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Economy Immigration Markets Truth

Illegal Immigration Drives Income Inequality

Rod Thomson

Applying some common sense to the immigration debate offers an immense amount of clarity. And it reveals errors at both ends of the argument: Immigration is a powerful engine for economic growth, but wrong immigration can be a recipe for low wages and the bottom end of the scale, high governmental costs and high wages at the top end of the scale.

And there is wrong immigration. We’ve been practicing it for decades and are reaping the results.

The unstated policy of the past 30 years or so has been to have a de facto open border with Mexico that allows somewhere between 11 million and 20 million illegal immigrants — one of many problems is that we just don’t know — to be here and work, live and enjoy the benefits of this country.

But they are allowed to come illegally with a wink and a nod because politicians have opposed enforcing U.S. immigration laws. Yes, we have some fencing and a Border Patrol and we do stop some and send them back — about 250,000 annually. But they come right back again and eventually get through. And apparently we miss most the first time. The proof that the de facto policy is open borders is the 11-20 million people that are here illegally.

In the rest of the picture, we have legal immigration that takes many years and is an arduous and expensive journey. But because we are controlling it, we are getting immigrants that as a batch are capable of not only improving their own lives, but those of other Americans.

In 2014, 29 percent of the 36.7 million immigrants ages 25 and older had a bachelor’s degree or higher, compared to 30 percent of native-born adults. While that lines up nicely with the existing American population, the bottom end still does not: 30 percent of immigrants lacked a high school diploma or GED certificate compared to 10 percent of native-born Americans.

What this overall picture shows is that we allow — legally and illegally — millions of low-end workers into the country, and that has enormous consequences for low-income Americans.

 

Compassion for whom?

Often the defense of keeping quasi open borders is that we are a “compassionate” nation. Well yes, that is indisputable by practically every definition of charity at home and around the world.

But in the case of immigration, compassionate for whom? While letting millions of poor, unskilled, illiterate immigrants in our country may be showing compassion toward them, it is demonstrably not showing compassion toward tens of millions of poor Americans.

Consider: Millions of uneducated, unskilled and illiterate immigrants from south of the border come to America seeking a better life — or for many, just income to send money back “home.” The economics is undeniable: Their very presence depresses the low end of wages. They not only take millions of entry-level jobs, but also keep all those wages low or even lower them.

So the jobs “Americans won’t do” theoretically, are actually only jobs Americans won’t do at the prevailing wages. Without all those immigrants — legal or illegal, but most are illegal — low end wages would rise. Perhaps a lot. They would have to for supply to meet demand. It’s basic economics and the effect trickles up to middle class incomes.

How much? It’s hard to say, but George Borjas, Professor of Economics and Social Policy at the Harvard Kennedy School of Government, writes in Politico: “Wage trends over the past half-century suggest that a 10 percent increase in the number of workers with a particular set of skills probably lowers the wage of that group by at least 3 percent.”

This explains the flattening or declining of wages in real terms of lower skilled American workers with the huge influx of unskilled workers, and it is a minor tragedy that so few understand the reality.

But this also explains a big social bogeyman in American politics: income inequality.

 

A surprising source of income inequality

In a recent fascinating EconTalk podcast, Russ Roberts interviewed Borjas, himself an immigrant and leading expert in the economics of immigration, and Borjas laid out a fascinating case.

First off, immigration has historically increased capital, even with those who bring nothing to the country. They work for companies who provide goods, a percentage of them start and build successful companies, and overall the economy grows and capital is produced. This dynamic, along with a fairly free market capitalism and rule of law, explains the dramatic economic engine that the United States developed into after the Civil War.

If immigration demographics of skill level roughly mirror the makeup of the United States, then the net impact on the country is economic growth and capital growth, without much relative change in distribution between low, middle and upper incomes. Roughly, it’s a win-win-win.

However, if the immigration demographics do not mirror the country, there will be income distribution impacts. In the United States in recent decades we have seen immigration heavily weighted toward the low income end, depressing wages as explained above.

But it also has a converse impact.

Because capital has been expanded with the immigration, the value of people’s skills at the high end of the scale has gone up. This is because there are relatively fewer of these people to provide their services in an environment of both increased demand for them and increased capital due to immigration that is not mirroring the country’s current demographics.

There may be other policies that drive income inequality in a trade-off for another benefit, but there can be little doubt that the millions of illegal immigrants at the low end not only depress low-end wages but drive up high-end wages and create income inequality.

No public policies can alter the laws of economics. They are immutable. But public policies can alter the laws of immigration, which can positively impact the economics and the people in the economy.

That’s a debate worth having.

Categories
Government Markets Obamacare Truth

Replace Obamacare with Free Market Principles

By Nate Davis

The key to any open market is “price discovery” — sellers competing on price to attract customers. On price discovery hinges every free market economic principle.

The problem with skyrocketing medical costs is simple. There is no price discovery. When was the last time you asked at your doctor’s office, “What will it cost?” Do you shop around for the best deal? Have you ever negotiated for a better deal? If you have insurance, probably not. Would you go to the tire store with the same attitude? Of course not. With medical services, most of us are participating in a quasi-socialist system, the opposite of a free market.  

Taming medical inflation is as simple as letting consumers out of the cages and giving them something for which to fight — specifically, the best price.

The government needs to employ seven strategies to empower the consumer. The simplicity of these proposals typifies free market solutions. Thousands of pages of legislation are not needed.

  1. Combining health savings accounts (HSA) with higher deductible insurance will reward consumers for shopping around and negotiating. Unspent HSA funds could be saved for retirement or withdraw, tax free, at any time as long as the minimum reserve is met. So, whatever a consumer saves, he pockets.
  2. Publish the price of everything. Consumers have to know what things cost well before a service is provided. We expect this of every other service to which we subscribe, and medicine should not be the exception. How could this be done? One idea is that each provider could be required to keep his price list on one or more collective websites where consumers can sort competitor’s services by medical code, scientific description, common name, price, etc. The key is to create a path to price transparency for consumers.  
  3. Legislators should pursue ways to give consumers information about the deals that others, particularly insurance companies and the government, have negotiated with service providers.
  4. The government should encourage non-traditional “insurance” providers, including non-profit insurance organizations and cooperatives. Consumers should be protected from loss in the case a non-traditional provider fails to pay, just as they are with for-profit insurance companies.
  5. Laws should make way for non-traditional services, including call-in doctors, software based robo-doctors and independent nurse practitioners. With disclosure of caveat emptor, liability for these new types of services should be very limited, almost nil.
  6. Certain medical emergencies are monopoly-like situations for the one receiving the service. The most expensive of these services warrant government price control so that returns are reasonable. Common sense says that a doctor does not need to bill $10,000 or more an hour in an urgent, major surgery, for example. Admittedly, addressing situations in which service providers have monopoly pricing power is the most cumbersome policy proposed here, but market principles necessitate that the government step in in some circumstances, and monopolies are one of those.
  7. Finally, increasing the supply of traditional medical practitioners will, over time, reduce fees. Some have suggested that there are simply not enough spots available at medical schools or in residencies.

True competition will drive providers to eliminate waste, and creative solutions will streamline everything from medical record databases to diagnosis to lab work to billing.

In the past, Republican administrations have focused on trying to develop a more efficient market for buying insurance, which does not help. The insurance companies facilitate the system of rapid inflation by creating a separation between patients and doctors. They subvert price discovery. Insurance companies may appear to negotiate for the buyer’s sake, but services are marked up so that they can be marked down. Large mall-based retailers do the same thing. They offer 30-50% of the “regular price,” but no one would think of actually paying the “regular price.” Insurance companies are not the solution to the pricing problem, so slight tweaks to the insurance market will not reign in medical price inflation.  

The free market based on price discovery has been and will be far more efficient and the most fair system on planet earth, and this will be true in medical services market as well. One should not underestimate the power of the consumer.

Nate Davis studied business and economics at Purdue University. He stepped away from trading futures contracts on the Chicago Mercantile Exchange to write a book called God the Parent which will be out this winter.

Categories
Economy Markets Minimum wage Truth

Does Raising the Minimum Wage Help the Low-Wage Earner?

The first thing to understand about the minimum wage is that it is a classic case of understandable emotionalism and frustration versus concrete data and economic reality. So the clearest explanation is a pros-and-cons listing.

On the pros side of increasing the minimum wage, people who are making it and who keep their jobs will make more money. Their increased earnings improve their purchasing power.

The cons side is a little lengthier.

Sharp increases in the minimum wage reduces the number of entry-level jobs

This, in turn, reduces the opportunity for unskilled workers to start getting experience. This is common sense. You cannot climb a ladder without stepping on the first rung. Minimum wage increases eliminates that first-rung opportunity for a certain number of mostly young or unskilled workers by making automation more affordable. It falls under the law of unintended consequences. The more a company must pay an unskilled worker, the more automation technology that was previously too expensive to make sense becomes affordable. Nine out of ten companies will go with the automation every time to remain competitive.

Minimum wage hikes raise prices for everyone

This naturally tends to hurt the people in the economic strata that the increase is most aimed at helping. WalMart’s everyday low prices will be higher if they have to pay every $10-per-hour employee $15 per hour. But it goes further. There were employees either doing better work or with more experience who were making maybe $14 or $17 per hour. They will demand, and deserve, higher wages. So this pushes wages higher up the ladder. Some will emotionally think this is win-win! But it’s closer to lose-lose. Every item from bread and milk and toilet paper to shirts, basketballs and trikes will cost more. McDonald’s value meals will be less of a value and gas prices will be higher than they otherwise would be. This will be true even when automation replaces some of those employees because remember, the increased employee costs are what made automation more affordable — but still more expensive than the previous cost for the employee.

This is not just theoretical

Seattle recently raised its minimum wage from $11 per hour to $15 per hour. In the first month after it was implemented, economists reported that 1,000 restaurant workers — just restaurant workers — lost their jobs. That was the largest one month job decline since the Great Recession while the overall economy was strong. But around the state of Washington, restaurant jobs increased 3.2%. Market forces are never trumped by government decree. And in some cases, a community can be so economically hot that it can absorb it — for awhile. But the out-of-balance market pricing will catch up eventually. This is market inevitability. So in a sense, dramatic minimum wage hikes create mini recessions among the low-wage workers even while increasing the costs of living for those same folks and everyone else.

Finally, the emotional tug is a bit of a false set up

Only a tiny percentage of people earning the minimum wage are trying to put food on the table. According to the Bureau of Labor Statistics, about 2.5% of all workers are on minimum wage. Of that, one-third are teens and more than half are under 25. So it is probably affecting only about 1% of the country’s workers over 25, and only a percentage of those actually have families. About two-thirds of all workers on minimum wage are second and third incomes in a family. So when the media does its inevitable story on some pitiable mother working two minimum wage jobs to try to make ends meet for her children, they are finding the needle in the haystack to stoke the emotional appeal that will actually hurt more of those same types of people.

The minimum wage’s positive impact on individuals is really quite minimal. As an aside, but so often the case, there is a political benefit to politicians who push the issue, playing to emotions over economic reality. But the reality of its negative impact on the broader economy, on all low-income workers and on companies competing globally is much larger — and fewer people are working and getting the opportunity to climb the ladder.