Tuesday, September 17, 2013

Does government intervention help the poor?


Who eats at McDonalds? How much do you usually pay for you and your family? Let's say $20. Now let's say that the government enacts a new sales tax on McDonalds of 83%, which means that your usual $20 meal is now $36.60.

What do you think? Would you continue paying $36.60? Or would you try somewhere else? I bet you'll go other places.


Now what if the government did the same law to all the fast food places, and to all the restuarants? Then where would you eat? Maybe you buy more groceries to eat at home more. Right?

But then that means that fewer people are eating out, and that means less revenue for those companies, and that means that they'll have to downsize operations ~~ which means fewer jobs ~~ to lower costs in order to cope with the reduced revenue. So of course this isn't a viable solution. This is counter-productive to the intended goal of more money for the poor.


So the government law for new taxes had some unintended consequences that were counter to their intended goals.

But lots of people will say that my proposed 83% sales tax is ridiculously high and unrealistic. No one would do that in America! Well that's what's basically being proposed. Democrats are trying to increase the minimum wage from $7.50/hr to $15. And for McDonalds that equates to 4 times more money than annual profits,[1] so the extra cost would have to be passed on to the customer. But as I argued above, that means lower sales precisely because of the higher cost to customers. And that means downsizing and fewer jobs which is counter-productive to the intended goal of more money for the poor.


But wait. Democrats have another idea.[3] Why not just take whatever profits there are and give that to the workers? 25% of the target is better than none of the target, which equates to a $1.83/hr minimum wage increase. But this doesn't work either because it means that the investors wouldn't get any return on their profits, so they'll pull out their money and invest instead in other companies that actually turn a profit. And that means no more money for McDonalds and they'll have to downsize and that means fewer jobs. Again this is counter-productive to the intended goal of more money for the poor.


But wait. Democrats have yet another idea.[3] Why don't we take half of the money from the greedy CEO who made $9 million last year and give that to the workers? Well, that's only $4.5 million, which comes to 1/10th of a penny per hour, which of course is ridiculous to even consider because its so small in comparison.[2] And that's not a viable solution because the CEO will resign and go where he gets paid what he's worth instead of half of that, and McDonalds will replace him with a less capable CEO, and that means less profits for McDonalds, and that means downsizing and fewer jobs, which of course is counter-productive to the intended goal of more money for the poor.


~~~ Edit 9/19/2013 ~~~

a friend said that my argument ignores that lots of non-US mcdonalds employees have much higher min-wage, so my math is off. she's right.

so i looked up their financials:

http://www.aboutmcdonalds.com/content/dam/AboutMcDonalds/Investors/Investor%202013/2012%20Annual%20Report%20Final.pdf


1. US, company-operated sales = $4.5 billion.

2. US, company-operated margins = $883 million. This is #1 minus costs.

3. US, company-operated operating income = $3.75 billion. That's #1 - #2.

4. US, number of min-wage employees = 500,000.

5. Suggested min-wage increase of $3/hr. [the friend suggested it]

6. Extra annual cost = $3 billion. That's #4 x #5.

7. Net profits after increase = $750 million. That's #3 - #6.

8. Percent decrease to profit = 80%. That's #6 / #3.

So my argument still works for the US. An 80% decrease of profits means that investors will pull their money out and instead invest in other more profit-producing ventures. That'll result in downsizing and fewer jobs in the US, which means that the suggested minimum wage increase of $3/hr doesn't solve the problem that its intended to solve.

~~~

[1]
  1. Suggested increase in minimum wage is +$7.50/hr.
  2. Number of minimum wage employees is 1.5 million (for McDonalds).
    • this is a wild guess from total 1.7 million minimum-wage and non-minimum wage employees
  3. Average number of hours worked per year per employee is 2000.
  4. Total extra wages annually is $22.5 billion. That's #2 x #3.
  5. Last year's annual profits is $5.5 billion, which is only 25% of the target #4, so its not enough money.

[2]

    6.  Half of the CEOs pay is $4.5 million.
    7.  That's $2.50 extra per employee per year. That's #6 / #2.
    8.  That's a wage increase of $0.001 per hour. That's #7 / #3.


[3] These aren't real Democratic positions. I made them up to illustrate the various ways that the wage increase could potentially be paid for and how they fail.

2 comments:

  1. kudos. Your argument is logical, sequential apt and it makes sense

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    1. cool. thanks. if you want to read more like that (and way better stuff), join this email list (me and lots of others talk daily here):

      http://groups.yahoo.com/neo/groups/fallible-ideas/info?yguid=344005930

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