AS THE ECONOMY TURNS

BE CAREFUL WHAT YOU WISH FOR

Dr. William Shingleton

April 10, 2006

So now Washington has so much extra cash lying around that they want to waste $2,100,000,000 of our tax money to build a 700-mile wall between the United States and Mexico, if we can assume that the costs of this latest government boondoggle will come in under budget. That ought to help a lot, considering that the actual border extends for 1,956 miles, so the wall will come up about 1200 miles short. I guess nobody is going to try to cross the rest of the border. Maybe we can put up some signs in Mexico directing people to the new wall. At least HB 4437 will add some jobs to the economies in the area! What kinds of jobs? That’s a mean, picky detail. They will be construction jobs under the hot Arizona or New Mexico sun. The kinds of jobs only an illegal immigrant would do, even if they pay Davis-Bacon wages, so we are going to have to green-card some of the 11 or 12 million illegals who are already here. We are going to need them. Sometimes it just does not seem like the people in Washington have any common sense. (Okay, maybe it’s not just “sometimes”, but we’ll leave that one for another day.)

If we wanted to keep illegals out, maybe we should consider why they want to come here in the first place. The answer goes back to the first paper I ever wrote in graduate school. Then, the question was relatively simple, “Why did the wretched refuse of those teeming shores come to America, were they pulled by the prospect of opportunity in America or were they pushed by the economic distress of their countries of origin?” (As a budding economist, I didn’t worry about non-economic factors.) After examining the available economic data from the latter half of the 19^th century, the answer seemed to be that, in spite of the Irish potato famine and other assorted European maladies, most people made the journey across the ocean to a foreign world because they saw great opportunities in the United States, they were pulled, not pushed. Today, we would argue that, while some of the characteristics of the immigrants have changed, both the question and the answer are probably the same; today’s immigrants, both legal and illegal alike, are mostly coming for the jobs they find here. Nothing illustrates this more vividly than the World Bank poverty standard, one dollar per person, per day. In much of the rest of the world, a person is not poor unless he/she earns less than one dollar per day. Anyone who makes it into the United States, even if they get paid wages that are well below our national minimum wage of $5.15 per hour, can reasonably expect to get paid wages they can only dream about at home.

If anyone should understand how poorly a wall would work, it should be the Bush administration, those great proponents of the free-enterprise system. Look at the logic. People in low-wage countries know that wages in the United States are much higher than anything they can hope for at home. If these people are reasonable and ambitious, then they are going to be willing to pay someone to help them get to the United States, that is, there will be a DEMAND for the service of cross-border transportation. As we have so often seen in any number of other markets, from drugs to space travel, whenever there is sufficient demand for a product somebody is going to come up with a way to earn a PROFIT by providing the good or service and charging a PRICE, pretty much regardless of what the laws may say about the situation. It’s the American way. All of the fences, surveillance towers and Minuteman patrols are not likely to change a great deal, all they can do is to increase the COST of successful transport.

However, increasing the cost has a perverse effect. Since the price of the service needs to cover all of the costs, a higher cost is going to lead to a higher price for the service, reducing the number of times that many of these people want to try to cross the border. And one simple way to do that is to just stay in the United States once you have made a successful crossing, instead of coming here for a work season and returning home for the off-season. The migrants who used to come here for the work season usually left their families back home and sent REMITTANCES from the United States during the work season to help them live a better life in their own communities. When the season was done, many went home. With crossing now more expensive and more dangerous, the workers not only stay in the United States, but they arrange for their families to join them because (surprise!) they miss their families.

The most ridiculous solution to all of this is to make it a felony to be an illegal immigrant. If HR 4437 actually passes, we’ll need to close down half of the government to come up with the money to build prisons to hold 11 million people, and their collaborators. (Closing down half of the government is one of the few positive features to the bill.) Just identifying them and rounding them up will cost a fortune, testing even this Congress’s ability to spend our tax money. Fortunately, HR 4437 is just a poor example of political posturing; it looks like some senior Republicans must want to keep their party in the minority for the next generation.

There is a less complex solution. Make it a felony to hire an illegal immigrant. Forget about the trivial fines that can be deducted as a cost of business on the tax return. Jail time. You think that would not dry up the number of jobs offered to the illegal aliens in a hurry? And without the prospect of jobs not only would illegal immigration pretty much dry up, but many of those here would leave, of their own accord, without requiring taxpayer money. It’s a great deal cheaper than trying to put 11 or 12 million people in jail because there would only be a handful of employers. Employers, like almost everyone else, are reasonable. They hire illegal immigrants because they are cheaper. Making that hiring decision a felony completely changes the calculus. To be honest, nothing else is going to work because all of the other decisions seem to ignore the amount of money on the table.

If we cut off the illegal immigration, by whatever mechanism, there will be consequences. The most important result will be that the pool of unskilled labor in the United States will shrink dramatically, particularly in agriculture. The REDUCTION IN THE SUPPLY OF LABOR will, in turn, have consequences of its own. Right now the reason Americans won’t take many of the jobs filled by illegals is simple, the wages are too low. As a case in point, I surveyed my MBA class a few weeks ago and they are all are willing to do hard dirty labor if the wage is high enough. That’s how a market works. When the supply of just about anything gets smaller, then the EQUILIBRIUM PRICE, in this case the WAGE, will go up. For the workers who are able and willing to claim these jobs, their incomes will rise. In addition, when the wage for unskilled labor rises, there will be some SUBSTITUTION, replacing some unskilled workers with a smaller number of skilled workers, increasing the demand for skilled labor, and raising the wages in that market. There will also be some OUTSOURCING, moving some production processes to other countries where unskilled labor is relatively inexpensive if the labor cost reduction will compensate for the increase in transportation costs. Any outsourcing, of course, will reduce the number of jobs in the United States and counterbalance some of the effect of not having the illegal immigrants in the labor force.

There is a second important consequence, on prices. This one will affect all of us. Even with the adjustments discussed n the previous paragraph, labor costs will be higher in many industries. If these industries are competitive, and many of them are intensely competitive, all of the cost increase will be passed on to the customers in terms of higher prices. The irony here is that low wage workers tend to spend a disproportionate share of their incomes on goods and services, such as food, that are produced by other low-wage workers. We could have a situation in which low-wage workers get a five percent increase in their dollar incomes (NOMINAL INCOMES) but face more than a five percent increase in their COST OF LIVING, leaving them with lower REAL INCOMES. (Of course the government will collect higher taxes from them because it taxes your nominal income.) If we want to end the presence of illegal labor in this country then we need to be willing to face, and to accept, all of the consequences.

The bottom line is that we need to think about what we are doing a little more. But at least maybe we’ll stop the terrorists. Of course the only terrorists we know of either came in legally or crossed the CANADIAN border. Maybe we can boondoggle a wall across Montana.

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