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.

Thoughts on the Recently Stagnant National Unemployment Rate

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4 MIN READ - The Cautious Optimism Correspondent for Economic Affairs and Other Egghead Stuff shares a few observations on the recently stagnant national unemployment rate.

Earlier this month the Bureau of Labor Services reported the U.S. unemployment rate held steady at 5.9%.

The Economic Correspondent pulled the unemployment rate numbers going back to the beginning of the pandemic and found some interesting results.

March 20 - 4.4%

April 20 – 14.8% (beginning of initial and most stringent lockdowns)

May 20 – 13.3%

June 20 – 11.1%

July 20 – 10.2%

August 20 – 8.4%

September 20 – 7.8%

October 20 – 6.9%

November 20 – 6.7%

December 20 – 6.7%

January 21 – 6.3% (Biden enters White House)

February 21 – 6.2%

March 21 – 6.0%

April 21 – 6.1%

May 21 – 5.8%

June 21 – 5.9%

Source: https://data.bls.gov/timeseries/LNS14000000

Of note is that in the nine months from the beginning of lockdowns to Trump’s departure from office the unemployment rate fell 8.5 points from 14.8% to 6.3%.

In the five months since Biden has taken office the unemployment rate has fallen 0.4 points from 6.3% to 5.9%.

That’s a 21.25 faster reduction in the jobless rate in 1.8 times the number of months or a near twelvefold faster reduction in joblessness:

Trump: 0.94 points per month

Biden: 0.08 points per month

That said there are several mitigating factors that can be cited:

1) Trump had a much higher number to start with. It’s easier to reduce unemployment quickly starting at 14.8% than at 6.3%. In fact it’s impossible to reduce joblessness by 8.5 points from 6.3% since the unemployment rate would have to be negative.

Of course reducing unemployment from already low rates is exactly what Trump did during his term—from full employment of 4.7% in January of 2017 to 3.5% in September of 2019—the lowest rate since the 1960's and a feat the media and the Left/Democrats never gave him credit for.

However Biden has taken five months to reduce the unemployment rate by just 0.4 points. In Trump’s last month in office the unemployment rate fell by 0.4% (one month!) from 6.7% to 6.3%. So even with lower numbers joblessness was still plummeting quickly in Trump’s last weeks compared to Biden’s tenure so far which has stalled out.

2) One could argue “Biden hasn’t really made many policy moves. This is still mostly a Trump economy, so how can you blame Biden?”

Well it’s true Biden hasn’t been able to raise everyone’s taxes yet although he has reversed many of Trump’s deregulations since he took office. But Biden did promise that his $1.9 trillion stimulus package—far more loaded with goodies and handouts to political allies than even Trump’s two 2020 packages after Congressional Democrats held them up to get their own pork added—"will strengthen our economy” and his Council of Economic Advisors Chairman Jared Bernstein argued it would “hasten the return to full employment.” (NBC News quote)

Well Biden got his $1.9 trillion package passed and unemployment is doing precisely the reverse of what he promised it would do. Instead of falling faster or even at the same rate as during Trump’s final month, the reduction in the jobless rate has not only slowed, it’s reduced to barely a crawl.

If anything where are the headlines?

3) BTW in a pre-emptive move Biden’s Treasury Secretary Janet Yellen sold the $1.9 trillion stimulus by arguing that without it the U.S. unemployment rate might not reach pre-pandemic levels (4.4% before the crisis) until the year 2025.

https://www.politico.com/news/2021/02/07/yellen-biden-stimulus-pandemic-challenges-466727

Well, talk about setting the bar really, really, REALLY low—giving themselves nearly five years to reduce the unemployment rate by just 1.9 points. 

Even during Obama’s snail crawl to full employment, the second slowest in over 200 years of American history and only four months faster than the Great Depression's, it only took 22 months to reduce joblessness by 1.9 points to full employment (6.9% to 5.0% from November 2013 to September 2015), but Yellen says it could be nearly five years from February 2021 to as long as December 2025?

Incidentally if Biden gets everything he wants—personal, corporate, capital gains, and estate tax hikes, a slew of new regulations, green infrastructure, debt forgiveness, $15 minimum wage, you name it—I’d bet money that we’ll never see pre-pandemic (ie. 4.4%) unemployment levels during his tenure with just one exception: he lucks out and the Fed is able to blow another temporary asset superbubble such as the dot-com stock market bubble of the late 1990’s or the housing bubble of the mid 2000’s, or the Go-Go stock market bubble of the late 1960’s—three of the only four times unemployment has fallen to or below 4.4% since Eisenhower, the fourth being during Trump’s presidency when there was no obvious superbubble.

And we know what happens shortly after the Fed blows up temporary superbubbles. The late 1960's stock market, 1990's dot-com, and mid 2000's housing bubbles all burst and sent the country into recession, the 1970's and 2008 being particularly harsh ones.

But back to Yellen lowering the bar, obviously the plan was in case their “recovery” package underdelivered they could argue an unprovable counterfactual: “Well without it we wouldn’t have reached pre-pandemic levels until until 2025.” 

2025: by which point they would either be safely back in power for another four years or kicked out, in both cases when it would no longer politically matter how wrong they were. Meanwhile the “no pre-pandemic employment until 2025” scenario was just made up out of thin air to pad any potentially dismal performance.

4) One could also argue “Well a lot of people have left the workforce so the unemployment rate really isn’t as low as 5.9%.” 

The Economics Correspondent wont’ argue with that, but the pandemic and lockdown-related phenomenon of driving people from the workforce was already well in play during the Trump administration as well as during Biden’s first five months so both presidents have had to contend with it fairly equally. Yet under apples-to-apples conditions unemployment plummeted in Trump’s last nine months and is stagnant under Biden.

5) Also Trump didn’t have the advantage of mass vaccinations that have helped America regain a great, if not complete semblance of normalcy. 

Shots were just beginning to go into arms in December of 2020, yet by June of 2021 nearly half of all Americans—including the lion’s share of the most vulnerable ones—were fully vaccinated and over half had received at least one dose.

Things have been a lot closer to normal and much more open under Biden, but the job results are worse.

One more observation: The BLS also publishes unemployment rates by state + District of Columbia.

https://www.bls.gov/web/laus/laumstrk.htm

Of the ten states + DC with the highest unemployment rates, all ten are solid blue:

New Mexico (7.9%)

Connecticut (7.9%)

Nevada (7.8%)

New York (7.7%)

Hawaii (7.7%)

California (7.7%)

New Jersey (7.3%)

Illinois (7.2%)

DC (7.0%)

Pennsylvania (6.9%)

Of the ten states with the lowest unemployment rates, eight are solid red, one is a battleground state (New Hampshire), and one is blue.

Nebraska (2.5%)

Utah (2.7%)

New Hampshire (2.9%)

South Dakota (2.9%)

Idaho (3.0%)

Vermont (3.1%)

Alabama (3.3%)

Kansas (3.7%)

Montana (3.7%)

Oklahoma (3.7%)

Dikötter on Maoist Red Guards vs Militant "Woke" U.S. Youth

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6 MIN READ - The Cautious Optimism Correspondent for Economic Affairs and Other Egghead Stuff is a fan of Dutch historian Frank Dikötter and his 2010 book “Mao’s Great Famine,” a chronology of Chinese Communist Party Chairman Mao Zedong’s attempt at full communist agricultural collectivization that instead produced world history’s greatest famine—killing an estimated 43 million Chinese from starvation, forced labor, beatings, and torture between 1958 and 1962.

Reading Dikötter’s followup, “The Cultural Revolution: A People’s History 1962-1976,” the Correspondent was struck by the close but unsurprising parallels between Mao and his party leadership clique’s manipulation of student Red Guards and the radicalization of America's woke, militant, violent, and brainwashed leftist youth. 

Here are a few key sections from Dikötter that could easily describe the blueprint for the West's academic and political leftists, militant students, and Antifa:

1. “One group was more privileged than the others. When the radio broadcast the guidelines of the Cultural Revolution on 8 August [1966], it pointed out that no measures should be taken against students at primary schools, middle schools, colleges and universities.

“Mao went straight to the students, seeing in the young his most reliable allies. They were impressionable, easy to manipulate and eager to fight. Most of all, they craved a more active role. ‘We have to depend on them to start a rebellion, a revolution. Otherwise we may not be able to overthrow those demons and monsters,’ he confided to his doctor.”

2. “[Mao’s heir apparent Vice Chairman and Marshal] Lin Biao made a lengthy speech, appealing to the excited youngsters to destroy ‘all the old ideas, old culture, old customs and old habits of the exploiting classes.’

“A wave of violence engulfed the capital after the rally on Tiananmen Square. At the Beijing Third Grade Middle School, the principal was beaten to death… … At another middle school near Beijing Normal University the principal was ordered to stand under the hot sun while Red Guards poured boiling water over him. New depths of horror were plumbed at another middle school, this one attached to the Beijing Teachers’ College, as a biology teacher was knocked to the ground, beaten, and dragged by her legs through the front door and down the steps, her head bumping against the concrete. She died after being further tormented for several hours. Then the other teachers, rounded up as so many monsters and demons, were forced to take turns and beat her dead body. …some teachers were made to swallow nails and excrement, others had their heads shaved and were forced to slap each other.”

3. “The Red Guards also turned against some of their schoolmates. For years they had harboured deep resentment of students from bad [ie. capitalist or Nationalist Party] family backgrounds who often performed well, having to rely on their marks rather than their status to succeed. Only two years earlier the Chairman had voiced his opposition to an education system he viewed as dangerously meritocratic, demanding that admission of children from ‘exploiting families’ be limited.’

“The Red Guards now craved a system of permanent discrimination. They were born red, their enemies were born black. Students from bad class backgrounds were locked up, forced to carry out heavy labour on campus, humiliated and tortured to death.”

4. “Ordinary people considered to be from bad class background were openly persecuted. The family of one of the victims denounced as ‘hooligans’ a week earlier at the Workers’ Stadium were tracked down by Red Guards. They lived near the lake where Lao She’s body was found. The father, an impoverished elderly man named Nan Baoshan, was dragged on the street and clubbed to death. His second son was beaten and locked inside his home where he died of thirst a few days later.”

5. “On 18 August, appearing on the rostrum next to Chairman Mao, Lin Biao had exhorted his youthful audience to go forth and destroy ‘all the old ideas, old culture, old customs, and old habits of the exploiting classes.’ Feudal ideology had fettered people’s minds for thousands of years, and now those cultural remnants were to be destroyed to ensure that the country’s revolutionary colour would never fade…

“Sidney Rittenberg, an American who had thrown in his lot with the communist party before liberation and knew many of its leaders, was surprised by the fury of the message: ‘Everything was smash, smash, smash. I could hardly believe what I heard. These people at the very top were truly planning to destroy everything they had built up over the past two decades, to smash and build something new.’”

6. “On the evening of 20 August, bands of Red Guards began roving through the streets of Beijing, attacking anything that smacked of the old order. They changed street names, plastering new revolutionary terms over the old signs. Shops providing services, for instance tailors and barbers, came under attack, as their owners were humiliated, sometimes beaten and forced to close down…

“[Red Guards] decided to eradicate all traces of the old world in Zhengding, setting off towards the old quarter of the town with a red flag inscribed with ‘Red Guard’ fluttering at the head of their column. They copied what they had read and heard about the Red Guards in Beijing. They changed street names and attacked the lacquered signboards hanging over small shops…

“But the biggest target was an ancient history archway that symbolized feudal oppression. Thick ropes were attached around the top, the foundations were prised loose with crowbars and the structure was pulled down, reduced to a pile of broken stones…

“Similar scenes played out across the country. In Xiamen… …teams fanned out through the streets destroying everything old in their path, from ornamental brass knockers and antique shop signs to the dragon-shaped cornices on temples…

“Zhengding and Xiamen were small cities, but an even greater outpouring of destruction took place in Shanghai, a city that had been administered by foreign powers before liberation… …Every sign of the imperialist past came under attack, as Red Guards chipped, drilled, and burned off ornaments from the solid granite buildings along the Bund – renamed Revolutionary Boulevard. Shops selling curios or flowers were smashed. Mattresses, silk, velvet, cosmetics, and fashionable clothes, all condemned as bourgeois luxuries, were tossed out and carted away.”

7. “Now that the army had given them full licence to turn the old world upside down, the Red Guards went on a rampage. Libraries were easy targets, as they worked their way through the stacks, in schools and on campuses, confiscating every volume that looked even vaguely feudal or bourgeois. Book burnings were common. Some were symbolic, with only a few books thrown into the bonfire. Others were conflagrations that lit up the sky for days on end… …In Shanghai, Red Guards destroyed thousands of books from the Zikawei library, a scholarly repository of over 200,000 volumes started by Jesuits in 1847…

“Public monuments were assailed. In Shanghai, it took the Red Guards only a few days to demolish eighteen listed historical monuments, including the tomb of Xu Guangqi (1562-1633), the city’s first Christian convert, who had collaborated with the Italian Jesuit missionary Matteo Ricci. Longhua Pagoda, the oldest temple in Shanghai and a towering 44 meters in height, fell victim to the hammers and ropes of the Red Guards. Three thousand ancient scriptures belonging to the temple were reduced to ash. The Confucius Temple, an ancient architectural complex located in a quiet public park, was razed to the ground. Red guards also attacked St Ignatius Cathedral… … tearing down the spires and the ceiling before shattering the stained-glass windows…”

8. “There were scenes of Red Guards toppling the steeples of foreign churches or burning ancient pagodas in most cities… …Qufu, the hometown and resting place of Confucius, had some of the largest compounds and family tombs in the country… … Local Red Guards repeatedly tried to attack the premises, but the Qufu authorities managed to repel their assaults. Only after more than 200 Red Guards from Beijing had descended on the city were the tombs finally desecrated. Five female corpses, still well preserved, were tied together and hung from a tree…

“[Shanghai] had some sixty-nine cemeteries with 400,000 graves, and 20,000 of these belonged to foreigners. Headstones were systematically smashed, crosses broken and memorial plaques and inscriptions obliterated with cement or smeared over with paint… …The party intervened, deciding to level all tombstones dating from the pre-liberation era [pre-1949], since they were ‘symbols of imperialism…’

“Nationwide in 1966 there were roughly 50,000 graves belonging to foreigners. More than half of these were destroyed during the Cultural Revolution. Many others were defiled, and only one in ten managed to escape undamaged.”

(all passages from Frank Dikötter’s “The Cultural Revolution: A People’s History 1962-1976”)

ps. Dikötter has served as Chair Professor of Humanities at the University of Hong Kong since 2006. With the recent PRC crackdown on civil liberties in the former British colony it’s unclear if Dikötter, who has written many books critical of the CCP during the Mao era, has remained in the city or relocated. His Facebook page still reads “Lives in Hong Kong."

"$142,126 annual salary required to comfortably afford a two-bedroom apartment in San Francisco"

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5 MIN READ - An update from the Cautious Optimism Correspondent for Economic Affairs and Other Egghead Stuff on San Francisco’s ongoing government-created housing and rental crisis.

San Francisco local news reported this week the results of a study by the National Low-Income Housing Coalition estimating the income required to comfortably afford an apartment in many U.S. metro areas.

Unsurprisingly, the three major San Francisco Bay Area metros—San Francisco, Oakland, and San Jose—ranked in the top four most expensive rental cities in the USA with California owning eight of the top ten.

Eleven of the eleven most expensive rental states are blue Democratic strongholds and twelve of the least expensive fifteen are red Republican strongholds (the remaining three being swing states: Iowa, Ohio, and Missouri, all of which went for Trump in 2020).

All ten of the top ten most expensive counties in America are in California.

And San Francisco, where the Economics Correspondent lives, was the most expensive rental metro area in America. The study estimated one needs to earn $68.33 per hour to comfortably afford a two-bedroom apartment.

That’s a whopping $142,126 per year. 

$142,126 just to afford a two-bedroom apartment despite San Francisco’s urban exodus due to the Covid pandemic and a year of falling rents.

Since the Economics Correspondent has lived in San Francisco for many years, the reasons for the city's out-of-control rents have long been clear to him: massive government interference in the housing market which makes the problem of a geographically small city with limited building space even worse.

San Francisco voters and government have adopted a NIMBY-prohibition-of-new-housing attitude going back to 1985. For three decades the San Francisco Board of Supervisors made it nearly impossible for any developer to build new housing units in the city, burying them in a tidal wave of red tape and regulatory mandates designed for the express purpose of discouraging residential real estate construction altogether.

Over ten years ago the Correspondent watched one developer surprise the Board by agreeing to all their expensive terms, so two weeks later they changed the rules to make the conditions even more prohibitive and then celebrated when the developer pulled out in disgust.

Predictably, if government freezes the supply of housing in a small city (surrounded on three sides by water) populated by many high earners prices are going to rise rapidly.

Under free enterprise, rising prices would be a siren call for developers to step in and construct new housing (ie. add new supply) which moderates the market, but San Francisco government has frustrated them for decades. Politicians and liberal voters have adopted a “developers making a profit must be banned” and “if they don’t sell it far under market levels we won’t allow it” and “you can neither convert existing non-residential space to residential nor can residential buildings be any taller” attitude, yet all complained for decades about skyrocketing housing and rental costs throughout.

And the enlightened San Francisco voters frequently blame “cutthroat capitalism” for lack of affordable housing—in America's most regulated market.

The next mitigating proposal of the 1980's was not to back away from strangling the market, but instead to choke it even more tightly with rent control. The Correspondent will write another column in the future on the perverse effects of rent control but for now it will suffice to say the result was predictably more rental units taken off the market, tenants lost incentive to use space efficiently, and a further tightening of supply to compound the existing problem.

In the mid 2010’s San Francisco Mayor Ed Lee finally began a push to start allowing construction of some new housing units, taking on the far-left Board of Supervisors with considerable success. As modest new construction began Ed Lee suddenly died from a heart attack at a Safeway grocery store but his successor, the current Mayor London Breed, has to her credit continued his pro-housing policies.

But San Francisco is now hopelessly three decades behind the curve. A few high-profile buildings are going up near the downtown and Civic Center areas, but the Correspondent has read at least one estimate that San Francisco will need at least 300,000 new housing units to return to the inflation-adjusted level of affordability it enjoyed in 1985, when it began the NIMBY policies that have put residents in such a fix today—all for a city of less than 900,000.

Not only will San Francisco not be able to make up for the 300,000 units it’s neglected to build the last three decades, it also won’t be able to keep up with new entrants going forward. And as rents keep rising local liberals will argue “see, this proves building [a hopelessly inadequate handful of new housing units] doesn’t work.”

One final comment about the coalition’s report: a focus on minimum wage.

The report laments that no major city’s minimum wage is sufficient for low-skilled workers to afford a two-bedroom apartment or purchase a house. It urges higher minimum wage legislation.

But anyone with a brain knows that low-skilled minimum wage jobs produce too little value for the marketplace to trade a house or even urban center two-bedroom apartment in return. But that aside, the “raise the minimum wage” solution is a giant doomed-to-fail fallacy that is easily discredited by simple microeconomics.

In a city with X demand for rental housing but far less than X supply, rents will rise relentlessly until demand is curbed enough to bring it into equilibrium with supply—usually via people getting roommates or moving outside city limits.

But raising the minimum wage only inflates demand further. Higher purchasing power is only useful if businesses are allowed to offer enough supply to satisfy more consumers.

If supply remains rigid by government decree, higher minimum wage workers—or those who survive after their coworkers have been laid off—will only push the demand curve to the right which further raises the equilibrium price (see inelastic supply model).

In other words the bidding war for the same, unchanged number of housing units will only intensify, the final result being even higher prices. No one wins since there are still no more apartments available to live in. Everyone throws more dollars at the same number of units.

If minimum wage workers find themselves more capable of raising their “bids” against higher-skilled, higher-wage workers, the latter will simply continue to outbid low-skilled workers by upping the price they’re willing to pay. Without additional housing capacity, the end result will at best be a slight reshuffling of who lives in the same number of units. 

Actually there will be one clear winner: the real-estate owning class. 

Landlords, who enjoy a government enforced cartel of limited rental units, will be even further enriched as rental bids rise. The unintended consequence will be that the very landlords San Francisco liberals hate, bash, and vilify with a passion will only get richer thanks to yet more government regulations courtesy of the very same politicians San Francisco liberals just keep on electing year after year.

Read more about the affordability study in the San Francisco Chronicle at:

https://www.sfgate.com/local/article/san-francisco-most-expensive-city-in-america-16314661.php

Minimum Wage Economics and Fallacies: Labor vs Capital Part 2 of 2

Click here to read the original Cautious Optimism Facebook post with comments

5 MIN READ - Continuing with the labor versus capital dilemma, the Cautious Optimism Correspondent for Economic Affairs and Other Egghead Stuff examines an interesting and fallacious minimum wage theory regarding the societal benefit of capital itself.

The final and most interesting capital fallacy from Fight for $15 proponents asserts that by spurring more investment in technology to replace low-skilled workers, higher government-imposed minimum wages actually produce a net economic benefit to society. 

The Economics Correspondent himself believes the employment of more efficient capital tools and machines is the key driving force behind world history's economic progress, and that it’s productivity-enhancing tools that have ultimately—according to Austrian economist Ludwig von Mises—“transformed step by step the awkward search for food on the part of savage cave dwellers into the modern ways of industry.”

So, according to $15-per-hour advocates, what could be better than a law that fires low-skilled workers but compels businesses to invest in new technologies and employ more highly skilled engineers?

This alleged net benefit to society was recognized as fallacious in the mid-20th century by Ludwig von Mises himself and we’ll examine his critique in just a moment.

III. THE POLITICAL FALLACIES OF FORCED CAPITAL INVESTMENT

But first a more obvious and politically-disposed fallacy is that such an argument celebrates the layoffs of hundreds of thousands or even millions of low wage workers. And while finally acknowledging job losses that minimum wage proponents usually deny will ever materialize, it also depicts the loss of jobs to capital as a good thing.

This from the crowd that usually complains heartless machines are taking away all our jobs so we need government-paid universal basic income.

Another political contradiction lurking within the argument is that replacing a large number of low-skilled workers with a smaller number of high-skilled ones exacerbates the very income inequality the progressive movement claims higher minimum wages will solve. Large numbers of low-skilled workers will see their incomes fall from $7.25 per hour to zero, while more high-skilled tech workers will be hired at white-collar salaries. 

Once the dust settles the media's headlined trend will read “widening income inequality,” blamed on capitalism of course, as more of the lowest earners lose their incomes completely and are forced to rely completely on government to survive.

IV. THE ECONOMIC FALLACY OF FORCED CAPITAL INVESTMENT

But the most interesting error within the theory is the fallacy of forced capital investment as a net benefit. 

Austrian economist Ludwig von Mises reminded readers in his 1949 treatise “Human Action” that labor isn’t the only limited resource in an economy: capital is finite too. The quantity of physical resources at the disposal of businessmen for the purpose of productive activities is always limited by the public’s level of voluntary saving (ie. deferred consumption).

Given that there are only so many capital resources to go round, businessmen opt to invest where labor shortages and rising costs of labor signal the most urgent need for employed capital, ie. where demand and investment returns for labor-saving or labor-enhancing technology are greatest. 

For example, on the labor-cost side automated systems might relieve the demand for stockbrokers to process trade orders or for airline ticket agents to check in passengers. On the technology-demand side capital might be directed to better MRI machines that diagnose lifethreatening medical conditions more effectively (which medical insurers are willing to pay a lot for) or to manufacture more fuel efficient jet engines that save airlines billions of dollars globally in annual fuel costs.

And some investments are made in capital tools and machines that perform functions human beings are simply incapable of carrying out at all such as the fabrication of microchips or rigs that drill for oil a mile beneath the ocean floor.

However when the minimum wage displaces fast-food cashiers capital resources are diverted away from other, more urgently needed uses towards more self-serve kiosks, networks, and software which is not necessarily the best use of society’s scarce capital.

In a marketplace unhampered by government interference, the freely floating price system would normally signal to entrepreneurs that better jet engines, MRI’s, or automated securities trading machines are of greater benefit to society, especially when human workers are already standing by to take food orders at lower cost. 

However when government artificially inflates the price of low-skilled labor, the price system is short-circuited and capital is diverted away from the most urgently demanded uses to more irrational ones.

Furthermore, capital is diverted for a purpose that now-unemployed human workers were perfectly capable of performing before, but now can’t because they’ve been artificially priced out of the market. Sending workers home to sit idle and receive government welfare payments while capital is diverted from urgently needed uses to perform their old jobs is a net loss to society, not a gain. 

Anyone who has read von Mises’ works knows his writing can be tough sledding, but one "Human Action" passage on the subject is actually quite readable:

“All that minimum wage rates can accomplish with regard to the employment of machinery is to shift additional investment from one branch into another. Let us assume that in an economically backward country, Ruritania, the stevedores' union succeeds in forcing the entrepreneurs to pay wage rates which are comparatively much higher than those paid in the rest of the country's industries. Then it may result that the most profitable employment for additional capital is to utilize mechanical devices in the loading and unloading of ships. But the capital thus employed is withheld from other branches of Ruritania's business in which, in the absence of the union's policy, it would have been employed in a more profitable way. The effect of the high wages of the stevedores is not an increase, but a drop in Ruritania's total production.”

-“Interference with the Structure of Prices,” Chapter 30 of “Human Action” (1949)

 Ludwig von Mises

The Economics Correspondent has also found a passage from modern-day economist Richard Ebeling that summarizes the same critique via Ludwig von Mises’ student and colleague, Nobel laureate Friedrich August von Hayek.

Says Ebeling:

“By artificially raising the price and therefore the cost of certain types of labor through minimum wage legislation, the price system for workers no longer is fully telling the truth about who is available for work and at what market-determined wages to assist producers and enterprisers on deciding what would be the most appropriate use and combinations of labor and capital given the real, underlying supply and demand conditions in the market.”

“Capital that would be more profitably and efficiently utilized in other sectors of the economy will be drawn into these labor-saving activities due to the government imposing this wage floor for labor. This may occur, as a consequence, years or decades before the market would have determined that this was the best use for scarce laborsaving capital resources, and in some cases when it might never have been profitably desirable to redirect capital into those uses if not for the minimum law.”

-“Minimum Wage Can Result in Capital Replacing Labor When Not Needed”

 From “F.A. Hayek and Why Government Can’t Manage Society” (2015)

So while government forcing firms to invest in more development of technology might sound great on paper, it comes at a great cost. The false price signal that government creates diverts capital and technological resources away from more urgently demanded uses towards irrational ones that could have been performed more cheaply by humans, except that government imposed wage-floors have made those humans more expensive, jobless and ultimately idle.

ps. Those who wish to read von Mises’ and Ebeling’s commentaries on the minimum wage’s effect of shifting finite capital from optimal to suboptimal uses can do so at...

https://mises.org/library/minimum-wage-rates

https://www.fff.org/explore-freedom/article/f-hayek-government-cant-manage-society-part-ii/

Minimum Wage Economics and Fallacies: Labor vs Capital Part 1 of 2

Click here to read the original Cautious Optimism Facebook post with comments

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

Cautious Rockers intuitively understand that workers and machines are in constant competition for productive work, and that businesses are going to weigh the cost/productivity ratio of one against the other when deciding which to employ.

Although classical economists such as Adam Smith and Jean-Baptiste Say had already identified the benefits of labor-saving devices in their late 18th century writings, it was British economist David Ricardo who famously summarized the competition between workers and machines in the third version (1821) of “On the Principles of Political Economy and Taxation.”

In Chapter 31, named “On Machinery,” Ricardo praised the ability of machinery (ie. “employed capital”) to enhance the productivity of labor and create more goods and services with fewer workers. But he also noted that if the production cost of capital fell below the equivalent cost of labor then the laboring classes would be placed at a disadvantage and lose their jobs—although some new, highly skilled workers would be needed to maintain the machines.

This is all conventional thinking today, but Ricardo recognized the developing phenomenon two hundred years ago during England’s first Industrial Revolution.

I. WHEN GOVERNMENT PLACES LABOR AT THE DISADVANTAGE

Which leads us to an obvious, self-evident conclusion. If labor is competing with capital for jobs that entrepreneurs need completed, and labor can produce one unit of output at lower cost than capital can in its existing state of technological efficiency, labor will remain gainfully employed.

However if the cost of labor is artificially inflated enough by government mandates and wage floors, capital will win the cost race and entrepreneurs will begin replacing workers with machines.

The classic example that is frequently cited at the center of the minimum wage debate is the self-serve kiosk.

Kiosks are hardly free technology. Aside from the relative low cost of the touchscreen itself there’s also the cost of employing higher-skilled labor to install and maintain kiosks, to program and upgrade software, to administer the kiosk network with constant, localized price changes across hundreds or even thousands of stores, and to replace kiosks that break or wear out (depreciating capital).

So long as the market wage for human cashiers is a less expensive proposition than the investment and maintenance cost of kiosks, businesses will choose to retain labor.

This is precisely what we see in most restaurants in those states and cities where the minimum wage remains at or close to the federal standard of $7.25 per hour.

However as the minimum wage is forced up in other states and cities, the incidence of kiosks replacing workers increases, just as Ricardo predicted 200 years ago.

As an anecdote, the Economics Correspondent lives in San Francisco and watched the voter-approved increases in minimum wage rise to $12.25/hour in May of 2015, $13 in July of 2016, $14 in July of 2017, and $15 in 2018. With each summer’s increase the Correspondent saw the sudden installation of kiosks in new batches of restaurants and the disappearance of human cashiers. By the time $15/hour was reached in 2018 several of the restaurants that had employed kiosks one or two years prior simply closed down as did many other restaurants that had been San Francisco staples for decades. 

Ricardo’s conclusions played out predictably in the 21st century real world.

Meanwhile the Correspondent visited Louisiana on a business trip, walked into a restaurant chain whose San Francisco locations had replaced cashiers with kiosks before closing in 2018, and saw not a single kiosk in the Louisiana store but instead three smiling human cashiers waiting to serve him.

Louisiana’s minimum wage at the time was the federal floor of $7.25 per hour.

II. “BUT IT WAS GOING TO HAPPEN ANYWAY”

Most “Fight for $15” proponents deny that raising the minimum wage will result in capital displacing labor, but when it actually happens they rarely acknowledge that their prediction of no job losses was wrong nor admit any error nor show any sympathy for the fired workers whose welfare they claim to care about. 

Instead the most common, unremorseful pivot is to change the argument to “Well, kiosks were going to replace cashiers anyway,” as if the jobs were sure to be eliminated by the relentless march of technology—coincidentally right after the minimum wage hike.

Readers can agree that over time certain capital devices, particularly those that employ information technology, do become less expensive and more economically competitive, and that fast food kiosks are probably no exception. 

However what is highly debatable is that low-skilled jobs would be replaced as quickly were it not for the government-imposed price floor.

Although McDonalds began experimenting with self-serve kiosks in its flagship Oak Brook, Illinois store as far back as 2003, McDonalds France began installing permanent kiosks as early as 2004 and in London by 2009. In 2011 McDonalds announced it was ordering 7,000 kiosks for use in its European stores and by 2016 McDonalds reported 90% of all stores in France were using self-serve kiosks.

All of these numbers dwarf McDonalds’ employment of kiosks in the USA in 2004, 2009, 2011, 2016, or even today.

(citations at the end of this article)

The Correspondent doesn’t recall seeing permanent McDonald’s kiosks—or even encountering a temporary one—in the U.S. in 2004 or 2009 (maybe he missed it?), and even today many McDonalds locations still exclusively use human cashiers, particularly in most red states.

Uncoincidentally virtually all customer orders are now processed by kiosks in blue strongholds like San Francisco, New York City, or most of Illinois state where local minimum wage hikes have priced labor at a disadvantage to capital.

The reason for Europe's decade-plus head start on the USA isn't hard to fathom. In France the minimum wage was already 8.27€ in 2006 or $10.42 based on the Euro exchange rate at the time ($13.72 in 2021 dollars). 

Moreover, French labor laws make it nearly impossible and at best exorbitantly expensive to fire workers under age 26, and when the Chirac government attempted to reform the laws in 2006 French youth rioted and burned cars in the streets of Paris that very same year. Hence French employers know there’s a real risk that under-26 labor will be very unproductive since young workers know they can “get away” with a lot of sloth and other misbehavior at work.

In the UK the minimum wage in 2009 was £5.80 or $9.28 based on the exchange rate ($12.08 in 2021 dollars). This wage lagged France’s but was still well ahead of the USA’s, hence no surprise kiosks appeared in France first, the UK second, and are a relative latecomer to the United States.

If the technology was “going to happen anyway,” as Fight for $15 proponents claim, hundreds of thousands or possibly over one million fast food cashier positions would have been eliminated in the USA over a decade ago since kiosks were already common in Europe.

But they weren’t, because the cost of low-skilled American labor remained lower than the cost of capital all that time. Had the U.S. minimum wage been raised to $15-per-hour in 2004 those million-plus jobs would have quickly been eliminated and stayed nonexistent for the last seventeen years, along with all the wages that came with them. And minimum wage advocates would have been claiming back in 2004 that “it was going to happen anyway.”

But what we know from the hindsight of 2004-2021 is that it wasn’t “going to happen anyway” after all. Hundreds of thousands of human cashiers are still here working although their numbers are dwindling with each regional minimum wage increase.

Perhaps 10 or 20 years from now the cost of self-order kiosks will fall far enough to outcompete even $7.25/hour labor, but clearly the state of the technology hasn’t yet reached that level. If it had there wouldn’t be a single human cashier left working at any restaurant in the United States.

=====

Citations:

“Dating back to as early as 2004, locations around France started to see the implementation of these automated food ordering systems.”

https://burgerlad.com/mcdonalds-touch-screen-ordering/

“McDonald's Europe strikes another blow against human interaction by installing 7,000 touch-screen computers to take your order and money.” (2011)

https://www.cnet.com/news/mcdonalds-hires-7000-touch-screen-cashiers/

“Over 90% of McDonald's restaurants in France now boast the ordering kiosks, said execs on a call with analysts Oct. 22 [2016]”

https://www.thestreet.com/opinion/mcdonald-s-rolling-out-self-ordering-kiosks-in-europe-will-u-s-be-next-13511123

McDonalds touchscreens in France: 2009

https://burgerlad.com/mcdonalds-touch-screen-ordering/