Carnegie, Rockefeller, Ford, Westinghouse, Boeing, Gates and Tariffs

Posted by PITHOCRATES - September 10th, 2013

History 101

Ford brought the Price of Cars down and Paid his Workers more without Tariff Protection

Andrew Carnegie grew a steel empire in the late 19th century.  With technological innovation.  He made the steel industry better.  Making steel better.  Less costly.  And more plentiful.  Carnegie’s steel built America’s skylines.  Allowing our buildings to reach the sky.  And Carnegie brought the price of steel down without tariff protection.

John D. Rockefeller saved the whales.  By making kerosene cheap and plentiful.  Replacing whale oil pretty much forever.  Then found a use for another refined petroleum product.  Something they once threw away.  Gasoline.  Which turned out to be a great automotive fuel.  It’s so great that we use it still today.  Rockefeller made gasoline so cheap and plentiful that he put the competition out of business.  He was making gasoline so cheap that his competition went to the government to break up Standard Oil.  So his competition didn’t have to sell at his low prices.  And Rockefeller made gasoline so inexpensive and so plentiful without tariff protection.

Henry Ford built cars on the first moving assembly line.  Greatly bringing the cost of the car down.  Auto factories have fixed costs that they recover in the price of the car.  The more cars a factory can make in a day allows them to distribute those fixed costs over more cars.  Bringing the cost of the car down.  Allowing Henry Ford to do the unprecedented and pay his workers $5 a day.  Allowing his workers to buy the cars they assembled.  And Ford brought the price of cars down and paid his workers more without tariff protection.

George Westinghouse decreased the Cost of Electric Power without Tariff Protection

George Westinghouse gave us AC power.  Thanks to his brilliant engineer.  Nikola Tesla.  Who battled his former employer, Thomas Edison, in the Current Wars.  Edison wanted to wire the country with his DC power.  Putting his DC generators throughout American cities.  While Westinghouse and Tesla wanted to build fewer plants and send their AC power over greater distances.  Greatly decreasing the cost of electric power.  Westinghouse won the Current Wars.  And Westinghouse did that without tariff protection.

After losing out on a military contract for a large military transport jet Boeing regrouped and took their failed design and converted it into a jet airliner.  The Boeing 747.  Which dominated long-haul routes.  Having the range to go almost anywhere without refueling.  And being able to pack so many people into a single airplane that the cost per person to fly was affordable to almost anyone that wanted to fly.  And Boeing did this without tariff protection.

Bill Gates became a billionaire thanks to his software.  Beginning with DOS.  Then Windows.  He dominated the PC operating system market.  And saw the potential of the Internet.  Bundling his browser program, Internet Explorer, with his operating system.  Giving it away for free.  Consumers loved it.  But his competition didn’t.  As they saw a fall in sales for their Internet browser programs.  With some of their past customers preferring to use the free Internet Explorer instead of buying another program.  Making IE the most popular Internet browser on the market.  And Gates did this without tariff protection.

Tariff Protection cost American Industries Years of Innovation and Cost Cutting Efficiencies

Carnegie Steel became U.S. Steel.  Which grew to be the nation’s largest steel company.  Carnegie had opposed unions to keep the cost of his steel down.  U.S. Steel had a contentious relationship with labor.  During the Great Depression U.S. Steel unionized.  But there was little love between labor and management.  There were a lot of strikes.  And a lot of costly union contracts.  Which raised the price of U.S. manufactured steel.  Opening the door for less costly foreign imports.  Which poured into the country.  Taking a lot of business away from domestic steel makers.  Making it more difficult to honor those costly union contracts.  Which led the U.S. steel producers to ask the government for tariff protection.  To raise the price of the imported steel so steel consumers would not have a less costly alternative.

During World War II FDR was printing so much money to pay for both the New Deal and the war the FDR administration was worried about inflation.  So they put ceilings on what employers could pay their employees.  With jobs paying the same it was difficult to attract the best employees.  Because you couldn’t offer more pay.  So General Motors started offering benefits.  Health care.  And pensions.  Agreeing to very generous union contracts.  Raising the price of cars.  Which wasn’t a problem until the imports hit our shores.  Then those union contracts became difficult to honor.  Which led the U.S. auto makers to ask the government for tariff protection.  To raise the price of those imported cars so Americans would not have a less costly alternative.

These two industries received their tariffs.  And other government protections.  Allowing them to continue with business as usual.  Even though business as usual no longer worked.  So while the foreign steel producers and auto makers advanced their industries to further increase quality and lower their costs the protected U.S. companies did not.  Because they didn’t have to.  For thanks to the government they didn’t have to please their customers.  As the government simply forced people to be their customers.  For awhile, at least.  The foreign products became better and better such that the tariff protection couldn’t make the higher quality imports costly enough to keep them less attractive than the inferior American goods.  With a lot of people even paying more for the better quality imports.  Losing years of innovation and cost cutting efficiencies due to their tariff protection these American industries that once dominated the world became shells of their former selves.  With General Motors and Chrysler having to ask the government for a bailout because of the health care and pension costs bankrupting them.  Something Carnegie, Rockefeller, Ford, Westinghouse, Boeing or Gates never had to ask.

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The Rise and Fall of the American Textile Industry

Posted by PITHOCRATES - July 2nd, 2013

History 101

Inventions and Innovation gave the United States a Burgeoning Textile Industry

The American textile industry was founded by businessmen.  And inventors and their inventions.  Not by any labor movement.  For before there could be a labor movement there first had to be industry to employ laborers.  And laborers weren’t creating these industries.  They were just selfishly waiting for others to do this so they could get a job in them one day.

We may never know which came first.  The chicken or the egg.  But we do know which came first when it comes to industries and laborers.  The mind came first then the muscle.  Rich people with a keen eye to judge a good investment.  Businessmen and entrepreneurs unafraid to take a risk.  And who will throw their body and soul into their business.  Then the non-risk taking people come along.  The laborers.  Who have no skin in the game.  Who wait until the minds come together to create something in which they can apply their labor.  And get a paycheck.

Samuel Slater built cotton mills in New England (1800ish).  Slatersville Rhode Island, the town he established, bears his name.  Francis Cabot Lowell and Paul Moody created a more efficient power loom and a spinning apparatus (early 1800s).  Elias Howe invented the sewing machine (mid 1800s).  And the lock-stitch.  Throw in a few more inventions, some improvements on past inventions and some innovation and you have a burgeoning U.S. textile industry.

The Luddites went about England smashing the Machines of the Mechanized Textile Industry

Cloth-making used to be a labor-intensive activity of highly skilled artisans.  For those who had the money to afford the costly clothing they made.  Many could not.  And made their own clothing in the home.  Women would spin fiber into yarn.  And weave the yarn into cloth.  Which was very labor intensive.  Allowing only a meager production of clothing for the family to wear.  Which meant a lot of darning for worn out clothing.  Hand-sewing patches to cover holes.  Sewing ripped seams back together.  And sewing together rips and tears.  Until the clothing was so worn that it couldn’t be darned anymore.

It is hard to fathom how important this was during early America.  A time of a mini ice age.  In the north the winters were long and they were cold.  This homemade clothing may not have been pretty.  But it could keep you from dying of exposure in those brutally cold winters.  The mechanization of the textile industry changed all of that.  Smart inventors and business owners used machines to automate the cloth-making process.  Allowing less skilled people to operate smart machines.  Producing more clothes for less.  Bringing the cost of clothing down.  So anyone could afford to buy clothing.

Of course, this did not make everyone happy.  As those machines replaced the need for highly skilled artisans.  Who demanded high prices for their craft.  Allowing only the rich to afford their wares.  They didn’t like these machines cutting into their high wages.  And did something about it.  A group of people called ‘Luddites’ went about England smashing the machines of the mechanized textile industry (1811-1817).  Hoping to force a return to the old ways of making clothing.  By skilled artisan.  Where only the rich could afford to buy clothing.

Unions have Exported Entire Industries to Emerging Economies to Escape Soaring Labor and Regulatory Costs

Just as the textile industry was modernizing and mechanizing two seamstresses formed the first all-women’s labor union in 1825.  The United Tailoresses of New York.  Protesting 16-hour workdays.  And the lack of a living wage.  Strikes followed.  The Lowell, Massachusetts, mill women’s strike in 1834.  The Manayunk, Pennsylvania, textile strike in 1834.  The Paterson, New Jersey, textile strike in 1835.  And the Llowell, Massachusetts, mill women’s strike in 1836.  In 1844 women formed and ran the Lowell Female Labor Reform Association.  Then more strikes.  The Cohoes, New York, cotton mill strike in 1882.  The Fall River, Massachusetts, textile strike in 1884.  The Augusta, Georgia, textile strike in 1886.  The Fall River, Massachusetts, textile strike in 1889.  In 1890 New York garment workers won the right to unionize.  Close their shops to nonunion workers.  And fire any nonunion workers on the payroll.  In 1900 the International Ladies’ Garment Workers Union was founded.  In 1901 the United Textile Workers was founded.  Then came the New York shirtwaist strike in 1909.  Massachusetts passed the first minimum wage law for women and minors in 1912.  Then came the Lawrence, Massachusetts, textile strike in 1912.  Giving us the walking picket line.  Then the Paterson, New Jersey, textile strike in 1913.  The Amalgamated Clothing Workers union was founded in 1914.  Then the Fulton bag and cotton mill strike in 1914.  The Passaic, New Jersey, Textile Strike in 1926.  And so on.

The Luddites hated the machinery of the modern textile industry.  As they didn’t like the idea of replacing many highly skilled and well-paid artisans with automated machinery operated by fewer low-skilled laborers.  So they tried to smash the automated machinery.  To try and save their jobs.  Which the labor movement was happy to see go away.  For they would rather pack as many low-skilled laborers into those Dickensian factories as possible.  For the more members they had in their unions the more powerful they were.  And the more they could demand from the business owners.  They demanded a lot, too.  Higher wages, shorter hours and better working conditions.  So much so that the cost of labor rose while productivity fell.  Throwing the door open to foreign competition.

The big labor movements used their friends in government to protect their generous union contracts.  By passing pro-union legislation.  And placing tariffs on imported textile goods.  Keeping clothing prices high.  So business could earn enough to pay those generous union pay and benefits.  But this left these businesses uncompetitive in the world’s markets.  Which they wanted to sell in.  For it wasn’t only Americans that wore clothes.  Those union contracts increased labor costs so much that businesses found it hard to remain in business let alone remain profitable.  So they started leaving the United States during the 20th century.  Which is why today there is no U.S. textile industry.  Because of the high cost of labor.  And costly regulatory policies.  Where is the textile industry today?  In the emerging economies.  Where labor and regulatory costs are lower than in America.  While the standard of living for those employed in these factories are often higher than their fellow countrymen.  Which is what unions have often done in the United States.  Create good jobs in emerging economies.  By exporting entire industries from the United States to these emerging economies.  Where they can escape soaring labor and regulatory costs.

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More Unions are Angry about the Unintended Consequences of Obamacare

Posted by PITHOCRATES - May 26th, 2013

Week in Review

The unions and President Obama were tight.  Once upon a time.  They helped the president win two elections.  Dumped truckloads of campaign money into his coffers.  And the thanks for all of this?  Obamacare.  Which they once enthusiastically supported.  But now they are learning what the opponents have been saying about Obamacare all along.  That it will make health insurance more expensive.  And likely that people will lose coverage they like and want to keep.  It’s getting so bad that unions are now coming out in opposition of Obamacare (see Some unions now angry about health care overhaul by SAM HANANEL, Associated Press, posted 5/24/2013 on Yahoo! News).

…some unions leaders have grown frustrated and angry about what they say are unexpected consequences of the new law — problems that they say could jeopardize the health benefits offered to millions of their members…

“It makes an untruth out of what the president said, that if you like your insurance, you could keep it,” said Joe Hansen, president of the United Food and Commercial Workers International Union. “That is not going to be true for millions of workers now.”

The problem lies in the unique multiemployer health plans that cover unionized workers in retail, construction, transportation and other industries with seasonal or temporary employment. Known as Taft-Hartley plans, they are jointly administered by unions and smaller employers that pool resources to offer more than 20 million workers and family members continuous coverage, even during times of unemployment.

The people who work in construction may work for many different construction companies throughout their working life.  But they have consistent benefits because of the one constant during their union life.  Their union membership.  Which makes these jobs different than someone working in the same UAW assembly plant all of their life.  Who also work for the same company all their working life.

A lot of people will stay in a job they don’t like because of their health insurance benefit.  Construction workers don’t have to worry about being stuck in a job they don’t like.  If they don’t like an employer they can quit.  Go to the union hall.  And pick up another job.  All without any interruption in their benefits.

Construction companies collectively bargain contracts with these unions.  For example, electrical contractors will negotiate a contract with the local chapter of the union representing electricians.  And health care costs are a big part of those negotiations.  For it is these electrical contractors that pay for the health insurance plans managed by the union.  And it’s costly.  Raising a contractor’s cost when bidding new work.  Which is why union construction companies try to keep nonunion companies from bidding their work.  Because nonunion companies don’t have this massive cost to pay for this generous union benefit.  Which can provide uninterrupted health insurance for an unemployed worker sitting at the hall for months waiting for another job.  As well as for his wife and his children.  Something people don’t enjoy when they get laid off from most other private sector jobs.

The union plans were already more costly to run than traditional single-employer health plans. The Affordable Care Act has added to that cost — for the unions’ and other plans — by requiring health plans to cover dependents up to age 26, eliminate annual or lifetime coverage limits and extend coverage to people with pre-existing conditions.

As it has added to the cost for ALL insurance plans.  There’s a reason why before Obamacare plans didn’t cover dependents up to age 26, had annual or lifetime coverage limits and excluded pre-existing conditions.  Because they add great cost.  Insurance companies aren’t greedy.  They’re just trying to provide insurance.  Having people pay a little bit for a policy to insure against a large financial loss.

For insurance to work you need a lot of responsible people paying a little bit for those policies.  Forcing plans to cover pre-existing conditions, though, makes people NOT buy health insurance.  For they think why should I pay years of health insurance premiums when I can just buy a policy when I’m sick?  Which they will.  So they will consume a lot of health care costs that have to be paid by people who are buying policies.  While contributing nothing to the pot for others.  Making those policies under Obamacare very expensive.  Because with preexisting conditions covered a few people will now have to a pay a lot.

Workers seeking coverage in the state-based marketplaces, known as exchanges, can qualify for subsidies, determined by a sliding scale based on income. By contrast, the new law does not allow workers in the union plans to receive similar subsidies.

Bob Laszewski, a health care industry consultant, said the real fear among unions is that “a lot of these labor contracts are very expensive and now employers are going to have an alternative to very expensive labor health benefits.”

“If the workers can get benefits that are as good through Obamacare in the exchanges, then why do you need the union?” Laszewski said. “In my mind, what the unions are fearing is that workers for the first time can get very good health benefits for a subsidized cost someplace other than the employer.”

You see, the Obama administration cannot give a subsidy to the unions.  Because they have to pay for subsidies they give to low-income people with a ‘tax’ on other insurance plans.  That is, the people who can afford to pay for health insurance have to pay the subsidies for those who can’t.

The ultimate goal of Obamacare is to put the private health insurers out of business so the government can step in and get what they want.  National health care.  Of course, doing that has one big drawback for these unions.  With national health care you don’t need to belong to a union any more for the kind of health care benefit that provides for you and your family even when you’re unemployed.

Labor unions have been among the president’s closest allies, spending millions of dollars to help him win re-election and help Democrats keep their majority in the Senate. The wrangling over health care comes as unions have continued to see steady declines in membership and attacks on public employee unions in state legislatures around the country. The Obama administration walks a fine line between defending the president’s signature legislative achievement and not angering a powerful constituency as it looks ahead to the 2014 elections.

The cost of unions has pushed most of U.S. manufacturing offshore.  Public sector unions are bankrupting city and state governments.  And even the state of Michigan, home of the automotive industry, has voted to become a right-to-work state.  The heyday of the unions is over.  And they’re struggling to hold onto what little they have.  Especially in the private sector.  Where their ranks have done nothing but fall since the Sixties.

The unions poured money into the reelection of President Obama because Democrats are supposed to make things better for unions.  Not worse.  At this rate unions may start voting Republican.  For though they may not have as generous union contracts they may at least still have union contracts.  Because with the business-friendly environment of the Republicans there may at least be a building boom.  And more union construction jobs.

As the 2014 midterm elections draw close you may see a louder voice for the repeal of Obamacare.  This time coming from one-time vocal supporters.  Perhaps giving Democrats a difficult time at winning their elections.  Unless they come out for the repealing of Obamacare, too.  For unions may have at one time thought about how nice it would be to get rid of that costly benefit from their benefit package.  Which will happen if Obamacare evolves into national health care.  But now they’re seeing that this outcome may make unions irrelevant.  And are likely thinking, “My God, what have we done?”

It just goes to show you have to be careful what you wish for.  Because sometimes those wishes come true.

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Nikola Tesla, Sheldon Cooper, Inventors & Entrepreneurs, Compromise & Tradeoff, Theoretical & the Practical, GM and Hostess

Posted by PITHOCRATES - December 4th, 2012

History 101

Geniuses strive for Theoretical Perfection which often doesn’t work in the Market Place

There have been a lot of brilliant inventors that gave the world incredible things.  Nikola Tesla gave us the modern world thanks to his work in electromagnetic fields.  Giving us the AC power we take for granted today.  Electric motors.  The wireless radio.  Etc.  But as brilliant as Tesla was he was not brilliant in making money from his inventions.  He died broke and in debt.  And, some say, insane.  Though he was probably more like Sheldon Cooper on The Big bang Theory.  As one character on the show called him, “The skinny weirdo.”  Tesla had an eidetic memory (often called a photographic memory).  And probably suffered from obsessive-compulsive disorder (OCD).  Which when added to genius can be mistaken for crazy genius.

So Tesla and the fictional Sheldon Cooper have some things in common.  Genius.  And some odd behavioral traits.  As well as something else.  Neither was rich.  Their genius did not make them rich.  Which is a common trait of all brilliant inventors.  Their genius gets in the way of practicality.  They strive for theoretical perfection.  Which often doesn’t work in the market place.  Because perfection is costly.  And this is what separates the theoretical geniuses from practical engineers.  And entrepreneurs.

The internal combustion engine is a technological marvel.  It has changed the world.  Modernized the world.  It gave us inexpensive modes of transportation like cars, trucks, ships, trains and airplanes.  But the engine is not theoretically perfect.  It is a study of compromise and tradeoff.  Providing a final product that isn’t perfect.  But one that is economically viable.  For example, pistons need to compress an air-fuel mixture for combustion.  However, the piston can’t make such a tight seal that it can’t move up and down in the cylinder.  So the piston is smaller than the cylinder opening.  This allows it to move.  But it doesn’t contain the air-fuel mixture for compression and combustion.  So they add a piston ring.  Which contains the air-fuel mixture but restricts the movement of the piston.  So they add another piston ring that takes oil that splashes up from crank case and passes it through the ring to the cylinder wall.  The heat of combustion, though, can leave deposits from the oil on the cylinder wall.  So they add another piston ring to scrape the cylinder wall.

Selling a ‘Low Price’ is a Dangerous Game to Play Especially if you don’t Know your Costs

Every part of the internal combustion engine is a compromise and tradeoff.  Each part by itself is not the best it can be.  But the assembled whole is.  A theoretical genius may look at the assembled whole and want to add improvements to make it better.  Adding great costs to take it from 97% good to 99% good.  While that 2% improvement may result with a better product no one driving the car would notice any difference.  Other than the much higher price the car carried for that additional 2% improvement.

This is the difference between the theoretical and the practical.  Between brilliant inventor and entrepreneur.  Between successful business owner and someone with a great idea but who can’t bring it to market.  The entrepreneur sees both the little picture (the brilliant idea) and the big picture (bringing it to market).  Something that a lot of people can’t see when they go into business.  The number one and number two business that fail are restaurants and construction.  Why?  Because these are often little picture people.  They may be a great chef or a great carpenter but they often haven’t a clue about business.

They don’t understand their costs.  And because they don’t they often don’t charge enough.  A lot of new business owners often think they need to charge less to lure business away from their competition.  And sometimes that’s true.  But selling a ‘low price’ instead of quality or value is a dangerous game to play.  Especially if you don’t know your costs.  Because as you sell you incur costs.  And have bills to pay.  Bills you need to pay with your sales revenue.  Which you won’t be able to do if you’re not charging enough.

If Business Operations can’t Produce Cash a Business Owner will have to Borrow Money to Pay the Bills

The successful small business owners understand both their long-term financing needs.  And their short-term financing needs.  They incur long-term debt to establish their business.  Debt they need to service.  And pay back.  To do that they need a source of money.  This must come from profitable business operations.  Which means that their sales revenue must make their current assets greater than their current liabilities.  The sum total of cash, accounts receivables and other current assets must be greater than their accounts payable, accrued payroll, accrued taxes, current portion of long-term debt, etc.  And there is only one thing that will do that.  Having sales revenue that covers all a business’s costs.

The successful business owner knows how much to charge.  They know how much their revenue can buy.  And what it can’t buy. They make the tough decisions.  These business owners stay in business.  They see the big picture.  How all the pieces of business fit together.  And how it is imperative to keep their current assets greater than their current liabilities.  For the difference between the two gives a business its working capital.  Which must be positive if they have any hope of servicing their debt.  And repaying it.  As well as growing their business.  Whereas if their working capital is negative the future is bleak.  For they won’t be able to pay their bills.  Grow their business.  Or service their debt.  Worse, because they can’t pay their bills they incur more debt.  As they will have to borrow more money to pay their bills.  Because their business isn’t producing the necessary cash.

Those restaurants and construction companies fail because their owners didn’t know any better.  Others fail despite knowing better.  Like GM, Chrysler, Hostess, just about any airline, Bethlehem Steel, most print newspapers, etc.  Who all entered costly union contracts during good economic times.  Costs their revenues couldn’t pay for in bad economic times.  Which was most of the time.  As they struggled to pay union labor and benefits they run out of money before they could pay their other bills.  As their current liabilities exceeded their current assets.  So instead of producing working capital they ran a deficit.  Forcing them to incur more debt to finance this shortfall.  Again and again.  Until their debt grew so great that it required an interest payment they couldn’t pay.  And now they are no longer with us today.  Having had no choice but to file bankruptcy.

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Working Capital

Posted by PITHOCRATES - December 3rd, 2012

Economics 101

A Business Owner uses Start-Up Capital to Pay the Bills until the Business starts Making Money to Pay the Bills

Few people understand how business works.  Some think it’s a mystical entity that has an endless supply of money for the taking.  To be taken by the government.  The unions.  And their employees.  While some believe business is some evil entity that acquired its wealth by taking it from poor people.  Poor people that had no wealth to give.  Because they’re poor.  Who we define as being poor because they have no wealth.

But businesses aren’t mystical or evil.  They’re run by ordinary people.  Often doing extraordinary things.  In a constant battle to survive.  They start off by risking everything they’ve ever earned and saved.  Perhaps persuading family to invest in them and their idea.  Or mortgaging their house to the hilt.  Just to get the money to start their business.  Short term financing to pay the bills until the business starts making money to pay the bills.  If the business ever starts making money to pay the bills.

One of the most misunderstood things about business is that their prices are pure profit.  When you buy a $4.50 cup of coffee from Starbucks people think that’s $4.50 of profit.  But it’s not.  That price has to pay for the coffee beans.  The water.  The regular milk.  The low-fat milk.  The flavored syrup.  The cup.  The cup sleeve so you can hold it without burning you hand.  The lid.  The plastic stick that plugs the drinking hole in the lid.  The baristas working there.  The equipment to grind the coffee beans.  To make coffee.  To make espresso.  To make steam to heat the milk.  The point-of-sale cash registers.  The lights.  The heat.  The air conditioning.  The Internet access provided free to their customers.  The soap and toilet paper in the restrooms.  Garbage bags.  Cream.  Sugar.  Sugar substitute.  Coffee stirrers.  The rent.  The telephone bill.  Marketing.  Etc.  They have to recover all of these costs in the sales price of their coffee.  With enough left over to pay for growth.

For a Business to be able to Pay their Bills their Current Assets must be Greater than their Current Liabilities

Bills.  Everyone has them.  And business owners have more than most.  Because it takes money to make money.  A business owner has to spend a lot of money to make something to sell.  Like a cup of coffee.  So they incur a lot of costs.  Costs that their revenues have to pay.  For a business like Starbucks that’s mostly cash and credit card sales.  For other businesses that could be sales on account.  Or accounts receivable.  Sales that don’t result in cash.  But a promise to pay cash later.  Like a lot of those bills Starbucks has to pay.  Things they bought on account.  With the promise to pay cash later.

Businesses have current liabilities.  Which include the bills they owe.  Accrued payroll.  Accrued payroll taxes.  And everything else that they have to pay within one year.  All of which they have to pay with current assets.  Such as cash.  Or short-term assets they can convert into cash within one year.  Like accounts receivable.  Or things that conserve cash.  Like prepaid expenses.  For a business to be able to pay their bills their current assets must be greater than their current liabilities.  If their current liabilities are greater than their current assets, though, they will have some problems paying their bills.

The relationship between current assets and current liabilities is important.  If we divide current assets by current liabilities we get the current ratio.  If this is greater than one then a business will find it easier to pay their bills.  If it’s less than one then a business will struggle to pay their bills.  And may not be able to pay their bills.  If they can’t they are insolvent.  Meaning that they are not selling at high enough prices.  They’re not selling enough.  Or their costs are just too great at the prevailing market prices.  And if any of the above is true they may have no choice but to file for bankruptcy protection.  Because they simply cannot pay their bills.

If a Business can’t Generate Cash (Working Capital) Borrowing Money will only Delay the Inevitable—Bankruptcy

Cash is king.  A business has to have it.  And if they’re business can’t generate it they have to get it someplace else.  Either by borrowing it from the bank.  From family.  Or taking out another mortgage on their home.  All of which are short-term solutions to a much bigger problem.  For if their business can’t generate cash borrowing money will only delay the inevitable.  Bankruptcy.  Which means they either have to raise their sales volume.  Raise their prices.  Or cut their costs.  To get their current ratio above one.  Making them solvent again.

When you subtract current liabilities from current assets you get a business’ working capital.  The greater a business’ working capital is the easier it is for them to pay their bills.  And the easier it is to grow their business.  Or to offer raises, bonuses, more generous benefits, etc.  For to do any of these things a business first has to be able to pay their bills.  If they can keep paying their bills and maintain a current ratio above one for a few consecutive accounting periods they will find themselves with a surplus of cash.  Or working capital.  Useable cash to expand business operations.  Or to better pay their employees.

Of course if a business is too generous with their employees it will dry up that working capital and make it harder to pay their other bills.  For example, when generous union contracts impose heavy costs on a business while the prevailing market prices prevents them from charging enough to be able to afford those generous union contracts a business will soon find itself in financial difficulties.  Leading to a possible bankruptcy.  Where a bankruptcy court allows them to renegotiate their union contracts.  So their sales at prevailing market prices can afford them.  As well as their other bills.  While leaving enough working capital left over to grow their business.  Replace some worn out equipment.  Or repay a loan.

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The High Cost of Labor Contracts and Environmental Regulations cause Planes to Run Low on Fuel

Posted by PITHOCRATES - August 26th, 2012

Week in Review

Here is a lesson in basic economics.  There is a tradeoff between costs and safety in aviation.  You could hire thousands of additional mechanics to give an airplane a complete overhaul after each flight.  And double their pay rate just to make sure they are especially happy workers.  You can have a couple of chase planes follow a passenger airliner on every flight to observe the outside of the aircraft so they can warn the pilot of any problems.  And you can top off every fuel tank on an airplane just to be extra safe.  These things would make flying safer.  But they would also make it very expensive to fly.  So expensive that few people would fly.  Thus reducing the amount of airplanes in the sky.  As well as the number of flight and maintenance crews.  Which illustrates the ultimate cost of generous union contracts.  The more they ask for the more they put themselves out of a job.

But these unions are powerful.  Margins are so thing in aviation that a strike could turn a profitable year into a money losing year.  So to avoid a strike they cut costs where they can.  And the one cost that gives them something to work with is their fuel costs.  Because an airplane only needs enough fuel to fly from point A to point B.  Plus some reserves.  So they are very careful in calculating the fuel requirements to get from point A to point B.  But sometimes weather can enter the picture and add a point C.  And this can sometimes cause a fuel emergency (see Pilots forced to make emergency landings because of fuel shortages by David Millward posted 8/20/2012 on The Telegraph).

Pilots have had to make 28 emergency landings because they were running low on fuel according to figures compiled by the Civil Aviation Authority…

Although the total represents of fuel-related emergency landings is a reduction on 2008-10, when there were 41 such incidents, some pilots have warned the airlines are operating on very narrow margins as they seek to cut operating costs…

One retired pilot told the Exaro website that he and his colleagues were under pressure from airlines because of the industry’s need to keep costs down.

“There is pressure on pilots by airlines to carry minimum fuel because it costs money to carry the extra weight, and that is quite significant over a year…

“The way in which aircraft are being developed in becoming more fuel efficient, there is less need for fuel.

We make jet fuel by refining petroleum oil.  And two things make this an expensive endeavor.  Higher environmental regulations.  And reductions in supply.  Often due to those same environmental regulations.  If they allowed the American oil business to drill, baby, drill, it would be safer to fly.  Because fuel would be less expensive.  And airlines could more easily afford to carry the extra fuel weight.

Airlines don’t have much power over controlling the price of jet fuel.  It is what the market says it is.  They have a little more luck in keeping their capital costs down thanks to the bitter rivalry between Boeing and Airbus.  Who are both eager to sell their airplanes.  Cutting their labor costs is another option they have but it comes with great political costs.  Usually it takes the specter of bankruptcy to get concessions from labor.  So when it comes to cutting their operating costs the least objectionable route to go is to cut fuel costs.  By loading the absolute bare minimum required by regulations.  And for safety.  Airlines want to save money.  But having planes fall out of the sky to save fuel costs will cost more in the long run.  In more ways than one.  (It’s hard to get people to fly on an airline that has a reputation of having their planes fall out of the sky.)

So there are only two practical options to fix this problem of skimping on the fuel load.  Either you drill, baby, drill.  Or you get labor concessions to lower you labor, pension and health care costs.  The very same things that are bankrupting American cities.  So you know the costly union workers are all in favor of drill, baby, drill.  Because the lower the cost of jet fuel the less pressure there is on their pay and benefits.

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California finding it more Difficult to Pass On the High Cost of Union Contracts to the Taxpayers

Posted by PITHOCRATES - August 5th, 2012

Week in Review

Have the California taxpayers reached their limit in paying new taxes?  Perhaps (see Cash-strapped California cities back off asking voters to hike taxes by Ronald Grover posted 8/2/2012 on Reuters).

Over the past six months, city councils in at least seven municipalities invoked a state law which allows them to put tax hikes on the ballot much more quickly in the event of a “fiscal emergency.”

Burdened by expensive public employee contracts and the fall-out from the housing meltdown, the cities are struggling to avoid the fate Stockton and San Bernardino, both of which recently filed for bankruptcy protection.

But now some of those cities are thinking twice about the wisdom of seeking tax hikes…

The retreat reflects political realities in California, where tax increases often generate noisy and well-funded opposition from business groups and self-styled taxpayer advocates…

“Voters are getting very angry that their government keeps coming back and asking for more money,” said Darry Sragow, managing partner of the law firm SNR Denton in Los Angeles and a long-time Democratic campaign strategist. “The voter is saying, ‘I’m cutting back, you should be doing the same thing…'”

The city of El Monte, outside Los Angeles, opted for a different kind of approach. On July 24 it put a proposal on the November ballot to increase taxes on sugary drinks, a move it said would help it fight obesity among its children.

The proposal drew immediate opposition from industry groups who were fighting a similar tax proposed two months earlier by the city of Richmond, California.

“This tax is a sign of the times,” said Bob Achermann, executive director of the Californa/Nevada Soft Drink Association, said. “City governments are looking for revenue. We think this is a misguided approach.”

It is interesting that while it’s the cost of union contracts (salary and benefits, including pensions and health care) causing these crippling deficits they always threaten to lay off cops and firefighters if the voters don’t approve new taxes.  If it’s the union contracts that are causing the problem why are they not addressing the union contracts?  Instead of trying to tax cigarettes or sugary beverages?  While lying to us that this will pay for public health initiatives or make our children healthier?  When it will only go to pay for those union contracts that they can no longer afford?  Passing this cost onto the taxpayers who don’t have such generous pay and benefit packages?  Why?

Because there is a symbiotic relationship between government and unions.  Government gives them generous contracts.  And unions provide campaign cash and foot soldiers for elections.  While passing the high cost of this relationship on to the taxpayers.  Again, those people that don’t have such generous pay and benefit packages.  This is why governments will turn voters upside down and shake them for every last dollar they can get out of them.  So they and the unions can live very comfortable lives.  While the rest of us don’t.

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