Mark Faber is a proponent of Austrian economics, which is above all about economic realism. Faber's ultimate point is that American elites are waging class warfare against the classes that created the welfare state. What better way to wage war than to destroy the American currency and dissolve political solidarity through forced integration of incompatible ethnicities?
Ethnic diversity overall tends to expand the welfare state, not reduce it. While the research only focuses on one effect of unskilled immigration (reduced fellowship), there are at least three effects that go the other way. Here are the main effects of increasing the share of low income minorities:
1. Solidarity is diminished and social ties are weakened, so that the majority population becomes less willing to pay taxes to help "the other". This limits the size of government. The ethnic-diversity-and-redistribution-literature has almost entirely focused on this sole effect.
This is a strange way to describe the state of the argument. It would be more accurate to say that (a) Almost everyone assumes that immigration increases the size of the welfare state; (b) AGS identified a mechanism going in the opposite direction; and (c) AGS showed that on international data, the net effect of diversity on the welfare state is indeed negative . There is a -.66 bivariate correlation between social spending as a percent of GDP and racial fragmentation, and this relationship persists controlling for per-capita income, region, and age distribution.
I freely admit that AGS's results for the U.S. states are indeed subject to Sanandaji's critique here. AGS only show that states with larger black population shares spend less per person , not less in total. But even this weaker result shows that the standard story is overstated.