Fervid assertions made in the 2016 election campaigns prompt reader queries about the underlying economic realities. Here are some of the more frequent ones:
Would boosting the minimum wage to $15 an hour cause high inflation?
No, for a couple of factors. First, the usual reason is that the number of people actually earning minimum wage at its current level is a small fraction of the total national labor force; the total wages they earn is a very small fraction of total labor earnings. However, a move to $15 an hour is a very large jump. People now earning between the current minimum and the new $15 one also would be affected. And to avoid excess “compression” of their own wage scales, some employers would have to raise the wages of people already above $15 to maintain a workable wage premium for supervision or experience. So there would be “wage pressures” of the type many blamed for inflation in the 1970s.
However, Nobel economist Milton Friedman always argued that as long as a central bank did not increase the money supply excessively, inflation would not occur. He won that argument within economics. A $15 minimum wage would create some wage pressures, but the Fed could keep that from funneling through to an increase in the general price level – inflation – by suitably tight money. Don’t celebrate too much; while we could avoid inflation, businesses and households would have to pay at least marginally higher interest rates on loans.
How much would it cost to deport 10 million illegal immigrants and how would that deportation affect the national economy?
The first is partially a question for law enforcement experts, but the econ answer, looking at history, is that it would be a major effort costing billions of dollars. Deporting 10 million people would be three or four times larger than the expulsion of 2.6 million Sudenten Germans from Czechoslovakia after World War II or the forced migration of 3.6 million Germans from what is now Poland. It is nearly as large as the 12-14 million people forced to move during the bloody partition of India and Pakistan in 1947.
In these cases, there was no consideration of due process. “Profiling” on the basis of language or appearance was the norm. In our country, this would be problematic. There are millions of people with Hispanic names, including many whose first language is Spanish, yet who are legal citizens, often for decades. On the other hand, there are tens of thousands of Irish citizens in New York, Boston, Chicago and other cities who have illegally overstayed visas, but who generally could not be “profiled” by language or surname. Once identified, apprehending, confining and transporting people would be one of the very largest logistical efforts ever undertaken by our government. The cost would be very large.
The second part of the question is clearer for economists. Ten million people make up about 3 percent of our population. Since their average age is younger and their labor force participation higher, they are a somewhat higher proportion of the work force. Expelling this many people would reduce labor resources and consumer spending. The size of the U.S. economy would shrink.
Because immigrants tend to work in lower-paying low-productivity jobs, the decline in output might be less than the percentage decline in the labor force. Ditto for household spending, the percentage decline would be less than that for the population. That is in terms of the nation as a whole, assuming the transition was smooth and costless.
The adjustment in certain businesses and geographic areas would be wrenching, however. Labor costs would go up. Getting your roof shingled or your children cared for by a nanny would rise in price. Restaurants would see their wage bills go up, as would large dairy farms in Minnesota. Stores in ethnic neighborhoods would close. Producers of specialty foods would see demand evaporate. Storefronts in some neighborhoods would stand empty as would apartments, houses and farmsteads. Schools in places like my hometown of Edgerton would suffer a big drop in enrollments. But wages would rise for low-skill U.S. citizens.
If we imposed high tariffs on imports from China, what would happen? Would U.S. manufacturing be reborn?
A tariff is a tax on a product and the effect is very much like imposing a sales tax on a product. The largest and most immediate effect would be that consumers would have to pay more for all sorts of items, including clothing, footwear, housewares and so on. The same would be true for many products used by businesses. The degree of these price increases depends on several factors, however.
One is the extent to which production would shift to other low-cost countries not hit by a tariff targeted against China. Many of our imports from that country already are largely manufactured in Vietnam, Bangladesh, Myanmar and other poor countries. They may be finished and packaged in China, but this would be easy to shift elsewhere. And nations in Asia or South America and Africa that have no Chinese connection and somewhat higher manufacturing costs would enjoy an opportunity to enter the U.S. market.
Existing U.S. producers now competing with China would be able to raise prices and hire some more workers. Over time, new manufacturing firms might emerge, but almost certainly not to the extent envisioned by those championing high tariffs. U.S. manufacturing output has never declined, only manufacturing employment. The reasons for that labor decline were myriad of which import competition was only one. So don’t expect a sudden or dramatic surge in employment.
Trade restrictions will be reciprocated, so expect some offsetting job losses in U.S. sectors that export. For Minnesota, this includes agriculture, which is highly dependent on exports. To the extent that soybeans and corn are fungible, globally-traded commodities, retaliatory Chinese limits on purchases from our country would have little effect. Brazil would fill in for us in China and we would sell our products to Brazil’s former customers. But for higher value-added products, such as processed or semi-processed pork, a trade war with China would hit Minnesota farming hard.
Most importantly, centuries of history demonstrate that trade allows resources to be used more efficiently. A return to high import barriers would reduce this. For the same use of resources, we in the United States would have fewer goods and services available to meet out needs.
These answers are far from exhaustive of all issues raised by these questions. And there are many more good questions embodied in campaign platforms. Wait for future columns to examine some of these.