Saturday, August 2, 2014

The NLRB and McDonald's

This week the general council of the National Labor Relations Board, the NLRB, issued a ruling on a case involving McDonald’s.  The ruling was that McDonald’s is a co-employer, along with the McDonald’s franchisees, of the hourly workers at all the restaurants.

“Well, wait,” you might say.  “Don’t the people behind the counter at my local McDonald’s work for McDonald’s itself?  I mean, the company logo is on those caps their wearing.”

Actually, the answer is no.  Most McDonald’s restaurants are owned by small independent businessmen (and women).  They pay the parent company for the franchise.  They agree to follow the rules of the franchisor, and in exchange the franchisor provides operating procedures, brand building, and group buying power.  This is the most common model for the fast food industry.

McDonald’s exercises more control over their franchisees than most.  The parent owns the land under every restaurant, and the franchisees pay rent, which is a major revenue stream for the company.  Also, McDonald’s monitors operations at every store, and sets guidelines for efficiency, throughput, and waste.  Every aspect of operations is covered by the operating rules.  This unusual degree of involvement was key to the NLRB ruling.

However, there are a number of things McDonald’s does not involve itself in.  Like who to hire, and who to fire, or how much to pay people.  McDonald’s does not track the hours of each employee at the restaurant, or calculate payroll.  McDonald’s guidelines might specify how many workers should be there for the morning rush.  But McDonald’s does not decide who is going to be scheduled to work those shifts.

Hiring and firing, determining pay rates, scheduling, and paying employees.  Those are the classic tests for determining who is the employer in a business relationship.  McDonald’s does none of those things.  So why would the NLRB suddenly decide that the case law of the last fifty years was incorrect?

The baseline assumption of the staff at the NLRB is that the best and most natural state of affairs is for everyone to belong to a union where they work.  Anything else is unfair, and possibly proof of a “great right wing conspiracy.”  This is in spite of the fact that union membership has dropped below 7% of the private sector workforce.  It’s not much of conspiracy if everybody is in on it.

Well, it turns out that small businesses with 40-50 employees are really hard to organize.  The business owners tend to fight really hard against unions, reasoning that having a formally adversarial relationship with their employees is both bad for business and bad for their personal financial interests.  From the union’s perspective, a single big target is easier to attack than a lot of small moving targets.  So the Service Employees Union, the SEIU, has lobbied the NLRB staff for favorable rulings.  Since the SEIU shares the same baseline mindset as the NLRB staff, they found a receptive audience.


This ruling will probably not survive the inevitable court challenges.  Still it does make me wonder.  If less than 7% of the workforce is unionized, maybe the conspiracy isn’t among the employers.

Sunday, June 8, 2014

Seattle's Minimum Wage Hike

Last week the Seattle City Council passed a massive increase in the minimum wage.  Washington State’s minimum wage was already $9.97, and the Seattle initiative increases that to $15 an hour over three years.  There is a slower phase in for small businesses, but in one of the most controversial features of the new law, franchisees are considered big businesses.

This was clearly done to rope in the fast food industry, one of the major employers of minimum wage jobs.  Most fast food outlets are owned by small businesses that franchise their advertising and operating systems from large corporations.  In many cases the owners are working side by side with the employees that just got a 50% raise, courtesy of the Seattle City Council.

The idea here is that if all the fast food stores have their costs raised at the same time, all of them will have to raise prices simultaneously.  No one will get a competitive advantage.  If labor accounts for 10 to 20% of the cost of fast food, and that cost goes up by 50%, then prices will go up by 5 to 10%.  Profit margins will go down, but overall profits stay the same for the industry as a whole. The hope is that even if prices go up by 5 to 10%, sales will remain constant, keeping employment constant.  You’d pay an extra buck for your Big Mac and fries, wouldn’t you?  Sure you would.  At least, that’s the theory.

This is all riding on an economic concept called price elasticity of demand.  Represented graphically, price elasticity of demand is the slope of the demand curve on a supply and demand chart.  If elasticity of demand is high, a small percentage increase in price leads to a large percentage drop in demand.  If demand is relatively inelastic, even a big increase in price does not lead to a big drop in demand.

An example of inelastic pricing is gasoline, at least in the short run.  When gas prices spike, you still have to get to work, so you grumble, but you also buy the amount of gas for your commute.  The plan is that things will work out the same way for fast food, because, hey, you gotta eat.

There are two things wrong with this plan.  One, even if the price elasticity of demand is low, it is not zero.  With gas, when prices go up, you stop taking unnecessary drives.  You slow down a little, coast when you can.  In the longer run, you trade in for a more full efficient vehicle.  You do all these things to use less of the more expensive product.

The same adjustments will occur when fast food prices go up.  People will brown bag it more, or forego getting a soda with their chicken tenders.  Witness the popularity of dollar menu items if you think people are not sensitive to the price of fast food.

The other problem is that it assumes that businesses will remain static in light of this big addition to their costs.  The rate of investment in labor saving equipment will increase, to minimize even further the labor content in the product.  Equipment that now does not have a fast enough payoff period to be worth doing will make a lot more sense once these wage increases begin to bite.

With lower demand overall, and labor savings a high priority, labor will get squeezed.  The remaining workers will get paid more, but there will be less of them.  But that’s okay, because the displaced workers will just go to …


Actually, the employer of last resort for people with low literacy and no salable skills has been fast food.  Fifteen dollars an hour doesn’t help if you don’t have any hours.  I don’t think this is going to end well for Seattle.

Saturday, May 31, 2014

The VA Waiting List Scandal

Eric Shinseki, the retired general who was the head of the Veterans Administration, resigned this week over the scandal regarding waiting times at VA hospitals.  This has been  dominating the news cycle for the last week, but there  has been a focus on the political  maneuvering in the news coverage, and a minimum of discussion about what actually happened that was so bad.

It  turns out that the VA has a  benchmark for the time it is supposed to take between a veteran calling for medical care and the first appointment: two weeks.  Most of the VA medical facilities have been hitting that number in their official reports,  and those reports could be verified by the VA's centralized computer scheduling system.  Congratulations, pass out the cigars.

The only problem is that it has now emerged that administrators were cooking the books.  Either they used special techniques to report zero waiting time in the computer system, no matter how long the patient actually waited, or else they maintained two sets of books.  There was a paper list of people who had requested an appointment.  Then, when an appointment  actually became available, the patient would be taken off the paper record  and added to the computer system.  Voila!  The computer shows that nobody waits too long for an appointment.

Some of the senior VA administrators collected bonuses for (falsely) hitting their performance benchmarks.  That is fraud, plain and simple, and some of those guys need to go to jail.  Being federal GS employees, however, that is unlikely to happen.  They will claim that they were not directly doing the scheduling, and had no knowledge of the book cooking.  "I'm shocked, shocked to discover that gambling is going on in this establishment."

And that is at least partially true.  There are literally thousands of schedulers in the VA system, most of whom are low level employees (low level Federal employees, which means their pay and benefits are better than their counterparts in the private sector).  Lots of them were actively involved in cooking the books, even though they weren't getting bonuses for it.  Why?

Incentives come in two flavors, positive and negative.  Positive incentives are raises and bonuses: you did a good job, so here's a pile of money for you.  Negative incentives are the bad things that happen if you don't hit your targets.  It can include losing your job, but a negative incentive does not have to be so harsh to be effective.  Merely the desire to avoid a whole lot of unwanted attention from higher up is a powerful motivating tool.  "Your wait times are too long, so we're going to come in and audit you to see what you are doing wrong.  Every day.  Every stinking day."  Yeesh!  It doesn't take too much of that and you'd want to game the system too.

You especially want to game the system when you are given a no win scenario.  To shorten wait times, you need more resources.  But the VA was not given more resources.  You can do a lot with attention to efficiency and productivity improvement, but there are limits to what even the best managers can squeeze out of a system.  Given a game where being honest led to negative incentives, every time, and gaming the system led to being allowed to do your job with minimal interference, it's not hard to understand  why this situation arose.

If you ask someone to lie to you, don't act surprised when they do what you've asked.

When demand exceeds the supply of scarce resources you always need an allocation mechanism for the supply.  In a market based system, price is the allocation tool.  Some individuals get resources because they can pay a higher price.  Other individuals who cannot pay the price go without.  There are other allocation mechanisms.  You can use a lottery, and rely on chance.  You can use subjective criteria, like appealing to a connected decision maker ("It's not what you do, it's who you know.").  Or you can do what the VA did, and stretch out waiting times, even if only unofficially.

The real issue with the VA is that fans of single payer health care system in this country have been holding out the VA as a shining example of what socialized medicine can do.  "The VA gives great medical care, at a lower cost than the private sector, and see, the wait times are comparable with the best of the private sector.  The rest of the health care industry should be run just like the VA."

It has now been exposed that was a lie in a muumuu.  It's a big fat lie.  The VA may be more cost effective than the private sector, which is great, as long as you don't mind that some of your patients are going to die before they get seen.  That we've had this lie pushed on us is the real scandal.


Saturday, May 10, 2014

Climate Change Today

This week the White House released a new report on anthropomorphic climate change, AKA global warming.  Unlike previous reports, this one stressed that climate change has already begun to impact society, in a negative fashion.  droughts and storms are getting more frequent and severe, imposing real costs on us.

As a check on this, I went back and looked my insurance premiums of the last few years.  The insurance industry has extremely sophisticated systems for measuring risks and losses, and a lot of skin in the game to be sure they get it right.  My insurance premiums have experienced a modest increase, but nothing like the skyrocketing increases I should have seen if costs associated with climate change were really climbing rapidly.

It is not that I do not believe the basic science behind climate change.  Levels of CO2 in the atmosphere are rising rapidly, and are well above historical levels.  Higher levels of greenhouse gases mean more heat is retained from the suns's radiation.

But if we  are truly on the verge of calamitous changes in planetary weather patterns, as some would have us believe, than we all have to make radical changes to our lifestyles.  And to enforce those changes, we have to accept an equally radical expansion of government power.

Tax credits for hybrid cars and compact florescent bulbs are not gong to cut our carbon footprint in half.  It will take gas and food rationing, restrictions on the amount of living space per person, and strict limits on climate control.  We are really talking about shifting to a low energy society, where the limits of what we can do will be defined by the limits of muscle power, instead of machine power as we have today.

To make this happen, we will have to cede wartime powers to the government, and hope that they keep the best interests of the citizens at heart.

A low energy society where we live in un-airconditioned, small houses, with travel restricted to the distance we can walk.  For sustainability's sake, food will be locally grown, so that your diet will be kept to only those items produced within fifty miles.

This basically looks like the lifestyle of a medieval peasant.  Or life in a third world country.

Maybe it is not surprising that so many are so skeptical about climate change.

Friday, February 7, 2014

Tales from Tax Season: Part 1

The tax season is in full swing.  There has been a steady stream of clients for the last few weeks, including a number who came in during January, before the IRS even started accepting returns.  A common theme among many of these early season clients is the mix of desperation and entitlement.  Desperation, because they are flat broke, and they really need money.  Entitlement, because they have been led to expect that the IRS exists to give out money.

Now, I don't know about you, but I have never thought of the IRS as a source of cash.  To me, it has always been the other way around.  But for low income tax filers with children, the tax system is a conduit of funds from people who pay taxes directly to them.

The key to that last sentence however, lies in the words "low income" and "children."  If you have no income, or no kids, the tax system is not an overflowing cornucopia of cash.  This is true of the entire panoply of benefits available from the American welfare state.  However, since they talk to people who are getting big checks, they think they should get a big check too.

This leads to conversations that go a bit like this:

Client: "I hope you can help me out, because I really need a big refund this year."

Me: "Well, let's see.  With your standard deduction and personal exemption, those exceed the amount of money listed on your W-2.  That means you have no taxable income, so you are getting all of your withholding back.  Your refund will be $250, before we subtract our fees."

Client: "Wait, is that all!  That's not very much.  Can't you do any better than that?"

Me: Think: Did you hear me when I said you were getting all of your withholding back?  Say: "Without dependents, you con't get any Child Tax Credit, and only a little Earned Income Credit.  You only had a little withholding taken out of your check."

Client: "So I should tell them to have more withholding taken out?"

Me: Think: Lady, what part of this are you struggling with?  Say: "If you have more withholding taken out, you'll get less money every week, but you'll get it back at the end of the year.  I don't think you are really gaining from that situation."

Client: "It is not much money, but I guess it will have to do.  Can I get that today?"

Me: "Well, the refund actually comes from the IRS.  We are telling people to expect their refund in21 days or less from the date we file their return."

Client: "Twenty-one days!  So you're saying I drove all this way here for nothing."

Me: Think: I drove all the way here.  For this.  Say: "I'm sorry you're disappointed.  But I have no control over the IRS."

Entitlement and desperation is a bad mix.

Monday, January 20, 2014

IRS Schedule H

For the last few weeks I've been preparing to take  the IRS tests to achieve Enrolled Agent status.  This has sucked up most of my spare time and energy, taking away from reading and writing.

But part of getting ready for the first test has entailed having to poke about in some of the obscurer portions of the tax code.  Like Schedule H, for example.  Schedule A is for itemized deductions, Schedule B covers interest and dividends, and Schedule C is for sole proprietorships.  These are the schedules that most people are familiar with.

If you have capital gains, you report them on Schedule D.  Rental income and expense show up on Schedule E, and if you have a farm, you use Schedule F.  I've been trained and have seen all of those on tax returns.  But Schedule H?

It turns out Schedule H is for household employees.  When I first saw this, I thought it was pretty obscure for a test.  I mean, how many people actually have a butler?

However, it turns out you don't actually have to have a staff of full time servants to require this schedule.  If you pay anyone over the age of 18 over $1800 through the course of the year to do work in your home or property, you are required to file Schedule H.  You calculate how much Social Security and Medicare the employee owes, and then you subtract that amount from your refund.

Every so often you hear about a high ranking political appointee failing to pay taxes on a nanny, or a gardener.  It has derailed a couple of candidacies.  I've always wondered why the high powered types who get caught like that didn't just go through an employment agency, like a temp service.  Of course, a temp service adds their markup to the wages and taxes paid to the employee.  So a Schedule H is actually a more cost effective way to go.

So remember: if you hire the neighborhood kid to mow your lawn all summer, make sure he's under age 18.  Otherwise you're cheating on your taxes.

Yeah.  Like we're all quaking in our boots over that one.

Saturday, December 21, 2013

Obamacare (continued)

A couple of weeks ago my company renewed our insurance policy with Blue Cross Blue Shield.  Part of this process was all of the employees having to sign reenrollment paperwork.  This was where I found out that not only had the company’s share of the premium increased, but I was also going to have to pay in an additional $50 a month.  The real kicker, however, was the deductible.  It went from $2000 to $4000.  So in 2014 I’ll be paying more for less coverage.

The insurance agency we use had sent in a senior person, in addition to the clerks who normally process the open enrollment.  His job was to answer the inevitable questions.  His first response when asked about why I was paying more and getting less was some airy hand waving and “Obamacare.”  When pressed a little further, he came up with “we’re required to charge the actuarial value of the policy.”

I told him I understood about actuarial value, but that did not really answer the question.  Insurance is essentially a zero sum game.  Everyone with a policy puts money into the system.  Some people pull money out of the system, and use it to pay medical bills.  If I was putting more money in, then someone was getting the benefit thereof.  I wanted to know what the specific changes were that enabled someone else to get more money out.

You see, I was operating under the assumption that Obamacare had minimal impact on the small group health insurance market.  More fool I.

So, after the insurance agency rep agreed to be more specific, and I let him out of the headlock, he shared some of the details with me.  One of the big chunks is preexisting conditions.  I had not realized that with our current company insurance, there was a one year waiting period for coverage on preexisting condition.  So if we hired someone with cancer or AIDS, they would not be covered for a year under our policy.  Obamacare requires Day 1 coverage of all medical conditions.  This is a win for people who change jobs with chronic health problems.  It is a loss for everyone else.

Another area of increased cost is pediatric dental and eye care, for people with family coverage.  The new regulations now require that coverage.  This is a win for people with children.  It is a loss for people who do not have children on their policy.

The requirement to provide birth control is another regulatory requirement that has gotten a lot of news coverage.  If you use birth control: winner.  If you don’t, well … you know what category that puts you in.  The rep for the insurance agency ‘fessed up that there was no one large cost driver in the regulations.  There were a whole series of small adders that drove up the premium cost.

One of the selling points behind Obamacare was that it would “bend the cost curve.”  Put another way, part of the rhetoric used to sell it was that it would reduce the overall cost of health care in America.  That was BS then, and it is BS now.  The baseline philosophy behind the law was that all Americans have a right to unlimited medical care.  Since a single payer system was a political nonstarter, they decided on the current, massive injection of government into the health care system, through the insurance market.  The people selling the plan would have said anything in furtherance of that goal.

What they either forgot, or just did not care about, is that in a zero sum game like insurance, there are both winners and losers.  And what they really lost sight of was that in health care, there have to be a lot of losers to make up for a relatively small group of winners.  So everyone in my company is going to lose, so that a few people can win.


This is not the kind of game I enjoy playing.

Monday, December 9, 2013

The Minimum Wage: $15 or $10

I'm really not one for conspiracy theories, but I'm starting to wonder if there isn't a grand design at work behind the current rash of labor demonstrations by fast food workers.

For  most of this year, I have been reading news stories about the push to increase fast food wages up to $15 an hour.  There have been several multi-city event built around this theme.  They get a lot of media coverage, but no real impact that I can see so far.  The fast food industry has not been brought to its knees by the union organizers behind the demonstrations.  It is too widely dispersed, and the ownership is too fragmented for a few small demonstrations to create a big change.

And we are talking about a big change.  A $15/hour wage rate would close to double prevailing wages at most fast food outlets.  That's a pretty big jump for someone whose primary job skills are showing up on time and pushing the button with the picture of a large order of fries when the customer orders it.  So it seems like a pretty absurd demand on the face of it.

But maybe the true goal is not to increase the minimum wage to $15/hour.  After all, the White House is also pushing for an increase in the minimum wage.  The Obama administration has set a target of $10/hour.  That is a 38% increase, which seems steep to me.  But compared to $15/hour, it is not so extreme.  And the White House has been relatively quiet on this.  All the noise is being made by the organizers of the $15 campaign.

There is a concept in psychology called anchoring bias.  In a nutshell, we tend to make decisions based on the first piece of information presented.  The initial position presented sets the anchor, and then the ultimate decision is made in relation to the anchor.

You can see how this would work in regard to the minimum wage.  The position set out with a lot of fanfare is $15 an hour.  Even though it sounds outrageous, it sets the anchor.  Then alternative positions are compared, not to the current minimum wage, but to the anchoring position.  Suddenly a $10 per hour minimum wage seems much more reasonable.

Since the Obama administration has strong allies among labor unions, I can easily envision policy makers in the White House collaborating with union organizers on a plan to define the terms of the debate on the minimum wage.

Conspiracy?  Nah!  Its just politics as usual.

Sunday, November 24, 2013

Boeing Makes a Move

The labor market news coming out of Washington State continues to be interesting.  After voters in the airport district passed a $15 minimum wage, the next major news item was a contract negotiation between Boeing and the Machinists' Union.  Boeing currently builds the 777 wide body jetliner in Washington state.  However, they just announced a series of orders for a newer model of the plane, the 777X.

In order to keep building the new plane in Washington, Boeing renegotiated the contract.  The final offer would extend through 2021 and included several features that would not endear it to the union.  First, the wage increases in the contract were limited to 1% every other year.  Second, the new contract would introduce a two tier wage scale.  Under the current contract, assemblers start at $15 an hour.  after 6 years of annual increases, they top out at $35 and hour.  Under Boeing's offer, the new hires would take 20 years to reach that top rate.

The big enchilada, however, was the pension plan.  Boeing's workforce in Washington is currently covered by a traditional defined benefit pension plan.  With a defined benefit plan, once you retire, your monthly benefit is fixed.  The company bears all of the investment risk of choosing the right investments to make sure enough money is in the plan to make all of the payouts every month.

Boeing proposed to replace that with a defined contribution plan.  Under defined contributions plans, the company agrees to place a percentage of the employee's earnings into the employee's account.  The employee is then responsible for investing that account in such a way that it grows over time.  When the employee retires, the account is theirs to spend as they wish.  Don't spend it all at once, however, because the money has to last you for the rest of your life.

When the contract proposal was put to a vote, th Machinists voted it down by a two to one margin.  Reasons that were cited for the rejection included the fact that the company is highly profitable, and that the CEO of Boeing got a big increase in compensation.  Too bad for the Machinists that those things don't matter worth a squat.

What does matter is this: Boeing can build the new 777X in one of several new locations.  One possibility that was cited was North Charleston, South Carolina, where Boeing is currently starting to assemble 787 Dreamliners.  Although the 787 had a really rough launch, they seem to have gotten past their teething pains.  The workforce now has experience, and the good people of South Carolina would be thrilled to increase the Boeing payroll.

Another possibility is Long Beach, California.  Boeing currently assembles C-17 military transports in Long Beach.  That contract is going to end in 2015, about the same time Boeing will be gearing up for the 777X.  Although unionized, the folks in Long Beach recognize that without a new piece of business, they're toast.  They will be very receptive to Boeing's overtures, because they recognize that the alternative is massive unemployment.

Another area talking to Boeing is Huntsville, Alabama, where Boeing has located their space operations.  Alabama, like South Carolina, is another Right to Work state.

The Machinists' Union thinks they are calling a bluff on the part of the company.  They think that the skills of the workforce in Washington state are unique and irreplaceable.  You used to hear such statements coming out of the United Auto Workers as well.  At least, you did before the Japanese and Koreans opened up a whole series of assembly plants in the US using non-union labor from Right to Work states.

By rejecting the contract offer, the Machinists have gambled the future of their jobs.  I certainly would not cover their side of the bet.  I think they are going to find out their skills are not irreplaceable.  Then they are going to find out that nobody else thinks their skills are useful in any other situation than building aircraft.

Saturday, November 16, 2013

Obamacare II

What a difference a month can make.  This time last month the Republican party appeared to be self destructing, having taken the blame for both the government shutdown and nearly causing the US to default on its debt.

Now, the debacle around Obamacare’s healthcare.gov website is controlling the news cycle, day after weary day.  I’ll bet that at the White House, it is all hands on deck.  Everybody coming in every day, preparing for twice daily briefings on the status of Obamacare’s launch.  Too bad none of the staffers can actually do anything constructive about fixing the problems.

The latest wrinkle is that the President has decided that he won’t enforce the law mandating certain levels of coverage, if the insurers would like to rescind some of the cancellations they have already sent out.

See, now you can keep your coverage if you like it, just like the President has been saying all along!

You have to wonder what the state insurance commissioners and insurance companies think about that.  Did anybody ask them?  Or is the spin machine getting geared up to blame the insurers for all the people who will lose their insurance coverage next January if the website is not straightened out?

One of the ironies of this situation is that Obamacare, which was intended to increase the number of people paying for health insurance, may end up significantly reducing the number of insured in this country.


Another irony is that the Republicans went to the mattresses trying to defund, or at least delay the implementation for a year.  I’ll bet Harry Reid wishes he had done just that, right about now.

Saturday, November 9, 2013

Increasing the Minimum Wage


The off year elections are over. Chris Christie of New Jersey stokes his Presidential
prospects by cruising to a win as Governor of New Jersey. Bill DeBlasio, an unabashed
tax and spend liberal, kicked the stuffing out of his Republican opponent to become
mayor of New York City.

The most interesting election result to me, however, was a referendum in the city of Sea-
tac, Washington. Seatac is in the Seattle metropolitan area. It gets its name from the
Seattle-Tacoma airport (Sea-Tac), which occupies about 25% of the land area of the city.
Seatac has what is described as a working class population. This probably means that
housing is cheap, so households in the bottom half of the income distribution can afford
it. The tradeoff is that every time a jet lands the windows shake.

The good people of Seatac just passed a law mandating a $15 per hour minimum wage,
the highest in the country. Seattle’s current minimum wage is $9.19, while the Federal
minimum wage is $7.75 an hour. So fast food workers at the airport who live in Seatac
just voted themselves a 63% raise.

The activists behind the campaign to increase the minimum wage were tactically brilliant.
The increase is limited to airport related businesses, and restaurants with more then 10
employees. This means most of the increased costs are being shoved onto travelers who
can presumably put the bills on their expense accounts. Since the area around Seatac is
already pretty built up, businesses will have a hard time relocating to just outside the city
limits to avoid the higher wage costs.

This is a classic union organizing tactic: target a large, immobile concentration of capital
assets. If the capital can’t move, then labor can organize to capture a larger percentage of
the economic value created. In the ‘30’s it was steel mills. Now, the capital asset is the
airport.

This will be a large scale experiment on the effects of a big increase in the minimum
wage. We should see a flow of marginally higher skilled workers across the boundary
of the city line, as better workers apply for the higher paying jobs, and businesses eject
less skilled employers in favor of superior applicants. Some of the Seatac residents who
voted for the increase may find themselves on the losing end of that transaction. Be
careful what you wish for.

We should also see a decrease in the number of employees, as businesses work to reduce
their higher labor costs. One of the most interesting results to watch will be the effect of
the higher minimum wage on people who now make between $10 and $20 an hour. If
you are making $12 dollars a hour today, do you accept your $3 raise and go on? I think
it far more likely that you go back to your boss and demand a bigger raise.

I can hear the conversation now: “Why should I work this (fill in the blank) job. I can go
to McDonalds and get the same money.” And because businesses have to compete for
even moderately skilled workers, wage scales will increase from top to bottom. What
I don’t know is whether the push back will be based on a fixed dollar gap or a fixed
percentage gap.

In other words, does the guy who is making $15 an hour today ask for a 63% increase to
$24.45? Or will he settle for a $7 increase up to $22.

One thing is for sure: I'm glad I don't own a business in Seatac

Sunday, November 3, 2013

Obamacare and Private Insurance

Despite being repeatedly told that you can keep your health insurance coverage if you like, hundreds of thousands, if not millions of Americans are getting cancellation notices in the mail.  It turns out that a lot of health insurance in the private market doesn't meet the definition of what the political appointees at HHS consider adequate coverage.

Maybe the problem is that it does not cover what the regulators think it should.  Because everyone, and I do mean everyone, needs maternity coverage.  If you don't believe me, just ask them.

Or maybe the deductible is too high.  The news coverage I have read is that the limit is $6000.  Higher deductibles than that are being outlawed.  I guess if you have $6000, and are in perfect health, that doesn't really matter.  You can't accept that risk in exchange for lower premiums.  Because someone in Washington decided they knew better than you.

Predictably, many of the people whose policies are being cancelled are finding out new coverage will cost considerably more going forward.  However, they're being told they shouldn't complain, because their new coverage is better, even though it costs more.  It covers more conditions, and kicks in earlier.

This reminds me of what the cable company tells me when they raise my price every year.  "Sure, our price went up 6%.  But look how many more channels you are getting."  News flash for you, buddy: I neither need nor want twelve versions of the Golf Channel.  Golf Grudge Match channel: this time it's personal!  What's up with that?

That's what you get when you hand things over to a monopoly.  And at least I can understand the reasoning of the cable company.  They're trying to maximize their profits.

But Obamacare was advertised as the way to lower prices.

Monday, October 21, 2013

Further Thoughts on the Shutdown

There has been a lot of news coverage of the terrible “costs” the government shutdown imposed on the US economy. The number I have been seeing the most is $24 billion. The ratings agencies have tossed out an estimate that the shutdown reduced 4th quarter growth from a 3% rate to a 2.4% rate. The subtext of all these reports is clear: “Evil Tea Party Republicans! Bad Republicans! Bad! Bad!”

 Let’s just do some back of the envelope calculations. The overall size of the US economy is around $16.6 trillion, or around $45 billion a day. Over the sixteen days of the shutdown, $24 billion works out to $1.5 billion a day. So whoever came up with the $24 billion number figured that a partial shutdown eliminated 3.3% of the American economy during that period.

 When you dig further into the numbers, the estimate for lost economic activity seems to boil down to two factors: reduced travel bookings, and the shutdown of the national parks. It does not include lost wages for Federal employees, because they were given back pay. Some contractors presumably had some lost time, but I have not seen those numbers broken out. The big enchilada is the reduction of business at the national parks. Now, the local communities undoubtedly suffered a loss of business during the shutdown period. But what the analysis ignores is the substitution effects caused by the park closures.

 The simplest way I can explain substitution effects is through an example. Have you ever gone to the multiplex to see a movie, only to find out that the movie you went to see is sold out? Every time this has ever happened to me, I pick another movie to see. I substitute one product for another. Notice, from the point of view of the hit movie producer, they have lost a sale. I didn’t go see the hit movie. But from the point of view of the producer of the plan B movie, they gained a sale. From the economic point of view of both myself and the movie theater, there was no change at all. The theater sold a ticket, and my wallet was lighter by the same amount.

 In this example, there were winners and losers, but the overall amount of economic activity was unchanged. Even if you don’t choose another movie, you’re already out of the house. You may go to a bar. You may go out to eat. You may go shopping. A rational person would conclude that consumers will substitute an alternative form of entertainment for the lost opportunity to see the hit movie.

Tourism, like all forms of entertainment, is a redistributive form of economic activity. No new wealth is created. Instead, wealth is transferred from those who have it (the tourists) to those who want it (the vendors). Change entertainment venues, and you have different winners and losers. But the net amount of wealth remains the same. Government statistics do not measure wealth; they measure activity. But even on the activity side, without an accurate measurement of the substitution effects, it is not possible to blithely announce that the economy suffered a significant loss because of the shutdown.

Thursday, October 17, 2013

Thoughts on the Shutdown


Well, the government shutdown is over and the debt ceiling has been raised.  This was an unmitigated defeat for the Republicans.  What the Democrats got was Obamacare is being funded, and the expansion of Medicare is going to be a reality.  What the Republicans got was a drubbing in the court of public opinion.

The conventional wisdom is now that the party that shuts down the government, or does not agree to raise the debt ceiling, will end up the loser in the fight.  The Democrats will now use this to expand the scope and scale of the Federal government.  It will work like a ratchet: whenever possible, the Democrats will create a new entitlement.  Then, to be fiscally responsible, taxes will have to increase to pay for it.  If you don’t want to be fiscally responsible, that’s okay, because the Chinese will be happy to loan us the money to pay for the goodies.  What could go wrong with that?

Since we are going to go through this again in three months, the Republicans are going to have to change their game plan.  One possible change is that they just go along with whatever the Democrats suggest.

But I think they could learn from their defeat.  On a tactical level, here are the things I think the Republicans could do the next time around:

1)    Hook together raising the debt ceiling with defunding entitlements.  Fiscally responsible people don’t default when they don’t have to.  The Republicans thought that threatening default increased their leverage.  Instead, it worked the other way around.  Next time, make the Democrats reject the extension of the debt ceiling, and precipitate the real crisis.  Remove the entitlements, and the debt will take care of itself.
2)    Redefine the National Park Service as an essential government service, just like the military and the air traffic controllers.  The primary means of inconveniencing the public during the shutdown was the closure of the parks.  Keeping them open makes it really hard for media stories about how bad the shutdown is to gain traction.  What is they gave a shutdown, and nobody outside of DC noticed?  After all, it was really only a partial shutdown.
3)    Resist the urge to retroactively pay furloughed workers.  That way, you can shape the narrative into how much you are saving the taxpayers every day.  The message is “We saved over $1 billion today.  Did you miss anything you really needed?”  

The philosophical divide between the two parties is deep and profound.  The Democrats want to increase the size of government, and increase taxes to pay for it.  The Republicans want to shrink the government, and use the money saved to cut tax rates.  We are going to dance this dance again.

Sunday, October 13, 2013

The Government Shutdown and Obamacare


The current Federal government shutdown is due to House Republicans unyielding opposition to Obamacare.  This desire to repeal the law is so strong tat they are willing to shut down the government to force the issue.

What the Republicans have not done is present a clear case for why their opposition is so strong.  Lacking that clear communication, the story that has emerged is presented as mere partisan bickering.  The Republicans just say no reflexively to everything the administration proposes; that’s the way the story runs.

But maybe “just say no” isn’t the whole story.  Maybe there is a reason to think that Obamacare should be opposed, and that the implementation should not go forward.

Let’s try this: Obamacare is going to create a gigantic new entitlement program, and massively increase the size of the Federal deficit.

We all know that the Federal government spends vastly more than it takes in (hence the upcoming fight over the debt limit).  Most of us know that funding demands on existing entitlement programs like Social Security and Medicare are going to grow, as the baby boomers age out of the workforce.  Solving these problems of sustainably funding entitlements is a huge political mess, largely because there are big segments of the electorate who are feeding at those troughs.  Among the list of sure fire ways to get elected, you will not find cutting benefits for the people who cast votes.

Knowing that the government is already overcommitted with unfunded mandates makes it a colossally bad idea to add on another unfunded mandate.  When you have dug yourself into a hole, the first step toward getting out of the hole is to stop digging.

Obamacare requires everyone to buy health insurance.  However, for people with lower incomes, there will be subsidies from the government.  Those subsidies were originally supposed to be funded through a series of revenue raising functions and cost saving changes in the health care system.  This article from Real Clear Politics details how many of the revenue enhancements and cost savings are already falling apart.

The bottom line is that it is increasingly apparent that full implementation of Obamacare is going to accelerate the growth of the Federal deficit.

Obamacare.  ‘Cause when a shovel is too slow, try digging with dynamite.

Sunday, September 29, 2013

Turning of the Tide


Last year a major milestone for the global economy passed, all but unheralded.  In 2012 the working age population of China peaked.  This population is defined as the number of Chinese between the ages of 16 and 60.  There is a smaller pool of workers this year than there was last year.  That number will decline again next year, and every year after that for the next couple of decades.

This decline is the inevitable result of the one child per family policies put in place decades ago.  And the process is unstoppable.  Even if the Chinese government were to relax its population control policies tomorrow, and Chinese women to immediately react by having more kids, it would be at least 17 years before that increased fertility would begin lifting the number of workers.

This is a major milestone because China has become the world’s go to location for manufactured goods.  Export of manufactured products has powered the unprecedented growth of the Chinese economy.  However, two processes are about to collide.  As  the Chinese economy gets bigger, it is starting to generate more internal demand.  At the same time, the pool of labor is beginning to get smaller.  More demand for a scarcer resource inevitably means the price of that resource gets bid up.

We are already seeing that process starting.  In the southern coastal regions, which have been the major manufacturing areas, wage increases of 10% to 24% have been reported.

For the last ten years, powered by a seemingly inexhaustible supply of cheap labor, Chinese manufacturers have taken market share away from domestic producers.  Chinese made products have taken over whole industries.  This has been great for consumers, who have benefited from low prices, but for American manufacturers, it has meant layoffs and plant closings.  There are now signs of this process reversing.  Motorola has opened a factory in Texas to start making cell phones.  And Apple Computer has announced plans to begin making some computers in the US again.  GE is moving more production of appliances back to the heartland.

Of course, China is not the only low wage country out there.  Vietnam, India, the Philippines—the world is awash in low cost labor.  Also, if Chinese workers decide to stay in the labor force past age 60, the erosion in the size of their labor force will stop.  Still, as an American manufacturing manager, the last ten years have been like watching the tide go out, with every year bringing tighter margins and fewer opportunities.  So I can be forgiven for taking Chinese demographics as a hopeful sign.

Maybe we’re seeing the turning of the tide.

Saturday, September 14, 2013

Defining Poverty


There is a great deal of discussion in this country about the poverty line, and the percentage of the population that lives below the poverty line.  In the debate about increasing the minimum wage, the issue is often couched in terms suggesting that the minimum wage should be high enough for a single wage earner to earn over the poverty line for a family of four.

In an earlier post, I pointed out that with current Federal antipoverty programs, one wage earner can get a family above the poverty line.  In this post, I want to look at a different question: where does the poverty line come from?  We say that a family of four that has less than $23,450 of annual income is living in poverty.  How do we make that determination?  It turns out it is not hard to find that information.

In 1963-64, an economist with the Social security Administration, Mollie Orshansky, made the first official definition of poverty.  Her methodology was simple.  She took a Department of Agriculture economy food plan that listed how much a person should eat during a week (3 lbs. of milk and cheese, 2 lbs. of meat, 5 eggs, etc.).  This amount of food was added together for various family sizes, then the cost was calculated.  Orshansky then multiplied the dollar cost of the food by a factor of three.  That was the definition of the poverty level adopted in 1965. 

Where did the factor of three come from?  In 1955, the Department of Agriculture did a survey that showed families of three or more persons spent about a third of their after tax income on food.

In 1969, this poverty line was indexed to changes in the consumer price index (CPI), so that it increases with inflation.  Other then minor changes regarding issues such as the distinction between farm and non-farm families, the formula has remained constant since then.  You can find this history here.

The problem with a static definition of poverty is obvious.  It does not take productivity growth and technological change into account.  Long term productivity growth means you can buy more stuff with less money.  For example, in 2011 Americans spent only about 8% of their income on food, tobacco, and alcohol combined.  That number reflects a remarkable shift in spending patterns over the last 50 years.  The money not spent on food is deployed in other ways.  For example, only 18% of household below the poverty line do not have air conditioning, and some of those people live in Alaska.  Television ownership is almost universal in our society.

Those in favor of more government intervention in the economy often cite poverty statistics to demonstrate that the government needs to do more giveaways of other people’s money.  I would argue that a bad definition of poverty leads to bad policy making. 

After all, if “poor” people are 50 pounds overweight, and walking around with smart phones, TVs and iPads, doesn’t that indicate that the “war” on poverty has been pretty much won?  Maybe we can declare victory and go home.