Wednesday, August 07, 2013

Why The Minimum Wage Doesn't Help The Poor

Let me emphasize that I am neither an economist or politician.  Yet when I read articles like this recent New Yorker piece on the minimum wage, I feel compelled to share my take.

In his piece, James Surowiecki does a good job of teasing out some of the main issues around low-wage work these days.  These include:
  • The transition from a high-wage manufacturing economy that provided blue-collar middle class jobs to a low-wage services economy (Note: It's my opinion that the high-wage manufacturing economy was an anomalous period, where an export-driven US economy could essentially grow unimpeded by competition, and where modern corporate governance had yet to place an emphasis on the primacy of the shareholder)
  • The increasing trend for low-wage workers to be adult breadwinners, rather than adolescents looking to earn spending money
  • The remarkable statistic that Apple's profits exceed those of all retailers, restaurant chains, and and supermarkets in the Fortune 500 combined...and that Apple employs 76,000, while those old-line companies employ 5.6 million
Yet Surowiecki's piece is still rife with insane troll logic.  For example, he writes, "Walmart and Target earn between three and four cents on the dollar; a typical McDonald’s franchise restaurant earns around six cents on the dollar before taxes, according to an analysis from Janney Capital Markets."

In that very same paragraph, he adds, "Congress is currently considering a bill increasing the minimum wage to $10.10 over the next three years. That’s an increase that the companies can easily tolerate, and it would make a significant difference in the lives of low-wage workers."

I looked up Walmart's most recent 10K filing.  SG&A (largely wages) made up $21.7 billion of Walmart's expenses for the quarter, or just about 19% of revenues.  Walmart's profits were 3.3%.

Increasing the minimum wage from $7.25/hour to $10.10/hour represents a 39% increase.  If Walmart's SG&A expenses rose 39%, they would increase to 26.5%.  Walmart would go from making 3.3 cents for every dollar sold to losing 4.2 cents.

Doesn't sound like something Walmart "could easily tolerate," does it?

Despite my criticisms, I share Surowiecki's opinion that raising the minimum wage isn't enough.  Raising the minimum wage is attractive to folks who lack economic sense because it doesn't carry an easily reckoned hard dollar cost, and is simple to carry out.

A better approach is to provide a more effective social safety net:
"Realistically, then, a higher minimum wage can be only part of the solution. We also need to expand the earned-income tax credit, and strengthen the social-insurance system, including child care and health care (the advent of Obamacare will help in this regard). Fast-food jobs in Germany and the Netherlands aren’t much better-paid than in the U.S., but a stronger safety net makes workers much better off."
I heartily agree, though I'd add educational reform to the mix, so that you don't have to be wealthy to get a good public education (the essential fact that drives today's housing market).

There is only one easy way to increase wages, and that is to increase the demand for labor.  The law of supply and demand will then lead to an increase in wages.  Rather that futzing around with foolish policies, our government should focus on enabling economic growth, which will help a heck of a lot more than the smoke and mirrors of minimum wage increases.

Monday, August 05, 2013

SnapChat and the disappearing founder OR Get it in writing, dumbass!

A friend of mine pointed me to the sad story of Reggie Brown, who was frozen out of SnapChat by his co-founders and fraternity brothers:

Or, was Brown a hard-partying bro who didn't add much value, in comparison to his co-founders (a hacker and designer)?

It's a tough call, given that various witnesses and actual records show that the other founders credited Brown with coming up with the "million-dollar idea" behind SnapChat because he wanted something that would help him be more discrete while sexting.

In the end, the truth, or some semblance thereof will be up to the courts:

But there is a broader lesson here that, sadly, entrepreneurs always seem to need to learn for themselves: GET IT IN WRITING.

Over the years, I have told numerous entrepreneurs to get everything in writing, because once people smell money, the ugly side of human nature comes out:
"People are capable of rationalizing almost any action if it enriches them. I’ve seen family members sell each other out and lifelong friends come to blows over this. I personally have two close friends who lost millions over broken promises because they trusted their partner’s word rather than insisting on a contract."
It's been nearly three years since that post, and sadly, the number of friends who lost money because they failed to "paper things up" has only grown.

Don't rely on friendship, good faith, honesty, or anything else that won't hold up in a court of law.  Get it in writing.  Not only will this keep you from losing your money, by removing temptation, it might also keep you from losing your friendships.