Minimum Wage Economics and Fallacies: Minimum Wage’s Biggest Fans, Part 2—Big Business

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7 MIN READ - More on the weaponization of minimum wage from the Cautious Optimism Correspondent for Economic Affairs and Other Egghead Stuff.

“Amazon supports the Raise the Wage Act, which will increase hourly wages for 32 million hard-working people… …We applaud the policymakers leading this critical effort… …We believe $15 an hour is the minimum *anyone* in the U.S. should be paid for an hour of labor. We also believe it’s good for business.”

-Jay Carney, Amazon VP for Global Corporate Affairs and former Obama White House Press Secretary

“Jeff Bezos’s flagship enterprise publicly supports the implementation of a $15 an hour federal minimum wage. Such a policy would cripple small businesses, especially those in rural areas, and, in effect, open up more of the market for Amazon. Such advocacy is borne out of brazen self-interest , not genuine concern for workers.”

-Robert Schmad, Washington Examiner

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In Part 1 we discussed the over century-long strategy employed by labor unions and skilled white workers of using minimum wage to price their lower skilled but also lower-priced nonunion and minority competition out of work.

To read more about the historically racist and xenophobic roots of minimum wage laws, go to:

http://www.cautiouseconomics.com/2021/08/microeconomics11.html

Once it was discovered that higher priced, higher productivity workers could use minimum wage to force their lower priced, lower productivity competition out of the market, other economic players caught onto the idea and devised creative ways to manipulate minimum wage laws to subvert their own rivals.

In today’s economy the most active weaponizer of minimum wage against competitors is business, specifically:

-Big business

-Smaller businesses with high labor costs, usually selling a premium product or service

In this column we’ll focus on big business and save smaller businesses for the next installment.

A BIG BUSINESS THAT SUPPORTS HIGHER MINIMUM WAGE: MCDONALD’S

So why does anyone think McDonald’s has officially come out in support of a $15 minimum wage?

McDonald’s executives are now declaring they support a higher minimum wage for the welfare of American workers, “their communities and their people.” (McDonald's U.S. President Joe Erlinger). And in its letter to the National Restaurant Association McDonald's has stated “We believe increases should be phased in and that ***all industries should be treated the same way***"  (key emphasis mine)

https://www.cbsnews.com/news/mcdonalds-federal-minimum-wage-fast-food-chain-now-supports-raising-7-25-an-hour-floor/

But as the late economist Murray Rothbard always reminded his students to ask: “Cui bono” (who gains) from the new law?

Clearly a nationwide increase in the minimum wage from $7.25/hour to $15/hour will raise McDonalds' costs, but it will cost their small competitors a lot more. Because McDonald’s has the means to replace more expensive labor with capital and leverage economies of scale that mom-and-pop burger competitors can’t.

Consider the kiosks we’re already seeing pop up in virtually every deep-blue city’s McDonald's and even some middle-America locations. When cashiers cost $15/ hour it becomes less expensive to replace them with self-order stations.

McDonald’s, which has nearly 16,000 locations in North America, already connects its stores via computer networks, has a large IT staff to support their current information assets, and has many of the assets in place today to deploy and operate a large kiosk network to replace tens of thousands of human cashiers.

Furthermore with so many stores they can operate the kiosk network at a lower per-location cost using simple economies of scale while getting a per-unit supplier discount for being such a huge buyer.

Now consider what a local mom and pop’s three local burger locations’ options are.

They employ a handful of cashiers at their locations, and those workers probably multitask pulling orders from the kitchen to the counter and dining room cleaning duties. 

Mom-and-pop currently has no computer network and no IT workers, at most maybe a modest website, email, and interstore communication by phone. How much will it cost them to roll out a new corporate network, self-serve kiosks in each store that send orders electronically to the kitchen and display queueing orders both to cooks and waiting customers? And how much will it cost them to employ an IT professional to install, operate, and maintain the stations and software, integrate their payment systems, and replace/upgrade the solution?

On a per-store basis not only will mom-and-pop’s costs be far higher for their three locations than McDonalds’ 16,000, it may even be higher than simply forking out the extra money and giving their cashiers the raise to $15/hour. 

Hence, lacking the same options that a megacorporation like McDonalds has, mom-and-pop will have to raise their prices far more than McDonald’s who is more able to fire their cashiers and replace them with less expensive machines (ie. substitute labor for capital).

Final result? With mom-and-pop’s prices rising fastest, more customers abandon them and defect to McDonalds’ less burdened price structure. McDonald’s makes up their marginally higher costs on increased volume—at their smaller competitors’ expense. Ideally, many mom-and-pops are even driven out of business altogether, plenty of which has happened in $15/hour blue cities as the Economics Correspondent has already witnessed here in San Francisco.

If minimum wage rises even further and by enough to make workers like cooks too expensive, we’ve all seen new machines being developed for food preparation that, once again, McDonald’s will be more able to afford enterprise-wide while it remains an impossibly expensive dream for mom-and-pop operations.

Large companies have been aware of their greater ability to absorb systemwide costs than small-scale competitors for decades, and the mantra goes far beyond just minimum wage legislation. Which is why most new expensive regulations have been lobbied for and even written by big business over the last several decades. 

A good example is Dodd-Frank which placed huge regulatory burdens on financial institutions.

Money center banks like JP Morgan and Citibank may not have been thrilled about new post-financial crisis regulations, but they were able to lobby hard to change many of its provisions. In Dodd-Frank’s final form Wall Street banks were better able to absorb new costs as they already had small armies of regulatory compliance personnel, but countless small community banks in America’s heartland soon complained they were paying more people to perform regulatory compliance than conduct lending, processing, and collections.

Burdened by prohibitive regulatory costs many small community banks were forced to sell themselves to large Wall Street firms, reducing competition as Wall Street intended.

Also during the days of airline regulation the U.S. Civil Aeronautics Board (1938-1985) set high fares and shut out new airline market entrants. According to Wikipedia:

“While the CAB regulation suppressed free competition, it provided security for the existing airlines… …To achieve its goals, the CAB was empowered to provide and administer subsidies to airlines. Further, the CAB regulated airline industry mergers and intercompany contracting -- but shielded the airlines from antitrust regulation.”

It’s no surprise that the dominant, legacy airlines of the time threw their support behind creation of the CAB. Airlines were guaranteed to make a lot of money without worry from competitors lowering fares, they paid their employees well, and air travel was glamorous but unobtainable for the middle class as only the rich could afford to fly.

ANOTHER MEGACORPORATION: AMAZON

Probably the other most visible proponent for $15 minimum wage has been Amazon.

Yes, raising the wage floor to $15 will cost Amazon more money, but it will cost their biggest competitor—Walmart—a lot more, which Amazon is counting on.

Walmart has thousands of stores to operate with armies of minimum wage store cashiers and stockers. Amazon has some minimum wage workers in its warehouses, but its workforce is far more geared towards higher-paid information technology and logistics positions and it also has a generally smaller workforce and larger net income profit margin.

-Walmart employees: 2.3 million

-Amazon employees: 1.3 million

-Walmart FY20 net income: $13.5 billion on revenues of $559 billion (2.4%)

-Amazon FY20 net income: $21.3 billion on revenues of $386 billion (5.5%)

Using an extreme reductio ad absurdum example, if both companies had to give all their employees a $7.75/hour pay raise for fulltime work it would cost Amazon $20.9 billion per year. But it would cost Walmart far more: $37.1 billion.

All other things remaining equal, Amazon would barely still be profitable, but Walmart would run huge losses around $20 billion a year.

Of course neither company’s payrolls are 100% fulltime. Both companies have large numbers of skilled employees who already make more than minimum wage.

But Walmart has far more minimum wage workers than Amazon due to Amazon’s web-based delivery model and its logistics and web services divisions. And Amazon has a fatter profit margin more able to absorb the cost.

Amazon management knows this and has already calculated that it could easily absorb a hike in the minimum wage without having to raise prices, but Walmart can’t.

Thus Walmart would be forced to raise their prices significantly to compensate for its higher labor costs while Amazon would have the option not to. Higher prices at Walmart means more customer defections to Amazon who plans to make up their own marginally higher costs on volume—at Walmart’s expense of course as well as the American consumer.

Of course Walmart can also deploy machines to partially offset higher costs (which means laying off workers) as it still has enormous capital budgets, but Amazon also gains business from the even larger loss of customers at America’s countless small retail business operators. Unlike Walmart they have no effective defense.

In Amazon’s case they’ve actually stepped forward and raised their own minimum salary to $15/hour unilaterally without waiting for legislation, in part because the labor market has tightened enough. But also so they can loudly broadcast (and they have) their virtue to arm pro-$15/hour politicians with “see, even Amazon thinks it’s the right thing to do” and convince reluctant politicians that “hmm, looks like business is actually OK with it.” 

It’s an old strategy designed to give politicians ammunition and/or cover to force Amazon’s competitors to absorb the higher costs as well. No wonder Amazon tasked Jay Carney with the lobbying effort, being Barack Obama’s former press secretary and well-connected to Washington establishment.

And the Washington Examiner has already sniffed out this strategy in one of their many columns accusing Amazon of supporting a $15 minimum wage to cynically serve its own interests (see attached URL).

https://www.washingtonexaminer.com/opinion/amazons-swampy-lobbying-for-15-minimum-wage-proves-the-little-guy-really-loses

Meanwhile “Fight for $15” activists don’t even realize their puppet strings are being pulled by their declared arch-enemy: big business. How little they realize they're simply pawns in a grandmaster's game of megacorporation versus megacorporation, or worse yet megacorporation versus local mom-and-pop.

This is just one more of the countless examples of one company weaponizing minimum wage to hurt another, and quite frankly a long history of companies weaponizing government regulation in general going all the way back to America’s very first federal regulatory legislation: the 1887 Interstate Commerce Act.

One day the Economics Correspondent will write a column on that fascinating but somber story.

Leftist Media Fail Once Again on Unemployment Numbers

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1 MIN READ - From the Cautious Optimism Correspondent for Economic Affairs and Other Egghead Stuff.

Childishly fallacious attempt to absolve enhanced
unemployment benefits from persistent jobless rates

The liberal media fail math again, trying to portray early ending of enhanced unemployment benefits as some sort of massive failure.

The reasoning? In states that closed the taps the media laments that over 33% of idle workers lost their benefits, but in return those states only saw a 4.4% gain in new jobs. 

Wow, only a 4.4% gain from a 33% cut, what a disaster. Just look at that graph! Who can't see this obvious failure of dogmatic free-market ideology?

Except that there are far more members of the labor force working than not, so they’re comparing a third of a very small number to 4.4% of a very large one.

Take a state like Colorado with a 6% unemployment rate. 6% of the workforce is idle and 94% of the workforce is employed.

So 2% (one-third of 6%) of the overall workforce lost extended benefits while 4.1% of the overall workforce saw new job gains (4.4% of 94%).

Or if we take an example using hard numbers, the Bureau of Labor Statistics says Colorado’s workforce consists of 3.2 million people, 3 million of whom were working in July and 194,000 of whom were filing for unemployment benefits.

https://www.bls.gov/eag/eag.co.htm

So if we apply these “disastrous” numbers…

33% of the 194,000 unemployed had their benefits cut or -64,000 people.

In return there was “only” a 4.4% increase in the 3 million people working or +132,000.

So in exchange for cutting extended benefits for 64,000 people, 132,000 people start working again.

Sounds more like a resounding success... for anyone who can do math (ie. not certain journalists).

ps. Except that Colorado is not one of the states cutting enhanced benefits early, which is why we haven't seen any single-month 132,000 job gains over there. In fact the number of people working in Colorado has actually fallen slightly since May: from 3,000,100 to 2,999,500 (see BLS tables).

Minimum Wage Economics and Fallacies: Minimum Wage’s Biggest Fans, Part 1—White Racists, Xenophobes, Labor Unions, and Leftist Intellectuals

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"[The minimum wage will] protect the white Australian’s standard of living from the invidious competition of the colored races, particularly of the Chinese.”

-Harvard Professor Arthur Holcombe (1912)

Countless black workers were deliberately and calculatingly 
 driven from their jobs by early 20th century minimum wage laws

7 MIN READ - The Cautious Optimism Correspondent for Economic Affairs and Other Egghead Stuff offers CO readers a short break from Afghanistan and Covid with a column on the racist origins of minimum wage laws.

Yes, you read that right. The roots of minimum wage laws lie with racism, unions, and left-wing academics blocking people of color and nonunion workers from getting good jobs going back to the early 20th century. And we’ve got the quotes to prove it.

PRICE THE COMPETITION OUT

In the 1910’s states such as Massachusetts, California, Arkansas, and others passed America’s first minimum wage laws. In the 1930’s President Franklin Roosevelt pushed for the first national minimum wage.

During the entire two-plus decades, white workers and unions across the country threw their political weight behind all these legislative efforts. Despite their public rhetoric championing the higher wage floor to help their laboring brothers and sisters, the truth is it was all a cynical attempt to price their nonwhite and nonunion competition out of the market.

The math behind this calculated effort is childishly simple so before looking at the historical evidence we’ll illustrate with a single example:

Take white, unionized shop worker A and black, nonunionized worker B in right-to-work state C.

A is more skilled, more productive and can make 4 widgets per hour, but he and his union colleagues demand $18 per hour.

B is less skilled and can only make 3 widgets per hour, but he only asks for $12 per hour.

So in an eight hour day A makes 32 widgets for $144 ($4.50 per widget) while B makes only 24 widgets for $96 ($4.00 per widget).

Even though our nonwhite worker isn't as productive (yet) as his white counterpart, he also asks for less money. Our employer calculates he can hire three employee A’s to make 96 widgets a day or four employee B’s to make exactly the same number, and operating in right-to-work state C (no "closed shops"), he opts for nonunion B employees who are more economical.

Union A workers could still be competitive if they asked for salaries more in line with their productivity (ie. $16 instead of $18), but historically unions haven't been keen to operate within the voluntary marketplace and looked instead to government to tilt the playing field in their favor.

They also worry that with some on-the-job training those minority nonunion workers might get better at the job, eventually match their productivity, and get pay raises even as they continue to economically outperform their white counterparts. 

Thus during the early 20th century white and unionized workers devoted a great deal of time and effort devising strategies to stop minorities and nonunion workers from getting those "foot in the door" starting jobs that might threaten their stranglehold over their respective trades.

The solution? Press the government to raise the minimum wage to $15 per hour.

The union wage remains unchanged at $18 since it’s still above the minimum wage, but the minority worker's wage is forced up from the previous $12 per hour to $15. 

The nonwhite worker's productivity hasn't increased, but thanks to the government the cost of hiring him has.

The cost of worker A remains $18 an hour for four widgets ($4.50 per widget) but now the cost of worker B is $15 an hour for three widgets ($5 per widget). 

Worker B is now no longer competitive.

Minimum wage therefore prices our nonwhite and nonunion workers right out of the factory which was the objective all along. 

Minority workers are then pushed out towards less desirable, lower paying jobs in agriculture, domestic work, or waiting tables—shut out of the blue collar factory workforce. The opportunity to work, learn new skills, raise their productivity and pay, earn a good living, and build a career is denied to them, proven by the “employment segregation” which was so common for at least the first half of the 20th century.

Unions claim this was never their strategy, but unions have also employed small armies of their own economists since the Progressive Era and the minimum wage analysis is a simple math problem that any high school student can solve. So yes, clearly the leadership knows what it’s doing even if the rank and file may not.

As economist Gary Wolfram recalls when acting as a Congressional Chief of Staff in the 1990’s, he was approached by labor union lobbyists pushing for another increase in the minimum wage. They were taken aback when he replied…

“Why are you guys here? None of your members make less than the minimum wage… …Well you’re here because you want to raise the price of a substitute… … to increase the price of a substitute for high skilled labor which is low skilled labor. And once I do that I’m going to substitute capital for labor and demand more high skilled labor and that’s why you’re here.”

During the early 20th century white Australian workers also used the same minimum wage strategy to price lower-wage Chinese workers out of the market, white Canadian workers used minimum wage to bar Japanese immigrants from their workplaces, American workers pushed hard for minimum wage to throw black workers out of their jobs, and white workers in apartheid South Africa did the same even in the late 20th century.

MEA CULPAS

In the 21st century most labor unions and racists won’t come out and openly admit their goal is to price their minority or nonunion competition out of work. Instead they and their paid economists wail that they “care about the living standards of their fellow workers” and are only expressing solidarity with laboring classes against exploitative businessmen everywhere. 

And feelgood liberals fall for the narrative hook, line, and sinker a la P.T. Barnum.

But white and union workers haven’t always been so discreet about their nefarious goals. 

Their motivations were much more openly expressed in the early 20th century as the introduction of minimum wage laws was being debated. Starting as early as the Progressive Era whites, unions, and academic eugenicists praised minimum wage's prospects for preventing the “inferior races” from earning a better living and thereby “breeding” and “increasing their numbers…”

1) Royal Meeker, Woodrow Wilson’s labor commissioner and a Princeton economist argued in 1910 that:

"It is much better to enact a minimum-wage law even if it deprives these unfortunates of work. Better that the state should support the inefficient wholly and prevent the multiplication of the breed than subsidize incompetence and unthrift, enabling them to bring forth more of their kind."

2) Harvard Professor Arthur Holcombe wrote approvingly of Australia’s proposed minimum wage as it would shut Chinese immigrants out of the labor market. Writing in 1912 Holcombe cheered:

“[The minimum wage will] protect the white Australian’s standard of living from the invidious competition of the colored races, particularly of the Chinese.”

3) A minimum wage was passed in British Columbia, Canada in 1925 for the same purpose: to shut Japanese immigrants out of the lumber labor market.

4) Progressive Columbia economist Henry Rogers Seager stated:

"The operation of the minimum wage requirement would merely extend the definition of defectives to embrace all individuals, who even after having received special training, remain incapable of adequate self-support…..If we are to maintain a race that is to be made up of capable, efficient and independent individuals and family groups we must courageously cut off lines of heredity that have been proved to be undesirable by isolation or sterilization . . . ."

5) University of Wisconsin economist John R. Commons wrote in his book “Races and Immigrants”:

“[Wage] competition has no respect for the superior races. The race with lowest necessities displaces others.”

6) And the late free-market economist Walter Williams documented the publicly affirmed minimum wage strategy of apartheid South African white unions as recently as 1989 in his book “South Africa’s War Against Capitalism.”

Williams writes:

“During South Africa's apartheid era, white unionists argued ‘in absence of statutory minimum wages, employers found it profitable to supplant highly trained (and usually highly paid) Europeans by less efficient but cheaper non-whites.’”

“One South African union leader said, ‘There is no job reservation left in the building industry, and in the circumstances I support the rate for the job (minimum wages) as the second best way of protecting our white artisans.’”

“The South African Nursing Association condemned low wages received by black nurses as unfair. Some nurses said they wouldn't accept wage increases until the wages of black nurses were raised…”

“…You can bet the farm that these calls for minimum wages for blacks didn't represent white compassion for the welfare of blacks. Minimum wages are simply one of the most effective tools in the arsenals of racists everywhere.”

(Correspondent’s note: the demands of white South African nurses that all wages be raised before their own echoes of modern-day corporations Amazon and Starbucks demanding a nationwide increase in minimum wage, a strategy we will cover in the next column)

So as woke “Fight for $15” and “living wage” advocates drone away to raise the minimum wage most have no idea they are realizing the dream of white supremacists and anti-immigrant xenophobes a century-over, even as they accuse minimum wage opponents of being the "racist” and “anti-immigrant" ones.

Even more strange is the entire progressive Left and mainstream media, who in the era of Trump and Biden leave no pebble unturned searching for any hint of racism real or imagined, have been completely silent on the adoption of a policy that was blatantly racist for most of the last century.

In fact minimum wage advocates and the press even portray the Fight-for-$15 as a "struggle against Jim Crow” and liken their cause to the civil rights movement, all while ignorant of their own agitation for precisely the instrument of discrimination that white racists embraced during the real Jim Crow era (CNN: “The Fight for $15 Takes on the Jim Crow Economy” and Time: “The Fight for $15 is our Selma”).

https://www.cnn.com/2018/04/13/us/fight-for-15-birmingham/index.html

https://time.com/5940311/minimum-wage-biden/

Well the strategy has worked, just as it worked a century ago.

Given that federally mandated wage floors have long been placed higher than the productivity (or what economists call Marginal Revenue Product) of swaths of unskilled minority workers it’s no surprise that black and Hispanic unemployment has consistently run several points higher than joblessness for whites going back nearly a century (see charts). 

The minimum wage dream of shutting minority labor out of the workforce has been realized by the progressive Left for a hundred years, and today they continue the fight to raise the bar even further.

(Federal Reserve charts: black and black youth historical unemployment rates)

https://fred.stlouisfed.org/series/LNS14000006

https://fred.stlouisfed.org/series/LNS14000018

Study: Oh No, Jeff Bezos Holds More Wealth Than all of America's Grade Schoolers!

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2 MIN READ - Of all the reasons why the “X billionaires hold more wealth than the bottom 50% of Americans” argument for more tax-and-redistribution policies is fallacious, the Cautious Optimism Correspondent for Economic Affairs and Other Egghead Stuff admits to having missed this one.

Mathematically, just who makes up the victimized "bottom 50%” of asset-owning Americans?

(From FEE.org, article attached)

“Maybe the factoid is true. Maybe Jeff Bezos, Bill Gates, and Warren Buffet have more wealth than all of the infants, children, students, disabled, prisoners, and postgrads combined. But you don’t need a PhD to figure out that’s not useful knowledge. Even if the factoid is true, it's deceitful. Whoever created it was obviously trying to manipulate people. And we uncovered this deception with nothing but some simple knowledge of the US population.”

“Next time you encounter an economic factoid, remember that it might be pitting a bunch of newborns against Jeff Bezos, and that hardly seems fair.”

-The Irrelevance of That “3 Billionaires Have More Wealth Than Half of America” Factoid

https://fee.org/articles/the-irrelevance-of-that-3-billionaires-have-more-wealth-than-half-of-america-factoid/

Faulting actual free market capitalism—not our current system of crony capitalism with a central bank pumping out trillions of freshly printed dollars to inflate stock and other asset prices—for a handful of the richest industrialists holding more assets than America’s children, mentally disabled, convicted felons, and professional university students doesn’t make a lot of sense if you think about it for a minute, which is one minute longer than the tax-and-redistribute crowd wants you thinking.

ps. Bezos, Gates, and Buffett’s current combined net worth of about $420 billion doesn’t really mean they “control” that much of America’s wealth. The vast majority of Bezos and Buffett’s net worth is held in Amazon and Berkshire Hathaway stock, with Gates owning Microsoft stock as well as shares in other companies via his Cascade Investments, LLC holdings. To come up with the cash needed to start "controlling" $420 billion of America's wealth the billionaires would have to sell huge blocks of shares of their own own companies’ stock. 

But barely after they left the opening gate the selling would send their respective stock prices plunging, made worse by widespread news that they were conducting an insider garage sale (5%+ owners and insiders are required to file their stock sales with the SEC). Thus simply the act of exercising “control” of America’s wealth alone would send their paper net worth plunging.

Minimum Wage Economics and Fallacies: Corporate Accounting

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8 MIN READ - The Cautious Optimism Correspondent for Economic Affairs and Other Egghead Stuff visits the basics of calculating corporate profitability, a math lesson that most “living wage” proponents have never taken and still refuse to learn.

The final set of fallacies in our minimum wage series involves a much more straightforward topic: corporate accounting. Which means revenues, costs, interest payments, taxes, and ultimately net profit.

Minimum-wage proponents are constantly trying to justify higher government-mandated wage floors on the grounds that corporations are “swimming in loot” and can “easily afford” to give their low-skilled workers big pay raises. They often cite impressive Walmart or Amazon profit figures in the billions of dollars and claim such numbers prove that raising low-skilled worker wages to $15 per hour would only cost a proverbial drop in the bucket.

Here’s a good example: “Walmart made a gross profit of $138 billion last year. Of course they can pay $15 an hour to their employees. It’s not money but rather shameless greed that is holding them back.”

These sorts of statements are rooted in pure ignorance of basic corporate accounting, plain and simple.

The Economics Correspondent will give a brief overview of consolidated revenue, cost, and profit statements in accordance with universal accounting standards that public corporations file with the Securities and Exchange Commission and hopes to be brief enough to keep your attention.

GROSS PROFIT

First, gross profit is NOT final profit. Gross profit is revenues minus only those costs associated with making/delivering the final product, ie. “cost of sales.”

The examples referenced in the next few paragraphs are available from the income statement in Walmart’s SEC 10-K filing page 54.

https://d18rn0p25nwr6d.cloudfront.net/CIK-0000104169/598c8825-536a-4371-ab8a-98b9ee761c43.pdf

So in Walmart’s case yes, in calendar 2020 total revenues were an impressive $559.1 billion, and the $420.3 billion cost of buying consumer products at the wholesale level, transporting them to stores, and paying employees to do so did leave Walmart with a gross profit of $138.8 billion.

SG&A AND D&A EXPENSE

But that’s hardly the end of Walmart’s costs. Corporations then have to subtract “Selling, General, and Administrative” expenses (aka. SG&A) which includes paying service vendors, operating costs of running thousands of stores, HR and IT, the huge expense of advertising and marketing, and a lot more.

Furthermore corporations have to subtract “depreciation and amortization” (D&A). Some companies make a huge investment buying capital equipment at which time the value of the investment is logged as the purchase price. But over time the equipment wears out and has to be replaced, and that depreciation is amortized over several years as an expense. Once it wears out the company buys replacements that are once again recorded as a non-loss transaction that will be amortized over several years in another cycle.

Walmart’s considerable SG&A and negligible D&A costs in 2020 totaled $116.3 billion which withered their gross profit down from $138.8 billion to just $22.5 billion.

So much for that imaginary $138.8 billion profit that greedy Walmart executives were just holding back from their oppressed workers.

IT’S NOT OVER: INTEREST EXPENSE AND INCOME TAXES

Then there’s interest expense for debt financing. Corporations borrow billions, sometimes tens of billions of dollars to fund operations and capital investments. Walmart’s interest costs in 2020 were actually pretty low for a company their size: $2 billion because they only have about $44 billion in debt and get a fairly low interest rate. By comparison AT&T, with less than one-third of Walmart’s topline, pays $8 billion a year in interest on $150 billion in long-term debt.

So after $2 billion in interest payments Walmart’s pretax income is now down to $20.5 billion.

And sooner or later Walmart will also have to pay the $44 billion in loans back or roll them over.

Then there’s corporate income taxes. Woke progressives love to say corporations pay zero to the federal government, but Walmart’s corporate tax bill was nearly $7 billion in 2020.

So in the end, Walmart’s actual bottom line—called “net income,” the profit that really matters—was $13.5 billion. That’s less than one-tenth the fallacious gross profit number parroted by liberals of $138.8 billion.

It’s also a net profit margin—again the one that really matters—of only 2.4%.

So…

$13.5 billion/$138.8 billion = net income of only 9.7% the fallaciously cited gross profit

$13.5 billion/$559.1 billion = 2.4% net profit margin

Incidentally, nearly all companies, even those that post consistent net losses, run positive gross profits. It’s SG&A, D&A, and interest that decides if the company will ultimately be profitable or not. But gross profits make a more convenient target for labor proponents since it's always a bigger, but totally fallacious number.

HIGHER COSTS AND THE REAL BOTTOM LINE

Of course even having established a much lower net income of $13.5 billion the Fight-for-$15 activist will still argue “Hey, $13.5 billion is all the money in the world. Only greed is preventing them from paying $15 per hour.”

But simple math says, well… they’re simple-math-challenged yet again.

Walmart has 2.3 million employees worldwide. Granted some aren’t minimum wage workers and some are overseas. But with that many employees, it only takes an average raise of $2.82 per hour for fulltime employees to generate $13.5 billion in new annual costs. And when adding in the extra payroll and Medicare taxes Walmart has to add on it really only takes a raise of $2.62 per hour.

Reminder: Fight for $15 advocates want to raise the national minimum wage from $7.25 per hour to $15 or a hike of $7.75 per hour, which is nearly three times greater than $2.62.

With a universal $2.62-per-hour raise generating $13.5 billion more in costs Walmart’s gross profit may only fall from $138.8 billion to $125.3 billion, but SG&A, D&A, and interest costs are virtually independent of wages so when subtracting them too most of Walmart’s net income before taxes is wiped out.

Give a bigger raise of $4 or $5 or $7.75 an hour and Walmart literally becomes unprofitable.

This is why people in the know say “retail operates on razor thin margins.”

In fact, with net profits reduced from $13.5 billion to low single-digits or even zero, creditors will demand higher interest rates as security against Walmart’s higher credit risk. So with the added burden of billions more in interest payments Walmart quickly becomes even more unprofitable.

And remember, 2020 was a banner year for Walmart and other big box retailers as the Covid pandemic drummed up an epic amount of business for them. That party isn't going to last forever.

But some of you may ask: Seriously, if the national minimum wage is raised to $15-per-hour, will Walmart’s profits really disappear?

The answer is of course not. Because Walmart won’t take it sitting down. They’ll still eke out a profit, but only by raising prices to whatever level is necessary to cover all these costs.

And when prices go up across the board consumer demand will correspondingly decline, and tens or even hundreds of thousands of previously busy workers will find themselves either replaced by automation or outright fired due to not enough work.

This is the pattern seen over and over in industry after industry when wage floors are raised. It’s also exactly what happened with three great waves of government-mandated pay hikes during the Great Depression that resulted in three great waves of skyrocketing national unemployment (see Economics Correspondent’s article on that disaster at the URL below: )

http://www.cautiouseconomics.com/2021/06/microeconomics06.html

And the countless victims who become unemployed will predictably be ignored by Fight for $15 activists as though they never existed.

So to review in mathematical form:

Gross Revenues – Cost of Sales = Gross Profit*

Gross Profit – SG&A – Depreciation and Amortization = Operating Income

Operating Income – Interest/Financing Costs = Net Income Before Taxes

Net Income Before Taxes – Income Taxes = Net Profit**

*Cited by progressive liberals as a company’s profit

** The company’s real profit

LAST NOTE: A CAUTIOUS OPTIMISM ANECDOTE

On a more personal note, the Economics Correspondent was aggressively confronted by a CO reader from California (whose identity we’ll keep anonymous—the point is not the person but rather the misguided principle) who claimed to have “decades of business experience…”

…and sanctimoniously declared “Subway made a gross profit of $2.5 billion last year. They can easily afford to pay $15 an hour but they’re too greedy!”

Given that Subway is not even a publicly traded company and files none of its finances with the SEC, the Correspondent was puzzled how this reader claimed to know Subway’s gross profit. However Subway Corporation has publicly announced annual revenues of about $10 billion and about 440,000 worldwide employees mostly paid by franchisees, so we’ll assume for the moment the $2.5 billion gross profit number is correct.

But for someone who claims to have vast business experience, our commenter didn’t seem to know much about accounting.

First, as we’ve already established, gross profit is not the same as net profit. Any business owner is supposed to know this.

Self-serve restaurants, especially franchise corporations, also incur huge marketing, selling and administrative costs since they have to support thousands of franchise operators.

Although Subway’s finances again are not public, just looking at other publicly traded fast food franchises like YUM Brands (KFC, Taco Bell) or RBI International (Burger King, Tim Hortons, Popeyes) confirms the pattern of gross profit being whittled down to razor thin operating profits by SG&A expenses.

Then the final arbiter of profitability versus loss is often borrowing costs.

We don’t have their income statements to look at, but after SG&A, D&A, interest, and taxes Subway Corporation would be lucky to post net income of a few hundred million dollars, not $2.5 billion.

And with 440,000 associates employed mostly by franchisees who typically run even thinner margins than the corporation, who are typically smalltime local businessmen, and who are not worth billions of dollars, if each worker received just a $2.75 per hour raise ($2.55 before payroll and Medicare taxes) costs would rise systemwide by over $2.5 billion which wipes out the corporation’s entire gross profit and drives net income down to a multibillion dollar loss.

Granted most of the wage cost would be borne by the franchisees—who are not the fat cats our commenter paints them out to be and who run even more fragile profit margins—not the corporation itself. But the pressing point is regardless of whether we start with the corporation’s gross profit or the franchisees’, $15-per-hour will drive net income into losses unless, once again, the company/operators predictably raise prices, suppress demand, lay off workers, and in many cases even close stores.

It seems even someone claiming to have “decades of business experience” can also be painfully ignorant of the difference between gross and net profit. Which is why financially competent businesspeople run corporations and not Facebook commenters who, from the comfort of their homes and blessed ignorance of corporate accounting, self-righteously demand the power to run someone else’s business into the ground while getting its most vulnerable workers fired.