Georgia’s law requires private and government employers to use E-Verify, a federal program, to ensure that workers are eligible to work in the United States. The law also increased the penalties for using fake documents to obtain jobs; offenders now face up to 15 years in prison and $250,000 in fines. Moreover, the law makes it a criminal offense to intentionally transport or harbor illegal immigrants, authorizes local and state law enforcement officials to arrest illegal immigrants and house them in state and federal jails, and requires documentation verifying legal status before people can apply for food stamps or government housing.

Alabama’s law goes even further than Georgia’s. It not only clamps down on illegal immigration, it also prevents illegal immigrants already in the state from establishing themselves. The law requires public schools to verify students’ residency status with birth certificates, bans illegal immigrants from state colleges, and outlaws transporting, harboring, employing, or renting property to undocumented immigrants. The bill also requires law enforcement officers to detain and investigate anyone they reasonably suspect is an illegal.

Opposition to the new laws emerged immediately in both states. In Alabama, churches and charities thought the wording so stringent that they worried about being implicated simply for ministering to illegal immigrants. Episcopal, Methodist, and Catholic church officials in Alabama sued Governor Robert Bentley and Attorney General Luther Strange. The American Civil Liberties Union (ACLU) of Alabama and Georgia, as well as other civil liberties advocacy groups, like the Southern Poverty Law Center, also brought forward lawsuits because the new law will likely result in racial profiling.

While the specific methods of implementation for Alabama’s and Georgia’s immigration laws could be altered in the hope of minimizing their social consequences by, for example, randomly checking people for citizenship instead of profiling people who look different or out of place, the negative economic results cannot be avoided or minimized unless the laws are ignored. New business paperwork, law enforcement, and incarceration will impose steep costs. All industries will suffer some negative effects, and the fortunes of a number of industries, such as agriculture, restaurants, landscaping, catfish and poultry processing, and construction, will be seriously compromised. Jeffrey Passel estimated in a 2006 study that across the nation, illegal immigrants make up 24 percent of the agricultural workforce, 17 percent of the cleaning industry workforce, 14 percent of the construction workforce, 12 percent of the food preparation workforce, and 9 percent of the production workforce.

The effects of the new laws are already being felt throughout the agricultural industry in both states. Illegal immigrants are now so afraid of imprisonment and deportation that they have stopped supplying their labor during harvest seasons. And it’s not just illegals who are fleeing the state. Green-card carrying immigrants also quit their jobs in protest and are leaving Alabama.

Wasted Crops

Alabama Live reports that central Alabama farmers requested an emergency suspension of the law because millions of dollars of crops were at risk of not being harvested due to labor shortages. In the Wall Street Journal, Alabama Deputy Commissioner for Agriculture and Industry Brett Hall was quoted saying: “We have a big problem on our hands. . . . [F]armers and business people could go under.” Economists say the law will hurt Alabama’s economy, but politicians such as State Sen. Scott Beason (a Republican) called their arguments “absolutely, positively wrong”. He also called the Alabama law “the biggest jobs program for Alabamians that has ever been passed.”

Meanwhile Jay Bookman of the Atlanta Journal-Constitution reports that Georgia’s law has already caused a severe enough labor shortage that farmers are at risk of leaving up to $300 million of crops rotting in their fields.

The construction industry, which has relied on immigrants in recent years, is also being hit hard. Despite the remaining slack from the housing crisis, delays in Alabama and Georgia are common. Nowhere is the story more tragic than in Tuscaloosa, Alabama, where residents and businesses downtown were hit by a tornado last April. Cheap, efficient labor was desperately needed. Yet reconstruction in Tuscaloosa has been slow and has lagged behind Joplin, Missouri, which was hit with a much more severe tornado a month later. While some of the delays in Tuscaloosa can be blamed on red tape, the harsh immigration law certainly has not helped matters.

Unambiguous Benefits

Despite politicians’ ill-informed rhetoric and pro-law rallies by Tea Party groups, the economics of the issue remain unambiguous: Immigration, whether legal or illegal, is a net general benefit for the people of a state or country. The argument is an easy extension of David Ricardo’s argument for free trade; blocking immigration hampers the free operation of an economy in much the same way that blocking trade does. It prevents resources, including labor, from being reallocated to those industries and locations where consumers most urgently want them.

The evidence shows that immigration does not take away jobs or even decrease wages for native workers. Julian Simon in a 1995 study found that immigration does not increase unemployment for U.S. citizens, even among minority and low-skilled workers. George Borjas and Lawrence Katz, in a study published in 2007, found that the only group adversely affected by immigration in the United States was high school dropouts, who saw a long-run 4.8 percent reduction in wages.

Borjas and Katz assumed that immigrant and native workforces do the same work, an assumption that does not bear out empirically. Even with that assumption, however, Borjas in 2008 estimated the net economic gain to native workers from immigration to be around $22 billion annually. When Gianmarco I. P. Ottavanio and Giovanni Peri corrected for this assumption in a 2006 study, they found immigration actually increased natives’ wages in the short and long runs because immigrants complement the native workforce.

More Workers, More Prosperity

As coauthor Luke points out from his farm experience, Americans usually don’t want the jobs that immigrants are willing to take.

The number of jobs in an economy is unlimited because our wants are unlimited. The more people working, the further down our list of wants we can get. Moreover, the more people working, the more potential customers—and hence business opportunities—we have. Immigrants buy or rent houses, purchase food and goods, and dine at restaurants. This is why the United States did not suffer mass unemployment as our population drastically increased over the last few decades, and why there wasn’t a jump in unemployment when women joined the labor force. (See graph.)

Another common argument for the Alabama and Georgia laws is that immigrants will flood U.S. cities beyond capacity in search of higher living standards. If people migrated en masse to those areas with the highest wage rates, one may wonder why all U.S. citizens don’t flood Malibu, California. The reason is that real estate values adjust upward to act as a natural brake on migration. In addition, while there is much need for immigrant labor in the United States, workers will come here only as long as the expected wage exceeds their domestic wages plus the costs of relocating. As more immigrants resettle, the relevant wage will drop, decreasing their main incentive for coming in the first place.

The Welfare Argument

A third justification for legal restrictions is to prevent immigrants from living off government programs. Anyone concerned about this should ask why the Alabama, Arizona, and Georgia laws focus almost all enforcement efforts on preventing immigrants from working. Although immigration laws have provided strong incentives for immigrants not to work, Simon’s 1995 study calculated that on net they paid more into government programs than they took out.

The justifications for Alabama’s and Georgia’s laws fail to pass the test of basic economics. Not only do these laws not bode well for the economy, they also tar the civil rights images of two states that historically have suffered poor reputations in that department. In a country founded on open immigration and the basic freedom of human association and commerce, laws of this nature are a travesty.

Despite the widespread acceptance of this narrative, there are many reasons to question whether it accurately portrays the motivations and hopes of some Progressive-Era reformers. In a 2005 article in the Journal of Economic Perspectives, “Eugenics and Economics in the Progressive Era,” the economist Thomas C. Leonard offered a completely new historical account of the sources of Progressive-Era labor legislation and the intentions of its supporters. Leonard’s work, including an important 2009 article coauthored with legal scholar David E. Bernstein for Law and Contemporary Problems, “Excluding Unfit Workers: Social Control Versus Social Justice in the Age of Economic Reform,” indicates that lurking behind what many people see as humanitarian reforms was something much uglier.

Leonard and Bernstein argue that some of the most prominent of the Progressive reformers were “partisans of human inequality.” They supported interventions as ways to forward their eugenic goal of a purer (that is, whiter) human race by eliminating the opportunities for the “unfit” to get meaningful work. The “unfit” here included not just nonwhites (especially African-Americans) but also the “insane,” immigrants (especially from central and eastern Europe), and in a somewhat different way, women.

In other words, what we today think of as the unintended consequences of laws supported by today’s well-meaning but economically uninformed Progressives were actually the intended goals of some of their intellectual ancestors a century ago. Early Progressive economists understood the effects of these interventions, but they thought those effects were desirable.

The Progressive economists of the late nineteenth and early twentieth centuries saw social science not merely as a means of inquiry and understanding but as a guide to social management and control. The advent and broad acceptance of Darwinism in the late nineteenth century, combined with a more general belief in the power of science and scientific management to solve social problems, led to a fascination with eugenics and the possibility of using public policy to ensure the “survival of the fittest” and the purity and strength of the human race. In the hands of many thinkers at the turn of the twentieth century, Darwinian theory became a rationale for using the power of government to weed out the “undesirable” and “unfit” in much the way that the new understanding of evolution was changing agriculture and animal husbandry. Eugenics clubs and societies grew rapidly and many of the leading intellectuals of the early twentieth century, including a number of well-known economists (such as John Maynard Keynes and Irving Fisher, perhaps the most famous American economist of the time), were active in these groups and saw their work through the lens of eugenics.

Eugenics and Intended Consequences

We look back on the eugenics movement with proper horror. Yet the same ideas that led to forced sterilization also led to restrictions in the workplace, because labor markets were one place where eugenics-oriented economists could combine their two interests. They recognized early on that legislation which  excluded the “unfit” from labor markets would advance their eugenic goals. Most of these laws were enacted at the state level during this period, but the New Deal era saw many of the same arguments applied at the national level.

Consider minimum wage laws, for example. Today we tend to think people support them because they believe a minimum wage is a free lunch that will help the poor. Classical-liberal economists have long criticized such regulations, arguing they are a perfect example of the law of unintended consequences and of the disconnect between intentions and outcomes. In a competitive labor market any worker who can produce value is hirable at some wage up to that value. Even workers with limited skills are employable. What the minimum wage and other mandated benefit laws do is create a minimum productivity criterion for hiring, closing off the labor market to workers whose productivity is too low to justify that cost.

Leonard’s work shows that some advocates of the minimum wage, including many giants of the early days of the economics profession, such as John R. Commons and Richard T. Ely, understood exactly what minimum wage laws would do and liked it. In addition, various Progressives and socialists who were not economists, such as Eugene Debs and Beatrice and Sidney Webb, also supported minimum wage laws and other interventions into the labor market precisely because they would weed out those who were deemed too stupid or lazy to compete in a market economy—in particular, women, immigrants, and blacks.

Leonard writes, “the progressive economists . . . believed that the job loss induced by minimum wages was a social benefit, as it performed the eugenic service ridding the labor force of the ‘unemployable.’” He quotes the Webbs’ statement that “this unemployment is not a mark of social disease, but actually of social health.” Further, he quotes Henry Rogers Seager of Columbia University, who suggested that minimum wages were necessary to protect workers from the “wearing competition of the casual worker and the drifter.”

A. B. Wolfe, who would one day be a president of the American Economic Association, wrote in the American Economic Review in 1917 (quoted in part by Leonard and Bernstein): “If the inefficient entrepreneurs would be eliminated [by minimum wages,] so would the ineffective workers. I am not disposed to waste much sympathy upon either class. The elimination of the inefficient is in line with our traditional emphasis on free competition, and also with the spirit and trend of modern social economics. There is no panacea that can ‘save’ the incompetents except at the expense of the normal people. They are a burden on society and on the producers wherever they are.”

In the context of the early twentieth century this group largely included nonwhites, immigrants, and women, as well as white males with physical or mental disabilities—the very same groups the Progressive eugenicists thought were diluting the quality of the human gene pool. Unlike their modern successors, these supporters of minimum wage laws were under no illusion about the effects of their proposed policies; they understood and intended the negative consequences that economists now go to great lengths to argue will be the outcomes of the policies favored by contemporary Progressives. A great irony of the Progressive movement for a minimum wage is that while it aimed at eliminating the “unemployable,” it in fact created a group of “unemployables.”

Leonard’s research shows that even professional economists, including some for whom distinguished prizes and lectures are named today, engaged in a manner of thinking about issues like minimum wages that was profoundly—even obscenely, given their explicitly racist goals—anti-economic. According to some Progressives, wages were determined not by marginal productivity but by the living standards to which a particular worker was accustomed. Competition from women, children, and members of “low-wage races” threatened the dignity of white male heads of households, the robustness of the white genetic stock, and ultimately the social fabric. Leonard and Bernstein quote sociologist Edward A. Ross, who wrote that “the coolie, though he cannot outdo the American, can underlive him.” If society was to endure, white male breadwinners needed protection from outside competition.

Economists today sometimes argue that subsidies or expansion of negative income tax programs like the earned income tax credit are far more efficient ways to help the poor than policies like minimum wages. Leonard and Bernstein point out that according to Progressive economist Royal Meeker, wage subsidies were undesirable precisely because they would create more employment, particularly among “unfortunates.” The virtue of the minimum wage was that it increased the supposed dignity of white labor while separating “unfortunates” and “defectives” from jobs they would have otherwise had. Minimum wages were supported by explicit racists seeking explicitly racist ends.

Fast-forward a few decades and the results are still the same even if the intentions are more noble. In a recent paper, “Unequal Harm: Racial Disparities in the Employment Consequences of Minimum Wage Increases,” William Even and David Macpherson argued that in states fully exposed to the most recent minimum wage increases, the law cost young African Americans more jobs than the recession has. We should judge policies by results, not intentions. As the economist Thomas Sowell might say, whether a policy is deemed “compassionate” or not should depend on its effects rather than the stated goals of its advocates.

Other Labor Market Interventions

Eugenics provided an allegedly scientific pretext for protectionist legislation—specifically, restrictions on immigration. The eugenicists supported immigration restrictions because they believed that members of “low-wage races” would compromise not only whites’ living standards but also whites’ genetic stock through miscegenation. According to them, immigrants and other outsiders (read: African-Americans) would degrade the labor force and debauch the species. The Progressives proceeded on a model of society in which a (white male) breadwinner earned a “family wage” sufficient to support a (white) wife and (white) children. Women were to fulfill their roles as “mothers of the race,” and children were to be trained to do the same in the following generation.

In his 2005 article Leonard pointed out that restrictions on child labor were enacted specifically to prevent the lower classes from putting their children to work. Presumably this would then cause them to think twice about procreating as well as limit their incomes.

The Progressives used the same techniques to reduce the labor market opportunities of women. Women were seen both as fragile—in need of protection from the rigors of the workplace—and as having a special role in bearing children and managing the household as “mothers of the race.” This was in contrast to the perceived “overbreeding” of nonwhites and immigrants from places like eastern and southern Europe. Progressive reformers tried to keep women out of the labor force by enacting a variety of “protective” legislation at the state level, including maximum hours and minimum wage laws for women, both of which were set differently from those for men. Such laws made women less desirable and more expensive employees, which limited their labor force participation—precisely the goal of the reformers.

The perils of the 1930s provided an opening for additional burdens on the labor market designed to exclude “unfit” workers. Leonard and Bernstein report that the Davis-Bacon Act, for example, was “passed with the intent of preventing itinerant African American workers and others from competing with white labor unionists for jobs on federal construction projects.” The amplification of interest-group politics was evident in the relatively transparent attempts by New Deal Progressives to protect special interests from low-wage competition from the South—from African-Americans and other “low-wage races.”

In the 1930s U.S. Rep. John Cochran (D-Mo.) said he had “received numerous complaints in recent months about southern contractors employing low-paid colored mechanics getting work and bringing the employees from the South.” Rep. Clayton Allgood (D-Al.) joined in: “Reference has been made to a contractor from Alabama who went to New York with bootleg labor. This is a fact. That contractor has cheap colored labor that he transports, and he puts them in cabins, and it is labor of that sort that is in competition with white labor throughout the country.”

The disemployment effects, for example, of the National Industrial Recovery Act (NIRA) were stark. Leonard and Bernstein cite one estimate that the NIRA’s “wage provisions directly or indirectly led to the dismissal of 500,000 African American workers.” They also write that “the American Federation of Labor took credit for the failure of the FLSA [Fair Labor Standards Act] to provide for a lower minimum wage in the South,” preventing southward capital flows.

The Progressives, the Modern Left, and the Dismal Science

This history can be read as the American version of what happened earlier in England. David Levy has shown that economics became known as the “dismal science” because classical-liberal economists (such as J. S. Mill) favored racial equality in a free labor market. Reactionary, elitist British Romantics such as Thomas Carlyle and John Ruskin argued that the free market, with its underlying assumption of equality, would eliminate racial hierarchies and bring a “dismal” future of racial mixing. It was the classical-liberal economists who were providing the intellectual support for that future.

The moral of the story is that, despite the modern left’s continued claim that the pro-market philosophy is racist, sexist, and xenophobic, history demonstrates that classical liberals/libertarians were proponents of equality and opponents of racism, and that those who viewed the races as unequal were likely to seek backing from the State, particularly in labor markets. The historical record of the left on these counts is much more mixed than it is willing to acknowledge.

Despite their odious views on race and the use of the State to enforce their eugenically informed vision of the future, Progressive-Era reformers were ahead of their modern liberal counterparts in one important way. They understood that free markets, especially free labor markets, are the enemy of racism.

So what? It’s darn near a miracle, that’s what, and would seem so to most inhabitants of today’s world and everyone in yesterday’s world. Leonard Read’s phrase “The Miracle of the Market” was only a slight exaggeration. I won’t attempt to describe how markets miraculously motivate and coordinate the actions of the thousands of people who cooperate in providing me with sardines. Nobody can do that better than Leonard Read did in his classic “I, Pencil.” If for some reason you haven’t read it, stop now and do so.

The increased quantity and quality of the conveniences available to us are really amazing. We should stop to think about them from time to time, paying special attention to the incentives that brought them about.

I have vague memories of the Fisher Brothers grocery store where my mother took me around 1950. The place was tiny and the selection limited. Looking back, I wonder about its cleanliness: The owners kept sawdust on the floor to soak up spills. Later they built a supermarket that was much larger but still only a pale precursor of today’s Safeway. A mix of union coercion, government regulation, and perhaps just plain custom kept all supermarkets closed after six p.m. Monday through Saturday and all day Sunday. A working woman had to scramble to get her shopping done before closing time or join the mob on Saturday.

Our local Safeway was remodeled a few years back. Over the perfunctory objections of the union, management installed scanners. Five checkout lanes replaced eight, and waiting time was drastically reduced. Now the clerks seem to enjoy swiping the goods over the scanner. Some do it with the grace and aplomb of a ballerina. Sometimes they finish faster than I can fumble for my credit card and swipe it through the machine.

Credit cards and the machines that accept them are themselves pretty amazing. There were no credit cards in the days of the Fisher Brothers, though they might have extended their own credit to a steady customer. The machine at Safeway validates my credit card and completes the transaction within seconds. How does it do that? More important, how does it do it economically, given the store’s razor-thin profit margins?

As part of the remodel, they laid faux wooden floors and installed special lighting for ambiance—a term that would have baffled the Fisher Brothers. They added a deli, an organic section, and a sushi chef. Those things fascinate me even though I don’t care to partake of them.

Then there’s the “Safeway Club” card. Most retailers offer such things these days. The bargains I get from using the card and the customized coupons are worth the minor sacrifice of privacy. So my eating habits are in a database somewhere. I care not.

As mentioned, supermarkets operate on notoriously low profit margins. From each dollar of revenue, Safeway brought 1.4 cents down to the bottom line in 2010. If someone pilfers a can of sardines, there goes the profit on about 70 more cans. And then there’s corporate income tax. Safeway’s rate was 33 percent for 2010. Of course, corporations don’t really pay taxes; people do. That burden falls on shareholders, employees, and customers, most of whom don’t realize this.

Competition is fierce. Lunardi’s on the opposite corner is a comparable supermarket that gives Safeway a vigorous run for its money. A few miles away, Trader Joe’s and Whole Foods are bustling with high-end customers. There is no Walmart nearby, but Costco and Kmart are but a short drive away. So Safeway struggles to position itself between low-end and high-end competitors.

Shrinkage is a problem for all retailers. This term refers to pilfering by customers or employees, and again the slim profit margins can easily get pilfered away. Safeway’s shrink rate is a company secret, as are the countermeasures it deploys, but it does report progress on that front.

How well have the owners of Safeway been compensated for risking their capital? Just so-so. Earnings per share dropped from $2.21 in 2008 to $1.55 in 2010 but are now recovering. Notwithstanding declining earnings, they have raised their dividend each year but it is still a rather modest 2.3 percent. Investment advisory service Value Line gives Safeway high marks for both timeliness and safety, but I’m not tempted.

Do I love Safeway? Not really. I’m very pleased about my relationship with it, but I reserve my gratitude for the fact that governments haven’t yet ruined it. It’s not for lack of trying—our local planning commission and planning staff are constantly harassing it with petty regulations and subsidized competition in the form of a weekly farmers’ market. (A tale of my experiences as a libertarian planning commissioner can be found at tinyurl.com/3z4pnf6 [pdf].)

Of course Safeway tries to entice me with marketing ploys. High-margin items are prominently displayed. You run a gauntlet of these displays to reach the pharmacy in the back. There are trashy magazines to look at in the checkout line and candy bars up for mindless grabbing. None of this bothers me. I’m all grown up and can take their enticements or leave them.

Am I loyal to Safeway? Not entirely. When I want a sandwich I cross the street to Lorenzo’s, a tiny family-owned shop. They’re a friendly and hard-working bunch, under the same ownership for 26 years, and they always seem to be busy. They have many loyal customers here in Belmont, and provide good job experience for the high school kids they hire, some of them sons and daughters of previous employees. And yes, they make good sandwiches. Watching them hustle is part of the fun of going there. So is the look in their eyes when they speak of the satisfaction they get from their work.

Sometimes I go to Kmart for bargains despite the distance. The clerks seem not terribly bright, and the clientele is mainly lower-class, but the savings on cat food and paper towels make the trip worthwhile. Sears and Kmart merged a few years ago, and the combined firm has been struggling ever since.

The stock fetches a hefty 38 times earnings and pays no dividend although its debt burden is low. Seems like a tempting short sale.

Besides the goodies available to me, I’m pleased about the influence I exert every time I spend a dollar in a competitive market. Ludwig von Mises called this “consumer sovereignty.” Actually this was a rare instance where Mises was somewhat off-base. As sellers of labor services, we naturally want high wages and salaries, but we are also highly motivated by nonmonetary considerations like working conditions. Dave and Marta, owners of Lorenzo’s, might well pass up better-paying jobs with Safeway or Walmart because they like their independence and their customer relationships. Recognizing that producers may pass up monetary profit opportunities in favor of other values, Murray Rothbard rejected Mises’s phrase in favor of “individual sovereignty.” Consumers and producers jointly determine what is produced—consumers don’t hold all the cards. Still, as consumers we exercise considerable sway over what gets produced and in what quantity and quality, leaving aside government intervention.

Speaking of Walmart, it has been trying to penetrate the San Francisco Peninsula for years but has advanced no farther than Mountain View, 35 miles south of San Francisco. The city of Belmont, 20 miles south, owns a piece of land that seems like a dandy Walmart site, but the political elite in our town wouldn’t allow it. A lot of Walmart’s customers would be lower-income people; around here, that means they’re likely to be minorities, particularly Hispanic people, so there’s an element of racism here.

A (Dollar) Tree Grows

Walmart has been held at bay, but Dollar Tree slipped past the barricades. This national chain acquired a moribund shoe store in our town and was able to convert it to its own brand without any special permits. Oh my, the howling! We’re Belmont! We want boutiques and artsy-craftsy shops! But Dollar Tree has done a land-office business since day one. It’s not uncommon to see a Mercedes or a Lexus in the lot, driven perhaps by some of the same howlers.

Its operation is pretty amazing. Everything is priced at a dollar (plus 9.25 percent on most items, extracted by you know who). I returned from my fact-finding trip with a peanut bar, a pack of four pens, a bag of non-licorice sticks, a bag of cashew pieces, a small bouquet of artificial flowers, a pack of four alkaline AA cells, 48 ounces of soda, and a can of Pringles-like chips, each one dollar. Some of this is junk, but shopping there is just so darn much fun! Management must be well aware of that psychology.

Dollar Tree must drive the good people at the Bureau of Labor Statistics batty. What would they do with four ball point pens for a dollar when compiling the Consumer Price Index? That’s perhaps a tenth of the inflation-adjusted price of 25 years ago. The low price is probably due to Dollar Tree’s acumen in scooping up remainder stocks at very low prices more than anything else. Yet this price would contribute to the idea that price inflation is low and therefore the Fed has done a good job of managing our money.

Dollar Tree’s margins, amazingly, are double those of Safeway. And they take credit cards. Though I feel a tinge of guilt when I swipe my card and trigger a merchant fee, I shouldn’t because handling cash is expensive too. It’s unfortunate that the new restrictions on bank debit-card fees may result in the end of debit card use at places like Dollar Tree.

The Great Recession of late is nowhere to be seen in Dollar Tree’s stock chart, and in fact the shares have tripled over the past three years. The downturn clearly attracted lots of cost-conscious customers. DLTR pays no dividend, although they have been buying back shares—a tax-efficient strategy often used in lieu of a dividend.

Perhaps the most important aspect of the three chains I have highlighted, from my point of view as a consumer, is the competition they face. That’s what keeps them scrambling to earn my dollars.

A field trip to a local Safeway, Kmart, or Dollar Tree, or one of their competitors, should be part of every economics curriculum, along with one to a mom-and-pop operation like Lorenzo’s. All of us when we go shopping should think about the amazing goods and services we get and the incentives that keep them coming.

Involuntary Unionism

Correctly understood, freedom of association is each person’s right to affiliate with any group pursuing legal ends that is willing to associate with him. Logically, this implies that each person is free to abstain from affiliation even if the group is eager for him to join. American unionism under the National Labor Relations Act is not based on freedom of association because where there is a certified union, individual workers may not abstain from associating. Moreover, American union law violates employers’ freedom of association by mandating good-faith bargaining. American unionism is involuntary unionism. Hazlitt put it this way:

In accordance with the principle of freedom of peaceful association, the law should not prohibit unions, but neither should it go out of its way to encourage them. Certainly the government should not continue, as it does in the United States, to turn itself in effect into a union-organizing agency and to force employers to negotiate with unions.¹

Voluntary unions would, according to Hazlitt, have legitimate functions to perform:

There are, no doubt, areas in which the activities of unions, wisely directed, could be on the whole beneficent—in negotiating with individual employers, for example, concerning hours of work and such conditions of work as light, air, sanitary arrangements, rest rooms, coffee breaks, shop rules, grievance machinery, and the like.²

In 1946 he stated that the legitimate functions of voluntary unions would include assuring “that all of their members get the true market value of their services.”³ That is, any worker who felt that he wasn’t being paid the full value of his services should be free to designate a willing union to bargain for him with an employer who was willing to bargain. He then went on to state that it is highly unlikely that most workers would be in such a situation because underpaid workers are a profit opportunity for other employers to bid wages up.

Government-Employee Unionism

Hazlitt thought that the principle of freedom of association also justified voluntary government-employee unions. However, he advocated strict limits to the scope of collective bargaining in the government sector.

They [civil servants], like private employees, should not be prohibited from joining unions. They, too, should enjoy the right to freedom of peaceable association. But no government unit for which these public employees work should be under any legal obligation whatever to recognize or negotiate with such unions. . . . It is . . . an absurdity for the public authorities to make agreements or “contracts” with these unions. The terms of employment should be set by the government directly with the individual employee.⁴

Hazlitt also held that third-party arbitration was never proper in the government sector.

If the government authorities “bargain collectively” with unions, and if the union leaders refuse to accept the final terms offered, must the authorities then turn to third parties and let them decide the terms? The elected representatives of the people have been elected to make these decisions. They cannot delegate them to private “arbitrators,” or be overruled by them. It is they, and they alone, who must take final responsibility for whatever terms of employment are set.⁵

Hazlitt held that “No public employee has the right to strike.” He quoted Calvin Coolidge to make the point: “There is no right to strike against the public safety by anybody, anywhere, any time.“⁶

The “Grand Illusion” of Labor Solidarity

Unionists contend that all workers have interests in common against employers, and that every worker is therefore duty bound to honor all picket lines and to join labor unions. In fact, as Hazlitt eloquently explained, unionism almost always pits the interests of some workers against other workers, both as workers and as consumers. In Economics in One Lesson he constructs an arithmetic example, assuming that all workers are unionized, to illustrate the logical fallacy of labor solidarity.⁷ His argument is based on relative real wages. Space does not permit me to quote him here, but I commend it to you. In 1973 he summed up his thinking on this issue:

Once it is clearly recognized that the strike-threat gains of each union are at the expense of all other unions in forcing their members to pay higher prices for products, the whole myth of “labor solidarity” collapses. It is this myth that has kept the strike-threat system going. . . . The mass of the working population has been taught to believe that all workers should support every strike . . . to “respect the picket lines” because “Labor’s” interests are unified. The success of any strike is thought to help all labor and its failure to hurt all labor.

This is the modern Great Illusion. In fact, each union’s extorted “gains” by raising a specific industry’s cost and therefore its prices, reduces the real wages of all other workers. The interests of the unions are mutually antagonistic.⁸

In 1971 Hazlitt wrote that employers should not be allowed to discriminate, in hiring, against workers on the basis of their affiliation or nonaffiliation with a union.⁹ In my view, truly voluntary unionism implies that employers must be free to operate on a union-only or union-free basis. The market will sort out what works from what doesn’t work on a case-by-case basis. Hazlitt agrees with Hayek on the point,¹⁰ so I guess I shouldn’t be too dismayed.

Notes

1. Henry Hazlitt, The Conquest of Poverty, Chapter 13, “How Unions Reduce Real Wages” (New Rochelle, N.Y.: Arlington House 1973), pp. 141–42.
2. Ibid., p. 141.
3. Henry Hazlitt, Economics in One Lesson (New York: Arlington House Publishers, 1979 [1946]), p. 141.
4. Henry Hazlitt, chapter in The Strike: For and Against (New York: Hart Publishing Co., Inc., 1971), pp. 80–81.
5. Ibid., p. 81, emphasis in the original.
6. Ibid., emphasis in the original.
7. Economics in One Lesson, pp. 143–45.
8. The Conquest of Poverty, pp. 135–36.
9. The Strike, p. 78.
10. F.A. Hayek, The Constitution of Liberty (Chicago: University of Chicago Press, 1962), p. 278.

According to Greenwald (who teaches in Columbia University’s Graduate School of Business) and Kahn (a former history professor), “writers on globalization” largely misinform the public. They fail to acknowledge earlier waves of globalization that Americans have survived and benefited from, and rely on “anecdotes” but not “harder, more representative, and more dispositive data.” As a result, the public overestimates the negative effects of globalization. The authors aim to more accurately describe and discuss globalization and its consequences.

They begin with the history of globalization. In the first phase (1820-1920), innovations in transportation and communication set the stage for world trade in commodities. Globalization receded during the second phase (1920-1950). Greenwald and Kahn recognize that tariffs, economic depression, and war explain part of that decline, but in their view the leading factor was innovation in the production of commodities, which increased incomes and encouraged manufacturing. The new manufactured goods were not readily traded, so countries exported and imported less output across borders. Globalization rebounded during 1950-2000 as “businesses learned to sell differentiated products in distant markets.”

Currently, the authors see the mix of economic activity changing again. In this phase, productivity gains are reducing the importance of the manufacturing sector relative to the service sector. Greenwald and Kahn reason that many of these services will still be produced in home markets and predict another round of decreasing globalization.

Economists generally advocate free trade as a policy that leads to higher standards of living, but Greenwald and Kahn argue that the causality generally runs the other way, with greater prosperity leading to increasing trade. Their data show that standards of living around the world have little to do with the pace of globalization, and they contend that living standards depend more on whether an economy is capitalistic or socialistic than the ebb and flow of globalization.

Few economists would disagree that market-oriented economies outperform socialist economies. The authors seem to be creating an unnecessary debate on that point. Far worse, however, they endorse neither free trade nor protectionism. “Like other economic policies,” they write, “trade policy is best decided by local authorities, responding to local conditions.” That’s a feeble argument. Local authorities are just as susceptible to special-interest pressures to restrict trade as are national ones, and the results are just as bad for consumers.

Free trade remains unpopular because the public worries about job losses. Greenwald and Kahn acknowledge this concern, but observe that what the public does not notice are the tremendous job gains. “During 35 years of increasing globalization,” report the authors, “employment in the United States actually increased by over 80 percent.”

Their analysis of employment data shows that many of the new jobs are in attractive categories such as management. Furthermore, globalization is not the primary destroyer of manufacturing jobs. By the authors’ calculation, globalization accounted for 35 percent of the manufacturing jobs destroyed from 2000 to 2006, while automation accounted for 65 percent. Might it not be that American workers will keep their jobs but suffer wage cuts due to globalization? In fact, the authors show, while real wages in the United States declined between 1970 and 1982, since 1983 they have been rising.

So far, so good. But Greenwald and Kahn then argue that because other countries are practicing “monetary mercantilism” we must take steps to reverse the U.S. trade deficit. They favor creating a new world currency, with the International Monetary Fund acting as a global central bank. What terrible analysis and advice! Trade deficits are not harmful; they’re the flip side of capital inflows that reflect increasing investment. Furthermore, there is no reason to believe that international bureaucrats can run a central bank any more successfully than can the bureaucrats in charge of our own inflation-prone Federal Reserve.

The basic premise of the book–that people should stop thinking about “globalization” as if it were the economic equivalent of the Black Death–is correct. The trouble is that Greenwald and Kahn let their erroneous notions (not all of them pertinent to globalization) get in the way of a truly enlightening work. We emphatically do not need any of the interventionist policies they propose (like the new international currency) or think are harmless (like local trade impediments). Economic freedom, including global trade, needs a full-throated defense rather than this rather timorous one.

In view of our long experience of near-perfect freedom to move about as each might choose, some of us may not realize the limitations that confront people in many other parts of the world who might like to move toward something better. Many who might choose to enter the United States , peacefully observing our laws and paying their own way, are denied entry. Our community slogans now seem to read: “Welcome to all peaceful and productive newcomers—except foreigners.” And a foreigner here is an individual who has crossed a special political line, supposedly which bounds “the land of the free”! 

If it is sound to erect a barrier along our national boundary lines, against those who see greater opportunities here than in their native lands, why should we not erect similar barriers between states and localities within our nation? Why should a low-paid worker—“obviously ignorant, and probably a Socialist”—be allowed to migrate from a failing buggy shop in Massachusetts to the expanding automobile shops of Detroit? According to the common attitude toward immigrants, he would compete with native Detroiters for food and clothing and housing. He might be willing to work for less than the prevailing wage rate in Detroit, “upsetting the labor market” there. His wife and children might “contaminate” the local sewing circles and playgrounds with foreign ways and ideas. Anyhow, he was a native of Massachusetts, and therefore that state should bear the full “responsibility for his welfare.” 

Those are matters we might ponder, but our honest answer to all of them is reflected in our actions—we’d rather ride in automobiles than in buggies. It would be foolish to try to buy an automobile or anything else in the free market, and at the same time deny any individual an opportunity to help produce those things we want. 

Our domestic relationships would be harmed seriously by restraints upon man’s freedom to migrate. But why shouldn’t the same reasoning hold for our foreign relationships? 

Fear No. 1: The “melting pot” might fail to assimilate newcomers. This notion has as little merit as the idea that a third-generation Yankee’s digestive tract isn’t capable of assimilating a bunch of carrots grown by a foreign-born Japanese or Italian vegetable gardener. The assimilation of a foreign-born person is accomplished when the immigrant willingly comes to America, paying his own way not only to get here but also after he arrives, and peacefully submitting to the laws and customs of his newly adopted country. Freedom to exchange goods and services voluntarily in the market place is the economic catalyst of the American “melting pot.” Christian-like morality is the social catalyst—and if it has come to be in short supply among native Americans, the blame for that shortage should not be laid upon our immigrants. 

Fear No. 2: The “wrong kind” of people might come to America. The danger that “a poorer class” might come from Asia or Africa or Southern and Eastern Europe and contaminate our society undoubtedly seems real to any person who thinks of himself as a member of a superior class or race. Such a person, like any good disciple of Marx, is assuming the existence of classes and is convinced that he is qualified to judge others and to sort them into these classes. 

Perhaps what is feared is the importation of a new idea of the relationship between the individual and his government. If that has been our fear, it very well might have been justified. For America has been rapidly substituting a socialistic State control for the traditional system of private enterprise. But let us not mistake persons for ideas; the ideas are the root of the problem. Migration of persons is not a reliable measure of the flow of ideas. 

Fear No. 3: Immigrants might deprive our own workers of jobs and depress the wage scale. The fear that immigrants might take the jobs of American workers is based on the fantasy that the number of jobs to be filled within our economy is strictly limited. Individuals still do—and undoubtedly always will—entertain unsatisfied desires for more and more goods and services, which industrious and ingenious individuals constantly are producing in response to opportunities. If there is freedom to think, to trade, and to move, then opportunities for new, creative jobs are not limited to the wilderness or a spot of idle land.

The fear that heavy immigration of workers would depress the wages of native workers is an outgrowth of socialist doctrine. Socialism is so concerned with consumption and “equitable distribution” that it neglects the source of production. It fails to recognize that there can be more and more to consume only if capital and tools are first produced to give leverage to the productive power of man. 

Can we hope to explain the blessings of freedom to foreign people while we deny them the freedom to cross our boundaries? To advertise America as the “land of the free,” and to pose as the world champion of freedom in the contest with communism, is hypocritical, if at the same time we deny the freedom of immigration as well as the freedom of trade. And we may be sure that our neighbors overseas are not blind to this hypocrisy. 

A community operating on the competitive basis of the free market will welcome any willing newcomer for his potential productivity, whether he brings capital goods or merely a willingness to work. Capital and labor then attract each other, in a kind of growth that spells healthy progress and prosperity in that community. That principle seems to be well recognized and accepted by those who support the activities of a local chamber of commerce. Why do we not dare risk the same attitude as applied to national immigration policy? 

Our collective abandonment of the economic system of the free market leaves for us the controlled communal life, where everyone wants to be a consumer without producing anything. 

The Basic Problem 

Our immigration policy merely reflects the existence of this serious internal problem in America . Our present policy toward immigrants is consistent with the rest of the controls over persons which inevitably go with national socialism. But the controlled human relationships within the “welfare state” are not consistent with freedom. Great Britain once thought she could deny freedom to American colonists. And now, her own people have traded their freedom for nationalized austerity. Even a “prosperous” modern America can ill afford traveling that same course. If we do, our community, too, will lose its capacity to attract newcomers. Then we wouldn’t need an immigration policy. But who among us would want to remain in a community where opportunities no longer exist?

Politicians can enact policies from two general categories to achieve desirable outcomes, including the creation of high-paid jobs: 1) policies that work, but in ways that do not benefit politicians, and 2) policies that don’t work (and typically make matters worse), but which create the mirage of working in ways that do benefit politicians.

Under prevailing democratic arrangements, electoral survival demands that politicians appear to promote desirable social objectives with direct and decisive action that caters to organized interest groups. Even when such special-interest policies are socially harmful, as they invariably are, they still do more to promote the interests of politicians than policies that would promote broad social benefits indirectly by creating a setting in which people can pursue their various interests through productive interaction. The political problem with the indirect approach is twofold: 1) the benefits are created so gradually and spread so widely that few will notice them, and 2) even if the benefits are noticed, it will be difficult, if not impossible, for politicians to claim credit for them. As F. A. Hayek pointed out in volume three of Law, Legislation and Liberty, politicians “who hope to be reelected on the basis of what their party during the preceding three or four years has conferred in conspicuous special benefits on their voters are not in the sort of position which will make them pass the kind of general laws which would really be most in the public interest” (emphasis added).

When we look at policies aimed at creating high-paying jobs, we easily find examples where politicians preferred conspicuous “benefits” that actually harmed the public to inconspicuous benefits that really were good for the public.

Many policies would increase the number of high-paying jobs indirectly, and many would appear to increase the number directly but actually reduce those jobs and lower wages. The former policies all do the one thing necessary for higher wages and salaries—increase labor productivity—while the latter policies all reduce, or retard, labor productivity, and so reduce wages below what they would be otherwise. The political bias against effective policies is readily apparent from the following list and brief discussion. Consider first some policies that would increase wages.

Eliminate restrictions on imports: One of the most effective things the federal government could do to increase labor productivity and wages is eliminate tariffs and restrictions on imports. Reducing import restrictions increases real wages in two ways. First, it reduces the price workers have to pay for those goods and services that could be produced at less cost in other countries than they can be domestically. Second, it increases the competition domestic producers face from foreign producers, which directs workers into those employments in which they are most productive–in which they have a comparative advantage.

Increased productivity is both necessary and sufficient to increase wages, at least in general. No serious person can deny that there are costs associated with workers moving to more productive jobs, or that a few people will be unable to find new jobs that pay as much as the ones they lost. But no economy can prosper without open competition, which keeps all resources, including labor, moving from less-valued to more-valued employments (in the eyes of consumers) in response to constantly changing conditions. And even those who end up with lower wages because of the particular adjustments they are required to make still earn far higher wages than they would in an economy where they, and everyone else, are protected against having to make such adjustments.

End corporate welfare: Import restrictions are a form of corporate welfare, but unfortunately not the only form. Eliminating all forms of corporate welfare would increase high-wage jobs by reducing taxes and their distorting influence (see below), and allowing both domestic and foreign competition to direct labor and capital into their most productive uses, as determined by consumers, not by politicians catering to their special-interest clients.

Lower marginal tax rates: No matter how efficient a government is, it has to raise revenue to finance its activities, and that means imposing taxes. Unfortunately, all other taxes reduce economic productivity by 1) putting a wedge between the price suppliers receive and demanders pay, thus preventing mutually beneficial exchanges from occurring, and 2) motivating people to make decisions to avoid taxes rather than create wealth. These distortions are commonly called deadweight losses and are an inevitable cost of taxes over and above the opportunity cost of the money raised. Reducing the deadweight loss from taxation increases the effectiveness of exchanges between employers and employees at directing workers to where consumers would value them most, and increases the general level of productivity, both of which increase the real wages of workers. So an effective way of increasing the number of high-paying economy jobs is by lowering the marginal tax rate and expanding the tax base by eliminating loopholes, reducing the deadweight loss of taxes for a given amount of revenue raised. The lower the marginal tax rate the smaller is the wedge between what sellers receive and buyers pay, and the fewer the tax loopholes (along with a low marginal tax rate), the less the tax benefit from diverting resources from high-valued production to low-valued tax avoidance.

Avoid inflation: The federal government can do a lot to increase high-paying jobs by avoiding inflation. Inflation erodes labor productivity and lowers real wages, just as surely as it erodes the value of the dollar. The most destructive thing about inflation is that it distorts the information communicated by market prices, reducing the ability of market exchange to direct resources, including labor, into their most productive uses. Just as a yardstick ceases to be useful for measuring and comparing distances if its length is subject to sporadic change, so market prices are less useful for expressing and comparing values when the value of money is subject to sporadic changes. Also, inflationary distortions make it almost impossible to know what interest rate is appropriate when people borrow and lend money to finance long-term investments. So in an inflationary environment, many efficient capital investments that would increase the future productivity of labor—and increase future wages—never get made.

Avoid the Pork

Reduce pork-barrel spending: There can be no doubt that reducing pork-barrel spending would increase real wages by increasing the productivity of the economy. A major portion of federal spending is motivated by the ability of particular congressional districts or organized interest groups to capture benefits by spreading the costs over the entire taxpaying public. With those receiving most of the benefits paying only a small portion of the cost, the pressure is expand spending well beyond the socially efficient level. Resources are transferred from higher-valued uses to lower-valued uses (for consumers), reducing the real value of salaries and wages. Excess government spending is a negative externality, just like excess pollution, and the former is no less to erode real wages than the latter. If politicians worried about the negative externalities of pork-barrel spending as much as they claim to worry about those of excess pollution, the result would be less wasteful government spending and more high-paying jobs.

Eliminate the minimum wage: This would increase wages by increasing the human capital that, for many young people, is best acquired through on-the-job training. Minimum-wage legislation clearly creates unemployment among young people who, for a variety of reasons, including being trapped in dysfunctional public schools, don’t have skills worth the legally imposed minimum wage. The result is not just unemployment, which may be a short-term problem, but a reduction in the opportunities for many young people to acquire the skills and attitudes that will make them more productive over the long run. Even those who do get a job at the minimum wage are less likely to get one in which the employer invests in them by providing training opportunities at the cost of some immediate output. The minimum wage prevents many young people with little opportunity to continue their formal education to develop the skills necessary to earn a good income in the future by working at a low wage when they have few financial responsibilities. Eliminating the law would make it legal for our less-advantaged youth to have much the same opportunity for higher-paying future jobs as more fortunate youth get through college subsidies.

Reduce the power of labor unions: Eliminating some of the legislative privileges that empower labor unions would be an effective way to increase wages. Labor unions can, and do, increase the wages of some workers. But they do so by reducing the wages of others by enough to reduce wages in general. Because of legal privileges that unions receive, it is difficult (and sometimes impossible) for workers to qualify for some jobs without being members of a union. Thus unions can increase some wages by restricting entry into some occupations and rendering those workers less efficient with rigid work rules.

All these practices reduce the productivity of the general labor force. Restricting entry into some occupations increases the wages of union members who work in those occupations, but it increases the number of workers in other occupations where their skills are less valuable. This not only lowers their wages, but reduces the productivity and wages of workers in general by preventing them from moving into their highest-valued employments. By reducing the flexibility of employers to shift workers from one task to another in response to changing conditions, rigid work rules also reduce the productivity, and wages, of workers.

Industry-wide labor unions have also lowered general economic productivity through cartelization of workers. If the firms in an industry explicitly agreed to reduce their output to increase their prices, they would be in clear violation of antitrust law (from which unions are exempt) and subject to harsh penalties—including prison time for senior managers. On the other hand, the firms in an industry have little to worry about if output is reduced because of a strike by its union. So both industry profits and union wages can be increased by the inefficiencies of a cartel “agreement” that remains within the law only because it is brokered by a labor union. (I am not arguing for antitrust laws. Even if antitrust laws could be rendered immune to political considerations, which they have never been and never will be, they would still reduce the competitiveness of the economy because of the static textbook notion of perfect competition on which they are based.)

All these union-induced inefficiencies reduce output below competitive levels and therefore reduce real wages. These inefficiencies would be reduced and the real wages of workers would be increased by reducing the power of labor unions.

As I have noted, all the policies discussed have one thing in common—they would increase wages by increasing economic productivity. They also have another thing in common—they would increase wages broadly, indirectly, and gradually by establishing an environment in which people productively cooperate with one another through markets in ways that best serve their collective interest. This means that the better jobs and higher wages will not be readily noticed, and even when they are, they will not be seen as the result of can-do government actions for which politicians can easily take credit. So the effectiveness of these policies at creating the type of jobs that politicians are constantly promising to provide does not translate into much political support for them. Politicians would rather receive credit for appearing to create better jobs with counterproductive policies than not get credit for policies that actually allow better jobs to be created. We now consider some policies that are politically popular because they give the appearance of increasing high-wage jobs while actually reducing them.

Policies That Reduce Wages

Restrict imports: When politicians argue for increasing an import restriction or against reducing a restriction, they invariably claim that they want to protect high-paying jobs. An import restriction does protect some high-paying jobs, but at the cost of reducing the emergence of other, even higher paying, jobs, because of the general reduction in productivity that lowers average real wages. But the protected jobs are currently held by relatively few identifiable workers who are typically well represented politically and are fully aware of the benefits they receive from politicians who vote for a trade restriction protecting them from foreign competition. The resulting loss of even more productive jobs can be safely ignored by politicians since it is widely dispersed and not easily noticed—it is hard to miss what we never had. And even if the loss is noticed, the cause—the import restriction—is not easily seen.

Put corporations on the dole: Politicians oscillate between attacking business and praising it, depending on the political issue and climate. But they are constant in dispensing large quantities of corporate welfare that the general public pays for through higher taxes and lower economic productivity. The most common justification for this welfare is that it creates jobs. And indeed it does, but only by destroying the chance for more productive jobs that would have emerged if competition had not been restricted and consumers had been allowed to spend the money paid in taxes to buy what they valued most instead of paying for corporate welfare. Unfortunately, the jobs that are created are visible and easily seen to be the result of government policy, while the higher paying jobs that don’t emerge are invisible—it is difficult to miss what never was created.

Raise taxes: Politicians often call for higher taxes as the best way to promote economic growth and create more and better jobs. Supposedly higher taxes will reduce the budget deficit, which will reduce interest rates by reducing government borrowing. The popularity of raising taxes to increase good jobs seems to contradict the thesis of this article. It suggests that politicians are willing to take an unpopular action—raising taxes—to provide a general benefit—widespread economic growth and job creation. But raising taxes is not an effective way to increase economic growth and create jobs. Even if raising taxes did reduce the federal budget deficit, it is not likely to have much effect on interest rates. Interest rates are determined in a worldwide capital market, with rates often falling when the federal budget deficit is increasing and rising when it is decreasing. Second, increasing taxes seldom reduces the budget deficit, at least not for long. Even when higher taxes raise more tax revenue, the additional money is invariably used to expand government spending and pork-barrel programs, with spending growth typically outpacing revenue growth. The effect is to substitute public spending guided by political influences for private spending guided by economic considerations—a sure prescription for reducing productivity and lowering real wages. Also, with higher tax rates, special interests are willing to pay politicians more for tax loopholes, which introduce more productivity-reducing distortions in the allocation of spending and investments. The political cost of increasing taxes is more than offset by the political benefits from the plausible pretense that good jobs are being created while securing more of the national income to buy more electoral support.

Increase government spending: The list of benefits from more spending on highway construction, recycling, education, agricultural subsidies, parks, airport expansion, water-diversion products, and so on always includes additional jobs. But the jobs created are a major cost of these spending projects, not a benefit. The jobs necessary to build a road or recycle aluminum cans are filled by workers who are not producing value in other activities. Unless this cost is considered, the jobs created will be destroying wealth at the margin, since the value created by workers on government-funded projects will be less than the value (in terms of consumer preferences) they could be creating elsewhere. Political incentives make this misallocation of labor inevitable.

Regulate labor markets: Politicians can take credit for protecting and creating jobs by imposing a number of productivity-reducing restrictions on labor markets. To list two: affirmative-action enforcement pressures employers to hire workers on the basis of the racial mix of the communities in which they operate and increases the difficulty of dismissing unproductive workers; politically mandated employee benefits reduce the flexibility of employers to adjust compensation in ways that attract the best mix of workers to their firms at the least cost. (We’ve already discussed the minimum wage.)

The advantage of the policies that would create more high-paying jobs indirectly is that they do so by creating a positive-sum setting in which people interact in increasingly productive ways.The same increase in productivity that raises real incomes also increases the general level of wealth, enhancing our lives in a host of ways. For example, as wealth increases, infant mortality decreases, life expectancies (and the quality of life) increase at all age levels, poverty declines, the environment becomes cleaner, access to the arts increases, more leisure time becomes available, and jobs become safer, more pleasant and higher paying.

The problem with policies that try to create more high-paying jobs directly is that they do so with government transfers and protections that are negative-sum. Yet this negative-sum approach is politically compelling because politicians receive much of the credit for the benefits, while receiving little of the blame for the larger losses.

The first topic is best expressed as a question: how much of our material standard of living do we owe to research funded by the government? Nobel-laureate economist Joseph Stiglitz asserts that we owe a great deal to government funding:

“While free marketers rail against industrial policy, in the US the government actively supports new technologies, and has done so for a long time. The first telegraph line was built by the US federal government in 1842; the internet was developed by the US military; and much of modern American technological progress is based on government-funded research in biotechnology or defense. (“Do as the US Says, Not as it Does,” Guardian, October 29, 2003.)”

But how much is “much”? Does 1 percent of our material standard of living spring from government funded research? Or 10 percent? Maybe 50 percent? More? It’s an impossible question to answer theoretically, and a very difficult one to answer empirically.

Stiglitz is correct that we can point today to many useful technologies that first sprung into existence because of government encouragement. But how would the resources marshaled by the government to promote these specific technologies have been used had they remained in private hands? Would all of these resources have been consumed frivolously—say, on extravagant lawn parties for the idle progeny of the superrich—so that they would forever have been lost to research? Or would they instead have been directed to research that, because these resources were in fact confiscated by government, was never undertaken or was undertaken later than otherwise?

And what of the trillions of dollars worth of resources confiscated over the years by government and spent in ways that no one regards as research-oriented: programs such as farm subsidies, foreign “aid,” and welfare? Even if you think these programs to be justified, they take resources away from the possibility of being used on research.

Finally on this topic, we must ask to what degree has the expansion of government’s power prompted firms to transfer resources from efforts aimed at making better mousetraps into efforts aimed at making political hay? A government that refuses to pander to special interest groups gives firms no incentives to spend resources lobbying for goodies such as tariff protection or subsidies. Resources that might otherwise have gone into lobbying are instead spent by firms on R&D and other efforts to lower production costs and improve product quality.

But because government today routinely doles out subsidies and monopoly privileges to firms and industries that lobby for such artificial entitlements, government’s actions on this front reduce private sector research efforts. But by how much?

Bottom line: any proper reckoning of government’s contribution to the scientific research that makes our opportunity costs of all resources confiscated and diverted over the years by government. A careful, thorough empirical investigation of this question would be most welcome.

Workers and Wages

My second candidate for much-needed research poses an even greater challenge. It is to develop a more complete and correct elementary analysis of the effects on wage rates of changes in the supply of labor.

The standard analysis, I’m sure, is wrong. That analysis is one of simple textbook supply and demand (a tool, I hasten to add, that I generally find enormously helpful). According to this standard analysis, if the supply of labor increases, wages fall, just as a greater supply of anything causes its market value to decline. So, according to this textbook tool, a larger labor supply makes workers worse off. More immigrants, more women entering the work force, a higher birth rate—all should reduce real wages.

And yet, even the most casual observation belies this textbook prediction. Real wages in the United States today are at an all-time high, despite continued immigration of new workers and despite the massive entry, since the 1960s, of women into the workforce. Likewise, real wages in New York City are much higher than real wages in New Orleans, even though New York’s working-age population is larger than New Orleans’s.

Why? I have some hunches.

Workers are not always substitutes for each other. Instead, workers often complement each other. Consider the simple example of the teamwork necessary to lift a 400-pound boulder onto a truck bed. Worker Jones can’t perform this task alone. But if worker Smith shows up, then the two of them working together — as a team, complementing each other — can lift the boulder into the truck.

Much more fundamentally, however, is an insight that I regard to be among the most important and pioneering of the twentieth century, and yet one that has not even begun to be incorporated into economics. This insight is the late Julian Simon’s understanding that the ultimate resource is human effort and creativity.

A greater supply of workers means far more than additional backs and hands available to perform existing tasks. It means a greater supply of human initiative to discover how better to organize work so that each worker is more productive; it means an increased flow of creative ideas about what new goods and services might better satisfy consumers; it means more human ingenuity at figuring out how resources and capital can be used in previously unimagined ways to lower production costs and expand output.

Of course, mainstream economics can qualify and contort its textbook theory into consistency with the observed fact of steadily rising wages. But the result is artificial and not compelling. I have a powerful hunch that thoroughly reworking labor economics so that it rests squarely on Julian Simon’s insight will revolutionize this important branch of economics. This Simonesque reformulated economics will then be a broad platform from which insights that are impossible today will pour forth.

So, to you graduate students out there, get to work!

On January 7 President Bush announced what appeared to be a sweeping plan to grant de-facto amnesty to millions of illegal aliens working in the United States. In fact, it was little more than a long-term worker-visa program that barely increased the ability of employers to hire whom they wished, and came nowhere near recognizing the right of individuals to move where their abilities take them.

Nonetheless, this has not stopped commentators ranging from conservative radio hosts Laura Ingraham and Michael Savage to writers such as Pat Buchanan and Mark Krikorian from heralding the end of America as we know it. Though it might be easy to flippantly dismiss such warnings, many of their arguments are substantive and important. Due to the paternalism of contemporary government, the proposal to accept the “illegals” is fraught with problems.

But apart from these practical, day-to-day considerations, and separate from the debate over whether immigrants are a net gain or loss to the coffers of the federal government, there is a larger, timeless issue that lies at the heart of the anti-immigrationist assertions. It is the sweeping claim that immigrants suppress American wages and take American jobs. The argument is used to pander to blue-collar workers and high-tech employees alike, and it is bandied about far too frequently by those who should know better.

Perhaps the most egregious example in this regard is Krikorian, who has a deft and stylish way of selectively presenting arguments made by free-trade advocates and using their words to bolster his own anti-free-trade position.

In his January 7 National Review Online article about the President’s plan, Krikorian (a visiting fellow at the Nixon Center and director of the Center for Immigration Studies) paints a rosy picture of an America that restricts immigration. According to Krikorian, if the U.S. government were to enforce more stringently the nation’s immigration policies, life for American workers would improve: “[E]mployers would respond to this new, tighter, labor market in two ways. One, they would offer higher wages, increased benefits, and improved working conditions, so as to recruit and retain people from the remaining pool of workers. At the same time, the same employers would look for ways to eliminate some of the jobs they now are having trouble filling.”¹

This hopeful passage brings some nagging questions to mind. Foremost among them is where employers will get the expendable capital to offer higher wages, increased benefits, and improved working conditions. Are they operating on such high profit margins that they can absorb the new costs that Krikorian would dictate?

He seems unconcerned with this minor problem, and continues to tread along his utopian path. “The result would be a new equilibrium,” Krikorian says, “with blue-collar workers making somewhat better money, but each one of those workers being more productive.”

It is interesting that he should feel so free to tell employers and workers how their businesses will operate and that they will achieve a “new equilibrium” that he prefers over the one the employers and workers could establish without his help. Besides the fact that his assumption regarding wages is completely erroneous and reflects little understanding of profit, marginal costs, and the productive use of capital, he assumes employers can simply increase these wages without any consideration of the most important player in the free-market economy, the consumer.

Krikorian conveniently neglects to consider how consumers would respond to the forced higher costs of products. Perhaps this is because he believes the heady notion that costs just wouldn’t go up. As he says: “[S]ince all unskilled labor—from Americans and foreigners, in all industries—accounts for such a small part of our economy, perhaps four percent of GDP, we can tighten the labor market without any fear of sparking meaningful inflation.”

Such assurances usually don’t sit well with people who understand why we work to decrease costs of production in the first place. This is a basic concept that nearly every consumer going to the market understands.

Less, Not More

The purpose of a productive economy is to make things easier, not harder, to buy; to let us use less, not more, of our toil to get a product. To embrace Krikorian’s naïve notion would be to accept the idea that the farmer should take a wheel off his plow, because, though the machine will move more slowly and he will have to work harder to get his produce, it will employ an American to carry the wheel-less side of the plow, or better yet, force the farmer to hire a team of experts to develop a new, floating plow that may cost him too much to stay in business, but will employ high-skilled natives.

This must be an attractive line of thinking to Krikorian, for in his attempts to supersede the preferences of consumers and businessmen as reflected in the market, he cites as inspiration one of the most legendary free-market thinkers, the late Julian Simon, and his work on scarcity.

In his breakthrough 1981 publication, The Ultimate Resource, Simon revealed that most of the leftist fears regarding depletion of natural resources were unfounded. Simon understood that the relative scarcity of resources leads to greater human innovation, which leads to greater productivity, greater market abundance of old and new resources, and improved living conditions.

As Krikorian notes, Simon spelled it out clearly when he said: “It is important to recognize that discoveries of improved methods and of substitute products are not just luck. They happen in response to ‘scarcity’—an increase in cost. Even after a discovery is made, there is a good chance that it will not be put into operation until there is need for it due to rising cost. This point is important: Scarcity and technological advance are not two unrelated competitors in a race; rather, each influences the other.”²

This is absolutely correct. Unrestrained human ingenuity lets us thrive in a world of limited resources. But Krikorian seeks to use this discovery to justify depletion of the U.S. labor force! Citing raisin growers in the United States and Australia as comparative examples, he explains that in Australia, a nation with a small workforce, raisin growers were forced to develop new techniques to harvest their product. This innovation led to greater productivity—more raisins being harvested per worker. In the United States, he argues, a surplus of low-wage, immigrant workers suppressed this development, and thus U.S. raisin growers did not adopt the new, productive methods that arose in Australia.

But implicit in his argument is the fact that U.S. employers did not have to develop those new forms of harvesting, because their relative costs were lower and labor was not scarce. According to Krikorian, the scarcity of labor in Australia led to technological progress, the kind of thing Simon would have applauded, and the surplus of labor here led to technological stagnation, which hurts an economy in the long run.

By embracing the idea that scarcity leads to innovation, Krikorian assumes that a man like Simon would have welcomed greater scarcity. Under Krikorian’s paradigm, we ought to eliminate as many resources as we can, be they labor resources or natural resources, because their scarcity will lead to technological innovation and greater productivity.

In other words, burn down the forests with eager dispatch. We will come up with new alternatives to lumber.

Need-Based Decisions

Krikorian makes the dual mistakes of assuming better market knowledge than the U.S. raisin growers themselves and of confusing all technological innovation—at all times—with a greater productive use of capital. While the needs of Australian raisin growers led them to come up with new ways of harvesting their crops, and these may have been more productive for them, U.S. growers made their decisions based on their own needs. To assume for U.S. growers the responsibility of how best to spend their money and invest in resources is not only arrogant; it also stifles the cost analysis that leads to innovation in the first place.

This may all seem academic at first glance. But it is important. As it happens, Krikorian’s argument has been widely disseminated, not only in the online and print versions of National Review, but also in the broadcast media, where Rush Limbaugh read his polemic on the air to millions of listeners. It is pervasive, and it is ominous.

Krikorian’s messy reinterpretation of Simon’s logic is really a tool to support his belief that immigration is not only unnecessary, but that it should be curtailed. At the core of his thinking, and of that of people such as the usually insightful Laura Ingraham, is the honest belief that foreign laborers suppress native wages and harm the economy as a whole.

Perhaps not coincidentally, it was Julian Simon himself who conducted probably the most exhaustive survey of all economic data regarding these claims, and his work refutes Krikorian on every level. In his landmark 1995 paper titled “Immigration: The Demographic and Economic Facts,” published by the Cato Institute and the National Immigration Forum, Simon looked at the available studies, and concluded: “The studies uniformly show that immigrants do not increase the rate of native unemployment in the aggregate. The reader need not go further if the conclusion is all that is desired.”³

However, if one wanted to go further, one could discover that immigration also does not, in the aggregate, suppress wages for native workers. Immigration has a slight dampening effect on wages only in certain sectors of the economy, typically those sectors that depend on immigrant labor. These decreases in wages are often very slight, and the wages rise over time as each sector sees economic improvement. As one study reported: “[T]he evidence we have assembled for the 1980s confirms the conclusions from earlier studies of 1970 and 1980 census data. In particular, we find little indication of an adverse wage effect of immigration, either cross-sectionally or within cities over time. Even for workers at the 10th percentile of the wage distribution, there is no evidence of a significant decline in wages in response to immigrant inflows.”⁴

Data like these often go overlooked by commentators. With such information on hand, readers would be able to dispel error and seek out the truth, and in the political realm, this practice is not just an academic exercise. When codified, assumptions can cause great damage. Many people assume that an influx of immigrants will harm the bargaining power of the American worker. But they do not see that a decrease in immigrant workers would mean a decrease in the bargaining power of the consumer.

Some claim that the “jobs no one else will do” would pay higher wages if we just got those pesky foreigners out of the labor pool. They never consider that the consumer would be forced to pay more, and the businessman might not be able to attract the consumer to his product if he had to sell it at a higher price.

Most of all, however, they do not see the dynamic effect that a few extra pennies in each consumer’s pocket can have on the economy as a whole. The reason immigrants are not dangerous to the U.S. economy is that they allow consumers to buy the best product they can for the lowest price. This in turn allows the consumer to have more expendable capital perhaps for new American product or business venture, which will employ more people, and in turn help strengthen the economy. Despite what the doomsayers claim, immigration helps us all better our lives. It’s what economic progress is all about, and it is why people come to this country in the first place.

Notes

1. Mark Krikorian, “Jobs Americans Won’t Do,” National Review Online, January 7, 2004, www.nationalreview.com/comment/krikorian200401070923.asp.
2. Quoted in ibid.
3. Julian Simon, “Immigration: The Demographic and Economic Facts,” December 11, 1995, www.cato.org/pubs/policy_report/pr-immig.html.
4. Quoted in ibid. from Kristin F. Butcher and David Card, “Immigration and Wages: Evidence from the 1980s,” American Economic Review, May 1991, p. 296.

I am proudly, completely, confidently, and unconditionally a free trader. I find none of the many “butwhatabouts” to be effective arguments against free trade.

What, you ask, is a butwhatabout? A butwhatabout is the most common response of a free-trade skeptic, issued in the form of a supposedly killer question—as in “But what about the trade deficit?” or “But what about the fact that many foreign workers are paid a mere fraction of what Americans earn?”

Butwhatabouts are bountiful and varied. But the most frequent butwhatabout is this: “But what about the worker who loses his job to foreign competition? How do you justify free trade to him?” The suggestion is that free trade is inappropriate for real-world policy if its advocates cannot satisfactorily justify their case to workers rendered unemployed by foreign trade.

Because I encounter this particular butwhatabout so often, I know that it’s one whose answer matters and hence one that should be rebutted with care.

I begin my answer by expressing sincere recognition that losing a job is an unfortunate and often devastating experience. I truly pity workers who, through no fault of their own, find themselves unemployed. Then I ask, “But what about the worker who loses his job to protectionism? How do you justify high tariffs and import restrictions to him?” You see, it’s a common mistake of free-trade skeptics to overlook the fact that protectionism inevitably causes some workers to lose jobs.

When government imposes a tariff or import restraint on, say, Americans who seek to purchase foreign steel, one object of this policy is to protect jobs in the U.S. steel industry. And, indeed, by making it more costly for American consumers to buy foreign steel, government artificially props up demand for American steel and thus keeps some workers employed in steel plants who would otherwise lose their jobs.

But by artificially reducing American purchases of foreign steel, protectionism also reduces the number of dollars that foreign steel producers receive. With fewer dollars to spend, foreigners must reduce the amount of goods and services that they purchase from American producers—say, from U.S. lumber suppliers and software firms. Also, because Americans are forced by protectionism to pay more for steel, they must spend less on other goods and services, many of which are produced domestically.

Employment in these domestic industries falls. Some American workers who would have kept their jobs in the absence of the steel tariffs are, through no fault of their own, thrown into unemployment. So it is no argument against free trade to point out that it eliminates the jobs of some domestic workers. Preventing free trade—protectionism—has the same effect.

While no essential differences distinguish workers who lose jobs as a consequence of free trade from workers who lose jobs as a consequence of protectionism (hence making invalid the argument that free trade is cruel or otherwise suspect because it causes some particular job losses), there are at least two differences that distinguish the jobs eliminated by free trade from those eliminated by protectionism. These differences are worker productivity and wages.

Workers in protected industries are less productive than workers in industries that survive without protection. The reasons are two. First, shielding a firm from competition weakens its incentives to increase efficiency. Second and more important, firms that enjoy a comparative advantage over foreign competitors do not need protection from imports. So the industries and firms that seek protection typically are those that do not enjoy a comparative advantage in producing the things they will produce behind the tariff wall. These firms are among the country’s least-efficient producers.

Being among the country’s least-efficient producers means that the per-worker output of protected firms is generally lower than the per-worker output of firms that are efficient enough to survive market competition without protection. Therefore, competitive wages in protected industries generally are lower than competitive wages earned by equally skilled domestic workers whose jobs depend on free trade. In short, jobs made possible by free trade generally are more highly paid than jobs maintained by protectionism.

Protectionism protects jobs that are comparatively inefficient; it eliminates jobs that are comparatively efficient. This is hardly a means of fostering a strong domestic economy.

Consumers Eliminate Jobs

But an even more fundamental response to the butwhatabout-the-unemployed-worker question is pertinent—namely, that free trade is not unique in causing some jobs to disappear while causing others to arise. Any substantial change in consumer spending or savings will eliminate some jobs and create others.

For example, if changing tastes prompt consumers to spend more time working out in gyms and less time bowling, some bowling-alley employees will lose their jobs. Some might remain painfully unemployed for a long time. Butwhatabout them? Do those of us who support consumer freedom have the burden of persuading unemployed bowling-alley workers that such freedom is desirable? Does the fact that nearly all changes in consumer spending will destroy some particular jobs mean that government should consider freezing consumer spending in place now and forever?

Of course not.

Whenever government intervention is proposed, it is imperative to avoid being misled by superficial facts. No fact about voluntary exchange is more superficial than the particular piece of geography in which a seller happens to be situated—no ifs, ands, or butwhatabouts.