Economics & Finance

Over at The Corner, Mark Krikorian suggested spending funds Bush earmarked for job training on “immigration enforcement” at work sites. The idea is to make cheap immigrant labor less available, and thereby to make domestic ex-convicts more attractive to employers.

But how about streamlining immigration procedures instead? If immigrants will work for lower wages than ex-convicts, artificially restricting the labor market to benefit ex-cons amounts to an indirect and inefficient subsidy. Krikorian ignores the costs to business, and hence consumers, of immigration restrictions that drive up labor costs.

He also ignores the possibility that employers prefer immigrants for many jobs at a given wage level. In that case the better course of action might be to eliminate, or at least lower, minimum wage rates that price less-productive and higher-risk workers out of jobs.

It’s obvious that most immigrants come to this country because they want to work, but we shouldn’t forget that American employers want to hire them. It should be easier for hard-working immigrants to come here without first spending years jumping through bureaucratic hoops.

Prison reform is a separate issue. Ex-convicts may be made employable via training programs (as Bush proposes), by lowering the minimum wage, or even by directly subsidizing employers who hire them. Attempting to increase demand for ex-con labor by driving illegal immigrants — many of whom are illegal mainly because it’s prohibitively difficult and time consuming to become legal — out of the labor market, is a poor alternative.

My last client was for a spin out of a small manufacturing business of an oil equipment giant. This subsidiary’s business isn’t really related to the parent’s, so they’re trying to create value through an IPO. I was there for the diligence part of “due diligence”, so really got to know the operations inside out. (The cynic in me says the partners are there for the “due” part, which is to collect the bills due, but that’s another story in itself.)

One thing that really stuck out in my mind through this assignment was that this was one of the last great American manufacturing jobs left. By which I mean a relatively uneducated employee could start on the company’s manufacturing line with a salary of around $22,000 a year, and work their way up. With hard work and patience, they could eventually work their way into a skilled job up the line with a respectable annual salary of $50,000 – $70,000 a year. Granted it would take many years, but it’s an accessible on-ramp into middle class for literally someone with a high school education. If the person were really dynamic and had the brains, they could even swing themselves into a management position at some point. The company had good benefits, including retirement and all the usual goodies. In a nutshell, a worker’s paradise for lack of a better term.

Looking over what they do and what they make, there isn’t really anything – save social responsibility on the company’s part – to stop them if they wanted to transplant their entire operations to China or India. They would save a bundle on labor costs, and given the highly automated nature of their machines, you really don’t need that much skill on the part of the workers. At the very least, none of the skills involved are above the aptitude of an eager Chinese or Indian. The double edge sword of modernization is also that since you want to make everything automated and dumb it down to the n-th degree to maintain high quality, you get to a point where you can literally take the brain out of the equation. So pay a Chinese or Indian $100 a month, and you decrease your biggest operating expense by more than 90%.

Maybe it’s because a lot of them are wrong. (1 Euro was worth about 1.22 US dollars when I made this prediction and is worth about 1.27 dollars now.)

It’s a truism that market trends often continue beyond our expectations. This is especially true in currency and interest-rate markets, because these are dominated by governments that have the resources to make markets go where they want them to — at least for a while. The Euro is backed by nothing more than political expectations about the behavior of the European Central Bank; the Euro’s current historically high valuation vs. the dollar is largely a function of the Bush administration’s economic ineptitude and politically-driven dollar bashing. These factors are subject to change and sooner or later the Euro will lose value against the dollar. I don’t know when this will happen or how high it will go first.

UPDATE: Paul Johnson makes a strong case for the Euro’s coming downfall, and argues that the U.S. should cultivate relationships with European countries that share its interests:

I’ve always maintained that the moment France finds theEU to be no longer of use, it will break it up. A German revolt against the payments system could provide that moment. Hostility to the EU is rising in France anyway, to the point where no referendum on the proposed EU constitution can be held there for fear it would be voted down heavily.

U.S. policymakers’ aims should be to forge close links with in-dividual countries that have strong common interests with America in wide areas of policy. Such nations include Britain, obviously (though not Ireland, which is sure to do the opposite of anything Britain does), Spain and Italy. The latter two are deeply resentful of French-German behavior and are anxious to have a powerful friend outside the EU to redress the internal balance of power.

Johnson’s argument isn’t new, but it appears that events may at last be catching up to it.

Lex and I had an exchange of emails about Bush. Lex argued that Bush is doing a great job all around. I agreed he is doing well on the war, but argued that he has been irresponsible on the economy and that I am concerned he might sign a reauthorization of the gun- and high-capacity-magazine ban in Clinton’s 1994 crime bill (which sunsets in 2004). Lex has blogged his response to me, and what follows is an edited version of my rejoinder to his response.

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Chicago Boy WV forwards an AP article that confirms what we all know: equity markets are thin and whippy because volume is down, and volume is down because everyone is waiting for the war.

– This NYT article discusses a report (pdf link) by a pair of economic researchers who think that war in Iraq is likely to have a significant negative effect on world stock markets. This goes against conventional wisdom that markets will rally in response to the war, but (therefore?) I think these guys may be right. It’s noteworthy that the researchers base their inferences on data from Tradesports.com, an Irish online betting exchange that I discussed in previous posts (here and here). The researchers argue that the Tradesports.com contracts may be more reliably predictive than are those on the respected Iowa Electronic Markets:

The Saddam Security is in fact more widely and frequently traded than the typical contract on the Iowa market. Wall Street is over-represented among market participants, and evidence from a variety of sources suggests that these data do in fact reflect underlying war probabilities.

Here’s an article about similar research one of the co-authors did on elections. One of the more interesting sentences:

Wolfers, an assistant professor of economics who as a youth worked for a bookmaker in his native Australia, followed a hunch about the predictive power of betting markets in forecasting the outcome of political elections.

So much for abstract theorizing.