Rent Control reduces the Amount of Affordable Housing

Posted by PITHOCRATES - April 15th, 2014

Week in Review

Living in New York City is expensive.  High taxes.  And high property values.  But people want to live in the city.  And will pay very high rents to do so.  Which landlords can charge because there are people willing to pay them.  It’s the basic law of supply and demand.  It’s the same reason why beachfront property is so expensive.  There’s so little of it and so many people want to live there.  So the property goes to the highest bidder.  Which is why some of the richest movie and television stars own the best of these properties.  Because they are willing to pay the highest price.

Of course that’s all right for the rich.  But what about the poor and middle class?  Who can’t afford to live like rich movie and television stars?  Well, there has long been a cry for affordable housing for the less affluent.  And price controls.  To keep rents affordable for those of more modest means.  There have been various forms of rent control in New York City.  To make housing more available to the less affluent.  Which actually reduced the number of apartments available to them.  How, you may ask.  Well, when it comes to rent there are two parties.  A buyer and a seller.  We know why buyers are buying.  They want a place to live.  But why do sellers want to rent out apartments?  To make a profit.  And because rent control made it more difficult to make a profit landlords went elsewhere to make a profit.  Thus reducing the number of rental units available.

New York City still has rent-controlled apartments.  And people desperately want to live in them because rent everywhere else (at market prices) is so expensive.  So there are often battles between rent-control tenants and landlords who want to rent at market prices.  Like this (see Brooklyn landlords illegally harassed, targeted rent-stabilized tenants: suit by Erik Badia, Ginger Adams Otis posted 4/15/2014 on the Daily News).

The landlords targeted longstanding black tenants who lived in rent-stabilized apartments, the suit contends.

The plaintiffs pay anywhere from $600 to $1,400 a month for 52 three-bedroom units in the three buildings, according to the lawsuit…

The group claims the landlords, who bought the buildings in 2009, have neglected to do repairs in black-occupied units…

Approximately 15 new tenants have moved in since then, paying market rents as a high as $2,500, the plaintiffs claim…

Pilgrim, who pays a stabilized $950 rent for his apartment, said he has talked to new tenants who had told him they are paying more than double that rate…

“How can you go from paying $687 a month to $2,500 a month? They’re also taking advantage of these young kids,” Bell said.

The tenant sees the landlord as being greedy.  While the landlord sees that apartment being rented 72.5% below what it could be renting for.  If the roles were reversed the tenant would probably do the same thing.  Because people want to make money.  And people want to be rich.  That’s why they buy lotto tickets.  And try to make it in movies and television.  To be rich and famous.  They don’t buy properties to see how little money they can make with them.  They buy them to see how much money they can make with them.  Movie stars would never put their mansions up for sale at 72.5% below what other rich people would pay for them.  Just as a middle class homeowner would never sell her home for 72.5% below what someone would pay for it.

The law of supply and demand bring buyers and sellers together at a price they both agree on.  Making both parties happy.  When laws interfere with market prices (such as rent control) both parties are seldom happy.  Buyers tend to be happier.  But because sellers are so unhappy they stop selling.  Thus reducing the number of apartments available to rent.  Which is why rent control doesn’t work.  It actually reduces the amount of affordable housing.  So that only a very lucky few can enjoy life in a rent-control apartment.

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The Cost of Recalls and Lost Goodwill

Posted by PITHOCRATES - April 7th, 2014

Economics 101

Manufacturers make a Point of not Killing their Customers because it’s just Bad for Business

There have been some costly recalls in the news lately.  From yoga pants that were see-through.  To cars with faulty ignition switches that can turn the engine off while driving.  Disabling the power steering and airbags.  Resulting in the loss of life.  These recalls have cost these companies a lot of trouble.  Including financial losses from the recalls and lawsuits.  Being called to testify before Congress.  And possible criminal charges.

No surprise, really.  As those who distrust corporations would say.  For they believe they constantly put their customers at risk to maximize their profits.  Even if it results in the death of their customers.  Which is why we need a vigilant government to keep these corporations honest.  So they can’t sell shoddy and dangerous goods that can kill their unsuspecting customers.  Which they will do if the government doesn’t have strong regulatory powers to stop them.  Or so says the left.

Of course, there is one problem with this line of thinking.  Dead customers can’t buy things.  And when word spreads that a corporation is killing their customers people don’t want to be their customers.  Because they don’t want to be killed.  Manufacturers know this.  And know the price they will pay if they kill their customers.  So manufacturers make a point of not killing their customers.  Because it’s just bad for business.

The Longer it takes to Recall a Defective Product the Greater the Company’s Losses

Manufacturing defects happen.  Because nothing is perfect.  And when they happen they are both costly and a public relations nightmare.  As no manufacturer wants to lose money.  And, worse, no manufacturer wants to lose the goodwill of their customers.  Because it’s not easy earning that back.  Which is why executive management wants to acknowledge and resolve these defects as soon as possible.  To limit their financial losses.  And limit the loss of their customers’ goodwill.

Let’s illustrate this with some numbers.  Let’s assume a company manufactures 5 product lines ranging from low price to high price.  The lowest priced product has the greatest unit sales.  And the lowest margin. The highest priced product has the fewest unit sales.  And the highest margin.  The other three items fall in between.  Rising in price.  And falling in margin.  Summarized here.

Cost of Recall - Gross Margin per Product Line R1

So each product line produces a sales revenue, a cost of sales and a gross margin (sales revenue less cost of sales).  Adding these departmentalized numbers together we can get total sales, cost of sales and gross margin.  And subtract from that overhead, interest expense and income taxes.  Summarized here.

Cost of Recall - Net Profit

So on approximately $5.8 million in sales this company earns $312,414.  A net profit of 5.4%.  Fictitiously, of course.  Not too bad.  That’s when everything is working well.  And they have nothing but satisfied customers.  But that’s not always the case.  Sometimes manufacturing defects happen.  Which can turn profits into losses quickly.  And the longer it takes to address the defects the greater those losses can be.

Losing the Goodwill of your Customers will end up Costing More than any Product Recall

Let’s say Product 3 suffers a manufacturing defect.  By the time they identify the defect and halt production of the defective product they’ve produced 20% of the total of that product for the year.  Which they must recall.  Limiting their losses to 20% of the total of that product run.  Which they will have to refund the sales revenue for.  But they will have to eat the cost of sales for those defective units.  And despite the company’s quick response to the defective product and providing a full refund to all customers their goodwill suffers from the bad press of the recall.  Summarized here.

Cost of Recall - Recall

Refunding customers for the 20% of the line that was defective reduced net profits from 5.4% to 0.7%.  And when they lose some customers to their defect-free competition they lose some customer goodwill.  Resulting in a 15% drop in sales.  Leaving manufactured product unsold that they have to sell with steep discounting.  Bringing their sales revenue further down while their cost of sales remains the same.  Turning that 0.7% annual profit into a 2.8% loss.  But as time passes they recover the lost goodwill of their customers.  Limiting these losses in this one year.  Now let’s look at what would probably happen if the company had a ‘screw you’ attitude to their customers.  Like many on the left fervently believe.  Summarized here.

Cost of Recall - Loss of Goodwill R1

The company did not recall any of the defective products.  As word spread that this company was selling a defective product sales of that product soon fell to nothing after selling about 50% of the annual production run.  The other half sits unsold.  Even steep discounting won’t sell a defective product.  And seeing how they screwed their customers on the defective products sales fall on their other products (in this example by 30%).  As they don’t want to suffer the same fate as those other customers.  So what would have been only a $159,929 loss with a recall becomes a $1,494,344 loss.  Over nine times worse than what it could have been without a large loss of customer goodwill.  And this is why executive management moves fast to identify and resolve defects.  Because losing the goodwill of their customers will end up costing more than any product recall.  As it can take years to earn a customer’s trust again.

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Health Care Economics

Posted by PITHOCRATES - January 20th, 2014

Economics 101

Because Obamacare Insurance pays for everything Under the Sun it is anything but Insurance

Do you know what the problem is with health care?  Insurance plans that give away free flu shots.  Not that flu shots are bad.  They’re not.  And it’s a good thing for everyone to get one every year at the onset of the flu season.  For it does seem to limit the spread of the flu virus.  It’s because we get a flu shot every year is why insurance shouldn’t pay for it.  Because we know about this expense.  And we can budget for it.  Just like we can budget for our monthly cellular bill.  Which is in most cases more than ten times the cost of one annual flu shot.

When Lloyds of London started selling marine insurance at that coffee shop they were selling insurance.  Not welfare.  Losing a ship at sea caused a huge financial loss.  And shippers wanted to mitigate that risk.  So every shipper paid a SMALL premium to protect against a LARGE loss.  A POTENTIAL sinking and loss of cargo.  Not every ship sank, though.  In fact, most ships did not.  Which is why that little bit from everyone was able to pay the financial loss of the few shippers that lost their ship and cargo.  But that’s all that Lloyd’s of London paid for.  They didn’t pay a dime to shippers whose ships didn’t sink.  No, those shippers paid every cent they incurred (crew, food, rum, etc.) to ship things across those perilous oceans.  Because they could expect those costs.  And they could budget for them.

This is how insurance works.  Which isn’t how our current health insurance system works.  No.  Today people don’t want to pay for anything out-of-pocket.  Not the unexpected catastrophic costs.  Or the EXPECTED small costs that everyone can budget for in their personal lives.  Like an annual flu shot.  Childhood vaccinations.  Annual checkups.  Childbirth.  Etc.  Even the unexpected things that aren’t that expensive.  Like the stitches required when a child falls off of a bike.  Things that would cost less than someone’s monthly cellular bill.  Or things that people can plan and save for.  Like a house.  A car.  Or a child.  Which is why Obamacare insurance is not insurance.  It pays for way too many expected costs that we can budget for.  And because it does it only increases the cost of our health insurance policies.  Which are now anything but insurance.

Free Market Forces and Insurance for Catastrophic Costs will Fix any Problems in our Health Care System

When we pay these things out-of-pocket there are market forces in play.  For a doctor is not going to charge someone they’ve been seeing for years as much as he will charge a faceless insurance company.  Even today some doctors will waive some fees to help some of their long-time patients during a time of financial hardship.  Because there is a relationship between doctor and patient.  And they want to help.  Which is why they sometimes overcharge insurance companies to recover costs they can’t recover in full from other patients.  (Which is why insurance companies are vigilant in denying overbillings).  Especially those things government pays for.  Medicaid.  And Medicare.  Which the government discounts.  Leaving health care providers little choice but to overbill others to pay for what the government does not.

When we pay out-of-pocket doctors can’t charge as much.  Because they need patients.  If they charge too much their patients may find another good doctor that charges a little less.  Perhaps a younger one trying to establish a practice.  These are market forces.  Just like there are everywhere else in the economy.  Even a cancer patient requiring an expensive miracle drug benefits from market forces.  If there was true insurance in our health care system, that is.  Cancer is an unexpected and catastrophic cost.  But not everyone gets cancer.  Just as every ship does not sink.  Everyone would pay a small fee to insure against a financial loss that can result from cancer.  Where that little bit from everyone buying a catastrophic health insurance policy was able to pay the financial loss of the unfortunate few that require cancer treatment.  Even one including a costly miracle drug.  Because only a few from a large pool would incur these financial losses insurers would compete against other insurers for this business.  Just like they do to insure houses.  And ships crossing perilous oceans.

Health care would work better in the free market.  It doesn’t today because government changed that.  Starting with FDR putting a ceiling on wages.  Which forced employers to offer generous benefits to get the best workers to work for them when they couldn’t offer them more pay.  This was the beginning.  Now the health insurance industry is so bastardized that it doesn’t even resemble insurance anymore.  It’s just a massive cost transfer from one group of people to another.  Instead of a pooling of money to insure against financial risk.  For the few unexpected and catastrophic costs we cannot afford or budget for to pay out-of-pocket.

Because our Health Care System is the Most Expensive in the World it is the Best in the World

The American health care system is the finest in the world.  When you have a serious health care issue and you have the wherewithal there’s only one place you’re going for your medical care.  The United States.  And the best costs.  And it’s because it is so costly that people enter into the health care industry to do wonderful things.  Such as pharmaceutical companies.  Who many rail against for charging so much for the miracle drugs only they produce.  It’s a free country.  Anyone could have created that miracle drug.  All they had to do was to spend a boatload of money for years on other drugs that were losers.  Until they finally found one that wasn’t a loser.  That’s all you had to do.  Yet few do it.  Why?

Because creating miracle drugs is an extremely expensive and often futile endeavor.  Which is why we award patents to the few who do.  Which is the only reason they pour hundreds of millions of dollars into research and development and pay massive liability insurance premiums for taking a huge risk to put a drug onto the market that may harm or kill people.  They do this on the CHANCE that they may develop at least one successful drug that will pay for all of the costs incurred to develop this one drug, the costs for the countless drugs that failed AND provide a profit for their investors.  Who took a huge risk in paying their employees over the many years it took to come up with at least one drug that wasn’t a loser.  Their investors do this only because of the CHANCE that this pharmaceutical will develop that miracle drug that everyone wants.  But most don’t.  And investors just lose their investment.  But it’s the only way miracle drugs become available to us.  Because of rich investors who were willing to risk losing huge amounts of money.

This is what the profit incentive gives us.  The best health care system in the world.  Why the countries based on free market capitalism have the finest health care systems in the world.  And why North Korea, Cuba, the former East Germany, the former Soviet Union, Venezuela, etc., have never given us miracle drugs.  There never was an economic incentive throughout the economy to do so.  Like there is in countries with free market capitalism.  Where everyone at every level pursues profits that result overall in a pharmaceutical industry that produces these miracle drugs.

There is an expression that says you get what you pay for.  Our health care system is the most expensive in the world.  And because it is it is the best in the world.  Trying to inhibit the profit incentive for research and development and forcing medical providers to work for less (steeper Medicaid, Medicare and now Obamacare discounts) will change that.  Because you do get what you pay for.  And those who live/have lived in North Korea, Cuba, the former East Germany, the former Soviet Union, Venezuela, etc., can attest to.

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McDonald’s 2012 Annual Report

Posted by PITHOCRATES - August 6th, 2013

History 101

The Benefit of a McDonald’s Franchise is getting the Benefit of their Years of Building their Brand

Recently a late-night comedy show attacked McDonald’s for being greedy.  Because they don’t pay their minimum wage workers a living wage.  Because what were once entry level jobs are now the primary support for some families.  And why have entry level jobs come to support families?  Because the anti-business policies of the current administration have destroyed better-paying jobs.  But they don’t attack that on late-night television.  They attack a company actually providing jobs in a jobless economy.

Today McDonald’s is huge.  You can find them pretty much anywhere in the world.  Which can be a welcome site for a weary traveler.  For they know they can walk into a McDonald’s wherever they are and have the comfort of a meal exactly like that at home.  Which is pretty amazing if you think about it.  And why McDonald’s is so successful.  The sight of those Golden Arches can attract a foreigner in a strange land or a construction worker on a new project in a distant city.  They know exactly what they can get at that McDonald’s.  What it will taste like.  And what it will cost.  Even if they’ve never been in that McDonald’s before.

This is because McDonald’s has very successfully built their brand.  Which is one of those intangible things.  It has great value.  But you can’t physically touch it.  Those who own a McDonald’s franchise can enjoy a thriving business.  From day one.  Without doing any marketing to get people to walk into their restaurant.  They don’t have to.  Because McDonald’s has already done it.  And continues to do it.  This is the benefit of the franchise.  You get the benefit of all those years of hard work McDonald’s did to build their brand by simply paying a franchise fee (see Restaurants and Franchises posted 8/5/2013 on Pithocrates).  It’s not cheap.   But it’s such a fair deal for both franchiser and franchisee that McDonald’s had 27,882 franchised stores in 2012 (see McDonald’s 2012 Annual Report, page 11).

Owning a McDonald’s Franchise allows you to own a Restaurant that has been Successfully in Business for 72 Years

In addition to the intangible value of the brand the franchise fee also includes rent.  For McDonald’s “owns the land and building or secures long-term leases” for the franchisee’s store (see McDonald’s 2012 Annual Report, page 11).  While the franchise needs to foot the bill for the “equipment, signs, seating and décor.”  This makes sure all stores are modern and up to date and uniform.  Helping to maintain that comfortable familiarity for the customers.  While splitting the capital costs between the franchisee and franchiser.  So both parties have a major investment in the business.  And each shares in the profits of the business.  Perhaps the best of the deal for the franchisee is getting a mentor.  And a detailed operating manual telling them everything they need to know and do.

Owning a McDonald’s franchise is costly.  But you get to step into a restaurant that has been successfully in business for 72 years.  Give or take.  Considering that half of all restaurants fail within the first five years of business this is a HUGE benefit for the franchisee.  And something well worth the franchise fee.  As evidenced by 27,882 franchised stores in 2012.  So what is that franchise fee?  And how much money does the franchisee get to keep after paying the franchise fee?

Well, if you do a little number crunching with the financials included in the 2012 annual report you can get an approximate number.  McDonald’s also has stores they own and operate.  In 2012 they had 6,598 company-owned stores.  The average per store revenue was $1,358,594 (calculated by dividing the total revenue from the company-owned stores by the number of company-owned stores).  A similar calculation gives an approximate $667,205 franchise fee per franchised store.  Subtracting the typical franchisee fee from the typical store revenue (assuming all stores have the same average revenue as the company-owned stores) gives the franchisee an annual income of $691,389.  From this income the franchisee has to pay for food, labor and overhead.  And whatever is left over is profit.

High School Kids and College Students work at McDonald’s because they need no prior Restaurant Experience

The rule of thumb in restaurants is that costs are broken down into thirds.  One third is food cost.  One third is labor cost.  And one third is overhead and profit.  So if we divide that $691,389 by 3 we get an annual food cost per franchised store of $230,463.  Ditto for labor.  And overhead (gas, electric, water, insurances, taxes, licenses, fees, waste disposal, light bulbs, toilet paper, soap, garbage bags, etc.) and profit.  Let’s look at the labor cost more closely.  To see if McDonald’s is greedy when it comes to paying their employees.

The benefit of owning a franchise is that it comes with very explicit instructions.  A McDonald’s distributor delivers prepared food ready for the grill and fryer.  As delicious as it is, though, it doesn’t take a highly skilled chef to prepare it.  As the franchisee operating manual has it down to a science.  Which is why high school kids and college students work at McDonald’s.  They need no prior restaurant experience as it is an entry level job.  Typically their first job.  Where they learn what it’s like entering the workforce.  The importance of being on time.  Following instructions.  Being responsible.  Skills that they will use in later jobs.  Which most do.  As there is a high turnover of employees at McDonald’s as there is for all fast food.  Because these are entry level jobs for unskilled workers.  Who learn the skills they need on the job.  So let’s assume a restaurant that is open 24 hours a day, 7 days a week.  Assuming an hourly rate of $8.50 and an overhead of 40% for direct labor costs (workers’ compensation insurance, unemployment taxes, health insurance, uniforms, training, etc.) the average hourly labor cost comes to $11.90.  Dividing the labor cost of $230,463 by this hourly cost gives us 15,758 annual labor hours.  Or about 53.06 hours per day.  Or 17.69 hours per 8-hour shift.  Giving us an average of 2.21 workers per 8-hour shift.

During the breakfast and lunch rush a typical McDonald’s may have between 5-8 people working.  With fewer working in the evening.  And a skeleton crew over night working the drive-thru.  So the labor fluctuates during the day to correspond to the amount of business.  Which is why there are a lot of part-time workers at McDonald’s.  Ideal for high school and college kids.  In addition the owner typically works during those busy periods to help with the rush.  And works on paperwork during the slower times.  Putting in about 12 hours a day.  If you assume an overhead rate of 18% and multiply that to the franchisee annual income of $691,389 we get an overhead expense of $124,450.  Subtracting that from the $230,463 (overhead & profit) leaves an annual owner income of $106,013.  Or, based on a work week of 84 hours (12 hours a day X 7 days a week), the owner earns about $24.27 an hour.  A rate a lot of people can earn working for someone else without the headaches of owning a business.

That late-night comedy show attacked McDonald’s for being greedy.  Saying they should increase their pay rate to a living rate.  Like picketers were asking for.  $15/hour.  A labor cost increase of 82.6%.  Or an additional $190,382 each year.  Which would bring the franchisee’s annual income from $106,013 to an annual loss of $84,369.  So are these McDonald’s franchisees greedy because they refuse to pay a living wage?  No.  They simply can’t afford to pay more than the minimum wage for these minimum wage jobs.  Unless they can get people to spend $6-$7 for a Big Mac.  They are delicious.  But are they $6-$7 delicious?  And can a low-income family afford to take the family to McDonald’s when they are charging $6-$7 per burger?  Probably not.  No.  McDonald’s is just fine.  What we need to do is to un-do the anti-business policies of this administration that is killing those higher-paying jobs.  And forcing the primary earner in some families to work a minimum wage job.  Because that’s all that is available in this jobless economy.

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One Pharmaceutical Company spent on Average $12 Billion per new Drug they brought to Market

Posted by PITHOCRATES - July 28th, 2013

Week in Review

People hate pharmaceutical companies.  They think they’re gouging them on the price of their medication.  If the people only knew what it cost to bring a new drug to market (see The Truly Staggering Cost Of Inventing New Drugs by Matthew Herper posted 2/10/2012 on Forbes).

The average drug developed by a major pharmaceutical company costs at least $4 billion, and it can be as much as $11 billion…

Bernard Munos of the InnoThink Center for Research In Biomedical Innovation…divided each drug company’s R&D budget by the average number of drugs approved…

The range of money spent is stunning. AstraZeneca has spent $12 billion in research money for every new drug approved, as much as the top-selling medicine ever generated in annual sales; Amgen spent just $3.7 billion. At $12 billion per drug, inventing medicines is a pretty unsustainable business. At $3.7 billion, you might just be able to make money (a new medicine can probably keep generating revenue for ten years; invent one a year at that rate and you’ll do well).

…the main expense is failure.

Why include failure in the cost? Right now, fewer than 1 in 10 medicines that start being tested in human clinical trials succeed…

It really does cost billions of dollars to invent new medicines for heart disease, cancer, or diabetes. The reality is that the pharmaceutical business is in the grip of rising failure rates and rising costs. We can all only hope that new technologies and a better understanding of biology will turn things around.

This is why our medicines are so expensive.  And why we have to wait for patents to run out before cheap generics hit the market.  Because whoever will manufacture those cheap generics didn’t have to spend $12 billion to bring the drug to market.

If drug companies can’t recover these massive costs they may do something worse than charge us an arm and a leg for a drug that will save our life.  They may stop bringing drugs that can save our life to market.

People say the profit incentive shouldn’t guide something as important as health care and medicine.  But what is the alternative?  Have the government spend $12 billion to develop a life-saving drug?  Because they’re so smart and motivated by social responsibility?  Instead of profit?  Yeah, they sure can pick winners in the private sector.  Like Solyndra.  If you’re not familiar with the name it’s because Solyndra filed bankruptcy.  Because their solar panels were the wrong solar panels to bet on in the private sector.  But the federal government bet $535 million in loan guarantees because they were so sure that Solyndra was a winner.  And their bankruptcy shows why we don’t want the government spending $12 billion to develop a life-saving drug.  For the federal government is just not good at bringing things to market.

So if we want these life-saving drugs we have to let these drug companies recoup the $12 billion they spent to bring a new drug to market.  For the sad reality is that $12 billion is a bargain compared to what the government would spend.

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Government Officials want Businesses to do their Social Duty after making it so Difficult for them to Earn a Profit

Posted by PITHOCRATES - July 27th, 2013

Week in Review

You know a country is intervening too much into the private sector economy when they start saying things like this (see Hiring UK workers ‘more important’ than profit, Matthew Hancock indicates by Peter Dominiczak posted 7/26/2013 on The Telegraph).

Mr Hancock, the business and skills minister, has said that companies have a “social duty” to employ young British workers rather than better-qualified immigrants.

He said that employers should be prepared to invest in training British staff rather than simply looking for “pure profit”.

“During the last boom there was a lot of recruitment from abroad and, in fact, youth unemployment went up, even during the boom.

“This is about a change of culture. I’m arguing that it is companies’ social responsibility, it is their social duty, to look at employing locally first.

“That may mean that they have to do more training. It may mean more training in hard skills, in specific skills. Or it may mean training in the wherewithal, the character you need in order to hold down a job.

Of course, the question that gets begged to ask is this.  Why do the immigrants have better training in hard skills, have better training in specific skills and have the character to hold down a job?  Why is it that the British youth is not as employable as these immigrants?  Is it the British educational system?  What exactly are these other countries doing better than Britain that their people are better qualified for these jobs?  Or is it that these immigrants are just older and more responsible and desperate for work?  As there is no generous welfare state in their country to support them in their unemployment?  Has the government created an environment where businesses have to turn to better-qualified immigrants?

If Mr. Hancock thinks business should hire people based on social duty instead of what’s best for the bottom line then why doesn’t he show these businesses how it’s done.  Let him create a business that hires based on social duty instead of profit.  Of course, without profit it will require Mr. Hancock to use more and more of his personal funds to finance business operations.  Such as paying to train those unqualified workers.  But I’m guessing he won’t do that.  Because he’s a government official.  And will only risk the taxpayers’ money.  Force businesses to take greater risk with their money (by operating at a lower profit level due to higher taxes and regulatory costs).  But he won’t risk his money.  No.  Anything but that.  But he’s perfectly okay with everyone else risking theirs.

Perhaps this is the reason why these immigrants are better qualified for these jobs.  People in government managing the private sector economy who don’t know the first thing about business.  But think they do.  And have no idea of just how ignorant they are.

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North Korea turning to Free Markets to End Famine and Abject Poverty

Posted by PITHOCRATES - June 2nd, 2013

Week in Review

Our public schools are teaching our children that capitalism is evil and unfair.  That government is needed to prevent business owners from making too much profit at the people’s expense.  Our public schools teach our kids this because the left controls our public schools.  And the left hates capitalism.  They would love to replace capitalism with socialism.  An egalitarian system that puts people before profits.  Because putting people before profits is the only way to truly increase the quality of life.  Unless you actually live in a place where they put people before profits (see NKorean farmers planting rice with profits in mind by AP posted 5/31/2013 on Yahoo! News).

Farmers say they have begun working under the new policies, which are designed to boost production by giving managers and workers financial incentives. Foreign analysts say the moves to spur North Korea’s moribund economy suggest Pyongyang is taking cues from Beijing on how to incorporate free market ideas within its rigid socialist system…

Impoverished North Korea suffers chronic food and power shortages and has not released economic data for decades. South Korea’s central bank estimates the North’s gross national income, an indicator of the average standard of living, was $1,250 per person in 2011 compared with $23,400 in South Korea.

In the past, the North Korean state set workers’ salaries. Under new measures announced April 1, the managers of farms, factories and other enterprises have been given leeway to set salaries and offer raises to workers who help drive up production…

Beijing dismantled its centrally planned economy slowly. In the 1970s, it began allowing farmers to keep more of their harvests, giving them an incentive to grow more to sell on newly permitted free markets. Food production soared.

In the mid-’80s, the government gave state enterprises the authority to link bonuses and salaries to better performance. Those changes were mostly aimed at managers, but they cracked a communist-era preference for egalitarianism.

New rules in the early 1990s gave state enterprises full flexibility to set wages, widening the use of performance incentives. In that decade, China truly broke away from its centralized “iron rice bowl” system of guaranteed employment and state-set incomes…

At the Tongbong farm in the eastern city of Hamhung, farmers are in the midst of a busy rice planting season after a long, cold winter.

A long, cold winter?  Guess there’s no global warming in North Korea.

North Korea’s “rigid socialist system” has impoverished and starved her people.  As well as left them in the dark as they don’t have the energy to light up the night.  This is egalitarianism.  Everyone’s life is equally miserable.  This is what socialism gets you.  Countries like North Korea, Cuba, the former Soviet Union and China under Mao.  Countries notable for their abject poverty.  And occasional famine.  This is what the left wants America to be.  Egalitarian.  Where we put people before profits.  Where no one has any incentive to do anything.  Because working harder than the next guy doesn’t improve your lot in life.  So you don’t work harder.  You do the minimum.  Because why work harder when the outcome is always the same?  Misery.

No doubt the American left disapproves of North Korea’s introduction of market forces.  And the profit incentive.  For it puts profits before people.  They’d rather see another layer of bureaucracy.  And another 5-year plan.  Where brilliant government elites think brilliantly to solve the nation’s problems.  Instead of leaving it to the chaos of the free markets.  For what did the chaos of the free markets ever do for the people?  Other than give them an obesity problem while socialism gives her people famine.  Free markets give her people smartphones and the Internet.  While Socialism can’t even light up the night.  And free markets give her people peace and happiness.  While socialism gives her people fear and intimidation.

Of course, the American left doesn’t have a problem giving fear and intimidation to some people.  As the IRS persecution of conservatives shows.  Which is perhaps why the American left admires socialism so much.  Why they insist that we put people before profits.  Because when we do we move closer to a police state like they have in North Korea.  Something the American left no doubt would like.  For it would make it easier for them to persecute their political enemies.

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How a 12-Year Old Canadian and U.S. Unions see Business Differently

Posted by PITHOCRATES - May 12th, 2013

Week in Review

Advancing technology has greatly increased productivity.  Allowing fewer workers to do what workers a generation earlier did.  Causing our workforce to age.  Fewer workers are entering the workforce than are leaving it.  And costly union contracts paying pensions and health care to those who have left the workforce has decimated union membership.  For the costs they place on business have made these businesses uncompetitive in the market place.  Chasing manufacturing jobs out of the country.  Leaving union membership in the private sector at its lowest rates since the heyday of the labor movement.  To understand why let’s take a business lesson from the Canadians.  Who are trying to encourage their kids to become entrepreneurs.  Unlike in America.  Where business and profits have become a 4-letter word (see Canadian entrepreneurs: Born or made? by BARRIE McKENNA posted 5/10/2013 on The Globe and Mail).

[Entrepreneurial Adventure] pairs students with local business people to create a business, design a product, sell it and then give the profits to charity.

Why?

Evidence suggests Canada suffers from a weak entrepreneurial culture. While it’s relatively easy to start a company, the record of turning start-ups into fast-growing and successful enterprises is less convincing.

A 2010 study by Industry Canada…

… found that Canada generates a lower proportion of fast-growing companies than other developed countries, that relatively few small companies export and that the age profile of business owners is getting older…

Many business schools, including McGill University and the University of Toronto, now offer special entrepreneurship programs.

This is a problem.  For the number one job creator in any free market economy are small business owners.  People who go into business for themselves.  Taking great risk.  And hiring people as they grow.  This is the entrepreneurial spirit.  People who start out small.  And become someone like Steve Jobs.  Most people don’t understand the entrepreneurial process.  And the importance of having a business-friendly environment to encourage entrepreneurialism.  To create jobs.  To grow a healthy economy.  Creating new products that make our lives better.  And to do that one of the first things an entrepreneur must learn is what this 12-year-old learned.

“Some things work and some don’t,” acknowledged Alim Dhanani, 12, who worked on project management and Web design for the company. “To sell something, you have to have the right price. Not too small, so you have a profit, but not too big, so people will buy it.”

A 12-year-old can understand this.  The role of prices in the economy.  They have to be high enough to pay the bills.  But low enough to encourage people to buy from you.  Often times it’s not a matter of a business owner determining the price he or she wishes to charge.  They have to figure out how to pay their bills (and earn a profit) at the prevailing market price.  Something labor unions don’t understand.  Or they simply don’t care (see Fast-food workers in Detroit walk off job, disrupt business by Steve Neavling and Lisa Baertlein posted 5/10/2013 on Reuters).

Hundreds of fast-food employees in Detroit walked off the job on Friday, temporarily shuttering a handful of outlets as part of a growing U.S. worker movement that is demanding higher wages for flipping burgers and operating fryers.

The protests in the Motor City – which is struggling to recover from the hollowing out of its auto manufacturing sector – marked an expansion in organized actions by fast-food workers from ubiquitous chains owned by McDonald’s Corp, Burger King Worldwide and KFC, Taco Bell and Pizza Hut parent Yum Brands Inc.

Fast-food workers, who already have taken to the streets in New York, Chicago and St. Louis, are seeking to roughly double their hourly pay to $15 per hour from around minimum wage, which in Michigan is $7.40 per hour…

“People can’t make a living at $7.40 a hour,” said Rev. Charles Williams II, a protest organizer. “Many of them have babies and children to raise, and they can’t get by with these kind of wages.”

Those workers face high hurdles in their fight for better pay. Low-wage, low-skill workers lack political clout and face significantly higher unemployment than college graduates…

The Detroit action was put together by the Michigan Workers Organizing Committee, an independent union of fast-food workers, that is supported by community, labor and faith-based groups such as the Interfaith Coalition of Pastors, UFCW Local 876, SEIU Healthcare Michigan and Good Jobs Now.

The unions want to do to fast-food what they did to the automotive industry.  In this case the union basically gave unskilled workers the wages and benefits of skilled workers.  Sounds great if you’re an unskilled worker.  But the UAW priced the U.S. auto manufacturers out of the market.  The Big Three are a shell of what they used to be.  With both General Motors and Chrysler requiring taxpayer bailouts to avoid bankruptcy.  And pay for their crushing pension and health care cost obligations.  For GM was paying for more people not working than they were paying to work.  Even a 12-year-old can understand that this is a business model that just won’t work.

So what will happen in fast-food restaurants if you raise the labor wage from $7.40 per hour to $15 per hour?  That’s a labor cost increase of 103%.  In the restaurant business the rule of thumb for calculating your selling prices is as follows.  You calculate your food cost then triple it.  For in general one third of a menu price goes to food.  One third goes to labor.  And one third goes to overhead (utilities, rent, insurance, etc.) and profit.  Now let’s take a typical combination meal (sandwich, fries and beverage) price of $7.50.  One third of this price is $2.48 which represents the labor portion of the price.  The increase in labor is 103%.  So we take 103% of the $2.48 ($2.54) and add it to $7.50 to get the new selling price of the combo meal.  Bringing it to $10.04.

What will customers do?  Now that the combo meal will cost $2.54 more will they just continue to eat fast-food like they once did?  Will they stop adding an extra item from the dollar menu?  Will they just buy a burger and eat it with a beverage from home?  Will they just buy from the dollar menu instead of buying combos?  Of course, with the increase in labor costs that dollar menu will have to become the $2.03 menu.  Will people stop going to fast-food as often as they once did?  Some may decide that if they’re paying for a $6 hamburger the may go to a diner or bar for a $6 hamburger.  Worried about the lost business would fast-food owners try to cut their costs elsewhere to try to continue to sell fast-food at the market price?  By hiring fewer people?  Pushing current workers to part-time so they don’t have to give them costly health insurance?  Or will they just close their restaurant.  As people just won’t pay fancy restaurant prices for fast-food.

That 12-year-old in Canada would understand how the higher labor costs would affect business.  Causing changes in buying habits.  And changes in business practices.  He would not start up a fast-food franchise if labor prices were 103% higher than they are now.  For he would have to raise prices high enough to pay the bills.  But when he did they might be too high to get people to come in and buy food.  Causing a fall in business.  And a loss in revenue.  Making it more difficult to pay the bills.  That 12-year-old would see this as bad business.  Because he understands that a business owner can’t charge whatever he wants to charge.  He has to figure out how to stay in business while selling at the prevailing market price.  And though he may love fast-food he knows that his allowance won’t be able to buy as much as it once did.  So he would reduce his purchases at fast-food restaurants.  Just as his father will probably take the family out less often because of the higher prices.  Just as single mothers struggling to pay their household bills will, too.  But the unions don’t understand this.  Or simply choose not to.  Instead they just tell the workers that their employers are greedy.

It’s a sad day when a 12-year-old has better business sense than our unions.  Then again if unions cared about business they wouldn’t have bankrupted two of the Big Three.

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Obamacare is Raising Health Care Costs and Causing People to Lose their Health Insurance

Posted by PITHOCRATES - April 13th, 2013

Week in Review

Members of Congress think they’re smarter than the average business owner.  But they’re not.  In fact, when it comes to running a business most Congress people don’t have a clue.  Yet they continuously pass new legislation.  Discounting any concerns business owners may have.  With a certain measure of disdain.  For business owners are, after all, the enemy.  Because they object to paying higher taxes.  And they object to higher regulatory costs.  Just so they can keep their earnings.  And that’s just being greedy.

When the Democrats rammed Obamacare through Congress on a straight party vote the business community said this legislation was going to hurt them.  But Congress didn’t care.  Their basic attitude was ‘screw them’.  They’re just greedy.  But they weren’t being greedy.  They were just worried how they were going to stay in business under Obamacare (see Some Small Businesses Opt for the Health-Care Penalty by EMILY MALTBY and SARAH E. NEEDLEMAN posted 4/8/2013 on The Wall Street Journal).

Mr. Levi currently spends about $140,000 a year on insurance premiums to cover 25 managerial staff at his business, Consolidated Management, which runs cafeterias at schools, offices and jails.

Under the new law, he will have to offer insurance to all of his 102 full-time employees starting in January. Assuming all of them take the coverage, Mr. Levi says the cost of premiums could exceed $500,000.

“I’ve never made a profit in any year of the company that has surpassed that amount,” says Mr. Levi, 62 years old. “I don’t make enough money.”

He says it makes more sense to drop insurance entirely and pay a penalty of about $144,000…

Mr. Levi…is worried that failing to offer insurance could entice employees to seek employment at competing businesses that do offer benefits.

“If we don’t offer coverage, will it be harder to hire people?” he asks. “That’s the unknown.”

Meeting the new health care mandate will turn an operating profit into an operating loss.  Now as much as the Democrats may hate the very idea of profits a business just can’t remain in business if it doesn’t make a profit.  So his choices are go out of business or cut health care.  But if he cuts health care he may lose employees.  And have trouble hiring new employees.  For even though the majority of his employees were happy to work without health insurance those positions that had it may be very hard to fill without it.  Which may leave the only option available is the going out of business option.  Putting 102 people out of a full-time job.  And he’s not alone.

Mr. Epstein, 52, employs about 250 workers and currently provides health insurance to his 20 office personnel. If he were to start covering the 100 or so nurses and nursing assistants that work full time, his annual health-insurance costs would jump to roughly $600,000 from the current $100,000, he says.

Even if he takes the penalty option, he estimates he would have to pay about $240,000—a cost he doesn’t think his business could absorb. To compensate, he plans to cut the number of hours his nurses and nursing assistants work so they will be considered part-time under the law. He says he will hire more part-timers to ensure patients receive the same level of care.

Few business can just absorb another $500,000 in costs.  Even absorbing an additional $140,000 is not that easy.  Unless you have a monopoly and can just increase your prices.  But few have the privilege of just increasing their prices to absorb additional costs.  Most have to figure out how to cut costs elsewhere.  Such as dropping insurance coverage.  Forcing full-time workers to part-time.  Or deducting more out of their paychecks for the higher insurance cost.

To avoid the employer mandate, some small firms are considering other strategies, such as increasing employees’ share of the premiums, so they don’t have to shoulder the entire cost of offering benefits. Others say they will stay under the 50 full-time employee threshold or deliberately turn full-time workers into part-timers.

This is the reality of Obamacare.  And when it hits our businesses with higher regulatory costs it is ultimately the employees of the business that pay.  If you have ever wondered why the current economic recovery is one of the worst in history this a big reason why.  Obamacare.  It has frozen hiring.  And even pushed full-time workers to part-time.  All in the name of trying to pay the costs of Obamacare.  Which, according to the geniuses in Congress, was going to make everything better.  Giving everyone high-quality health care.  While cutting health care costs.  So far it appears to be doing the exact opposite.  And they’re still rolling it out.  So the worst is, no doubt, yet to come.

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The UK Economy lingers in Recession thanks to Inflation caused by High Tuition Costs and High Utility Bills

Posted by PITHOCRATES - December 23rd, 2012

Week in Review

The Democrats have attacked health insurers with a vengeance for the high prices of health care.  They blame them for these soaring prices.  As well as greedy doctors, hospitals and pharmaceutical companies.  The Left is always ready to attack some greedy business for their ‘excessive’ profits driving up their prices.  And all businesses are guilty of being greedy profit whores.  With a couple of exceptions (see No Happy New Year for UK as Gloom Worsens by Holly Ellyatt posted 12/21/2012 on CNBC).

With gloomy economic forecasts, falling consumer confidence and poor retail figures adding to concerns over talk of the U.K. leaving the European Union, 2013 is set to be a tough year for the country, analysts say…

“There’s been a lot of discounting in the high streets because the shops are trying to shift stock and it’s not working,” Jane Foley, senior currency strategist at Rabobank, told CNBC…

Foley told CNBC that growth had been disappointing mainly due to inflation and low wage growth.

“[Inflation] took money out of our pockets and made our real wages negative. Many economists were anticipating that by now we would have positive wage growth but no, again we have sticky inflation and inflation at high levels because of university fees and utility bills going up.”

Funny how universities and the utilities are never labeled as greedy profit whores.  No, they never get attacked like those in business do.  Instead they attack greedy taxpayers who don’t volunteer to pay more in taxes to help subsidize the high cost of education and utilities.  They’re the greedy profit whores.  Who oppose those in education and the utilities from living a better life than they do.  How selfish.

University professors brainwash their students into being good liberal voters.  The utilities are unionized.  Both do a lot to elect liberals to office.  And keep them in office.  Therefore those who attack health insurers, doctors, hospitals and pharmaceutical companies never attack those in education and the utilities.  Even though they are gouging consumers far more than health insurers, doctors, hospitals and pharmaceutical companies.

For all the talk about leveling the playing field and looking out for the little guy the Left sure likes taking care of their own.  In a country where there is no nobility there is an aristocracy.  Government workers.  And those who help the government gain and maintain power.  These people live the good life.  While the rest are attacked for being greedy.  Pay high tuition costs.  And pay high utility bills.  The aristocracy has to pay these things, too.  But with the generous pay and benefits package they give themselves they can easily afford these things.  Thanks to the power they have to make us pay high tuition costs and high utility bills.  As well as high taxes.

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