Category Archives: Economics

Miscellaneous economy stuff

Tipped Wages or Not?

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McDonald’s is insisting that every restaurant—especially fast food restaurants—should be required to do away with tip-based wages and pay servers at least the Federal-level minimum wage. There are a couple of major disingenuosities in the surrounding argument.

McDonald’s Chief Executive Chris Kempczinski:

Right now, there’s an uneven playing field,

because casual-dining restaurants, bars, and other establishments to pay below the typical minimum wage to tip-earning workers. If he thinks so, he should push for getting his restaurant able to similarly pay his workers rather than demanding that others kowtow to his business model.

Kempczinski went on:

If you are a restaurant that allows tips or has tips as part of your equation, you’re essentially getting the customer to pay for your labor[.]

This is an especially blatant bit of disingenuousness. The customer already is paying for the restaurant’s labor. The customer also is paying for the restaurant’s cooking, food and food preparation inputs, rent, management salaries, every cost the restaurant incurs. Those costs are included in the prices the restaurant puts on its menu. Tipping is just a customer-facing line item on the bill.

This is nothing but a regulated business manager venally and self-servingly trying to capture the regulators and impose added costs on his smaller and weaker competitors.

What is their Value, Really?

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What is their Value, Really?

In a Sunday Wall Street Journal article on universities’ penchant for investing their endowments in private equity (as opposed to instruments bought and sold on public exchanges, these are bought and sold in private deals between the university and one or another private (i.e., not traded on an exchange) entity, or rarely a private deal to which a publicly traded entity might also agree.

A few exceptionally talented, or lucky, endowment managers seemingly did very well in this environment. Yale’s late David Swensen got an annualized return of 13% over the course of his management.

But how valuable are those investments, really? The WSJ‘s subheadline reads

Universities and other institutions have built up large private-equity holdings, but they are now lagging behind the S&P 500 and aren’t easy to shed

And this:

And much of what those funds earned for their investors in that time was on paper; endowments and other institutions were getting less and less cash that they could put to work in the booming stock market.

And this [emphasis added]:

…making it hard for managers to get the prices they want for the companies in their portfolios. Meanwhile, institutions have struggled to find investments that hedge against stocks and private equity without further eroding returns—and the problem has gotten worse with the stock market’s latest rally.

The value of any investment is what someone is willing to pay to get it. The initial value of those private equity investments in these endowments is what the endowment managers paid to get the private entity or a piece of it. Now they’re moving to sell some/most/all of these privately held pieces, but there are few to no buyers at those initial prices or anywhere near those prices.

This is Yale’s continued position:

Yale said in a statement that it remains committed to its private-markets strategy. “We trust that sophisticated investors, especially our partners who know us best, understand this,” the school said.

That sounds like the typical arrogance of Know Betters.

What is, in the end, the true value of those privately held pieces? It’s still whatever a buyer is willing to pay for them. And that calls into question two things: an accurate valuation of those entities and the wisdom of relying so heavily on non-publicly traded entities for endowment investments.

Former Yale endowment private-equity manager Tim Sullivan:

One of the reasons we hire these guys is because they know when’s the right time to sell an asset[.]

The problem here is that a potential buyer won’t necessarily agree that it’s the right time to buy that asset.

It’s tough to grow, or even just to maintain the value of, an endowment based on phantom valuations of its holdings.

Nationalizing Companies

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The Wall Street Journal editors are badly mistaken here.

Mr Trump accused Kamala Harris of being a socialist, but the Biden Administration never nationalized companies.

Routine political polemics on the first part of that; functionally, and obviously, wrong on the second part.

Nationalizing individual companies is piffle. The Obama reign nationalized a whole industry—our health care “insurance” coverage industry via Obamacare, which required all of us to buy an Obamacare policy whether we wanted to or not, whether we needed one or not.

It’s true that the Biden administration didn’t formally nationalize any companies, but it functionally nationalized far more industries than that piker Obama with the Biden administration’s excessive regulation: ICE-powered vehicles and our energy production industries, our banking industry with its pressure to lend to these types and refuse to lend to those types, and even our press with its pressure to spike these news reports and to push those news reports, all the while pushing for editorials that favored administration ideologies while panning or ignoring policies of which Biden and his minions disapproved.

None of this is to suggest that the Federal government taking an ownership stake in Intel or any company is a good idea or even an acceptable one. It isn’t. But it’s telling that these opinion writers can make such an obviously wrong claim at the outset of their piece.

An Alternative

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Or two. The Trump administration is kicking around the idea of taking a stake in companies that receive Federal funds pursuant to the 2022 Chips Act (formally the Chips and Science Act), 10% in Intel being one of the ideas in play. I have an alternative, although it likely would require a legislative modification to the Chips Act: structure the funding as a loan, the [10%] stake as collateral, and dissolve the stake when the loan is repaid.

Another alternative, also likely necessitating modification to the Chips Act, would be to structure the funding as a grant, with the stake dissolved after a [five] year period on satisfactory performance under the grant—suitably boosted domestic research and manufacturing.

Either of these alternatives would mitigate the risk of government-run “capitalism” by getting government back out of these enterprises once performance has been confirmed durably established. They’re similar, too, to the government bailout program of the Panic of 2008, with the critical addendum of a hard withdrawal of government on clearly measurable achievement of tightly defined milestone.

False Comparison

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In their letter to the Tuesday Wall Street Journal Letters section, Professors Amy Finkelstein, of MIT, and Matthew Notowidigdo, of the University of Chicago, argued for the necessity of Obamacare.

…because millions of Americans “don’t use” their subsidized insurance, they therefore “don’t need” it. Yet as we teach our students every year, this misunderstands the purpose of insurance. Not filing a claim doesn’t mean you didn’t need insurance. We’ve never had to use our oxygen masks during decades of flying, but that hardly means they’re not essential.

The professors, as educated as they seem to be, should know better than to make such a false comparison. Folks die if they don’t have access to those oxygen masks in the realization of the once-in-a-lifetime likelihood of needing one. Folks without insurance always can get at least life saving care, and usually more than that for a variety of non-life threatening ills, in any hospital ER.

The professors also cynically conflate “need” with “useful.” Having insurance against this or that outcome usually is a useful backstop to have, IFF the accumulated premiums paid are worth the Expected [sic] cost of a realized outcome. Underlying the distinction between “need” and “useful” is the individual’s own assessment of those risks and that value. With Obamacare, though, folks are required to buy the insurance, however bad it is, and to do so wholly independently of any cost/benefit tradeoff that actually exists and equally independent of the individual’s assessment of his risk, or of his need. Risk assessment has been taken out of the individual’s hands altogether.