Economic parables

One of my very favorite stories about economics, right up there with Bastiat’s parable of the broken window, is the old story of the three Hasidic merchants who were shipwrecked on a desert island and became fantastically wealthy by trading each other’s hats. The only thing they had to worry about was being rescued.

If you don’t get the story, it’s a parable about banking. The merchants paid increasingly larger sums for the hats (their only item of trade) by borrowing from each other.

Mark Thoma of Economist’s View draws attention to an article that makes the case that the massive immigration from Mexico is a consequence of NAFTA, U. S. agricultural policy, and the world labor market. I think I’d add to that the strong growth in the U. S. economy and the vagaries of U. S. immigration policy over the last 40 years.

From the cited article:

U.S. and Mexican officials touted the deal as a way to stanch the flow of illegal immigrants by creating jobs in Mexico. The tide of undocumented Mexicans in the U.S. surged after the pact was implemented. Fully two-thirds of undocumented immigrants currently living in the United States have been there 10 years or less…

Many of those people are Mexicans from hard-hit rural areas, the predictable casualties … of a trade deal that forced Mexico to wrench open its farm sector without a viable transition strategy for millions of subsistence farmers. …

Some analysts contend that Mexico simply hasn’t moved far enough and fast enough down the free-market path, while botching earlier reforms. Privatizations such as the 1990 sale of the state-owned telephone company essentially replaced public monopolies with private ones. Mexico’s inefficient state-owned energy companies are harming its competitiveness. Red tape and corruption are strangling innovation.

But … others contend that some free-market policies simply haven’t delivered and are contributing to the immigration friction… Economists point to a host of demographic, cultural and economic factors fueling the mass migration. But many agree that NAFTA accelerated the decades-long exodus of Mexicans from the countryside by opening the nation’s markets wider to subsidized U.S. agriculture products.

Mexico has shed nearly 30% of its farm jobs since the trade pact went into effect, according to government statistics. That translates into 2.8 million farmers and millions more of their dependents fleeing their fields. Some have taken subsistence jobs in Mexico’s cities, but many have relocated to the U.S. ….

What the article misses is that the policies have worked: the benefits of free trade have paid off and both countries are better off than they were before the agreement, if not quite in the way its proponents envisioned.

My concern about the current policies is that the massive immigration is socially damaging to both countries and I doubt that reliance on the importation of large numbers of low wage workers as a business strategy is sustainable. Mexican demographics and rising incomes there support that.

Where will the next wave of low wage workers come from? Central America? Or places in the world where languages and cultures differ enough from ours (and from those of the previous wave of immigrants) that they’ll be that much more difficult to assimilate.

But back to my point about economic parables. The experience with NAFTA both here and in Mexico is yet another good lesson: beware of unexpected secondary effects.

If there are any economists in my audience, I have a some questions. Is it possible to construct a system of tariffs, bans, and so on that obscure the pricing signals that make Riccardian comparative advantage function? I think it’s likely that it is but I’d welcome information to the contrary. Second, is that what China is doing? How about India?

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