Competition is Good

It’s been a while since I wrote about Economic Understanding – that there is no magic money tree. Here is a short refresher.

A few often misunderstood economic concepts are that one person getting richer does not mean others must be getting poorer and that competition in markets usually benefits everyone.

Many politicians try to convince us that rich people got that way by taking money from us. They must be dishonest and greedy. They are not playing by the rules or paying their fair share (whatever that is). When they give examples of those rich, fat cats, they never seem to mention rich people we admire. They omit the professional athletes, TV and movie stars, studio heads, software executives and others who make their millions by bringing us the entertainment we crave. Those people get rich, and they don’t do it by stealing. They earn their money honestly; fans spend freely on tickets and apparel. The majority of other rich people also did it honestly, and if they took advantage of loopholes, that’s what the politicians should be focused on rather than stirring up envy. (Most of those politicians are also very well off.)

In a free society, where people make their own choices about how to spend their money, that money flows to those with the best ideas, best products or best services as determined by some combination of quality and price. Consumers get what they want at a price they are willing to pay, and the providers make a profit. 

This fair exchange, happy buyer and happy seller, keeps the economy growing. As one seller sees a rival doing more business due to a better product or better price, he is motivated to improve quality and/or make the operation more efficient to be able to lower the price. We get better things for less.

Examples are easy to find. In 1975 a good (tube) TV with a 26-inch screen could easily cost in the $450 range. Here is a 65”, Ultra HD, Smart LED TV with good reviews for about the same price. That is a direct comparison without considering that $450 in 1975 would be over $2,200 in today’s dollars. 

 Air conditioning in cars began as a luxury item, but today about 99% of new cars sold have it. And those smart phones owned by many, even some of those considered poor, were unavailable twenty years ago at any price! Anyone claiming that poor and middle class families are not better off today would have to ignore history and economic reality. Examples are so easy to find.

The progress we see all around us, and mostly take for granted, was driven not by government programs, but by the free exchange happening everyday across the nation as consumers made choices based on quality and price. Those free choices forced the competition and innovation that led to generally increased prosperity. Certainly that prosperity is not evenly divided, but that’s not the fault of people we willingly gave our money to.

The idea of competition can be scary, but it only means everyone has to work harder to keep improving price and quality. Where would your favorite sports team be without competition – playing inter-squad scrimmages all year? What fun is that?

One market where competition seems impractical is public utilities. Years ago cable companies were treated like utilities because towns and cities didn't want more than one entity digging up yards and streets to lay cable. Today in my neighborhood outside a small Midwest city, I have a choice of traditional cable, fiber optic cable, satellite dish and soon Internet and TV delivered by my electric utility. Four companies compete and prices are now coming down! 

When the government alone provides goods and services, there is no competition. There is scarce pressure to be more responsive, more customer-oriented, more efficient, with better quality at a lower price. Prices go up at rates greater than that of inflation with minor if any improvements in the product, e.g., public colleges and universities. The post office and the DMV have for years been held up as examples of poor service. If we want their services, or are forced to use them, we don’t have a choice. We take what we get, pay what they demand; and improvements are slow.

Competition should not be scary. Competition is good.

Only People Have Money

A key to economic understanding is the concept that only people have money.  Other entities pass around the money and may hold it for a while, but when you “follow the money,” as the expression goes, it always eventually comes back to individual wallets and bank accounts.

Thomas Piketty, a well-respected French economist, professor and author of several books on income inequality, made the point clearly in a 2009 essay.  He wrote, “Let’s also recall that no taxes are paid by businesses: ultimately, every euro of tax is always paid by households…there is unfortunately nobody except physical, flesh and blood people who can pay taxes.”

He goes on to say, “Inevitably, firms pass on everything they pay to their workers (by reducing their wages), or to their shareholders (by reducing dividends or accumulating less capital in their name) or to consumers (by raising prices).”  Higher (or lower) corporate taxes means one or more of these entities is going to be affected.

In fact, this economic principle is not limited to taxes.  Any action that affects every company in the US or all companies in a particular industry – whether it be regulations, union bargaining, tariffs, or external events such as weather – feeds back to the end consumer.  This is true because when a cost affects every company, it takes competition out of the equation.  In this case each company can pass along those costs directly without fear of falling behind.  

It works in both directions: companies pass along costs to the three categories of people but their revenue also comes from people.  After they make sales and pay expenses, they must decide how much of the difference to reinvest in the business, making shareholders happy; how much to lower the price, hoping to get more customers and grow the business; or how much to increase wages, hoping to attract and retain the best workers.

So when CBS reports, as they did early last month, that Apple, Amazon and Google made a load of money in the last quarter of 2017, we must understand that those billions came from our wallets. And no one forced anyone to buy an iPhone or order items on line.  Facebook had similar positive results, but they forced no one to log in or click on the ads.  All these companies got their money from individuals (households) by providing goods and services that they valued.  Unlike the case of corporate taxes where every company gets to pass along added costs, all these companies, and any other company that wants to stay in business, must compete every day to provide the best service or product at the best price. When they do, they attract customers. That’s where their money comes from.

Some politicians want you to hate the rich.  But, barring those who inherited their wealth, it was people who made them wealthy by willingly giving them money in return for something of value, either directly (Jeff Bezos at Amazon) or indirectly (Warren Buffett investing in successful companies).

This dynamic works very well unless the government gets involved.  When certain companies are favored due to their relationships rather than their ability to provide the best for the least, their incentive shifts from satisfying customers to influencing politicians.  They no longer compete for our business where we voluntarily trade our money for their products.  Instead they compete for money that was taken from us involuntarily by the government (in taxes) and paid out in grants and subsidies.  It’s easy to see how this can skew the system, replacing an emphasis on added value with efforts to influence politicians.  This shift ends up costing the entire economy in the long run as less efficient companies stay in business through government favors.

Economic understanding helps voters to step back and look objectively at some of the actions and promises of elected officials, sorting through fact and fiction by following the logical path to and from households – wallets and bank accounts.  As a current example, when all the cities and states sue drug companies over the opioid epidemic, the money they (and their lawyers) collect will ultimately be an indirect tax levied on households through higher drug prices just as tobacco lawsuits translated into higher cigarette prices.

Some People Do Get It!

I probably don’t dwell on positive behavioral examples often enough, but this one came up on a local news report in Indiana.

The story tells of a 14 year-old boy living in West Lafayette who started his lawn care business at the age of 8.  He began with only a couple of nearby customers and has grown the business to about 40 yards in the neighborhood.

Though he had some difficulty getting started – some might consider an eight-year-old mowing lawns as not a very safe situation and I would tend to agree – he persevered and grew the business from year to year.  It seems to be a real business in that he reinvests a portion of his earnings in better mowing and yard maintenance equipment without relying on financial assistance from his parents.

The segment also made clear with a number of interviews of the neighbors that he understands the importance of outstanding customer service.  They say he is always on time, reliable and conscientious.  When they see the results, they “always want more.”

Some of his earnings he saves, some he reinvests in mowers and snow blowers, but he even reserves some to give to local charities.  He’s a kid with a good attitude who “enjoys taking care of people.”

These are the kinds of behaviors that reflect the entire range of the five key dimensions.  America needs more kids and clearly more adults with this kind of perspective, work ethic and generally good values.  What a marvelous example!

Where Are the Jobs Going?

“Daddy, I want to be an elevator operator when I grow up.”  “Daddy, I want to be a gas station attendant when I grow up.”  What is wrong with this picture?  We understand it now, but 50 years ago, though it might not have been an ambitious career choice, it was a possibility.

Today kids might grow up wanting to be an autoworker making $60 an hour including benefits.  Those jobs are disappearing as the older workers retire to be replaced by workers making more modest wages.  Today it takes an extreme combination of patience and luck to actually be able to speak to a human when trying to resolve a billing problem or check on an order.  (“Your business is very important to us, so please stay on the line and your call will be answered in the order in which it was received, or go to our website.”)  A good question to ask is, where are all the jobs going?  Some politicians say they are going overseas and south of the border, but when they come back, if they come back, will people do them?

These thoughts come as I look through a few recent articles.  “Walmart (WMT) has patented a robotic device that would create self-driving shopping carts, giving customers free hands while they shop. While that might benefit shoppers, the robot could lead to cutbacks in staff if it lives up to the potential highlighted in the patent, ranging from retrieving containers and abandoned items to helping with stocking and checking inventory.”  According to CBS News:  “A wave of automation is predicted to take 5.1 million jobs away from humans over the next five years, with low-paying, low-skill jobs considered those most at risk.”

In another instance, Zume Pizza, a Silicon Valley company, is using robots to prepare and cook their pizzas. This article calls it “the latest in a new trend within the food industry…to increasingly depend upon machines rather than human labor.”  The management says they are doing it for the employees, as they “eliminate boring, repetitive, dangerous jobs.”  Workers are still needed to prep the dough and measure out the cheese and other ingredients but the robots will soon be taking over those tasks too.  Robots will eventually remove pizzas from the oven, slice them, and box them for delivery – in self-driving cars perhaps.

In other related news, Foxconn, an electronics maker, recently cut around “60,000 factory jobs and replaced them with machines. And Wendy’s cited the rising cost of labor and competition among fast food chains as motivation for its own decision to replace some cashiers with kiosks.”

Meanwhile back at Walmart, they are also “eliminating about 7,000 store accounting and invoicing positions over the next several months.”  Mostly long-term employees held these highly sought-after and well paid jobs among Walmart’s hourly workforce.  There is also talk of a trend to cut back on middle management and support jobs in other industries.

Note how many of these changes can be made under the heading of improving customer service or giving the workers more challenging and rewarding jobs.

The question looms:  Will many of those jobs that may come back from Mexico, China and Vietnam only to be taken by robots, machines that can work 24/7 without vacations, require no government mandated health insurance and don’t give a hoot about the minimum wage?  It is something to thing about today instead of waiting 25 years to wonder what happened – both to the jobs themselves and to all those political promises about creating them.

Perspective: Penny-wise, Pound-foolish

I have some recent (behavioral) evidence that many corporate executives are skimping on IT resources in the short term, risking eventual loss of business and higher costs over time.  This certainly falls in the category of perspective.

Today I picked up the mail and opened an envelope from my doctor’s office.  It was a bill for zero dollars.  It told me what I already knew, that I didn’t owe them any more money for my recent visit, but costing them for the printing, the postage and the enclosed return envelope that I didn’t need.

Earlier in the day I received 3 identical e-mails from my broker telling me that my profile had changed. (I changed from my current listed bank to the one that sends me two identical e-mails at the same time every month reminding me to balance my checkbook.) The brokerage is very careful in these cases and sends two small test deposits to the new bank. I looked at the bank website and found the two deposits in my checking account. So far, so good. Then I returned to the brokerage site to confirm and was told to come back in a couple days after they made the deposits. Apparently they were not yet aware that the deposits were made. Somebody’s programs are not talking to each other.

The reason for the above change is that I am ending my relationship with the bank that was originally listed with the broker. At this bank every time I come in, they look up my account and say, “I just signed you up for next quarter’s bonus points!” – like they are starting off by doing me a big favor.  Then I tell them that I already signed up and wonder why their PC doesn’t indicate it. If they said, “I see you are already signed up,” at least I would think they are on the ball, however, when I checked later at home, it is very difficult to get that information, so they just sign me up whenever I talk to them. (This, by the way, is the credit card that I was issued two of and just got one cancelled when I received a solicitation for another identical one in the mail – another case of programs not communicating.) But I digress. The reason I went to the bank was to transfer out my IRA and, not wanting any trouble from the IRS, I specifically asked for a check made out to the new bank showing me as FBO (for the benefit of). They told me that their computer wouldn’t do that without a transfer request from the receiving bank, which would take longer than the 10-day grace period. (And they wonder why I’m changing banks!) So I have a rollover instead of a transfer, which means that each bank (or each bank’s computer) must send me an additional tax form.

Finally, in the process of checking on the bonus-points question, I noticed that the department store where I ordered a wedding present on line is about to bill me twice, once on the day I submitted the order and again on the day they shipped it. 

I hope all these companies are saving a bundle from off-shoring, because they are losing a lot of goodwill by this display of incompetence to their customers.