Wal-Mart is the new General Motors for the Middle Class

Posted by PITHOCRATES - February 22nd, 2014

Week in Review

The left hates Wal-Mart.  Because they are nonunion.  And their low prices make it difficult for small mom & pop shops to stay in business charging their customers higher prices.  But being nonunion lets them hire more people.  And their low prices allow people to buy more with their paychecks.  Good things.  Yet the left hates Wal-Mart.  Because they would rather have union jobs even if it means fewer jobs.  And higher prices.  Despite Wal-Mart being the best thing for the middle class since General Motors (see Walmart and the middle class, sinking together by Rick Newman posted 2/21/2014 on Yahoo! Finance).

It was once General Motors (GM) whose fortunes reflected those of the middle-class Americans who bought its products. Now, that bellwether Goliath is Walmart (WMT)…

A chronically weak job market is pinching lower-income consumers — some of whom can’t even afford to shop at Walmart anymore.

The digital revolution has left Walmart at a disadvantage against etailers such as Amazon (AMZN), which has 7 times’ Walmart’s online revenue, and a much smaller physical footprint to manage.

With Walmart tied so closely to the fortunes lower-middle-class Americans, it’s no exaggeration to say that, as goes Walmart, so goes America. And vice versa…

A century ago, Henry Ford famously doubled the pay of his workers — to $5 per day — to reduce turnover and make his production lines more efficient. That move had the added benefit of raising living standards for Ford workers and helping establish the modern middle class.

Even though Walmart is the nation’s largest employer — with 1.3 million U.S. workers — it seems highly unlikely it could achieve anything similar to what Henry Ford did. Global competition gives retailers little room to raise costs without giving away pricing advantages. And fading demand for lesser-skilled workers lacking a college degree leaves few companies with a real incentive to raise wages, aside from earning a bit of public goodwill. Before Henry Ford doubled wages, his workers often left for other blue-collar jobs in a booming industrial economy. Most Walmart workers lack such options.

Amazon is nonunion, too.  But Amazon founder, Jeff Bezos, donated $2.5 million to support gay marriage in Washington State.  Donates primarily to Democrat candidates.  And supports an Internet sales tax (see What Are Jeff Bezos’s Political Leanings, and How Might They Shape the Washington Post? by David A. Graham, The Atlantic, posted 8/5/2013 on the National Journal).  So there are things the left likes about Amazon.  But they only have about 100,000 employees to Wal-Mart’s 2.2 million.  Which is why the left has an all out assault on Wal-Mart.  Because they want to unionize those 2.2 million.  For 2.2 million people would provide a lot of union dues.

Unionization or a higher minimum wage does not build a strong middle class.  A strong economy does.  That’s what helped Henry Ford raise his wages.  To keep his best workers from quitting so they could take higher paying jobs elsewhere.  Which is how people earn more money.  When an economy is so robust that there are more jobs than people to fill them.  Requiring employers to pay more to attract workers.  Not by forcing employers to pay more.  Especially during a weak economy.  When a business’ margins couldn’t be thinner.  Leaving them unable to raise wages without cutting workers.  Which the left will be glad to see.  Lost jobs.  As long as those remaining are union jobs.

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Wal-Mart Health Care Plans are better than Obamacare Plans

Posted by PITHOCRATES - January 12th, 2014

Week in Review

Government at all levels and unions hate Wal-Mart.  Because they are nonunion.  Which helps to keep their costs down.  Enabling them to offer such low prices.  And it’s those low prices that keep bringing customers through their doors.  Allowing them to make a decent profit.  So they can take care of their employees.  Including health care plans that are better than anything offered under Obamacare (see Surprise! Walmart health plan is cheaper, offers more coverage than Obamacare by RICHARD POLLOCK posted 1/7/2014 on the Washington Examiner).

For a monthly premium as low as roughly $40, an individual who is a Walmart HRA plan enrollee can obtain full-service coverage through a Blue Cross Blue Shield preferred provider organization. A family can get coverage for about $160 per month.

Unlike Obamacare, there are no income eligibility requirements. Age and gender do not alter premium rates. The company plan is the same for all of Walmart’s 1.1 million enrolled employees and their dependents, from its cashiers to its CEO.

A Journal of the American Medical Association analysis from September showed that unsubsidized Obamacare enrollees will face monthly premiums that are five to nine times higher than Walmart premiums.

JAMA found the unsubsidized premium for a nonsmoking gouple age 60 can cost $1,365 per month versus the Walmart cost of about $134 for the same couple.

The medical journal reported a 30-year-old smoker would pay up to $428 per month, in contrast to roughly $70 each month for a Walmart employee.

A family of four could pay a $962 premium, but the same Walmart family member would pay about $160.

Low premiums are not the only distinguishing feature of the Walmart plan. The retailer’s employees can use eight of the country’s most prestigious medical facilities, including the Mayo Clinic, Pennsylvania’s Geisinger Medical Center and the Cleveland Clinic.

At these institutions, which Walmart calls “Centers of Excellence,” Walmart employees and their dependents can get free heart or spinal surgery. They can also get free knee and hip replacements at four hospitals nationwide.

Many top-rated Walmart hospitals — such as the Mayo and Cleveland clinics — are left out of most Obamacare exchange plans…

Slayton said the gap between doctor availability in Chicago under the Obamacare and Walmart plans is dramatic.

“You will notice there are 9,837 doctors [under Obamacare]. But the larger network is 24,904 doctors. Huge, huge difference,” he said.

Wall-Mart can give more for less under their health care plan than the government can under Obamacare.  Which proves that the private sector is better than the public sector in doing anything.  Even health care.  So if we want quality health care for everyone then we should get rid of Obamacare and have everyone join a Wal-Mart plan.  But, of course, that won’t happen.  For Obamacare is not about quality health care for everyone.  It’s about amassing power.  Which is why governments and unions attack Wal-Mart.  And we have Obamacare.  Because this transfers money and power from the private sector to the public sector and unions.  Allowing the privileged few to live better lives than the masses.

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Washington D.C. and Detroit say ‘No’ to Wal-Mart because they don’t need Jobs or Shelves full of Low-Priced Goods

Posted by PITHOCRATES - July 20th, 2013

Week in Review

The Democrats hate Wal-Mart.  As do unions.  Because Wal-Mart stores do not have union labor.  Unions hate that.  And because Democrats and unions are joined at the hip, Democrats hate what unions hate.  Which is why you won’t find Wal-Mart stores in big Democrat cities.  Because the Democrats do everything they can to keep them out.  Even writing laws specifically targeting Wal-Mart (see Trouble in store: Why Walmart has failed to woo Washington by Rupert Cornwell posted 7/21/2013 on The Independent).

Walmart has been wooing [Washington D.C.] for years, and in 2010 announced plans to open four stores there, a number subsequently raised to six. Everything was going swimmingly, with work already started on three of the sites, until earlier this month, when the council passed its Large Retailer Accountability Act, otherwise known as “Get Walmart”.

Under it, non-unionised stores with a commercial space of 75,000ft or more – ie Walmart – will henceforth have to pay employees at least $12.50 (£8.20) an hour, compared with the city’s existing minimum wage of $8.25, and the national one of just $7.25 an hour. The company retorted by threatening to scrap three of the planned stores at once, and perhaps abandon the three where construction has begun too, causing the loss of up to 1,800 new jobs…

The case for Walmart is strong – that its stores provide working-class Americans (and many wealthier ones too) with good service and a broad selection of goods “at the lowest prices possible”, to use the words of old Sam Walton, who opened his first store in Rogers, Arkansas, in 1962. And it provides jobs: 1.4 million of them in the US alone…

Nor is Washington DC alone in feeling that way. Five of the country’s other largest cities – San Francisco, Detroit, Seattle, Boston and, above all, New York – have also said no. “As long as Walmart’s behaviour remains the same, they’re not welcome in New York City,” says Christine Quinn, the New York City council speaker who may well be the next mayor. “New York isn’t changing. Walmart has to change.”

Not by coincidence all those cities, like DC, are Democratic strongholds where unions are strong. They are liberal, socially “progressive” and, by definition, urban, while Walmart’s genes are southern, conservative and suburban.

Detroit said ‘no’ to Wal-Mart?  The city that just filed the largest municipal bankruptcy in history said they don’t need jobs or low prices on food, clothing, pharmacy and household goods?  If you’re looking for the answer to why Detroit is in the mess it is in this is your answer.  The Democrat stronghold in Detroit got so anti-business that it chased all the jobs out of the city.  Once the jobs left the people soon followed.  First the whites.  Accelerating their ‘white-flight’ following the Detroit riots.  While the blacks held on.  But after 20 years (1974 – 1994) of Coleman A. Young they gave up, too.  For they don’t come further left than Coleman A. Young.  And when you’re that far left you’re no friend to business.  So businesses stay away.  As do their jobs.

The black middle class followed the whites out of Detroit.  In pursuit of greener pastures.  And jobs.  Leaving Detroit with half the population it once had.  Impoverished.  And more anti-business than ever.  Which is why they said ‘no’ to Wal-Mart.  Because Wal-Mart isn’t union.  And the two largest employers in the city, the City of Detroit and the Detroit Public Schools, are union strongholds.  So they protected their high pay and benefit packages.  By keeping nonunion jobs out of the city.  While thinking nothing of the unemployed masses in the city.  Helping to keep the unemployment rate in Detroit well above the national average.  While the unemployed masses would have loved to see up to six new Wal-Mart stores (or more) opening in the city.  The 1,800 new jobs (or more) that would have came with them.  And shelves full of food, clothing, pharmacy and household goods at low prices that their Wal-Mart paycheck could easily afford.  But no.  Wal-Mart is not union.  So the people of Detroit have to stay unemployed.  And impoverished.

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Big Government in Europe is worried about Glencore cornering the Zinc Market

Posted by PITHOCRATES - November 24th, 2012

Week in Review

With the price of natural gas falling some providers are capping their wells until prices go up.  During the Eighties the price of oil soared, pulling oil producers into the oil business left and right.  Resulting with the oil glut of the Eighties as supply greatly outpaced demand.  OPEC tried to set the price of oil by limiting production.  But they sometimes fail as member states often cheat, selling a little more than their quota to profit from those high prices.  In America, when John D. Rockefeller was selling refined oil products cheaper than any of his competitors it was his competitors who urged the government to bring antitrust actions against him.  Not the people buying his products at low prices.  President Obama has shut down most drilling on federal lands.  But because of demand drilling on private lands is soaring.

Trying to maintain monopoly control is difficult.  And rarely can be done without the help of government (even with the help of government it’s not that easy).  Or by selling at a price below your competition.  Which rarely hurts consumers.  No, low prices hurt those who can’t sell at low prices.  Those who want consumers to pay their higher prices.  This is the power of market forces.  And greed.  For when prices go up greed lures others into the market place to cash in on those high prices.  Which brings prices down.  Supply and demand.  It’s how we have pretty much whatever we want in a complex economy.  Even just the right amount of zinc (see EU steelmakers unhappy with EU conditions on Glenstrata deal by Silvia Antonioli posted 11/22/2012 on Reuters).

EU steelmakers said Europe’s antitrust conditions for Glencore (GLEN.L) to go ahead with its $33 billion takeover of Xstrata (XTA.L) are not sufficient to prevent the dominant influence of one zinc supplier…

“The European steel industry, which uses the lion’s share of zinc metal traded in Europe, will still have to face a leading provider effectively controlling the zinc supply chain from mining to warehousing operations,” Eurofer said in a statement.

Post-merger, the parties will still have a share of around 35 per cent of the European zinc market and the vertical integration of the new entity, which includes mining, smelting, trading, logistics and warehousing, is also concerning according to Eurofer.

What’s really of concern here?  Economies of scale.  The bigger Glencore gets the lower its production costs per unit become.  And the lower their selling price can be.   This is what economies of scales get you.  Not monopoly power.  And who is hurt by lower selling prices?  Glencore’s competition.  And those supplying the other 65% of the European zinc market.

Of course, the argument always goes once someone corners the market (by driving their competition out of business with low prices) they’ll then start raising their prices.  A lot.  Oh my.  Imagine what would happen if zinc prices soared.  It would pull zinc suppliers into the European zinc market left and right to cash in on those high prices.  Can anyone name a supplier who cornered the market with low prices and now is selling at high prices that isn’t propped up by the government?

No.  Because it doesn’t happen.  Because it can’t happen.  Not with free markets.  Because of greed.  For if prices go up more people enter the market out of greed.  And the greater this greed the greater the supply brought onto market.  And the greater prices fall.

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FT135: “If corporations aren’t people than neither is government.” —Old Pithy

Posted by PITHOCRATES - September 14th, 2012

Fundamental Truth

Corporations get Wealthy by either Pleasing their Customers or Pleasing Government

Mitt Romney said during the Republican primary campaign that corporations are people.  And the Left castigated him.  While late-night comedy made jokes with that snarky, all-knowing condescension.  Because everyone on the Left knows that corporations aren’t people.  They’re evil, soulless entities.  Unfeeling and cruel.  Who care only about profits.  While poisoning our environment.  Everyone on the Left will agree with this.  And those CEOs?  They’re the worst.  A bunch of greedy, old, white men.  Except those women who shattered the glass ceiling.  Who the Left celebrates.  Even though they run evil, soulless entities.

So what is a corporation?  Other than something that comes from the bowels of hell?  Well, perhaps the simplest explanation is this.  A corporation is a business structure that lowers consumer prices.  Which reduces the cost of living for poor and middle class families everywhere.  Huh?!?  No.  That can’t be right, you say.  Because corporations are evil and soulless.  On top of that they’re not people.  So why would some evil, soulless non-humans do something that is very beneficial to humans?  In a word, greed.

There are two ways corporations can get wealthy.  Either by pleasing their customers.  With high quality, great selection and low prices.  Or by pleasing government.  Allowing them to give their customers lower quality, poorer selection and higher prices.  Because their friends in government limit competition.  So they don’t have to please their customers.  Wal-Mart is an example of a company getting rich by pleasing customers with high quality, great selection and low prices.  Wal-Mart shoppers enjoy going to Wal-Mart.  The American auto industry is an example of companies getting rich because of government.  Which restricted free market competition as much as possible in the auto industry.  Raising prices and lowering quality.  Because of this auto shoppers don’t enjoy buying American cars as much as foreign imports.  Which has made Toyota the number one car company.

The more Corporations Pursue Profits the more Choice, Quality, Variety and Lower Prices Consumers Have

Selling a large variety of high quality goods at low prices will attract customers.  And increase sales volume.  That leads to profits.  Which is what those greedy corporations want.  And one of the best ways to do this is through economies of scale.  Growing larger to have greater purchasing power.  And selling so many units that you can charge less per unit to recover overhead costs.  Thus allowing you to sell at lower prices.  And the bigger you get the more you can lower your prices.

But to get big you need to take a lot of risks.  And the biggest risk is borrowing enormous sums of money.  Because it takes money to make money.  The kind of money one person typically doesn’t have.  So how to get it?  By incorporating.  Becoming one of those evil, soulless entities.  So you can give your customers a large variety of high quality goods at low prices.  When a business incorporates a few things happen.  First of all the business becomes a legal entity.  Which protects the people running the business.  By diversifying risk to its numerous shareholders.  Who assume that risk in exchange for ownership.  Incorporating also opens the capital markets for them.  Where they can sell bonds to finance growth.  Or sell stock.  Allowing them to raise the large sums of money to open more stores/plants.  Hire more people.  And achieve economies of scale.

The more corporations that do this the more choice consumers have.  The better quality.  And the lower prices fall.  Just think of something you’ve bought recently.  And the choices you had.  The stores you visited.  The websites you visited.  How you found exactly what you were looking for and paid what you thought was a fair price.  And how you enjoyed the whole process.  Now compare that experience with, say, renewing your driver’s license.  Where you have no choice in quality or price.  Compare the friendly faces at your favorite store with the joy of waiting for them to call your number at the DMV.  When the number being served is 76.  And you have number 12.  Worse, when you make the “I have places to go look” to the civil servants behind the counter working at a snail’s pace you don’t get a friendly smile in return.  You get a look of contempt.

People in Corporations put on a more Human Face than Government Workers because they Want to Please You

When you get poor service at a store you will complain.  You will talk to management.  You will threaten to take your business elsewhere.  Or you will just take your business elsewhere without telling anyone at that business.  Giving them no chance to correct a problem that will discourage customers shopping with them.  Which is the worst thing that can happen to a business.  Because they can’t fix a problem they don’t know about.  But if they know about it they will fix it.  Because if they don’t you will take your business elsewhere.  The last thing they want you to do.  So they will strive to make your experience a good experience.

If you get poor service at the DMV, though, you don’t want to get the people who can make you wait forever angry.  Instead you smile and tell them what a great job they’re doing.  Because you can’t go anywhere else.  Which is par for the course whenever you have to deal with the government.  Where customer service is not in the employee handbook.  Which is why people usually feel fear and/or dread whenever they have to deal with a government bureaucrat.  Especially the IRS.  Which is why the dark world George Orwell wrote about in Nineteen Eighty-Four was about the oppressive world of socialism.  Not an oppressive world where corporations take over.  Because they could never do that in a free market economy.  They could only do that in a world where government chooses winners and losers in the private sector.  Which would be a world without competition.  Where there was no large variety of high quality goods at low prices.  But the grey world that Orwell wrote about in Nineteen Eighty-Four.

So what’s the difference between corporations and the government?  The people.  The people in corporations put on a more human face because they want to please you.  Because they have to please you to stay in business.  The people in government, though, don’t.  Because government doesn’t have to please you.  And don’t try to.  For where else are you going to go?

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Free Market Competition

Posted by PITHOCRATES - July 2nd, 2012

Economics 101

Competition makes Everything Better for Consumers

Let’s go back a hundred years or so.  When the railroads were making their way west.  Through barren and unforgiving country.  Where a depot is built in the middle of nowhere.  One day it will become a city but now is just a shack or two.  And a water tower along the tracks to replenish the steam locomotives.  This is the closest thing to civilization for hundreds of miles.  Railroad building supplies head west on the new track to continue the track further west.  And the trains stop to fill their locomotives with water.  You look at all that traffic passing that depot and decide to open up a diner/saloon to replenish all those people.  Who are earning wages.  But have nothing to spend them on for hundreds of miles around.

There’s no electricity yet.  Or ice.  So the meat shipped to the diner may not be the freshest.  But you can cook it with a lot of spices to hide any bad taste in case the meat is rancid.  Liquor comes out without any spoilage.  It’ll last so long that you can keep watering it down to make more money per bottle.  Your diner/saloon can be dirty and overrun with bugs.  You can just throw the bugs into the pot to make the meat go further.  It doesn’t matter.  Because for most of your customers this is the only place to come to eat and drink.  Even if they get ill from eating bad meat they’ll keep coming back.  Because where else are they going to go?

Your costs are low.  And your prices are high.  You’re doing very well.  It’s nice being the only diner/saloon at this depot.  But then a town starts growing around the depot.  And another diner/saloon opens.  It’s cleaner.  They serve fewer bugs in their food.  Their meat is less rancid.  Their liquor is less watered down.  And their prices are lower.  Everyone who eats and drinks at this depot-town eats and drinks there.  Not at your filthy shack.  You quickly go from making a lot of money to making nothing at all.  Because this new competition in town took away all of your business.  For competition makes everything better for consumers. 

When the Government Interferes with the Free Market there is no Incentive to Please their Customers

Competition is key to the free market economy.  And it’s the most important thing.  Even more important than government regulation.  Because with competition you don’t need regulations.  You don’t need inspectors.  You don’t have to file complaints.  You don’t have to wait for corrective action.  Because if you have competition you have something that works better.  And faster.  Pleasing customers.  If you don’t please them more than your competition then you will lose your customers to your competition.  This is a powerful incentive to lower your prices.  Improve the cleanliness of your establishment.  And to improve your quality.  Competition makes businesses try harder to please their customers.  On their own.  Without compulsion.

In the above example the first diner/saloon owner could have appealed to the government.  Asked the government to prohibit the second establishment from opening.  Saying that it was destructive competition.  That they were dumping lower-priced food and drink onto the market to put the first establishment out of business.  So they could raise their prices higher and lower their quality when they do.  That the market wasn’t large enough to support two businesses.  That their lower prices mean they will pay their employees less.  And a whole host of other bad things that will follow if this second business opens.  Of course the second business has none of these complaints.  Because they offer better quality at lower prices.  They don’t need the help of government.  Just a competitive free market.

If the first business should prevail in their request for government help the government will take action.  Force the second business to shut down.  Make them sell their food and drinks at higher prices.  Charge them a special excise tax on all their sales to raise money to transfer to and help the first business.  Or some other action to make the market ‘fair’ again.  Which means allowing the first establishment to continue to sell lower quality at higher prices.  Which they would.  For with the power of government helping them they have no incentive to please their customers.  So they don’t.  So people with no choice have to pay more for lower quality.  And this is what happens when the government interferes with the free market.

Free Market Competition delivers High Quality at Low Prices with the Most Efficient Allocation of Resources 

Competitive free markets also guarantee that businesses use resources in the most efficient manner.   As they try to sell the highest quality at the lowest price they will buy very carefully.  They will buy only the things they can sell.  And only enough of them to meet their demand.  For if they buy more than they can sell it will only raise their prices.  As those prices have to pay for the things they sell.  And the things they can’t sell.  So there is a very strong incentive to buy only what they absolutely need.  Leaving things for others to buy.  Which is much better than having some government bureaucrat allocate resources.

Suppose the government owned the railroad and all the depot-towns along the line.  And each depot has a diner/saloon.  Each depot-town is about the same size.  So the government bureaucrat ships the same supplies to each depot.  One barrel of flour.  One barrel of cornmeal.  One barrel of salted pork.  Two sacks of beans.  Four sacks of coffee.  Five cases of whisky.  And so on.  But the people don’t eat and drink the same in each of these depot-towns.  Some drink more liquor than others.  Some drink more coffee than others.  Some eat more meat than others.  Some eat more beans than others.  Depending on the season.  The cattle drives.  Whether the farmers are sowing or reaping.  The religious pilgrimages.  The weather.  Etc.  The local diner/saloon owners are in tune with the rise and fall of demand.  But the government bureaucrat 2,000 miles away isn’t.  So some receive more than they can use.  Others run out before the next shipment.  Making the allocation of resources inefficient.  Leading to waste.  And higher prices to pay for all of that waste.

Free market competition always works best.  And the more problems that we solve by creating more competition the better the solutions are for the people ultimately paying the prices.  The consumers.  As free market competition delivers high quality at low prices with the most efficient allocation of resources.  Giving us things like the high-definition television.  The smartphone.  The tablet computer.  And our morning coffee.  Where quality just keeps getting better while prices keep falling.  When we don’t use free market competition we get high prices, poor quality and inefficient resource allocation.  From cable television that increases rates while lowering quality (we’ll be at your house either sometime in the morning or sometime in the afternoon tomorrow or the day after.  Please have someone available at your home to meet our technician).  To waiting in line to renew your driver’s license.  Which is about as enjoyable as a root canal.

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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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FUNDAMENTAL TRUTH #20: “It is never a consumer that complains about ‘predatory’ pricing.” -Old Pithy

Posted by PITHOCRATES - June 29th, 2010

LOW PRICES.  GOD help me, I do hate them so.  I hate them with every fiber of my body.

Who says this?  Do you?  I don’t.  Of all the times I’ve spent shopping, I have never heard anyone bitch about low prices.  I’ve heard people bitch about high prices.  But never about low prices.  When gas approached $3/gallon, people bitched about that being too high and drove 10 miles to find ‘cheap’ gas to save a few pennies per gallon.  Let it approach $4/gallon and they’ll want Congress to take action.  To attack Big Oil.  To seize their oil and their profits and give us cheap gasoline in return.  But when gas was cheap, no one ever bitched about it being ‘too’ cheap.  It just doesn’t happen that way.  People bitch about high prices.  Not low prices.

So who bitches about low prices?  Competitors.  There’s a saying that competition makes everything better.  And it does.  It lowers prices.  And raises quality.  And who is looking for lower prices and higher quality?  Consumers.  Who isn’t?  Competitors.  Especially competitors with political connections.

WHEN THE BIG 3 were putting out crap in the 1970s, they did so because they could.  I mean, who else were you going to buy a car from?  So what if your car breaks down and the fenders and quarter panels rust away?  That just means you gotta buy another car sooner rather than later.  A pretty sweet deal.  Especially when there are only three places to go to buy a car.  And each of the Big 3 is selling the same crap.

Then the Japanese had to go and ruin a good thing.  They started selling cars in America.  These cars were smaller than your typical American car.  But there were other differences.  They didn’t rust like the American cars.  They didn’t break down as much.  And the imports were cheaper than the American cars.  Lower price and higher quality.  More bang for the buck.  Exactly what consumers were demanding.

So what was the response of the Big 3?  Did they rise to the level of their new competitors and deliver what the consumer wanted?  No.  They ran to government for help.  For protection.  And they got it.  Voluntary Export Restraints (VER).  The government negotiated with the Japanese to ‘voluntarily’ limit the number of cars they exported to the United States.  Or else.  So they did.  To avoid worse protectionist policies.  Problem solved.  Competition was limited.  And the Big 3 were very profitable in the short run.  Everyone lived happily ever after.  Until the Japanese refused to play nice.

The problem was what the Big 3 did with those profits.  Or, rather, what they didn’t do with them.  They didn’t reinvest them to raise themselves up to the level of the Japanese.  Protected, they saw no incentive to change.  Not when you have Big Government on your side.  And how did that work for them?  Not good. 

So look, the Japanese said, the Americans like our cars.  If the American manufacturers won’t give them what they want, we will.  While honoring the VER.  We won’t export more cars.  We’ll just build bigger and better cars to export.  And they did.  The Big 3 were no longer up against inexpensive, higher quality subcompacts on the fringe of their market share.  Now their mid-size and large-size cars had competition.  And this wasn’t on the fringe of their market share.  This was their bread and butter.  What to do?  Build better cars and give Americans more bang for their buck?  Or run to government again?  What do you think?

The Big 3 assaulted the Japanese under the guise of ‘fair trade’.  The cry went out that unless the Japanese opened up their markets to American imports (in particular auto parts), we should restrict Japanese imports.  To protect American jobs.  To protect the American worker.  To protect the children.  This was code for please make the Japanese cars more unattractive to purchasers so they will settle for the more costly and lower quality cars we’re making.  (Let’s not forget the reason Americans were buying the Japanese cars in the first place).

The Japanese response?  They took it up a notch.  They entered the luxury markets.  They launched Acura, Lexus and Infiniti.  They competed against Cadillac and Lincoln.  And well.  The quality was so good they even affected the European luxury imports.  More attacks followed.  Americans were losing their jobs.  Soon there would be no more American manufacturing left in the country.  So the Japanese built plants in America.  And Americans were now building the Japanese cars.  The Japanese actually created American jobs.

SON OF A BITCH!  So much for the loss of American jobs.  The Japanese threw a wrench in that argument.  So now the argument became about the loss of ‘high paying’ American jobs.  For the Japanese plants were non-union.  Didn’t matter that their workers were making better pay and benefits than many in their region.  No.  What mattered was that they were building a better product.  And they didn’t want THESE jobs in America.  But if they couldn’t get rid of these new workers, they should at least unionize them so their cars cost more.  To make them a little less appealing to the American consumer.  So far they have been unsuccessful in this endeavor.  The workers are happy as they are.

Well, these cars just weren’t going away.  So the Americans surrendered car manufacturing to the Japanese.  They couldn’t beat them.  (Of course, it’s hard to do that when you don’t even try).  They, instead, focused on the higher profit truck and SUV markets.  Then the Japanese entered those markets.  And at every level they competed with the Americans, the Japanese gave more bang for the buck.  And the consumers responded.  With their hard-earned wages.  It just wasn’t fair.  The Japanese kept giving the American consumer a better product.  No matter what political action the Big 3 took or demanded.

And there’s the problem.  They sought their answers from government.  Instead of making a better car.  They wanted to stop the Japanese from giving the American consumer what they wanted so they could force Americans to pay more for less.  All the while the economy was forcing the majority of consumers to get by on less (the majority of consumers do not have the wage and benefit package the ‘select’ few had in the Big 3). 

Fast forward to 2008 and we see the ultimate consequence of their actions.  Bankruptcy.  GM and Chrysler had to grovel for a federal bailout and in the process become Washington’s bitch.  Ford survived on her own.  As did the Japanese.  You can bitch all you want about costs, but if you have the revenue you can pay your costs.  And the Americans just couldn’t sell enough cars to maintain the revenue they needed for their cost structure.  By refusing to address the core problem (they weren’t making cars Americans wanted to buy), they only made their competition stronger and more entrenched in the U.S. market.

IT’S ALL POLITICS.  Political cronyism.  And crony capitalism.  It all comes down to political spoils and patronage.  That’s what happens when politics enter capitalism.  Big Business partners with Big Government and they enter into relationships.  You scratch my back and I’ll scratch your back.  But when government protects a business for political expediency, the industry suffers in the long run.  As the U.S. automobile industry has.  Ditto for the U.S. textile industry.  And the U.S. steel industry.

So what goes wrong?  When you protect an industry you insulate it from market forces.  You can build crap.  The problem is, consumers don’t buy crap.  So, for awhile, politics intervene and makes the crap more favorable.  Whether it’s predatory pricing, monopolistic pricing or collusion, business can’t win.  Big Government is there.  If your prices are too low, government will intervene.  If prices are too high, government will intervene.  If prices are too similar, government will intervene.  To make things ‘fair’.  And by fair they mean to reward those who play the game and to punish those who don’t.  And the spoils go to those large voting blocs they need.  And in return for their votes, they can count on patronage.  Government jobs.  Political positions.  Favorable legislation and regulation.  If you got the vote out, you were rewarded quite nicely. 

And consumers be damned. .

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