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Congress Sacks Samoan Economy

Economics / Recession 2008 - 2010 Jan 22, 2010 - 12:32 PM GMT

By: Peter_Schiff

Economics

Best Financial Markets Analysis ArticleLike 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

For a more in-depth analysis of our financial problems and the inherent dangers they pose for the U.S. economy and U.S. dollar, read Peter Schiff's 2008 bestseller "The Little Book of Bull Moves in Bear Markets" and his newest release "Crash Proof 2.0: How to Profit from the Economic Collapse." Click here to learn more.

Regards,
Peter Schiff

Euro Pacific Capital
http://www.europac.net/

More importantly make sure to protect your wealth and preserve your purchasing power before it's too late. Discover the best way to buy gold at www.goldyoucanfold.com , download my free research report on the powerful case for investing in foreign equities available at www.researchreportone.com , and subscribe to my free, on-line investment newsletter at http://www.europac.net/newsletter/newsletter.asp

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