FT106: “You can’t have high paying jobs with generous benefits and low consumer prices.” -Old Pithy

Posted by PITHOCRATES - February 24th, 2012

Fundamental Truth

To give Workers High Wages and Generous Benefits a Business has to sell their Goods at High Prices 

The problem with politics is that voters don’t understand economics.  And they demonstrate this by demanding mutually exclusive things all of the time.  Where having one thing makes it impossible to have the other thing.  Like that old saying that goes like this.  You can’t have your cake and eat it, too.   You can have cake.  Or you can eat cake.  But you can’t have cake after eating it.  Because once you eat your cake it is gone.  And there is nothing to have.  These things, then, are mutually exclusive.  You can have one or the other.  But you can’t have both.

Now let’s transfer this train of thought to economics.  And to its most fundamental element.  The demand curve.  Which represents people in the economy.  Consumers.  And the stuff that they buy.  And at what prices they will buy the stuff that they buy.  Let’s take large flat-screen televisions.  The big ones.  Over 60 inches in size.  If they cost the price of a luxury car few consumers will buy them.  But if they only cost the price of a pack of gum consumers will buy them until they have one for every room in their house.  And consumers will buy various amounts at the prices in between.  But in general this one truth holds true.  People will buy more televisions as their prices fall.  And they will buy fewer televisions as their prices rise.  When we show this graphically by plotting how many televisions they sell at various prices we get a demand curve.

Well, you think, why can’t we just sell televisions at the price of a pack of gum?  More people will have televisions.  That’s good.  Because people just love watching television.  And television makers will make more televisions.  Creating more jobs.  And jobs are good.  Everyone says so.  So why not just sell televisions for the price of a pack of gum.  Well, I suppose if we pay the people who make these televisions a wage and benefit package closer to the price of a pack of gum, we could.  But who wants to work for a paycheck that can only buy a pack of gum?  Which brings us back to wanting mutually exclusive things.  To give workers high wages and generous benefits we have to sell goods at high prices.  Which is mutually exclusive to the low prices consumers demand.

Big Oil’s Exxon Mobil was not as profitable as GE and Apple in 2010

Yes, you can’t have low consumer prices and high pay and generous benefits.  Because, per the demand curve, higher prices mean fewer things sold.   And fewer things sold mean lower sales revenue.  And sales revenue pays for everything in a business.  Including wages and benefits.  Which means lower sales revenue means less money available to pay wages and benefits.  And any company that tries to pay high wages and provide generous benefits has to do one of two things.  Have a product they can sell a lot of at high prices.  Or go bankrupt.  Two of the Big Three Detroit automakers tried to do the former and failed.  So they went bankrupt.  And the government bailed them out.

So to pay employees well these companies need to be profitable.  Unlike the Big Three.  And to be profitable you have to have sales revenue large enough AND prices high enough to generate profits.  Profits so large that they can provide high wages and generous benefits.  Unlike the Big Three.  Because they couldn’t sell enough cars at high enough prices to pay those high union wages and generous union benefits.  But some companies have been profitable.  Including one corporation liberal Democrats love to hate.  Exxon Mobil (a member of a group liberal Democrats derisively call Big Oil).  One company that the current liberal Democrat administration loves and partners with in green energy technology.  General Electric.  And one corporation liberal Democrats just love period.  Until Steve Jobs died, at least.  Apple. 

In the fourth quarter of 2010, the profits for Exxon Mobil, GE and Apple were, respectively, $9.25 billion, $4.46 billion and $4.31 billion.  The first thing that jumps out at you is that Big Oil is making twice as much money as the corporations liberal Democrats love.  Which is why they hate them.  And why they love to bitch about high prices at the gas pump.  While at the same time they are rejoicing about those high prices.  Because those high gasoline prices help push their green energy agenda.  But these profit numbers are misleading.  Because they don’t factor in the cost of producing those profits.  And the most common way we do that is by dividing these profits by the sales revenue that generated them.  Giving us net profit margin.  When we do this for Exxon Mobil, GE and Apple we find their net profit margins on those profits were, respectively, 8.79%, 10.8% and 21.2%.  Of the three Big Oil is the least profitable.  And Apple is the most profitable.  In fact, nearly 2.5 times more profitable than Exxon Mobil.  But no one is demanding that the government step in and lower the price of Apple’s products.  Unlike they do with Big Oil.

The Government’s Regulatory and Compliance Costs increase the Price of Gasoline at the Pump

So why is Big Oil less profitable than those other businesses?  Well, for one, you can’t drill for American oil in China.  Like GE and Apple can build products in China.  And by working in the United States Big Oil is subject to massive regulatory and compliance costs.  And government regulates few things more than the oil industry.  The permitting process alone just to drill an exploratory well can take years for approval.  And millions of dollars.  It wasn’t like this when gas was cheap in America.  Before all of this regulation.  In the days when John D. Rockefeller was refining petroleum no one was complaining about high prices.  In fact, his competition complained about his low prices.  Prices they couldn’t match.  Asking for the government to investigate them for antitrust violations.  Which they did.  And busted up Standard Oil.  So they could sell their products at higher prices.  But when you can manufacture goods in China you can escape all of these regulatory and compliance costs.  And governmental insanity of protecting consumers by raising consumer prices.

Some may counter that the net profit percentage isn’t the important number.  But the dollar amount of their profits.  The same people who say we shouldn’t look at the dollar amount rich people pay in taxes.  But what they pay as a percentage of their income.  Which is an example of a double standard.  Determining how much profit is too much by one standard for Big Oil (dollars).  But determining by another standard how much rich people should pay in taxes (percentage).  It doesn’t make good sense.  But it makes good politics.  Especially when you have nothing but class warfare to rely on to win an election.

The attack on Big Oil is also irrational.  For Big Oil can do one thing that even GE and Apple can’t do.  Provide high wages and generous benefits to American workers.  Because American oil deposits can only be extracted in America.  By American workers.  If only government will cease their attack on Big Oil.  And allow people to drive gas guzzlers if they want to.  Let them fill up those tanks.  Increase the demand for gasoline.  If they did and we got rid of the anti-gasoline policies Big Oil will go after that oil and bring it to market to meet that demand.  Making it inexpensive and plentiful just like John D. Rockefeller did.  Before government stepped in to ‘protect’ consumers.  And added so many regulatory and compliance costs that has since jacked up the price at the pump so much that it is eating away an ever larger share of a family’s budget.  And ultimately reducing their standard of living.  Without even getting any high paying jobs with generous benefits in the bargain.  And if you ask me that’s a pretty sad job of protecting consumers.

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LESSONS LEARNED #21: “The reason why health insurance is so expensive is because it is not insurance.” -Old Pithy

Posted by PITHOCRATES - July 8th, 2010

THE LONGER YOU live, the more you see and hear.  Here’s a smattering of our collective experiences.

YOU CAN LEARN a lot working in a small business.  I did.  I did about everything you could in a small business.  Including keeping the books.  And getting fired.  Over money.  It’s always about money, isn’t it?  And broken promises.  But I digress.

The business owner had a couple of kids.  As did some other ‘key’ employees.  I didn’t.  I was a young, single man.  Rarely went to the doctor.  So the ‘Cadillac’ health care plan we had meant little to me.  But it was important to them.  So important that it was a serious financial burden to the company.  The owner scrimped and saved elsewhere to maintain it.  Including my salary.

I helped to bring us through a difficult time.  I did my part.  Now it was time for the owner to do his part.  But he forgot those promises.  (Important life lesson?  Get things in writing.)  We had words.  I considered my options all the while dealing with one of the ‘key’ employee’s wife.  Who was always calling to bitch about the medical plan.  She didn’t like her co pays, that the non-generic drugs cost more, being billed for something that SHE thought should have been covered, etc.  I talked to her (it seemed like) at least once a week.  So and so who worked at such and such didn’t have to pay for this or that or the other thing.  And, perhaps, in some fairyland, they didn’t.  Our plan was good.  Above average.  She just didn’t want to pay for anything.  In fact, she wanted the business to pay for the things the plan didn’t cover.  She wanted it all.  But didn’t want to pay a dime for any of it.

She thought it was an outrage that she had to pay her bills.  But she took the health care.  Just wanted others to pay for it.  Even if cuts had to be made elsewhere.  Even if others didn’t get promised raises or bonuses.  As long as the cuts didn’t affect her. 

My experience is only a microcosm, but it applies to the big picture.  Our health care system is the best in the world.  But the way we go about paying for our health care is threatening to destroy that great system.  We’re voting ourselves the treasury.  We want more and more things but forget that old saying.  There’s no such thing as a free lunch.  Costs are costs.  And someone has to pay them.  If we don’t, others have to.  Until they choose not to.  And then what are we going to do?  Run to government?

Well, yeah.  There has to be someone we can take more money from.  Make those young and healthy people buy insurance so more people contribute into the big insurance pot and bring down the cost per person.  If they pay more, I wouldn’t have to pay as much.  Or my fair share.

Don’t like that?  Why, then let’s just nationalize it.  Wait a tic, nationalize care sucks.  So let’s not nationalize it.  Let’s do that other thing.  It’s just like nationalizing but we get to keep the things we have now.  Single payer.  Yeah, that’s it.  Let’s go with a single-payer system.  We keep the care we have and tax the rich to pay for it.

Or let’s be like Canada.

I DROVE INTO Quebec once from upstate New York.  At Canadian customs, the guy asked if I had any cigarettes. 

“No,” I said.

“Really?” he asked.

“No,” I said.  “I don’t.”

“Come on.  You must have some cigarettes.”

“No.  I don’t have any cigarettes.  I don’t smoke.”

“I don’t believe you.”

“Well, I don’t.”

He stared at me, smiling.  Waiting for me to break, I guess.  I didn’t.  I was confused.  Customs never interrogated me like that before.  He kept staring.  And smiling.  I looked backed.  Befuddled.

“Okay,” he finally said.  “You can go.”

And I did.  Found out later what that was all about.  Obscene cigarette taxes.  In an effort to stop people from smoking cigarettes.  But it opened a huge black market.  Drug dealers switched from smuggling in drugs to smuggling in cigarettes.  It was as profitable.  And less punishable.  If caught.

CANADA HAS A large tourism industry.  And high taxes.  They tax everything.  Making it costly to be in Canada.  They have a Value Added Tax (VAT).  It’s called the Goods and Services Tax (GST).  That means they tax most goods and services you pay for from the first level of being to its final delivered form.  They tax the thing you buy. And they tax the things that made that thing you buy.  At every level, when someone adds value, they add another GST.  Taxes upon taxes.  They can collect a lot of money.  But they also raise prices.  Which makes everything more expensive.  So Canadians can’t afford to buy as much as they once did.  Less demand contracts supply.  Lays people off.  They spend less.  Pay less in taxes.  Collect unemployment benefits.  Government collects less and spends more.  Deficit spending.  They raise taxes to offset the deficit spending.  And the cycle repeats.

There’s been talk about establishing a VAT in the United States.  Because of out of control government spending.  Those who support it say it will help the economy.  They lie.  Taxes don’t help economies.  At least, they haven’t yet.

In order not to hurt their tourism industry the Canadians (for a time, at least) let tourists get a refund on the provincial and GST taxes paid while in Canada.  Canadians have no choice.  But tourists do.  They could choose not to go Canada.  So they allowed the refund because they knew that higher taxes don’t stimulate consumer spending.  And they wanted stimulated consumers to come to Canada to spend.

SOME CANADIANS DO have a choice, though.  Those who live near the US-Canadian border.  I’ve worked with Canadians who traveled to America to work.  They love their country.  Believe America could learn a lot from her.  But they buy their gasoline in the States.  And everything else they can to escape their own high taxes.

WHEN MY DAD was in the hospital for quintuple bypass surgery, a few of his nurses were Canadian.  They said a lot of Canadian doctors and nurses crossed the border into the United States for better paying jobs.  My dad had no complaints.  They were good nurses.  He was grateful for their care.  That’s what high paying jobs do.  Attract high quality talent.

I SAW A fund drive once while in Canada.  There was a sign on the lawn with a colored-in bar showing where they were in achieving their goal.  A hospital was raising money to buy something.  An MRI machine.  For there was none in this medium-sized Canadian city.

I WAS AT a small community hospital (in an American city) walking the grounds with the facilities manager.  He had to close a small road intersection on campus that doubled as the helipad.  The university hospital’s medical helicopter was making a test flight to this small hospital.  I asked him if they flew in many patients here.  He said no.  But they flew critical patients at this hospital to the university hospital (about 30 miles away) where they had a better chance for survival.

I ONCE WENT on a skiing vacation throughout New England and Quebec.  I skied Jay Peak, Mont Tremblant, Mont-Sainte-Anne, Sunday River, Stowe and Killington.  I remember a helicopter flying overhead at one.  (It’s been awhile, but I think it was in Canada).  There was a sanctioned FIS ski event there.  Part of the requirements for a high-speed ski event is a readily available rescue helicopter to immediately air-lift a seriously injured skier off the hill.

NATASHA RICHARDS HAD a freak accident while taking a ski lesson at Mont Tremblant in Quebec.  She fell.  Like we all have while skiing.  She got up.  Like most of us do.  Laughed it off.  She felt fine.  But there was now a silent killer at work.  She declined immediate medical attention.  After awhile, she started to feel ill.  She would subsequently die from an epidural hematoma due to a blunt impact to the head.  A shame it was only blunt.  Had it knocked her unconscious, she may have survived.  That would have demanded immediate medical attention.

She died because her initial injury was not painful enough.  She therefore had little cause for concern.  As many of us no doubt would have if we were in her place.  Critical time was lost.  Time that she couldn’t get back.  There’s no one to blame.  It was a freak accident.  What made the headlines, though, was an interesting fact.  The province of Quebec did not have a single medical helicopter (probably wouldn’t have made a difference for Richardson).  The province had determined that the cost of a helicopter system was greater than the perceived benefit.

SO THERE’S A smattering of health insurance, tax and health care anecdotes.  A small smattering, but nevertheless a smattering you can draw some conclusions from.  First and foremost, people are cheap bastards.  And they have an entitlement mentality.  Put the two together and you’ve got an ever-expanding, under-funded, welfare state.  And that can only lead to one place.  Bankruptcy.

You can’t keep raising taxes on people to solve problems.  They’re just not going to whistle a happy tune and keep paying.  They will make efforts to evade those taxes.  Or they’ll simply cut back on their spending.  And when they do, they will create other problems in the process.  Those unintended consequences that have bedeviled government planners since the dawn of government planning.

The Canadian health care system is not the utopia some claim it to be.  It’s big.  And costly.  Bureaucrats conduct cost-benefit analysis.  It’s cold and impersonal.  What is the cost per unit life saved by having a medical helicopter system?  Does the mean wait-time justify adding another MRI in a geographic region?  Or would the resultant excess capacity from a second MRI be too wasteful?  And what is the acceptable mean wait-time for a procedure?  Would a 2% cost savings from a reduction in staff be acceptable if the corresponding rise in mortality rates is kept at or below 1%?  It’s all very analytical and rational.  But when it’s your loved one in a critical condition, you’re rarely analytical and rational.  And you’ll do just about anything.  Even go to the United Stated and pay out of pocket for medical care.

Of course, if the United States adopts a Canadian system, the Canadian system should improve.  Without those better paying jobs a short drive from the border, those doctors and nurses would probably stay in Canada and work within the Canadian system.

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