Archives For Economics

NOTE: Though I am referencing an article on a conservative website, this is NOT a political post. It’s an ECONOMICS post.

I read this article this morning. In case you’re not familiar, Dan Price, CEO of Gravity Payments announced recently that he was going to set his company’s minimum wage at $70,000 per year. A noble goal, according to some. The media went nuts. Everyone was singing this guy’s praises.

Well, it turns out it wasn’t such a great idea.

Actions meet (unintended) consequences:

What few outsiders realized, however, was how much turmoil all the hoopla was causing at the company itself. To begin with, Gravity was simply unprepared for the onslaught of emails, Facebook posts and phone calls. The attention was thrilling, but it was also exhausting and distracting. And with so many eyes focused on the firm, some hoping to witness failure, the pressure has been intense.

More troubling, a few customers, dismayed by what they viewed as a political statement, withdrew their business. Others, anticipating a fee increase — despite repeated assurances to the contrary — also left. While dozens of new clients, inspired by Mr. Price’s announcement, were signing up, those accounts will not start paying off for at least another year. To handle the flood, he has already had to hire a dozen additional employees — now at a significantly higher cost — and is struggling to figure out whether more are needed without knowing for certain how long the bonanza will last.

Two of Mr. Price’s most valued employees quit, spurred in part by their view that it was unfair to double the pay of some new hires while the longest-serving staff members got small or no raises. Some friends and associates in Seattle’s close-knit entrepreneurial network were also piqued that Mr. Price’s action made them look stingy in front of their own employees.

Then potentially the worst blow of all: Less than two weeks after the announcement, Mr. Price’s older brother and Gravity co-founder, Lucas Price, citing longstanding differences, filed a lawsuit that potentially threatened the company’s very existence. With legal bills quickly mounting and most of his own paycheck and last year’s $2.2 million in profits plowed into the salary increases, Dan Price said, “We don’t have a margin of error to pay those legal fees.”

The author of the article sums it up nicely:

It didn’t work for two reasons. First, a business can’t survive when employees can’t generate enough value to give you a big enough return on what you pay them. And if they can’t do that because you paid them too much, that’s not on them. It’s on you. Second, people don’t appreciate what they haven’t really earned. You think they’re going to be grateful and loyal to you because you were so good to them. It doesn’t work that way.

I like this:

I discovered Arthur Brooks back when he came out with his book, “Who Really Cares?” His latest book, The Conservative Heart: How to Build a Fairer, Happier, and More Prosperous America*,
will be out next week. It looks like an interesting read.

Mr. Brooks was interviewed in this week’s WSJ. I liked what he had to say. Here are a couple of quotes for those of you who are not WSJ subscribers:

When he was a child, Mr. Brooks notes, one of four people lived on less than a dollar a day. Today, though we still have far to go, the advance of trade and a globalized economy has shrunk that figure to one of 20.

The liberation of hundreds of millions from desperate poverty ranks among the greatest success stories in history. But it’s a story that remains largely untold and mostly unheralded. In his new book, “The Conservative Heart,” Mr. Brooks puts it this way: “Capitalism has saved a couple of billion people and we have treated this miracle like a state secret.”

AEI aims to change that. “We should be shouting it from the rooftops,” he says. “If Beethoven were alive today, he would dedicate the ‘Ode to Joy’ to this miracle. In the very first verse of that poem—which inspired Beethoven’s Ninth Symphony—we hear, ‘Beggars become Princes’ brothers’! If this is so, it is because of free enterprise.”

Few today would deny the market’s success in literally producing the goods. For some, however, this is a paradox. It’s a paradox because, in this way of thinking, socialism has the higher ideals but fails in practice, while capitalism succeeds in practice even though it is based on greed.

Mr. Brooks believes these critics are limited by materialistic assumptions about wealth and its production. Capitalism, he insists, succeeds not because it is based on greed, but because the freedom to trade and do business with others is in harmony with our God-given nature. So he has no patience for those who fear the moral argument.

I wish we could get back to a country that emphasizes education and concentrates on teaching people HOW to succeed instead of constantly telling them that they can’t succeed without the government’s (the taxpayers) help. The pessimism is rampant, thanks to social media. Flip through a Flipboard magazine on the topic of Capitalism or Income and you’ll see what I mean.

*Affiliate link

Did you hear the news?

Non-farm payrolls increased 288,000 in April and the unemployment rate “plummeted” .4% to 6.3%. See this Yahoo! story.

At the same time the employment participation rate fell .4% to 62.8%.

In case you don’t know, the participation rate “refers to the number of people who are either employed or are actively looking for work. The number of people who are no longer actively searching for work would not be included in the participation rate.” (Source).

Here is what that rate has looked like since 1990:

Labor Participation Rate History (1990 - April 2014)

It’s dropped 2.9 percentage points since President Obama took office. It had dropped 1.5 percentage points during Bush’s presidency.

I understand some of the reason for this drop could be people retiring. Regardless, it makes the unemployment rate statistic almost meaningless.

While writing this post, I happened to see an AFL-CIO blog post about this news. They failed to even mention the labor participation rate. Why does this not surprise me?

Have a good weekend, everybody.

I have been (slowly) working my way through a book titled “Changing Texas – Implications of Addressing or Ignoring the Texas Challenge.” It’s a pretty dry read.

I came across this part that I wanted to share with you [brackets] mine:

1. The U.S. workforce is becoming more racially and ethnically diverse;

2. The racial and ethnic groups that are less well educated (e.g., Hispanics) are the fastest growing due to higher rates of natural increase and [illegal?] immigration;

3. The increasing rate of retirement of “baby boomers”–the most highly educated generation in United States history–is expected to lead to a drop in the average level of education of the U.S. workforce now and for the next two decades;

4. If these current population trends continue and states do not improve the education levels and graduation rates from high school and college for all racial and ethnic groups, the knowledge and skill levels of the U.S. workforce will decline;

5. If the knowledge and skill levels of the workforce decline, occupational achievement will be lower;

6. If occupational achievement declines, the income of the U.S. residents will decline;

7. If the levels of knowledge and skills of the U.S. workforce decline, more jobs will be exported off-shore;

8. As jobs are exported off-shore and U.S. residents’ incomes decline, the taxes paid by U.S. residents will decline; and

9. As taxes decline, revenue for state and federal support of state and federal of state and federal services will decline, including support for education.

This chain of interrelationships is dependent on the validity of three key demographic and socioeconomic trends:

1. The rate of increase in minority populations with reduced socioeconomic resource bases;

2. The relationship between the demographic characteristics of populations and the education level of the population; and

3. The relationships between education and income (both personal and household) and between education and poverty and other types of socioeconomic change.

Will jobs be exported or will people from other countries come to live and work in the U.S.? I have also read that basby boomers will most likely work longer because so many of them haven’t saved enough for retirement.

Either way, I do not like the sound of a less education society. I cannot see this as being a good thing.

This is just comical to me.

Venezuela Moves to Cap Prices, Profits

The cause for the inflation?

“The amount of bolívares in circulation rose 70% over the past year, a clear sign the government is printing ever larger amounts of money to stoke a slowing economy.”

So, the government floods the economy with new money, prices rise, and the government moves to cap prices. Pretty crazy, isn’t it?

From today’s WSJ (How Government is Making Solar Billionaires):

Welcome to SolarCity, SCTY -0.59% the latest booming green company that has never recorded a profit. The startup’s stock price has soared by 600% since its IPO last December—it closed on Monday at $57 a share—and spiked after the company announced a couple of weeks ago that it expects business to grow by 70% to 90% next year. Yet the company, based in San Mateo, Calif., and specializing in deploying rooftop panels, ended the first six months this year $61 million in the red.

Ordinarily, that sort of number might disconcert investors. But SolarCity’s business model is powered by government subsidies, which also fueled the 500% stock run-up and turn to profit this year of the electric-car maker Tesla. Steering both companies is Elon Musk.

In addition to being the chairman of SolarCity and CEO of Tesla, Mr. Musk is the largest shareholder in both companies. The increase in their stock prices has raised his net worth by more than $5 billion over the past year.

Isn’t that lovely?

Yes, I am aware that the government also helps other industries. The point is the government really should get out of all business creation and promotion. The government should not be deciding who is or is not successful. If your idea cannot succeed in the market place on its own, then you need a different idea. Mr. Musk has the U.S. taxpayers to thank for his wealth.

Discuss among yourselves while I go paint the master bedroom…

PS – If you can’t read the link, email me (JLP – at – and I’ll get you a copy.