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Like many football fans around the country, I recently
tuned into a heavily promoted 60 Minutes segment on the uncanny
ability of tiny American Samoa to produce a steady stream of NFL players.
Although it was certainly interesting to learn how Pacific island warrior
culture translated seamlessly into the disciplines of American football, and
how the island's players adapted to the hard-scrabble terrain and poorly
funded athletic fields, the most interesting aspect of the piece concerned
economics rather than sports.
In passing, the narrator mentioned that American
Samoa had recently experienced major setbacks, both natural and man-made.
Earthquakes and tsunamis had left scores dead and inflicted major damage on
the islands' infrastructure. More ominously, one of the two major tuna
canneries, which together accounted for up to half of the islands' private
sector jobs,[i] had
closed. If the second cannery closes, as 60 Minutes mentioned is a
distinct possibility, American Samoa will become completely dependent on
Federal support. Whether the reporters considered the subject off-target for
their piece or simply could not connect the dots, the pending economic
disaster was left largely unexamined. However, the Samoan situation offers a
very clear lesson for the rest of America about how government policies can
devastate an economy, and how the road to hell is paved with good intentions.
For generations, American Samoa offered strong
advantages for tuna canners. The close proximity to vast Pacific tuna
schools, the islands' good port facilities, political association with the
United States, and an abundance of relatively inexpensive labor (by American
standards) enticed StarKist and Chicken of the Sea
to locate their primary canning facilities in American Samoa. Although the
workers were paid, in recent years, wages that were below the U.S. minimum,
given the low taxes and living costs, these wages were enough to offer the
average worker a standard of living that was superior to the denizens of
other islands in that area of the Pacific.[ii]
But then, in 2007, Washington came to the
"rescue." As part of its efforts to provide a "living
wage" for all Americans, Congress passed a law to step up the minimum
wage to $7.25 per hour across all U.S. states and territories by 2009.[iii] Understanding that such a law would devastate
American Samoa by raising canning costs past the point where the companies
could maintain profitability, the non-voting Samoan member of the U.S. House
of Representatives convinced Congress to allow an exemption for the islands.
However, Republicans raised allegations that Speaker of the House Nancy
Pelosi, in whose district both Chicken of the Sea and StarKist
had corporate offices, had caved to pressure from big donors and was allowing
the continued "exploitation" of Samoan workers. Facing a sticky
political situation, the exemption was removed.
The Samoan representative desperately sought to fend
off what he was sure would be an economic calamity. He asked the Department
of Labor to issue a report examining the potential consequences of the law upon
the islands' economy. The report explained that "nearly 80 percent of
workers covered by the FLSA earned under $7.25 per hour. By comparison, if
the U.S. minimum wage were increased to the level of the 75th percentile of
hourly-paid U.S. workers, it would be raised to $16.50 per hour."
Therefore, the study continued, "there is concern that [the tuna
canneries] will be closed prior to the escalation of the minimum wage ... and
that production will be shifted to facilities outside the U.S."
Ultimately, the Department of Labor concluded that "closure of the tuna
canneries will cause a total loss of 8,118 jobs - 45.6 percent of total
employment." (emphasis mine)[iv]
Despite this dire forecast, the law went through.
Two years later, the results could not be clearer: Chicken of the Sea closed
its cannery and moved its production to a largely automated plant in
Georgia,[iv] while StarKist has reduced its
workforce and is threatening to leave as well.[v]
If that were to occur, which seems likely, American
Samoa would be left with no functioning industry. Although many of the
islanders have the size and athletic ability to be drafted into the NFL,
clearly football will never serve as the backbone of their economy. By
imposing an artificially high minimum wage on American Samoa, without taking
into account actual economic conditions on the islands, Washington
essentially decided that it was better to have no one working there than have
thousands of people working for wages that the politicians felt were
substandard.
Meanwhile, just as the minimum wage is destroying
jobs in American Samoa, it is destroying jobs here on the mainland. Of course
the numbers are fewer because the relative minimum is lower, but the principle
is the same. Rather than causing wages to rise (which only do so as a
function of increased worker productivity), minimum wage laws simply set the
minimal level of productivity a worker must contribute to legally be allowed
to work. In the case of American Samoa, tuna canners simply could not deliver
$7.25 cents per hour of productivity, so their jobs were eliminated. Rather
than being employed at $3.26 per hour (the level prior to the minimum wage
hike), they are now unemployed at $7.25 per hour. Which do you think is
better?
Among the unintended consequences of congressional
"benevolence" are rapidly rising consumer prices, due to the higher
shipping costs now necessary to bring consumer goods to the islands. Before
the minimum wage hikes destroyed most of the canning jobs, lots of canned
tuna were shipped from American Samoa to the U.S. (over 50% of the canned
tuna in American markets came from American Samoa). One benefit of all the
shipping traffic was a low cost of imports, as ships were coming to the
islands anyway to pick up the tuna. However, with fewer ships coming to Samoa
to pick up tuna, goods are now much more expensive to import. That is because
the round trip cost of the journey must now be factored into import prices,
as ships bringing in those goods now leave tuna-free. As a result, consumer
prices rose from a 2006 annualized rate of 3%[v] to
roughly 20% by 2008.[vi] So, not only is unemployment wide-spread, but the
cost of living has risen sharply as well - a double whammy.
This just serves to highlight, once again, how
inflexible central planning is compared to free markets. From housing to
banking to money itself, the politicians would rather mandate prices that
they deem acceptable than listen to the innumerable individual decisions that
set market prices. Though not always as transparent as with the Samoan case,
the result is the same, every time: economic dislocation, higher
unemployment, the boom-bust cycle, and a lower standard of living.
On that note, I must take a step back and qualify
some of the remarks I made in last week's commentary "Poland's Economy
Is No Joke." Motivated by the Polish Finance Minister's terrific
pro-market opinion piece in the Financial Times, the generally favorable
economic statistics coming out of the country, and the impressions I received
during my trip to that country a few months ago, I attempted to highlight how
free-market reforms can contribute to economic success. Although in my
research I did consult a few wise sources (and even the Polish embassy),
based on the e-mails that I have subsequently received from readers in
Poland, it appears that my portrait of the country's current administration
could have been more balanced.
In particular, my descriptions of the current tax
system in Poland did not account for their onerous social security and
value-added taxes. In addition, rather than boasting a pro-business agenda
that encourages entrepreneurship, as I had argued, Polish citizens have
pointed out to me that the labor laws in Poland are still far more
restrictive than those of Western Europe (a pretty stodgy place itself). I
also appeared to have given the government a pass for the corrupt manner in
which the state's industries were privatized following the fall of communism.
While I did claim that Poland "has continued
the process of transforming [itself] into a laissez-faire paradise," I
did not mean to imply that the metamorphosis was even nearly complete. For
the record, Poland still has a very long way to go. However, if their leaders
can talk the talk, there is always hope they can
walk the walk. Then again, politicians always have trouble with this, no
matter what language they speak.
[i]
2009/06/08, tunaseiners.com & 2009/10/28,
cia.gov/library/publications/the-world-factbook/geos/aq.html
[ii] 2008/03/20. List of countries by GDP (PPP) per capita. The World Factbook, United States Central Intelligence Agency
(CIA).
[iii] 2007/05/25, gpo.gov/fdsys/pkg/PLAW-110publ28/html/PLAW-110publ28.htm
[iv] 2008/01, "Impact of Increased Minimum Wages on the Economies of
American Samoa and the Commonwealth of the Northern Mariana Islands" by
the Office of the Assistant Secretary for Policy, U.S. Department of Labor.
[v] 2009/01/22 spc.int/prism/country/as/stats/
[vi] 2009/04/09. samoanewsonline.com/viewstory.php?storyid=5259&edition=1239271200
Peter D. Schiff
President/Chief Global Strategist
Euro Pacific Capital, Inc.
20271 Acacia Street, #200 Newport Beach,
CA 92660
Toll-free: 888-377-3722 / Direct:
203-972-9300 Fax: 949-863-7100
www.europac.net
pschiff@europac.net
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