Why America should swap its retirees, patients, and students for skilled immigrant labor.
Immigration reform is back on the policy agenda. Can it help get the United States out of the economic pickle in which it finds itself these days? The global financial crises reinforced the long-term trend of stagnating incomes, shrinking wealth, and diminishing opportunities for the U.S. middle class. Both ends of the age spectrum have been hit: Today, only 45 percent of those between the ages of 16 and 24 are employed, while an increasing number of baby boomers are retiring with reduced savings and pensions. Meanwhile automatic budget cuts and future fiscal tightening will overwhelmingly affect the infirm, retirees, and students. High long-term growth, obviously, is one solution. But that's easier said than done. There's a more straightforward way to revive the U.S. economy and put money in people's pockets. To borrow from the 19th century U.S. politician Horace Greeley: Go South, Americans!
Already, Americans are spending more time in the economically dynamic developing world. Patients are traveling to Thailand for treatment. Retirees are enjoying the low costs of living in Latin America, while students are enrolling in medical schools in the Caribbean.
These trends should be embraced and enhanced. This new form of globalization will boost the purchasing power of U.S. consumers by providing greater and cheaper access to key services -- such as health and education -- whose costs will likely grow in the future. Additionally, if U.S. emigrants and medical or education tourists seek opportunities overseas, other countries could help convince the United States to relax its barriers to foreign entrepreneurs, scientists, doctors, and engineers. Greater skilled immigration would boost domestic innovation and growth.
To start, consider retirees. The Congressional Budget Office estimates that the unfunded pension liability of the state and local governments in the United States ranges between $0.7 trillion and $3 trillion (depending on how assets and liabilities are valued.) Since the net worth of the median household has also declined by 35 percent over the last decade, the prospects of current and future retirees who stay in the United States are dim: They have fewer savings, and their pension incomes will become less reliable.
One dollar will buy twice as much in Costa Rica, and three times as much in Thailand as it does in the United States, as well as the opportunity to hike in Monteverde and sunbathe in Phuket. According to the Social Security Administration, about 350,000 U.S. retirees (about 1 percent of the total) already live abroad, a quarter in developing countries. Between 2008 and 2010, 35 percent of U.S. retirees who moved abroad headed for the developing world, double the rate of the preceding seven years. If the fraction of those choosing to live overseas were to increase to 2 percent by 2020, and 3 percent by 2030, nearly 3 million U.S. retirees could be living abroad within two decades. Retirees relocating to developing countries would not only continue to draw Social Security benefits, but they would maintain their current standard of living.
Today, the U.S. government spends nearly a trillion dollars on the major federal health-care programs alone, more than 6 percent of GDP. But health care of comparable quality is much cheaper in other countries. Besides retirees or expats already living internationally, if other Americans with medical problems elected to go abroad for treatment, it could yield huge savings. For example inpatient knee surgeries, roughly 400,000 of which were performed in 2010 in the United States, cost more than $15,000 in a typical community hospital; the same procedure is roughly $3,000, including travel, at the best hospitals in Hungary and India -- which have the same or better record than the average U.S. hospital. If only one out of every 10 Americans who need 15 highly standardized, low-risk treatments, such as tonsillectomy or cataract extraction went abroad for treatment, the annual savings for the United States would be $1.4 billion, according to our calculations.
But since most of these savings accrue initially to Medicare or health insurers, and because patients must bear the cost of travel and the hassle of claiming reimbursement for treatment abroad, they have little incentive to travel for treatment. Insurance reform is needed to eliminate these disincentives.
While less dramatically than in health care, higher education too has become more costly and less affordable in the United States, and at a time when globalization and technological developments are increasing the premium on skill. Tuition fees in the United States have risen 29 percent in private universities and 72 percent in public institutions over the past decade. More ominously, student indebtedness has risen sharply. Two-thirds of students who graduated in 2011 took on debt to finance their education, compared with 59 percent in 1996; meanwhile average debt has risen from $17,100 to nearly $26,600. While online education could lower these costs, it's an imperfect substitute.
As with health care, exploiting the gains of trade could lower costs. Higher education, like most other goods and services, can be broken down into a highly skilled component and a less-skilled one. For example the early stages of a medical education involve the acquisition of fairly routine knowledge and skills like anatomy and physiology, which need to be learned in a classroom, and which could be imparted cheaply in developing countries. If the first two years of a U.S. medical education (where the learning is mostly standardized) can be traded for an Indian one, the cost savings for a 4-year U.S. medical degree would be about $90,000, or about 40 percent.
Americans are already studying abroad in larger numbers. The number of post-secondary U.S. students studying overseas increased from 65,000 in 1987-88 to 260,000 in 2008-09. Over the same period, post-secondary U.S. students studying in developing countries increased twentyfold, to 57,000. Savings from studying abroad will initially accrue to universities in the United States, as they will save money by hosting students overseas. But as in the case of health care, competition between universities will ensure that the savings are passed on to students.
Would exploiting this cost differential undermine quality? A significant number of foreign-educated medical professionals have been deemed qualified to work as health-care providers in the United States. Foreign-educated instructors now account for almost a fifth of the total at U.S. medical school faculties. It is, therefore, likely that the medical education chain can be sliced up without compromising quality. Multinational universities would help create global value chains in education while ensuring and certifying quality of individual segments.
There are large economic gains to be realized from flows of people in both directions. Flows from rich countries would allow Americans to get cheaper services, while skilled immigrants coming to the United States would enhance production possibilities by making the U.S. economic pie larger.
But politics impede flows: It is difficult for foreign scientists, doctors, and engineers to enter the United States. There are also subtle barriers to consuming health and education abroad: in particular, the lack of portability of health insurance and educational qualifications.
Barriers imposed by poor countries are currently not significant. But if the scale increases there will be a political backlash, for example, against U.S. patients occupying scarce hospital beds and driving up the costs of health care in Bangkok, or American students taking slots away from aspiring university students in Mexico City. Demands to erect barriers will emerge, mirroring the barriers to flows of people from poor to rich countries.
The symmetry of barriers, and of the political costs of reducing them, sets up the possibility of cooperation to ensure they are kept low. Governments in developing countries could tell their citizens that welcoming U.S. retirees, patients, and students means more money in the local economy, with the added benefit that that they, in turn, would be welcomed in the United States as well.
For Washington, reducing barriers on both sides and facilitating greater two-way flows of people would have political advantages over traditional trade with developing countries. The anxiety about globalization in the United States comes from the threat of relatively unskilled workers losing their jobs because of competition with factories in cheaper countries. It is becoming politically harder to make the case that the expansion of the economic pie offsets the costs inflicted on those at the bottom of the income distribution.
But the politics of going south could be different. Americans would still be better off and have more money in their pockets as the elderly go abroad for cheaper retirement and medical care, and as students seek low-cost educational opportunities. But this time, the squeeze within the United States would benefit the unskilled and poorer people at the expense of those at the upper end of the income distribution. For example, more foreign doctors entering the United States, and more Americans seeking medical care overseas, would put downward pressure on doctors' fees. While doctors would likely resist, they would have to contend with the countervailing power of retirees, who have a big stake in getting cheaper health care.
Developing countries can help overcome many of the problems the United States faces. As economic imperatives continue to drive this trend, the attitudes and mindsets that hinder it domestically could change. The developing countries are saying to the United States, "Give us your retired, your poor, your huddled students yearning to breathe free." It's time to listen.
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