Goods or People

Departing on a trip to Asia, Barack Obama responded to a report that showed unemployment in the United States near double-digit figures nearly two years into his administration and said, “I’m going to be talking about opening up additional markets in places like India, so that American businesses can sell more products abroad in order to create more jobs here at home.”

But at the same time, Obama’s monetary policy calls for a weak dollar, thus making foreign goods less competitive in global markets.  “By keeping interest rates very low, that meant that businesses that had seen consumer demand really shrink were still able to service their debt and to keep their doors open,” Obama said, explaining his desire for inflation, “And so it was the right thing to do to keep interest rates low.”

Making the entire matter even worse is Obama’s feckless handling of the immigration issue.  Playing to both sides of the issue, in an attempt to fool all of the people all of the time, Obama said, “Once we get past the two poles of this debate, it becomes possible to shape a practical, common-sense approach.”

Obama fails to understand the fallacy and negligence of his conflicting policies, consisting of political soundbites to appease the liberal wing of his Democratic Party.

An American president should understand that the issues of trade and immigration are linked, both part of a comprehensive economic policy: Let goods cross borders or people will

Consider the following thought experiment:

Let there be a global market consisting of Nation D and Nation P.  The currency used by Nation D is the dollar; the penny is the currency used by Nation P.  The currency exchange rate is 1 dollar = 100 pennies.

Company D and Company P from Nation D and Nation P, respectively, manufacture the same product, Product D and Product P, at a total cost of 0.95 dollars (95 pennies) for factors of production:

Labor = 0.50 dollars (50 pennies); Land = 0.30 dollars (30 pennies); Capital = 0.15 dollars (15 pennies).

Revenue from each product is 1 dollar (100 pennies), thus resulting in earnings of 0.05 dollars (5 pennies) for each product.

If Nation D mandates a price floor for labor at 0.60 dollars, the total cost to manufacture Product D would increase to 1.05 dollars, making Company D less competitive in the global market.  But if Nation D also refused to honor the concept of free trade, imposing a tariff on Product P, thus mandating revenue of 105 pennies (1.05 dollars) for Product P, workers from Nation P would decide that all things being equal, immigration to Nation D would make more economic sense, due to the opportunity for higher wages.

Similar logic could be applied to the concept of currency devaluation, such that if Nation D called for a weak dollar, with an exchange rate of 90 pennies, Product D would be 10 pennies less expensive to purchase in the global market, all else being equal.

Representative John Boehner and Senator Mitch McConnell, leading the United States Congress, should judge it as necessary and expedient to enact legislation supporting a comprehensive economic policy for trade and immigration most likely to effect safety and happiness.

References

N. Gregory Mankiw, Principles of Economics, Fifth Edition (Mason: Cernage Learning, 2009).

Barack Obama, “Remarks by the President in a Discussion on the Economy in Richmond, Virginia,” September 29, 2010.

Barack Obama, “Remarks by the President on the October Jobs Report,” November 5, 2010.

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