Raising Wages


Wal-Mart recently announced it will start paying all of its workers at least $9 per hour. TJ Maxx and Target have now followed suit. I’m being asked frequently if these moves are a response to the minimum wage protests or other business interests. It’s impossible to tell if you read the press releases—companies never tell you exactly what’s going on the boardroom—but I think both are factors.

Wal-Mart is the most protested and sued corporation in the US. Its customers are driven primarily by value and convenience. Still, most Americans like to “feel good” about where they work and shop. Raising wages at the bottom certainly helps companies like Wal-Mart and Target fend off some of the social criticism. If customers are willing to base their shopping decisions in part on retailer image, then these companies could be making a wise business decision.

Nonetheless, Wal-Mart and Target must compete for labor. With the employment picture improving a little—especially in certain markets—retailers must deal with reality. If you pay less than your competitors, then you’re likely to lose your best workers. There’s no doubt that both Wal-Mart and Target are raising wages for certain employees because their leaders believe they need to do so for competitive reasons.

There are several take-home points here. First, corporate social decisions are usually just business decisions. Pressure from social groups calling for changes such as higher wages, better benefits, or more products made in the US can influence business strategy, but this is unlikely to occur unless it is necessary to keep customers happy. Put another way, Starbucks is often touted as a very “socially responsible” firm because of its human resource and environmental practices, but its customers seem to be willing to pay more—a lot more—for coffee there. For Starbucks, it’s a good investment. For companies like Wal-Mart and McDonald’s, it’s often not.

Second, raising the minimum wage is irrelevant when competitive pressures make it more difficult for companies to attract and retain employees. The minimum wage is only relevant to workers whose market value is really less and therefore, would earn less without it. Wal-Mart, Target and other retailers are making proactive decisions to pay market value above the minimum wage.

Finally, companies like Wal-Mart are criticized primarily because they are large, successful, cost-conscious firms. The criticism hasn’t stopped because of the impending wage increases. Search “Wal-Mart” in Google News and count the number of negative stories. Those who despise Wal-Mart will continue to do so. It’s about capitalism, not just wages.


Political Correctness at the U of Minnesota


I was intrigued to learn that the University of Minnesota recently decided to no longer include racial descriptions in crime alerts to avoid stigmatizing minorities. By definition, crime alerts are designed to provide specific information about a perpetrator so that the general public—in this instance, faculty, staff and students—can remain vigilant and safe. The purpose and effectiveness of crime alerts is directly tied to the specificity of the information. It wouldn’t do me much good to know that robbery suspects on my campus are on the loose if I don’t know what they look like.

There are two problems here. First, why not eliminate other descriptors as well? For example, most assailants are young males, so identifying a perpetrator as such reinforces the stereotype that young males are criminals. If we are really concerns with social stigmas, then we must take this argument to its logical conclusion. Needless to say, a crime alert that avoids race, gender, and age would be essentially useless, as in the hypothetical alert, “We have information that a heavily armed person with a red shirt is loose on campus.” I hope I don’t happen to be out for a jog and wearing a red shirt when that alert goes out.

The second problem is ironic; not including specific information in a crime alert can cause members of the general public to fill in the blanks themselves. Although removing this information from the alert is designed to trigger fewer racial or ethnic stereotypes, those prone to them might mistakenly conclude that a nondescript perpetrator identified in an alert is a young, non-white male. Hence, withholding information can actually lead to stigmatization.

In researching the University of Minnesota’s decision, I ran across a column by Camille Galles at the Minnesota Daily (www.mndaily.com/opinion/columns/2015/02/02/political-correctness-connects-people). Galles presents the logic that underpins PC thinking, arguing that, “for students, being politically correct helps facilitate open dialogue instead of stifling it.” Put another way, political correctness is not offensive and makes everyone feel safe, thereby promoting deeper conversations among parties with different worldviews.

There is a kernel of truth here. Avoiding offending someone—when possible—helps advance an argument and promotes greater understanding. The problem is that real issues involve inconvenient reality. When truth is evaded in the interest of political correctness, then an entire conversation is based on half-truths and is therefore, worthless at best. At worst, such conversations can be damaging because they create the illusion of sound conclusions.

Consider the following example. Common sense tells us that some Americans who receive unemployment benefits don’t really want a job. This is not to say that all or even most unemployed Americans are in this category; the percentage is up for debate, but at least some are. If making this point is not permitted (i.e., politically incorrect) because it might offend unemployed Americans who are genuinely seeking work, then the discussion must proceed on the misguided idea that all Americans who receive unemployment benefits really want to work instead of receiving government benefits. Hence, Galles has it completely wrong. As this example illustrates, political correctness stifles open dialogue and can actually lead to poor personal decisions and poor public policy.

I’m a strong advocate for free speech everywhere, especially college campuses. It’s important to encourage everyone to be respectful when expressing views. However, real tolerance is the opposite of political correctness. It’s about being offended less and respecting differences, not evading them.


Update on Venezuela


The oil-rich and once expanding Venezuelan economy is in shambles. The country is running out of basics, from food to toilet paper. While retaining preferred exchange rates for select food and medicine at 6.3 bolivars per dollar, the official value of the Venezuelan currency has plummeted from about 50 to 170 in the last several days, an admission that the central government’s attempt to control the currency has failed miserably. Meanwhile, the government is seeking to overturn a World Bank ruling that it owes Exxon Mobil $1.6 billion due to under-compensation when the Chavez regime nationalized some of its oil projects. I’m sure Exxon Mobil wants to be paid in U.S. dollars, not bolivars.

But as Venezuela continues its downward economic spiral, the police state is intensifying its clamp on society. Mass protests are common. Police shot and killed a teenager in San Cristobal during a protest against the Maduro regime. The city’s pro-democracy mayor has been arrested for allegedly plotting the overthrow of the national government. As usual, Maduro sympathizers continue to claim that the U.S. is behind the protests and is actively seeking regime change. I ordinarily wouldn’t discount this charge completely, but President Obama seems to be somewhat of a sympathizer himself.

The take-home point here is the connection between economic and political tyranny. Economic freedom is fundamental to any prospering society and includes rights to make both production decisions—what is produced and how it will be priced—and personal decisions—where to work and what to buy. When a government restricts economic rights by nationalizing industries, controlling prices, and manipulating the value of its own currency, it is stifling individual liberty. Government has a monopoly on ultimate force, which must be garnered to institute such restrictions. In the end, the socialism-fascism mix employed by Chavez and Maduro not only destroys the economy, but also ends in arrests and violence.

The U.S. is not Venezuela, but the same principles apply. A confiscatory and irrational tax code is enforced by an IRS with an endless staff of taxpayer-financed attorneys and a legal ability to confiscate assets, sometimes without stated charges. Obamacare requires that individuals purchase government-specified health coverage or pay a fine. And if some on the left eventually get their way, businesses will be required to pay all workers $15 or more per hour regardless of what they actually contribute to the organization. Refuse to do so and you’ll be fined. Refuse to pay the fine and your assets will be seized. You could even end up in jail.

It’s important that we learn from what’s happening in Venezuela. Government isn’t always a bad thing, but most of its regulations restrict both economic and individual liberty. In the end, all laws must be ignored, selectively applied, or administered with force. None of these options are good, which is why


The Politics of Political Talk Radio


I’m a fan of good talk radio (Wilkow on Sirius is my favorite). I don’t like every host but I enjoy an open discussion of ideas and I appreciate the genuine passion that goes with it. But I’m not the only one. About 50 million Americans listen to talk radio each week.

The history of talk radio is fascinating. The format saved AM radio after the FM onslaught. Rush Limbaugh was a groundbreaker, but many others have followed. No two personalities are alike, but almost all of them lean conservative. My theory to explain this is that individuals on the right appreciate fact-based discussions and debates; talk radio (as opposed to TV or other video media) emphasizes the spoken word, and it’s much more difficult to make an emotional argument without visual images. Whether I’m right or not, talk radio is clearly dominated by the political right. Some of the left continue to clamor for fairness and “equal time,” but it’s a free market.

Like any other programming, talk radio is financed by advertising. A host that cannot build and retain an audience sufficient to attract enough ad revenue will be out of the industry. This is where it gets interesting.

During the last several years, many on the left have sought to silence talk radio hosts by threatening their advertisers. In a 2012 satirical monologue, Rush Limbaugh referred to referred to Georgetown University law student as a “slut” because she argued that the federal government should require the Catholic university to provide her with free contraception. Left-wing political groups responded by organizing social media campaigns threatening retaliation against sponsors, many of which eventually shifted their ad campaigns to programs deemed to be less controversial. As the Wall Street Journal recently reported, this campaign has taken a toll. Even with large audiences, advertising on talk radio programs costs about half of what it costs on music radio stations because large accounts are difficult to acquireThis effort tells us a lot about many on the left. Rather than seek to win an argument in the marketplace of ideas, they seek to squelch the opposition. Of course, they have the right to attempt to dissuade advertisers from sponsoring talk radio in a free society, and it’s understandable why many large firms prefer a “safer” route when it comes to marketing. However, it’s interesting to compare their response to the rise of talk radio to the right’s response to network news. Most “conservatives” don’t think much of the news on ABC, NBC, CBS, or CNN, but they just change the channel.

My point here is one of instinct. When those on the right see a problem, most are content to let the market solve it. If you don’t like a product, don’t buy it. If you don’t like Jon Stewart, don’t watch him. But when those on the left see a problem, many seek to control the outcome. They say things like “companies shouldn’t be allowed to…” or “this guy should be off the air.” Their faith is not in free choice and liberty, but in government intervention.


Gas, Highways, and Obama’s $4 Trillion Budget


In a recent post, I addressed a call from statists to increase the gas tax. I suggested that Republicans accept the proposal, but only if the plan included a revenue-neutral cut in income tax rates across the board. I reasoned that a use tax is always better than an income tax and that such an offer wouldn’t be accepted anyways because leftists just want to raise taxes. My post generated several more questions worth answering.

Washington can’t be trusted, so shouldn’t we oppose all tax increases regardless of the trade-offs? I don’t think so. I agree that Washington can’t be trusted, which is why I don’t think any tax trades (i.e., raise one and cut another) should include new taxes. This is why I opposed Herman Cain’s 9-9-9 plan. In theory, it would have been better than the current system, but would have also created a new tax on sales. I prefer a sales tax to an income tax, but over time, the 9-9-9 rates would change and we’d be stuck with an additional tax. We should only add a sales tax if we eliminate the income tax in the same bill.

Washington shouldn’t finance highway construction anyway, so why consider raising the gas tax even if income tax rates are lowered? In a perfect world, I’d rather turn all road construction over to states, local governments, and private entities. Arguably, there is a limited federal role for highway construction, but only for roads that are vital to the national transportation system. The Feds should not be in the business of sending funds back to the states for any other projects. The quagmire here is that the Feds already built the roads and someone has to maintain them. My point is simple: IF the federal government is going to engage in highway projects, than it should do so only with funds its collects from a usage tax, not the general coffers. The gas tax is far from perfect, but it’s better than the alternatives.

Obama’s proposed budget makes my point. The President is asking for increases in “grants” for local road projects from the general fund. Federal grants to local governments are unconstitutional, inefficient, and unnecessary. States and local governments can raise their own taxes to pay for such programs. My proposal is simple: ALL revenues derived from the gas tax must go to pay for vital national highway projects (not projects of state or local interest) through the Federal Highway Trust Fund (FHTF), and NO revenues from other sources should pay for any highway projects. If it is necessary to raise the gas tax to achieve this, then do so, but ONLY with an across-the-board, dollar-for-dollar cut in income tax rates.

Why should we trade income tax rates for gas tax rates when the income tax should be abolished or completely overhauled to a flat tax anyway? Sometimes we have to take incremental gains when we can get them. Followers of this blog know my strong preference for a sales tax (not a VAT, and not in addition to any income taxes) or a simplified flat (income) tax. The former is better, but the latter is easier to achieve, at least in the short term. My disgust for the current system aside, we still need to take action that moves us in the right direction. The left understands this point very well. Just consider how long they’ve worked on shifting healthcare from an individual responsibility toward a single payer system. Their progress has occurred one step at a time over decades.

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Where do the jobs come from?


The job picture has improved some in recent months. While current statistics overstate the employment rate by understating the number of available workers, it is true that things have gotten a little better. Hopefully we’ll finally have a recovery from the recession, one that is long overdue.

Needless to say, the Obama administration—like any other—is claiming responsibility for anything good that might be happening. But have the President’s policies actually promoted job growth? While there are always many factors to be considered, the lion’s share of the recent gains can be attributed to the long-term unemployment benefits supported by the President, most Democrats, and some Republicans in Congress. Unfortunately for the left, it was the expiration of damaging government intervention that actually helped get things moving.

In a recently posted working paper sponsored by the non-partisan National Bureau of Economic Research, economist Marcus Hagedorn and two colleagues concluded that 61% of the jobs created in 2014 can be attributed to the expiration of long-term unemployment benefits (see www.nber.org/papers/w20884). The technical aspects of this study are beyond they scope of this post, but another finding is also worth noting. States where unemployed workers received the highest long-term benefits experienced (on average) higher unemployment rates than did states with lower long-term benefits prior to the reform that eliminated these benefits. But after the reform, these same states experienced greater employment growth. In other words, long-term federal unemployment benefits hampered job growth through 2013, but their expiration helped promote it in 2014.

You may recall the arguments when federal unemployment benefits were extended on several occasions. Some on the right—those not afraid of being called heartless—suggested ending the long-term benefits because they provided an incentive for many would-be workers to stay unemployed. Those on the left argued that such a move would have been both insensitive and cruel because there simply were not enough available jobs.

The President continues to attribute any positive movement in the economy to his policies, but the Hagedorn study suggests otherwise. As the numbers tell us, it was the end one of Obama’s policies that seemed to trigger the majority of last year’s job growth. Just imagine what would have happened if the feds had stayed out of the long-term unemployment benefit situation in the first place.


Raising the Gas Tax


Thanks for the strength of the dollar and the competitive threat from frackers, the price of oil has declined precipitously, resulting in gas prices close to the levels that existed when President Obama was inaugurated. Some legislators—including a few Republicans—see this as an opportunity to raise the gas tax. Raising it might not be the worst idea, but not for the reasons they claim.

The federal gas tax is currently 18.4¢ per gallon. State tax rates vary but average about 30¢ more. The federal portion of the gas tax is supposed to finance the transportation infrastructure through the Federal Highway Trust Fund (FHTF). On paper, this sounds like a good idea. Consumers pay for road upkeep directly based on their road usage and indirectly through the prices of goods and services that are transported by trucks. It’s not a perfect system—for example, consumers with low mileage vehicles end up paying more per mile—but it’s a use tax that everyone has to pay in rough proportion to the benefit they receive. Unfortunately, the system doesn’t actually work this way.

Even with the FHTF, the President and others are constantly complaining about our “crumbling infrastructure.” In fact, the $787 billion stimulus package passed in 2009 was supposed to “create shovel ready jobs” to alleviate this and other problems. Obama’s subsequent admission that many of the jobs didn’t turn out to be so shovel ready after all highlights the reality: Although use taxes are the most rational way to pay for vital public services, politicians rarely honor their original intention; they typically seek to supplement them with more taxes from the general fund or use the money for other projects.

State lotteries are a great example. Their “profits” are typically earmarked for specific, popular projects—usually education—but other state appropriations for the same purpose tend to decline as lottery contributions increase. In the end, expenditures on education might be a little higher than they otherwise would have been, but a big chunk of the lottery money finds itself in other coffers.

My point here is that a use tax is the most rational means of paying for government services, but the system must be honest. Supporting an increase in the gas tax to fix our “crumbling infrastructure” assumes that highway allocations from the general fund wouldn’t be reduced to offset the increase in gas tax revenues. The extra general funds replaced by those from the increased gas tax could be used for, say, “free” community college education or government childcare programs. By the time the 2016 elections roll around, we’d have higher gas taxes, the same roads, more government programs, and continued calls by politicians for more revenues to fix our failing bridges and roads.

Should we oppose an increase in the gas tax? Not necessarily. In fact, I would support an increase in the tax as long as (1) all gas tax funds generated pay for highway maintenance and, (2) rates for all of the federal income tax brackets are reduced by the same percentage to completely offset the gas tax increase. This change wouldn’t have a substantial effect on economic growth and the entire tax code needs to be overhauled anyway, but an even trade of a lower income tax for a higher use tax is rational economic policy. Moreover, it calls the bluff of statists who claim that their proposal to raise the gas tax isn’t really about raising taxes.


Hiking the Minimum Wage


The minimum wage was raised in 20 states on January 1. President Obama is calling for an increase in the federal minimum wage from $7.25 per hour to something in the $10-15 range.

The mainstream press continues to clamor for more increases as well. A recent Washington Post article is one such example. In it, Danielle Paquette argues, “Economically, the verdict is mixed on minimum wage: Supporters paint the raises as an economic stimulus, a way to reduce poverty; detractors worry budget-strained employers will be forced to cut jobs.” This is a perfect example of economic ignorance.


Whatever you think about the minimum wage, the economic argument is clear and Paquette is dead wrong by suggesting that there’s an ongoing debate. It can’t be a stimulus because—even if it resulted in no job losses—it simply takes money that would have been spent by one group of individuals and give it to another group.  In this respect, it’s a wash at best. It’s an obvious job killer as well. Common sense should tell you that companies required to pay workers more won’t be able to afford as many employees. It’s true that companies typically pass part of the increased costs along to customers, but the overall effect has to involve some number of lost jobs. This is not a debatable point. It’s economic reality.

Michael Saltsman provides a clear, more detailed analysis in the video linked to his recent Wall Street Journal article. He also tells the story of a restaurant in Michigan that closed as a result of the wage hike.


Back to the Washington Post article…Most of it is devoted to stories of several individuals who work long hours for minimum wage. I don’t doubt their difficulties, but these stories miss the point. Wages are determined by the value workers provide employers. Some who receive minimum wage are actually worth less than that amount. Whenever an employer is required to pay a worker more than the market rate, the difference must be absorbed somewhere else. The naïve among us claim that it comes out of the pockets of greedy business owners. In the long run, it’s always passed to the consumer. In other words, the minimum wage is simply a transfer of wealth from consumers to a small percentage of workers. It’s a hidden tax you pay whenever you shop.

Minimum wage jobs are not meant to be careers and for most they are temporary. Most minimum wage workers are not the primary breadwinners in their homes. They provide opportunities for unskilled workers to gain skills and work experience. Those who work hard can move up or move on.

One of the workers highlighted in Paquette’s article even referred to the minimum wage as modern-day slavery. If anything should offend those committed to seeing a global end to real slavery, this is it.


Running the Government like McDonald’s


Government can learn a lot from business. Most private companies get their revenue primarily from customers so responsiveness is not an option. Keeping customers happy and cutting expenses are essential. Continuous improvement is the norm. Consider the case of McDonald’s.

During the last decade, McDonald’s added a lot of new products, including oatmeal, snack wraps, and lattes. The company doesn’t release specific data, but one estimate identified an increase in the total number of offerings from 85 to 121 between 2007 and 2014. Each new product was intended to expand service. Who can argue with more choices?

There was a problem with this approach. Each new product required a new station for preparation, new training procedures, and additional labor. Collectively, these changes broaden the responsibilities of employees, crowd the food preparation area, increase inventories, lengthen waiting times, and raise costs, all of which have hurt the company’s ability to deliver Big Macs, fries, shakes, and other staples. Rivals like Five Guys, Chick-Fil-A, and Chipotle Mexican Grill are smaller and more focused, and have lured many customers away. As a result, McDonald’s just experienced the sharpest decline in same-store sales in 14 years.

There’s a simple lesson here for business: Sometimes less is more. But government can learn from McDonald’s as well. The Constitution underscored the notion of limited government, giving Washington certain, specific responsibilities. As stated in the tenth amendment: The powers not delegated to the United States by the Constitution, nor prohibited by it to the States, are reserved to the States respectively, or to the people. Sticking to a short list was intended to keep Washington focused and responsive. A government involved in fewer activities should have an easier time keeping its eye on the ball and doing those activities reasonably well.

Like McDonald’s, governments at all levels—especially in Washington—have expanded their reach over the years. Amidst the massive continuing resolutions required to keep the behemoth moving, government waste and cronyism have soared to an all-time high. McDonald’s responded to its crisis by announcing the elimination of eight menu items—about 7% of the total. More might follow, but eight is a start. With an $18 trillion nation debt, why can’t Washington take similar action and eliminate 7% of its spending?

Some will disagree; I’ve heard the rejoinder many times: “You can’t compare government to business because you can’t run government like a business.” There are certainly differences, but the principles associated with managing both entities effectively are quite similar. Besides, if you don’t run government like a business, then how do you run it?


Obama & the Business Roundtable


The Business Roundtable (BRT) is a group of US CEOs that seek to promote pro-business government policies. My review of the BRT is mixed. Some of its positions, like the group’s support for “comprehensive immigration reform,” are just plain self-serving. In fact, the notion that CEOs and the President should “work together” to solve our nation’s problems might sound good to some, but it’s a recipe for cronyism.

My concerns aside, President Obama addressed the BRT on Wednesday and made some interesting comments:


The last 2 paragraphs before Q&A were particularly revealing:

But, domestically, the area where I have the deepest concern is the fact that although corporate profits are at the highest levels in 60 years, the stock market is up 150 percent, wages and incomes still haven’t gone up significantly, and certainly have not picked up the way they did in earlier generations. That’s part of what’s causing disquiet in the general public even though the aggregate numbers look good.

And one thing I’d like to work with the BRT on is to ask some tricky questions, but important questions, about how we can make sure that prosperity is broad-based. I actually think when you look at the history of this country, when wages are good and consumers feel like they’ve got some money in their pocket, that ends up being good for business, not bad for business. I think most of you would agree to that. And we’ve got a lot of good corporate citizens in this room; unfortunately, the overall trend lines, though, have been, even as productivity and profits go up, wages and incomes as a shared overall GDP have shrunk. And that’s part of what is creating an undertow of pessimism despite generally good economic news.

The President is arguing that CEOs have a responsibility to be “good corporate citizens” and increase wages when profits and stock prices increase. When they don’t, a “disquiet” and “undertow of pessimism” develops in the populous. He’s wrong for at least 3 reasons:

First, wages are—or at least should be—determined by the market, not profits or stock prices. Companies pay workers what is necessary to get a job done. Companies don’t increase wages because profits increase. If this were true, then wages would fall at a company when profits decline. The market simply doesn’t respond this way.

Second, shareholders incur risk that typical workers do not bear. Companies that lose money still have to pay their workers—or lay them off; their shareholders suffer the consequences. Workers wishing to share in the bounty of anticipated company growth should become shareholders and accept the risk. You can’t have it both ways.

Finally, Obama only mentioned profits, share prices, and wages. He neglected to address the myriad government policies and regulations that discourage companies from hiring workers. Whether it’s Obamacare, his higher minimum wage proposals, or his support for amnesty for illegal immigrants, Obama’s policies—not corporations—have created the “disquiet” and the “undertow of pessimism.”

The President’s comments reflect a continued misunderstanding of how business can and should function.

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