Monthly Archives: September 2013

A Thought on Minimum Wage

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The current minimum wage is $7.25/hr, and under the guise of that being not enough to live on (it works out to about $15,000/yr before taxes), there’s move afoot to raise the minimum—to anywhere between $9/hr and $15/hr.

I’ll ignore in this post the fact that the jobs that get minimum wage are low-skill and/or entry-level jobs whose product simply isn’t worth very much money.  I’ll ignore, also, the fact that very few minimum wage earners have this job as their sole source of income—it’s a second job, intended to supplement the income from the primary job.

I want, instead, to propose a wholly radical idea: how about reducing regulations, especially for small businesses (the ones hardest hit by minimum wage laws) and lowering tax rates (of which min-wage earners aren’t paying much, but which taxes contribute to the cost of the goods min-wage earners are trying to buy)?  Those tax and regulatory costs drive up our (which includes min-wage earners) cost of living, as the cost of the things we buy is driven by those regulatory and tax costs of doing business.

Here’s a brief look at (aggregated) regulation costs for small businesses.  Daniel Sutter, a Professor of Economics at Troy University, had this information in a recent piece in the Troy Messenger:

…compliance [with Federal regulations] often requires spending on new equipment, signs, or other changes to workplaces.  Both the Competitive Enterprise Institute and Small Business Administration estimate the cost of regulations at around $1.8 trillion.  …this $1.8 trillion (largely hidden) cost of [Federal] regulatory compliance exceeds the revenue from Federal individual and corporate income taxes combined.  It represents almost 12% of GDP, or nearly $15,000 per family, annually.

There’re those $15,000, again.  Also, that aggregate cost equals 10% of the current national debt.

Sutter also had this:

Automobile dealers, for example, must comply with over forty Federal regulations affecting every aspect of their business, from the showroom to the service bays.

They aren’t even allowed to run their own businesses without the Feds looking over their shoulder, telling them how to do so.

And it goes beyond compliance costs.

Regulation reduces the freedom of individuals and businesses to innovate or create new products.  Regulation reduces productivity growth, ultimately reducing standards of living, and particularly burdens small businesses, which are the source of many new jobs.  The greatest cost is likely the new products, services and businesses that are never created because of regulation.

Now, about those taxes….

The small business owner, rather than the business itself, typically pays the taxes on the business’ income, as that, and its costs, typically are passed through to him.

A small business might have an annual income of, oh, say, $500,000—and if it’s really successful, that’ll generate a profit of $50,000.  Any salary he might take out of the business is on top of that, but let’s ignore salary and only concern ourselves with the income tax on that profit.  On those $50k, he’ll pay roughly $8,400 in ordinary income tax—nearly 17% of that profit ultimately lost to the government—at 2013 single rates.  At married, filing jointly, the bite will be roughly $6,600—13% of his profit lost.

Rather than raising the minimum wage, and pricing the worker out of the labor market, it’d be better to enable the existing wage to go farther by getting rid of all those Federal regulations, and their costs, and lowering tax rates.

Executive Pay and Jobs

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TJ Rogers, Founder and CEO of Cypress Semiconductor, wrote in part about executive pay and income taxes in his experience in a Wall Street Journal op-ed a while ago.

A couple of years ago, I decided to invest in my hometown of Oshkosh, Wis., by building a $1.2 million lakefront restaurant.  That restaurant now permanently employs 65 people at an investment of $18,000 per job, a figure consistent with US small businesses.  If progressive taxation in the name of “fairness” had taken my “extra” $1.2 million and spent it on a government stimulus program, would 65 jobs have been created?

According to recent Congressional Budget Office statistics on the Obama administration’s 2009 stimulus program, each job created has cost between $500,000 and $4 million.  Thus, my $1.2 million, taxed and respent on a government project of uncertain duration, would have created about one job, possibly two, and not the 65 sustainable jobs that my private investment did.

On the other end of the capital-intensity scale, Cypress Semiconductor required huge investments to create jobs in its chip-manufacturing plants.  Between 1983 and 2003, those investments totaled $797 million and led to the creation of 4,033 jobs at an investment of $198,000 per job created.  Thus, my own experience on the cost of job creation ranges from $18,000 to $198,000 per job, compared with $500,000 to $4 million per job created by the Obama stimulus program.

That got me thinking about CEO compensation and the number of employees working for the CEO’s company more generally—how much was the CEO paid per employee on the payroll for stable companies that were not (yet, or anymore) actively investing in plant expansion?

Here, for some not very randomly selected large corporations, are CEO compensation, total employees in the company, and the CEO’s compensation per employee.  The data, for the year 2011 (except as noted), are from CNN Money.

Company

CEO Total Compensation

Total Employees

CEO $ Per Employee
GE

$21.4 million

287,000

$74.6
Wal Mart Stores

$17.7 million

2,200,000

$8.0
Exxon Mobil Corp

$29 million

(2010)

99,100

$292.6
AT&T Inc

$27.3 million

256,420

$106.5
UnitedHealth Group Inc

$10.8 million

99,000

$109.1

 

Here are the same data for small businesses (contra Rogers’ example, fewer than 25 employees), averaged across selected industries.  The CEO $ per employee is figured, naively, on 15 employees, since most small businesses won’t have 24 employees, and 15 made the arithmetic easier than 12 (the mid-point of the employee range).

Industry

CEO Total Compensation

CEO $ Per Employee
Business Services

$138,000

$9,200
Construction

$148,500

$9,900
Healthcare

$130,800

$8,720
Retail & Wholesale

$175,300

$11,690
Internet

$131,900

$8,795

 

These guys, despite being an order of magnitude, or two, more expensive than a large corporation CEO on a per job basis, still are enormously more efficient job creators than the Federal government.

The real takeaway, though, from these two tables has to do with the compensation “disparity” between CEOs and line workers, especially concerning those highly paid large corporation MFWICs.  Given the hiring rates they’re generating, they seem to be worth their pay.  (And none of this disputes the thesis that it’s small businesses that are the engines of economic growth and employment hiring.  It’s a whole lot easier to ramp up a small business than it is a large one.)

Mockworthy

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The Los Angeles Times had this about President Barack Obama’s…deliberations…about what ought be done in response to Bashar al Assad’s rudely arrogant act of crossing the former’s rhetorical red line.

One US official who has been briefed on the options on Syria said he believed the White House would seek a level of intensity “just muscular enough not to get mocked” but not so devastating that it would prompt a response from Syrian allies Iran and Russia.

Which is a contradiction in terms.  If it’s actively timid enough to avoid responses from Russia and/or Iran, it’s mock-worthy solely on that account.

Some Labor Day Questions

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The Wall Street Journal asked some questions on Labor Day 2012, and supplied some answers.  Here are some of those questions and answers, which remain as valid this Labor Day.

  • Q: How are America’s workers doing? Not good. Over the past decade, over the ups and downs of the economy, taking inflation into account, the compensation of the typical worker — wages and benefits—basically haven’t risen at all. … The Labor Department recently said that 6.1 million workers in 2009-2011 have lost jobs that they’d had for at least three years. Of those, 45% hadn’t found work as of January 2012. … Federal Reserve Chairman Ben Bernanke said Friday that unemployment is still two percentage points higher than normal….
  • Q: Things ARE getting better, though. The U.S. economy is creating jobs, right?  Back in December 2007 when the recession began, there were about two jobless workers for every job opening.  When the economy touched bottom in mid-2009, there were more than six unemployed for every job.  At last count, the BLS says there were 3.4 jobless for every opening.
  • Q: How much of this elevated unemployment is because the unemployed just don’t have the skills that employers are looking for right now?  Some.  …the bulk of the evidence is a lot of the unemployment really is the old-fashioned kind: the kind that would go away if the economy was growing at a stronger pace. Mr. Bernanke said as much at the [2012] Jackson Hole conference….

The Democratic President has taken a bad situation and done little to improve it.  He has, though, actively attacked businesses—the hirers—demonizing them, (over)regulating them, demanding to raise taxes on them.

Happy Labor Day.

Another Government Takeover of an Industry

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…and for what purpose?

The US government has used the merger-approval process to increase its influence over the telecom industry, bringing more companies under its oversight and gaining a say over activities as fundamental as equipment purchases.

The leverage has come from a series of increasingly restrictive security agreements between telecom companies and national-security agencies….

And

The security agreements…compel [telecom companies] to honor requests to access their systems.  What’s new is that consolidation in the industry and an influx of overseas investment have left much of the industry under the government’s sway.

Thus,

Three of the top four wireless carriers now operate under such agreements….

Three of the major equipment suppliers have come under these agreements in recent years as well.

What requests?

The deals routinely require the companies to give the government streamlined access to their networks.  At their most restrictive, they grant officials the right to require firms to remove certain gear and approve equipment purchases and directors.

And

when T-Mobile and MetroPCS sought approval for their merger this year…the US secured 30 days’ notice before the company uses a new vendor for network equipment, and T-Mobile agreed to resolve any security concerns the government raises relating to new equipment providers, according to a 2013 amendment to the 2001 security agreement.

All of this comes under the mirage of trading freedom for security.

Makes me wonder what the government isn’t telling us about why they blocked the AT&T-T-Mobile merger a couple years ago.