Immigration Is A Four-Letter Word… Spelled S-T-E-M

As 2016 gets underway, presidential candidates are appealing to voters with their ideas for stimulating economic growth. The strategy makes perfect sense. The timing is curious.

The U.S. economic expansion is approaching the seven-year mark, already the fourth longest on record. At 5 percent, the unemployment rate is nearing full employment. The Federal Reserve is determined to raise its benchmark rate by 300 basis points in the next three years, according to recent projections. China's economy, the world's second largest and a huge consumer of raw materials, is stumbling. In this economically challenged environment, the candidates need new ideas to give the 2-percent economy a lift when 2 percent is all the economy is capable of right now.

Instead, they are offering the same warmed-over prescriptions. The Republicans want to lower tax rates. The Democrats want to increase government spending.

Sure, there are variations on a theme: taxing consumption to eliminate the payroll tax (the GOP's Ted Cruz); or taxing securities transactions to pay for free college at state universities (Democrat Bernie Sanders). But basically the two parties are pushing the same old stuff for what is a new and different economic problem. Potential growth has slowed. Potential has to increase in order to accommodate faster economic growth.

Potential GDP is the rate at which an economy can grow without generating inflationary pressure. It is circumscribed by the growth in the labor force and in productivity. Both inputs have been especially weak since the recession, with the labor force growing at an average rate of 0.2 percent and productivity at 1.4 percent. (The productivity slowdown preceded the recession.) The Congressional Budget office estimates potential GDP at 2 percent for 2015-2019 and 2.1 percent for 2020-2025, in line with its actual GDP forecasts.

The real issue for presidential candidates is boosting the economy's capacity for growth, or potential GDP. Redistributing income - or, as the Democrats like to say, "putting money back in the pockets of those who will spend it" - isn't the solution. It's the supply side that needs a nudge. 

The government can't do anything about the aging population. What it can do is replace the retiring baby boomers with highly educated and motivated immigrant entrepreneurs.

"The easiest and best way to promote new business is an unpopular way: with major changes in immigration law," says Bob Litan, an adjunct senior fellow at the Council on Foreign Relations, where he focuses on entrepreneurship. "Unfortunately, in this campaign, immigration has become a four-letter word."

What we need is a different four-letter word, like STEM, for science, technology, engineering and math.

"We need STEM graduates to stay here," Litan says "Give them green cards. We need massive entrepreneurship visas."

The existing H1-B Visa program, which allows U.S. companies to employ foreign workers with a degree in "specialty occupations" on a temporary basis, is inadequate to the task. Drawing discouraged workers back into the labor force "has its limits," Litan says, given their outdated skills and the millions of Americans who have taken long-term disability.   

Tax cuts, the traditional supply-side remedy, are not the answer either, even though lower corporate tax rates and fewer loopholes would produce a more efficient economy, according to Litan. "Most new businesses don't make any money in first few years, so they aren't worried about taxes. Regulatory reform would help, but regulations at the state and local level are a bigger impediment to start-ups than federal regulations." 

Enter the StartUp Act, a bill to jump-start the economy through new business formation that was inspired by a 2011 Kauffman Foundation report, according to Jason Wiens, policy director at Kauffman. In addition to entrepreneurship visas and green cards for graduates with STEM degrees, the report proposed incentives for entrepreneurs, such as a capital-gains tax exemption and an extension of the R&D tax credit to companies that have yet to turn a profit. While the three versions of the StartUp Act went nowhere, the R&D tax credit was incorporated with various tax extenders into the omnibus spending bill passed in December, according to Wiens.

Senator Jerry Moran (R-Kan) co-authored the first StartUp bill in 2011 with Senator Mark Warner (D-Va). The following year, Senators Marco Rubio (R-Fla) and Chris Coons (D-Md) became co-sponsors of  version 2.0. Rubio has said he wants to modernize the immigration system and turn it into one based on skills once the border is secure. At least he understands the benefits of supply-side immigration reform, unlike many of the GOP contenders.

According to the StartUp Act, anyone applying for an entrepreneurship visa would have to meet certain prerequisites, such as minimal capital requirements, and demonstrate results: a thriving business over a period of years, according to Litan. 

Because new businesses are responsible for nearly all of the net new job creation in the U.S.; and because immigrants are more than twice as likely to start a company than native-born Americans; U.S. policy should be geared toward new company formation through immigrant entrepreneurship visas.

Start-up activity has yet to recover from the Great Recession. Both the number of new firms as a percent of all firms and the number of jobs created by new firms are down, according to a recent Kauffman study. Unless the trend reverses, the United States will lose a key driver of economic growth and the major source of innovation, which would provide a much-needed boost to productivity. 

While the United States is focused on immigrant terrorists, other countries have taken the lead in welcoming foreign entrepreneurs. Cruising on Highway 101 through California's Silicon Valley - the tech industry's Main St. - Wiens spotted a billboard beckoning those with "H-1B Visa problems" to apply for a "new start-up visa." The billboard sponsor? Canada. 

More than a dozen countries, including Germany, Israel and Chile, have introduced start-up visas, according to Wiens. The United States had better get on board before the ship sails without it.

Caroline Baum is a contributor to e21. You can follow her on Twitter here.

Interested in real economic insights? Want to stay ahead of the competition? Each weekday morning, e21 delivers a short email that includes e21 exclusive commentaries and the latest market news and updates from Washington. Sign up for the e21 Morning eBrief.