Curious voters raise good questions about U.S. economy, trade

Election campaigns assertions prompt reader queries about economic realities. Here are some of the more frequent ones:

▪  Would a $15 minimum wage cause high inflation?

No, for a couple of factors. First, the number of people actually earning minimum wage at its current level is a small fraction of the total national labor force. Moreover, the total wages they earn is a very small fraction of total labor earnings. That said, a move to $15 is a large jump. People now earning between the current minimum and $15 one also would be affected. And to avoid excess “compression” of their own wage scales, some employers would give raises to people already above $15 to maintain a workable premium for supervision or experience. So yes, there would be “wage pressures” of the type 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 could create wage pressures, but the Fed could prevent an increase in the general price level — inflation — by suitably tight money. Don’t celebrate; while we could avoid inflation, businesses and households would pay higher interest rates.

▪  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 Sudeten 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 “due process” and “profiling” on language or appearance was common. Here this would be problematic. Millions have Hispanic names, including many whose first language is Spanish, yet are legal citizens. On the other hand, there are tens of thousands of Irish citizens 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 largest logistical efforts ever undertaken. 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 so many would reduce labor resources and consumer spending. 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.

The adjustment in certain businesses and geographic areas would be wrenching, however. Labor costs would go up. Getting your roof shingled or your children nannied would rise in price. Restaurants’ wage bills would go up, as would large dairy farms. 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. Some schools 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. The largest and most immediate effect would be that consumers would pay more for many items, including clothing, footwear, housewares and so on. The same would be true for many products used by businesses. The degree of these 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 imports from there already are largely manufactured in Vietnam, Bangladesh, Myanmar and other poor countries. They may be finished and packaged in China, but this would easily shift elsewhere. Other nations with no Chinese connection and only somewhat higher manufacturing costs would enjoy an opportunity to enter the U.S. market.

Existing U.S. producers now competing with China would raise prices and might hire more workers. Over time, new manufacturers might emerge, but 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 offsetting job losses in U.S. export sectors. These include 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. But for higher value-added products, such as processed or semi-processed pork, a trade war with China would hit farming hard.

Most importantly, centuries of history demonstrate that trade allows resources to be used more efficiently. Returning to high barriers would reduce this. For the same use of resources, the United States would have fewer goods and services available to meet our needs.

These don’t exhaust 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.

This story was originally published May 27, 2016 at 5:12 PM with the headline "Curious voters raise good questions about U.S. economy, trade."