I’m on vacation this week so this will be more of a blog I free write than my usual research papers with links disguised as blogs. Meaning, when my one year old is crying in the next room, I don’t have 10 minutes to hunt down a source. That being said, without legit sourcing for this, take it as a blog and my opinion based on writing about this stuff for over 15 years. I see the same arguments wrapped in different paper and presented with a different stench.
Those who want workers to “just get paid more” use a straw man argument of corporate greed. It’s not a math problem. If only the top employees got paid less, they can then distribute this to the working man. If only companies decided they can survive with 90% less profits, we can make our employees happy.
The real world doesn’t work like that, and I’d like you to get a cup of coffee and explain how some of this works.
First, I manage 10 managers and 120+ employees in my real job, which I never talk about here for obvious reasons if you have seen my LinkedIn profile. I also tend to stay away from anything political in public – however, I would address this more under the economics umbrella, and I’d like to stay in that swim lane for the remainder of this piece. I have voted on both sides of the isle in the past, so I see things through both of your lenses.
Second, I have a business school degree spanning over 4 years of all of the fun classes of economics, accounting, marketing, etc. So, while I’m not a wall street trader, I have had the classes to at least have the discussion here to try and educate you.
Third, many of you want to treat symptoms rather than the root cause. I feel I have identified the root cause of income disparity in this country, and with that, I’d ask you to focus your efforts at the root cause and not the brainwashing you’ve been led to believe.
Starting a business
The one class I never took was a class called entrepreneurship. This class teaches you about starting a business, buying on leverage, creating shares, value, etc. I never thought in my early years I’d start a business, as I wanted to work in the FBI, go into the military, or become a lawyer after West Point and then join the military. None of that sort of panned out, so I went into IT halfway through college. By the time I got to B school at Villanova to start, I had been 3 years into my IT career and entrenched in this as my path forward.
The first thing they teach you, on day one, minute one is this…
“You are in business to make money”.
One thing people completely disrespect in this “greed” narrative is that I believe many are focused on the highest paid CEOs of large corporations, but if you look around and see the businesses that are hurting, you are dealing with local restaurants and shops. These small businesses can be lucrative, but many just barely scrape by and struggle to make ends meet working 18 hours a day for many years. I put in the 12 hour days in IT for years in server rooms, and by the time the interest of starting a business came into my mind, having a wife and children did not seem congruent to a life of 18 hour days.
Still, many reading this have no idea that something like 90% of small businesses fail within the first 5 years of existence. Meaning, there is a massive risk of loss of capital to go into business for yourself, AND hire other employees.
Lesson 1 of economics – “something is worth what someone else is willing to pay”.
This is the ultimate constraint of a small business. You have goods to sell, but you cannot charge too much or else your competitors will beat you on price. If you charge too little, you cannot make enough to stay in business.
COVID completely decimated small businesses in this country by restricting the number of people who could come in to the establishment, IF they were even allowed to be open at all.
You then had elected officials essentially ruining small businesses everywhere. Many who had saved for 20 or 30 years had seen their savings erode while they tried to keep the lights on. Now that things are opening up again, they are competing for resources to hire people back.
At which you then see no one willing to work at the wages they used to pay.
The OBVIOUS solution is to “pay people more”.
Supply and demand – and price ceilings and floors
Going back to that same economics class above, we discussed the dangers of price ceilings and floors. Essentially, by artificially setting these things, you risk oversupply or lack of supply. Supply and demand fundamentals, left to their own devices, solve almost all of these problems.
What you are seeing is a lack of supply of workers that get paid x. So the obvious solution is to increase the wages to attract more people in. The problem is, these workers have had artificial wages given to them by generous unemployment benefits. These benefits paid them more NOT to work, than to work at all. Many, including myself – who identifies as libertarian – understand the massive issues our country faced and the extraordinary TEMPORARY measures that needed to be taken to keep from the wheels coming off.
That time is over.
Now, many states are stopping the extra benefits ahead of Sept. What this does is, effectively force people back into the labor force. Soon, we will see a lot of people here looking for work at the rates small businesses are willing to pay.
However, in the meantime, I did see an ice cream shop hire someone at $15 per hour for workers. If you are in NYC and you need to find employees, I get it at $15 per hour, but in bumfuck Idaho, you don’t need $15 per hour for some high school kid to do this part time. IF the shop owner WANTS to hire people at $15 per hour, so be it. But, now you need to assume the rest of his staff was making a lot less than that, and now they all want raises or threaten to walk.
What you, assuming corporate greed, do not understand is that this money is not Federal Reserve Magic Fairy Dust – these small business owners have a mortgage and kids – and they cannot take a pay cut. So these wages are paid, but only if they can pass these costs on to the consumer – you. So you want to applaud an ice cream shop that pays $15 per hour. Great. But here’s what you aren’t seeing. Those ice cream cones get way more expensive. The average ice cream cone for a large goes from $3.50 to $6. Most people that came in to the ice cream shop see how expensive this is, and they go to visit Steve’s ice cream shop down the street that charges $3.75.
The ice cream shop then eventually has less sales. This then leads to them cutting staff. Eventually, the ice cream shop goes out of business because they can’t pass the costs on to the consumer any more. The consumer has seen this inflation and decided not to go out.
You want to demonize small businesses for not paying more, but they can’t, or risk going out of business.
Who to blame?
Maybe you don’t blame the small ice cream shop. Maybe you like “corporate greed” as your straw man and want to lash out at CEOs. This is relatively fair play, but I want you to consider that these corporations that make billions of dollars per year then need to have the best management team they can have. Most of you reading this are in to my gold and silver miners with me – and what is the first thing you look for? A good management team.
Now, I ask you this. With 3,000 or so mining projects worldwide and a handful of teams that are “elite”, this supply and demand formula works in favor of the employee. Meaning, if you want to lure a Ross Beatty to run your mining company as CEO, first you’d have to lure him out of retirement, but then you’d probably have to compensate him amongst the best in the world. Why? Your 5,000 or 10,000 employees only have jobs because of the strategic direction he can take the company and his ability to sell.
Many don’t get this. IF you have a company like Pfizer (I worked there briefly as a contractor on a project), they have 175k employees. You need to hire the most qualified executives in the world to run this. Sure, the lowest level employees are DOING the work, but only because the highest level employees set the strategy, made the deals, bought the equipment, and hired the right people to invent things. Then, they had to navigate difficult FDA processes, price their products right, and be competitive with thousands of other pharm companies.
There are only a small handful of people in the world who can do this job. If you want to go with the B squad, it’s possible you lose contracts, miss opportunities, and in a few years, reduce your company to 100,000 employees after massive layoffs.
The right people at the helm make all of the difference when it comes to setting the table to employ people, and they aren’t cheap.
So you want to blame CEOs for being greedy. OK. There’s SOME fairness to that, but it’s the company’s directors who are the ones making the compensation offers to lure in the best of the best. They do this because they are beholden to the shareholders, and the shareholders think….
“you are in business to make money”
So the deal here is the CEO may make $5 million, but maybe because he is at the helm, sales over 5 years go from $20 billion to $40 billion. The next-best CEO would have needed $3 million. For $2 million more, you increased sales by $20 billion. This is the part of the whole thing most miss.
Many of you like to look at the news and just fire our quick answers as band aids. It’s how the US is now structured. Rather than critically thinking at the root cause issue, it’s now in our nature to do field medicine to keep the shit going. Do the quick fix. Don’t think. Blame straw men rather than really look under the hood.
I feel the problem today with income disparity is rooted in failure to correctly report inflation over the last 40 years. At face value, you may have the Jim Rickards of the world completely disagreeing with me. The computer I wrote this on is deflationary because it does a lot more than a computer in the 1980s. The car I drive is deflationary because it has a lot more bells and whistles built in. I call bullshit on all of it.
I wrote in depth the other day about this here, but I’ll give you the cliff’s notes here. I believe, strongly, over the last 40 years there has been more official inflation than has been reported. Meaning, the government will tell you it’s been 2% per year for 40 years. This low inflation then allows interest rates to come down. It’s very low risk, in that case, to buy bonds because inflation is low.
Over those 40 years, this artificially inflated the price of bonds, treasurys, etc. These low rates then allowed businesses to rapidly expand using cheap money. It also inflated housing prices, because all anyone cares about is the monthly payment, not the principal. If you can borrow more cheaply, this inflates housing prices. This is the net effect of 40 years of super low reported inflation:
- Low interest rates allow businesses to borrow cheap. This low cost of capital allows for rapid expansion of large corporations. This also allows them to finance inventory cheaper. Because of this, these large corporations could more easily put small businesses out of business. Think Home Depot and your local hardware shop. Your local hardware shop had to close because their prices were higher. Cost of labor, cost of rents, cost of inventory. Bigger businesses were more efficient with capital and drove small businesses out of business.
- This had then artificially increased the value of houses. A house you paid $200k for was now worth $600k. Many people sold or borrowed cheaply against it.
- Overall, more money in the system has inflated the stock market to record highs time and time again. PE ratios are at an all time high.
This “pump” over 40 years had resulted in your year over year costs going up between 5-10%, yet CPI was reported at 2%. This is where I will veer off of course from Rickards.
My wife is a county employee and we would see her pay check go up 1-2% every couple of years, at best. Yet we’d see parking go up, gas go up, groceries go up, and medical costs go up year over year 8%. The plans also would have higher deductibles and less benefits. Those who were in this career would also see rents go up 3%, and perhaps housing go up even more. Doing a job like this for 40 years actually has you losing money year over year, for years on end. Most in her profession now have to work second and third jobs.
This is what Rickards misses. Completely. Love his writing. But he wants to get the charts out and look at the macro picture and make an argument that this is all deflationary because my wife uses a computer that is deflationary as opposed to 25 years ago they did it by hand. He is missing the point that MOST Americans, Year over Year, are getting poorer.
The M2 money supply is increasing, as housing prices increase due to cheap money, more money is created out of thin air to lend out.
This money is created in the form of debt. Houses are bought on credit. Businesses expand on credit. And all of this credit exists at low rates.
What most also don’t see is those who benefit from this lowest rates are the richest of the rich. Most of these people risked all to build their fortunes. And this meant 18 hour days and navigating through local ordinances, laws, regulations, to then rise to the top.
IF the rates had actually existed AS they were designed to do, rates would have stayed higher. This cost of capital would have then been higher, and this higher risk to borrow would have slowed growth. More people would have saved rather than spent.
The rates are sort of the brakes of the economy, and if functioning properly, keep everything working correctly. When the rates are juked artificially low, perhaps on false inflation data, this doesn’t put the brakes on. This allows the rich to get much richer, and then forces the lower to middle class into poverty. It’s the boiling frog thing. The water temperate rises 1 degree per year, so no one sees the boil as it is happening.
What WILL happen with this whole thing, is that at some point, and soon, the people will realize, as a whole, they have been lied to about inflation. This will cause many to sell. Nation states will see this, and they will sell. This will drive rates up to the point that the government has to heavily, heavily, heavily intervene to keep rates 100% fixed low to avoid default.
While you think paying someone $20 an hour to flip a burger is an answer, it isn’t. The people that you are hiring to flip a burger then have rising costs, as everything around them gets more expensive. Their NOMINAL rate goes up, but they continue to get poorer and poorer year over year because the root cause is not fixed.
I believe that David Hunter’s global bust will happen – maybe not on his timeline – but I believe at some point, everyone realizes at the same time inflation is massively high and get the hell out of bonds at 1.2% to chase yields. This yield chasing is the pin that pops the bubble, ultimately.
Fix the root cause. Don’t paint a turd.
You know, some feel a UBI is the answer. There is a problem with this thinking. First, as you give UBI to everyone, it needs to be paid for, somehow. This is socialism wrapped in a pretty bow, and as you get everyone this $1,000 per month, and don’t fix the root cause, you are just seeing higher and higher prices and need more UBI. The second issue here is you are disincentivizing people from working for a living. In this country, you work or you starve, and there’s a net there for people who are disabled or CANNOT work. We already have this system. For everyone else, the system is get off of your ass and be productive.
When you give a UBI to everyone, you are artificially adding monetary units, that need to be paid for by someone. You just point to evil corporate greed, but again, these people will simply pass these taxes on to the consumers…which increases inflation.
THE solution is a band aid rip. Fix inflation first by reporting it correctly. I feel the best way of measuring this is the Chapwood index, which tracks the 500 most paid for items in 25 cities. IF you can acknowledge inflation is there, you can then allow interest rates to adjust accordingly. The problem is, doing this bankrupts the government. So your UBI only contributes to prices that spiral upwards. And, anyone with means starts to look for other places to be incorporated, move offices, find cheaper labor elsewhere. You then have massive amounts of unemployment, and no amount of UBI would be able to keep up with the ever-increasing costs.
We are in a debt bubble the government cannot pop. A day of reckoning is coming when everyone collectively realizes that the interest rates are way too low by orders of many magnitudes.
When this pops, I can tell you the only way out of this is to have the government slash costs by 95%. It’s the only way out of the bust.
Once spending is controlled, rates can legitimately rise and we begin the 30 year process of trying to pay the debt off – but this allows for people to start saving again. It allows for the slowing of growth, in which value can be discovered in a free market again, rather than the heroin needle of cheap cash to expand at break neck speeds.
GDP and growth have been what politicians have been measured on, and those days are coming to an end. Soon, it will be who can do more for less. And massive cuts are coming, at some point.