How Does Costco Pay Higher Wages Than Wal-Mart??

Emily Fox has an interesting article over at today :Worker wages: Wendy’s vs. Wal-Mart vs. Costco. Apparently…Costco pays its hourly workers about $20 an hour, with health benefits and a 401k, compared to an average of $13 at Wal-Mart. So…of course, the liberal answer is quite simple…let’s just raise everybody’s wages….double or triple them…and everything will be right with the world…right?

Well…no. You see…if I had to bet…Costco pays more simply because they have a very different  human resources strategy. Rather than hiring a lot of low level, borderline employable people like Wal-Mart…instead, they are willing to pay much higher wages…for a much higher quality employee. You pay more…you get more.And it seems to be working for them…their sales per employee is nearly double that of Sams Club according to the article.

So…you see… Costco didn’t just take a lot of minimum wage employees and triple their wages like the liberals seem to believe. No…they went out and hired competent, productive employees….who happen to cost about $20 per hour. Yes it costs more…but for them, the increase in productivity, lower headcount, lower turnover, and satisfied customers make it worth it.

Now…this isn’t to say one strategy is better than the other…clearly both Wal-Mart and Costco are doing quite well…despite very different strategies. Just don’t confuse the correlation with the causation. Costco employees aren’t better at their jobs because they are paid more…they are paid more because they are better employees. You could take a Wal-Mart cashier making $8 an hour… odds are….they wouldn’t make it a month at Costco before being fired.


McDonald’s Pay Strike…Missing The Point

I saw some clips today from the McDonald’s employees protesting their low wages. I can sympathize with that..hell, I’d like a pay raise too. What I think everybody is missing here is that it’s not McDonalds who ultimately decides their employee wages…it is the end customer, and how much he is willing to pay for the product.

In that $0.99 value burger…McDonald’s has to pay for the direct cost of bread, the meat, and the secret sauce. Furthermore, they need enough left to cover the cost of the storefront, the equipment, the property taxes, the employee wages….and of course still have a few pennies left to make the whole thing worthwhile for the franchise owner. If the price of anything in that equation moves…either the owner can eat it…or he can raise prices.

So…let’s double the wages…from $8 to $16. Now the price of the value burger isn’t $’s $1.50. And now…everybody’s happy right….except that the customer goes next door….to the place that didn’t raise their employees wages. Now…the entire restaurant goes out of business….and not only do they not make $16 an hour…they now are making $0. So…who do they have to blame for low wages? Ultimately…blame the customers…who just like everyone else, want to pay less for things…not more…including how much they ultimately pay you…to the extent your wages are part of the price of my burger.

That’s not just true for low wage fast food workers…it’s true for everybody…everywhere. You’re wages are a reflection of what the end customer is willing to pay you for your time. If you are an athlete, or an actor or musician ….maybe you are able to get paid a huge amount for your time…If you can sell out a 50k seat stadium at $100 per seat, well, you may be able to net a couple million bucks for a couple hour show….good for them right?

But let’s be honest here…you probably are not Paul McCartney. You take orders and cook hamburgers… something that anybody with a pulse can do…. Your job exists because…sometimes people (like me) are too lazy to cook their own hamburger…or maybe they just don’t feel like doing dishes tonight. Look…I don’t doubt that it sucks trying to live off of minimum wage…I’ve been there…but I just think the blame is misplaced. Unfortunately for our McDonald’s workers…nobody is ever going to be willing to pay a lot of money for a McDonald’s hamburger….or the employees who manufacture them.

McDonald’s simply fills a niche…they bring customers willing to pay a certain price for a certain quality of burger together with employees who have the skillset to deliver that burger, within that budget. If  wages go up…the price of the burger goes up, and if the price of the burger goes up….the balance is broken and there are no customers, and there is no job at all. If you think your time is worth more than they are willing to pay…well…go find someone willing to pay you more…and quit your job at McDonalds. Until then…you can protest all you want…but you will never be able to force customers to pay $2.00 for a $0.99 burger. Well…I’m off to lunch…Chinese anyone 🙂

Do Federal Employees Pay Taxes? Kinda, But Not Really

One of the first challenges I faced when I decided to use the treasury department’s “Daily Treasury Statement” was to reconcile the thing to other external data points like the debt outstanding and cash balances as well as internally reconciling the tables within it to make sure I understood the report inside and out, and furthermore, trusted it. In this quest I ended up stumbling on one thing I could not answer…the “Cash FTD(federal tax deposits)” category in table II…which makes up over 2/3 of all cash deposits never tied to table IV, which summarizes tax deposits by type, like withheld income, corporate taxes ect… It was perpetually short by a category labeled “Inter-Agency Transfers”

It took some back and forth, but the good folks at Treasury provided the clues I needed. This imbalance..$82B over FY 2012 is due primarily to the affect of FICA taxes and Income taxes withheld from the paychecks of federal employees.

Before we look at that, lets start by looking at a regular employee of a fortune 500 company. Say the person has an annual salary of $100k, $25k of which is withheld from the paycheck and submitted to the federal government by the company. This $25k (plus another $7650 for FICA) shows up on the DTS as cash received in the “CASH FTD” category.

Now….let’s use the same example, but this time the employee works for the federal government. Each year…the government sends the employee his $75k of cash….but what to do with the $25k of taxes withheld? Transfering $ from one bank account to another has no net affect on cash in this scenario…unlike when it was submitted by the fortune 500 company. The plug is “Inter-Agency Transfer…essentially an intercompany elimination. This is why we have the $82 difference. That $25k of taxes “paid” by the employee show up in the official tax receipts number…even though no marginal cash is ever received…it just gets shuttled around from one federal bank account to the next…netting out to zero. 82B per year!!

Looking at this from another angle…say the federal government has revenues of exactly $1T, and the economy is perfectly stable…no change in employment, no raises ect…everything is constant. Then, the government decides to hire our employee for $100k per year. When all is said and done…government revenues have stayed exactly the same, even though income is up $100k, and reported income taxes are up $25k. Contrast that to if the employee was hired by a company…then government revenues would have increased by $25k+. Isn’t that something? The federal government could go out and hire 5M people….and it would have exactly no direct increase in cash inflows. Or…you could fire all of the current employees…and cash inflows would not drop a penny.

So what is going on here? Essentially, the cost associated with federal employees income and payroll taxes, and the revenue they represent, net to zero. The affect is…that the federal government can essentially hire identical employees, yet effectively pay quite a bit less than a company would bringing up an interesting point….that in the end, consumers pay all taxes. In order to get $75k of cash to the employee, a company has to pay $100k because Uncle Sam want’s his “rent”….as if he owned you. That cost…is pushed all the way through the value chain and ultimately ends up on the retail shelf, raising the cost of everything…probably by a factor of nearly 2 when all is said and done. Ponder on that for a while….you can raise taxes on whoever or whatever you want in the short run, but in the long run, the economy re-adjusts back to equilibrium…with higher prices for everything as the plug.

So…to answer our question…while government employees end up with the same after tax pay as a corporate employee with similar gross pay does, their income taxes more or less manifest themselves as a discount to the federal government rather than cash receipts or actual revenues. I think that the reality is…not only do Federal employees not pay income/payroll taxes…none of us as individuals do. Instead…our employers essentially pay a consumption tax on our labor pushing the cost of a $75k per year employee up over $100k.  If there were no income/payroll taxes, our employee’s take home salary would still be around $75k…but it would go a lot further because the price of everything would be 25-50% lower. Instead….consumers simply pay more. Our employer pays over $100k for a $75k employee just like at the grocery store, you pay $2, for a $1 loaf of bread.


Fairy Tales: Stock Market

The Fairy Tale goes something like this…a rising stock market is good for the economy. As the market goes up, people have more money, spend more money, and the cycle continues. Sounds believable enough. Taking a step back in time back to the 90’s… I was in high school, and according to the news, everyone was getting rich investing in stocks. I recall one friend telling a story about an uncle or 3rd cousin or something who had gotten into day trading…apparently he could make $30k a day. It probably wasn’t true (or was only half true…he also lost $30k a day), but it just didn’t make any sense to me. I understood how companies made money…they produced a product and sold it. But when a stock goes up, where does the money come from? It just didn’t make any sense…it seemed like money was just being created out of thin air.
It wasn’t until much later, armed with the tools of the accounting trade that I was able to work my way through this logical fallacy. So let’s imagine that on a particular trading day, the entire stock market is complately flat, with the exception of one stock that pulls a clean double. It starts the day at $50 a share and a market cap of $1B, and ends the day at $100 a share and a $2B market cap. Hooray right? Without a doubt, the fortunate owners of this stock are ~$1B better off. But….back to accounting 101… for every debit…there exists an evil twin….a credit…somewhere. The reason the fairy tale persisists is because the credit is not as obvious as the $1B debit the owners of the doubling stock, but it exists nonetheless. The credit manifests itself as a type of inflation….while the owners of the stock are $1B better off….after this trading day, the owners of all the other stocks in the universe, and generaly every other person in the world, is just a tiny bit poorer.
The day before, anyone could have purchased the stock for $50… it costs $100. Nothing has physically changed in the economic universe. It is the same company, same employees, same manufacturing facility, same revenues, same cash flow….If the price of gasoline doubled, you would immediately recognize this as inflation, and feel a bit poorer, and while the mechanics in the stock market are identical, we tend to categorize this differently.
So I guess what I am getting at is that changes in the stock market do not create wealth, they simply reallocate wealth. We can see this in the clearly by looking at price fluctuations in a single commodity. When the price of oil rises, the relative wealth of owners/producers of oil goes up, while the relative wealth of consumers of oil goes down. These more or less wash, though I won’t pretend the economic system is so perfect that they wash to the penny. The exact same thing happens with individual stocks, or the market as a whole. So as we sit here in April 2013 with the DOW and S&P500 pretty close to “record” high’s (unadjusted for inflation of course), there is no doubt that for owners of stock, this is a good thing. But for the economy as a whole, it’s pretty much a wash. High stock prices are only good for the economy in the same sense that high oil prices are good for the king of Saudi Arabia. If you are the King…it’s not so bad at all. If you aren’t the king, and your tank is empty, it can kinda suck.
You probably are not convinced…a 5 minute blog post isn’t going to change decades of stock market mythology….all I’m saying is think about it. If the entire stock market doubled tomorrow…..would anything really change? Or would the rich just be richer and the poor that much poorer? let it marinate…I’ll probably bring this up again some day.
For bonus points…think about the inverse…the stock market instead tanks…90% tomorrow. Nothing else is changed. The factories, the infrastructure, profits revenues ect…. are all the same, but nobody wants stock anymore…Is it the end of the world, or just a reallocation event? What if it happens over a 10 year period instead of overnight. Write in complete sentences 🙂

What Does Deficit Spending Accomplish

I wanted to expand a bit on my earlier post. The economic Witch Doctors are firm in their belief that deficit spending is the cure to jumpstart an ailing economy. They promise that at some point, the spending can be weaned, and the economy can stand on it’s own. We’ve been trying this for a decade and are now working on our 5th straight trillion dollar deficit, with no weaning in sight. I think it’s time to think just a little bit harder about the true affect of deficit spending. The symptom deficit spending tries to cure is declining GDP, or even just a reduction in the rate of growth….in other words, people are deciding not to transact.
In a prior article, we looked at a scenario where a buyer and a seller had a desire to transact, but were simply too far apart on price for a transaction to occur.
After haggling for a bit, the buyer is at $25, and the seller is still at $75….no transaction occurs. Oh no…GDP is crashing…prepare the soup kitchens right? Well…no. You see, the buyer has determined that the value of a massage to him is only $25. Spending $75, would mean taking a loss….which he won’t do, because he can take his $75, and get something he personally values at greater than $75…even if that something is nothing at all. On the other side of the transaction, the seller values his time at greater than $25. He would rather call it a day and spend the extra time with his kids…or watching TV, or sleeping….all things he may personally value more than the marginal $25. In this case, a non-transaction is the optimal economic outcome.
I would offer that this scenario…the decision not to transact is the natural state of things. For example…the Bugatti Veyron is a phenomenal machine, one that I would love to drive and park in my driveway, and yet…I drive a substantially less phenomenal vehicle. The problem, you see, is price, and utility. While I would surely have a blast driving a Veyron, to me, those occasional adrenaline rushes simply are not really worth a decade or two of pay…at least not to me. And if I walked into a dealership…and offered say $25k….they would almost certainly politely, or not so politely decline. And so…Bugatti, and I, though never having met, have collectively decided not to transact. The same thing happens every time you go to the grocery store. Out of tens of thousands of potential products…you politely decline on all but a few dozen….And yet the world keeps turning.
Deficit spending, in one way or another, alters this equation by temporarily subsidizing either the buyer, or the seller, or both.  This initiates transactions that otherwise wouldn’t have taken place, spiking GDP, which sounds fine…except that it leaves an extra trillion of debt on the federal governments balance sheet each year. So back to our Bugatti example, maybe the government offers Bugatti a rebate…$1.5M per vehicle sold. Now, Bugatti can afford to sell them for $25k, and with the government’s rebate, make enough to cover production cost and a healthy profit. GDP increases, Bugatti hires thousands of new employees, and all is right with the world right? Well…no, because someday…all of the new Bugatti owner’s kids and grandkids have to pay back the Billions borrowed. Furthermore….we know that the amount of marginal enjoyment these owners will get from their cars us substantially less than $1.5M….or else they would have bought them before, so while we get a temporary increase in GDP and employment, over the long term, the losses are huge.
Now of course, our Bugatti example may be a bit silly. (or is is…anyone remember the Chevy Volt?) Rather than handing out high performance sports cars, our government tends to be a little more subtle. Typically, they will just buy things nobody needs or wants, and hire people to do things that don’t really need to be done. It doesn’t have to be something completely useless…it will generally be something we would all like….just not at the going price… They will send $100 a month to a family for food…which frees up $100…now they can go buy an I-phone, which helps Apple and AT&T. They can send the money to schools, so they can buy overpriced laptops for students to misuse…saving parents money, and helping out computer manufacturers like Dell.. Or…they could just offer to give everyone over 65 a stipend and more or less free medical care…for about $1.5T per year….so those people, rather than saving for retirement over their career…can spend that money on other things.
 While all of these things do increase GDP and employment, they all actually result in suboptimal economic outcomes….overriding optimal decisions not to transact by hiding and shifting the true cost. My theory is…that you can never wean, because if you stop paying sellers to sell and buyers to buy…those transactions would simply cease. GDP would revert back to its natural, and optimum state. Only the debt would remain. Since there is no capacity, or even intention to repay, every dollar of deficit spending simply devalues the dollar. Now, official statisticians cleverly hide this in CPI, but it is quite obvious…just look at this selection of commodities from 2002-2012:

2013-03-23 Commodities 2002-2012

So…over this 10 year period, deficit spending was about $10T…and coincidentally, the price (in $) of this selection of commodities just so happened to increase…excluding natural gas, from 200% to 700%, averaging a 332% increase? This isn’t your grandfather’s inflation….this is a government intentionally debasing it’s currency based on the advice of economists who clearly have no friggin clue what they are doing…If you haven’t seen some iteration of this…it’s worth a view. It’s a series of clips of Ben Bernanke before the last financial crisis…Basically whatever this guy predicts based on his models and fancy book lernin…the complete opposite actually happens…this from the cream of the crop….best of the best of what modern economics has to offer. Get ready kids…this fairy tale will not have a happy ending.