Saturday, December 10, 2005

Price-setting and illegal immigration

(Don't miss the follow-up entry, "When conservatives don't get it about illegal immigration.")

The labor theory of value, theorized by Adam Smith, David Ricardo and Karl Marx, states that an item's value is based on its cost of production. Hence, the selling price of an item is based on the cost of creating it.

The theory of subjective value, however, counters that the selling price is only what the buyer believes it is worth. While Adam Smith said that diamonds are more expensive than water because diamonds cost more to produce, subjective value explains it is simply because people value diamonds more. Subjective value also explains why, if someone has many carats of diamonds but no water, one will be happy to trade a great value of diamonds in return for a relatively small amount of water (and at a ratio people would usually consider "unreasonable").

Still, the costs of production are a factor. A business will not continue operating if marginal revenue (profit margins) falls below marginal costs, so when it incurs increased costs (not just from supply and demand with raw materials and wholesale costs, but taxation too), then it must pass the increased costs onto its customers in the form of higher prices. Perhaps marginal revenues are still positive after falling, but if they are too low, they may no longer be enough for the business to bother with its current inventory; it could make more by offering something else. In both situations, if customers are unwilling to pay the higher prices, they will simply not have the product.

This should seem axiomatic and evident, yet many Americans consumers don't recognize it when it happens in real life. A week ago, McQ at QandO noted that, thanks to the crackdown on illegal immigration, California and Arizona farmers can't hire enough people to pick their crops. Regular Americans won't take the jobs, even though the farmers have offered $8.50 per hour. McQ said, "I promise, the right wage will work. Two problems with that a) farmers don't want to pay it and b) consumers don't want to pay for the added cost. And there might be a (c) as well ... imported produce doesn't have the high labor cost that produce in the US has."

Before discussing a) and b), I'd like to promote an entry I made on the subject of c). Last August, I confronted a couple of Larouchers who were outside a midtown Manhattan post office. They were passing out fliers, hawking books and promoting their socialist agenda to anyone passing by. When one of them claimed the U.S. imports most of its own food, I called him on it. It's simply wrong, but as I explained in my entry detailing the encounter, it's not a bad thing for the U.S. to import food, either.

Now, it's not that the California and Arizona farmers don't "want" to pay higher wages. They can't, not if they want to stay solvent. They would be perfectly willing to pay higher wages if it meant attracting enough workers to stay in business, and if they could continue to sell enough strawberries to stay in business. Reality sets in when we see how true McQ's b) is. If the farmers paid Americans what the latter demanded in pay, the farmers must charge higher prices to continue with the same profit margins, and the produce would become too expensive to retain as much of its customer base. The reduced sales volume might force strawberry producers to raise their prices even higher to cover certain fixed costs (which because of reduced sales would become a greater percentage of total business expenses).

Just how much sales fall depends on the individual products' elasticity (demand's responsiveness to price changes). Take strawberries as an example. Some people would continue buying strawberries as they did before; some would cut back but still buy some; others would no longer buy any strawberries. I myself buy strawberries infrequently, and I just realized I can't explain why, or tell you when I last bought some. Even if they rose to $3 or $4 per pound instead of the usual $2 at my local grocer, I would probably still be in the first group.

So, out the window goes the claim of many conservatives, that illegal immigrants take jobs away from Americans. On the contrary, this shows that illegal immigrants -- the ones who come here with perfectly peaceful intentions of hard, honest work and not harming others -- do take many meneal jobs that few, if any, Americans will. These jobs are available, but Americans today don't want them, even at $8.50 per hour. Americans have such high opportunity costs today that it's not worth their while to pick berries. They would have seventy years ago. Steinbeck's The Grapes of Wrath was fiction but certainly accurate in its depiction of Americans traveling to California from Oklahoma and other parts of the Midwest, searching for any kind of work. Because they had low opportunity costs, there was an abundant labor supply, and thus low wages, for tiring work.

As I explained in my entry on the politics and economics of illegal immigration, I am very open on immigration. I support the ability of people to come into our country and become part of the workforce, but I also believe we need to register them as a matter of pure national defense. It's not just Tom Clancy fiction that Islamic terrorists are trying to sneak in through our border with Mexico, which is why I disagree with Don Boudreaux, who supports fully free immigration. He recently criticized the Minutemen, some of whom probably irrationally fear immigrants as a threat to American labor.

The Minutemen are a two-edged sword. Are they restricting the flow of cheap immigrant labor that makes it possible for us to enjoy cheap and abundant? Unquestionably, but if we make immigration easy (which does not require it being unrestricted) for honest people who simply want to work, then the Minutemen would become irrelevant insofar as the immigrant labor that keeps our produce affordable. On the other hand, they would still be valuable for the other two services they also provide: spotting violent criminals (especially drug traffickers that more than a few times have turned some border towns into shooting galleries) and defending private land from trespassers. Last August, I was one of an apparent few to note illegal immigrants trespassing on someone's ranch and eventually winning the ranch in a court ruling. It was private land. The immigrants had no right to be on it.

If illegal immigrants become legitimate workers, will they demand higher wages? Certainly. They would not have to take any old job picking fruit, afraid of being caught and deported. However, I doubt they would get more than minimum wage, certainly not $8.50 per hour. Their opportunity costs would still not be very high, because their job opportunities elsewhere would still not be that great. There would still be a language barrier, making it difficult for those who cannot speak conversational English (let alone those who are uneducated and lack special skills) to get more than minimum wage jobs in fast food or cleaning services, and there are only so many of those jobs to go around. Also, making it easier for immigrants to achieve "legitimate" status would encourage more to come to El Norte. I can foresee a tremendous supply, perhaps an oversupply, of cheap labor for our most meneal jobs, especially because the alternatives in their home country are generally deep poverty and no rule of law.

Why should we not want to welcome people who are simply seeking honest work? What should it matter that they will send much of their money to their home countries? As we've seen, they don't really take jobs away from Americans, and as a matter of economics, it's no more relevant what they do with their savings or consumption spending than what I do with mine. The dollars they export must return to us in one form or another, and in addition to the cheap agricultural products they help supply, their own consumption spending is very much a part of our economy.

There are valid concerns about our welfare state luring illegal immigrants, to which I have always had a simple answer. If we abolished our welfare state, for everyone and not just immigrants, then the only people who would want to come here are honest workers and criminals. And we can deal with the criminals. If we set harsh penalties for the crimes they commit, penalties that they deserve, they will think twice about coming. Execute them for murder. For other crimes, throw them in jail for 10, 20, or 30 years, as befits the severity of the crime, then deport them. With a free-but-regulated immigration system, they'll not bother going through checkpoints, so if we manage to catch someone at the border, we'll have a pretty good idea that he's up to no good. If criminals return and are caught again, if their previous crime was a felony, send them back to prison for life -- real life, with no parole and no deportation. Let's stop the Dukakis-like "catch and release" games.

On a side note: I've mentioned being born overseas in the Philippines and not coming to the U.S. until I was seven years old. In case anyone was wondering: I was born a U.S. citizen, not naturalized. I would not trade it for any other citizenship.



Anonymous Anonymous said...

The problem is that the welfare state has not been abolished. Hence the taxpayers pay incredible costs. The hospital where I work has millions of dollars a year in immigrant costs which are either uncompensated and hence eventually paid for by the insured, or paid for by medicaid which obviously does little or no screening for eligibility. Every child of an immigrant receives $10,000 per year of free public education. Just considering these two factors makes it obvious that the taxpayers get a raw deal from immigration as it stands now.

Sunday, December 11, 2005 3:39:00 PM  
Blogger Perry Eidelbus said...

My best friend deals with MediCal all the time, and she sees the same thing. What we save in cheaper produce is certainly offset by the expense of social services. But just like we can't be the world's policeman, we can't be the world's Santa Claus. We invite people to our country to join us, but not so we can feed and clothe them forever, or educate their children for free.

So I say again, if we abolish the welfare state, only two types of people will immigate: those who want to work honestly, and criminals.

Sunday, December 11, 2005 11:26:00 PM  
Anonymous Anonymous said...

Exactly. However, the welfare state is not going to be abolished anytime soon, it is actually expanding at rates never seen previously. Politically there is a bit more chance to restrict illegal immigration than the welfare state. Hence a taxpayer like myself will promote immigration restrictions as a primary goal since I see illegal immigration costing me money on literally a daily basis. The more fundamental principle is that immigration without the welfare state would be welcome and appreciated (I would suggest very few restrictions under those conditions) but until that is the way it is, illegal immigration is a classical example of the extended "robbing Peter to pay Paul" axiom.

Tuesday, December 13, 2005 5:18:00 PM  

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