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.

Tippie MBA Ranked Best Value in the World

Chiara sent me an article posted on my school's website citing the increase in salary after graduation and the relative cost of the MBA at the University of Iowa, as being reasons why the Financial Times have ranked the University of Iowa higher than last year.

I have posted the article in the comments section if you are interested.

Inflation Rises Slightly Not Significantly

A brief article published by the Free Market Project, describes a news report a few weeks ago about an over excited reporter claiming that inflation is at its highest in 15 years! He cites a 5.4% increase in wholesale prices, but Mr. Shepherd points out that core prices (what you and I pay for most things) only rose 1.7% during the same period.

Businesses chose not to pass on their increased costs to the consumers. I have to ask why not? My guess is because of competition. It is hard for a business to raise their prices subtly. They can't meet with their competitors to agree on a date when everybody will raise their prices, so any increase in the sales price runs the risk of driving their customers right into their competitor's hands.

This especially rings true if there is no or little cost to the customer for switching. This often results in the good sold being a commodity or near-commodity.

Be careful what you read and make sure you examine the numbers before jumping to conclusions.

Starting a Roth IRA

From the same site (The Motley Fool) comes an article about setting up a Roth IRA. The site compares three vendors, but there are countless other vendors that will help you set up a Roth IRA.

What are the benefits of the Roth IRA? If you qualify, you can invest a relatively small sum every year ($4000 until 2007 and then $5000 in 2008 and then small increases afterward) in a tax-sheltered tool. You don't pay taxes on the money you gain from the Roth IRA. The reasoning being of course, because you already paid taxes on the money you put into it. In order to qualify you have to have an income of below $95,000 a year if you are single or $150,000 a year if you are married.

I haven't set up my own Roth IRA yet, but there is still time to place some money in a 2005 Roth IRA for tax purposes and the benefit of being able to place more money into it in 2006. April 15, 2006 is the deadline, so you still have time. What are you waiting for?

Retirement Investing Tools

I came across this relatively simple survey of the different tools available to you if you are planning to invest for retirement (that should be everybody!). The article describes each of the tools including 401(k)'s, IRA's, annuities, or tax-deferred investments. It goes on to give a brief strategy on how to distribute your money to the various investment tools depending on what situation you are in.

This isn't the first article like this, but it helps to refresh understanding of these important tools to help you plan for your future.

Don't Limit CEO Compensation

I came across a controversial perspective on compensating CEO's. The article argues that by limiting the amount a CEO makes, and pegging it at a "realistic" number, it will create more "CEO envy" and potentially cause companies to pay their CEO's more.

I like the last paragraph of the article because it puts full faith into a free market. In this case, the market for CEO's:

At the end of the day, what is the true market value of a CEO? Every MBA knows that the market value of anything (or anyone) is whatever the market is willing to bear. That’s how Howard Stern walked away with a $600 million deal from Sirius before he had ever spoken a single word on satellite radio. Maybe he’s worth it, maybe he’s not. However, in the time period since he signed the mammoth contract with Sirius, the company’s stock price has doubled, creating $5 billion in new shareholder value. All too appropriately, a recent Wall Street Journal article about Stern was titled “Shock-Jock Stern Has New Fan Base: Well-Paid Executives.”

I've posted on this topic recently and you can catch up on the discussion here.

"The Wal-Mart Effect"

This article by Kathleen Parker reviews the book by Charles Fishman called "The Wal-mart Effect." I often find myself defending Wal-mart on this site and even in general, but some excerpts from the review were striking to me. I'll share them below:

Wal-Mart isn't just a company. It's a global market force - a nation unto itself. Americans spend $35 million every hour at Wal-Mart, 24 hours a day, every day of the year. Wal-Mart is so huge and so powerful, you'll wonder how you failed to notice that the company affects not just how we shop, but how we think and live - even if we never set foot in a Wal-Mart store.

When you stand back and examine Wal-mart as Mr. Fishman has, it is quite shocking how the above statement could escape your attention. They control markets. They set the prices. They have power.

They aren't necessarily an evil corporation like some have argued (including myself), but some aspects of their business model should be brought to public attention.

On the home front, Fishman argues that critics are wrong when they say that Wal-Mart puts little people out of business. We (consumers) put little people out of business, he says. We vote with our wallets, and we're the ones who choose Wal-Mart over local stores. Wal-Mart, in that sense, is the ultimate model of democracy.

Consumers also have made possible the company's phenomenal growth. In 1990, Wal-Mart had just nine supercenters in the U.S. By 2000, there were 888. Wal-Mart is the No. 1 grocery retailer in the world. Between 1990 and 2000, 31 supermarket chains sought bankruptcy protection, including 27 that cited Wal-Mart as a factor.

It's true. We are the ones that give Wal-mart the power they have. We choose where to shop and as I have written previously, it is up to us to choose where to shop. If we want to buy our food or goods at a local boutique, there is nothing stopping us. I like the analogy of democracy, because it rings true.

Fishman argues that Wal-Mart's power and scale hurt capitalism by strangling competition.

"It's not free-market capitalism," he says. "Wal-Mart is running the market. Choice is an illusion."

Wal-Mart not only changes the way we buy, but the way we think, Fishman says. If Wal-Mart charges $5 per pound for salmon, then shoppers wonder why a restaurant charges $15. We expect salmon to cost only $5. Or a microwave to cost only $39. The Wal-Mart effect first changes our expectations, then changes the quality of merchandise, which is cheap, because it isn't always well- or ethically made.

This struck me as quite interesting. The article continues with the example of salmon and how it raised in Chile causing immense environmental damage. Wal-mart buys this salmon, because it wants to give us, the consumers, the cheapest price possible. We accept that price and from then on, we compare all other offerings to the lowest price. It is up to us to decide whether the price is "worth it" when looking at the example of salmon (or any other good that is not "well- or ethically made").

Next time I'm in Wal-mart or another discount store, I'm going to think twice about buying the cheap salmon.

Hedge Funds and Hollywood

I've posted an article in the comments section from Variety.com. They call to attention the decreasing willingness for movie companies to make movies. Most companies are paring back the number of movies they are making to focus on different markets or increasing their quality.

It seems that hedge funds are getting involved in underwriting the costs of movies for a share of the profits. Movies can be highly lucrative if audiences like it, but can also (and often times are) not very profitable, especially when you take into consideration the costs of production, distribution and marketing. Unfortunately, the article doesn't give many details on which funds are buying into the movie business.

Ford to Close Plants and Lay Off Thousands

Ford announced yesterday that it would be laying off up to 30,000 employees and shuttering 14 auto plants. According to this article, they are running at only 79% of capacity whereas Toyota is at full capacity.

I feel sorry for the people who will be losing their jobs. That has got to be a hard thing to go through. But in the interest of the economy as a whole and Ford in particular, this is a good thing because it looks like they are trying to change the direction the company is going and become more efficient. One particular statement of note is that Ford will no longer provide earnings guidance after 2006. Bill Ford said that the company has to stop thinking "short-term" and focus on a longer horizon.

Good luck to them. If Ford ends up becomming more efficient or producing better cars that consumers want, they'll grow and add more jobs. If they crash and burn, then smaller, more efficient comapanies will fill the gap; or even rivals who have better products to begin with. Either way the economy is better off:
Ford becomes more efficient = more quality for less cost to the consumer.
Ford goes bankrupt = one less competitor to worry about for other car manufacturers, and thus more market for them to strengthen their own positions = good news for customer.

Back during our stock market experiment, I had bought Ford and basically lost my shirt on it. I hope that they succeed because it seems to be less painful for everybody.

Kids in College Woefully Uneducated About Money

My mom sent me this article she found (thanks mom!) about students in college who have no idea how to manage money or can even do simple math. Education about money and its uses (and misuses) is the main reason why this blog exists. Learning about how money can be used and the tricks of the trade help everyone better their lives, be more efficient, and plan for their future (and not get ripped off).

Had I not decided to get an MBA at the University of Iowa, I would also fall into the group the article mentions. Fortunately, my classes, along with good discussions with my classmates, have helped me learn more about how to manage money and do so with a goal in mind. No longer will I unknowingly pay the "Foreigner Tax" within my own country. Probably the most important thing that was spelled out to me was the time value of money.

Don't be ignorant about money. Ask questions. Read books, take classes, and visit Cashtalk or other financial sites. Take the time to learn how your income can be used to make your life better and those around you (in a responsible way). Don't wind up being the subject of an article about how people don't know anything about money.

Tax Software

Just a brief post here to remind everyone that a year has gone by and soon, taxes will be due. CNET.com has an article here briefly comparing the two popular tax software products.

Of course, software might not be the way to go if you own a business or have a high number of investments. If that is your case, I'd recommend talking with a CPA or other tax professional.

Game Theory

Why game shows have economists glued to their TV sets... from today's Journal, in the comments.

Game: Set Economic Policy as the President of the US

This upcoming Spring semester I'll be taking two classes: Economics and a Summary class to fulfill the requirements for an MBA.

When browsing the website for the Economics class, I came across this game which allows you to test economic theory by setting certain macro-economic monetary indicators (such as the Congress, President or Federal Reserve would be able to do) to see what effects it has on the economy (and your popularity). Check out the game here.

I played it and cut taxes to 10% of GDP and spending to about 12% of GDP. I tweaked the money supply each year to keep inflation in check and overall I think I did pretty well. At the end of the sixteen years, I got 4th place, right behind President JFK/LBJ, Eisenhower and Clinton. Unfortunately, I left a deficit for my successor.

Play the game and let me know how you did.

The Basics of Forming a Corporation

I came across this interesting summary of forming or starting a corporation. What are the implications? What are the advantages/disadvantages? Check it out.

"Fear Can Move Markets or Even a Whole Economy"

The Free Market Project recaps the year with an article about the media's obsession with fear. Notable and relevant to our site, the article examines the impacts of fear and hysteria on stocks, companies and even economies.

It kind of makes me feel dumb about posting earlier about the bird flu. Sometimes you just get caught up in a wave of human emotion. In order to be a successful handler of money and make wise money decisions, you have to control your own fear and even anticipate the fear of others and take advantage of it (in an ethical way of course). The article mentions that when the bird flu story started spreading, Roche's stock price increased 50%.

Check it out and let me know if you think the media is out of control when it comes to "ginning" up fear.

I knew it, I knew it, I KNEW IT.

I hate to say "I told you so" (and that's not directed at anyone in particular), but I remember thinking all along that this was a baaaaad idea:

In today's Journal:

GM Official Regrets
Employee Discounting

General Motors Corp.'s top North American sales and marketing executive, Mark LaNeve, said he now regrets launching the employee-discount program that drove GM sales to record levels last summer, and doesn't plan to repeat such promotions this year.

Mr. LaNeve said the employee-discount promotion, which GM began last June, was very efficient in moving vehicles. But after the program ended three months later, sales dipped and hit a low in October, when sales fell by 26%. The employee-discount program also caused the Detroit auto maker to focus its advertising messages on the sales promotion, instead of highlighting product attributes and its effort to reduce base prices on certain models.

"Hindsight being 20/20, I probably wouldn't have done it," Mr. LaNeve said.

Google $600?

Piper Jaffray analyst Safa Rashtchy defends his price target of $600 a share for Google in today's Wall Street Journal.

Quick read, posted in the comments.