The Life of Yogi Berra.

In the 1990s, Schulz served as a policy analyst and aide to former vice presidential candidate Jack Kemp and former Secretary of Education William J. Bennett. He was also a consultant to Platinum Technology, a major relational database management firm, and a consultant at the Software Publishers Association.

Schulz has been a media fellow at the Hoover Institution at Stanford University and is on the board of advisors of the Ewing Marion Kauffman Foundation’s survey of economics bloggers.

Schulz continues to publish widely in many major newspapers and magazines around the country, including The Washington Post, The Wall Street Journal, the Los Angeles Times, USA Today, and Slate. He and his wife and three children live in suburban Washington, D.C.

The Human Capital Imperative: Bringing More Minds to America

By Nick Schulz Scholar, National Chamber Foundation DeWitt Wallace Fellow, American Enterprise Institute

100 Years Standing Up for American Enterprise

U.S. CHAMBER OF COMMERCE

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The Human Capital Imperative: Bringing More Minds to America

Introduction

The United States is in a precarious condition. The American economy still has not fully recovered from the downturn that began in 2008. A mortgage and banking crisis, followed by a long recession, has given way to an anemic recovery. Americans have endured an alarmingly high unemployment rate—at times, more than 10% of the working age population has been eager and willing but unable to find work.1

For Americans long accustomed to stable growth and low unemployment rates, the past few years have come as a profound and unsettling shock. As policymakers rattle around their tool kits looking for ways to help the American economy, now is a good time to take a new look at immigration, in particular high-skilled immigration.

In this paper, we will examine some of what scholars and the public have learned over the years about the economic effects of adding new skilled immigrants to the work force.

There is no doubt that immigration is often a contentious and polarizing political issue. Reasonable people of good will can come to different conclusions about how much immigration the nation should permit, but there are good reasons to separate the issue of high-skilled immigration from low-skilled immigration. One reason has to do with a gradual evolution in thinking about the nature of modern economies and how they function, grow, and thrive over time.

The Human Capital Revolution

Over the past few decades, economists, social scientists, and other scholars have begun to realize the importance of “human capital” to a nation’s economic success.2 When we think of capital, we typically think of hard assets that can produce income over time, such as factories, farm equipment, and manufacturing plants. Human capital is another kind of capital. It is the stock of talent, skill, know-how, intelligence, education, and experience embedded within individuals that helps them to produce income.3

Consider what this means for the American economy as it has changed over time.

The American economy transitioned from largely agricultural roots in the 18th century to an industrial power in the 19th and 20th centuries to include a large service and advanced technology dimension today.4 Over that time, as sophisticated technology has penetrated to the center of economic life, the role played in the American economy by human capital has grown steadily larger.5 Greater amounts of human capital are required to develop and manipulate the technology that drives the economy. The American economy has gone from one that emphasizes brawn to one that relies on brains.

How important is this human capital? According to recent estimates, the stock of human capital is over $750 trillion.6 According to a research report from JP Morgan

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called “U.S. Recession and Repression Are Only in Our Minds,” this is much greater than the roughly $70 trillion of physical and financial assets owned by American households.7

Figure 1: Capital Stock, United States 800

$738

700

As important as human capital is to economic success, it is not evenly distributed around the world.

There is ample human capital already in the United States, but there are also enormous stocks of human capital—and potential capital—found overseas.

600

This is a constructive way for policymakers to think about skilled immigration—it holds the potential to broaden and deepen the stock of human capital in the United States.

100

500 400 300 200

0

$45 Human Capital

Physical Capital

Source: Michael Christian, Bureau of Economic Analysis

The Economic Effects of Skilled Immigration

The addition of new immigrants to any country will have an effect on its economy, and understanding that effect can help us appreciate how we might want to structure immigration policy.

There is no doubt that immigrants have a profound impact on the American economy; for example, the addition of new people into the United States makes the economy larger in size. Just adding more people to enlarge the economy is not what should concern policymakers. After all, China and India have many more people than the United States, but they also have much smaller economies. Instead, when we think about economic growth and progress, we are interested in productivity: doing more with less. Productivity growth is the key to long-run economic growth and rising standards of living.8

So do skilled immigrants contribute to productivity growth? The answer is a clear yes.

New Businesses

For starters—and perhaps most important, given the weakness of the American economy coming out of the Great Recession—skilled immigrants start businesses at higher rates than the native-born.9 Robert Fairlie of the University of California at Santa Cruz noted in research published in 2008 that immigrants are 30% more likely to start a business than those who are native-born.10

New businesses play an important role in pushing productivity-enhancing techniques, technologies, and business models into the broader economy. As research put out in 2010 from the Kauffman Foundation shows, new firms are responsible for the vast majority of net new jobs in the United States.11

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The Human Capital Imperative: Bringing More Minds to America

Many of us are familiar with skilled immigrants starting great, transformative American companies. Several generations ago it was visionaries such as Andrew Carnegie who helped the United States to industrialize and whose innovations made possible the building of the transcontinental railroad; or Levi Strauss who forever changed American retail, culture, and fashion when he started selling denim jeans. Of a more recent vintage, we can think of Yahoo! founder Jerry Yang or Andy Grove of Intel.

Indeed, skilled immigrants are disproportionately represented at high-growth companies.

Researchers from Duke University examined new science, technology, engineering, and mathematics (STEM)-related companies founded in the decade between 1995 and 2005, and found that one-quarter had at least one immigrant founder.12

Perhaps it should not surprise us much that immigrants would be more likely to start businesses and become entrepreneurs. After all, starting a business is a risky enterprise, and one thing we know about immigrants is that they are natural risk takers. Most of them had to risk their own financial capital and place great stock in their natural ability to succeed in a foreign land just to come here.

Arthur Brooks, president of the American Enterprise Institute, discussed the cultural and historical roots of American entrepreneurial success in his best-selling book The Battle. Speaking of the nation’s immigration heritage, he noted that “America’s vast success might be explained in part by our genetic predisposition to embrace risks with potentially explosive rewards.”13

The STEM Dimension

Skilled immigrants can be found in every line of work, but many either work or start businesses in some of America’s key growth sectors—those industries where science and new technology play a significant role. According to Pia Orrenius of the Federal Reserve Bank of Dallas, immigrants accounted for well over 50% of the growth in employment in STEM-related fields between 2003 and 2008.14 The high-growth fields include computer technology, telecommunications, defense, and biotechnology. These are crucial industries in an advanced modern economy and keep the United States on the frontier of technology.

Skilled immigrants are important for keeping America’s competitive edge. Today, much of the rest of the world today is playing “catch-up” growth. This means nations such as India, China, Brazil, and other rapidly growing countries are adopting the technologies and institutions already found in advanced countries such as the United States. For developed and technologically advanced countries such as the United States to continue growing rapidly, they must push the technology frontier. In testimony before the Subcommittee on Technology and Innovation, House Committee on Science, Space, and Technology, Brink Lindsay of the Kauffman Foundation explained the challenge this way: The available sources of growth, and the policy requirements of growth, change over time with a country’s advancing economic development. In particular, as countries get richer,

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they become ever more heavily dependent on home-grown innovation—as opposed to simply expanding existing activities or borrowing good ideas from abroad—to keep the growth machine humming. And since new firms play an absolutely vital role in the innovation process, that means that removing barriers to entrepreneurship becomes increasingly important to maintaining economic dynamism and prosperity.15

Innovation, Intellectual Property, and Global Orientation

Competitive growth also means fostering as much innovation as possible on American soil. To do so, the United States must attract the best available talent from abroad to ensure that established companies and new firms can innovate rapidly.

The Organization for Economic Co-operation and Development (OECD) looked at the role that immigrants play in promoting innovation and economic growth in advanced countries. It reported that “migrant enterprises are no longer confined to the lower segments of markets, and they are increasingly found in high-value activities which characterize advanced urban economies. In the United States, skilled migrants outperform college-educated natives in terms of starting companies, per-capita patenting, commercializing or licensing patents. In particular, for patenting, there is evidence that immigrants’ success has positive spill-over effects on natives.”16

The presence of these skilled immigrants “enhances the international competitiveness of the U.S. economy,”17 said Barry Chiswick, the chair of the Department of Economics at The George Washington University. Indeed, the presence of so much human capital—gathered from around the world but residing on American soil—has helped to account for America’s relatively strong competitive position in global markets.

“Another reason skilled immigrants are valued assets in the American economy,” according to the OECD report, “has to do with the increasing globalization of the economy.” Many major American firms are multinational in their orientation, with growing presences in foreign markets around the world. Think of great companies such as Coca-Cola, Microsoft, Intel, Caterpillar, 3M, or Ingersoll-Rand. Skilled immigrants possess valuable knowledge of foreign market customs, mores, obstacles, and opportunities. Their knowledge can offer an additional edge to the companies that employ them or the new companies they start. Skilled immigrants also help established companies by their interaction with new foreign markets. The presence of these immigrants working for American companies can help boost trade “by lowering trade-transaction costs as a result of migrants’ knowledge of markets back home and their contact networks.”

“Migrant entrepreneurs are in a good position to personally stimulate trade with their countries of origin,” the OECD continued. “Moreover, they can serve to show the way for other firms that want to engage in trade with their former home countries, by strengthening business networks and disseminating knowledge about markets in migrants’ country of birth.”18

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The Human Capital Imperative: Bringing More Minds to America

Skilled immigrants help create new intellectual property that can increase economic growth over time. They are awarded patents at high rates,19 and the presence of skilled immigrants bolsters the rate at which native-born Americans patent as well.

Public and Private Investment

The presence of immigrants also creates positive spillover effects, prompting and sustaining creative activity that adds value to companies and the broader economy.

Chiswick noted, “High-skilled immigrants expand the productive potential of the economy in which they reside... High-skilled immigration to the United States, therefore, enhances the international competitiveness of the U.S. economy and attracts foreign capital to the country.”20

Two scholars from the University of Fribourg, Volker Grossman and David Stadelman, recently studied the connections between high-skilled immigration and subsequent public expenditures, such as education and key infrastructure.21 They found that “raising net high-skilled immigration has a positive and quantitatively important impact on productive public expenditure.”

Despite this additional public expenditure, skilled immigrants have a positive effect on the nation’s overall fiscal balance. Chiswick noted that “High-skilled immigration adds workers to the labor force who tend to pay more in taxes than they receive in public benefits… As a result, they tend to have a positive net fiscal balance.”

At a September 28, 2011, program hosted at the U.S. Chamber of Commerce, New York City Mayor Michael Bloomberg underscored the net fiscal benefits of admitting more high-skilled immigrants. “We really need an approach that allows business to grow, that expands our markets overseas, that spurs innovation, that increases the number of entrepreneurs who start businesses here, and that creates jobs for Americans on every rung of the economic ladder,” he said. “Now, what if I were to tell you that there’s a way we could do all of those things at no cost to the taxpayers. Not one penny. Well, I think if told you that in the process we could raise revenue and we could use that revenue either to pay for tax cuts or to pay for essential services like national defense, I suspect all of you would say, ‘Great, what are we waiting for?’”

While skilled immigrants make it possible to boost badly needed public investment, Grossman and Stadelman also found that “an increase in high-skilled immigration raises the return to private-capital investment” and that “changes in the net high-skilled immigration rate over time are positively related to changes in the physical capital stock per capita of a country.” Of course, the growth of America’s capital stock is critical to expanding the wealth of the nation and of raising living standards for all Americans.

New research is also finding skilled immigrants bring benefits in unexpected ways. Few people are surprised to find talented Indian or Chinese programmers in places like Silicon Valley today. Researchers James Ted McDonald, Casey Warman, and Christopher Worswick recently

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learned that skilled immigrants have been filling doctor shortages that have plagued rural America in the recent past.22 These physicians and skilled medical workers have stepped in to provide badly needed primary and specialty care.

Coming to America—for How Long?

Of course, skilled immigrants have always come to our shores. It is not enough to say that we are a nation of immigrants. In many ways, we have long been a nation of skilled immigrants.

Today, more attention is paid to computer programmers or biomedical engineers, but several generations ago America was the home for immigrant artisans, craftsmen, and smiths of all kinds who brought new know-how, technology, ambition, and talents.23 Without doubt, the nation has benefitted from this influx of talent over the generations.

Many things attract skilled immigrants to the United States. At one end of the spectrum, America’s great universities, colleges, and technical institutes are an enormous draw. Indeed, the portion of immigrant workers with advanced degrees is higher than America’s native-born population. Almost 2% of immigrants have Ph.D.s, far larger than the percentage of Americanborn doctorates.24

Our universities may be a magnet for skilled immigrants, but current policy practically goes out of its way to turn away or discourage them. George Mason University economist Alex Tabarrok recently put the matter this way: “The U.S. has an immigration policy that treats these potential citizens with something between indifference and hostility.”25

In the past, this policy did not pose much of a problem, except for the immigrants who had to endure unpleasant treatment, paperwork, and bureaucratic hassles. The world has changed, and the United States is no longer the only attractive option to these highly talented, international students. As Tabarrok put it, “the world is now competing for highly skilled workers.”

On some measures, the United States is losing its edge. Research from Duke University’s Vivek Wadhwa and others shows that skilled immigrants—tired of bureaucratic hassles in their quests to become permanent residents, coupled with growing opportunities in their native countries—are increasingly leaving the United States to work and start businesses elsewhere.26 They found that “foreign national students are planning to leave the U.S. after graduation in numbers that appear to be higher than the historical norm as measured in STEM disciplines.

A significant percentage of these students also say they intend to open businesses in the future.

This expressed intention is prevalent among Indian and Chinese nationals currently studying in the U.S.”27

So while the rest of the world competes to retain or attract human capital, the United States will need to take steps to make sure it can compete. Despite this concern, and despite the need for the world’s best minds to power the world’s leading economy, the United States at times is moving backward. For example, Michael Greenstone and Adam Looney at the Brookings

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The Human Capital Imperative: Bringing More Minds to America Institution’s Hamilton Project have reported that the United States is issuing a decreasing number of total H1-B visas and employment-based preference visas (EB-1, EB-2, and EB-3) for high-skilled workers.28 A little over 270,000 such visas were available for high-skilled immigrants in 2009, down sharply from more than 301,000 visas in 2000.

High-Skill Immigration

Employment-Based Preference Visas + H1-B Visas

Total H1-B Visas

Total High Skill Visas as a % of Recent College Graduates

35

350

30

300

25

250

20

200 150

15 2000

2001

2002

2003

2004

2005

2006

2007

2008

Percentage of Recent College Graduates

Number of Highly Skilled Immigrants (1,000s)

400

2009

Note: Includes workers seeking legal permanent residence under Employment First (Eb-1), Second (Eb-2), and Third (Eb-3) Preference, new arrivals and adjustments, and H-1B Initial and Continuing Applications. “College graduates” refers to bachelor’s degrees, and excludes bachelors conferred to nonresident aliens; Source: DHS (2000–2009), NCES (2009).

Tim Kane and Robert Litan of the Kauffman Foundation aptly summarized the situation that the country faces today when they wrote, “The single most important policy reform that will boost long-term economic growth in the United States is to reduce the barriers facing highly skilled and highly educated immigrants.” They point out that “at least 50,000 workers with advanced degrees are sent out of the United States each year, although they have already passed security tests and become part of the productive fabric of the U.S. economy. In a world where the knowledge economy adds more value to national incomes than physical labor, the current U.S. stance of exiling many of the smartest people in the world imposes self-inflicted wounds on our currently troubled economy.”29

When any economy faces challenges, the first thing it should do is determine if it has any self-inflicted wounds, as those are the easiest to correct. The evidence is clear that the benefits of skilled immigration are high. The costs of bad immigration are also high. It is past time for the nation to stop shooting itself in the foot.

The late economist Julian Simon was one of the nation’s great growth theorists. He was fond of saying that “the ultimate resource is people, especially skilled, spirited, hopeful young people who will exert their will and imagination for their own benefit and in doing so, will inevitably benefit the rest of us as well.” The United States is rich in many natural resources, but it needs more of that ultimate resource to thrive in the 21st century.30

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Endnotes

1 WolframAlpha. Web. <http://www.wolframalpha.com/input/?i=une mployment+united+states>.

2 Becker, Gary S. Human Capital: A Theoretical and Empirical Analysis, with Special Reference to Education. New York: National Bureau of Economic Research; distributed by Columbia University Press, 1964. Print.

3 4

Ibid.

ordon, John S. An Empire of Wealth: The Epic History of American G Economic Power. New York: HarperCollins, 2004. Print.

5 Kling, Arnold S, and Nick Schulz. From Poverty to Prosperity: Intangible Assets, Hidden Liabilities and the Lasting Triumph Over Scarcity. New York: Encounter Books, 2009. Print.

6 Human Capital Accounting in the United States, 1994-2006, Michael S. Christian, <http://www.bea.gov/scb/pdf/2010/06%20 June/0610_christian.pdf>.

7 Feroli, Michael. “U.S. Recession and Repression Are Only in Our Minds.” Global Data Watch. J.P. MorganChase, 30 Sept.

2011. Web. <https://mm.jpmorgan.com/stp/t/c.do?i=339CCFF3&u=a_p*d_687313.pdf*h_-1evfkon>.

8 Ibid. From Poverty to Prosperity: Intangible Assets, Hidden Liabilities and the Lasting Triumph Over Scarcity.

9 Hunt, Jennifer. “Which immigrants are most innovative and entrepreneurial? Distinctions by entry visa.” (Working Paper No. 14920). Cambridge: National Bureau for Economic Research.

April 2009. <http://www.nber.org/papers/w14920.pdf>.

10 United States. Small Business Administration. Estimating the Contribution of Immigrant Business Owners to the U.S. Economy. By R. W. Fairlie. 334th ed. Washington, D.C.: Small Business Administration, 2008. Office of Advocacy Research Summary. Web. <http://archive.sba.gov/advo/research/rs334tot.pdf>.

11 Kane, Tim. The Importance of Startups in Job Creation and Job Destruction. Rep. Kauffman Foundation, 7 July 2010. Web. <http:// www.kauffman.org/uploadedFiles/firm_formation_importance_of_ startups.pdf>.

12 Wadhwa, Vivek, AnnaLee Saxenian, Ben Rissing, and Gary Gereffi. America’s New Immigrant Entrepreneurs. Rep. Kauffman Foundation, 4 Jan. 2007. Web. <http://www.soc.duke.edu/GlobalEngineering/papers_newimmigrant.php>.

13 Brooks, Arthur C. The Battle: How the Fight between Free Enterprise and Big Government Will Shape America’s Future. New York: Basic Books, 2010. Print.

17

hiswick, Barry R. High-skilled Immigration in a Global Labor C Market. Washington, D.C: AEI Press, 2011. Internet resource.

18 Ibid. Open for Business: Migrant Entrepreneurship in OECD Countries.

19 Kerr, William R, and William F. Lincoln. The Supply Side of Innovation: H-1b Visa Reforms and Us Ethnic Invention. Cambridge, Mass: National Bureau of Economic Research, 2010. Internet resource.

20 Ibid. Chiswick, Barry R. High-skilled Immigration in a Global Labor Market. Washington, D.C: AEI Press, 2011. Internet resource.

21 Grossman, V. and Stadelmann, D. High-skilled immigration: the link to public expenditure and private investments, in Chiswick, B.R. (ed.), High Skilled Immigration in a Global Labor Market, Washington, D.C.: American Enterprise Institute, pp. 201–230.

22 MacDonald, J.T., Warman, C., and Worsick, C. Earnings, Occupations, and Schooling Decisions, in Chiswick, B.R. (ed.), High Skilled Immigration in a Global Labor Market, American Enterprise Institute, Washington, pp. 165–198.

23 Ferrie, J. A Historical Perspective on High-Skilled Immigration, in Chiswick, B.R. (ed.), High Skilled Immigration in a Global Labor Market, American Enterprise Institute, Washington, pp. 16–49.

24 Greenstone, Michael, and Looney, Adam. Ten Economic Facts About Immigration. Washington, D.C.: The Hamilton Project, Brookings Institution. 2010. Web.

25 Tabarrok, Alex. Launching the Innovation Renaissance: A New Path to Bring Smart Ideas to Market Fast. Amazon Digital Services. 2011.

26 Wadhwa, Vivek. “America’s Other Immigration Crisis: the United States Has a Pressing Immigration Problem. But It’s Not the One You Hear about on Cable Chat Shows. Vivek Wadhwa Explains How We Are Bringing the World’s Smartest Minds to Our Shores, Training Them, and Then Pushing Them Away.” The American (Washington, DC) 13 July 2009. Internet Resource.

27 Wadhwa, Vivek, Saxenian, AnnaLee, Freeman, Richard, and Salkever, Alex. Losing the World’s Best and Brightest: America’s New Immigrant Entrepreneurs, Part V. Rep. Kauffman Foundation, March 2007. Web.

28 Greenstone, Michael, and Looney, Adam. Ten Economic Facts About Immigration. Washington, D.C.: The Hamilton Project, Brookings Institution. 2010. Web.

14 Orrenius, Pia M, and Madeline Zavodny. Beside the Golden Door: U.S. Immigration Reform in a New Era of Globalization. Washington, D.C: AEI Press, 2010. Print.

29 Kane, Tim, and Robert E. Litan. Knowledge Economy Immigration: A Priority for U.S. Growth Policy. Rep. Kauffman Foundation.

30April 2009. Web. <http://www.kauffman.org/research-andpolicy/knowledge-economy-immigration-a-priority-for-usgrowthpolicy.aspx>.

16 O pen for Business: Migrant Entrepreneurship in OECD Countries.

Paris: OECD, 2010. Print.

For more information go to: ncf.uschamber.com/humancapital

15 Creating and Growing New Businesses: Fostering Innovation, Hearing before the Subcommittee on Technology and Innovation, House Committee on Science, Space, and Technology, 112th Cong. (2011) (Brink Lindsey).

30 Simon, Julian L. The State of Humanity. Oxford, UK: Blackwell in association with the Cato Institute, 1995. Print.

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