Flashback – Robbing Peter to Pay Paul

[Here, from over seven years ago, are some examples of government actions showing how failures in economic understanding lead to bad outcomes. Politicians will never change their tactics and sales pitch until voters wise up. In many cases we have to lead the people we elected  away from senseless legislation with hidden, but predictable, consequences.]

When I call for economic understanding by saying that there is no magic money tree, here is what I mean. When corporations incur added costs, whether it be shoplifting, a utility rate increase, wage increases or higher taxes, they find a way to pass the cost along to their customers, usually as higher prices. When governments decide to spend more money, they either raise taxes or borrow, leaving the taxpayers to absorb the cost directly or pay the interest now and leave the principle repayment to future generations.  No magic money tree means that the funds must come from somewhere, not out of thin air, and that somewhere is usually from our wallets, directly or indirectly.  The consumer/taxpayer is the bottom of the economic food chain.

As 2013 begins, the Affordable Care Act (ObamaCare) requires manufacturers of medical devices to pay an excise tax, 2.3% of sales. Besides the possibility of reducing costs by outsourcing to other countries and reducing development budgets, the industry also hints that the added costs will result in a price increase. As this article points out:  “Recent surveys show that medical technology executives are examining a host of other options that will have negative consequences, including passing along the added costs through price increases.” (Emphasis added) Those of us who don’t believe in a magic money tree are not at all surprised.

But look at how circular this situation becomes. The government adds a tax to help offset the cost of healthcare. The companies pay the tax by raising prices. Healthcare providers, doctors and hospitals, raise their prices to account for their now higher costs. Insurance companies raise their premiums or co-pays to account for their now higher costs. The government uses the tax money to subsidize health insurance that is now more expensive due to the tax itself! If anything, the cost of the whole system increases due to the added administration associated with paying and collecting a new tax.

In an economy such as ours, this concept of punishing greedy companies with taxes or penalties doesn’t seem to work very well, and why would we even want to punish someone who provides us with a product or service that we want or need? In general, magic-money-tree thinking leads to a host of unintended consequences.  

As citizens and voters we can solve this, but not until we stop thinking this way ourselves. This type of logic drives decisions by both parties at all levels. They tell us that most of a project will be paid for by a federal government grant, as if that's not our money too.  They try to make us believe that corporations pay taxes by just reducing their profits or paying their CEO less. They spend as if the bills will never have to be paid, as if there is some magic money tree or secret treasury to make it all right.  

Flashback – Job Creation Basics

[Every two or four years we hear tales from federal and state candidates about who has or who is going to create the most jobs. In reality the only jobs governments create are government jobs. The best any government can do is to minimize regulations that stifle job creation and not try to micromanage the job market. 

I wrote a reminder of this in August 2011 when the job market was just recovering.]

There has been a lot of talk about jobs in the past two or three years, but I think it requires strong economic understanding and critical thinking to draw accurate conclusions.

Jobs are not created; they are purchased. You don’t work for the boss; you work for the customer. Conversely, jobs don’t go away, customers go away. My experience is that many bosses don’t understand this important concept and fail to pass it along to their workers. When a company is growing or downsizing, it is usually based on matching the number of jobs to the needs of their customers.  (Sometimes, though, they economize by passing along their work to their customers, think self-service check-outs and those irritating phone menus).

When we work at jobs, making goods or delivering services, there must be a market for those goods and services. People should say to themselves, ”Wow, this is better and cheaper than the other comparable alternatives. I’m glad I made that particular purchase.” Everyone in the organization, whether it be a single proprietor or a global corporation, is working together to make that sale successful. Then customers continue to buy and more customers arrive. By buying more products or services, they essentially create more jobs. This is the motivation for a company to focus on customer satisfaction.

When a governor decides to “create green jobs” by mandating that a portion of electricity be generated by renewable sources (wind, solar), who purchases these jobs? Since they are created, they must be additional to jobs that already existed and the additional wages for these additional jobs must come from somewhere. Because there is no magic money tree, utility customers pay more. These jobs are created not because there are voluntary customers; instead the customers are forced to buy these new jobs with money they would have spent on other things (i.e., other jobs). Then we are paying more to support a wind farm that no one asked for, with a much bigger ecological footprint than conventional generation, that requires a back-up system anyway because it is only 35% efficient as the wind blows only part of the time and more at night, when less electricity is consumed. It doesn’t improve customer satisfaction or attract new customers. It merely creates jobs by displacing other jobs.

When we hear of jobs being created, we must be very wary. GM, GE, General Mills, and Geico don’t create jobs. When they have something we want, we, as customers, create those jobs voluntarily by our buying decisions, not because of new laws or regulations, but because we believe the output of those jobs makes our lives better.

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.

The Rising Minimum Wage

As an increase in the minimum wage in 20 states and more than 20 individual cities takes effect, according to the AP, this is an excellent time to review economic understanding.

My two primary rules of thumb about economics are: only people really have money and there is no magic money tree.

The idea that only people have money helps trace the flow of dollars back to our own wallets and helps to anticipate unexpected consequences of changes. Most people think the government and businesses also have money, but where do they get their money? They collect from people, their taxpayers and customers. Then they hold the money and eventually spend it. Governments have budgets for spending on employee pay and their various services and grants. Companies pay employees, buy raw materials or otherwise spend it to keep the business functioning. If they need more, they either borrow or raise taxes or raise prices or try to be more efficient. Except for the government printing more money, which affects people by lowering the value of the money they hold; the needed money always comes from people.

The second idea is related: there is no magic money tree. Money must come from somewhere. It doesn’t materialize out of thin air.

So the AP piece about the minimum wage starts with a story of a small restaurant in Missouri anticipating the need to raise prices slightly to account for the minimum wage increase. As the owner rightly says, “For us it’s very simple. There’s no big pot of money out there to get the money out of.” The companies that sell them food or napkins will not decide to just charge them less. The utilities will not lower water and electricity rates. It must come from the customers as 5 cents here and 10 cents there. The wait staff worries that patrons will notice, and compensate with lower tips or stop in less often. 

That is typically the way it works, prices go up or businesses make other changes. Again from the AP article, “Economic studies on minimum wage increases have shown that some workers do benefit, while others might see their work hours reduced. Businesses may place a higher value on experienced workers, making it more challenging for entry-level employees to find jobs.”

Some studies focusing on Seattle, an early adopter of minimum wage increases, have shown mixed results. There was little effect from a 2015 increase to $11 and conflicting reports on subsequent increases. Defenders of the increase rely on a later study showing only a modest reduction in hours and a small increase in take-home pay. In this case economic understanding urges us not to pass off any increase as harmless, but instead to ask what other factors may have been at work, and will these other factors be able to similarly moderate future increases or will there be a tipping point? It can't go on indefinitely with no effect unless everyone is already earning above the minimum wage.

We know there is no magic money tree. Only people have money. And when the prices go up (or the portion sizes go down like they do on many grocery store items) to cover the increased cost of business, the customers will make decisions – pay more or patronize less. If they pay more, they will have less money to spend elsewhere. If they patronize less the workers will feel the effects of less business. It’s a pretty simple choice.

Thoughts On Tipping

Interesting legal maneuvering has been going on in Michigan over something called the tip credit. It began with a ballot initiative that was challenged but upheld in court, but later was taken off the ballot after it was passed by the legislature instead.

Formerly, restaurants that employ servers, bartenders or delivery drivers were “obliged to pay those staff members only $3.52 an hour if the employees take in the rest of the minimum wage they’re due in tips.” Since the minimum wage was $9.25 per hour, if they received at least $5.73 an hour in tips, the restaurants did not owe them any further pay.

Under the new law, minimum wage would increase in annual increments to $12 an hour over the next three years, and the tip credit would be phased out. This is a big victory for labor advocacy groups, but the Michigan Restaurant Association (MRA) fears that it will drive up a full-service restaurant’s labor costs by 241% for their tipped employees. A survey of members by the MRA found that many restaurant owners plan to deal with this with a combination of cutting jobs and raising menu prices.

Despite the 30% increase from $9.25 to $12.00 per hour, it seems that the restaurant association could cope by adopting the European model where tipping is less common. Rick Steves, the travel guy, points out that “tipping in Europe isn't as automatic nor as generous as it is in the United States, and in many countries, they're not expected at all.” Often service is included in the bill, as it is in the US when serving large groups. According to this website, the default tip in the US should be 20%. Following this service-included philosophy, the restaurants could remain whole by gradually raising menu prices by only 10% and eliminating tips.

Note: A no-tipping policy would also eliminate a lot of intricate paperwork for the owners as the tip credit is phased out. It would also move the responsibility of training, rewarding and disciplining wait-staff from the customers to management where it belongs.

Surprisingly, the fear of this very thing, undermining the “existing tipping culture,” motivated many tipped workers in Michigan to organize a protest at the state capital earlier this year. They were very concerned that proposed changes would actually decrease their income. So those well meaning (out-or-state) labor advocates should have consulted with the Michigan restaurant workers that they were trying to protect before pressing for the changes.

One thing is for sure, when outside forces, either lawmakers or advocates or as in this case both, feel the need to tinker with an economic system; there will be unintended consequences. Enforced wage increases, unrelated to normal supply and demand, pushes up prices and may cost jobs. That’s economic understanding.

Side comment: For similar well meaning reasons, some people on social media have been speaking out against self-service checkouts at grocery stores, saying that they are taking away jobs. Last week my grocery store had signs posted at the self-service stations encouraging customers to apply for cashier jobs. Apparently with the current labor shortage, they can’t find enough cashiers and figure that people who have already been checking themselves out have acquired some of the skills needed!

Economic Understanding

Everyday we see on the news some reference to economic results or statistics. These should be of interest to everyone, not just those Wall Street tycoons and rich investors. Whether shopping at the grocery store, filling the car with gas or looking for a new job, economics affects our lives in so many ways.

One basic tenet of economics is the law of supply and demand. 

In a free market, the relationship between supply and demand determines the price of goods and services. Things that are scarce cost more because people who own them can wait to get the best offer from the highest bidder. Things that are common cost less because people who need them have a choice of sources; they can take their time to shop around for the best deal. As the supply of a product increases, the price goes down, simply because there is more of it. The opposite is also true.

This idea of supply and demand is behind many price changes, but it hits close to home when it affects jobs and wages. 

A couple of weeks ago the Business Insider ran a headline that made the point clearly: “The US unemployment rate fell to 3.7%, a 48-year low, in September.  What should be good news is bad news for the fast food and retail industry.” Why would it be bad news for the likes of McDonalds and Wal-Mart? The answer is supply and demand.

When the unemployment rate drops to today’s historic lows, the supply of available workers has decreased. That pushes up the cost of hiring people, that is, buying their services. Many of those jobs typically do not require a high level of education. Needed skills can be learned on the job. But with openings at many potential employers, workers would wisely look to where they could get the best deal – selling their skills to the highest bidder as fast-food locations and retail outlets compete for their time and loyalty.

But there is a downside to this as well. As I have written often before, there is no magic money tree.

The Business Insider continues: “Companies are giving workers higher pay and better benefits to compete – and trying to figure out how to cut labor hours by replacing employees with robots.” The higher wages and benefits must be paid for somehow. Do they pass along the added costs to their customers by raising prices? Do they try to absorb the added costs by making their operation more efficient? In the first case, it would be illegal to collude with their competition to get everyone to raise prices. They must continue to compete honestly. In the second case, using robots is one answer. Fast-food restaurants, grocery stores, banks and others have already increased the amount of self-service they expect from their customers.

Neither of these options is evil. People have raised prices and used automation for years. They are just trying to stay in business. Long distance phone calls used to be very expensive until they replaced operators with computers. Now distance is not even a consideration.

But what happens when the controlling factor is not supply and demand, when instead the government forces or coerces companies to pay more? For example when Senator Bernie Sanders wants McDonald's to raise its minimum wage to $15 an hour, they have the same options, raise prices or find ways to reduce overall labor costs. 

Notice that when Amazon came under the same pressure, they did promise all workers a $15 minimum wage. But according to CNBC, “the company is getting rid of incentive pay and stock option awards.” Although Amazon denies it, many workers complained that they will make less with the pay raise than they did before with the other benefits.

With a little economic understanding, none of this comes as a surprise, but people continue to act like there really is some magic money tree and that any well intentioned changes just make the world a better place with no ramifications whatsoever. Then, when the robots fire up and companies are only willing to hire people with $15-an-hour skills to fill the few jobs that are left, where do young people go for a first job experience? Where do today's fast-food workers find other employment?

Is Social Security Really "My Money"?

It’s a common argument among retirees, encouraged by organizations like AARP, that Social Security is my money and the government cannot be tinkering with it. It’s strange how this argument never came up years ago when the government decided to add an annual cost of living increase. Tinkering in the positive direction is fine. 

But advocates take advantage of retirees lack of perspective, critical thinking and economic understanding by pushing all kinds of myths and untruths to get them riled up enough to vote in a particular way.

Lack of perspective is evident when the announcement of the year’s cost of living adjustment is routinely met with complaints  that it is not really enough to keep up with inflation. They don’t understand that it was never in the original plan and any increase should be greeted with gratitude.

Lacking critical thinking, most don’t even make the effort to do a little simple research to find out how Social Security works. It’s clear that it’s not your money simply by the fact that when someone dies before retirement age, the SSA does not treat it like an inheritance to be divided among next of kin. No, the money was paid into Social Security and will be used for Social Security purposes.

There is also the lack of understanding about the government having “robbed” the Social Security trust fund and spent all the money on other projects. Consider this. Social Security since its beginning and up until this year has been collecting more money than it was paying out. The surplus had to be invested somewhere.

They can’t put it into a commercial bank or credit union. That would be an unfair windfall for that bank relative to its competition and would likely involve political favoritism. Investing in the stock market could not be justified, seen as “gambling with my retirement,” and equally problematic from the favoritism standpoint. Likewise corporate bonds are out of consideration.

What’s left? Government bonds. And what are government bonds used for? They are used to borrow money for the government to spend! The government has not been robbing from the “trust fund.” They have been borrowing the money with an obligation to pay it back, just as they must eventually pay back other bonds they sell to raise money when they spend more than they have. (They face that obligation now, as contributions are no longer sufficient to cover promised benefits.)

Finally, Social Security does not favor the rich. It is skewed in the opposite direction. Taking a look at the generic benefit calculator on the SSA website shows the difference. In one case, a person born in 1958, earning $50,000 per year, and planning to retire at 66 years old will receive $1460 per month (estimated). Leaving all assumptions the same and only changing the earnings to $100,000 gives an estimated monthly payment of $2276. Double the earnings and the benefit increases by only 56%.

 This is not my first tirade about Social Security (see here, here and here) and will probably not be my last. I just get very frustrated when people continue to fall for all those lies without doing a lick of work to investigate.

How To Watch News

I found myself talking back to the CBS Evening News a couple of nights ago. Usually they are pretty good, although like most of their competitors they don’t seem to be working as hard as they used to – over trusting anonymous sources, not confirming stories in a rush to be the first to bring us breaking news and presenting a dismal view – until the end when they throw in the obligatory heartwarming story. So critical thinking dictates that I treat their information skeptically.

The story that got me going was about tariffs. Now generally, I am for free trade and against tariffs. American tariffs are merely an indirect tax on us. They raise the prices of imported goods that we all buy and make the trading relationship with other countries less efficient – we don’t get the best goods for the best price. It’s basic economics. When they say something negative about tariffs I’m totally on board, but it’s not what they said but how they said it.

Jeff Glor started by saying, “Many Americans are already feeling the effects” of the $34 billion in tariffs on Chinese goods, the ones that went into effect less than 5 days earlier – really? That's a very fast supply chain. “The US is now threatening tariffs on thousands more Chinese products.” Then he turns to Jill Schlesinger who “looks at the impact” – the impact of what, imposing tariffs that he characterized as “threatened” just seconds before? Are they jumping the gun?

We learn that the next round of Trump tariffs, 10% on $200 billion of Chinese goods, “could hurt consumers.” Wait a minute. We were just told that many were already feeling the effect – now we are told the next round could hurt. They show a list of sample products: shampoo, baseball gloves, refrigerators, soap and cameras. Some are frequent purchases and inexpensive, while others are expensive but might be put off until a “trade war” is over.

“Already the lumber tariffs have added about $9000 to home prices”, Jill continues. I had a few problems here. Lumber tariffs are between the US and Canada, not China. Prices are not the same as costs. Are builders taking advantage of trade war news to boost prices like gas stations raise prices in anticipation of holiday demand? Besides, home prices are not uniform across the US, so any estimate will have different effects in different locations. 

“The North American Food Equipment Manufacturers said tariffs could raise prices at Chick-fil-A simply by increasing the cost of a pressure cooker used by the restaurant.” It makes me wonder how many pressure cookers they buy per year, what they cost, how much food they prepare before a pressure cooker has to be replaced, and what that comes down to on a per meal basis – I’m betting it’s mere pennies. (Not unlike the beer can story I told back in April.)

Finally, jobs could be impacted. They gave examples of Harley-Davidson and BMW saying that they would move more US production overseas. Do companies of this size hear about tariffs in April and 3 months later pull the trigger on an overseas move? This is very doubtful. It takes a lot of planning and many decisions. If they do move, it’s likely they had something in the works  a long time ago and the timing just happened to be coincidental (making the bosses look pretty smart).

But what can small businesses do? Jeff asks. “They can’t just move overseas and don’t have enough money to absorb price increases...” Wait another minute! What is this talk about absorbing increases? If any absorbing is going on, the consumer will be hurt less. How does this statement fit in at all with the rest of the piece?

All those unanswered questions and apparent discrepancies happened in a minute and a half. They don’t take any responsibility. (Jill Schlesinger is a financial planner, not an economist.) It’s up to us to be skeptical and think about what they are feeding us before swallowing it as indisputable fact. We must force them to do better than this as they try to make us panic.

Not Enough Babies!

Oh, no!  We're running out of people!

The Washington Post, along with several other news outlets reported a few weeks ago that the birth rate in the US is down. It fell 1% from 2015 to 2016. Why is this news? Is it a problem?

 Apparently it is. The article says we are “in the midst of what some worry is a baby crisis.” The birth rate has been declining for years and is now at a historic low according to the Centers for Disease Control and Prevention. Some predict it will result in “economic and cultural turmoil” and that “there's a danger that we wouldn't be able to replace the aging workforce and have enough tax revenue to keep the economy stable.”

The workforce issue could be a worry if the birthrate falls and stays below the replacement level, unless robots fill some of those jobs that the aging workforce leaves. Of course, the idea of robots taking jobs is another of the worries that the news media presents as a potential crisis! But maybe it would be a good thing.

With robots doing the work, there would not be enough human workers to pay into the Social Security fund that the retirees draw from. But that is already a problem, a flaw in the design of the program rather than a crisis brought about by not enough babies. It is compounded by the inadequate savings of many older Americans, but fewer children would cost parents less and with a little more discipline the may be averted.

Then there is the fact that as economies strengthen and the standard of living improves it is natural for parents to have fewer children. Populations migrate from farm to city, and the childhood survival rate improves as healthcare improves. It happens in every country, not just here. According to the article countries that already have low birthrates are fighting this trend by putting “pro-family policies into place to try to encourage couples to have babies.” 

That smacks of yet another government attempt to sway individual decisions – there is already a tax break for having children and assistance payments are calculated on a per child basis.  Now should programs like mandatory parent leave be added? Do we have people in Washington (or anywhere) capable of fine-tuning the birthrate by turning on and off programs and regulations? Even if we did, is it politically realistic to expect that such benefits could easily be turned off? 

At the same time we have a distress call every summer that children are out of school and will be going hungry because they no longer get free breakfasts and lunches. Charitable organizations are putting together programs to address this problem.  Would more babies compound this problem?  

Finally, since everyone is worried about climate change, isn’t having fewer people burning fossil fuel, otherwise adding to greenhouse gases by eating meat and generally using up the earth’s resources a good thing? Technically, your children and grandchildren are part of your carbon footprint. Maybe this is another case of wanting to clean up the planet by letting someone else do it.

The news media are always eager to pick up on the worries of certain experts even if they seem to conflict with the worries of other experts.  This sounds like another crisis where the experts have already made up their minds about the problem and course of action without looking at the many trade offs and contradictions – puzzling.

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.

Sauce for the Goose

An old expression, "What’s sauce for the goose is sauce for the gander," conveys the idea that what’s good for one person is good for another.  If the behavior of one person or group is acceptable it must be acceptable for the rest.

This concept is often misapplied in politics.  If Politician A does something shady or immoral, pointing out that (otherwise) respected Politician B acted the same way years ago and it did not affect his (or her) job performance, does not excuse the behavior.  Telling lies or having extra-marital affairs is not made moral by the comparison to some great predecessor’s moral shortcomings.  Poor judgments are not excusable on the basis that my opponent or predecessor made equally poor judgments.  These excuses are as bad as saying that it’s right for any president to own slaves, because George Washington did.  No, using the idea for political excuses is clearly a misapplication.  Wrong behavior is not excusable by invoking some supposedly noble precedent.

I think a different application of “sauce for the goose” is more accurate, although I don’t expect many to agree.  That comparison is between the Black Friday shoppers and the top management of Wal-Mart.

Thanksgiving protesters held rallies at over 1500 stores to demand higher wages and better working conditions.  They argue that the company is rich enough and can afford to pay workers more.  Although most of the attention is on Wal-Mart, low-wage workers at fast food and other businesses join in the cry for a higher minimum wage and more benefits for their work.  The implication is that the company management is greedy and taking advantage of their employees.  They are paying as little as they must to purchase the labor to run their business.

Meanwhile, shoppers fight to get bargains inside the same stores, and the protesters expect these shoppers to agree with and back their cause.  People who have gone out of their way to pay as little as they can get away with for Christmas gifts and personal gadgets are expected to find at fault executives who want to pay as little as they can get away with, and to label them as greedy.  Good luck!

What gives anyone the idea that all prices should be low, while everyone’s wage is high?  Is there some kind of magic money tree that makes up the difference?  Aren’t the shoppers being greedy in the same way when they search for bargains as the executives when they want to keep their labor costs down?  Everyone wants the best deal, even, I suspect, those same protesters when they make purchases.  The irony raises an eyebrow among those of us who are lucky enough to be able to step back and look at it with cold objectivity.

The Second Heat Wave

It was quite a few summers ago.  I remember the headlines about a terrible heat wave in a major city, possibly Chicago.  The reporters were going on and on about the number of elderly people who died due to the heat.  What a tragedy it was!  They made a point to call out the mayor and his team, decrying how irresponsible it was that they were not prepared for the heat wave and how they should be held accountable for those deaths.  The mayor made public announcements and apologies declaring how personally upset he was at the tragedy and how he and his department heads would be taking immediate steps to ensure nothing similar happened in the future.  The weather cooled.  The press had gotten the desired response, both in terms of promised action and attention from the public.  Things went back to normal.

Several weeks later a second heat wave struck the same city.  This time the press was happy to report that the number of deaths among the elderly was much lower.  The mayor and his staff took bows and patted each other on the backs over how effective their quick response was in allaying the problem, avoiding a second tragedy of the same proportions.  The weather cooled, and things went back to normal.

No one asked the important question.  No one pointed out that it was probably the most fragile of the elderly that died in the first heat wave.  The only elderly left when the second heat wave struck were the ones who had survived the first.  What actions did the mayor take?  Were those actions really effective (and proper use of taxpayer money) or was the difference driven primarily by the fact that the first heat wave had already reduced the population of vulnerable elderly?

Keeping in mind the case of the second heat wave, I tend to question such headlines as: “Sharp Drop in US Homes Lost to Foreclosure in Feb.”  It sounds like good news, but I need more information.  Foreclosures may be 11% lower than January, but one data point does not constitute a trend.  They may be 29% lower than February of last year, but is that the sign of real economic progress or is it just the same situation as the second heat wave?  Isn't it reasonable to expect foreclosures to be lower after so many earlier foreclosures during the years of the housing crisis?  

The same applies to new job numbers, auto sales, housing starts and many other economic statistics reported to us every day where numbers are compared to last month or last year, but reference to what is considered normal or strong performance is omitted.  Read headlines such as these carefully.  It is easy to be misled when we don’t really understand the baseline from which we are measuring.  The numbers may represent real progress, or it may be like the second heat wave, perceived improvement due to a changed environment.