Economics, Again

15 Mar

There are times when I think Atlas Shrugged should be mandatory reading in secondary schools.

It doesn’t last, because Atlas Shrugged is one hell of a doorstopper. I first read it when I was 19, I think; I had problems sticking with it until the denouncement, even though I have read it again and again several times since then. I don’t think that most teenagers between 14 and 18 would welcome the chance to read Atlas Shrugged, even though they could learn some valuable life lessons from it. Indeed, I have actually considered trying to write a shorter version of the story, perhaps centred on two brothers. One who tries to keep the family business going, despite setbacks, while the other becomes a politician and idealist, proposing laws that undermine local businesses and eventually cause a collapse. It might actually be workable; instead of Galt’s Gulch, have the working brother emigrate to a US state that is actually friendly to small businessmen. Meanwhile, the other brother eventually gets lynched when the money runs out.

I mention this because of some of the comments made about the recent guest post; Why a Blue Collar American Doesn’t Want A Living Wage.

Like so much else, it all boils down to economics.

Every business, including mine, has operating costs. In my case, I have to buy computers, innumerable keyboards, pieces of software, artwork, internet access … as well as keeping a roof over my head, food in the kitchen and everything else I might need to stay alive and productive. If I can’t meet my operating costs, I go out of business.

A small business, like a bookshop, has far more operating costs. It must:

-Rent the building

-Provide power/water for the building

-Purchase new stock

-Pay taxes

-Pay the staff

-Pay insurance premiums

-Whatever I forgot.

Let us assume, for the sake of argument, that the monthly operating costs for the bookshop are £10000. In order to remain open, the bookshop MUST make at least £10000 per month or the business will collapse. Furthermore, if the business makes just £10000, there will be no actual profit for the owners. At this point, the owner might just start wondering why he even bothers when he isn’t getting anything out of it. (And he won’t have a safety cushion in the event of a sudden drop in profits).

However, bookshops have problems competing with Amazon and other online sellers (EBay, for example.) Amazon can afford to discount books, while bookshops cannot without cutting sharply into their profit margins. What that tends to mean, for booksellers, that customers may find books they want on the shelves, then go back home and order them from Amazon, where they can be purchased cheaper. This means, in real terms, that a bookseller may purchase 1000 books each month, but be unable to sell more than 500 – and if it doesn’t bring in enough money to meet the operating costs, the business is doomed.

So yes, a mandatory increase in the minimum wage is a serious problem.

Most businesses pass the burdens of such laws on to their customers (or start looking for ways to replace cheap labour with machines). A bookshop cannot lower prices too far without encouraging more and more people to depend on Amazon instead. Therefore, the profit margin grows thinner … and may vanish completely. And, as I said above, if the bookshop doesn’t bring in enough money to meet the operating costs, the business is doomed.

Assume, for the sake of argument, that there are 10 workers, who work from 9-5 Monday-Friday. If they’re each paid $7 per hour, the total cost is $11200 per month. However, if they’re each paid $14 per hour, the total cost goes up to $22400 per month. Given how close most bookshops run to the margins, it isn’t too hard to see how a minimum wage increase, enacted with the very best of intentions, can prove disastrous to small businesses.

This isn’t the only problem, of course. If the price of hiring a new employee goes up, fewer new employees will be hired. Therefore, the number of entry-level jobs will fall … and do so at the same time as the costs of everything start to rise.

In short, the unintended consequences of something intended to benefit the poor will ensure that it actually harms them instead.

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33 Responses to “Economics, Again”

  1. Steven March 15, 2015 at 1:32 pm #

    Said it last time, higher minimum wage means that the customers have a higher disposable income and much more likely to make impulse buys – exactly what a bookshop needs to be able to compete with Amazon. And the thought of a bookstore with ten full time employees which only turns over $10K per month is laughable.

    • chrishanger March 15, 2015 at 2:08 pm #

      It probably is. But given that I picked the figures for ease of calculation, it doesn’t matter.

      However, it does not follow that higher minimum wage leads to higher disposable income. If costs rise to keep pace with expenditure, the real purchasing power of a given person in employment will remain the same.

      Chris

      My Site: http://www.chrishanger.net/
      My Blog: https://chrishanger.wordpress.com/
      My Facebook Fan Page: https://www.facebook.com/ChristopherGNuttall

      • David P. Graf March 15, 2015 at 11:01 pm #

        Chris,

        Stockholders encourage businesses to pay as little as possible for employees in order to maximize their own return. You can address that by increasing taxes on stock related distributions and gains. For example, why should capital gains be taxed at a lower rate than regular income? Even Romney admitted that he could end up paying a lower rate than his secretary. Or, why should management receive stock as part of their compensation package? For decades, it was against the law because it was recognized that it was an incentive to do things which would increase the value of the stock in the short run but harm the company and customers in the long term. You could also revise the tax rate and return to those of the Reagan years for the higher tax brackets. If you can’t keep that money you extort from companies on the back of their employees, then you are less likely to demand ridiculous rates of return.

        We’ve learned in other aspects of human culture such as politics that the idea of royalty means (as in the words of the immortal Mel Brooks) that “it’s good to be the King” but it really stinks for everyone else. Well, we’re still learning that the idea that the “stockholder is king” is just as bad.

        If consumers had more money to spend, businesses could hire more workers. More workers can buy more goods. Businesses make more goods and you wind up with a “virtuous cycle” that benefits the economy and ordinary people. Of course, we have to address the issue of outsourcing.

        Chris – have you ever considered that if more people had more money that you could raise the price of the books and still give people a great bargain? We’ve seen how well the libertarian fantasy world of Rand plays out for people in the real world. It’s time to have Main Street rather than Wall Street run things.

      • chrishanger March 16, 2015 at 6:07 pm #

        One of the issues here – and truthfully matters are a lot more complex than you suggest – is that stockholders own the business. If Mr. A owns 10% of the stock, he has 10% of the say in how the business is run. At the start, they’re normally the people who invest in the business; later, of course, the stock may be traded on the open market. They have rights because there really isn’t such a thing as a free lunch – someone has to make the first investment.

        In this case, increasing taxes on stockholder returns cuts stockholder profits … which seems like a good idea, until you realise that this reduces the incentive for stockholders to actually invest in small businesses.

        If more people had more money … a lot depends, really, on just where the money is coming from.

        For example, if we assume this happens because of the minimum wage, it is quite likely that costs will rise along with wages, because businesses pass their expenses on to their customers. Therefore, you might have more money, but more costs as well. Furthermore, as demand rises, prices are likely to rise as well.

        In books, there’s an elephant in the room – Amazon and other mail-order services. If a bookshop unilaterally raises its prices, it will make itself uncompetitive against Amazon. Just because people have more money doesn’t mean they will spend more at a bookstore when they can go online and get the books cheaper.

        Chris

        My Site: http://www.chrishanger.net/
        My Blog: https://chrishanger.wordpress.com/
        My Facebook Fan Page: https://www.facebook.com/ChristopherGNuttall

      • Paul (Drak Bibliophile) Howard March 16, 2015 at 6:12 pm #

        Lefties/Liberals believe in Magic and one of their “spells” is raising the minimum way. Too bad Magic doesn’t work in the Real World.

      • Steven March 16, 2015 at 1:08 am #

        It does matter because the variable of wages was wildly over-represented to exaggerate the affect of an increase on the business.

        You are making an assumption that costs will rise equally with the rise in minimum wage which is not the case as there are many other factors involved.

      • chrishanger March 16, 2015 at 11:47 am #

        There’s no such thing as a free lunch. The money has to come from somewhere.

        So yes – if the wages are doubled, the costs are doubled too.

        My Site: http://www.chrishanger.net/
        My Blog: https://chrishanger.wordpress.com/
        My Facebook Fan Page: https://www.facebook.com/ChristopherGNuttall

      • Steven March 16, 2015 at 1:04 pm #

        You are quite right about there being no such thing as a free lunch, in the case of minimum wage employers that you are defending – that lunch is being paid for with food stamps.

        What is it going to take to change your mind on this topic? Ayn Rand’s ideas were terribly outdated in her own lifetime and she ended up living on welfare when she needed it.

      • David P. Graf March 16, 2015 at 11:29 pm #

        Chris,

        How do you define “ownership”? At one time, being an “owner” meant that you were in it for the long term. And so, you didn’t hose over your employees and customers, take the money and run. However, in days where ownership can change on a dime if one can get more money somewhere else, then you have “owners” who are in it just for themselves. They can do things to the company that will make them more money in the short term but to the detriment of long term prospects, employees and customers. We’re seeing the “fruit” of Rand’s “virtue of selfishness” approach coupled with the libertarian economics of those like Milton Friedman where the ONLY responsibility a company has is to make the highest return for its stockholders. And, yes, I have read her work and his and the proof is in the pudding. As Reagan said – are you better off? Since their views have ruled the roost, things have gotten worse for most people. It must be nice for them to live in a world where their actions which raise havoc with the economy and everyone else have no consequences for them.

        By the way, do you see much evidence that those with the big bucks are “investing” in businesses of any size? I’m just seeing a lot of churning in the market which benefits them.

    • Dennis the Menace March 16, 2015 at 6:16 pm #

      “Said it last time, higher minimum wage means that the customers have a higher disposable income and much more likely to make impulse buys – exactly what a bookshop needs to be able to compete with Amazon.”

      Keynesian nonsense that totally ignores the empirical proven track record that this doesn’t work at all as you describe. It is difficult to have higher disposable income when you don’t have a job or see your hours cut in response, after all.

      “And the thought of a bookstore with ten full time employees which only turns over $10K per month is laughable.”

      Yet another example of you arrogantly assuming that facts that dispute your fantasy world view are not to be treated as reality. Total Keynesianism.

    • JJ Reuter May 22, 2016 at 1:17 am #

      I give you George who worked in the bookstore for 20 years and is content with the low stress job. He was making $15 an hour. Now Fred, a snotnosed teenager comes in and starts at $15 an hour. George worked his butt off to get there and now he has to start over because the $15 an hour does not buy as much and all his coworkers are starting there. Why does $15 an hour now spend like $5? Because you just caused inflation. Prices go up as a result of wage increases that outstrip profits. Kind of like taxing or fining a corporation. The cost gets transferred to the consumer and the corporation barely notices.

  2. Paul (Drak Bibliophile) Howard March 15, 2015 at 1:33 pm #

    The People who complained about the guest post won’t understand this post. [Frown]

    • utabintarbo March 16, 2015 at 1:24 pm #

      This.

      They would never have read (or understood) any Hazlitt, or Hayek, or von Mises. And heaven forbid they read, no less try to understand, anything from Rand. No, they will continue to spill their “feelings” while wallowing in ignorance.

  3. RandyBeck March 15, 2015 at 7:34 pm #

    People like to support minimum wages because it’s an easy thing to say.

    I think we need to reject the way they describe these laws: They’re not laws against paying workers too little. Instead, these laws say that if you can’t find a job that pays $X per hour, then you’re not allowed to work.

    Should poor people be forbidden from finding a job? Ayn Rand would have said no.

    Next thing you know, they’ll want laws that say writers should not be permitted to sell books unless they can price them at least $2.99.

  4. R Godfrey March 15, 2015 at 8:14 pm #

    Now work out the cost of subsidising the subsistence wages the businesses are paying, with food stamps in the US, or Housing benefits in the uk, and what tax cut (or more likely deficit reduction) this could pay for. We MUST stop subsidising wages that would leave people homeless and starving.

    • RandyBeck March 15, 2015 at 11:07 pm #

      They’ll be homeless and starving when politicians forbid them from finding a job.

      • Steven March 15, 2015 at 11:58 pm #

        Can you give us some real life examples of countries with high minimum wages where ALL the jobs have disappeared?

      • RandyBeck March 16, 2015 at 12:52 am #

        Steven,

        No one ever said they’d all disappear. Most workers don’t get paid the minimum wage.

        Some of those who do can have new responsibilities added to their jobs, making them worth the extra pay. One of the newest tricks is requiring workers to be on call (yeah, like a medical doctor) just in case business picks up that evening. But they’re not paid if they’re not called in. Their wages have increased in name only.

      • Steven March 16, 2015 at 1:09 am #

        “They’ll be homeless and starving when politicians forbid them from finding a job.”

        Can you give a real world example of something like this happening.

      • RandyBeck March 16, 2015 at 3:00 am #

        Well, “homeless and starving” was an extreme phrase used in the spirit of the post I borrowed it from. In reality, they’ll just be living with their parents for a while longer.

        Spotted this today:
        pjmedia.com/tatler/2015/03/14/restaurants-in-seattle-going-dark-as-15-an-hour-minimum-wage-looms/

        Admittedly, it’s probably not the best example. Although it says the minimum wage hike is “a major factor,” there are plenty of other problems.

        But I dunno what your point is. There are no real world examples where everybody is living on minimum wage. Fortunately, we in the U.S. have the 22nd Amendment.

      • Steven March 16, 2015 at 3:12 am #

        My point is that your position on the question of raising the minimum wage is incorrect, harmful to the working poor and ultimately harmful to US society at large.

      • RandyBeck March 16, 2015 at 4:22 am #

        For that to be true, employers would need to be less concerned about profits.

  5. Duncan Cairncross March 16, 2015 at 6:27 am #

    More utter nonsense
    In a modern society we won’t let the poor starve (although the USA gets close)
    The net result is that in your “bookshop” if you pay your workers less than a living wage then we the taxpayers pay your workers so that they can work for you
    In other words we pay our taxes so that you can have a business and be a plutocrat

    The Economic Policy Institute reports that $45 billion per year in federal, state, and other safety net support is paid to workers earning less than $10.10 an hour. Thus the average U.S. household is paying about $400 to employees in low-wage industries such as food service, retail, and personal care.

    If you can run a business – great!
    more power to your elbow but I don’t see why I should subsidize you while you run something that is marginal or add to your profits

    As far as Atlas Shrugged is concerned – a very poor book written by somebody who had no idea how the world runs and who was on state support – although she would deny that support to other people

    • Dennis the Menace March 16, 2015 at 6:21 pm #

      “The Economic Policy Institute reports that $45 billion per year in federal, state, and other safety net support is paid to workers earning less than $10.10 an hour. ”

      So? That only proves that there are lots of stupid policies out there wasting the taxpayers money and that folks like you only want to shore them up by creating more problems via hiking the min wage.

      The simplest solution: Abolish those programs. Then Keynesians such as yourself can’t bitch about them as justification of Do More Stupd (min wage) via the bleeding hearts emotional vs logical way of ‘thinking’.

      Thank you for making all this clear to the rest of us.

    • bcaa12 March 23, 2015 at 5:08 pm #

      A fair point, Authors, and books Like Ayn Rand’s Atlas shrugged, tend to put a spin on a vastly more complex reality. let’s take the example of the bookshop, this argument that the increased cost of minimum wage would double costs lets say it is valid, but it is ignoring on the other hand business model, profitability, etc. while I am not familiar, with the operating procedure of a bookshop, I am more familiar with other businesses, such as a coffee shop. let me put it this way the profit margin designed in the pricing is 70%, thus even doubling the cost of labor is not a determining factor in pay, the actual determining factor, primarily is how little you can pay in labor while maximizing productivity.

      the reality is that minimum wage is a form of lazy thinking and poor economical theory. this concept is based from the 2 centuries plus economical theory which is completely invalid today, while I am not going to pontificate in the subject, I will simply add that if anyone studies US pre-civil war incomes, and post-civil war incomes, will find a very interesting reality.

      the truth is that the current stock system that has been encouraged is creating a gap not due the accumulation of wealth but due the fact that the people that are successful in developing an stock income are no longer operating under the same economic rules as anyone that depends on a pay income. forget about taxes, and look at the disparity between value.

  6. Bruno March 16, 2015 at 6:02 pm #

    “In short, the unintended consequences of something intended to benefit the poor will ensure that it actually harms them instead”

    Amazingly, this has been used as an excuse for 100 years.

    The arguments against—a hundred years’ worth—were recently collected by a group of scholars calling itself the Cry Wolf Project. [http://nelp.3cdn.net/fb518f3647002218a7_a6m6ilt1w.pdf]

    They sound hair-curling.

    “The minimum wage has caused more misery and unemployment than anything since the Great Depression,” Ronald Reagan said in 1980.

    “Rome, two thousand years ago, fell because the government began fixing the prices of services and commodities,” Guy Harrington, of the National Publishers Association, told Congress in 1937.

    The Fair Labor Standards Act, which set a national minimum wage of twenty-five cents an hour, in 1938, and also abolished most child labor, “constitute[d] a step in the direction of communism, bolshevism, fascism, and Nazism,” according to the National Association of Manufacturers.

    In the last seven decades, the minimum wage has rise over two dozen times, and yet nearly identical predictions of job loss and economic contraction – without regard or reference to the effects of earlier increases – continue to the present day.

    Cry Wolf indeed…

    • Dennis the Menace March 16, 2015 at 6:23 pm #

      Really? Switzerland doesn’t have a national min wage and is one of the world’s most prosperous nations. That pretty much puts paid to all the left wing garbage you wasted your time quoting.

      • Bruno March 16, 2015 at 10:36 pm #

        You’re using as an example a country that has collective bargaining agreements between its workers and management that covers the entire workforce, a universal healthcare system that requires every citizen to buy health insurance from private insurance companies, which in turn are required to accept every applicant (much like Obamacare), and almost free education even during undergrad studies, …as why the ‘left wing garbage’ is incorrect?

        Okay.

  7. Dennis the Menace March 16, 2015 at 6:14 pm #

    That’s just it: The word ‘unintended’ shouldn’t even be used in what you describe at all because anyone with half a brain would know that this would be the outcome, so to promote this idiocy is to ‘intend’ such harm.

    As for at shorter version of Atlas Shrugged, try “Alongside Night” by B. Neil Shulman. It is to Agorism what Altas Shrugged is to Objectivism.

  8. JJ Reuter March 16, 2015 at 10:21 pm #

    Reblogged this on jjreuter.

  9. Joseph Webb April 8, 2015 at 7:38 am #

    We talk about this. Others have made poor choices that limit their goals. Nothing we can do will change those who refuse to plan their lives.

  10. JJ Reuter May 22, 2016 at 1:25 am #

    I have never seen so many overweight people with cell phones, TV and housing anywhere else in the world. No one starves in the US unless you are poor white trash living in the Ozarks. Poverty is in the mind of the beholder.

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