It's Immigration, Stupid

The same group of voters have been shocking a disbelieving Westminster establishment for over ten years

Towering Columns

In The Times, Juliet Samuel says the public are right to want net migration to fall, and that officialdom’s views on its economic benefits are outdated.

Since at least 2002, we’ve been told by officialdom that more immigration always brings economic benefits. Among the most influential papers supposedly proving this were: a 2005 Home Office study claiming migrants had little impact on native jobs and wages; a 2010 study published by the Institute for Fiscal Studies finding that migrants from the eastern bloc were large net contributors to the exchequer; and a 2014 update arguing the same in more detail. What all of these studies have in common is their lead author: Christian Dustmann. The very same Dustmann whose hopelessly flawed model was used to justify opening the gates in 2004.

To be fair to Dustmann, even his analyses did not support the sweeping claims politicians made from them. In 2007, capturing the zeitgeist that was to last for at least another decade, then home secretary Jacqui Smith praised “the purity” — yes, the purity — “of the macro-economic case for migration”. Politicians red and blue, wonks, civil servants and even trade union officials have all tended to speak of the “great benefit” the economy was getting from immigration. But look closer at the studies and the picture is mixed. Several papers, for example, including Dustmann’s, have found that wages at the low end are dampened by immigration and that the benefits delivered are far more certain in higher wage brackets. Nearly all have found that non-EU immigrants are likely to be a net cost to British taxpayers. Dustmann’s 2014 study even found that by 2011, recent eastern bloc migrants had ceased to be net contributors. And Migration Watch has found that numerous studies relied on by government have not attributed the fiscal cost of having children, ageing or using public goods such as roads consistently between migrants and natives.

These flaws are pressing because, since Brexit, the composition of immigration has flipped. We are attracting many fewer young, single Europeans, who are overwhelmingly more likely to contribute to the public purse and return home as they age. And we are bringing in many more non-Europeans, who are older, paid less, bring dependants and stay permanently — all factors that suggest they will cost the exchequer and depress low-end wages. Even before this shift, mass migration had coincided with stagnant GDP per capita, wages and productivity — and, since the Boriswave, more and more workers leaving the labour market to claim benefits.

On ConservativeHome, Henry Hill says George Osborne is wrong to suggest that a more liberal Tory offer would win back the country.

Both within sections of the Conservative Party and in much of the commentary on it, the distinction between word and deed has collapsed. Senior Tories froze income tax thresholds and called themselves ‘tax-cutting conservatives’ – apparently sincerely, if their bafflement at the electorate’s failure to reward them is any indication. Meanwhile commentators look at a party which did that, uncapped student numbers, and tripled net immigratiton and say it ‘lurched to the right’.

So I ask: in lieu of “trying to copy the Brexit Party”, or whatever, what would Osborne do? Circling the wagons around an elite consensus works on low-salience issues, such as the death penalty. It does not work on issues such as immigration. (The test for whether a policy is in the first category or the second is whether or not a new party can ride it like the horseman of an electoral apocalypse.)

In the latter case, doubling down on the status quo simply shuts the political pressure release valves and sets the system on the path toward an explosion. Especially if, unlike in Germany, you can’t simply ban the new party. Thus, all the Osborne analysis (and it is peddled by many) really amounts to is the implication that if we had all just ignored Farage, he would have gone away. One might as well chide a recalcitrant audience of Peter Pan for killing Tinkerbell because they did not believe in fairies hard enough.

For Politico, Rachel Wolf says the political mainstream should be anything but shocked by the surge for Reform UK last Thursday.

“I went from Conservatives to Labour. Feel like I’ve been gaslit and lied to and now I’m thinking, do you know what? Who hasn’t had a turn in office? I’m going Reform because they haven’t had a shot. And I’m not being funny, they can’t do any worse than what the past governments have done.” – Woman, 40s, Labour 2024, now leaning Reform.

I hope no one reading this is surprised by Reform’s results in last week’s local elections. They are the predictable result of the failures of the last decade. There is no new magic Reform voter and no new problem politicians must figure out how to tackle. They are the same people who “surprised” us in Brexit, “surprised” us in 2019, and are “surprising” us now. They voted for Conservatives, they voted for Labour, and the change they wanted didn’t happen. On economics, they were the reason the Conservatives softened economic policy and abandoned austerity, why Tees Valley Mayor Ben Houchen supported the nationalization of his airport, why Labour had no problems with promising rail nationalization, and why Nigel Farage is advocating to nationalize British steel.

They are the people we have been writing about for the last decade.

They are not protest voters – they have a very reasonable case for not wanting the incumbent parties – but they are understandably anti-political. In the 2024 election, Labour captured this anti-political vote, for just a moment — bolstered by Tory failures — but it then immediately turned on them. Of course it did. The problems these voters have are not with the Conservatives, but with politicians. But let’s also have a reality check – those who think this is all about core economic policy or general “disillusionment” are kidding themselves. What do these voters care about?

Immigration. They have consistently voted for a party that promised to lower it, in every election since 2010 – and they have instead seen higher net migration, and more boats crossing the Channel. Farage, they understandably feel, is the only person who has any claim to consistency left (and it is Farage, not Reform in general). Yes, one of the reasons they dislike immigration is economic – they think it depresses wages – but it’s not the only reason, and making them better off is not going to make this problem disappear.

For The Free Press, Joe Nocera summarises the views of globalisation’s most credible critics in the context of Trump’s trade war with China.

No one anymore, on the left or the right, denies that globalization has fractured the U.S., both economically and socially. It has hollowed out once-prosperous regions like the furniture-making areas of North Carolina and the auto manufacturing towns of the Midwest. It has been a driver of income inequality. Perhaps most alarmingly, the U.S. has outsourced not just the manufacture of toys and furniture, but pharmaceuticals and semiconductors—products we need for our national security. Trump owes much of his political success to the fury that these realities aroused in working-class Americans.

“My dad ran factories in the Detroit supply-chain orbit,” Financial Times columnist Rana Foroohar told me recently. “In the 1990s, the factories started shutting down. And when I would go home in the 2000s, half of my high-school classmates were on opioids.” She added, “The economic theories didn’t connect with the real world.” Which raises an obvious question: Why did so many economists, policymakers, and journalists like me refuse to acknowledge the problems with neoliberalism for so long? Why were we so quick to label anyone who even flirted with the idea that maybe the U.S. should be protecting its industrial base, just as other countries did, as a Pat Buchanan-like fool?

One big reason was the most basic one: It meant low prices. Companies could keep their costs low by using China’s (and Mexico’s) comparative advantage: cheap labor. At the same time, companies like Walmart and Costco could buy goods directly from Chinese manufacturers, which invariably had lower prices than comparable American goods. Most economists believed that a growing trade deficit was a nonissue, and in any case, even if other countries, like China, didn’t play by the rules established by the World Trade Organization, the benefits still outweighed any economic losses. As for the undeniable fact that globalization cost factory workers their jobs, Rodrik told me that there was a “cavalier” assumption in the economics profession that people who saw their factories close would just move and find a job somewhere else. And they would get help in the form of Trade Adjustment Assistance and job training, which one administration after another was always promising but rarely delivering.

As for when the economists and elites started to realize that the neoliberal consensus was actually a problem, well, I can tell you when it happened for me: 2006. That was the year my brother-in-law Frank Williams was forced to close his small costume jewelry factory in Providence, Rhode Island, because Chinese manufacturers were stealing his designs and selling them for a third of the price. I was at The New York Times by then, and I wrote a column about the plight of his factory, which included an interview with economist Diana Farrell. “The process of globalization is wealth-creating for the economy,” she told me. My sister, who had seen dozens of jewelry factories close in Rhode Island, had another view. She said that she worried about whether there would be any manufacturing left in the U.S. if the government didn’t step in.

For Prospect magazine, Ann Pettifor says hyper-globalisation is both a symptom and a cause of inequality, arguing for a return to a more balanced international trading system.

Wealth in China is also highly concentrated. The richest 10 per cent of the population hold approximately 67 per cent of the country’s wealth. The top .001 per cent owns 5.8 per cent of it, about the same as that owned by the bottom 50 per cent. The share of China’s national income earned by the richest 10 per cent of the population increased from 27 per cent in 1978 to 41 per cent in 2015, while the share earned by the bottom 50 per cent (now around 536m adults) fell from 27 per cent to 15 per cent.

Trade wars, argue the economists Matthew Klein and Michael Pettis in their book Trade Wars Are Class Wars, originate with inequality at home: in conflicts between wealthy, subsidised, low-taxed exporters of capital—the 1 per cent—and the majority within a country who are enduring falling or stagnant incomes and rising levels of taxation.In the US (as elsewhere) those tensions have been exploited by the Trump team. It heaps blame for inequality and falling living standards on foreigners—Mexicans, Chinese and even Canadians—rather than on the oligarchal, tax-avoiding superrich.

It seems fair to say, as John Maynard Keynes did in 1933, that decadent international but individualistic capitalism has not been a success. The protectionist tariffs imposed by the Trump administration are a wake-up call “that the contradictions and tensions in the system are unsustainable, extending well beyond trade rules”, as the Brookings Institution, a thinktank based in Washington, DC, notes. To reverse the rise of protectionism, nationalism and authoritarianism across the world—and restore stability, sustainability and prosperity—it will be necessary to restore political, democratic liberalism. Above all, political leaders will need to commit to a new spirit of internationalism and to building a cooperative and coordinated economic world order. A new stable international order can only be achieved by ending inequality; by rebalancing economic and political power between capital and labour, between wealth and work, at home and abroad. Constraints on cross-border flows of both capital and trade are key to the restoration of global stability, and these flows cannot be left to the whim of markets and allowed to once again balloon out of control.

And on Commonplace, Chris Griswold says rebalancing America’s economy will require more than tariffs, and that pain will precede results.

If the promised reindustrialization takes too long to materialize even as avoidable and needless short-term pain is not mitigated, domestic political backlash may kill the effort before it has a chance to succeed. Working-class voters are giving Trump more leeway on tariffs than his opponents care to admit. But they will not wait forever. Potential Republican challengers are already waiting in the wings to pounce should tariffs prove too unpopular. Democrats are contemplating an anti-tariff electoral strategy the potential effectiveness of which should not be discounted—especially if the Trump administration does not course correct.

The other inconvenient truth is that while industrial timing affects the politics of tariffs, the politics of tariffs can also affect industrial timing. America’s trading partners have their own domestic dynamics that can extend the timelines of American reindustrialization efforts longer than they need to be. This underscores the urgency of a full-spectrum policy effort to speed those timelines up.

The most pressing example of short-term risk is China doing exactly what attentive leaders have long warned it could do: use its supply chain dominance to choke off the flow of critical minerals, used in everything from high tech weapons systems to MRI machines, into the United States. The intent is to strike at the heart of the Trump administration’s industrial goals, including the revitalization of America’s defense industrial base, which will be seriously impeded without these key inputs, as they are currently and overwhelmingly sourced from or flowing through China. In the meantime, America’s economic security will remain vulnerable.

Wonky Thinking

Economist Danny Rodrik published a paper examining what the mercantilists got right, and revealing how Adam Smith has been misunderstood.

In the public imagination, East Asia constitutes a different, alternative model of economic policymaking compared to the Smithian paradigm. But while there are some commonalities across the practices in different countries, there are plenty of differences as well. I have mentioned one of them already: Hong Kong and Singapore practiced free trade, while the others retained high levels of trade barriers decades into their economic take-off. China embarked on its export drive through a highly distinctive path: establishing special economic zones which operated under free-trade rules while the rest of the economy remained heavily protected. China also went farthest among East Asian nations in explicitly adopting the mercantilist prescription of running a trade surplus. (South Korea, by contrast, typically ran a trade deficit during its takeoff decades.) Even when there was a common orientation, the specific policies differed. South Korea incentivized industrialization through cheap bank credit, for example, while Taiwan relied mainly on tax incentives. The idea of an “East Asian model” hides nearly as much as it reveals.

Now, none of these practices necessarily violates economic principles, properly understood. Contemporary economic theory is rich enough that it allows us to justify all these variations as instances of adaptation to local constraints in second-best fashion. Industrial policies can be understood as a response to pervasive learning spillovers and coordination failures. Anomalies in corporate governance or industrial organization can be viewed as the consequence of poorly functioning financial markets. Mixed property rights regimes can be rationalized by referring to weaknesses in third-party enforcement in the context of weak legal administration. Two-track pricing systems – liberalization at the margin while large chunks of the economy remain controlled – can make sense against the backdrop of concerns about redistribution or unemployment. As one economist put it, more than fifty years ago, “by now any bright graduate student, by choosing his assumptions … carefully, can produce a consistent model yielding just about any policy recommendation he favored at the start.” But that would also be missing the point. It is clear that East Asian policy makers themselves were not really thinking at the time in terms of externalities or second-best constraints. They pursued exports, competitiveness, investment, domestic linkages and domestic value added – objectives that make much more sense from a mercantilist lens than under mainstream economic theory. South Korean policy makers are said to have derived their industrial priorities by examining what Japan produced a couple of decades previously and pushing their firms to emulate that production structure. It is also the case that policy makers there were not operating out of the standard guidebook of the Washington Consensus. They were much more open to experimentation and policy innovation than mainstream economics would allow.

In sum, it is fair to say that we would not have a full understanding of the East Asia growth story – the most miraculous experience of economic development in history – without bringing in key elements of mercantilist thought and practice. This is true not just in the descriptive sense that East Asian policy makers often pursued policies more akin to mercantilism than laissez faire. It is also true in the explanatory sense: it is difficult to explain how and why those policies worked without insights from the mercantilist rulebook. Of course, there are many countries that did terribly by also pursuing mercantilist-inspired policies. But Hong Kong aside, we do not have examples of countries that performed better (or equivalently) by sticking closer to free market policies. Another important lesson from East Asia is that adjusting policies to context is everything…

…Adam Smith may have won the battle of ideas, but his record is rather more mixed in the war for the minds of policy makers. President Donald Trump’s full-throated adoption of mercantilism during his second term in office is a case in point. And in view of China’s phenomenal rise in recent decades, some might even claim we are now living in a world that is increasingly the product of mercantilism, yet again.

This is not to defend Trump’s policies or mercantilist practices in general. Economists are right to denigrate Trump’s obsession with the trade balance and his resort to tariffs as an all-purpose cure for all that ails America. But the examples I have provided should also give us pause before we write off mercantilism altogether. Key mercantilist ideas have survived and have been put to good use in devising growth strategies and embarking on the green transition. Closer attention to them might have helped policy makers prevent a backlash against globalization and what has come to be called neoliberalism. The primacy of production over consumption, the importance of the structure of production and employment in addition to the benefits of specialization and division of labor, the value of government-business interactions versus arm’s length relationships, the visible hand of the state in addition to the invisible hand of the market, the focus on local context and contingency over global/universal rules – these are all insights that sit awkwardly with the lessons contemporary economists have taken from The Wealth of Nations. Yet they have a useful role to play in thinking about the economy and the role of government in it.

Most economists believe that their discipline works by way of better theories successively replacing older, disproved theories. In this perspective, Adam Smith’s Wealth of Nations clearly displaced mercantilist ideas. And subsequent advances tweaked and refined the invisible hand theorem further to reflect empirical reality better. But this is not how economics really works in practice. The discipline moves horizontally rather than vertically: new models do not displace old ones; they enrich our understanding of different contexts (imperfect competition, asymmetric information, irrational behavior, etc.). Given the almost infinite plasticity of social reality, a library of models serves us better than the search for a universal model that works best regardless of context. As is typical, John Maynard Keynes put it best when he described economics as the “science of thinking in terms of models joined to the art of choosing models which are relevant to the contemporary world.”

The real Adam Smith, as opposed to the caricature that has been handed to contemporary economists, would have been sympathetic. Jacob Viner, a Chicago economist from an earlier vintage than Milton Friedman, said nearly as much in his 1927 essay, “Adam Smith and Laissez Faire.” Viner wrote:

“Adam Smith was not a doctrinaire advocate of laissez faire. He saw a wide and elastic range of activity for government, and he was prepared to extend it even farther if government, by improving its standards of competence, honesty, and public spirit, showed itself enticed to wider responsibilities. . . . He devoted more effort to the presentation of his case for individual freedom than to exploring the possibilities of service through government. . . . [but] Smith saw that self-interest and competition were sometimes treacherous to the public interest they were supposed to serve, and he was prepared. . . . to rely upon government for the performance of many tasks which individuals as such would not do, or could not do, or could do only badly. He did not believe that laissez faire was always good, or always bad. It depended on circumstances; and as best he could, Adam Smith took into account all of the circumstances he could find.”

Indeed, important ideas that seem in tension can co-exist and enrich each other. Private incentives, market competition and the division of labor are powerful engines of prosperity, as Adam Smith taught us. But unleashing them often requires unorthodox policies and the guidance of the state. A certain dose of mercantilism works in the right context. Ultimately, it is the judicious combination of the two perspectives that serves us best.

The Foundation for American Innovation published the Techno-Industrial Playbook. The comprehensive set of proposals aims at the revival of American industrial capacity, increasing national security and establishing a competitive edge in frontier technologies.

Is America still the world’s leading technological and industrial power? As late as 2011, when China first surpassed the United States in manufacturing output, the answer would have been an unqualified yes. Today, the picture is far less clear. As China’s industrial might ascended in recent decades—last year reaching a manufacturing surplus almost equivalent to Britain’s entire GDP—we decided to let ours decline. For too long, our political leadership trusted an “invent here, make there” model that neglected the profound connection between innovation and production. This mistake has cost us dearly.

America is wholly unprepared for wartime production needs. With current manufacturing capacity, it would take at least eight years to replenish major defense program inventories at surge production rates. Nearly all Navy ship construction projects are years behind schedule. Decades of consolidation have reduced the number of defense prime contractors from more than 50 during the Cold War to 6 today, the number of surface ship suppliers from 8 to 2, and the number of tactical missile producers from 13 to 3. Ninety percent of all missiles come from three sources, creating inefficient oligopolies and inflated prices. While our defense industrial base slumbers in peacetime, China’s operates on wartime urgency, generating 23,000 percent more shipbuilding capacity; its Jiangnan Shipyard alone surpasses all US shipyards combined.

These problems are exacerbated by failing energy infrastructure across our country. US grid capacity is already reaching the breaking point in many areas. Yet it is getting increasingly costly and difficult to build basic electric infrastructure: annual transmission line construction has fallen nearly 90 percent since 2013. Rapidly growing demand from industrial projects and technological innovation, particularly artificial intelligence, will require much greater supply to come online, in amounts that can only be met with a combination of traditional and alternative sources. China, recognizing this reality, is currently building 23 next gen nuclear reactors, compared to zero in America, where nuclear plants cost 6 to 12 times more to construct today than in the 1960s. Last year, a single Chinese company, Tongwei, installed nearly the same amount of solar capacity as all of America combined. Meanwhile, China leveraged its superior production capabilities to scale up whole new industries and surpass America in a growing portfolio of critical technologies. From 2007 to 2018, its contributions to value-added manufacturing of the iPhone—one of the most complex pieces of hardware on earth—grew from 4 percent to 25 percent. Deepseek’s R1 model, released during President Trump’s second inauguration, exceeded OpenAI’s most advanced model on multiple benchmarks at 10 percent of the cost. China dominates global markets for rare earths refinement, 5G net - works, consumer drones, and lithium-ion batteries. In recent years, China achieved global firsts in quantum-encrypted satellite communication and landing spacecraft on the far side of the moon, proving its ability to push technological frontiers. Its industries are supported by a vast technical workforce: in 2020, China graduated 3.5 million STEM students (4x the US total) and roughly 50,000 STEM PhDs (2.5x the US total, excluding international students).

These successes result from a deep, unified seriousness among Chinese elites that the leading techno-industrial nation will win the 21st century. From Deng Xiaoping to Xi Jinping, the Chinese Communist Party’s top brass have consistently stated that we are in the midst of a techno-industrial revolution—and that “seizing this rare opportunity” is the “decisive fac - tor for national strength,” the “foundation for a world power,” and a requirement to achieving the “great rejuvenation” of the Chinese nation. This seriousness has allowed China to repeatedly defy American expectations about its technological capabilities, from the Semiconductor Manufacturing International Corporation’s 7nm semiconductors to Deepseek’s V3 and R1 models, despite stringent export controls.

For too long, many in Washington have lacked the same degree of seriousness. This does not imply imitating China, as US innovation does not depend on top-down economic mandates, forced tech transfers, or intellectual property theft. What America must take from China is not its methods but its attitude. A serious country would not allow overbearing red tape to hamper hundreds of billions of critical infrastructure investments. It would not educate the world’s brightest only to kick them out shortly thereafter—often into the arms of our adversaries, with disastrous consequences.

It would not have fetishized financialization— neutering industrial capacity and leaving com - munities hollow. It would not allow its students to hit all-time-low math scores just last year, at a time when such foundations are most critical. Such mistakes undermine America’s tradition of technological progress—a tradition that history shows is the foundation of our national prosperity. It was the First and Second Industrial Revolutions that catapulted Britain, then America, to global superpower status. For 20th-century Americans, nuclear bombs, industrial machines, and space shuttles secured existential military victories, widespread eco - nomic growth, and national pride. In recent de - cades, democracies such as Israel, South Korea, Taiwan, and Japan all became techno-industrial envies of the world by force-multiplying free markets with strategic state action.

Fortunately, the tide has begun turning. Continued failures at home, emerging threats abroad, and an intensifying arms race over emerging technologies such as AI have sparked a resurgent bipartisan awakening that drastic actions are needed to secure America’s tech - no-industrial future. Both the Trump and Biden administrations have taken bold steps— the former has initiated a sweeping agenda to reincentivize private investment in domestic industry, while the latter emphasized historic supply-side investments into chip factories, energy, and infrastructure.

However, neither approach is sufficient in isolation. Take American shipbuilding, which suffers from immensely inflated costs due to parts of the Jones Act, aging infrastructure, lack of modern tooling, labor shortages, and persistent shifting requirements from the Navy. Public subsidies without structural reform can - not fix these chronic inefficiencies. Likewise, private-sector incentives alone cannot close the funding gap to rebuild naval capacity, let alone on strategic timelines like a 2027 Taiwan scenario. America’s techno-industrial challenges are not just about trade or spending—they reflect deeper structural bottlenecks and insufficient state capacity. Policymakers must pursue an all-of-the above strategy. No single policy lever is enough. The scale, urgency, and complexity of today’s techno-industrial challenges require coordinated action across public investment, regulatory reform, and private mobilization. TSMC’s US expansion highlights the potential of such an approach—initially drawn by CHIPS Act subsidies to start a fab in Arizona, the company recently announced a further $200B investment, spurred by tariff pressure and accelerated per - mitting promises.

Despite our headwinds, America retains significant assets that, if strategically harnessed, can unleash a new century of prosperity. We still boast the world’s most advanced military, capital markets, and research ecosystem. We still lead many of the world’s emerging technologies, from AI to hypersonics to quantum computing (although the gap is shrinking fast). The world’s best and brightest still flock to us. The “spirit of enterprise” that Tocqueville saw as America’s most distinctive feature remains strong. Public policy should therefore seek to complement these forces, not replace them.

Quick Links

Cardinal Robert Prevost was unexpectedly elected the first American Pope, taking the name Leo XIV.

The Government agreed a trade deal that will make it 20% cheaper for a company to employ an Indian over a British worker.

And Britain signed a partial trade deal with the US to reduce tariffs - though the UK’s position is still worse than before their original imposition four months ago.

48% of voters think immigration is a major issue facing the UK, falling only behind the economy.

Sir Keir Starmer has agreed to a US “veto” mechanism for strategically dangerous Chinese investment in the UK.

China and Russia agreed to deepen ties after Xi Xinping visited Moscow.

London councils spend £4 million per day on temporary accommodation.

First-time buyers now receive an average of £55,572 from their parents.

955,000 visas were issued last year, only 210,000 of which were primarily for work purposes.

The NHS used the derogatory term “terf” in official diversity and inclusion guidance.

The field of necrobotics may now allow dead animals like spiders to perform tasks as complex as surgery via AI robotics.

Australia’s opposition leader lost his seat in national elections to the incumbent Labor Party.