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Wednesday, November 11, 2015

Innovation Is A Bitch

I was working in my store late last night, listening to the Republican debates with one ear.  Somewhere in the chatter, I heard a moderator make mention of the protesters that were outside the hall that was holding the debates.  Something about the $15 per hour minimum wage.

Coincidentally, a good friend had sent me this link earlier in the day - just to piss me off, I'm sure ;-)

The article discusses how this insistence on getting paid for more than you're worth results in you being replaced.  By a machine.

It is a concept that is lost on these, "I DESERVE more money!" soft-heads - the concept that virtually any job can be replaced by a less expensive alternative when push comes to shove.

And this is a big, aggressive shove.

Innovation rears its ugly head whenever government, "good intentions" force businesses to adopt practices the Nanny State feels are worthy.

First, a very simplified explanation on how a business works.  While every business and industry are a bit different, the following concepts apply:

Cost of Goods Sold:  The cost of the raw materials needed for whatever you sell.  For instance, for a burger joint, that might be beef, tomatoes, buns, lettuce, mayo, pickles, potatoes, cheese, onions, etc.  Let's say for this industry, this runs 30% of total income.

Operating Expenses:  This is the cost to keep the joint running.  In our example above, it would include rent, utilities, grills, fryers, maintenance expense, insurance expense, legal expense, advertising, taxes, fees, permits, inspections, etc.  Let's say this also runs 30% of total income.

Employee Expenses:  The cost of your employees to work for you.  It includes wages/salaries, benefits, paid vacation, family leave, state, local and federal employment taxes, payroll expense, etc.  Again, let's put this at 30% of income.

Profit:  This is what the owner gets to keep.  If it's a publicly traded company, any dividends paid come out of this pile (dividends are not allowed to be deducted as an expense of the company).  Let's put this at 10% of total income.

Profit, on average, is actually lower than that.  It averages 7.5%.  Now, think about this:  For every $100 in sales, the company keeps $7.50.  Here in California, on average, the local and state sales tax authorities would get paid $9.00.  This is on top of the fees, permits, licenses, et al, that are included in Operating Expenses.  Any wonder business are fleeing California?

Source:  American Enterprise Institute

It's a delicate balance for a business owner.  If expenses in one category goes up, that money has to be made up somewhere.  The owner can either raise prices to cover the new expense, make less profit, or cut other expenses.

Raising prices is very risky, especially in a competitive industry, or in a crappy economy such as we're in.  If your competitors don't also raise prices, you go out of business because you can't pay your bills.

Making less profit is the vehicle of choice for most non-business owners.  Unlikely to happen.  We invested our hard-earned money, and we expect a decent return on that investment.  Seven and a half percent doesn't seem out of line to me.  If you are willing to take the risk by investing your own money, and taking a lower profit, go right ahead and start your own business.  Also, if it's a publicly traded company that pays dividends, that means a drop in those dividends that are paid into your 401(k) or other retirement accounts.  Ouch... feel the burn?

That leaves us with cutting other expenses.  Believe it or not, most business owners cut their employee salary/wage costs as a very last resort.  We'll try and source lower costing raw materials.  Maybe cut out some training or educational budgets.  Perhaps a cut in the advertising account.

These are usually short-term fixes.  Eventually, you've cut to the bone, and the hard choice of reducing employee expense gets made.

The consequences of requiring a burger joint to pay $15 an hour to an employee with $6.50 an hour skills comes home to roost.

So they innovate.  In this case, as was noted in the linked article above, it means buying a machine that can make a perfect, and perfectly consistent burger at the rate of 360 burgers an hour.

No bitching.
No moaning.
No salary.
No employment taxes.
No payroll service.
No sick pay.
No vacation.
No disability insurance.
No HR department.
No nothing, other than the depreciation expense of a fixed asset that simply needs raw materials dumped into a hopper.  They'll pay that one hopper-filler guy his $15 per hour.

I'll give you a real example from my business.  The minimum wage in California is $9 an hour.  We had an opening for a sign waver (you know, someone who stands on the corner waving a sign to attract business).  For us to get a decent person, we had to pay a 22% premium over minimum wage ($11 an hour) to the high school student who got the job.

The amount of new business he brings in by waving that sign justifies the premium we paid.

I guarantee you, if California makes me pay this kid $15 an hour, he will be replaced by a machine.

So, for a one-time cost of $840 - about what this kid makes in one month as a part time employee - he is out of work.

My employee loses the experience that comes with going to a job every day, even when you don't feel like it.  He never gets to learn the work ethic.  And if he's like me, my first job taught me that I did not want to be stuck in a dead-end job working for minimum wage (like many of my older co-workers were stuck).  It helped incentivize me to go to college so I could earn more money.

The state and city both lose, in at least two ways.  First, no employee taxes are collected.  Secondly, this kid is now more likely to join the growing line of recipients for government welfare programs.

Great plan, you idiots.

Throw Obamacare at us, and we reduce hiring levels or working hours.  Make us pay for more than the value of our employee's skills, we replace them with machines.  Pile on taxes and fees to pay for your socialist Nirvana, and we shut our doors and open them in another state - or another country - that understands and appreciates businesses.

Call it greed, selfishness or gluttony.  Oh stop, I'm getting all teary-eyed.  I call it survival.  I will risk my time, experience and capital to make my life better.  Will you do the same?  Or do you just want to force me into paying for your desired lifestyle?

Get in my way, and I'll innovate around your blood-sucking, self-entitled, me-me-me ass.  Now step aside.... I've got work to do.

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Copyright 2015 Bison Risk Management Associates. All rights reserved. Please note that in addition to owning Bison Risk Management, Chief Instructor is also a partner in a precious metals business. You are encouraged to repost this information so long as it is credited to Bison Risk Management Associates.


Adam said...

Great article.

The market will always find a way. Look at all the gluten free stuff now. Or the foods that are taking out high fructose corn syrup. No government regulation, just people saying I wont buy this with that in it or without this oprion. So the consumer won. Same concept. You cant realistically regulate businesses to do stuff that makes no sense.

Chief Instructor said...

Adam, exactly, the markets will always deliver what people want, not what they're told they should have by some central planning administration. THAT has never worked, and never will.