Dec 06 2007

America: Land of the free, home of “jackass” economists

Recently, in AP Economics, we have been learning about Labor markets; in IB Economics we’ve been focusing on the benefits and costs of international trade and global economic integration. As students of market economics, it is ingrained in us that economic liberalization, the freeing of markets, enabling resources to be allocated based on the price mechanism; these are all are good things. Removing barriers to the free movement of products and resources across national and political boundaries should eventually result in greater world output, and subsequently increases in living standards and wealth for the citizens of all free trading countries.

Nations will produce the products for which they have a comparative advantage, and trade with their neighbors for those products for which they don’t. Resources will flow from markets in which they are in low demand to those where they are in high demand. Prices in both product and resource markets will rise and fall, allocating scarce resources to the markets where they are needed most.

So why, in an era where the benefits of free trade and free flow of productive resources seem so visible around the world, do Americans seem so susceptible to views like those exhibited in the video below:

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America has been the champion of trade liberalization and global economic integration since the world embarked on the wide-spread adoption of free market principles in the second half of the last century. We used to pride ourselves on our principles of freedom that were bringing wealth and prosperity not only to ourselves, but to the poor countries of the world that embraced our economic fundamentals. Korea, Japan, followed by the Southeast Asian Tigers, the Middle East, Latin America, the countries of the former Soviet block, China, India, even parts of Africa have opened their minds and economies to the principles of free trade. Slowly but surely, market liberalization seems to be lifting the world’s poorest nations out of poverty.

At the heart of this growing world prosperity lies a fundamental belief in the free flow of resources across political boundaries. Labor markets, when left unhindered by government, should achieve equilibrium through a shifting of workers from areas where labor is in low demand to areas of high demand. A basic example of this movement is the immigration of workers from Mexico and Latin America to the United States. Mexico is a country where demand for labor remains low relative to its northern neighbor, the US.

The main determinant of Mexico’s low demand for labor is the country’s relative lack of capital and technology, resulting in low productivity at home relative to the productivity in America, where a large capital stock and cutting edge technology result in high worker productivity, thus high wages. In addition, American workers have a relatively high level of education, which prepares them for jobs for which training and expertise are necessary, resulting in a shortage of workers in low-skilled labor markets in several parts of the US. Often, this drives wages for low-skilled workers above the minimum wage.

As the champions of free trade and market economics, it should come as a surprise that so many Americans today seem outraged by immigration and the resulting injection of labor into the American work force. In a discussion with my Econ class yesterday, I asked students to critically analyze the benefits and costs of immigration for the American economy. I asked them to put aside any social or cultural considerations, analyzing only the economic effects of the increase in the labor supply that results from immigration. Here’s a summary of our discussion:

Economic costs of immigration:

  • Lower wages for low-skilled workers: This may include high school drop-outs, teenagers, or anyone without any post-secondary education.
  • Higher unemployment: This point was disputable, however, because only in labor markets where the equilibrium wage rate falls below the minimum wage would increased labor supply result in unemployment. As we discussed, in many American labor markets, the minimum wage is “non-binding” or ineffective because the equilibrium wage is higher than the minimum wage. In this case, an influx of low-skilled workers would not create unemployment, only lower the equilibrium wage rate closer to the federal minimum wage.

Economic benefits of immigration:

  • Lower wages for low-skilled workers: Wasn’t this a cost? Yes, but it’s also a benefit, here’s how: Wages are a cost to firms, so lower wages mean lower costs for firms. In competitive product markets, where the price paid by consumers is close to the cost faced by firms, lower costs means lower prices. Lower prices are good for all American consumers, as it means higher real wages. Lower wages in unskilled labor markets may be offset by a lower price level in the nation as a whole.
  • Less likelihood that jobs will be “outsourced” or “off-shored”: By allowing more low-skilled workers into America, it’s more likely that firms who are forced to minimize their costs will keep their factories or operations within America’s borders, instead of opening up shop in Mexico, India or China, as so many firms have done in recent decades due to the shortage of low-skilled workers at home.
  • More tax revenue for the US government: American firms are more likely to remain in the US with a large supply of cheap labor, meaning the government can continue to collect taxes from them. More workers means more income tax (assuming immigrant workers are employed legally).
  • More efficient resource allocation: Labor is a resource. Prices act as a mechanism for allocating resources. When wages in the US are higher than those in other countries, it is a signal that the US demands more labor. Immigration to the US is no different from an economic standpoint than any resource shifting from a market where it’s not in demand to one where it is in demand. Also, American workers, who in general have a higher level of education and training than most immigrants, are freed up to pursue careers in more productive sectors of the economy, leaving the “low-skilled”, “menial”, jobs to immigrants.
  • Greater incentive for Americans to stay in school: We did not talk about this one in class, but it seems plausible. As the supply of low-skilled workers increases with immigration, wages in such labor markets will remain low. Low wages mean American households are willing to supply a lower quantity of labor; in other words, Americans are more likely to stay in school, seek higher education and more training to prepare themselves for a job in a labor market in which more advanced skills are required.

Despite the clear economic benefits of immigration as outlined above, many Americans have become isolationist in their view of globalization and free trade. CNN news anchor Lou Dobbs is one example. In his nightly news show, Dobbs spreads his anti-immigration, anti-globalization message to millions of American households, spurring Americans to join his cause: closing America’s doors to the rest of the world, “protecting” Americans from the threats posed by immigration, outsourcing, off-shoring, globalization in general. New York Times columnist David Brooks had this to say about Lou Dobbs in his recent column, Follow the Fundamentals:

Lou Dobbs is winning. He’s not winning personally. He’s not going to start winning presidential awards or elite respect. But his message is winning. Month by month the ideas that once prevailed on the angry fringe enter the mainstream and turn into conventional wisdom.

Once there was a majority in favor of liberal immigration policies, but apparently that’s not true anymore, at least if you judge by campaign rhetoric. Once there was a bipartisan consensus behind free trade, but that’s not true anymore, either. Even Republicans, by a two-to-one majority, believe free trade is bad for America, according to a Wall Street Journal/NBC poll.

Once upon a time, the fact that hundreds of millions of people around the world are rising out of poverty would have been a source of pride and optimism. But if you listen to the presidential candidates, improvements in the developing world are menacing. Their speeches constitute a symphony of woe about lead-painted toys, manipulated currencies and stolen jobs.

Dobbs and the millions of Americans who support his view share a common opinion of us economists: we are “jackasses” and “idiots” for believing what we do about free trade, immigration and globalization.

What do you think?

  1. Is Dobbs message valid?
  2. Should America do more to “protect” its citizens from the threats of the global economy and the immigrants who want to come join our labor force?
  3. After watching the video above, what do you think about free market economics?
  4. Has Dobbs convinced you that we’re all a bunch of “jackasses” because of our idiotic views of the benefits of economic liberalization and free markets?

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About the author:  Jason Welker teaches International Baccalaureate and Advanced Placement Economics at Zurich International School in Switzerland. In addition to publishing various online resources for economics students and teachers, Jason developed the online version of the Economics course for the IB and is has authored two Economics textbooks: Pearson Baccalaureate’s Economics for the IB Diploma and REA’s AP Macroeconomics Crash Course. Jason is a native of the Pacific Northwest of the United States, and is a passionate adventurer, who considers himself a skier / mountain biker who teaches Economics in his free time. He and his wife keep a ski chalet in the mountains of Northern Idaho, which now that they live in the Swiss Alps gets far too little use. Read more posts by this author

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