January 17, 2011

Let's start connecting dots

Actual sign (of the times).
President Bush's pretend border fence was apparently too much for liberals. Meanwhile illegal immigration is rampant. Forget the liberal agenda for a minute, let's think about what's going on with the bigger picture. The bigger picture involves more than just immigration.  It involves the economy.  The two issues do not exist in respective vacuums - they are interrelated. 

Illegal immigration, predominantly Mexican in origin, exists because of what? America is the land of opportunity - they come to earn a living, be it by doing a legal job (illegally) or through illegal activities. Why in the U.S.? Because there is more money to be made here than in Mexico, which is a much poorer country economically. If Mexico were doing well there would be a minimal immigration problem. But Mexico is not doing well.  Mexican minimum wage varies by region but at the top end is shy of $5 US per day. In Texas, minimum wage is over $7 per hour. That's not a tough decision to make for a starving family. So the minimum wage is definitely a major factor in the illegal immigration problem.

Another related factor is the supposed undesirable jobs that workers in the United States seem reluctant to engage in - labor-intensive farm jobs (like picking fruit) is one example. These jobs pay either too poorly to attract Americans who may have a sense of entitlement to a better job than that. When illegal immigrants come to do these jobs, they are often willing to do them at below minimum wage too. Yet even without a legal minimum wage, they must surely be making more than they could back home. So minimum wage alone can't be the sole contributing factor, it impacts the wages paid for that sort of job, and the overall quality of life that results from being a wealthy nation is another attractive factor.

This is all pretty obvious stuff.  The real question is what can be done to create a more tenable equilibrium?  Certainly this problem wouldn't be such a big deal if Mexico were able to maintain a large middle class on its own.  Mexico needs to be a wealthier nation.  There's no quick fix for a problem like that.  But let's consider connecting another dot.

American manufacturing.  While American manufacturing is strong and growing, both jobs and the percentage of world manufacturing jobs are declining.  In an article in Salon last June, the following was noted emphasis added);
A new report by IHS Global Insight indicates that China is on the verge of overtaking the U.S. in manufacturing output. IHS states the value of China’s manufacturing output at $1.6 trillion, while the U.S. registers $1.7 trillion. With China’s recent decision to strengthen the yuan against the dollar, which boosts the value of their output in dollar terms, they are poised to close the gap within a matter of months.

The fact that no one seems concerned, or even surprised, demonstrates that the U.S. gave up this contest long ago. China’s dominance predictably shows up in lower–tech manufacturing in areas like textiles and appliances, while the U.S. retains dominance in high-tech applications like medical equipment, aviation and media-related processes. This list, once robust, has now become so short as to represent mere vestiges of economic capacity.

Manufacturing in China accounts for 34% of GNP. This share has grown by 14 percent, adjusted for inflation, since 2007. In the U.S., manufacturing is 13 percent of GNP, and has grown by just 8 percent since 2007.
The United States economy might just be a victim of its own success. The country has done so well in the charge towards high tech products and processes, it's effectively abandon the low tech end of the economy to a country that specializes in abundant chap labor.  It's not surprising that Japan has had problems since the 1990's with furthering its economy just as the U.S. has had.  Japan, being smaller, may have hit the same wall sooner than the United States.  China on the other hand, has resources to take up those abandon industrial efforts like textiles.  And concurrently it has visions of advancing its high tech sectors.  It's possible it may ultimately achieve success in both areas.

It's not ready for you.
The United States has the land and capital to compete with China and while it only has 25% of the population of China, it has enough.  Arguably,China has too much labor and will face higher social expenditures in the long run to support such a massive population.  But the United States should consider re-entering the lower end of the production spectrum.  What's wrong with making those cheap Wal-Mart shirts in Mississippi instead of China or Bangladesh?  This is an especially valid consideration when tied to the rising domestic population and the availability of cheap labor.  It would be tough, but possible.

Now to connect the dots.  What if the minimum wage were rolled back to $1 per hour (for example).  The illegal immigration would diminish but not disappear.  The ability for those wanting to emigrate to the United States would need to be made easier to get supplies of cheap labor.  Taxation would need to be eased on corporations to entice them into new manufacturing production.  This would increase GDP as shirts (again, for example) are made here for cheaper than they can be made and exported here from China.  This would help with the balance of trade and the current account deficit.

The problem with that sort of solution is that it is never going to happen. It requires rolling back the minimum wage - there would be a panic about existing salaries and wages being subject to deflation despite the fact that the jobs are apples to the oranges of low paying manufacturing jobs.  It requires upping immigration numbers.  That's not a widely appealing prospect, especially during a recession.  To counteract that there would be a need to build a real border fence and staff a real border patrol.  Requiring age restrictions on new entrants is going to be regarded as the ageism equivalent profiling.  Not many people would support these sort of drastic measures.  Many economists might even argue that there is nothing wrong with abandoning the low tech manufacturing to China because specialization among nations is good overall for consumers.  My argument would be that an economy needs to be balanced - not too much service versus products, not too specialized, and not too reliant on external inputs.  That gives it the best possible immunity to economic shocks to the system.  Diversify, just like the economy was a portfolio.

That's my thinking.  But like I said, the approach will never get off the ground - there's too many pain points for a population that wants a painless and relatively effortless greatness.  But it just seems like that's a recipe for a champion to be dethroned.  

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