Free Markets, Free People

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Former McDonald’s CEO goes one for two

Ed Rensi is the former CEO of McDonalds and he commented on the reality of a $15 minimum wage and how most businesses will handle it:

I was at the National Restaurant Show yesterday and if you look at the robotic devices that are coming into the restaurant industry — it’s cheaper to buy a $35,000 robotic arm than it is to hire an employee who’s inefficient making $15 an hour bagging French fries — it’s nonsense and it’s very destructive and it’s inflationary and it’s going to cause a job loss across this country like you’re not going to believe.”

He continues, “It’s not just going to be in the fast food business. Franchising is the best business model in the United States. It’s dependent on people that have low job skills that have to grow. Well if you can’t get people a reasonable wage, you’re going to get machines to do the work. It’s just common sense. It’s going to happen whether you like it or not. And the more you push this it’s going to happen faster.”

That’s the one he got right.  Here’s the one he got wrong:

I think we ought to have a multi-faceted wage program in this country. If you’re a high school kid, you ought to have a student wage. If you’re an entry level worker you ought to have a separate wage. The states ought to manage this because they know more [about] what’s going on the ground than anybody in Washington D.C.

Good grief, Mr. Rensi, why not let the market handle it?  You know, supply and demand?  What the heck is wrong with you?  You wouldn’t even be discussing this if government hadn’t intruded and decided unilaterally that you should pay your employees a certain amount of money for their labor.  It is because of government you’re even discussing automation above.  And now you think government – even state government (you know like California or New York?) – would be the solution?

Really?

And you were a CEO of a major corporation?

Wow.

~McQ

The age of job automation

It’s closer than you think.  Last Friday I put a bit up in Stray Voltage about Dominos testing a robot delivery service in New Zealand.  And I intimated that that sort of automation would be something that would displace labor if labor got too expensive – like $15 for the minimum wage.

Over the weekend I happened across a couple of more articles.  One featured the CEO of Hardee’s and Carl Jr.’s talking about an automated restaurant he’d seen in San Francisco.  And, sure enough, his focus was on labor savings ($15 minimum wages specifically):

The CEO of Carl’s Jr. and Hardee’s has visited the 100%-automated restaurant Eatsa — and it’s given him some ideas on how to deal with rising minimum wages.

“I want to try it,” CEO Andy Puzder told Business Insider of his automated restaurant plans. “We could have a restaurant that’s focused on all-natural products and is much like an Eatsa, where you order on a kiosk, you pay with a credit or debit card, your order pops up, and you never see a person.”

Pudzer’s interest in an employee-free restaurant, which he says would only be possible if the company found time as Hardee’s works on its northeastern expansion, has been driven by rising minimum wages across the US.

“With government driving up the cost of labour, it’s driving down the number of jobs,” he says. “You’re going to see automation not just in airports and grocery stores, but in restaurants.”

Good old government.  Helping out again, aren’t they (another way to make you more dependent on them)?  As Pudzer says:

“This is the problem with Bernie Sanders, and Hillary Clinton, and progressives who push very hard to raise the minimum wage,” says Pudzer. “Does it really help if Sally makes $3 more an hour if Suzie has no job?”

Well no, it doesn’t. And then there’s this:

“If you’re making labour more expensive, and automation less expensive — this is not rocket science,” says Pudzer.

Well no, it’s not – er, except to Bernie supporters.  But then it isn’t necessarily easy to automate everyone’s jobs either.  But it is getting easier as technology develops.

Take the restaurant that Pudzer was talking about:

“I would call it different than a restaurant,” said David Friedberg, a software entrepreneur who founded Eatsa. “It’s more like a food delivery system.”

Last week, I was in a fast-moving line and browsed on a flat-screen monitor the menu of eight quinoa bowls, each costing $6.95 (burrito bowl, bento bowl, balsamic beet). Then I approached an iPad, where I tapped in my order, customized it and paid. My name, taken from my credit card, appeared on another screen, and when my food was ready, a number showed up next to it.

It corresponded to a cubby where my food would soon appear. The cubbies are behind transparent LCD screens that go black when the food is deposited, so no signs of human involvement are visible. With two taps of my finger, my cubby opened and my food was waiting.

The quinoa — stir-fried, with arugula, parsnips and red curry — tasted quite good.

And he saw no one other than other customers.  Says the author of the article:

Whether a restaurant that employs few people is good for the economy is another question. Restaurants, especially fast-food restaurants, have traditionally been a place where low-skilled workers can find employment. Most of the workers are not paid much, though in San Francisco employers of a certain size must pay health benefits and in 2018 a minimum wage of $15.

Ironic, isn’t it?  That the prototype “food delivery system” is established in a city in which government has decided it will set the wages.  The laws of economics, or “rocket science” for the Bernie supporters, begs to differ.  There’s no real advantage in terms of labor savings, if the market sets the minimum wage, but mandated wages?  Well, then it comes down to viable alternatives – and cost-wise, this is suddenly viable.  The lower wage job holders of America say – thanks government.

And beyond the obvious, there are advantages to automating:

By not hiring people to work in the front of the restaurant, he said, they save money on payroll and real estate. (There will always be at least one person available to help people navigate the iPads and to clean up.) The kitchen is also automated, though he declined to reveal how, and the company is experimenting with how to further automate food preparation and delivery.

And, fewer to call in sick, give benefits, sick days and paid vacations too.  Make an employer’s job easier, more efficient and more enjoyable and the employer will take that route every time.

“We can sit and debate all day what the implications are for low-wage workers at restaurants, but I don’t think that’s fair. If increased productivity means cost savings get passed to consumers, consumers are going to have a lot more to spend on lots of things.”

Consumers have a choice – spend more for the same thing to help someone else have more money or spend less for the same thing and have more to spend on other things they want or need.  Wal-Mart says they will choose the latter.  So do those pesky laws of economics.

The food industry isn’t the only industry that’s going to see this though:

Automation is transforming every industry. Business owners look to substitute machines for human labor. It happened to blue-collar workers in factories and white-collar workers in banks and even law firms. With self-driving vehicles, it may happen in the taxi and trucking industries. Robots and artificial intelligence machines are expected to transform health care.

Coming sooner rather than later … possibly sooner than we think.

Nowhere is the potential for job automation so obvious as it is in the on-demand economy, where many startups have grown fat with venture capital despite poor unit-economics. Uber is spending heavily to hasten the development of driverless cars. Instacart, Postmates, and other delivery-heavy startups are unlikely to stick with humans once machines—which don’t take sick days, need bathroom breaks, or threaten to unionize—can do the same jobs.

But even if you don’t work in the on-demand economy, chances are high that you or someone you know will eventually be in the same position as Fox-Hartin. Machines already exist that can flip burgers and prepare saladslearn and perform warehouse tasks, and check guests into hotels. Companies like WorkFusion offer software that observes and eventually automates repetitive tasks done by human workers. And automation has also crept into knowledge-based professions like law and reporting. When in 2013 researchers at Oxford assessed whether 702 different occupations could be computerized, they concluded that 47% of U.S. employment was at risk of being lost to machines.

~McQ

Again, what’s $15 times zero?

A “told you so” follow up on that $15 minimum wage hike in Seattle (and coming to San Francisco soon):

Seattle’s $15 minimum wage law goes into effect on April 1, 2015. As that date approaches, restaurant across the city are making the financial decision to close shop. The Washington Policy Center writes that “closings have occurred across the city, from Grub in the upscale Queen Anne Hill neighborhood, to Little Uncle in gritty Pioneer Square, to the Boat Street Cafe on Western Avenue near the waterfront.”

Of course, restaurants close for a variety of reasons. But, according to Seattle Magazine, the “impending minimum wage hike to $15 per hour” is playing a “major factor.” That’s not surprising, considering “about 36% of restaurant earnings go to paying labor costs.” Seattle Magazine,

“Washington Restaurant Association’s Anthony Anton puts it this way: “It’s not a political problem; it’s a math problem.”

“He estimates that a common budget breakdown among sustaining Seattle restaurants so far has been the following: 36 percent of funds are devoted to labor, 30 percent to food costs and 30 percent go to everything else (all other operational costs).  The remaining 4 percent has been the profit margin, and as a result, in a $700,000 restaurant, he estimates that the average restauranteur in Seattle has been making $28,000 a year.

“With the minimum wage spike, however, he says that if restaurant owners made no changes, the labor cost in quick service restaurants would rise to 42 percent and in full service restaurants to 47 percent.”

Key quote: “It’s not a political problem; it’s a math problem.”  Of course it is a “political problem” because it is clueless politics that pushed this.  However, for the owners, it is indeed a “math problem”. And the math for staying open doesn’t add up.

Are there alternatives to closing.  Sure.  But they’re the same ones we’ve talked about for years:

Restaurant owners, expecting to operate on thinner margins, have tried to adapt in several ways including “higher menu prices, cheaper, lower-quality ingredients, reduced opening times, and cutting work hours and firing workers,” according to The Seattle Times and Seattle Eater magazine. As the Washington Policy Center points out, when these strategies are not enough, businesses close, “workers lose their jobs and the neighborhood loses a prized amenity.”

Welcome to the land of $17 dollar cheeseburger.  And, as you can figure out fairly quickly, everything else will be more expensive too … which, of course, erodes the purchasing power of that $15 wage.  More importantly, if you work for one of those establishments that is closing, your wage is $15 times zero hours, isn’t it?

~McQ

 

Wondering why there are few women in tech? Here’s the perspective of someone in tech.

Via Instapundit and Bill Quick, I’ve noticed discussion about this Forbes article on why females are under-represented in technology companies.

As someone who has spent an adult lifetime in the tech industry, let me suggest an angle that I didn’t see in this article, and which I have not seen in other similar articles.

Most jobs of any consequence in tech companies require people to successfully write code at some point in their careers. Writing code is a very unusual human activity. In addition to logic skills and some other cognitive capabilities that the articles usually do touch on, there is one aspect of it most people outside the industry have never thought about: you must be comfortable being wrong and prepared to constantly acknowledge and fix your own mistakes.  

You are wrong a few dozen times a day. The computer tells you (via a compiler error or problem in the running program) that you are unambiguously wrong, and you *must* figure out how to fix the mistake before you proceed. The mistake can’t be overlooked or ignored. It must be fixed, and to the exacting standards of a machine with no emotions.

And here’s where I think the problem results in disparate impact between males and females: the computer is invulnerable to pleading, sweet-talking, eye blinking, hair tossing, lip licking, or any of the other things a substantial fraction of young women have learned to use to get their way in the world, via persuading a male to take care of it or overlook it.

Think, for example, about all those famous stratagems for getting out of traffic tickets, and the jokes about wanting to use one and finding out the cop is female. Whether feminists like it or not, that behavior is common among young women, and it’s common because it works in many social situations.

Whether you think it’s cultural or genetic, woman are less comfortable in the harsh reality, hard edged world of writing code. I think it’s at least partially because it goes against how they have learned to deal with the world around them. Because the computer isn’t a person, and certainly not a male, their best social skills avail them nothing. Plus, they have to be completely comfortable being told flat out “you are wrong about this – deal with it” many times a day, every day.

This is hard. No one likes being told that they are wrong. I know plenty of men who can’t deal with it either. But I think women, on average, have less experience with it than men.

There is evidence to back that up. For example, there is research confirming that teachers pamper girls in school. So, from a young age, and given our current educational system, I think a male is less likely to have someone overlook their mistakes.

There are certainly amazing and talented women developers. I know some and I’ve hired some. In fact, I’ve hired a larger percentage of the women candidates who interviewed with me than men. I just don’t see that many of them.

I strongly challenge the idea that the disparate numbers are due to sexism at the level of the technology companies. In the ruthlessly competitive world of tech, we’ll take talent where we find it. I don’t care about a candidate’s gender, race, religion, sexual preference, or anything else irrelevant to the prime consideration: can they effectively write software? 

In fact, given the current lop-sided proportion of men in the industry, in many cases a qualified woman actually has an advantage! Men are hardwired by eons of evolution to prefer to look at a woman across a conference table than another scruffy, bearded, overweight male nerd. Male decision makers, in my experience, simply never turn down a qualified woman due to sexism. (I supposed there are Neanderthal male decision makers out there who do, but in a long tech career, I’ve never met one.)

So, to the extent that gender matters at all, women typically have the better of it. But decision makers can’t afford to let that factor override the need to perform. Anyone running a software development team knows the dangers of having someone who can’t deal with the harsh realities of being told they are wrong and figuring out how to fix it many times a day. One of the prime characteristics I look for in interviews is defensiveness, which usually indicates an inability to deal with being wrong a lot. Such a person (male or female) not only fails to contribute much, they degrade the overall ability of the team to get things done.

I don’t know how to fix this comparative lack of women in the industry, and I would certainly like to see it fixed. But expecting university computer science departments or tech companies to do it is silly. Any solution is going to have to go a lot further back in a female’s life than young adulthood, and involve a much bigger effort than just encouraging more girls to enter science fairs.

What is the worth of a job?

Well that’s determined by all sorts of variables – how much the person seeking the job is willing to take, how much the person wanting the job done is willing to pay, the scarcity or abundance of labor, etc..  And so in a free market, when a job is open it is up to the person seeking to have the work done and the person seeking a job to decide what it is worth to each of them.  If they can reach agreement, then the job is offered to the person seeking the job.  If agreement can’t be reached, then the job goes unfilled.

The bottom line is that no outside party can decide what that job is worth – in that mythical free market, that is.  However, we don’t have a free market and legislators, trying to buy the good will of voters with other people’s money, often decide they know what every job is worth at a minimum.  Thus the minimum wage.

Well this is anecdotal, I know, but it certainly seems to support every negative we here at QandO have been talking about for years.  In the long run raising the minimum wage only raises the cost of labor.  It does not change the worth of a job.  Ever.

SeaTac workers are learning that the hard way:

Last January, SeaTac implemented a $15 per hour minimum wage for hospitality and transportation workers. The consequences to the drastic hike in wages are just beginning to be realized—and it’s not pretty.

A writer for NW Asian Weekly recently blogged about her experience attending an event at a SeaTac hotel. She asked employees if they were “happy with the $15 wage.” The ensuing conversations,

“It sounds good, but it’s not good,” the woman said.

“Why?” I asked.

“I lost my 401k, health insurance, paid holiday, and vacation,” she responded. “No more free food,” she added.

“The hotel used to feed her. Now, she has to bring her own food. Also, no overtime, she said. She used to work extra hours and received overtime pay.

“What else? I asked.

“I have to pay for parking,” she said.

“I then asked the part-time waitress, who was part of the catering staff.

“Yes, I’ve got $15 an hour, but all my tips are now much less,” she said. Before the new wage law was implemented, her hourly wage was $7. But her tips added to more than $15 an hour. Yes, she used to receive free food and parking. Now, she has to bring her own food and pay for parking.”

SeaTac is a small city—10 square miles in area and a population of 26,909—with an economy almost exclusively defined by the Seattle-Tacoma International Airport. Five months into the implementation of a $15 minimum wage and it appears that a deep sense of regret has already flooded the city and workers who should have “benefited” from the terrible economic policy.

Meanwhile, as the largest city in the Pacific Northwest and one of the fastest growing major cities in America, Seattle is on the verge of following in SeaTac’s woefully unfit footsteps. Seattle Mayor Ed Murray’s $15 minimum wage plan includes a phase-in period of three to seven years and makes no exception for business type or size. Murray’s plan elicited back-lash from prominent Seattle businesses owners and economists alike.

Like we’ve said, increased costs associated with the job will likely be passed along to either the customer or the worker or both.  Here you have two perfect examples of how perks that helped workers and were of value to them (and for which they didn’t have to pay taxes) fell victim to some interfering government body unilaterally raising the cost of labor.  The worth of the job done didn’t increase at all.  Consequently, businesses looked at ways to compensate for the increase in labor cost.  As for the decrease in tips?  Well people tip well because they know most waiters and waitresses don’t make much for a wage.  However, when they’re making $15 an hour, suddenly there isn’t a great or compelling reason to “help them out”.  Tips decrease.  Why tip someone for doing their job when they’re making that kind of money hourly.  And, just as likely, prices have gone up to cover this expense.  Consequently, overtime is limited, etc.

Its not that this is something hard to figure out.  But the socialists among us never get past the feelgood part of it, because, well, because math is hard and economics is absurdly hard … or something..

~McQ

More business busting regulatory abuse by the imperial President

Market?  What market?  We haven’t had a free market for much of anything in at least the last 75 years:

Business groups and congressional Republicans are blasting regulations President Obama will announce Thursday that could extend overtime pay to as many as 10 million workers who are now ineligible for it.

While liberals lauded the plan as putting more cash in the pockets of millions of workers, business groups warned it would damage the economy and Republicans said it was another example of executive overreach.

That’s right friends, now it appears that the Obama administration has decided … that’s right, “decided” … that in addition to the increase in the minimum wage, now it needs to redefine who is eligible for overtime. And, of course, that redefinition is going to negatively impact who?  Businesses.  And if they have to live with the changes, who then will it effect?

Oh, yeah, those that can least afford it.  Why?  Because it will increase the cost of doing business.  And what do businesses do when their costs increase?  Pass it on to the consumer.

Now, I ask, was that so hard to spell out?  No.  And is it hard to understand?  Again, no.

So why is it liberals can’t follow the logic train to its final destination?

Well that’s fairly simple, they don’t think, they emote.  The bureaucrats, who’ve never had to run a business or turn a profit in order to meet a payroll are experts in what others “need”.  And they’re convinced those who are involved in running a business are just greedy.

“What we’re trying to take a look at is how we can make the labor force as fair as possible for all workers and that people get rewarded for a hard day’s work with a fair wage,” Betsey Stevenson, a member of the White House Council of Economic Advisers, told reporters Wednesday.

Right.  Because, you know, the guy who risked everything and has succeeded to the point that he can hire others and thereby give the abysmal unemployment numbers some relief aren’t “fair” – by definition I guess.

“Changing the rules for overtime eligibility will, just like increasing the minimum wage, make employees more expensive and will force employers to look for ways to cover these increased costs,” said Marc Freedman, executive director of labor law policy at the U.S. Chamber of Commerce.

Meanwhile in fantasyland:

Stevenson, however, contended that there would likely be an increase in employment as a result of the change, with companies deciding to hire more employees rather than paying existing workers at a higher rate.

Really?  Or perhaps they’ll hire less and use technology to fill the bill.  Technological answers don’t ask for raises, don’t require health care coverage, don’t need overtime, etc.  In fact, it is likely to lead to less employment and more mechanization.

But we should understand the BIG reason:

Proponents say the regulations are an issue of fairness.

“I think that if you put in a full week’s work and you end up being asked by your employer to work longer hours, you deserve to be paid a little extra,” said Rep. Xavier Becerra (D-Calif.).

Is that right?  Well, frankly, Rep. Becerra, that’s none of your freakin’ business.  But, I assume you can point out the Constitutional basis for your “thought”, right?

Bunch of idiots.  They are bound and determined to destroy the golden goose because they’re are woefully ignorant of the goose’s anatomy and how it works.

~McQ

Here we go again …

The cult of the vicitim is alive and well in the US.  It’s been fostered by politicians and lawyers who are open to the idea that one’s problems, whatever they are, are the fault of someone else.
And, given that doing so gives the pols more power (and the lawyers more money), the field is open for exploitation.  Remember the tobacco settlement?  Well guess who is next and why:

Lawyers are pitching state attorneys general in 16 states with a radical idea: make the food industry pay for soaring obesity-related health care costs.

It’s a move straight from the playbook of the Big Tobacco takedown of the 1990s, which ended in a $246 billion settlement with 46 states, a ban on cigarette marketing to young people and the Food and Drug Administration stepping in to regulate.

Yes, getting fat is the fault of “big food”.  Being obese is just not your fault.  So lets soak “Big Food” (and raise already high grocery prices through the roof, shall we?):

“I believe that this is the most promising strategy to lighten the economic burden of obesity on states and taxpayers and to negotiate broader public health policy objectives,” said Paul McDonald, a partner at Valorem Law Group in Chicago, who is leading the charge.

McDonald’s firm has sent proposals to AGs from California to Mississippi explaining how suing “big food” could help their states close budget gaps as billions in Medicaid expenditures eat a growing share of tax revenues.

In a letter to Pennsylvania Attorney General Kathleen Kane last year, McDonald noted that the state faced a $3.7 billion budget shortfall in 2012 and had to cut back on certain services. The state’s total Medicaid burden that year was $10 billion — and getting a piece of that back could help close the gap.

Yes friends it is the “most promising strategy to lighten the economic burden on the states and taxapayers” … say what?  Taxpayers?  Aren’t they the one’s who will foot the bill for the “Big Food” pass-through of cost to litigate this idea and then, if the lawyers are successful, pay the settlement?

Name someone you know who isn’t a “food adicit” and doesn’t buy food from “Big Food”, will you?  I’d be interested to meet them.

In the meantime, if this guy is successful in selling this to state AGs (and I’d not be surprised if they bit), the cost of food will go up as the cost of litigating this nonsense rises.  After all, Big Government is now in charge of health care costs (something they’ve actually driven up) and are desperate for ways to make it cheaper.

You’re just a victim, slugger.  And these guys have your best interests at heart, don’t you know?  Let the demonization of Big Food begin.

As an aside, it is a bit ironic that the laywer pushing this full employment for lawyers scheme is named McDonald, no?

~McQ

Arrogance and ignorance on display on D.C. City Council

What they’ve done is pretty typical of liberal governments everywhere.  They are arrogant with their power and totally ignorant of the economic impact their decision will have on the city.  But boy did they strike out at big box stores and do they feel good about it:

D.C. lawmakers gave final approval Wednesday to a bill requiring some large retailers to pay their employees a 50 percent premium over the city’s minimum wage, a day after Wal-Mart warned that the law would jeopardize its plans in the city.

That’s right, the hated Wal-Mart must pay more because retailers with corporate sales of $1 billion or more and operating in spaces 75,000 square feet or larger will be required to pay employees no less than $12.50 an hour.

No arbitrary or capriciousness there, huh?  Not a discriminatory law at all.  And who cares, right, because as one of the council members says:

“The question here is a living wage; it’s not whether Wal-Mart comes or stays,” said council member Vincent B. Orange (D-At Large), a lead backer of the legislation, who added that the city did not need to kowtow to threats. “We’re at a point where we don’t need retailers. Retailers need us.”

Yeah, retailers need them.

Really?  That’s what he thinks.  What if retailers decide they don’t need them?  Not only do the goods go away, but so do the jobs.  So $12.50 times zero gives you what?  It gives you this:

“Nothing has changed from our perspective,” Wal-Mart spokesman Steven Restivo said in a statement after the vote, reiterating that the company will abandon plans for three unbuilt stores and “review the financial and legal implications” of not opening three others under construction.

So 6 stores and the jobs that go with them … poof, gone.  Oh, and this is gone as well:

Well before it had any solid plans to open stores in the District, Wal-Mart joined the D.C. Chamber of Commerce and began making inroads with politicians, community groups and local charities that work on anti-hunger initiatives.

The campaign was matched with cash. Through its charitable foundation, Wal-Mart made $3.8 million in donations last year to city organizations including D.C. Central Kitchen and the Capitol Area Food Bank, according to a company spokesman.

Yeah, there you go.  That’s worth it isn’t it?  6 x no jobs and about $4 million in charitable contributions to help those in need in the area … gone.  Just to make a political statement and display for all their insufferable arrogance and their economic ignorance.

Of course, all of these unintended consequences will likely go unnoticed by the usual suspects while they cheer the council slapping Wal-Mart around.

~McQ

Don’t drink “the employment picture is much better” Kool-aid

Why?  Because it isn’t really better.  Oh, it may be marginally better than it was a year ago but that’s not saying much at all.  In terms of real progress?  Yeah, not so much.  The National Journal says:

The U.S. jobs picture is bleaker than the most recent jobs reports may make you think. The economy added 175,000 jobs last month, but at the rate things are going, it would take almost a decade to get back to prerecession employment levels. A Job Openings and Labor Turnover Survey report released Tuesday by the Bureau of Labor Statistics digs in on the bad news: The number of job openings in the U.S. actually fell by 118,000 in April to 3.8 million.

How bad can 3.8 million job openings be? The Economic Policy Institute looks at the number and sees that “the main problem in the labor market is a broad-based lack of demand for workers—and not, as is often claimed, available workers lacking the skills needed for the sectors with job openings.”

Here’s a chart they put together to visually make the point:

An economy on the mend is generating jobs at such a pace that it is competing for workers.  As is obvious, that’s not the case in this economy, nor has it been the case for quite some time.

In a word, the employment picture sucks.  Anyone pretending otherwise is doing exactly that – pretending.  And they can toss around all the numbers they like, the bar charts above tell the real picture – business is not hiring and the reasons are multiple, most having to do with government intrusion (see ObamaCare for one example).

~McQ

US average marginal effective tax rate about 40%?

So tell me again why the government can’t seem to get along with what it already gets?

Taking into account all taxes on earnings and consumer spending—including federal, state and local income taxes, Social Security and Medicare payroll taxes, excise taxes, and state and local sales taxes—Edward Prescott has shown (especially in the Quarterly Review of the Federal Reserve Bank of Minneapolis, 2004) that the U.S. average marginal effective tax rate is around 40%. This means that if the average worker earns $100 from additional output, he will be able to consume only an additional $60.

And yet the prevailing political attitude seems to be that of France’s “leadership”, i.e. government, has first claim on all your earnings and if you protest you’re “greedy”.

Who’s greedy?

Speaking of France, California seems bound to duplicate its latest tax scheme:

Consider California, which just enacted higher rates of income and sales tax. The top California income-tax rate will be 13.3%, and the top sales-tax rate in some areas may rise as high as 10%. Combine these state taxes with a top combined federal rate of 44%, plus federal excise taxes, and the combined marginal tax rate for the highest California earners is likely to be around 60%—as high as in France, Germany and Italy.

Yet they wonder why people are fleeing the state.

Impact and implications?

Higher labor-income and consumption taxes also have consequences for entrepreneurship and risk-taking. A key factor driving U.S. economic growth has been the remarkable impact of entrepreneurs such as Bill Gates of Microsoft, Steve Jobs of Apple, Fred Smith of FedEx and others who took substantial risk to implement new ideas, directly and indirectly creating new economic sectors and millions of new jobs.

Entrepreneurship is much lower in Europe, suggesting that high tax rates and poorly designed regulation discourage new business creation. The Economist reports that between 1976 and 2007 only one continental European startup, Norway’s Renewable Energy Corporation, achieved a level of success comparable to that of Microsoft, Apple and other U.S. giants making the Financial Times Index of the world’s 500 largest companies.

Yet we continue to try to recreate Europe’s debacle here.

The economy now faces two serious risks: the risk of higher marginal tax rates that will depress the number of hours of work, and the risk of continuing policies such as Dodd-Frank, bailouts, and subsidies to specific industries and technologies that depress productivity growth by protecting inefficient producers and restricting the flow of resources to the most productive users.

If these two risks are realized, the U.S. will face a much more serious problem than a 2013 recession. It will face a permanent and growing decline in relative living standards.

These risks loom as the level of U.S. economic activity gradually moves closer to that of the 1930s, when for a decade during the Great Depression output per working-age person declined by nearly 25% relative to trend. The last two quarters of GDP growth—1.3% and 2.7%—have been below trend, which means the U.S. economy is continuing to sink relative to its historical trend.

But your political and financial lords and masters know best, don’t they?  Just ask them.  They continue down this road despite the fact the destination is in plain sight in Europe and it isn’t pretty.

Occam’s Razor states “entities should not be multiplied unnecessarily.” Said another way, the simplest explanation is usually the most likely explanation. In this case the simplest explanation is incompetence.  But is it really incompetence?  With the European example staring them right in the face it’s hard to believe anyone is that incompetent.  The conclusion to their policies have already been proven to be a disaster.

So one has to being to consider other possibilities when those who are pushing the policies seem oblivious to the obvious.

You have to begin to wonder if it is a problem of hubris.  I.e. “the only reason it hasn’t worked before is we weren’t in charge”.  We’ve seen that in any number of instances throughout history where discredited or obviously illogical ideological ideas were tried and they again failed.

Or you have to consider the words “by design”.  But then you’re stuck with trying to come up with a valid reason “why”.  Recreating Europe’s debacle, or Japans’s or, for heaven sake, our’s in the ’30s would seem to be something smart politicians would attempt to avoid.

But here we are.

Economic growth requires new ideas and new businesses, which in turn require a large group of talented young workers who are willing to take on the considerable risk of starting a business. This requires undoing the impediments that stand in the way of creating new economic activity—and increasing the after-tax returns to succeeding.

And yet, we see a government bent on erecting even more impediments via increased taxation, costly new laws and onerous regulation.

Isn’t it about time we demanded to know “why?”  More importantly, maybe we should ask whose side they’re on.

~McQ

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