Economics of Illegal Immigration

There is always something about the way Thomas Sowell describes issues that makes them easy to understand. He always gives clear, real-world examples to illuminate more complicated theory or just plain common sense.

With the current broil over immigration, and the fact that it effects most people in the United States in some way or another (and their money), two articles by Dr. Sowell attempt to put to rest common myths associated with illegal immigrants.

I was most surprised by his logical argument against the myth that we "need" immigrants to do jobs no one else will. His rationale against this is that everything should be based on price. And when people are illegally working for less money, than others lose out. He gives the example of news reporters:

If Mexican journalists were flooding into the United States and taking jobs as reporters and editors at half the pay being earned by American reporters and editors, maybe people in the media would understand why the argument about "taking jobs that Americans don't want" is such nonsense.

His second article covers the absurd idea that we need the immigrants for our farms. I had always believed that, having grown up in California, that it was because of the immigrants that we had access to the large variety of pickings from the field. But Dr. Sowell puts this into perspective by calling attention to the fact that most crops grown in the United States are un-needed! Their farms are being subsidized by the government to grow more vegetables and fruit than we need or can sell. What this leads to is the subsidizing of illegal immigrants by the government (let alone the worthless fruit that we, as consumers, are paying more for, because the market is restricted).

Read the articles and let me know what you think about this whole brouhaha.

Money and Inflation: A Macro-Economic Perspective

I have a test tonight in my Economics class and while I'm reviewing I thought I would share one of the topics covered in the examination: Money and Inflation. I want to thank Curt Wyse for looking up the information for me and N. Gregory Mankiw for writing it down in his book.

What are the three functions of money?
1. Store of value - money is a way to transfer purchasing value from the present to the future.
2. Unit of account - a yardstick with which we measure economic transactions.
3. Medium of exchange - money is what we use to buy goods and services.

Explain Milton Friedman's famous claim: "Inflation is always and everywhere a monetary phenomenon."
The quantity theory states that the central bank (the Federal Reserve for all you Americans out there), which controls the supply of money, has ultimate control over the rate of inflation. If the central bank keeps the money supply stable, the price level will be stable. If the central bank increases the money supply rapidly, the price level will rise rapidly. Thus, as Friedman says, inflation is a monetary policy. It is dependent upon how much money the central bank keeps in circulation, not the strength or weakness of the economy.

Use the concept of "seigniorage" to explain the "inflation tax."
Seigniorage is the ability of the government to print money. When the government prints money (and puts it into circulation), it increases the money supply. An increase in the money supply, in turn, causes inflation. Thus, when the government prints money to raise revenue, everyone's existing money becomes worth less through the inflationary increase in prices. While not a physical tax, the effect of this inflation tax is the same in that the government increases its revenue at the expense of the citizens.

What are the three notable costs of expected inflation? What is the major cost of unexpected inflation?
Notable costs of expected inflation:
"Shoe Leather Costs" - Since an increase in inflation causes people to hold less money, they will make more trips to the bank to withdraw smaller amounts. (Leaving money in the bank allows them to partially offset the inflation through the higher levels of interest rates they earn on their bank deposits). The "Shoe Leather cost" is so named since people will wear out their shoes more rapidly due to the increased trips to the bank.
Menu Costs - This is the cost of reprinting and distributing catalogues and menus due to the higher frequency of price changes during high inflationary times.
Price Variability Costs - These costs are related to menu costs and account for the decrease in margin between printing of menus/catalogues. During times of high inflation, the purchasing power of a currency declines, but it is impossible to keep all catalogs/menus current. Thus, a firm's relative prices will fall as inflation changes purchasing power between printing of prices.

The Cost of Unanticipated Inflation:
The major cost of unanticipated inflation is the redistribution of wealth among individuals. This happens because people take anticipated inflation into account in their decision making, but cannot do the same for the unanticipated. For instance, when taking out a long term loan, both parties agree on an interest rate based on the anticipated inflation. If inflation ends up being much higher, the borrower pays back the amount with less valuable dollars. This causes the borrower to end up with some value/money the lender was supposed to have had, but was unable to collect due to inflation. Similarly, individuals on fixed pensions are often planning on a certain level of inflation. If inflation is higher or lower than the estimate, they either end up with more or less purchasing power.

The Effects of a Higher Minimum Wage

Thomas Sowell continues his series "Something for Nothing" by writing about the effects of higher minimum wages on an economy. He cites this article from the Economist, reviewing an economic quandry that is occuring in South Africa: The economy is booming, but investment is stagnant. Sowell uses this as an example and cites a rising unemployment rate as a key symptom of inflated minimum wages, as the article suggests. Why? Because wages should be set at what someone's productivity warrants, not what the government thinks is "fair."

If I pay you $10.00 an hour because I have to, but your work is only worth $8.00 an hour to me, then why should I hire you at all? Why not just make the workers I already have work longer? Or better yet, why not get a machine to do the same job? Or even better still, why not out source the job to an economy that believes in paying workers by what their productivity demands you pay?

As if an inflated minimum wage wasn't bad enough for South Africa's economy (and others), Sowell cites job protection laws as having an even worse effect on the economy when compounded with the wage. The employers of SA can't fire their workers easily. So why should they hire more? There is too much risk of hiring somebody you can't fire. Also, when the economy picks up in a boom, why hire more workers if the employer can't fire them when the economy slows down again?

Sometimes, when campaigning for higher minimum wage laws or job protection laws, people think about themselves or somebody they know who may have lost their job, or can barely live off the $5.50 an hour they receive at some fast food joint. While this may be good anecdotal evidence, it fails to take into consideration the effects of the macro economy and thus when these types of laws are passed, it turns out to hurt them more than if things had remained the same.

South Africa's economy is very productive and growing at a respectible 5% a year. They are one of the most productive economies in the world, but because of the greediness of politicians and the short-sightedness of the constituents of South Africa, they are not reaping the benefits they should be.

You Can't Get Something For Nothing

It has been a month since the last post and for that I apologize. I have been taking two very demanding classes in my program. I hope to continue posting regularly in the future, but it may be sporadic until I graduate in May. Thank you for stopping by anyway.

Thomas Sowell posted a good article here stating the obvious in a very eloquent way, "You Can't Get Something for Nothing." In this multi-part series he uses real world examples, such as the auto workers union, teachers unions, and other monopolistic groups and explains their effects on those they seek to gain more from.

The specific example in the article deals mainly with GM and Toyota and sheds some light on a major factor in GM's rapidly decaying position and Toyota's steadily increasing position in the automobile market of the United States.