To wall or not to wall? What’s behind it for Trump in the USA economy?

07 Sep 16 - 12:00

To wall or not to wall?

What’s behind it for Trump in the USA economy?

By Francisco Alberto Castellanos Sosa

I am writing this article to express some points on a topic that has been constantly mentioned about a proposal made by Donald Trump, the Republican candidate for the presidency of the United States. His idea is to build a wall in the USA-Mexico border to stop illegal traffic of guns, drugs, and people; and to deport illegal immigrants. Nevertheless, there are some basic economic implications that are not being explained completely in the news that I aim to clarify here.

This work is composed of four sections. First, you will find basic Economics about demand and supply of normal goods and services. In the second section I will put on the table some necessary assumptions and implications derived from a simple analysis. As third section, I tackle the main question and add some proposals. At the end, I present some personal comments.


1. Basic Economics

The demand and supply curves are all the possible demanded, or supplied, quantities of a certain good or service at different levels of prices. These two curves intersect each other in a point (the equilibrium point), which has both unique equilibrium quantity and price, (see Figure 1).

Fig. 1 Market in equilibrium



Both supply and demand curves can increase or decrease, moving the equilibrium point and so the equilibrium quantity and price. All possible individual movements on demand and supply are shown in Figure 2.

Fig. 2 Market shocks

a)b)

c)d)

 
Now, I am going to refer to the previous figures when it becomes necessary.

2. Assumptions and analysis

Before starting with the implications of building a wall, it is essential to establish some assumptions.

 
  • All the illegal traffic (guns, drugs, and people) comes from Mexico.
  • Building a wall in the USA-Mexico border will completely stop illegal traffic of guns, drugs, and people.
  • Guns, drugs, and people are normal goods.
  • There are three moments under analysis:
    1. Before illegal traffic.
    2. When there is illegal traffic and the wall has not been built (now).
    3. After the proposal has been completely achieved (the wall has been built and immigrant workers has been deported).
  • The markets at the moment one are in the equilibrium point.
  • Immigrants occupy principally jobs that do not require a high level of education.
  • We are just to talk about national markets of guns, drugs, and people (regional effects not necessarily follow the same logic).

These assumptions are just to simplify the analysis of the Trump’s proposal. We all already know these assumptions are neither entirely true nor entirely false.

Moment 1 in USA economy

At this moment, markets are in equilibrium. There is no problem to care about.

Moment 2 in USA economy

The supply of guns, drug, and people increases in their respective markets (see Fig. 2c). Therefore, a first overall effect is that under presence of illegal traffic without having built the wall, it is going to be a lower equilibrium price and a higher quantity at each market. In other words:

 
  • Guns are going to be cheaper since there are more guns available.
  • Drugs are going to be cheaper since there are more drugs available.
  • Labor force is going to be paid lower wages since there is more people able to work.

Yes, the pattern is easy to be followed.

Subsequently, some basic issues may arise:
 
  • Security problems are more likely to increase since there are more guns out there.
  • Drug abuse and health problems are more likely to occur because of the easier access to drugs.
  • Part of the low-skilled workers in USA would be displaced by immigrant people since the latter ones are able to work for a lower average wage due to their immigrant status and no-taxable status (see Fig. 2c).
  • The production levels of products in which immigrants are hired increase because of the lower wages payed to immigrants (also see Fig. 2c). 
  • The price of those basic goods consumed by the new people in the economy will rise because of its new, and higher, demand (see Fig. 2a).

Moment 3 in USA economy

After the wall has been built, there is no illegal traffic of guns, drugs, and people anymore, and immigrants have been deported.

Thus, the supply of guns, drug, and people decreases on their respective markets (see Fig. 2d). The first overall effect is that under the absence of illegal traffic the price of the product in which illegal immigrant people were hired are going to increase (and the price of other goods since some of these products are inputs in the production of others) and a lower quantity of each of them is going to be available. In other words:

 
  • Guns are going to be more expensive since there are less guns available.
  • Drugs are going to be more expensive since there are less drugs available.
  • Labor force is going to be paid higher wages since there is less labor force able to work.

Subsequently, some basic issues may directly arise:
  • Security problems are more likely to be reduced since less guns are available for crimes.
  • Drug abuse and health problems are less likely to occur because of the more difficult access to drugs.
  • Part of the USA low-skilled workers would take immigrants' jobs. These legal jobs will require to be paid higher wages (see Fig. 2d) since less people is available to work.
  • The production levels of all the products in which immigrants used to be hired decrease because of the increase in the average cost (by paying higher wages when hiring USA citizens) (see Fig. 2d).
  • The price of the products of the industries in which immigrants used to work before deportation will increase since now costs are higher (due to higher legal wages) (see Fig. 2d).
  • The price of those basic goods that were consumed by the new people in the economy will decrease because of the new reduced demand (see Fig. 2b).

3. What’s behind Trump's proposal for the USA citizens?

Regardless of the "obvious" benefits that a wall in the USA-Mexico border and deporting people may “give” to the USA economy, there are some relevant points that need to be taken into consideration seriously.

 
  • The proposal promotes more low-skilled jobs with higher immigrant-salaries: Yes, after building a wall it is going to be more employment for USA citizens. Employment with a higher salary than that of the immigrants. Neither dream jobs nor great salaries, but those that were occupied by immigrants with a little extra wage to cover taxes are going to be created.
Many USA citizens are going to be benefitted with low-skilled jobs (those occupied by most of illegal immigrants), and they are going to ask for a higher salary.
 
  • Higher production costs and higher prices: Despite of the increased demand of basic goods consumed by the new people; due to the higher salaries, the costs of production are going to increase, and this situation is going to decrease the supply of the final goods or services (see Fig. 2d). Situation that lead to an increase of the price of final goods and services. This effect is not only present in specific markets, but in all those in which the goods or services are part of the production chain.
All consumers of goods and services of the industries in which immigrants worked directly, or indirectly, are going to be affected.
 
  • Many firms in the USA are going to close: Many firms are more likely to close because of the lack of labor force able to work for low wages. Yes, low-skilled USA citizens are going to obtain jobs, but, in the other hand, there is going to be a lack of labor force because of the massive deportation proposed by Trump.
Many firm-owners are going to be affected either moving their business to other place or changing to other industries. This could affect also other industries because of the new competitors.
 
  • The USA will need to import more products and it is going to be at higher prices: The price of the products would be that high that it will be worthwhile for USA to import, at higher prices, the low-price products that USA's industry used to produce before the wall was built. This because now the American industry will not be able to produce at the same level of low costs and low prices.
  • The reduction of available income to invest or the increase of taxes: The cost of paying a wall (including the extra 10 ft. Trump added some days ago) will become from USA resources since Mexico is not forced to pay for it. Where does the USA will obtain that money? Obviously from the USA taxpayers or by reducing the public investment in other areas.
Taxpayers are going to be seriously affected.
 
  • “Trade War”: Trying to force Mexico to pay the wall could result as the end of many trade agreements between both countries. Therefore, the USA would be in the need of producing such products at higher prices, or importing them also at a higher price than the obtained with the former trade agreement.
The prices are going to increase and affect USA consumers. 
 

To wall? I don’t think it is a good idea. If what USA people really want is to reduce problems related with employment and national security, then the wall proposal of the Republican candidate is not the best call.

Otherwise, if more employment and security is wanted, here I present some general proposals to make of America (the continent, not the country) really great.

 
  • Make of the USA-Mexico border an International Economic Zone: A zone in which both Mexican and USA citizens could be able to work without any legal problem. In this way there is going to be more employment and of higher quality in a specific geographical area, with economic benefits for both nations. The main idea is to establish an area in which unemployed USA people and unemployed Mexican people could have a quality job at the same time. This could be the biggest international industry area in the world, and a big target to international investors.
  • Ally both Homeland Security departments: Putting forces together will lead to higher levels of intelligence, and to increase the ability of blocking the traffic of drugs and guns. In this way, both countries will be able to make a complete following process to the already initiated investigations; block the traffic in strategic previously identified areas; and implement international security programs for both.

4. Personal comments

The fact that Trump offends and generalizes negative aspects on Mexican people does not offend me. I know that all countries have these problems and that he is just trying to call the attention of media and news. This, because he knows he can win the elections with votes, then he is trying to gain the electorate’s vote regardless of his jargon and unsoundness proposals.

We live in democratic countries and we must focus our votes on the soundness of the proposals presented during the candidates' campaign. Specifically, we should analyze the quality of the proposals and give our vote to the candidate with the most beneficial plan for the country and for us.

Being a president is not a position of complete power, presidents need to work as a team with the congress, other ministries, and other countries. Then, it is just a matter of logic that there are many benefits of having good national and international relationships. And, overall, it is a matter of logic that dialogue and peace should guide candidates’ speeches.

I really appreciate the time you spent by reading this since it is the first article I write in my blog. Please do not hesitate in sharing your thoughts with me.
 
Anonymous

John

27 Oct 2016 - 06:27 pm

me gusto

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