Why Smart Investors Should Support Immigration Reform
by Mar 6th 2013 1:05PM
In his State of the Union address in February, President Obama outlined a number of initiatives for his second term, including comprehensive immigration reform. The immigration issue has received little beyond lip service in Washington in recent years. But for the first time in a generation, there seems to be political will on both sides of the aisle to pass new immigration legislation.
While this issue is generally framed as a political or cultural one, it holds important fiscal consequences for investors and the corporations in which they are shareholders.
As anyone who has taken an introductory economics class knows, revenue -- at its most basic level -- is the product of price multiplied by quantity. In order to increase sales, a business can either raise prices or sell more product. In order to sell more product, the business must either find new customers, or sell greater quantities to existing customers.
Since consumer demand is the most important driver of the U.S. economy, this equation is essentially the same with respect to the economy as a whole.
Gross domestic product, though flawed, is the best measure we have of economic growth. It measures the value of all goods and services produced in the country during a given time period. Since Real GDP ignores inflation or the effect of prices going up, the only way to increase GDP is for more goods and services to be consumed.
Growing the population, therefore, is one of the best ways to ensure continued economic growth.
The Baby Bomb
As with revenue, there are two ways to grow the population: Increase the birth rate or increase immigration. Unlike in many of the world's developed countries, the birth rate in the U.S. has been high enough to support steady population growth during our recent history.
From 1950 to 2010, the U.S. population grew at an annualized rate of 1.2 percent. However, that rate has slowed recently, and population growth during this decade is on pace for the slowest increase since the Great Depression. In 2012, the population grew by just 0.73 percent, and the birth rate dropped to its lowest level since 1920.
Much of the blame lies with the financial crisis and the Great Recession, but it's important to remember that the decline in population growth can have long-term economic consequences.
The precipice Japan is heading toward offers an example of the potentially catastrophic effects of population decline. That nation is aging faster than any in the world, and the expensive burden of caring for a disproportionately elderly population is only going to grow heavier. On top of that, Japan also officially bans unskilled foreign labor, which has only made its demographic problem worse.
The Immigration Fix
When it comes to the economic impact of immigration, critics often accuse illegal immigrants of "taking" jobs from Americans, but there is no finite limit on jobs in this country.
Allowing immigrants into the country creates new consumers, which increases demand and leads to job growth. They spend money at Dow heavyweights like Walmart (WMT), McDonald's (MCD), and Home Depot (HD), buy cars, pay rent and utilities, and support countless other businesses.
Reforming immigration would also help the economy at the market level. Profit growth is valued above all else in the stock market, and as noted before, companies must either increase prices or volume in order to boost their dollar sales, the main driver of profit growth. A company can only increase prices so much without cutting into demand, so growing volume is the preferred means of increasing profits.
Less controversial but just as important for the economy is allowing international students to stay here and work after they graduate. Giving those students the opportunity to stay here and work would make it easier for U.S. companies to fill job openings in growth-driving fields like science and engineering and further encourage entrepreneurship within our borders, making it more likely that the next Google (GOOG) or Facebook (FB) will start in the U.S.
Growing the population has never been a stated goal of U.S. policy, but it should be an implicit aim. Reforming our immigration system to encourage healthy population growth fills voids in the job market, which in turn fuels growth among existing businesses. And that opens up opportunities for new businesses to be created.
In short, it rewards all stakeholders in the economy.
Motley Fool contributing writer Jeremy Bowman has no position in any stocks mentioned. The Motley Fool recommends Facebook, Google, Home Depot, and McDonald's. The Motley Fool owns shares of Facebook, Google, and McDonald's. Try any of our newsletter services free for 30 days.
Photo Credit: Sarah L. Voisin/The Washington Post via Getty Images