b a n k o f d a l l a sb a n k o f d a l l a s

so

u t h west

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f e d e r a l r e s e r v ef e d e r a l r e s e r v e

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ISSUE 5 SEPTEMBER /OCTOBER 1998

sNE OF THE difficult questions that arises in the ongoing pub-lic debate on immigration is whether immigrants to the UnitedStates represent an overall cost or benefit to the U.S. econ-omy. The answer to this question centers in part on the ex-tent to which immigrants contribute to the labor force,compete for jobs with native workers and provide goods and

services that otherwise would not be produced. The answer also centers on the fiscal impact of immigration—the amount of taxes immigrants pay relative to the amount of government services theyreceive.

This final article of a two-part series on immigration addressesthese issues, drawing on the research and ideas presented at “Immi-gration and the Economy,” a conference sponsored by the El PasoBranch of the Federal Reserve Bank of Dallas.1

Immigration’s Place in Population and Labor Force Growth

The most basic impact of immigration in any country is on its pop-ulation growth and, therefore, the size of its labor force. Assumingcurrent levels of immigration, a little more than half the growth in theU.S. population between 1995 and 2025 will come from new immi-grants and their descendants. Similarly, more than half of the growthin the U.S. labor force—16.5 million people—will be attributed to

O

IMMIGRATION AND THE ECONOMY––PART II

I N S I D E

Grading TIPS—An “I”for “Incomplete”

Border Bottlenecks Hamper Trade

post-1995 immigrants and their descen-dants.2 Without immigration, however,the U.S. labor force would begin to de-cline after 2015 (Chart 1 ).

A 1997 Congressional Research Ser-vice study on the education and skilldistribution of jobs for 1994–2005 esti-mates that the highest job growth overthis 10-year period will occur in jobsthat have high-skill requirements (requir-ing some postsecondary education at aminimum). However, many occupationswith limited skill requirements—such aspersonal service workers, cleaning andbuilding service occupations, and retailsales clerks—will also show above-average job growth. Thus, though theeconomy in 2005 will demand growingnumbers of workers with high educa-tion and skill levels (reflecting technol-ogy’s increasing importance), about halfof all jobs available then will requireonly a high school education or less.3

A look at the skill profile of immi-grants shows that immigrants will fillemployers’ projected labor needs. Im-migrants to the United States are dis-proportionately included in both somevery low-skilled occupations—waiters,housekeepers, agricultural and textileworkers—and some very high-skilledoccupations—physicians, chemists, en-gineers and physics professors. Also,immigrants are represented in occupa-tions that require little education butmuch skill, such as tailors, dressmakersand jewelers.4 This is concomitant withimmigrants’ overrepresentation at both

ends of the education spectrum—rela-tive to natives, more immigrants haveless than a high school education andmore have college degrees.5 However,because immigrants are more predomi-nantly found at the low end of the education distribution, they are morelargely concentrated in the low-educa-tion, low-skill occupations.6

Because native workers are becomingincreasingly more educated,7 they will becommanding more of the high-skilledpositions in the labor market and con-tinuously fewer of the low-skilled posi-tions. The skills of most immigrants aresuited to the low-skilled occupations, and,therefore, immigrants can be expectedto fill this niche in the labor market.

Immigration’s Impact on U.S. Residents

Immigration creates both winnersand losers in the U.S. economy. Asidefrom immigrants themselves, those whogain from immigration are those whocomplement immigrant labor—in gen-eral, domestic high-skilled workers andcapital owners. Those who lose fromimmigration are U.S. residents whocompete with immigrants for jobs, suchas less-skilled domestic workers withlow levels of education.

A comprehensive study on immigra-tion by the National Research Council(NRC) published last year describes im-migration’s impact on different groupsof U.S. workers.8 The study reports thatimmigration during the 1980s increasedthe labor supply of all workers by about4 percent, thus reducing the wages of alllow-skilled native-born workers by about1 percent to 2 percent. On the other hand,wages for high-skilled workers rose,given that immigrants, on net, representa source of increased demand for theservices of these high-skilled workers.

The NRC study reports that immi-gration has caused a 15 percent in-crease in the supply of workers withless than a high school education. Thiscompetition has reduced the wages ofthis group of workers by about 5 per-cent. Stated differently, between 1980and 1994 about 44 percent of the totaldecline in wages of workers with lessthan a high school education was be-cause of immigration. Fortunately, work-

ers in this category represent less than10 percent of the U.S. workforce.

Though immigration would be ex-pected to have a larger impact in geo-graphic areas that receive large numbersof immigrants, the NRC study reports an insignificant relationship betweennative wages and the number of immi-grants in a particular location. This rela-tionship holds across all types of nativeworkers—skilled and unskilled, maleand female, minority and nonminority.Thus, areas where immigrants are con-centrated do not suffer disproportionatelosses when it comes to wages, even forunskilled workers. According to theNRC study, this suggests that nativeworkers either find other jobs with simi-lar pay or move to other areas.

Interestingly, those who face thegreatest loss from immigration are priorwaves of immigrants, because newly arrived immigrants are their close sub-stitutes. A 10 percent increase in thesupply of immigrants, for example, re-duces the immigrant wage by at least 2percent to 4 percent.

Aside from high-skilled native work-ers, immigration’s winners also includethose who buy goods and services pro-duced by immigrant labor. Moreover, tothe extent that some immigrants mayspecialize in activities that otherwisewould not have existed domestically, allconsumers benefit from the availabilityof new goods and services and theirlower prices.

In measuring the magnitude of immi-gration’s overall impact on the U.S.economy, the NRC study concludes that“the most plausible magnitudes of theimpact of immigration on the economyare modest for those who benefit fromimmigration, for those who lose fromimmigration, and for total GDP.” Thenet gain for the economy may run be-tween $1 billion and $10 billion a year,which is a modest contribution in a $7.6trillion economy but a positive and sig-nificant one in absolute terms.

The Federal, State and Local

Fiscal Impacts of Immigration

The fiscal impact of immigrationvaries across regions and different lev-

Page 2 Southwest Economy September/October 1998

Chart 1Labor Force Declines Without ImmigrationMillions of people

125

130

135

140

145

150

155

160

Zero immigration

Medium immigration

2025202020152010200520001995

NOTE: Medium immigration assumes 1,040,000 immi-grants per year.

SOURCE: Jeffrey S. Passel and Barry Edmonston,“Immigration and the Future American WorkForce,” The Urban Institute, 1998.

els of government. Overall, immigrantshave been found to produce a net fiscalgain (that is, they pay more in taxesthan they receive in services) at the fed-eral level, but they impose a net burdenon the states and local communi-ties where they are concentrated. Thus,though immigrants do not represent afiscal burden to the nation as a whole,high immigrant-receiving states such asCalifornia, New York, Florida, Texas,New Jersey and Illinois absorb a net fiscal cost from their immigrant popula-tions.9

A recent study of California—thestate with the nation’s largest concentra-tion of immigrants—arrived at esti-mates of the net fiscal cost immigrantsimpose on the state for a given year. Forthe 1994–95 fiscal year, it was estimatedthat immigrant households incurred acombined state and local negative fiscalbalance of $3,178 (in 1996 dollars) perhousehold. Native California house-holds, on the other hand, recorded apositive fiscal balance of $1,178 perhousehold.10

Several characteristics of the averageimmigrant-headed household as com-pared with native households can ex-plain why immigrants impose a netfiscal burden (receive more in servicesthan they pay in taxes) on state andlocal communities where immigrantsare concentrated: (1) immigrant-headedhouseholds have more school-age chil-dren than native households and therefore consume more educationalservices; (2) the education provided toimmigrants at times is more expensive

because of additional bilingual educa-tion classes that may be incorporatedinto the system specifically for them;11

(3) immigrant-headed households havelower incomes (Chart 2 ) and own lessproperty than native households, andhence their state and local tax paymentsare lower; and (4) immigrant-headedhouseholds are poorer than nativehouseholds and thus qualify for moreincome transfers, even at the state andlocal levels.12

Although state and local communi-ties “lose” from immigration when thefiscal impact of immigrant households isconsidered for a given year, annual estimates do not capture the full fiscalimpact of immigration for the followingreasons. First, annual estimates repre-sent only one year’s taxes and oneyear’s expenditures, whereas immigra-tion is a dynamic process. Immigrants’incomes, and therefore tax payments,tend to rise with time in the UnitedStates, while their use of social servicesdeclines. (Once immigrants age and re-tire, however, they, like natives, will usemore in services than they pay intaxes.) Second, annual estimates in-clude those U.S.-born children of immi-grants who remain in their parents’households during their school-ageyears, when they represent a cost to thesystem, yet exclude them (because theyare treated as natives) once they are ofworking age, have moved out of the immigrant household and become con-tributors to the system.13

Immigrant Welfare Use

Another factor used to gauge whetherimmigration is good or bad for theeconomy is the incidence of welfare useamong immigrants. Welfare participa-tion rates among immigrants from 1970through 1990 reveal a rising trend. AsChart 3 illustrates, the welfare participa-tion rate among immigrants rose from5.9 percent in 1970 to 9.1 percent in1990. Moreover, while welfare partici-pation rates were virtually identicalamong immigrants and natives in 1970(at 6 percent), immigrants’ use of wel-fare in 1990 had surpassed the rate ofnatives by almost 2 percentage points.14

The lower incomes of immigrants rela-tive to natives explains this trend. How-ever, distinguishing among immigranttypes is also important.

Studies show that welfare use amongimmigrants is mostly concentrated amongrefugees—who are automatically enti-tled to welfare assistance upon their arrival in the United States—and the elderly.15 Duration of residence and agealso impact welfare use among immi-grants. As Chart 4 shows, when thesefactors are taken into account, working-age nonrefugee immigrants are lesslikely than natives to receive welfare.Working-age refugees, on the otherhand, have a much higher welfare par-ticipation rate.16

As Chart 4 also shows, elderly immi-grants have higher rates of welfare par-ticipation than natives. Welfare use amongrecently arrived elderly immigrants is very

Federal Reserve Bank of Dallas Page 3

Chart 2Immigrant-Headed HouseholdsGenerally Have Lower IncomeAverage household income, 1996

Entered before 1986

0

10,000

20,000

30,000

40,000

50,000

60,000

Other countriesRefugee countriesMexico, El Salvador,Guatemala

Natives$45,400

Entered after 1986

SOURCE: The Urban Institute.

Chart 3Immigrant WelfareParticipation Has IncreasedPercent

0

1

2

3

4

5

6

7

8

9

10

199019801970

ImmigrantsNatives

SOURCE: George Borjas, Harvard University, fromremarks presented at the economic forum“Immigration and the Economy.”

Chart 4Public Assistance IsConcentrated Among Refugees and the ElderlyPercent receiving public assistance, 1996

0

5

10

15

20

25

30

35

40

45

50

65 years and over18–64 yearsUnder 18 years

Nonrefugees, 1986–96Natives

Refugees, 1986–96Pre-1986 entrants

SOURCE: The Urban Institute.

grants arriving in their late 60s impose afiscal burden. Yet, because most immi-grants arrive at working ages, the long-term net fiscal impact of immigrants asa whole is usually positive.22

Education also bears on the long-termfiscal impact of immigrants. As would beexpected, the more education an immi-grant embodies, the more positive his orher long-term fiscal impact on the econ-omy. For example, estimates show thatimmigrants with less than a high schooleducation impose a long-term fiscalburden, while immigrants with a highschool education or more contribute asubstantial fiscal gain (Chart 5 ).

Comparing immigrants and natives intheir participation in public programsalso yields interesting long-term conclu-sions. For programs such as Social Se-curity and Medicare, immigrants receiveproportionately lower benefits than na-tives do. For programs such as SSI, Aidto Families with Dependent Childrenand food stamps, immigrants receiveproportionately more. When the cost ofall programs is combined, there is littledifference between immigrants and na-tives. And although immigrants are cost-lier during childhood than natives (if thecost of bilingual education is assumed),they tend to be less expensive than natives in old age. These differences,over a lifetime, tend to balance out.

Finally, though a long-run assessmentof immigration’s fiscal impact yields astrongly positive picture at the federallevel, the impact at the state and locallevels remains negative. Yet, while the

positive federal impact is shared evenlyacross the nation, the negative state andlocal impacts apply only to the few loca-tions that receive the most immigrants.

Conclusion

Sizing up immigration’s overall im-pact on the economy is not a straight-forward process, given the many factorsat play, some of which cannot be easilymeasured. Immigration is often onlyevaluated in the context of its fiscal im-plications for the economy or throughthe impact immigrants exert on the em-ployment and wages of low-skilled native workers. Factors often left out ofthe analysis of whether immigrants pro-vide a net gain or loss to the economyinclude the increase in consumptiongenerated by immigrant spending, thetax contributions and job creation (andassociated employment tax streams) ofimmigrant-owned businesses,23 the im-pact on productivity of highly skilledimmigrants and even the impact of immigrants on urban renewal and its associated fiscal implications.24

The evidence suggests that immi-grants produce a fiscal gain for the nation as a whole but impose a burdenon those states and communities wherethey are concentrated. This is the casewhether immigrant costs and benefitsare evaluated in a single year or overthe long run. However, over a lifetime,immigrants’ fiscal impact at the federallevel is much more positive than annualestimates show. Studies also concludethat while most immigrants complementthe higher skilled labor force, they im-pose downward pressure on the wagesof the lower skilled. Finally, immigrantsplay an important role in the continuedgrowth of the labor force. Although im-migration’s distributional effects may be nontrivial, the overall effects of im-migration are relatively small and aredwarfed by many other, more signifi-cant factors (such as national savingand investment rates) that more directlyimpact the performance of the $7.6 tril-lion U.S. economy.

— Lucinda VargasBeverly Fox Kellam

Page 4 Southwest Economy September/October 1998

high, at 27.3 percent for nonrefugeesand 46.6 percent for refugees. This con-trasts dramatically with the 3.5 percentwelfare participation rate of elderly na-tives. Such high welfare use by elderlyimmigrants—particularly in the form ofSupplemental Security Income (SSI)—suggests that welfare for this group notonly provides income but also access tomedical care through Medicaid sincemany of these immigrants are not eligi-ble for Social Security and Medicare.Thus, SSI use among elderly immigrantsmay be a substitute for Social Securityand Medicare.17 Conversely, welfare par-ticipation among elderly natives may be low because this group does haveaccess to Social Security and Medicareand therefore is less likely to need additional assistance through supple-mentary programs.18

Welfare and immigration laws passedin 1996 should ameliorate the use of wel-fare among (nonrefugee) immigrants,because the new regulations basicallybar immigrants from receiving federalwelfare until attaining citizenship, whichoccurs about seven years after arrival.Also, the law now imposes income requirements for sponsors of immi-grants,19 and the sponsors’ obligation tosupport immigrants is made legally en-forceable.20 For example, sponsors peti-tioning an immigrant—whether a familymember or prospective employee—mustprove income equal to 125 percent ofthe poverty line.21

Long-Term Measures of Fiscal Impact

As mentioned above, annual esti-mates of the fiscal impact of immigrantsdo not capture the full picture of immi-gration’s effect on public finance. Long-term measures of immigration’s impactconsider several factors that are absentin the annual estimates. One factor thatmatters, for example, is the age of theimmigrant upon arrival in the UnitedStates. Immigrants (like natives) arecostly during childhood and old age butare net taxpayers during their workingyears. Thus, the long-term fiscal impactof an immigrant varies by the age of arrival. Immigrants arriving at ages 10 to25 usually represent a net long-term fiscal benefit to natives, while immi-

Chart 5Better Educated ImmigrantsHave Positive Fiscal ImpactThousands of 1996 dollars

–50

0

50

100

150

200

250

Overall> High schoolHigh school< High school

SOURCE: The New Americans: Economic, Demographic,and Fiscal Effects of Immigration, NationalResearch Council, 1997.

(Continued on page 12)

Federal Reserve Bank of Dallas Page 5

NVESTORS HAVE LONG recog-nized the protection that indexeddebt contracts offer against unex-pected inflation, eliminating thecapricious transfers from lendersto borrowers. The inflation-tax

problem is a special concern when thegovernment is the borrower; in this set-ting, inflation is under the debtor’spurview. In addition, some economistsargue that there is useful informationcontained in the yields of non-indexedand indexed government bonds. Thedifference in the two yields is a market-based signal of expected inflation. Cen-tral bankers could use the yield spreadas an indicator of monetary policy.1

In February 1997, the U.S. Treasurybegan auctioning Treasury Inflation Pro-tection Securities, or TIPS. U.S. TreasurySecretary Robert Rubin explained thatTIPS would index both the semiannualcoupon payments and the security’sface value to movements in the Con-sumer Price Index (CPI).

To illustrate how indexation works,Table 1 presents a hypothetical examplein which a pair of 2-year securities areauctioned: one is a TIPS and the other

is a non-indexed security. Both securi-ties sell for $1,000. Suppose the couponrate on the TIPS is 4 percent.2 Assumethat buyers have perfect foresight,knowing that the inflation rate will beconstant and equal to 6 percent for thenext two years. The buyer is indifferentbetween the two securities, providedthe coupon rate on the non-indexedTreasury security is 10.03 percent.3 Notethat the coupon rate for the non-indexed security is a combination of thereal return and the expected inflationrate. Every six months, the TIPS’ facevalue is recomputed to take into ac-count price-level increases. In Table 1,the face value of the TIPS is updated totake the price increases into account.Formally, the TIPS’ face value is calcu-lated as the product of the initial facevalue and the ratio of the current CPI tothe CPI’s value when the security was issued. The semiannual coupon paymentis then one-half the coupon rate timesthe most recent face value. In contrast,neither the semiannual coupon pay-ment nor the face value changes for the non-indexed security. As Table 1shows, the person holding the non-

indexed bond receives a larger semi-annual coupon payment than the oneholding the TIPS, but at the cost oferoding purchasing power.4

The purpose of this article is to gradeTIPS’ performance. In 1997 and 1998,the inflation rate has been relatively low.While low inflation is desirable for manyreasons, it renders less meaningful thedistinction between indexed and non-indexed government debt. Low inflationnotwithstanding, TIPS are judged by twocriteria. First, do indexed governmentbonds make people better off? Recentresearch indicates the answer is yes, butthe gain is small. Second, has yieldspread served as a useful indicator? TheU.S. Treasury has been auctioning a rela-tively small quantity of TIPS, and thesehave maturity dates exceeding fiveyears. Arguably, this term is not shortenough for the central bank, which focuses on horizons up to two years. Insum, the TIPS’ “grade” is “incomplete.”

The Economics of Indexation

In the example above, the bond-holder ensures against the erosion ofpurchasing power over time by biddingup the coupon rate on the non-indexedsecurity. The higher coupon payment is necessary to compensate the bond-holder for receiving such payments incheaper dollars. Indeed, the bond-holder is indifferent between holdingthe non-indexed security and the TIPSbecause the present values of goodsand services are equal.5 Economist Irv-ing Fisher (1911) recognized this, stat-ing the coupon rate on the non-indexedTreasury security will be equal to

(1 + π)(1 + r) – 1,

where π is the inflation rate and r is thereal return.

The hypothetical example, however,is unrealistically simple in one impor-

GRADING TIPS––AN “I” FOR “INCOMPLETE”

I

Table 1Example of IndexationConsider two U.S. Treasury securities, each selling for $1,000 at initial auction on January 1,1998. Suppose Bond A is a non-indexed security and the other a TIPS. Further, suppose theCPI increases at a 6 percent annual rate known with certainty at the time of the auction. Bothbonds mature in two years.

Bond A TIPS

Coupon CouponFace value payment Face value payment

July 1, 1998 $1,000 $50.15 $1,029.56 $20.59Jan. 1, 1999 $1,000 $50.15 $1,060.00 $21.20July 1, 1999 $1,000 $50.15 $1,091.34 $21.83Jan. 1, 2000 $1,000 $50.15 $1,123.60 $22.47

(at redemption)

NOTE: To compute the coupon payments for the non-indexed bond, the following formula is used:c/2*FV, where c is the coupon rate on the non-indexed bond and FV denotes its face value.

tant way: The future price level cannotbe known with certainty; it can only beestimated. Thus, an unavoidable risk isinherent to the non-indexed security.Consider the example in Table 1, modi-fied so the average inflation rate is 6percent over the security’s two-year life.Suppose the bondholder is risk neutral,caring only about the average return.With a risk-neutral bondholder, thecoupon rate on the non-indexed secu-rity will be 10.03 percent, same as in theperfect-foresight scenario. Suppose,however, that the bondholder is riskaverse, disliking uncertainty. In thiscase, a coupon rate greater than 10.03percent is necessary to entice the risk-averse person to hold the non-indexedsecurity. The risk-averse person must becompensated for expected inflation,plus receive a risk premium to compen-sate for uncertain price-level move-ments over the next two years. Hence,the coupon rate will consist of threeparts: the real return, the expected in-flation rate and the risk premium.

The Gains from TIPS

To see why economists believe thatthe existence of TIPS will make peoplebetter off, it is necessary to take thegovernment’s income and expensestatement into account. Indeed, the riskpremium plays an important role ingovernment finance and, hence, inidentifying the gains from introducingindexed government bonds.

In a simple view, the U.S. Treasury’sexpenses consist of goods and servicesand debt payments, both paying inter-est and redeeming securities that havematured. Income is earned from taxes,new bond sales and money creation.The argument hinges on the interestpayments with TIPS versus non-indexedgovernment debt. The U.S. Treasury’sinterest payments, on average, will belower with a TIPS than with a non-indexed Treasury security.6 Providedthese savings are passed on in the formof lower taxes, the typical person willbe better off.

For instance, suppose the U.S. Treas-ury auctions one TIPS and one non-indexed security, both maturing in oneyear. Following the hypothetical exam-

ple, suppose the TIPS offers a 4 percentcoupon rate while the non-indexedTreasury security offers a 12 percentcoupon rate. Further, suppose that therealized inflation rate is 6 percent, equalto what people expected when the security was sold. Note that a risk-neutral bondholder would accept acoupon rate of 10.03 percent. Hence,the risk premium is 1.97 percent. (Thesole difference in government’s real in-terest expenses is due to risk aversion.)Compare real interest expenses withTIPS and with the non-indexed security.Because the coupon rate on the non-in-dexed bond is greater than the sum ofthe coupon payment and the actual in-flation rate, the government’s real inter-est expenses are lower with the TIPSthan with the non-indexed security. Next,suppose that the lower real interest ex-penses translate to a cut in taxes. For a given level of income, the typical risk-averse citizen will be better off be-cause the tax cut means the person canacquire either more consumer goods ormore capital.

The bottom line is that an inflation-indexed security creates a market for inflation insurance. Without the pres-ence of TIPS, for example, inflation in-surance works if the person accuratelyforecasted inflation. With TIPS, forecastaccuracy is no longer needed. The addi-tional market means that another goodcan be traded, improving consumer sat-isfaction.7

A government offering TIPS wouldhave less incentive to use the inflationtax. Note that all non-indexed govern-ment paper is subject to the inflation tax.At the end of 1997, the United Stateshad nearly $6 trillion of non-indexedgovernment paper—U.S. Treasury se-curities plus base money—outstanding.U.S. Treasury securities accounted formore than 90 percent—$5.5 trillion—of that quantity. Suppose the U.S. Treas-ury replaced all the non-indexed gov-ernment securities with TIPS. The taxbase would shrink to about $500 bil-lion. Correspondingly, the amount ofmoney raised by a given increase in theinflation rate would decline. After tak-ing into account the costs associatedwith higher inflation, the smaller payoffmeans there is less incentive to use in-flation to raise government revenue.

Page 6 Southwest Economy September/October 1998

The bottom line isthat an inflation-

indexed securitycreates a market

for inflationinsurance.

TIPS Role as Expected

Inflation Indicator

Should the U.S. substitute TIPS for allthe non-indexed government securitiesoutstanding? Although there is practi-cally no threat of this happening, theanswer is no. The coexistence of TIPSand non-indexed Treasury securitiescreates a potential indicator for centralbankers.

The value of the potential indicatorstems from the difference in yields onnon-indexed securities and TIPS. Recallthat the difference between the rates onthese two securities is the expected in-

flation rate and the risk premium. Het-zel (1991) argued that central bankerswould like an indicator of the inflationexpectations. Subtract the yield on TIPSfrom the yield on a non-indexed Treas-ury security, controlling for maturity, toobtain a market-based signal of ex-pected inflation rate. Unfortunately, theyield differential is a noisy signal; thereis no definitive way to identify whatpart of the yield differential is the ex-pected inflation rate and what part isthe risk premium. Still, movements inthe yield differential represent an im-provement compared with what policy-makers currently have—survey datathat are not subject to any market-performance criterion. Hence, econo-mists recommend that indexed andnon-indexed securities coexist.

It is time to look at how TIPS haveperformed.

TIPS: A Brief History

On February 6, 1997, the U.S. Treas-ury introduced 10-year TIPS notes.8 InJuly 1997, the Treasury auctioned 5-yearTIPS notes for the first time, followedby an auction of 30-year TIPS bonds inApril 1998. Plans have been announcedto auction 2-year TIPS notes and infla-tion-protected savings bonds. Overall,the Treasury has offered TIPS at six sep-arate auctions, including two dates in1998.

Table 2 displays the dates on which5-, 10- and 30-year securities were auc-tioned and the value of securities auc-tioned on those dates. Since 1997, theTreasury has auctioned 5- or 10-yearnotes on 28 occasions. TIPS were auc-tioned on five of those dates: 5-yearnotes twice and 10-year notes on threeoccasions. Of the past four auctions atwhich 30-year bonds were sold, in-dexed bonds were sold only once.9

Not only are the TIPS auctions rela-tively infrequent, but, on a maturity-by-maturity basis, the Treasury sells fewerTIPS at auction than it does non-indexed securities. Cumulatively, in1997 the Treasury auctioned slightlymore than $16 billion worth of 5-yearindexed notes, slightly more than $15billion worth of 10-year indexed notesand $8 billion worth of 30-year indexed

bonds. Over the same period, the Treas-ury auctioned more than $201 billionworth of 5-year non-indexed notes,more than $63 billion worth of 10-yearnon-indexed notes and more than $22billion worth of 30-year non-indexedTreasury bonds. The size of a TIPS auction was roughly 75 percent the sizeof auctions for non-indexed Treasurysecurities. On a cumulative basis, TIPSaccounted for less than 14 percent ofthe total amount of 5-, 10- and 30-yearsecurities auctioned during the past 18months.

Based on Table 2, three facts standout. First, TIPS auctions are held lessfrequently than auctions at which non-indexed securities are sold. Second, thequantity of TIPS auctioned is smallerthan the quantity of non-indexed gov-ernment securities being auctioned.Third, and perhaps most telling, TIPSwere never auctioned on the same dayas non-indexed securities.

Together, these facts suggest some-thing about the economic value of in-dexation. The evidence intimates thatthe U.S. Treasury was attempting to protect TIPS in their infancy. This claimbegs the following question: Whywould the TIPS market need protection?

One answer is that the gains fromTIPS are quantitatively small, as Viard(1993) found. If the gains are small, atypical bondholder is virtually indiffer-ent between the two securities. Such anattitude could inhibit the developmentof a market for TIPS, potentially lead-ing to undersubscribed auctions forTIPS. Such indifference is observation-ally equivalent to the notion that theTreasury was protecting TIPS. Smallgains may also account for why onlyfive countries—Australia, Canada, NewZealand, Great Britain and the UnitedStates—issue indexed bonds.

Assessing the

Information Value of TIPS

The other criterion for grading TIPSis the value of the information presentin the yield spread between indexedand non-indexed securities. The yieldsfor 5-year and 10-year U.S. Treasury se-curities are plotted in Charts 1 and 2, re-

Federal Reserve Bank of Dallas Page 7

Table 2Treasury Notes AuctionedSince January 1997

QuantityAuction auctioned

date (par value)

5-year 1-31-97 12,5032-28-97 12,5183-31-97 12,5164-30-97 12,5546-02-97 12,0296-30-97 11,5207-15-97 8,004(I)7-31-97 11,5269-02-97 11,52710-15-97 8,012(I)10-31-97 11,02112-01-97 11,02112-31-97 11,0182-28-98 11,0433-31-98 11,0124-30-98 11,4955-31-98 11,2166-30-98 11,1578-15-98 16,001

10-year 2-06-97 7,003(I)2-18-97 12,0144-15-97 8,005(I)5-15-97 12,0088-15-97 12,00611-17-97 11,0031-15-98 8,009(I)2-15-98 13,5545-15-98 12,414

30-year 11-17-97 11,3312-17-98 11,1824-15-98 8,002(I)8-15-98 10,003

NOTE: (I) denotes an auction of TIPS.

of the two streams of dollar payments are identical. The arbitragecondition is formally represented as

where FV denotes the face value of the security, cT is the coupon rateon the TIPS, d is the discount rate applied against future payments,c is the coupon rate on the non-indexed security and π is the infla-tion rate. The left side of the expression is the real present value ofpayments from the TIPS, and the right side is the real present valueof payments from the non-indexed bond. Note that payments fromthe TIPS security are indexed by (1 + π). Hence, deflating by (1 + π)and indexing by (1 + π) result in this term canceling out on the leftside of the arbitrage condition.

4 In practice, the CPI value used is called the reference value. The Bureau of Labor Statistics does not publish CPI values each day. Toget around this, the Treasury chooses a reference value that lags theissue date by 2.5 months. The Treasury computes the reference valueas a weighted sum, where the weight corresponds to the time of themonth when the security is issued. For example, a note issued onJanuary 15 will have reference date CPI equal to 16/31 times April’sCPI value plus 15/31 times May’s CPI. The first coupon payment isdue July 15. The reference value for that date is 16/31 times Octo-ber’s CPI plus 15/31 times November’s CPI. Then, 1 + π in footnote3 is calculated as the ratio of July 15’s reference value to January15’s reference value.

5 With coupon payments and with inflation that varies over time, it ismore difficult to ensure against inflation.

6 Note here that the par value of government securities is held fixed.7 This article ignores the risk associated with holding periods that

differ from the securities’ time to maturity. See Shen (1998) for a dis-cussion of market risk as it applies to the TIPS and non-indexedTreasury securities.

8 This is not to say that the February 1997 auction was the first timethat indexed bonds were auctioned in the United States. See Viard(1993) for a complete history of indexed bonds in the United States.

9 Some of the TIPS auctions were reopened. The U.S. Treasury oftenreopens some issues when bids are insufficient to sell all the notesor bonds.

10 There is not enough data on the yields for the 30-year securities tomerit a separate figure.

ReferencesFederal Reserve Board (1998), “Monetary Policy Report to the Con-gress,” Federal Reserve Bulletin (Washington, D.C.: Board of Gov-ernors of the Federal Reserve System, August): 585–603.

Fisher, I. (1911), The Purchasing Power of Money; Its Determinationand Relation to Credit, Interest and Crises (New York: Macmillan).

Hetzel, Robert (1991), “A Better Way to Fight Inflation,” Wall StreetJournal, April 25, A14.

Shen, Pu (1998), “Features and Risks of Treasury Inflation ProtectionSecurities,” Federal Reserve Bank of Kansas City Economic Review,First Quarter, 23–38.

Viard, Alan (1993), “The Welfare Gain from the Introduction of IndexedBonds,” Journal of Money, Credit, and Banking 25 (August, pt. 2): 612–28.

FV c d d FV cd dT i

i

i

i

/

/

2

1

42

2

1

4 2

1 1= =∑ ∑

+

=+

++

π π

spectively.10 In each chart, the yield isplotted for both a non-indexed securityand a TIPS. Note that the spread be-tween the two alternative securities hasnarrowed slightly since the inception ofTIPS. More precisely, the spread on 10-year notes declined slightly more than100 basis points, while the spread on 5-year notes fell about 70 basis points.

Before it can be claimed that ex-pected inflation has fallen about 0.75percentage point, two problems emerge.One is the basic identification issue.There is no way of knowing how muchof the decline in the yield spread is dueto falling expected inflation rate andhow much to falling risk premium. Amuch more accurate, but far weaker,statement is that 1998 data are consis-tent with some decline in the expectedinflation rate compared with early 1997.

The second problem is that the U.S.Treasury auctioned 5- and 10-year notes.Even if the identification problem wereeliminated, the data relate to the aver-age expected inflation rate over the nextfive years, which may not be that use-ful for central bankers. If the planning horizon is two years, movement in theaverage expected inflation rate over thenext five years is not the most useful in-dicator to the central banker. Until TIPSwith shorter maturities are sold, the cen-tral banker is left waiting until the timeleft on outstanding TIPS matches withthe central bankers’ planning horizon.

Concluding Remarks

So what grade does TIPS deserve? An“incomplete” seems appropriate at thisstage. The early evidence supports theclaim that people do benefit, albeit notgreatly, from indexed bonds. This is es-pecially true in a low-inflation environ-ment, like the one the United States hasenjoyed over the past couple of years.Unfortunately, the expected inflationrate that could possibly be inferred fromTIPS and non-indexed securities doesnot provide the information most usefulto the Federal Reserve. It is noteworthythat the “Monetary Policy Report to theCongress” (Federal Reserve Board, 1998)did not refer to the yield differential be-tween TIPS and non-indexed Treasurysecurities when it discussed the infla-tion outlook for 1998 and 1999. Whenshorter maturities, such as the 2-yearTIPS, are offered, it will be easier tojudge whether Federal Reserve officialsfind the market-based signal of ex-pected inflation useful.

—Joseph H. Haslag

Notes1 This argument is articulated in a Wall Street Journal op-ed article by

Robert Hetzel (1991).2 The coupon rate is computed as a year’s worth of interest payments

divided by the bond’s face value. At auctions, bids are ranked fromthe lowest coupon rate to the highest. Those offering the lowestcoupon rates are awarded the securities. The Treasury accepts bidsso that the security’s price ranges from 99.875 percent to 100.125percent of its face value.

3 Here, indifference requires that the inflation-adjusted present values

Page 8 Southwest Economy September/October 1998

Chart 15-Year Treasury Notes and 5-Year Inflation-IndexedTreasury NotesPercent

0

1

2

3

4

5

6

7

8

5-year indexed notes

5-year Treasury notes

7/15/983/25/9812/3/978/13/974/23/971/1/97

Chart 210-Year Treasury Notes and 10-Year Inflation-IndexedTreasury NotesPercent

0

1

2

3

4

5

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8

10-year indexed notes

10-year Treasury notes

7/15/983/25/9812/3/978/13/974/23/971/1/97

s

AST ISSUES OF Southwest Econ-omy have highlighted the posi-tive impacts of free trade andthe long-term potential benefitsof the North American FreeTrade Agreement (NAFTA). But

free trade that exists only in theoryhelps no one. In reality many road-blocks other than tariffs can hamper theflow of goods and services across bor-ders. For example, physical and struc-tural problems at the Texas–Mexicanborder can impede the flow of goodsand thus reduce the benefits of NAFTA.

Laredo is the busiest land port alongthe U.S.–Mexican border, representing37 percent of the value of all tradedgoods shipped by land in 1997 andabout one-third of total U.S.–Mexicantrade. Last year $50.5 billion in goodsflowed north and south through theLaredo area, a 71 percent increase since1994. Most of the goods were carried by 2.2 million trucks crossing on theLincoln-Juarez Bridge in downtownLaredo and the Solidarity Bridge 20miles to the north. While trade flow hasboomed in this border port, so has con-gestion. Trucks lined up for miles head-ing both north and south are a commonsight at the Lincoln-Juarez Bridge.

While rapid growth is partly respon-sible for the bottleneck, another causeis that Mexican customs agents preclearall truck cargo before it crosses intoMexico. U.S. long-haul carriers droptheir cargo in Laredo, where Mexicancustoms brokers inspect the cargo, col-lect duties and arrange for other trucksto transport the load across the bridge.These trucks then return to the U.S.side, usually empty. Similarly, Mexicancarriers usually deliver their cargo toMexican customs on the Mexican sideof the border. Another truck carries theload across to Laredo and then returns,often empty. As a result of this system,about 44 percent of the tractors crossingthe bridge in 1997 had no trailer or an empty one. Reducing the number of

empty trucks would have a significantimpact on border congestion.

Under NAFTA both north- and south-bound trucks should have been able todrive into border states beginning inDecember 1995 and throughout bothcountries by the year 2000. PresidentClinton, however, responding to per-ceived safety issues, delayed this pro-vision indefinitely. Implementing theprovision would pressure Mexican cus-toms brokers to stop inspecting U.S.cargo on the U.S. side of the border

because many major U.S. manufacturerslikely would seek direct shipment intoimportant industrial areas such as Mon-terrey. Researchers at Texas A&M Inter-national University (TAMIU) in Laredoestimate that in 1995 the big three U.S.automakers spent $2.8 million moreshipping products southbound throughLaredo than they would have if theNAFTA provision had taken hold andprecertification of goods was no longerrequired.1

Restrictive operating hours and bad

Federal Reserve Bank of Dallas Page 9

SWESWESWEBeyond the BorderBeyond the Border

Border Bottlenecks Hamper Trade

P

Mic

hael

Sho

rt

roads also cause delays at the border.U.S. customs is open from 8 a.m. tomidnight, while Mexican customs isopen from 9 a.m. to 11 p.m. The agencythat inspects agricultural products goinginto Mexico—Secretaría de Agricultura,Ganadería y Desarrollo Rural (SAGAR)—opens at 10 a.m. and closes at 5 p.m.Trucks carrying agricultural products intoMexico must first go through SAGAR inspection and then get in line to gothrough Mexican customs. Round-the-clock customs operations by all agencieswould reduce congestion in downtownLaredo and increase bridge capacity.Bridge crossing fees could be structuredto encourage use at off-peak times.

The state-of-the-art Solidarity Bridgewas completed in 1991 but has just re-cently begun to relieve some of thetruck congestion in Laredo and NuevoLaredo. The bridge, however, continuesto operate well below capacity. Onereason is the poor condition of the con-necting road in Mexico, which is only 8feet wide and has no shoulders. On theU.S. side, the road connecting to Inter-state 35 passes through busy residentialareas. Improvements to roads on theMexican side are in process, however,and a road connecting the bridge to anew Monterrey toll highway should becompleted in a couple of years.

Enhanced drug enforcement activi-ties have also added to the time and ex-pense of border crossings. To increasetraffic flow, U.S. Customs is looking to-ward technological and innovative re-sources. X-ray machines that can checkan entire truckload for contraband in 20minutes have been installed at four bor-der ports, and four more machines areplanned for installation in the next year.

Other types of technology have sig-nificant potential to reduce border congestion. The North American TradeAutomation Prototype (NATAP), now intesting, would allow cargo at either thepoint of origin or an inland port to beelectronically sealed, tracked and thentransported straight across the border.Currently the system is installed at fourtest sites: Otay Mesa, California; Nogales,

Arizona; El Paso and Laredo. For com-plete implementation of the plan, how-ever, current laws and agreements needto be changed to allow trucks to crossfreely into border states.

One proposed solution to the con-gestion is to build another bridge inLaredo. But before millions more arespent on a new bridge, the current in-frastructure should be utilized to itsfullest extent. Almost 5,000 trucks crossthe two commercial bridges in theLaredo region daily. If the empty truckswere eliminated, the same amount ofgoods could be transported in only2,750 trucks. This is about one-fourththe capacity of the Solidarity Bridge, according to James Giermanski ofTAMIU. Giermanski projects that, basedon the average growth rate of truck traffic over the past four years, it wouldtake until the year 2020 to reach the capacity of the Solidarity Bridge if allloaded truck traffic in Laredo wentsolely across that bridge.

In recent months the line of trucksheading south through Laredo has ex-tended back as far as 5 miles. The timespent waiting to cross the border repre-sents direct costs to shippers and to tax-payers, who must pay for the roads.There are also indirect costs such as in-creased air pollution and the opportu-nity costs of the resources that are idled.Improved technology and better roadsshould relieve some of the bottleneck.While a new bridge would help consid-erably, reducing the number of emptytrucks and extending operating hoursare other potential solutions.

— Keith PhillipsJay Campbell

Note1 See “The Effects of the Drayage Industry on Trans-U.S.–Mexico

Truck Shipments through the Port of Laredo, Texas,” unpublishedpaper by Henry C. Smith and James Giermanski.

Page 10 Southwest Economy September/October 1998

SWESWESWEBeyond the BorderBeyond the Border

Robert D. McTeer, Jr.President and Chief Executive Officer

Helen E. HolcombFirst Vice President and Chief Operating Officer

Harvey RosenblumSenior Vice President and Director of Research

W. Michael CoxVice President and Economic Advisor

Senior Economists andAssistant Vice Presidents

Stephen P. A. Brown, John Duca, Robert W. Gilmer, Evan F. Koenig

Director, Center for Latin AmericanEconomics, and Assistant Vice President

William C. Gruben

Senior Economist and Research OfficerMine K. Yücel

EconomistsRobert Formaini Jason L. SavingDavid M. Gould Fiona D. Sigalla

Joseph H. Haslag Lori L. TaylorKeith R. Phillips Lucinda Vargas

Stephen D. Prowse Mark A. WynneMarci Rossell Carlos E. J. M. Zarazaga

Research AssociatesProfessors Nathan S. Balke,

Thomas B. Fomby, Gregory W. Huffman,

Southern Methodist University

Professor Finn E. Kydland, Carnegie Mellon University

Professor Roy J. Ruffin, University of Houston

Executive EditorHarvey Rosenblum

EditorsW. Michael Cox, Mine K. Yücel

Publications DirectorKay Champagne

Copy EditorJennifer Afflerbach

Design & ProductionLaura J. Bell

Southwest Economy is published six timesannually by the Federal Reserve Bank of Dallas.

The views expressed are those of the authors and should not be attributed to

the Federal Reserve Bank of Dallas or the Federal Reserve System.

Articles may be reprinted on the condition that the source is credited and a copy is provided to the Research Department of the Federal Reserve Bank of Dallas.

Southwest Economy is available free of charge by writing the Public Affairs Department,

Federal Reserve Bank of Dallas, P.O. Box 655906, Dallas, TX 75265-5906,

or by telephoning (214) 922-5254.

b a n k o f d a l l a sb a n k o f d a l l a s

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Federal Reserve Bank of Dallas Page 11

Further Information on the Data

For more information on employmentdata, see “Reassessing Texas EmploymentGrowth” (Southwest Economy, July/August1993). For TIPI, see “The Texas Industrial Production Index” (Dallas Fed Economic Review, November 1989). For the TexasLeading Index and its components, see “The Texas Index of Leading Indicators: A Revision and Further Evaluation” (DallasFed Economic Review, July 1990).

Online economic data and articles areavailable on the Dallas Fed’s Internet Website, www.dallasfed.org.

Thousands of persons Index, 1987 = 100 May–July 1998Texas Leading Index and Nonfarm Employment Net Contributions of Components to Change in Leading Index

Percent

.80–.60 –.40 –.20 0 .20 .40 .60

Average weekly hours .50

Help-wanted index

Texas Stock Index

New unemployment claims–.42

Well permits

Real oil price

U.S. leading index

Texas value of the dollar

–.47

–.13

–.33

–.25

.03

–.44Leading indexEmployment

’81 ’83 ’85 ’87 ’89 ’91 ’93 ’95 ’975,500

9,000

8,500

8,000

7,500

7,000

6,500

6,000

85

1301251201151101051009590

1995 1996 1997 1998

Total

Utilities

Mining

Manufacturing

96

112

110

108

106

104

102

100

98

Texas Industrial Production IndexIndex, January 1995 = 100

Employment Growth in District StatesGrowth

1998:21998:1199719961995199419931992199119900

4.54

3.53

2.52

1.51.5

SWESWESWERegional UpdateRegional Update

HE REGION’S ECONOMY continues to grow at ahealthy pace. Although employment growth was a robust 4.1 percent annual rate in July, quarterlygrowth has been trending down since the fourth quarter of 1997, as can be seen in the chart below.The Texas Leading Index declined in July for the third

month in a row. Most indicators were negative, as shown inthe Net Contributions of Components to Change in LeadingIndex chart.

Despite the health of the regional economy, some indus-tries have weakened recently. The hot, dry weather is takingits toll on the farming sector. The energy and high-tech in-dustries continue to be weak, battered by low prices. Highsupply and low demand have kept oil prices near $14 per bar-rel, leading to declines in the rig count and layoffs in the oiland gas extraction sector. The weakness in the high-tech in-

T

Regional Economic IndicatorsTexas employment* Total nonfarm employment*

Texas PrivateLeading TIPI** Construc- Manufac- Govern- service- New

Index total Mining tion turing ment producing Texas Louisiana Mexico

7/98 122.8 129.0 171.1 488.5 1,099.5 1,499.5 5,660.9 8,919.5 1,878.4 720.1 6/98 123.4 129.2 171.7 486.8 1,101.0 1,494.9 5,635.6 8,890.0 1,876.0 718.7 5/98 124.7 128.6 171.2 485.2 1,099.4 1,495.3 5,622.6 8,873.7 1,872.3 717.3 4/98 124.8 128.6 171.6 482.8 1,098.5 1,495.3 5,605.5 8,853.7 1,869.8 716.1 3/98 124.7 129.1 171.7 480.3 1,097.9 1,493.2 5,593.9 8,837.0 1,868.9 714.9 2/98 125.0 128.9 172.4 478.1 1,096.4 1,489.8 5,579.2 8,815.9 1,862.6 714.1 1/98 124.0 128.9 172.2 474.8 1,094.1 1,489.4 5,560.1 8,790.6 1,857.0 714.2

12/97 123.2 128.8 171.4 470.3 1,096.6 1,488.1 5,541.8 8,768.2 1,854.9 712.8 11/97 123.9 128.4 170.8 469.1 1,092.8 1,482.4 5,522.2 8,737.3 1,852.1 712.010/97 124.5 128.8 169.9 468.0 1,089.6 1,479.6 5,504.0 8,711.1 1,849.4 711.3

9/97 124.6 127.9 168.9 465.7 1,087.9 1,475.1 5,478.3 8,675.9 1,845.4 708.5 8/97 122.8 127.2 168.4 465.5 1,084.4 1,481.6 5,448.2 8,648.1 1,839.4 709.7

* in thousands** Texas Industrial Production Index

dustry led to falling earnings in the second quarter for manyof the region’s high-tech companies and caused some layoffs.

The construction and service industries continue to showstrong growth. Construction industry activity was vigorous inthe second quarter, buoyed by residential building. Despitemuch new construction, apartment occupancy rates are up in all major metro areas. The single-family housing marketalso remains hot in all major metro areas. The Texas HousingPrice Index increased 4.6 percent in the first quarter (yearover year). Employment in the private service-producing sector (which makes up 63 percent of total Texas em-ployment) increased 4.1 percent in July (annual rate), led by growth in trucking and warehousing, communications, finance, insurance and real estate, business services and trade.

—Mine K. Yücel

s

SWESWESWE

Federal Reserve Bank of Dallas

p.o. box 655906

Dallas, Texas 75265-5906

BULK RATEU.S. POSTAGE

PA I DDALLAS, TEXASPERMIT NO. 151

Notes1 “Immigration and the Economy,” the Third Annual Interna-

tional Economic Forum sponsored by the Federal ReserveBank of Dallas, El Paso Branch, was held November 14,1997.

2 Jeffrey S. Passel, The Urban Institute, Washington, D.C.;outline of remarks presented at the economic forum “Immi-gration and the Economy.”

3 Linda Levine, “The Education/Skill Distribution of Jobs:How Is It Changing?” (Washington, D.C., CongressionalResearch Service, Library of Congress, August 8, 1997),pp. 5, 14.

4 James P. Smith and Barry Edmonston, eds., The New Amer-icans: Economic, Demographic, and Fiscal Effects of Immi-gration, National Research Council (Washington, D.C.:National Academy Press, 1997), pp. 211–14.

5 Beverly Fox Kellam and Lucinda Vargas, “Immigration andthe Economy—Part I,” Southwest Economy, July/August,1998, p. 6.

6 Smith and Edmonston, pp. 218–19.7 In 1997, nearly 24 percent of people 25 years or older in the

United States had completed four years or more of college.This figure was up from 17 percent in 1980.

8 Smith and Edmonston, pp. 5–7; 223, 225. Data presentedin the remainder of this section rely on the National Re-search Council’s findings.

9 Passel, economic forum.

10 Smith and Edmonston, p. 281. A similar study for New Jer-sey showed the same pattern. For the 1989–90 fiscal year,immigrant households in New Jersey incurred a negativebalance of $1,484 (also in 1996 dollars) per household,while native households showed a positive fiscal balance of$232 (p. 276).

11 Passel, economic forum.12 Smith and Edmonston, p. 9.13 Passel, economic forum.14 George Borjas, Harvard University, outline of remarks pre-

sented at “Immigration and the Economy.”15 Passel, economic forum. The Immigration and Naturali-

zation Service defines refugees as those persons seekingasylum in the United States because they are unable or un-willing to return to their country of origin because of per-secution based on their race, religion, nationality,membership in a particular social group or political opin-ion. Overall, there are no limits on the number of refugeeimmigrants allowed, though the president sets annual ceil-ings by geographic area after consultations with Congress.

16 Passel, economic forum.17 Passel, economic forum.18 Many economists believe that, to a large extent, Social Se-

curity payments to the elderly represent a form of welfarebecause current beneficiaries receive more in benefits thanthey contributed to the system.

19 The majority of legal immigrants enter the United Statesthrough a sponsor. Sponsors petition for entry of immi-grants based on family or employment considerations. In1996 nearly 78 percent of the immigrants who were admit-ted to the United States were sponsored by family members(65 percent) and employers (13 percent).

20 Passel, economic forum. The Personal Responsibility and

Work Opportunity Reconciliation Act of 1996 (the WelfareAct) changed the welfare system and restricts the access of legal and illegal immigrants to a wide range of publicbenefits. The Illegal Immigration Reform and Immigrant Responsibility Act of 1996 added to and amended sectionsof the Welfare Act and includes stricter provisions on the financial status and financial responsibility of sponsors of immigrants. The legislation, however, gives states the option to provide or bar assistance to most qualified immi-grants.

21 James L. Ward, U.S. Consul General, Ciudad Juárez, Chi-huahua; outline of remarks presented at “Immigration andthe Economy.” The Department of Health and Human Ser-vices defines the poverty level on an annual basis. In 1996the poverty line for a family of four was $15,600. Thus, inthat year, an immigrant wishing to bring his wife and twochildren to the United States had to show an annual incomeof $19,500—an amount equal to125 percent of the povertylevel.

22 Smith and Edmonston, pp. 11–12. Data in the remainder of this section rely on the National Research Council’s find-ings.

23 See Stephen Moore, A Fiscal Portrait of the Newest Ameri-cans, National Immigration Forum and the Cato Institute,July 1998, pp. 17–19.

24 Joel Millman, correspondent, Wall Street Journal, MexicoCity Bureau, outline of remarks presented at “Immigrationand the Economy.” Millman’s book, The Other Americans:How Immigrants Renew Our Country, Our Economy, andOur Values, includes a discussion of how some immi-grants, by settling in previously abandoned inner-city areas,have helped revive local economies.

IMMIGRATION AND THE ECONOMY(Continued from page 4)