 Congress Sacks
Samoan Economy
Peter Schiff
Jan 24, 2010
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,
[ 1 ] 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. [
2 ]
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. [ 3 ] 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) [ 4 ]
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, [ 4 ] while StarKist has reduced
its workforce and is threatening to leave as well. [
5 ]
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% [ 5 ] to roughly 20% by
2008. [ 6 ] So, not only is unemployment widespread,
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.
_______________
[1]
2009/06/08,
tunaseiners.com
:::: cia.gov/library/publications/the-world-factbook/geos/aq.html
[2] 2008/03/20.
List of countries by GDP (PPP) per capita. The World Factbook,
United States Central Intelligence Agency (CIA).
[3] 2007/05/25,
gpo.gov/fdsys/pkg/PLAW-110publ28/html/PLAW-110publ28.htm
[4] 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.
[5] 2009/01/22
spc.int/prism/country/as/stats/
[6] 2009/04/09.
samoanewsonline.com/viewstory.php?storyid=5259&edition=1239271200
###
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Jan 22, 2010
Peter Schiff
C.E.O. and Chief Global Strategist
Euro Pacific Capital, Inc.
1 800-727-7922
email: pschiff@europac.net
website: www.europac.net
Archives
 Mr. Schiff is one of
the few non-biased investment advisors (not committed solely to
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Mr. Schiff began his investment career as a financial consultant
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professional for seventeen years he joined Euro Pacific
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