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Wednesday, May 03, 2006

Bootleg Liquor

In the early twentieth century, social justice types decided that liquor was evil and must be banned. Laws were duly passed outlawing demon rum and its cousins. Because nothing had been done to reduce demand, the laws simply created a thriving market for the bootleg variety. After battling the problem for several years, the nation eventually scrapped the whole experiment as a failure.

American immigration laws have had a longer run, but they are very likely to end up on precisely the same scrap-heap of history, and for pretty much the same reasons.


Although outsourcing jobs to foreign countries has long been a contentious issue for the American public, most American economists see no problem with it. As both Walter Williams and Thomas Sowell like to point out, there is no functional economic difference between outsourcing a job to Korea and automating that same job through the purchase of a computer whose parts were made in Korea. In both cases, the job is no longer available to the American worker. Let’s examine this a bit more thoroughly.

Technology not only permits a computer to replace a local worker, it permits a worker half a world away to replace a local worker. Modern shipping, built on modern technology, has long been rapid and reliable enough to replace the local worker just as assuredly as a machine would. But transportation of goods is not always sufficient to solve the problem.

When Walmart buys a shipload of goods from Thailand or Reebok sews sneakers in Singapore, the corporation leverages third world muscle. The practice works because the corporation moves goods and not people. But, from a purely economic perspective, there is essentially no difference between outsourcing factory jobs to people in the South Seas and importing South Seas citizens to fill factory jobs in the United States.

In both cases, the American worker has been replaced. In the first case, he has been replaced by someone who ships goods subject to tariff into the country. In the other, he has been replaced by someone who pays tariff (sales tax, income tax, etc.) to live in the United States.

From the viewpoint of strict economics, whichever is the more cost-effective solution is the better solution.


Reebok imports goods rather than people primarily because it is cheaper to import goods rather than people. Not every industry is so blessed. Agriculture, for example, is tied to the land. The fields on which they produce goods cannot be transported to the laborers, so the laborers must be transported to the fields. Similarly, the slaughter of livestock or the remodeling of houses is tied to geography. Even if it were possible, it would make no economic sense to ship this raw material to the laborers.

Thus, corporations in the business of selling easily transportable goods have an economic advantage over corporations that depend on goods with fixed geographic locations. Reebok is driven to reduce costs. It does so by employing cheap foreign labor. By a quirk of fate, it is able to do so without running afoul of US immigration law. Tyson Foods, the immense chicken farming conglomerate, is driven by the same pressure to reduce costs, but enjoys no such legal economic advantage in producing its end-product. So, it levels the playing field by employing foreign labor anyway: illegal immigrants.

But, this isn’t the whole story.


As a recent survey points out, using illegal immigrants as day laborers is not limited to the corporations involved in harvesting livestock or produce. As it turns out, illegal immigrants make up a substantial portion of day laborers, and the number one employer of day laborers is homeowners.

Now, the homeowner is the smallest of the small-scale economic players. From an economic point of view, illegal immigration allows Joe Q. Public to leverage the economic advantages of cheap foreign labor in exactly the same way that Reebok and Walmart do, but without the shipping costs incurred by either corporation.

Thus, illegal immigration not only helps large, geographically fixed corporations, it also gives small business, especially the micro-business that is a family household, an edge. In fact, it gives micro-businesses the edge necessary to stay competitive with corporate giants who can afford massive just-in-time inventory control and the economy of scale possible through massive bulk purchases of items.

The illegal immigrant is the poor man’s automation. But why would small business need this kind of automation? Because the government has outlawed low-wage jobs.


Now, keep in mind that fully 99% of all enterprises employ less than 500 people. 52% of all workers are employed in small business. Small businesses produce three-quarters of the new jobs, and are much more economically nimble, able to respond to market pressures more rapidly than large corporations. Unfortunately, this is precisely the sector hit hardest by the minimum wage.

The minimum wage law is essentially a tax, a tariff on low-cost goods and services. The Smoot-Hawley tariff on foreign goods that economists have long lamented has been transformed today into the minimum wage tariff on low-end jobs, a government-imposed tax which not only outlaws low-wage jobs, it forces businesses who offer such jobs to pay the cost of enforcing the laws.

By taxing low-wage jobs, the minimum wage thereby abolishes such jobs. How? It artificially transforms them into high-wage jobs. At least, that's the theory.

In fact, the government actually creates a black market for low-paying, low-end jobs that cannot be legally filled by entry-level workers. But, on closer examination, the law actually does something much worse than this. Because it essentially outlaws low-wage jobs, it creates in those same entry-level workers the belief that low-paying, low-end jobs should not exist at all.

That is, the artificially imposed minimum wage creates in the American public an erroneous notion of what constitutes a just wage. This notion is not shared by most of the rest of the world. As a result, neighbors who do not accept the American government’s notion of what constitutes a just wage are more than willing to step in and do the job for what the job is actually worth, rather than demand the price of the job plus the government tariff.

Thus, perversely, while large corporations do employ illegal immigrants, the economic necessity which creates illegal immigration is not created by the corporations themselves. It is, instead, created by Joe Q. Public via the day labor market and the small business community in reaction to the government interference in the marketplace. Illegal immigration enhances the economic clout of the average American consumer by allowing a lower price for goods and services than would otherwise be possible.

Given the American appetite for low-cost comfort, an appetite which has caused Americans to essentially stop having children, illegal immigration is both inexorable and inevitable. Stopping illegal immigration would require a change in American attitudes towards their own comfort and bank accounts, and that simply won’t happen. A nation which can't be convinced to stop killing one-third of its children will certainly not want to give up its cheap lettuce, no matter what the demagogues say.


Patrick said...

"...there is no functional economic difference between outsourcing a job to Korea and automating that same job through the purchase of a computer whose parts were made in Korea." Actually this has been found to be completely false. Automation simply changes the job by creating new needs. Automated equipment requires someone local to sell the equipment, repair the equipment, and provide technological support locally. That is why the computer boom has created so many new job sectors that didn't even exist 20 years ago, but hit other job sectors hard with layoffs. In effect, in the technological business, making life more efficient takes more people, albeit more cheaply. Outsourcing simply changes location, and by doing so, it actually becomes more inefficient as training costs soar. Ask Google and Sony who outsourced to India and are now back in the US, and according to Forbes they are simply the beginning of the wave of companies coming back to the US. Outsourcing only works for very, very specific job categories.

Patrick said...

And as every economic indicator shows, illegal immigration only has a .5% economic impact on the US (which makes sense since they represent less than 5% of the total population). The only "need" that corporations have for illegal workers is to line the CEOs pocket. If you follow the indicators of the fluctuating gap between employee pay and CEO pay, the fluctuation is largest during the times of greatest illegal immigration. All arguments point towards illegal immigration simply increasing avarice, both on the corporate and consumer sides.

Steve Kellmeyer said...

Click on the Walter Williams link in the article. He strongly disagrees.

As he points out, the percentage of people in agriculture dropped from 41% to 2% of the population between 1900 and 2000. It is not the case that the missing 39% went into technology support for agriculture. Instead, they were retrained into entirely different industries - computers, for instance. To say that Google and Sony failed in their Indian outsourcing does not explain why IBM succeeded. In fact, I suspect it says more about their ultimate economic competence than it does about the advantages of outsourcing in their industry.

Also, while the impact of illegal immigrant labor may have only a .5% impact on the US economy as a whole, it has a much larger impact on those niches of the economy that are geographically fixed, e.g., agriculture and home renovation/construction.

Patrick said...

You just named two industries that are already heavily subsidized by the US government - in other words, they were already non-competitive. We shouldn't subsidize the non-competitives whether auto, airline or agriculture. In other words, you are paying for the lower wages through your taxes - they never have to survive on a level playing field. Import if you can't compete, you help 2 nations (the source company and the country whose needs are met). Illegal immigration is not helping Mexico is not creating any new jobs and costs you money that you could use to purchase imported competitive products with. Agriculture job reductions in the century were mostly due to advancing tech., not outsourcing. IBMs plan works because they are using foriegn workers to support mostly foriegn contracts (International services) - they are mostly a service company now. Google tried to use foriegn workers for US contracts - that was a proven mistake.

Steve Kellmeyer said...

From an economic perspective, there is no difference between jobs lost through advancing tech and jobs lost through outsourcing.

We cannot say that illegal immigration is a terrible threat to American jobs on the one hand while insisting that illegal immigrants can safely be deported because they make up less than 5% of American jobs. It's one or the other, but it can't be both.

St. Jimbob of the Apokalypse said...

While some could argue the macroeconomics, your final point is dead-on: We are addicted to our comforts, and we will sacrifice anything to stay comfortable.

As an experiment, I've been avoiding buying things manufactured in China. I just got fed up, reading about the Chinese government's continual harassment of catholics in China, and decide that I'd not materially support the oppression. Man, it's hard NOT to find stuff made in China. If it's made in China, I won't buy it, and there have been a couple situation where it's been very inconvenient, by American standards.