EB-5 reform could help the U.S. economy

By EB5 Investors

The EB-5 visa program has been a successful pathway to permanent residency for thousands of foreign investors for over twenty years. It has also been an important source of financing for many commercial enterprises in the United States during that time, especially over the last several years as the country has endured one of the worst recessions in history.

The EB-5 program, which is formally known as the Immigrant Investor Program, gives foreign entrepreneurs the opportunity to obtain green cards in exchange for investment in commercial enterprises in the United States. The green card that is awarded to investors who meet the requirements of the program is called an EB-5 visa, for the employment-based visa category it represents. The U.S. government established the EB-5 program to spur economic growth and the creation of lucrative jobs and other employment at home by attracting commercial investment from abroad.

An immigrant entrepreneur who invests either $500,000 or $1,000,000 in a commercial enterprise in the United States is eligible to receive an EB-5 visa if their investment leads to the creation or preservation of 10 permanent full-time jobs within two years. The lower investment amount, $500,000, can be made in a commercial enterprise that is located in a rural or struggling economy (Targeted Employment Areas), while a $1,000,000 investment can be made in a commercial development within any location in the United States. The same “10-jobs-created-or-preserved” requirements apply to both investments.

A growing number of foreign entrepreneurs use Regional Centers to manage their commercial investments. Regional Centers are federally-designated investment and development entities that (in the context of the EB-5 program) can accept money from multiple foreign investors and channel it into one or more commercial enterprises. Regional Centers can be government-sponsored agencies, public-private partnerships, or privately-held companies that identify areas for EB-5 investment, develop business plans, and manage EB-5 projects. This approach increases the likelihood of a successful EB-5 commercial enterprise, since most Regional Centers are led by experienced U.S.-based developers and business executives.

However, some modest reforms to the EB-5 visa program could help encourage further growth and development in the United States, while offering talented and entrepreneurial immigrants the opportunity to obtain permanent residency visas. For example, while Canada took in over 180,000 “economic immigrants” in 2010, the U.S. government has set the ceiling for employment-based visas at 140,000 per year. Canada’s population is a fraction of the United States’ population, and they are certainly not experiencing the same level of economic hardship as their neighbor to the south. There may not be a direct correlation between Canada’s immigration policies and their relatively stronger economic position, but the fact that they welcome substantially more immigrants relative to their overall population most likely has some positive economic impact.

Moreover, the U.S. government has set quotas on the number of visas issued to citizens of various countries, including China and India, which has the effect of shutting out hundreds or thousands of qualified and talented immigrants, and depriving the U.S. of their potential contributions. Student visas are typically revoked as soon as an immigrant has completed his or her studies, effectively forcing highly-educated individuals to return to their home countries with skills they have mastered in the United States, rather than encouraging them to remain here to apply those skills for the benefit of their adopted home. Why not grant permanent residency to student-visa holders who meet the requirements of this program?

Although up to 10,000 EB-5 visas are available each year, a maximum of roughly 6,000 have ever been issued in any given year. Since there are thousands of EB-5 applications out there, this suggests the U.S. government and its responsible agencies could do a better job of efficiently administering the application process so that more EB-5 projects are approved.

Finally, the government could consider increasing the number of employment based visas to 300,000 and designing the application process in such a way that the quality and number of immigrants from various countries is taken into account, so that otherwise qualified and talented individuals are not artificially eliminated from consideration. Perhaps it is also worth considering lowering the investment requirements for the EB-5 visa and engaging in an aggressive educational campaign throughout the world to increase the visibility of the EB-5 program and make foreign entrepreneurs aware of its benefits.

Why Economic Bubbles are Good for GDP

Economic bubbles are considered bad because they run up asset values without an underlying rise in production or real value. Bubbles have occurred several times in recent history, the tech bubble of the 1990s, and the housing bubble of the 2000s being two examples. Since bubbles are artificially inspired by market sentiment, and/or monetary policy they naturally burst to become more realistically priced. These bursts have tended to be dramatic and cause substantial financial stress to unprepared individuals and entities. 

Despite the negative effects of bubbles they are also economic opportunities. Bubbles attract investment capital from foreign countries, create wealth and fuel investments spawned by the increase in asset values. Without bubbles, financial and economic stasis would be more likely, and although that is more stable, it is can also have less near-term economic benefit. For example, consider an economy without asset inflation, and with GDP growth that remains steady at 1-2%, and that occasionally rises above inflation. Such an economy only keeps up with population growth and does necessarily increase or decrease in size.

A bubble economy however, may grow 3-5% for several years straight. Moreover, according to Department of Commerce GDP data, U.S. GDP grew an average of 3.82% each year between 1992-2000. That is year over year data as well meaning 3.82% compounded over the previous year's growth. Although in the 1990s the bubble was actually based in real technological innovation, a reasonable interest rate environment existed and inflation was actually kept in check by tightening the creation of U.S. currency per the CATO Institute. This bubble was conceivably caused by over-exuberant investors rather than loose monetary policy.

Even after the tech bubble had burst annual GDP did not decline below 1%, a relatively small price to pay for a bubble that created a lot of jobs, attracted a lot of foreign capital, and generated a lot of revenue. The housing bubble was not as healthy and was fueled by inaccurate derivatives valuations, loose lending policies, and a surge of speculative real estate purchases and construction.  Interest rates were also much lower in the mid-2000s than the 1990s. Yet this led to a four year average GDP growth of 2.95%, low unemployment and large corporate, foreign and individual investments. Without this bubble, economic growth may have only averaged 1-2%, and a recession still might have occurred afterward.

The growth created by asset bubbles serves as a stimulus for economic expansion, and expansion that may otherwise be impossible to attain with more practical, but stable economic policies. As with large companies, developed countries with large economies like the U.S. have to grow GDP in the hundreds of billions to expand at a rate that can support and substantiate significant capital investment into industrial research, business development, and government sponsored programs. The need for economic bubbles suggests it is quite possible the U.S. has reached its economic apex where continued economic expansion at a consistent rate higher than 1% is difficult, unsustainable and unfounded.

7 Quarters of Growth vs 5.9 Percent Summed Over 3 Years

The cliche glass half full or half empty applies and there are enough numbers to make it all look like a glass puzzle rather than something to drink out of.

The. U.S. economy 'summed' 5.9 percent GDP  between 2007 Q4-2010 Q4. To be fair add 1.8 percent to that for Q1 2011 making the total since Q1 2007 6.7 percent. Yet this doesn't really represent GDP growth just like 10 percent of $14 trillion isn't the same as 10 percent growth on $13 trillion. For example, in the graph below, Q3 2009 shows an 'increase' of 1.6 percent. Is this an increase over negative .7 percent? If it is the actual GDP graph is an illusion.

In any case was still in the right direction for the last 8 quarters, but the source of that growth was in part stimulated by massive government spending in 2009-2010, which is presumably about to be curbed by the 2012 budget and the forecasted end of QE2. 

Source: U.S. Joint Economic Committee

Personal expenditures and exports accounted for most the economic growth in Q4 2010.  If a stronger dollar emerges in the near future, it could mean potentially shrinking exports and lower federal or central bank spending would potentially deflate consumer spending and GDP growth. Steady inflation won't hurt but not if economics refers to steady means as excess of frozen inflation adjusted payrolls.

Source: U.S. Congress Joint Economic Committee