Immigration to the United States is a complex and thorny topic. Setting aside the impact of immigration on American culture and politics, as well as the balance of taxes and spending, this AIER explainer looks at the economics of immigration, both legal and illegal.

To understand the economic effects of immigration, we need to understand the motivations for immigrants to come to the US, particularly the economic incentives. Various economic models can be used to analyze which types of immigrants countries like the US tend to attract and what impacts they have. While no single model provides a complete picture, together they offer a more comprehensive understanding of the economic effects of immigration.

Labor as a Factor of Production

Factor Complementarity

The simplest way to think about immigration is as an increase in the labor supply. Labor is a factor of production, that is, a general type of input into the production process. Other factors of production may include land, capital, natural resources, and entrepreneurship. Technology is usually not considered a factor of production. Instead, technology is thought of as those ideas, processes, and techniques that make all factors of production more productive.

Entrepreneurs hire labor to make and do things. Without labor, entrepreneurship, capital, land, and the like are not productive. By the same token, without capital, land, and labor are not productive. This feature of factors of production is called factor complementarity: the more other factors a given factor can interact with and supplement, the more productive it is. Each hour of labor is more productive when it can use more capital (machines, entrepreneurship).

What entrepreneurs pay owners of labor (workers) in exchange for their services is called a wage. Wages are the price of labor (and human capital). The price of capital is usually called the interest rate, the price of entrepreneurship is economic profit, and the price of land is land rent.

Workers want to go where the wage is highest. If they can make more money in another industry or another location, they have a clear incentive to switch industries or locations. By balancing labor supply and demand, this constant switching in the economy drives long-run wage differences between industries and locations toward zero.

Thinking of immigrants and other workers as mere quantities of labor risks oversimplification, however. Like other workers, immigrants bring their distinct talents and interests into the labor market, learn on the job, and create new ways of doing things. Even unskilled workers have different levels and types of specialized knowledge that keep them from being perfectly interchangeable. Workers can also be capitalists: investors or entrepreneurs. By one estimate, immigrants in the US start businesses at 1.8 times the rate of natives. Illegal and legal immigrants have different outside options and therefore different levels of bargaining power with their employers.

In all these ways immigrants and workers are much more complex than mere quantities of labor, but to understand an economic phenomenon, we often have to start with a simple model before adding complexities.

Mobility and Specific Factors

Labor is mobile across industries and, if regulations allow it, across locations in the long run.

But how long is the long run? If we exclude human capital from the definition of “labor” and consider “labor” to refer only to raw, manual labor power, then labor moves quickly and readily across industries and, if allowed, locations. The skills required for picking crops, cleaning rooms, preparing fast food, mowing lawns, and such can be easily learned, and so workers can move easily among these jobs. We shouldn’t expect wages for these jobs to be very different. If demand for cleaning rooms rises, causing cleaners’ wages to rise, workers should move from fast food into cleaning, causing wages to fall back for cleaners and rise for fast food workers, until they are roughly equal and there is no longer any incentive to switch jobs.

But human capital is much more occupation- and industry-specific. It is difficult to apply the skills of a physician to the job of computer programming. The wage return to human capital should equilibrate only slowly across industries. Nevertheless, the same processes still do work, even if over a generation or two. If the demand for computer programming falls because of AI, for example, we should expect programmers’ wages to fall, while everyone else benefits from cheaper, better software. Programmers themselves will look for work in careers where the skills they’ve developed will be of some use, but the effect is even stronger on the upcoming generation. Fewer students will strive to learn programming skills; instead, more are likely to apply themselves to medicine, law, or finance, assuming wages in those fields remain high. As more new workers flood these fields instead of programming, the wages for computer programmers will gradually recover to attract the people needed to perform tasks that cannot be automated, while the wages for physicians, attorneys, and finance workers will fall, until the wages across these higher-skilled industries are roughly equal and there is little financial incentive for students to develop one set of skills rather than another.

In a dynamic economy, equilibrium is never actually reached. But the theoretical equilibrium does work like a kind of gravitational force, drawing workers away from where they are least needed and toward where they are most needed.

Labor mobility across locations is very observable where it’s allowed. In the United States there are ordinarily no restrictions on moving from place to place. As a result, we should expect wages for the same skill level in different places to be roughly equal unless some places are nicer than others to live in, that is, have different amenities.

US evidence suggests that total real compensation (price-adjusted wages plus amenities) does tend to equalize across locations, for a given skill level, when fully open immigration is allowed.^[1] In 2000, the places with the lowest real wages in the US were places like Santa Cruz, Honolulu, San Francisco, Santa Barbara, San Jose, rural Hawaii, and Jacksonville, North Carolina (Chen and Rosenthal, 2008). San Diego, Cape Cod, rural Montana, and rural Vermont were also near the bottom. Presumably, these are the nicest places in the country to live in: workers were willing to accept lower wages to be there. Among the highest-earning geographies were Kokomo, Indiana; Wilmington, Delaware; Flint, Michigan; Waterbury, Connecticut; Detroit; Trenton; Philadelphia; and Hartford, Connecticut. Houston, Newark, and Baltimore were also high on this list. These are, apparently, the least nice places in the country to live in: workers had to have high wages (relative to rents) to live there.^[2]

Still, we must remember that wages, like other prices, coordinate countless bits of information in the heads of employers and workers, relating to tastes, opportunities, and other circumstances. These circumstances and consumer tastes are constantly in flux, and therefore wages never reach a static equilibrium.

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The Heckscher-Ohlin and Stolper-Samuelson Theorems

The Heckscher-Ohlin and Stolper-Samuelson Theorems help explain how immigration affects the United States economy, which is an advanced country rich in physical and human capital. These theorems are usually used to explain the effects of foreign trade, but their logic applies equally well to immigration.

The Heckscher-Ohlin Theorem (1933) posits that different places start out with different factor endowments and then infers that places will specialize in producing the goods that intensively require their relatively abundant factors and import goods that intensively require their relatively scarce factors.

For example, the United States is capital- and land-abundant, but labor-scarce by contrast. This might also be phrased as the US having a high ratio of skilled labor to unskilled labor, and a low ratio of labor to land, compared to most other countries.

The Heckscher-Ohlin Theorem then predicts that the US will be a low-cost producer of goods that use a lot of capital, skilled labor, and land relative to unskilled labor, because those inputs are relatively cheap, and a high-cost producer of goods that use a lot of unskilled labor relative to capital, skilled labor, and land, because that input is relatively expensive. So the US will be able to sell capital- and land-intensive goods abroad while importing labor-intensive goods.^[3]

The Stolper-Samuelson Theorem says that a change in the relative prices of goods more than proportionally changes the prices of the factors used intensively in their production (Samuelson, 1948). For example, let’s say the US starts out with no trade with the rest of the world. Capital-intensive and land-intensive goods are cheap, and labor-intensive goods are expensive because of the US factor endowments. Once the US opens to trade, capital-intensive and land-intensive goods rise in relative price domestically, and labor-intensive goods fall in relative price. The overall effect is to increase US productivity, as David Ricardo discovered, and as Ludwig von Mises and Donald Boudreaux have elaborated. But holders of capital and land benefit from trade, while holders of labor lose from trade, even taking into account lower prices on imported and import-competing goods.

Note that by “holders of capital” we include skilled workers, who hold a lot of human capital. “Holders of labor” are unskilled workers, who have only their raw manual power to offer. They are relatively scarce in the US, so with international trade, companies will try to economize on their use, and consumers will buy goods made with a lot of unskilled labor from abroad, where these goods can be made more cheaply.

The phenomenon of factor price equalization(FPE), predicted by these two theorems, has been much debated in economics. Everyone agrees that FPE happens to some extent, but the question is how much of the growing inequality between the wages of skilled and unskilled workers in the US and other advanced industrialized economies is the result of globalization (trade, capital mobility, and immigration) versus technology.

The counterintuitive truth to keep in mind is that the United States’ aggregate economic gains from globalization are larger the more that globalization changes factor prices—that is, suppresses the wages of the unskilled and boosts the wages of the skilled. The reason for this lies in the theory of comparative advantage, cited above. Economies benefit from trade the more their domestic prices without trade diverge from world prices. That’s the primary reason small countries benefit more from trade than large countries (Alesina, Spolaore, and Wacziarg, 2000). If trade really lets Americans economize on unskilled labor that is relatively expensive to us, that’s a huge benefit to the US economy, but it also drives up inequality. By contrast, in poor countries trade reduces inequality because skilled labor is scarce and unskilled labor is abundant. As a result, trade, capital mobility, and immigration should reduce absolute poverty, since unskilled workers in poor countries are the poorest people on earth.

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Comparing Trade and Immigration

In the real world, opening trade has not led to anything near complete factor price equalization worldwide. (Remember that we do observe substantial FPE across locations in the US, however!) Even unskilled workers in the US make a much higher wage than unskilled workers in, say, Bangladesh or Bolivia. The reason for this is that total factor productivity (TFP) is higher in the US because our level of technology is higher, our laws and political system are more stable, and the government interferes less with the free-market system. As a result, an American unskilled worker is far more productive than a Bangladeshi unskilled worker. An American skilled worker is far more productive than a Bangladeshi skilled worker. Capital and land are more productive here, too.

Herein lies the economic difference between trade and factor mobility. When capital and labor can move across borders, they can access the TFP of the most productive economies. It’s clear that unskilled workers have an incentive to move from unskilled-labor-abundant economies, where wages are low, to unskilled-labor-scarce economies like the US, where wages are high. That follows just from factor endowments. But there’s even a case for skilled workers to move from developing countries to the US because TFP is higher here, allowing them to earn higher wages even though they are leaving a place where their assets are relatively scarce for one where their assets are relatively abundant.

For this reason, the economic gains from immigration are potentially much higher than those for trade. At the current margin, just about every worker in a low-TFP economy could become more productive by moving to a high-TFP economy (Clemens, 2011). The world as a whole could be much more productive and richer if workers could seek the highest wage their labor commands.

Now, there are two important things to note about this prediction. The first is that this conclusion follows only if mass immigration doesn’t have massive negative effects on TFP. Some critics of immigration have posited that this is precisely what will happen because of immigrants’ use of the welfare state, voting patterns, or cultural values and intelligence (Jones, 2022). Any full assessment of immigration policy must assess these claims and take those with strong evidence into account.

Second, as with trade, the economic gains from immigration are larger the greater the pre-immigration wage differences between economies. If healthy, English-speaking Bangladeshi unskilled workers moved to the US en masse, they’d be expected to drive down the wages of native unskilled workers, and this process is part of what generates the economic gains from Bangladeshi immigration.

Some pro-immigration commentators deny this effect. They say that immigration not only increases the supply of labor, it also increases the demand for goods and services, which in turn offsets the wage effect of immigration.

This claim is incorrect. First of all, the mechanism by which they claim immigration raises wages here implies that it increases prices. That’s the whole reason producers would bid up labor to produce more goods. But if immigration drives up prices, then it still drives down real, inflation-adjusted wages. Second, immigration can’t affect aggregate demand much in the long run. Aggregate demand affects choices most in the short run, until expectations change and prices adjust. Furthermore, the Federal Reserve should be expected to offset the alleged demand effects of immigration with tighter monetary policy, in order to reach its inflation target.

As supply and demand would predict, an exogenous increase in the supply of a factor of production will reduce its price. Immigrants will bid down the wages of native workers with precisely the same skill sets and industrial and occupational concentrations. But does this theoretical result happen in practice?

The Evidence on Immigration’s Distributional Effects

Does unskilled immigration reduce the wages of unskilled workers already here? Economists haven’t come to a consensus on this point. A key point of dispute concerns whether most unskilled immigrants to the US constitute a substitute for unskilled native labor, or not. Most unskilled immigrants to the US do not natively speak English. As a result, they may be less productive than native unskilled workers in service industries.

An influential early review of the literature suggested that the wage effects of immigration are much stronger than those of trade (Borjas, Freeman and Katz, 1997). Since then, economists have tried to identify “natural experiments” that let them draw causal conclusions more confidently.

One such natural experiment may be the Mariel Boatlift of 1980, which brought to South Florida an estimated 125,000 Cuban refugees, most of whom hadn’t finished high school and did not speak English. The original Boatlift study showed no wage effects (Card, 1990). An influential reassessment then showed a negative effect on the wages of high school dropouts (Borjas, 2017). However, a subsequent critique showed that the data Borjas used are unreliable because the sample sizes are too small to infer wages for the broader populations under investigation (Clemens and Hunt, 2019).

If immigrants are more complementary to native workers than substitutes for them, then they don’t compete much with native workers. Effectively, they offer different factors of production. That’s just what a study of “occupational task-intensity” data finds (Peri and Sparber, 2009). Along the same lines, Ottaviano and Peri (2012) find that in the long run, immigrants increase the wages of natives at all skill levels.

A more recent, high-quality study finds that Mexican immigrants impelled to the US by the peso crisis reduced native low-skilled wages and raised rents in the short run, but in the long run only reduced the wages of those low-skilled natives who entered the labor market in high-immigration years and reduced rents in locations where immigrants disproportionately entered the construction sector (Monras, 2020). Further work taking immigrants’ location decisions into account finds that immigrants concentrate in high-productivity cities so that they can earn money to send home. As a result, they improve the productivity and wages of natives more than they would otherwise (Albert and Monras, 2022).

The bulk of the evidence is therefore consistent with economic theory. Immigrants reduce the wages of natives with whom they directly compete, but they raise the wages of most native workers in the long run. Skilled immigration to the US is widely regarded as having positive effects on most workers, with the possible exception, in the short run, of native workers in identical occupations and industries.

What Economics Can Teach Us About Immigration

Economic theory tells us that immigration directly benefits economies for the same reason and in the same manner that trade does: it allows labor to work where it is most productive, making all other factors of production more productive. The government is no better at centrally planning labor markets than it is other markets: by incorporating dispersed, tacit knowledge, wages coordinate the choices of immigrants and their employers in myriad ways that no one could foresee. Moreover, immigration has a big positive effect on productivity that trade does not have: it gives workers everywhere access to the most advanced technology.

Popular discourse on immigration does not track the insights of economics. Immigration should have the biggest benefits for America as a whole precisely when it drives down the wages of our scarcest factor of production, unskilled labor. The same is true of trade. For these reasons, economists have often proposed policies to “compensate” low-skilled natives for the fact that their wages under globalization will be lower than under autarky.

Our biggest mistake, however, might be to think of people as if they were factors of production, rather than to understand that factors of production are things that people own. All of us at one time had only unskilled labor to offer the labor market. Many immigrants end up starting businesses and becoming owners of capital, raising the productivity of native Americans. Moreover, if American policies better supported skill development and productive work, fewer workers would have only unskilled labor to offer the market.

As Adam Smith discovered, economic progress depends on deepening the division of labor, which in turn is made possible by ever-larger networks of exchange. As a form of voluntary exchange for mutual benefit, immigration deepens labor markets and facilitates a more finely-grained division of labor.

This explainer does not address the indirect effects of immigration on the economy, which may work through culture, politics, or the welfare state. Those indirect effects are the ones most difficult to measure, and controversy about them is likely to continue. But before we can have a sensible conversation about immigration policy, we need to understand the economic basics.

References

Albert, C. and Monras, J. (2022) “Immigration and Spatial Equilibrium: The Role of Expenditures in the Country of Origin,” American Economic Review, 112(11), pp. 3763–3802. Available at: https://doi.org/10.1257/aer.20211241. 

Albouy, D. (2016) “What Are Cities Worth? Land Rents, Local Productivity, and the Total Value of Amenities,” The Review of Economics and Statistics, 98(3), pp. 477–487. 

Alesina, A., Spolaore, E. and Wacziarg, R. (2000) “Economic integration and political disintegration,” American Economic Review, 90(5), pp. 1276–1296. 

Bernard, A.B., Redding, S.J. and Schott, P.K. (2013) “Testing for Factor Price Equality with Unobserved Differences in Factor Quality or Productivity,” American Economic Journal: Microeconomics, 5(2), pp. 135–63. Available at: https:// doi.org/10.1257/mic.5.2.135. 

Borjas, G.J. (2017) “The Wage Impact of the Marielitos: A Reappraisal,” ILR Review, 70(5), pp. 1077–1110. Available at: https://doi.org/10.1177/0019793917692945. 

Borjas, G.J., Freeman, R.B. and Katz, L.F. (1997) “How much do immigration and trade affect labor market outcomes?,” Brookings Papers on Economic Activity, 1997(1), pp. 1–90. 

Card, D. (1990) “The Impact of the Mariel Boatlift on the Miami Labor Market,” ILR Review, 43(2), pp. 245–257. 

Chen, Y. and Rosenthal, S.S. (2008) “Local Amenities and Life-Cycle Migration: Do People Move for Jobs or Fun?,” Journal of Urban Economics, 64, pp. 519–537. 

Clemens, M.A. (2011) “Economics and emigration: Trillion-dollar bills on the sidewalk?,” Journal of Economic Perspectives, 25(3), pp. 83–106. 

Clemens, M.A. and Hunt, J. (2019) “The labor market effects of refugee waves: reconciling conflicting results,” ILR Review, 72(4), pp. 818–857. 

Jones, G. (2022) The Culture Transplant: How Migrants Make the Economies They Move to a Lot like the Ones They Left. Redwood City, Calif.: Stanford University Press. 13 

Leontief, W. (1953) “Domestic Production and Foreign Trade; The American Capital Position Re-Examined,” Proceedings of the American Philosophical Society, 97(4), pp. 332–349. 

Monras, J. (2020) “Immigration and Wage Dynamics: Evidence from the Mexican Peso Crisis,” Journal of Political Economy, 128(8), pp. 3017–3089. Available at: https://doi. org/10.1086/707764. 

Ottaviano, G.I.P. and Peri, G. (2012) “Rethinking the effect of immigration on wages,” Journal of the European Economic Association, 10(1), pp. 152–197. 

Peri, G. and Sparber, C. (2009) “Task Specialization, Immigration, and Wages,” American Economic Journal: Applied Economics, 1(3), pp. 135–69. Available at: https://doi. org/10.1257/app.1.3.135. 

Samuelson, P.A. (1948) “International Trade and the Equalisation of Factor Prices,” The Economic Journal, 58(230), pp. 163–184. Available at: https://doi.org/10.2307/2225933. 

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Endnotes

^[1] One paper that purports to find otherwise – Bernard et al. (2013) – does not attempt to adjust wages for local prices or amenities, substantially vitiating its results.

^[2] See also Albouy (2016).

^[3] Leontief (1953) found that US exports were more labor-intensive and less capital-intensive than its imports, but the well-known “Leontief Paradox” is explicable in that the US appears to have had a durable comparative advantage in skilled labor-intensive production.

Over the past decade, Europe has played a leading role in shaping global climate policy, highlighted by the launch of the European Green Deal in 2019 — Ursula von der Leyen described it as a “man on the moon moment.” The initiative aims to make Europe the world’s first climate-neutral continent by 2050 while fostering innovation and strengthening its industrial base.

Yet several years later, the results are deeply disappointing. Instead of meeting its goals, the Green Deal is increasingly associated with higher energy costs, weakened competitiveness, and growing political backlash. It has deepened divisions within the EU, strained global relations, and increased pressure on households and businesses — raising serious doubts about its feasibility and long-term economic impact.

How Green Ideology Undermines Europe’s Economy

Europe’s economic stagnation points to a deeper structural problem in its energy and climate strategy — one closely tied to the direction set by the European Green Deal. Since its launch, competitiveness has eroded sharply, with soaring energy costs at its core. Electricity prices in Europe are now two to three times higher than in the United States and China, with taxes accounting for nearly a quarter of the total cost.

These outcomes largely stem from policy choices. The EU’s binding targets — net zero by 2050 and a 55-percent emissions reduction by 2030 — have constrained energy supply, despite Europe accounting for only six percent of global emissions. At the same time, phasing out nuclear, restricting gas, and relying on intermittent renewables have weakened energy security and increased price volatility. For industry — where energy can account for up to 30 percent of total production costs — this, combined with carbon pricing, has become a critical constraint, driving firms to scale back, relocate, or shut down, accelerating deindustrialization across the continent.

The automotive industry clearly illustrates these pressures: representing over seven percent of EU GDP and nearly 14 million jobs, the sector is under pressure from the 2035 ban on combustion engines, forcing a rapid shift to electric vehicles despite unresolved technological challenges and market constraints. As Mercedes-Benz CEO Ola Källenius warned, the policy risks driving the sector “full speed into a wall.” The consequences for the sector are already visible: declining production, mounting restructuring, and significant job losses — 86,000 jobs since 2020, with up to 350,000 more at risk by 2035 — while tightening regulations are set to reduce profits by seven to eight percent by 2030, pushing the sector toward losses and eroding Europe’s automotive leadership.

Agriculture has also become one of the Green Deal’s clearest casualties. Stricter rules on emissions, land use, pesticides, and fertilizers are raising costs and increasing yield volatility, hitting small farmers hardest and accelerating consolidation among large agribusinesses. Targets such as cutting pesticide use by 50 percent and expanding organic farming risk significant declines in output, threatening both rural livelihoods and food security. Rather than enabling farmers to innovate and improve productivity, these policies are constraining production — fueling widespread protests and weakening both competitiveness and sustainability. 

Taken together, these pressures are not isolated — they reflect a broader economic burden. The European Commission estimates that the transition will require at least €260 billion in additional investment each year, with total costs reaching up to 12 percent of EU GDP — a burden that is increasingly difficult for the European economy to sustain.

The Green Deal’s Central Planning Problem 

The economic strain is now translating into political backlash. In recent years, opposition to the European Green Deal has surged across the continent — from farmers and industrial groups to voters and political parties. The 2024 EU elections confirmed what was already clear: the once-dominant green consensus is fracturing. In response, Brussels has begun quietly rolling back key elements of the policy — weakening regulations, introducing loopholes, and even avoiding the term “Green Deal” itself. What was presented as a historic transformation is now unraveling.

This backlash reflects a deeper failure. Although the EU allocated $680 billion from 2021 to 2027 — over a third of its budget — the Green Deal has achieved only modest environmental improvements, while imposing a heavy economic burden on households and businesses, who now face higher energy prices, taxes, and regulatory pressure.

The problem is not merely execution — it is structural. The Green Deal relies on centralized planning to manage a complex energy transition, even though policymakers lack the information and incentives to do so effectively. A major flaw is its rejection of technological neutrality. Leading manufacturers support a mix of electric, hybrid, hydrogen, and e-fuels to compete freely and allow efficient solutions to emerge, yet Brussels is enforcing a single pathway — effectively dictating which technologies survive and sidelining industry expertise.

In such a system, the outcomes are predictable: misallocation, distorted competition, and costly failures. These distortions are amplified by Europe’s restrictive regulatory environment, where internal barriers within the EU single market amount to a 44-percent tariff on goods and 110 percent on services, further constraining efficiency and innovation.

Germany illustrates these dynamics clearly. Long regarded as the leader of Europe’s green transition, its Energiewende — expanding renewables while phasing out nuclear — has cost around $800 billion since 2002, yet delivered only modest results and left German industries paying up to five times more for electricity than American competitors. Much of the progress in renewables has been offset by the closure of zero-emission nuclear plants. Estimates suggest that maintaining nuclear capacity could have achieved a 73-percent emissions reduction at half the cost, highlighting the limits of ideologically driven policy.

The comparison with the United States is instructive. In the US, emissions have declined even as the economy more than doubled since 1990 — driven largely by market forces, particularly the shift to cheaper natural gas and the expansion of renewables. This combination reduced emissions without imposing comparable costs. Europe, meanwhile, has pursued a more rigid, policy-driven approach that has raised prices and weakened growth. 

The deeper lesson of the Green Deal is that climate policy cannot succeed when it abandons the principles that made Europe prosperous in the first place: free enterprise, open markets, private innovation, and limited government. Energy transitions cannot be engineered through centralized planning, subsidies, and political mandates. Innovation emerges from competition, experimentation, and market signals — not from governments dictating technological outcomes.

Andrew David Edwards, in Money and the Making of the American Revolution, offers what his publisher describes as “a new interpretation of the American Revolution as a transformative monetary contest.” While many books and articles have examined the monetary arrangements of the American colonies and the financing of the Revolution, Edwards shows a solid command of much of this scholarship as well as the primary sources. While at times his writing can be eloquent, the book is necessarily ponderous and dense. Unfortunately, Edwards’ understanding of the nature of money and finance can be superficial at best.

Building upon the earlier contention of historian Joseph Albert Ernst that British restrictions on colonial paper money were a major grievance leading to the Revolution, Edwards goes further. He contends that the colonies and the mother country had fundamentally distinct monetary systems, and the resulting war was primarily a conflict over money rather than taxes. Moreover, because Americans had to ultimately abandon their reliance on the Continental currency and instead turn to foreign loans in specie (gold and silver coins) and create the Bank of North America, they won their independence only at the cost of losing control over their money. Edwards then finds conflict over the appropriate monetary system still lingering domestically into the Confederation period until its final settlement embodied in the Constitution. 

Overlaying this narrative is Edwards’ open hostility to capitalism. In recounting the history, Edwards suggests he is unveiling a self-interested monetary motive for going to war, undermining Bernard Bailyn’s ideological approach to the Revolution’s initiation. He does not seem to consider the possibility that both motivations could have been at play.

In the book’s introduction, entitled “The Burning Question,” Edwards makes much of the fact that colonial paper money — called “bills of credit” — was issued temporarily, usually in anticipation of future taxes that would retire them. This, he claims, makes the colonial monetary system entirely different from that of Britain. Edwards is correct that, during the colonial period, there were many other ways of making exchanges: direct credit, as well as barter and simple commodity exchanges, such as wampum, rice, or tobacco. But bills of credit still could and often did serve all those functions, and as Edwards mentions, colonial governments issued bills of credit to make temporary loans, earning interest against real estate. Only bills that could easily be re-spent on goods and services, like dollars today, would have been accepted.

That bills of credit were retired and burned did not make them unique, as Edwards contends. Colonial governments did often issue bills of credit to finance transitory wartime expenditures, but sometimes, future taxes were insufficient to retire and burn all bills in a particular issuance. And even when taxes were sufficient, new bills were issued. Pennsylvania, which consistently maintained the purchasing power of its bills of credit, always made overlapping issues, keeping some bills continually in circulation from 1725 until the Revolution’s outbreak. Retiring the bills of credit, then, was not a feature limiting their use but analogous to the US Treasury retiring worn dollar bills and replacing them with new ones.

Edwards also seems not fully aware of specie’s role as the unit of account in colonial America. True, gold and silver coins were not widely used for domestic exchanges within the colonies. Britain’s mercantilist Navigation Acts had discouraged the importation of English coins into the colonies. What coins the colonists did obtain from trade with the West Indies and southern Europe were often exported to purchase British goods. Nonetheless, nearly all colonial bills of credit were denominated in pounds, shillings, and pence. Although the market value of the bills often declined below their printed specie value while in circulation, the bills tended to be anchored to that value upon retirement. This does make bills of credit very different from US dollars and other fiat currencies today, in which there is no distinction between the unit of account and the medium of exchange; they are identical. But this also makes the colonial monetary system more similar to that existing in Britain at the time, in which the market value of many different coins in circulation could and often did depreciate with respect to their face value, including through physical clipping and defacing.

Of course, just as today a US dollar is different from a Canadian dollar, a Massachusetts pound was different from a British pound, and both were different from a Virginia pound. The colonies overvalued coins relative to their metallic value in Britain in a feeble effort to encourage their importation. But bills of credit were never intended to entirely displace specie. They were designed as convenient substitutes for specie. Admittedly, bills of credit issued in the Massachusetts Bay Colony in 1690 were the first paper money in the West, while in Britain, taxes were paid primarily with coins. But another similarity between Britain and the colonies is that merchants on both sides of the Atlantic extensively relied on bills of exchange. Not to be confused with bills of credit, bills of exchange were genuine credit instruments, with the holder of the bill owing a debt to the issuer at some future date. They could be traded before their maturity and pass through several hands. Sometimes their final settlement was specified as colonial bills of credit or even commodities such as tobacco, but nearly all the bills of exchange used in foreign trade were sterling silver bills, in which the issuer could demand repayment in specie.

The British government did impose restrictions on colonial bills of credit in a series of Currency Acts. Here again, Edwards omits or downplays a critical detail. The first Currency Act was passed in 1751 and applied only to the New England colonies. It did not prohibit bills of credit, something Edwards points out. But he leaves out the most important restriction stated explicitly in the 1751 act: “no Paper Currency, or Bills of Credit, of any Kind or Denomination … shall be a legal Tender in Payment of any private Bargains, Contracts, Debts, Dues or Demands whatsoever.” When the colonies did make their bills of credit legal tender, it allowed debtors to legally pay off debts even with bills that had depreciated. This benefitted debtors at the expense of creditors. Edwards does briefly allude to legal tender subsequently, off and on, and mentions it with respect to the Currency Act of 1764, extending to all the colonies similar restrictions to those in the 1751 act. But rather than showing any sympathy for creditors, Edwards instead exclusively treats these acts as onerous limitations on the colonies.

When the Continental Congress first authorized the issue of the Continental currency in June 1775, it adopted as the bill’s unit of account the Spanish silver dollar, the most common coin available within the colonies. Congress voted to retire the Continentals through taxation from November 1779 through November 1782, at which point Congress expected the war to be over. But since Congress had no authority to tax, the tax withdrawals were allotted among the united colonies based on their population. Edwards covers this well, with one caveat. Each bill had printed on it: “This bill entitles the bearer to receive . . . Spanish milled dollars, or the value thereof in gold or silver.” Congress also provided that if a state did not collect enough bills through taxation or other means to meet its requisition quota, it could substitute specie for its quota, which would then be available for private citizens to redeem bills at the Continental Treasury beginning in 1779. 

Edwards labels these last two features as “a contradiction” causing “confusion,” because they allegedly constituted a major and unfortunate, albeit perhaps necessary, deviation from how previously colonial bills of credit had worked.

But Edwards’ supposition is not strictly true. On occasion, some colonies did redeem their bills with specie, notably Massachusetts when it revalued its currency in 1750 after King George’s War. And the bills New York issued in 1774 promised on their face to be “payable on Demand” for specie. Most other colonial bills explicitly stated the bills should “pass current.” Edwards is again exaggerating the uniqueness of colonial paper money, having failed to recognize the extent to which the pound, however defined, provided a genuine unit of account within the colonies. His confusion is clearest when he complains that Congress, after issuing the Continental currency, “rather than issuing traditional legal tender laws, which made money, by law, pass at face value in payment of a public or private debt, Congress decreed that its ‘dollars’ should pass as if they were gold and silver, leaving the actual tender laws to the states.” This is a distinction without much of a difference. Trying to make the Continentals equivalent to coins is exactly what the colonial legal tender laws were designed to do for bills of credit. 

Despite Edwards’ weak grasp of monetary theory, much of the book is an excellent and informative narrative, displaying deep research and original insights. Any work that covers such a long span of time faces an inevitable trade-off between offering a broad summary of events or detailed specifics. Money and the Making of the American Revolution is heavily weighted toward the latter. As Edwards explains in the introduction, “I decided, wherever possible, to let the analysis emerge from the story itself, as told by the historical actors” so that the book “tells its story through the lives of individuals rather than through statistics or broad social surveys.” While this requires a certain selectivity, among the score of those whose lives are woven throughout the narrative are Thomas Paine, John Dickinson, Benjamin Franklin, Pelatiah Webster, and Robert Morris.

Edwards’ account also goes into extensive detail about what was going on in Britain during this period, unveiling a lot about the politics, motives, and players responsible for the Parliamentary acts that brought on the Revolution. His chapter on the Stamp Act is one of the book’s best, persuasively arguing that the severity of the colonists’ reaction to the Act owed to its provision that taxes had to be paid exclusively with scarce specie. He concludes that, without that requirement, colonial resistance would have been more muted. The Stamp Act in turn helped stiffen opposition to the Townshend duties, passed after the Stamp Act was repealed, despite the fact that these taxes fell mainly on merchants who had easier access to specie. And when dealing with the Tea Act, Edwards interweaves a long account of British East India Company’s depredations that were ultimately responsible for that act. When the book gets to the beginning of the war, Edwards gives an exceedingly complete account of the bills of credit initially issued by the individual colonies before Congress authorized the Continental currency.

Given Edwards’ fixation on the fact that Congress initially offered to redeem the Continentals with silver dollars, it is surprising that he never brings up the important detail that Congress in March 1780 had instituted a currency reform that officially devalued the Continental at 40 to 1 for a specie dollar. By ignoring this, Edwards makes Congress’s steadily increasing requisitions on the states for Continental bills appear to be a greater burden than they were. The Continental’s depreciation and devaluation actually made it easier for the states to start meeting those requisitions. Edwards’ observation that the war’s burden upon the population was steadily increasing is correct, but not primarily from heavy state taxation, as he suggests. Other factors were involved, including the Continental’s depreciation. Direct state taxation would not significantly increase until after the war was over, as the states tried to pay down their own wartime borrowing.

Edwards is not a fan of Robert Morris, who was appointed by Congress to the new post of Superintendent of Finance in February 1781. He credits Morris with bringing about a “sea change” in American finance, and to an extent that is correct. After all, the collapse of the Continental currency had made it necessary to find other ways to pay for the war. Although the French had been assisting since 1776 with modest subsidies and then a loan, only after France and the United States began negotiating a treaty of alliance, signed in 1778, did the French loans become more substantial. Edwards says little about their financial contribution, only detailing the later negotiations. Edwards gives greater attention to Morris’s creation of the Bank of North America. Yet here again he displays another misunderstanding of finance, asserting that “the bank could have used its specie … to multiply the means of payment by issuing more notes than the gold and silver it had in its vault, but it did not.” In fact, rarely if ever have banks held 100 percent specie reserves. The Bank of North America certainly never did, even during its initial capitalization. In fact, the bank’s specie reserves were critically low at its opening in January 1782 and during the recession of 1784-1785.

In summary, Edwards’ thesis that the United States lost a war over money with the British hinges on misconceptions about how different their monetary systems were. But this does not mean that Money and the Making of the American Revolution is not worth reading. Scholars will still find much that is interesting and informative.

The United States–Mexico–Canada Agreement is an established trade policy agreement among the US, Mexico and Canada, implemented in 2020 with a mandatory review after six years. As that review unfolds, its chances of being extended seem increasingly bleak. 

A failure to renew USMCA will mean disrupting the highly interconnected North American food system where, for example, Canadian wheat can be ground into flour in the US, shipped back to Canada to be baked into pastries or bread, which can then be sold in either country. Many Canadian feeder cattle are finished in US feedlots, or finished in Canada, then sold to US processors, and sold back to either Canadian or US further processors or retailers.

Farmers, consumers and food companies will bear the costs. Several US agricultural organizations clearly recognize this.

A better approach is to evaluate what’s working well for all North Americans, what’s not, and needs to change.

Agrifood products currently trade with few restrictions, reducing supply shocks and price volatility. Canada’s short growing season provides demand during the prolonged seasons of southern US horticultural industries. Food and feed grains, whose prices in both countries are discovered on the Chicago Mercantile Exchange, trade back and forth as needed. Regional crop yields are often inversely related, partly owing to weather phenomena. When yields are low in Canada, and high in the US, Canada buys more, thereby relieving downward pressure on US prices. Similarly, when Canadian yields are high and US yields lag, Canadian foodstuffs are rerouted to meet that demand, reducing upward price pressure.

Relatively free trade in basic food ingredients is always good risk management, but particularly so under extreme circumstances. Beef prices are currently high. History shows the highest prices occur when ranchers keep females to build their breeding herds, reducing the number available to be processed into beef. Two recent USDA reports show that hold-back hadn’t started. When it finally occurs, we will see much higher meat prices. Canada has heaps of grassland and exports more beef and cattle than it uses for its population and it’s cheaper to import than Brazilian or Argentine beef. Stopping exports to the US with high tariffs will drive American prices even higher, while Canada looks to Asia to sell its extra beef. 

Minimizing trade restrictions also helped manage risk around avian influenza, which has had greater effect in the US. Canada doesn’t normally export turkey meat to the US, but currently it is, thereby alleviating some of the upward price pressure caused by culling.

Finally, the US has a very limited natural endowment of potash, which is essential for crop growth. The US imports 90 percent of its requirements, of which more than 80 percent is from the province of Saskatchewan. The next three largest suppliers are Russia, Belarus, and China. With USMCA, American farmers got Canadian potash at the same prices as farmers in other countries. It’s working well. A threatened US tariff on it would put American farmers at the mercy of less-friendly countries.

The US, and other countries, have long complained about Canada’s supply management system for dairy (the Hub). It allows Canadian producers of dairy (and poultry) to avoid Canada’s Competition Act by colluding to control supply and prices.

Supplemented by high tariffs and tight tariff quotas on imports, the Hub works to keep foreign dairy products out of the Canadian market. It also raises prices for dairy in Canada (giving dairy and poultry producers an advantage over other farmers in buying or renting land, thereby driving up land and financing costs for everyone) and makes access to foreign markets for other Canadian products more difficult.

A major barrier to reforming Canada’s supply management is that the US dairy sector is even more protected than Canada’s. Its dairy prices and imports are “managed” by a different mechanism than Canada’s that is even more effective keeping foreign products out. The US wants more access to Canada’s dairy market; that access needs to go both ways. Lower trade barriers can be phased in over time so farms and processing companies can adjust slowly, but both countries must agree on an equitable way to do so.

The food and agricultural regulatory framework is also overdue for reworking. Both countries have constructed regulatory hoops that protect their markets while raising costs to farmers and food companies in both. Both are experiencing increased criticism of their red tape. For example, the Canadian Federation of Independent Business recently published a survey reporting 70 percent of Canadian agribusinesses discourage the next generation from staying in farming because of red tape and regulation.

Finding ways to reduce and rationalize the two food regulation systems could materially improve the competitiveness of agrifood sectors in both nations.

Focusing on the things that need to change and leaving alone the things that are working would put resources in the right places. Leaders of the two countries have a clear choice: continue to improve conditions for their farmers, consumers, and food companies, or pull the rug out from under them with short-sighted protectionism.

Three years after the disaster in East Palestine, Ohio, Congress has brought back the Railway Safety Act. It’s also focused on the wrong priorities.

The issue isn’t whether Washington can add another loud rail-safety mandate. It’s whether the bill steers investment toward the technologies and operational improvements that are actually, quietly, reducing risk.

On that test, too much of the act falls short. Three pieces of research — two new ones offering a broad insight about the economics of shipping, and an older one laying out the implications for safety — explain why.

In the first new study, Bentley Coffey, Pietro Peretto and I develop an economic growth model that treats transportation not as a side sector but as part of the innovation process itself. In most growth models, goods move to market as if by magic. In the real economy, they do not. Most everything you consume was shipped at least once, if not multiple times. Manufacturers can improve products and processes, but if getting goods to customers is too expensive, the gains from innovation eventually hit a wall.

The flip side is encouraging. When innovation includes transportation, growth becomes self-reinforcing. Better transportation expands markets and raises the return to manufacturing innovation. Better manufacturing raises the value of improving transportation. 

Policies that raise transportation costs therefore do more than burden one industry. They slow the spread of innovation through the whole economy. And that includes innovations that increase safety, like autopilot did for commercial aviation in the 1980s.

A companion paper asks what regulation does to that process in the real world. Using decades of data across air, rail, truck and water freight, we find that regulatory accumulation functions like a compounding tax on moving goods. It lowers labor productivity in every freight mode.

When it comes to the railroads Congress is targeting with this bill, more regulation also significantly depresses fuel and capital productivity. In our simulations, a five percent increase in rail regulatory restrictions caused rail unit costs to rise by 2.3 percent and rail volumes to fall by 4.1 percent in the first year alone. And because productivity growth is slower, the damage does not disappear in year two. It persists and compounds.

Crucially, these higher transportation costs do not simply reshuffle freight from one mode to another. The pie gets smaller. Total freight activity falls. That means policymakers should be even more cautious than usual about adding regulation to rail and other freight modes. The costs do not stay inside the targeted sector. They ripple through supply chains and the broader economy.

My earlier study with Jerry Ellig helps explain why all of this matters for safety as well as growth.

Ellig and I found that the Staggers Act, which removed some economic regulations of US railroads, was associated with improved railroad safety. Meanwhile, subsequent expansions in safety regulation made only marginal contributions to safety once railroads were freer to allocate capital. Accidents fell from more than 11,000 in 1978 to 1,867 in 2013 even as revenue ton-miles doubled.

The most plausible reason is also the most intuitive one. Railroads with healthier finances and more operational flexibility could invest more in track, equipment, maintenance, and technology.

Taken together, these papers point to an uncomfortable conclusion for supporters of the Railway Safety Act: safety and productivity are often complements, not tradeoffs.

The same investments that make railroads more efficient — better defect detection, better track and equipment, better logistics, more reliable operations — also make them safer. And any policies that siphon resources into compliance-heavy mandates leave less capital for those safety-enhancing investments.

That should shape how Congress thinks about this bill. Some parts of the act move in the right direction. Its defect-detection provisions (especially the requirement for risk-based plans for hot-bearing and related detection systems) are closer to what modern research would recommend. So are measures that improve hazardous-material information and emergency response. Those provisions target identifiable failure modes and improve the underlying system. 

Other provisions look like mere theater: visible, politically attractive, and not connected to actual risk reduction. The bill’s blanket two-person crew mandate is the clearest example. No sound evidence justifies it, as the Federal Railroad Administration itself admitted in 2016 when it could not “provide reliable or conclusive statistical data to suggest whether one-person crew operations are generally safer or less safe than multiple-person crew operations.” And there’s a reason for that: When railroads make changes to operations, such as reducing crew size on specific routes, they evaluate the overall system’s safety. When they reduce crew size, it is because they made investments in other safety layers, such as positive train control, that permit the same or even better safety performance with a smaller crew.

The new studies sharpen that point. Even when the safety benefit of a staffing mandate is uncertain, the cost is not. In this industry, higher labor and compliance costs mean less money for wayside detectors, acoustic bearing monitors, predictive maintenance, track renewal, and other investments that directly target accidents and actually improve safety.

The same logic may apply to the bill’s more prescriptive inspection mandates, including designated inspection locations and extra daily locomotive inspections. Of course inspections matter — as long as they are needed inspections and Congress is not just mandating a process. Without strong evidence of a safety payoff, it may satisfy Washington’s taste for visible action while undermining the capital deepening and technological upgrading that have historically delivered both better performance and better safety.

Not all rail safety regulation is misguided, but the burden of proof should be much higher than what Congress usually assumes. If transportation is a system-wide input into growth, and if regulatory accumulation’s effects on growth compound over time, lawmakers should favor rules tightly tied to actual performance and that preserve room for investment and innovation. They should be skeptical of prescriptive mandates that raise the cost of moving freight without comparable evidence of benefit.

The Railway Safety Act is mostly the latter — regulations that would impose costs without improving safety.  If it passes, these new studies indicate that the economic and safety consequences will be much larger than the compliance costs imposed on railroads.

At the end of April, New York City Mayor Zohran Mamdani proposed delaying pension plan contributions to help close the Big Apple’s budget deficit.  

The problem is that while delaying pension payments could free up $1 billion in the short term, the budget gap is $5.4 billion. This flawed strategy highlights a much larger problem: the Big Apple’s biggest budget pains are self-inflicted. 

Kicking the can down the road on mandatory pension contributions still leaves a massive hole in the budget while hurting public employees (many of whom helped propel Mamdani into office) and placing greater burdens on New York’s shrinking tax base. 

If Mamdani does not make the spending fixes on his own terms, markets will force him to do it when the City can no longer find willing investors.  

Why Pensions Matter  

A pension liability represents a financial retirement benefit promised to a public employee. Unlike Social Security, these benefits are prefunded: when a public employee retires, the plan should have on hand the total amount needed to purchase a lifetime annuity on that employee’s behalf. 

Pensions are funded through contributions from public employees and taxpayers, as well as investment returns. Public employee contributions are tied to a fixed percentage of payroll, so when investment returns come up short, taxpayers are compelled to cover funding gaps. These benefits are calculated using a formula, including a public employee’s final average salary.  

In most states, including New York, public employees can also use overtime and unused sick days to increase their final average salary. This practice, known as pension spiking, often results in pension payments that exceed the salaries public employees received while working.  

Publicly promised benefits have legal protections that vary state to state. New York guarantees public pension benefits through the New York State Constitution, as well as other state statutes and legal precedents that include pensions as part of a contractual relationship between employers and employees. Benefits can only be revoked if a potential beneficiary is convicted of a felony.  

In other words, these promises are rock-solid. The strength of those promises, however, also means that spending on pensions gets priority over other expenditures, including other public services that are deemed “core government functions.” That means taxpayers see higher tax burdens while the government becomes more bloated and ineffective. 

The only way New York State can change pension benefits without a constitutional amendment is by changing the benefits offered to future hires, which gave rise to the tier system. One’s tier is determined by when one was hired. The more recent the hire, the more the employee must pay into the system and the later they can retire. 

This has not stopped unfunded liabilities from growing. Public pension liabilities matter because they are one of the largest sources of long-term debt that state and municipal governments face. Massive pension liabilities are a leading contributor to recent fiscal crises, including those experienced by Detroit, Puerto Rico, and municipal bankruptcies across California. 

Currently, New York City owes over $40 billion in pension benefits not covered by current assets. That is just under $4,600 per person and a larger liability than the Empire State’s aggregated average of $2,681 per person and the national average of $1,475 per person.  

That burden will fall on a shrinking number of taxpayers, who cannot seem to escape New York fast enough. The city lost thousands of residents across all income levels in 2025, and New York State is on track to have a decade of population decline. 

Now, public employees throughout the Empire State are pressuring state officials to roll back the Tier 6 reforms in 2012, which would promise greater benefits from a city that is increasingly unprepared to pay for them. 

Back to the 70s? A Familiar Fiscal Pattern

In late April, Mamdani declared a fiscal emergency due to structural budget deficits. While his administration inherited a fiscal mess, his own ambitious spending plans only dig New York deeper into the fiscal hole. 

Many are quick to compare Mamdani’s New York to Mayor John Lindsay, whose similar spendthrift approach led to the 1975 fiscal crisis under his successor, former city controller Abraham Beame.  

While New York City is not currently in 1975, it may be in 1965. Much like Mayor Mamdani, Mayor Lindsay positioned himself as an outside urban reformer who grew government during a period of rising welfare costs, labor pressure, middle-class flight, crime, and weakening fiscal discipline. He also blamed his predecessor, Mayor Robert Wagner, for leaving him with massive budget deficits.  

Much like today, markets were skeptical of New York City’s ability to pay its debts. Unlike today, however, the Big Apple does not appear to be as dependent on short-term bonds as it was before the 1975 crisis. The recent pension contribution deferment, however, resembles the same attitude of short-term debt to cover current spending. This time, however, the city is effectively borrowing against the retirement security of public employees (who were, again, among Mamdani’s top campaign supporters) while leaving the bill to future taxpayers. 

Economist John Phelan notes that the crisis occurred when the city could not find a willing underwriter, a securities broker or dealer that purchases bonds to resell to investors, for its bonds. This is because news emerged that the city did not have the tax receipts necessary to cover the proposed debt. 

The Municipal Assistance Corporation (MAC) was created in 1975 after New York City lost access to credit markets. It served as an emergency financing vehicle, issuing bonds backed by state-controlled revenue streams to help the city meet obligations while forcing budget discipline. MAC also helped shift control away from ordinary city politics and toward state-supervised fiscal management. Although MAC itself was dissolved after its bonds were retired, its legacy remains.  

New York’s post-crisis guardrails now include the Financial Control Board, balanced-budget rules, limits on short-term borrowing, quarterly monitoring, and four-year financial plans. Those guardrails are weaker than direct crisis control, but they can still tighten if conditions deteriorate. 

Mayor Mamdani has already shown a willingness to pressure Albany for additional taxing authority. He pounced on the governor’s approved pied-à-terre tax on secondary residences, prompting the departure of Ken Griffin and other business-owners from New York. The recent budget deal reached in Albany further highlights the city’s ability to bully the rest of the Empire State into going along with the city’s desired policies.

While Mamdani’s New York still has willing investors, the past still provides a stark warning. If these recurring promises grow faster than revenues and if higher taxes accelerate outmigration of businesses and high-income residents, today’s structural gaps could harden into a deeper fiscal crisis.  

Has the Big Apple Gone Rotten? 

New York City still has much to recommend it to residents and investors, but the warning signs are increasingly difficult to ignore. New York’s future depends on whether its leaders can impose discipline before markets do it for them. If officials continue to squeeze a shrinking tax base, rely on pension gimmicks, and use short-term fixes to close long-term gaps, the city risks repeating the very mistakes that once pushed it to the brink of collapse.