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JakilaTheHun (99.93)

Why Starbucks Can't Pay Its Employees More

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February 19, 2012 – Comments (38) | RELATED TICKERS: SBUX , WMT , MCD

From Malthusian Nectar

 

Today, I encountered what I would consider to be a rather misguided article by Business Insider writer and CEO Henry Blodget.  Blodget’s writes:  “Dear Wal-Mart, Starbucks, and McDonald’s:  How Do You Feel About Paying Your Employees So Little that Most of them are Poor?“   He argues that the firms are wildly profitable and can afford to “share the wealth” by paying their employees more.

Unfortunately, we know from the science of economics that it’s not that simple in reality.  In fact, such a scheme would not achieve its objectives.

Let’s start with Starbucks.  I have no idea how much a Starbucks barista is paid, but let’s say for simplicity’s sake it’s $10 per hour (and no tips).  Starbucks decided to graciously raise the wage to $20 per hour.  Baristas become wealthier as a result, right?  Well, the answer is, “it depends.”

Actually, the most notable result of this wage increase is that the demand for jobs at Starbucks increases dramatically.  This is simple to understand — people are more likely to want a higher-paying job.  Now that Starbucks is willing to pay $20 per hour instead of $10, a data entry worker making $12 per hour, or a secretary making $18 per hour might suddenly become interested in the Starbucks job.

 

Meanwhile  the supply of Starbucks jobs is likely to decrease.  This comes from the fact that Starbucks will have to raise prices in order to increase wages.  As a result, fewer customers will demand Starbucks coffee and fewer baristas will be needed.  We could, of course, argue that Starbucks decides to absorb the massive hit in profits voluntary; thereby, not increasing prices.  I’ll get to that alternative argument later, but for now, let’s stick with the more logical explanation that they are required to increase prices.

Now, the question becomes, has anything improved?  On the face of it, the answer is yes, because Starbucks employees make more money.  In reality, the answer is no, because Starbucks merely lowered the supply of jobs and temporarily increased market labor wages.  The latter might initially sound desirable, until we realize who it actually harms.  Since other businesses have to compete with Starbucks for labor, they will have to raise wages to compete.  For instance, our $18 per hour secretary might demand an increase to $22 per hour, if she had an alternative of working at Starbucks for $20.  In a simple example, since secretarial work likely has a higher level of skill required, she would be able demand more than $20 per hour.

Higher wages for everybody — it’s great, right?  Well, maybe not.  Let’s say the firm that hired the secretary was having a rough go of it.  Now that they have to pay their secretary (and other lower-level employees) higher wages to compete, they might decide it’s not worth it to continue, and shut down the business. So not only does Starbucks reduce the number of jobs at its own stores (via lower demand for their coffee at higher prices), but it actually results in jobs being eliminated at other businesses.

In other words, all Starbucks did by raising wages was destroy jobs.  No economic wealth was created.  It merely arbitrarily rewarded those who were able to get the limited number of barista positions and arbitrarily punished those who lost their jobs as a result.

So a few people became somewhat wealthier, while a larger number of people became poorer; sometimes much poorer.  Eventually, Starbucks overpaying for its employees would probably result in competitors like Caribou Coffee gaining more market share and driving Starbucks locations out of business; thereby, driving the market wage for baristas back down towards $10 over time, regardless.  So nothing was actually achieved by this entire endeavor, except for a temporary increase in unemployment and a somewhat arbitrary redistribution of wealth between lower-wage workers.

But What About Shifting Profits Over?

Now, let’s shift back to Blodgett’s likely counter-response that he’s merely advocating that more of Starbucks profits go to employees, so a price increase would be unnecessary.  Unfortunately, this is not a convincing argument, either.  The problem is that all the investors in Starbucks stock would begin selling off their holdings. Since Starbucks’ profitability would plummet, the value of the stock would fall significantly.

Over the past three fiscal years, Starbucks’ profit margins have fluctuated from 4.0% to about 11.0%.  In my example above, I doubled Starbucks’ wages and it’s probable that the company would lose money in this scenario.  But even if we moderated the example, so that Starbucks’ profit margins fell to 0.0% to 7.0%, the implied value of the stock could fall over 50%!  Suddenly, Starbucks’ seemingly manageable debt burden starts to seem much, much larger with fewer cash flows to service it. Moreover, fewer people want to invest in Starbucks’ equity, so the company has a lesser ability to tap the capital markets.

As a result, Starbucks’ costs of capital would increase significantly, making it more difficult to finance their own investments.  This includes the opening of new stores internationally, as well as capital improvements to their existing US stores. This makes Starbucks less competitive with Caribou, Peet’s, and other chains; and their stores become less attractive to patrons.  This results in a likely downward spiral for Starbucks, which still ends up with the same result as above:  competitors eventually drive the market wages for baristas back down to $10.

To use two cliches in the same sentence, there’s a reason economics is “the dismal science” and it’s because “there’s no such thing as a free lunch.”  What Blodgett fails to understand is that there’s a reason that Starbucks’ employees make the wages that they do and it’s all about supply and demand.  A Starbucks barista is a relatively unskilled occupation, so much of the American populace is capable of performing the duties of the job with little to no training.  This means that wages stay relatively low.  Wages tend to only be high for skilled occupations where there’s a much lesser supply of labor and there’s more value created.

Blodgett’s proposed solution does not change the supply and demand dynamics; nor does it create more wealth through innovation.  It merely tries to redistribute wealth; but the redistribution fails to achieve its desired objective because the market will simply push back towards the supply-demand equilibrium.

How to Increase Wages

There are only a few noteworthy ways to increase real wages in this scenario:

(1) Starbucks innovates, thereby lowering capital costs, and increasing employee productivity. This results in higher wages for Starbucks employees, (However, it might also result in fewer jobs at Starbucks, since the innovation could require less labor.)

(2) Starbucks offers its employees equity compensation.  Since equity is higher risk, this form of wage tends to have a higher return over time, but it’s also less stable and many entry-level laborers (of the type that work at Starbucks) can not afford this risk.

(3) Technological innovations and productivity improvements in other areas of the economy increase the overall wealth in the United States, thereby creating higher-wage jobs, which “lifts all boats”; including Starbucks’ wages. This is probably the most realistic.

There are of course ways that individual employees could showcase their value and demand higher wages.  At Starbucks, that might include upselling other items, or convincing customers to move into higher-margin selections.  Or maybe a barista shows a knack for management, and moves “up the ladder”, therefore demanding higher wages.

Overall, however, the basic lesson here is that redistribution of wealth in ways that violates market principles never achieves the desire objective.  If Starbucks tried to pay higher wages, it would simply become less competitive and the “invisible hand” would tug things back towards their natural equilibrium.  That’s why Starbucks can’t pay its employees more.

Of course, if one is really concerned about the low wages of Starbucks baristas, there is one easy solution to this problem:  the next time you go to Starbucks, you can tip your barista more.

38 Comments – Post Your Own

#1) On February 19, 2012 at 9:33 PM, fdfpro (< 20) wrote:

Interestingly, sophisticated progressivists understand this argument all too well.

 

http://www.nytimes.com/1997/06/22/weekinreview/in-principle-a-case-for-more-sweatshops.html?pagewanted=all&src=pm

 http://www.slate.com/articles/business/the_dismal_science/1997/03/in_praise_of_cheap_labor.html

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#2) On February 20, 2012 at 9:08 AM, devoish (98.25) wrote:

Double a "barista's" pay? Why not use the real numbers from the TMF website?

You have 149,000 employees, and the company spent $555,000,000 rewarding investors through share buybacks, plus $389,000,000 rewarding investors with dividends.

$944,000,000/ 149,000 is $6335/year that could be spent on something other than investors. Lets call that something employees.

It is really only a matter of managements choice whether to reward themselves as investors instead of employees. 

You offered this hope to to Starbucks employees;

  (1) Starbucks innovates, thereby lowering capital costs, and increasing employee productivity. This results in higher wages for Starbucks employees, (However, it might also result in fewer jobs at Starbucks, since the innovation could require less labor.)

Starbucks employees would be foolish to believe that the choice to reward investors will change. Under the current facts, if we all sweep a little faster, somebody will lose their job not get better pay.

 (2) Starbucks offers its employees equity compensation.  Since equity is higher risk, this form of wage tends to have a higher return over time, but it’s also less stable and many entry-level laborers (of the type that work at Starbucks) can not afford this risk)

For simplicity's sake, lets say that your assumption of $10.00/hour is correct. I think most Starbucks employees could afford the risk of $10.00/ hour plus equity compensation. I agree that $10.00/hour less equity compensation would be a pay cut through the addition of risk to their income. But once again, there is executive choice involved. Referring back to the actual balance sheet, in addition to buying back $555,000,000 worth of shares, executives issued $235,000,000 worth of shares to someone.

(3) Technological innovations and productivity improvements in other areas of the economy increase the overall wealth in the United States, thereby creating higher-wage jobs, which “lifts all boats”; including Starbucks’ wages. This is probably the most realistic.

If I am a Starbucks employee, and the executives just rewarded investors with $555,000,000 in share buybacks instead of rewarding me with a pay increase or bonus, I'd be pretty pissed off that my work did not lift my boat.

Since it is clear that Starbucks management is already not choosing to "lift all boats" with company profits, the employees might notice that management and investors are actually standing on their shoulders as the tide comes in around them.

Best wishes,

Steven 

 

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#3) On February 20, 2012 at 11:16 AM, JakilaTheHun (99.93) wrote:

 If I am a Starbucks employee, and the executives just rewarded investors with $555,000,000 in share buybacks instead of rewarding me with a pay increase or bonus, I'd be pretty pissed off that my work did not lift my boat.

And you'd be completely free to quit. 

That's the great thing about the American economy, Devoish. If you don't feel as if you're being compensated enough, you can leave, and seek out greener pastures.  Meanwhile, someone else with less income-earning potential might be very happy to take your spot. 

 

If you really believe the employees are undercompensated, Devoish, I  gave you a solution --- use your own money to provide a greater tip for your service.   It's completely voluntary and doesn't harm anyone other than yourself.

I know that you would prefer that all your "good deeds" be done with other people's money, but it would be quite enlightened of you to actually live by the principles you extoll.  After all, if you believe the employees are undercompensated, is it really fair for you to buy goods that are 'artificially cheap', because of the 'undercompensated labor'?  

It would be interesting if you lived by your own standards. 

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#4) On February 20, 2012 at 12:02 PM, PeteysTired (< 20) wrote:

Steven -

I think you are onto a great business idea.  "Stevebucks'.  You charge the same price for your food and drinks, but pay your employees more.  You also don't have to issue shares since you own everything.  I like this idea.

Then you can branch out into retail.  "Stevemart"  Rinse and repeat.

Onto, gas stations, movie theatres, fastfood.... 

 

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#5) On February 20, 2012 at 12:11 PM, Valyooo (99.46) wrote:

Pete,

 With such an obvious idea, I am surprised he has not done so already!  I mean, it is not too hard to raise the money to start a big business like that right?  All you have to do is go on a roadshow and say "Hey potential investors, please fund my business. Now, I am not going to be able to return anything on your investment...but our employees will LOVE you.  Isn't that more rewarding?"

 Genius!

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#6) On February 20, 2012 at 12:24 PM, TheDumbMoney (44.09) wrote:

Jakila's argument is perfectly valid, and basically comes out of a first year microeconomics textbook.  I would note a few things though:

1)  Jakila says, "we know from the science of economics that it’s not that simple in reality".  This is an incorrect statement.  Many like to portray economics as a science.  It is not.  Physics is a science.  There are immutable laws of physics.  Economics is a social science.  This is not to say it has no laws.  But because they are ultimately based on assumptions about human behavior, which is variable, it is by no means a science in the way that physics or math is a science.  Now maybe one day even as to physics and mathematics, some current theories about multiple universes and multiple and shifting rules of even physics and math will be discovered.    For an excellent demolition of (left wing) social science mumbojumbo, by an actual scientist, as written about by a financial analyst, see here.

2)  As with much of economics, many assumptions are made above, not necessarily incorrect assumptions, but many assumptions.  Let us count them:

a)  Assumption 1:  "...most notable result of this wage increase is that the demand for jobs at Starbucks increases dramatically"  -- that is almost undoubtedly a correct assumption.

b)  Assumption 2:  "...people are more likely to want a higher-paying job."  This is true in the context of a single job -- if you pay more for a identical job, people are more likely to want that job, which is why assumption 1 is almost undoubtedly correct.  But as a general statement it does not really stand up to scrutiny -- it depends upon the person.  While it may be true as a whole, and of Jakila (and me, it is by no means universal).  Many people deliberately choose jobs based on prestige factors, or altruism.  I have friends who went to law school with me who could be making multiple hundreds of thousands of dollars per year, but who choose (much) lower paying "public interest" jobs because they believe, rightly or wrongly, that they are changing the world.  Many teachers deliberately choose a lower-paying profession.  Many people choose a lower-paying profession (or a slightly lower-paying job in the same profession as another) because the hours are better.  Many who serve in the army are deliberately choosing a lower-paying profession.  I have friends from high school who signed up after 9/11 because they wanted to serve their country, even after college, even though pay is relatively lower than what they could have earned in the private sector given their skills.  Some people, particularly those who go into the arts, deliberately choose a low (or no) paying job on the hope that it years down the road great prestige or earnigns will accrue.

c)  Assumption 3: "Since other businesses have to compete with Starbucks for labor, they will have to raise wages to compete."  There are actually a number of assumptions embedded here.  First, perfect sharing of information is (as if very often the case in economics) incorrectly assumed.  The farther out in time one goes, the better information is shared.  But even in the internet era, information-sharing is far from perfect.  Second, the basic statement is likely flawed in an environment where unemployment is as high as it is.  Those "other businesses" can very likely fill what they need from unemployed people without raising wages if their secretaries leave to become barristas.  Third, if one assumes they cannot do so, then that basically boils down to an assumption that the unemployed people are basically incompetent idiots.  As many of these people were gainfully employed prior to 2008 or 2009, that is likely false.  More broadly it highlights the fundamental difference between so-called fiscal conservatives and fiscal liberals:  fiscal conservatives and libertarians tend to assume people fail permanently because they are incompetent, whereas fiscal liberals tend to assump people fail temporarily because of bad luck.  The truth, in my view, is unknown, but is likely that there are large and unquantifieable (or at least unquantified) groups in both categories.

 d)  Assumption 4:  "This results in a likely downward spiral for Starbucks,..."  The scenios chosen of course depend upon a sudden shift taken at the time of existing capital, debt and equity conditions.  This is in itself a simplistic scenario, as Jakila himself highlights.  But this result is not entirely clear to me.  The perfect example is the Costco/Walmart comparison.  For years, Costco has famously paid its (low-skilled) employees better than Walmart has paid its workers.  There is no-reason from the textbook economic perspective why Costco should have to do this, or why this should be at all beneficial to Costco.  Yet Costco has thrived because it has made other tweaks to its business model, and because its very aura of generosity attracts more people to its stores, and more investors.  That highlights a further assumption above:  Jakila assumes no additional people would frequent Starbucks stores precisely because they were paying their baristas more.  That may be true in Texas -- it probably is.  But it emphatically is not true in Seattle in San Francisco, where, in fact, there are legions of hipsters who probably would never today set foot in "evil corporatist Starbucks" but who used to when it was smaller, and who would potentially patronize it more if it institited a milder form of this policy, and more importantly if it advertised it.  

That highlights another such assumption: that such a policy, in a milder form perhaps, would not in fact actually be a form of advertising, in the same way that certain corporate charity activities should really be construed as a form of advertising designed to draw a certain type of liberal consumer to stores.  Often this sort of thing boggles the mind of conservatives, perhaps rightly, but companies like Whole Foods and Costco have done very well becuase they take advantage of liberal people who really and truly will pay more for the privilege of shopping at a store that they perceive to be more "socially conscious" or progressive.

This highlights the fundamental flaw in the entire scenario presented:  Jakily chose a consumer company.  These things would be vastly more likely to be true of a widget company like BASF or Magna International that sells things to other companies, who could not give less of a sh!t about this socially-conscious stuff.  

But these sorts of textbook scenarios do not necessarily work as well with consumer-products companies.  Why that is highlights the extent to which economics is a social science, not a science, to return to my earlier point.  In the 1950s, and still today in certain areas of the country, everything Jakila says would be much more true.  I still tend to believe Jakila is "more right than wrong" here, just note.  But it is also important to note the assumptions made, and the extent to which changes in human behavior can change economics. 

Starbucks is particularly interesting and notable in this regard: as it has done things like choosing more expensive "sustainable" and "green" coffee beans -- which is itself somewhat irrational, and a cost-increasing move similar but not the same as paying higher wages, its results have improved (though not only for this reason), but in part because in many more so-called "progressive" locations, where it has a very heavy presence, many consumers have returned to the stores. 

All best,


DTAF 

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#7) On February 20, 2012 at 12:24 PM, Mega (99.96) wrote:

Most of you are missing Blodget's point.  Employee compensation versus profits is NOT a zero sum game over the long term.

Obviously, the dynamics vary for each business, but every CEO should consider the potential of increasing compensation to attract talent and increase productivity.  It can be a win/win in building the value of the business.

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#8) On February 20, 2012 at 12:25 PM, JakilaTheHun (99.93) wrote:

Great ideas, PeteysTired and Valyooo.  Hey I know how we can make it even better! 

Maybe Steven can market his idea to the pension funds of public employee unions, and private unions, as well.  The unions would be more than delighted to lower their long-term equity returns in order to advance the interests of the common workers!   And I know they're not the type of people to blame investment managers and demand taxpayer bailouts if things go wrong! 

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#9) On February 20, 2012 at 12:39 PM, JakilaTheHun (99.93) wrote:

Dumberthanafool,

Economics is a science. 

I've heard that it's an art or merely a "social science" all my life.  I used to accept that idea.  But I've largely come to conclude that this type of thinking is destructive and is normally used to undermine 'inconvenient realities.'  

Just because economics is a science, doesn't mean it functions precisely like the physical sciences. Nor does it mean that it's a very simple science to understand.  In fact, economics can get quite complex; no different than Physics or Chemistry.

The biggest argument people make as to why it's not "science" is because economists were wrong about [xx event].  Well, many physicists use to believe in alchemy, but that doesn't change physical realities; it merely made them "wrong" about those relaities. 

Economics is the science of human behavior.  And while there are minor differences from culture to culture or time period to time period, the basic truths remain the same.  Human behavior has not radically changed over the past 100,000 years. 

To constantly try to dilute it down to an art of "social science" is to deny that there are certain truths about human behavior that have held true for a long time.

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#10) On February 20, 2012 at 1:14 PM, Turfscape (40.42) wrote:

>>I've heard that it's an art or merely a "social science" all my life.  I used to accept that idea.  But I've largely come to conclude that this type of thinking is destructive and is normally used to undermine 'inconvenient realities.'  <<

Except that many, if not most, of the posited ideas in economics (hypotheses, theories, etc) cannot be tested with replicatable results. Some are entirely non-falsifiable (which almost makes it more of a religion than a science).

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#11) On February 20, 2012 at 1:45 PM, SkepticalOx (99.45) wrote:

It's called a "dismal science" for a reason. Economics, for most of the past century anyway, was not a science of "human behavior". It was a science based on these mythical rational utility-maximizing creatures. That was the problem. With the introduction of behavioral economics, neuroeconomics, the realization that humans suffer from consistent cognitive biases, etc. etc., the science as a whole is improving. 

I think it was Taleb that compared economics with medicine from a couple centuries ago. It did more harm than good.  

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#12) On February 20, 2012 at 1:51 PM, SkepticalOx (99.45) wrote:

Most of you are missing Blodget's point.  Employee compensation versus profits is NOT a zero sum game over the long term.

It isn't a zero-sum game, but the question for these jobs from Wal-Mart, Foxconn, or Starbucks, is if the benefits of better compensation outweigh the benefits of cheaper labor. Are these factory or low-level service jobs things where higher compensation is important to get the employees you want and keep them happy enough to be more productive? Obviously there are industries and jobs where higher compensation is a win-win for the business and employee (Silicon valley, copmuter engineers, etc.), where the labor supply is low and the demand is high. This is just not the case with these service and manufacturing jobs.

There will be many people who would be willing and capable of replacing a barista who is unsastisfied with the pay.

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#13) On February 20, 2012 at 2:22 PM, JakilaTheHun (99.93) wrote:

Except that many, if not most, of the posited ideas in economics (hypotheses, theories, etc) cannot be tested with replicatable results. Some are entirely non-falsifiable (which almost makes it more of a religion than a science).

Turfscape,

You're argument that it's not a science is centered around the idea that some economists make predictions that are inaccurate.  Some scientists do, too.  That doesn't mean that gravity is "faith." Gravity is a concept developed by scientists to explain a physical reality, just as the Law of Supply and Demand is used to explain a human behavorial reality. 

There are good chemists and poor chemists.  There are good economists and poor economists.  There are many quack scientists, but they don't disprove the existance of scientific realities. 

And you say some ideas can't be tested; but the same is true with the physical sciences.  We can't really test ideas regarding multiple universes.  Many scientific hypothesis can't be tested because lack of equipment on Earth that could conduct the experiments necessary.  It doesn't mean that science is invalid or that it's a religion. 

Many economic ideas can and have been tested.  It's sort of odd to say they can't be "tested", because you see them "tested" every single day all around you. Whether we gather the data correctly or interpret it accurately --- that's another issue altogether.

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#14) On February 20, 2012 at 2:29 PM, JakilaTheHun (99.93) wrote:

Most of you are missing Blodget's point.  Employee compensation versus profits is NOT a zero sum game over the long term.

It's not a "zero sum game", I agree. 

But it's very likely that the marginal benefits associated with increasing employee pay are exceeded by the marginal costs.  Blodget provides absolutely no evidence to support his conclusion, except that he personally believes it happened with Ford a century ago.  Even if we accept that as true (I don't; I think it's an inaccurate interpretation of reality), it hardly goes to say that Ford in the early 20th Century and Starbucks in 2012 are precisely the same situation.  In fact, it seems somewhat ludicrous on the face of it that people who work at Starbucks all day are simply going to use their wages to consume more coffee at Starbucks. 

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#15) On February 20, 2012 at 2:58 PM, borninusa (< 20) wrote:

Pay is only one motivator.  The Starbuck I frequent have employees who have been there for quite a while.  I don't think raising their pay will do much.  Benefits, work environment, good management are as important as pay. 

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#16) On February 20, 2012 at 2:59 PM, boogaloog (< 20) wrote:

dumberthanafool,

I won't say whether I agree with you or not -- that's irrelevant.  What I will say is that I appeciate seeing that someone out there considers that it's possible that things are complex and there may not be a single simple answer.  It's too bad 24/7 "news" (political, economic, whatever) makes too many people far too sure the world is ruled by the content of today's soundbites.

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#17) On February 20, 2012 at 3:08 PM, Turfscape (40.42) wrote:

>>You're argument that it's not a science is centered around the idea that some economists make predictions that are inaccurate.  Some scientists do, too. <<

Actually, that's not my argument at all. My argument is that within the physical sciences, there is a scientific method by which "bad science" is filtered out (through rigorous peer review). Methodologies are established, standardized practices followed, and results are published. Those results are then analyzed to see if further test using the same methodology replicates the same results. If not, it's junk science.

In the case of gravity, physical tests and mathematical tests have repeatedly shown the same or similar results over the course of many decades. Nobody takes it on "faith" that gravity exists as a force. Nobody starts an experiment in physics by declaring, "since we all know that gravity pulls objects down..."

But, that IS what happens in economics. Many theories start with broad assumptions about human behavior that have never been reviewed through falsifiable methodologies.

In it's simplest form: how many theories are there around the effectiveness of government programs during the Great Depression? How many of those have produced replicatable results?

My argument is not that the ideas can't be tested, but that the testing doesn't follow the scientific method. And, far too often, a hypothesis in Economic thought is given the weight of an immutable law, solely on the basis that it's been put forward as an idea. Again, I think this is a by-product of the lack of scientific peer review seeking replicatable results.

Economics could be a science. I don't really know whether that possibility truly exists. But, in it's current form, it's not scientific...it's scientistic.

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#18) On February 20, 2012 at 3:29 PM, JakilaTheHun (99.93) wrote:

Turfscape,

Here's a question for you. Which concept has been more thoroughly tested under the scientific method? 

Supply and Demand or The Drake Equation

Free Trade or the Kardashev Scale?

By the way, while some people still debate "free trade", you can actually conduct a simple logical experiment to test it mathematically.  It's actually not that difficult to produce and is taught in many macroeconomics courses. 

You point out complex theories (they are not "theories" in actuality, but merely conjecture in scientific parlence) about the Great Depression, but that doesn't mean that economics is not a science. There is conjecture in physics, chemistry, biology, and astronomy as well.  In fact, the scientific method requires conjecture.

The difference between physics and economics:  the latter is more difficult to come up with a common set of definition and assumptions for, in order to test.  Moreover, it's difficult to isolate variables, since we can't actually require societies eliminate certain practices in order to isolate the affects of one policy. 

But the idea that we can never isolate variables or never conduct experiments is simply inaccurate.  You can actually see supply and demand in many cases.  I've seen economists produce real supply and demand curves with real data before. It's very interesting when it's taken out of the abstract. 

 

In spite of the hurdles, your argument still seems to use a double standard to me.  You view physical sciences as "scientific" because you are not as familiar with the limitations, flaws, and difficulties associated with it.  Economics has the same issues, only magnified.  Still, it's a science --- even if not one that is necessarily practiced well. 

 

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#19) On February 20, 2012 at 3:39 PM, JakilaTheHun (99.93) wrote:

In any case, I'm not sure that there's much reason to continue the discussion.  It seems like we are agreeing on everything --- we just define "science" differently.

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#20) On February 20, 2012 at 3:42 PM, TheDumbMoney (44.09) wrote:

Jakila, in response to your response to me, I refer you to my own previous quote above:

"This is not to say it has no laws."  

You essentially repeated that, using many more words.

I am also well aware that people on the Left incorrectly and unusefully try to use the claim or fact that economics is a social science to undermine settled economic principles -- the laws that I referenced in my original comment, that are inconvenient to them.  As far as I am concerned, that error is no excuse for anyone to claim economics is a science just like physics or math.  But maybe I think that because I am intensely uninterested in semantic games and politically-useful reframings of issues words and concepts, from anybody, Left or Right.  

All best,

DTAF 

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#21) On February 20, 2012 at 3:47 PM, Mega (99.96) wrote:

Those aren't very good examples to prove your point.

Foxconn is a Chinese tech manufacturing company. Given their industry and their location, I'd be surprised if they are not on the long term path of higher compensation and higher productivity.  And if so, I would consider that a serious strategic mistake.

Wal-Mart, well known for stinginess, has had negative US growth and productivity trends over the past few years.  Compare them to more generous competitors like Costco and Whole Foods where the trends have been reversed.  Wal-Mart's growth has come from developing markets, where their wages happen to be much more competitive.

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#22) On February 20, 2012 at 3:54 PM, Mega (99.96) wrote:

"Blodget provides absolutely no evidence to support his conclusion, except that he personally believes it happened with Ford a century ago."

Good point.  But you provide no evidence for the opposite conclusion.

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#23) On February 20, 2012 at 4:03 PM, SkepticalOx (99.45) wrote:

Megashort

You're missing the point on the examples, but devoish was using profits the companies made as a figure to raise salaries by. You can use Apple instead of you wanted (they pay Foxconn more and Foxconn pays employees more). I forgot what the figures were, but a the workers just end up making $2 or $3 for every $499 iPhone, while Apple and swimming in cash.

I'm not sure what point you're asking Jakila to prove? The companies are acting according the point Jakila made, hence the low salaries Blodget has gripes with. 

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#24) On February 20, 2012 at 4:24 PM, Mega (99.96) wrote:

Each company's current strategy, including their compensation system, may or may not be optimizing their long term value.  Do you agree?

While Wal-Mart's current strategy of hiring lowest common denominator workers may optimize short term profits, I don't think it optimizes long term profits.

The way to prove it is with economic studies involving data, not just anecdotal evidence.

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#25) On February 20, 2012 at 4:46 PM, Frankydontfailme (27.42) wrote:

On the science point -

The keyword missing from this discussion is 'control'. In hard sciences we prefer (when available) to conduct experiments that are properly controlled so that we can isolate a causal relationship. 

In non hard sciences, we can never properly control our experiments. We can collect data and draw inferences. We can suggest, but never prove the causal the link. 

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#26) On February 20, 2012 at 4:58 PM, ETFsRule (99.94) wrote:

Comment #1 hit the nail on the head. Those articles pretty much sum up the "cheap labor" debate for me.

"In the case of gravity, physical tests and mathematical tests have repeatedly shown the same or similar results over the course of many decades. Nobody takes it on "faith" that gravity exists as a force. Nobody starts an experiment in physics by declaring, "since we all know that gravity pulls objects down...""

Actually, gravity is only a "theory", and it remains a highly controversial topic among physicists. They agree that gravity exists, but they don't know how it interacts with the other fundamental forces of the universe.

So I would argue that, currently, there is no "immutable law" to describe how gravity works. That means physicists are working based on observable data - kind of like what economists are doing.

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#27) On February 20, 2012 at 6:31 PM, devoish (98.25) wrote:

  If I am a Starbucks employee, and the executives just rewarded investors with $555,000,000 in share buybacks instead of rewarding me with a pay increase or bonus, I'd be pretty pissed off that my work did not lift my boat.

And you'd be completely free to quit. 

That's the great thing about the American economy, Devoish. If you don't feel as if you're being compensated enough, you can leave, and seek out greener pastures.  Meanwhile, someone else with less income-earning potential might be very happy to take your spot. 

If you really believe the employees are undercompensated, Devoish, I  gave you a solution --- use your own money to provide a greater tip for your service.   It's completely voluntary and doesn't harm anyone other than yourself.

I know that you would prefer that all your "good deeds" be done with other people's money, but it would be quite enlightened of you to actually live by the principles you extoll.  After all, if you believe the employees are undercompensated, is it really fair for you to buy goods that are 'artificially cheap', because of the 'undercompensated labor'?  

It would be interesting if you lived by your own standards.

- Jakila

I was being nice. 

Don't get mad, write a better post next time. The entire thing was badly flawed and the economic theorys conflict with themselves. You should be embarrassed to post such junk. You hid real numbers behind invented ones. My critique was rushed and mild. 

In ten mnutes I used the real numbers so readers could judge for themselves whether or not Starbucks employees were justly compensated for the income they have earned for investors.

You used fake numbers to tell people what to think. It was junk theory, junk facts, and junk economics.

Best wishes,

Steven 

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#28) On February 20, 2012 at 8:42 PM, devoish (98.25) wrote:

Jakila,

You're comment about quitting got me thinking. While Sbux employees can quit, so could management. But, while employees cannot fire management, management can fire the employees. What if they did?

Assuming $10.00/ hour, and 40 hour weeks, Sbux paid 149,000 employees $3,099,200,000 to work for 309,920,000 hours. 741mil shares split $1,230,006,000 in earnings.

If those investors were required to volunteer (only by agreement with each share they purchased) to work 1/2 hour at Sbux for each share they owned, they could eliminate all need for the employees and quadruple the earnings of their investment. Earnings would jump to $4,329,006,000 or $5.84/share. Assuming a forward P/E of 15 - less than it is today - a share would climb to $87.60. and investor/volunteers would make $40.00 each over todays $48.00 share price for just 1/2 hours work.

If you owned 2 shares you would be getting $80.00/hour for the time you work and you would not have to invest another penny. 

You would have to buy 4000 shares in order to work full time, but you would make $160,000 at a 15% tax rate.

Anyway, that's what your comment got me thinking about.

Best wishes,

Steven 

 

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#29) On February 21, 2012 at 7:43 AM, JakilaTheHun (99.93) wrote:

While Sbux employees can quit, so could management. But, while employees cannot fire management, management can fire the employees. What if they did?

Yes, they can. 

Quitting is the same as "firing management". 

The rest of your argument makes absolutely no sense.  Shareholders have "by agreement" hired employees to run the operations of the company for them.  They have done this because it's a low-skill occupation and many of them can earn higher wages elsewhere. 

If they took the Starbucks jobs, they'd not only harm Starbucks employees (who would no longer have a source of income), they'd also harm themselves (as they could earn higher wages elsewhere and the end result would be less economic value created.)

 

The ironic thing about your argument is that one class of people who would be harmed greatly by your position are the unions.  Calpers and other public employee pension funds are heavily invested in major US companies like Wal-Mart and Starbucks. Under your own silly plan, you'd force the union members to take lower wages in order to subsidize the Starbucks employees.  

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#30) On February 21, 2012 at 7:52 AM, JakilaTheHun (99.93) wrote:

The keyword missing from this discussion is 'control'. In hard sciences we prefer (when available) to conduct experiments that are properly controlled so that we can isolate a causal relationship. 

In non hard sciences, we can never properly control our experiments. We can collect data and draw inferences. We can suggest, but never prove the causal the link. 

Actually, I made this point repeatedly. 

There are situations in economics where you can isolate variables, but it's rare.  However, it is possible to create mathematical models that isolate variables to logically prove certain economic tenets, such as the benefits of free trade. 

When you get into higher-level economics, however, mathematical models often require so many assumptions, that you still run into this problem. 

This is why I say it's science, but it's a very difficult science, where it's almost impossible to conclusively prove anything beyond elementary points.

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#31) On February 21, 2012 at 8:12 AM, devoish (98.25) wrote:

Jakila,

Oh jakila, good lord. If the manager is still at starbucks after an employee quits, the manager has not been fired. The employee has quit, thats all has happened. 

My argument makes perfect sense. If the shareholders volunteered to work for their own interests for zero paycheck, they could quadruple the earnings and increase the value of their shares by at least $40 in one year.

The vast majority of Sbux shareholdersd absolutely cannot make $160,000/ year or $80/hour at their jobs. Why do free market apologists constantly find themselves making stuff up to support their theorys. Why not just account for the facts with accurate theoretical models? 

The math absolutely works.

Best wishes,

Steven 

 

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#32) On February 21, 2012 at 10:16 AM, Valyooo (99.46) wrote:

My argument makes perfect sense

Not at all.  Why would the shareholders work at Starbucks?  They already did work....they earned enough money to buy shares of SBUX.  Why should they have to work again to make it grow?

When you leave money in a savings account at a bank, do you go work at the bank to pay back the interest you were oh so generously given at the expense of employees?  I work at a bank.  If you leave $200,000 in a 1% savings account, you make $2,000 a year in interest.  I am not a teller but I know tellers make around 10 dollars an hour.  So anybody with those numbers in a savings account should be working 200 hours a year as a teller, right?  Why is it fair to give money to people just parking their money in a savings account, when its the tellers doing the work?

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#33) On February 21, 2012 at 11:34 AM, devoish (98.25) wrote:

Why should they have to work again to make it grow? -Valyoo

They don't have to but the reason would be to make $40.00 on each share of stock they own by increasing the cash available to shareholders which is themselves. 

The real question is not 'why should they', it is why aren't they? Are they lazy? Jakila had to invent the idea that all the Sbux investors have incomes exceeding $80./hour which is just untrue. Then getting a little panicy he yells 'union' on an investment website which is like yelling 'fire' in a crowded theater. He can smell the smoke, but he can't see the fire, and its because the fire is behind his eyes and between his ears.

C'mon Jakila. You gave us an OP with a dozen flaws and contradictions. My reply is fundamenally flawed too. The flaw is there, and its a big fatal one. Val's dancing on its edge but he hasn't nailed it down yet. I can see it. I am not fooled by it. But I wasn't fooled by your post either. 

I don't get it. Do the shareholders just not like each other? Are they unwilling to cooperate despite the obvious benefit for themselves? 

The math certainly adds up.

Best wishes,

Steven 

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#34) On February 21, 2012 at 1:09 PM, SkepticalOx (99.45) wrote:

Each company's current strategy, including their compensation system, may or may not be optimizing their long term value.  Do you agree?

I agree. Just as paying low wages may not be optimizing long-term value, neither is paying high wages. The question is who's decision is it to take on one strategy or the other? It is the owner's and the management that works on their behalf. 

I don't particularly think doing one or the other is superior from the business standpoint. It depends. What works for Google or Goldman Sachs may not work for Starbucks.  

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#35) On February 21, 2012 at 1:32 PM, Valyooo (99.46) wrote:

Devoish,

 I am very confused at the point you are trying to make.  Are you saying investors should not exist, only employees? Or that investors should be satisfied with zero returns? Or that investors will ever say "please, my dividend is enough, give me less"?

Investors own the company.  Employees do not own their job, they work it.  Which is why it is nonsense when people say they "lost their job".  You did not own it so you did not lose it, you just got fired.

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#36) On February 21, 2012 at 1:37 PM, dakeyras (< 20) wrote:

Assuming $10.00/ hour, and 40 hour weeks, Sbux paid 149,000 employees $3,099,200,000 to work for 309,920,000 hours. 741mil shares split $1,230,006,000 in earnings.

If those investors were required to volunteer (only by agreement with each share they purchased) to work 1/2 hour at Sbux for each share they owned, they could eliminate all need for the employees and quadruple the earnings of their investment. Earnings would jump to $4,329,006,000 or $5.84/share. Assuming a forward P/E of 15 - less than it is today - a share would climb to $87.60. and investor/volunteers would make $40.00 each over todays $48.00 share price for just 1/2 hours work.

If you owned 2 shares you would be getting $80.00/hour for the time you work and you would not have to invest another penny. 

You would have to buy 4000 shares in order to work full time, but you would make $160,000 at a 15% tax rate.

The problem is that if they volunteered for only one year, then the extra profit would be considered a one time item similar to selling of assets rather than profit from ongoing operations and thus would not lead to an increase of the magnitude that you are talking about. After all, if they rehired the workers after one year, then profits would fall back to the prior level (plus any year to year growth).

If the shareholders did volunteer to work unpaid in perpetuity, then you might see that sort of immediate increase, but the value would not continue increase by $160K for each employee each year. The average "salary" would drop rather quickly.

 

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#37) On February 21, 2012 at 7:33 PM, devoish (98.25) wrote:

Dakeyras,

Thank you. In the second year the investors would not see the gain in the value of their stock holding and would be working for $11.68/hour.

Valyoo, 

I was just playing around with the idea of maximising shareholder value through lowering pay. And then the trickle down RepublicanrenamedConservativerenamedLibertarian Politician thought he could sell me trickle down. So I played with him. Its not my favorite pasttime, but it's top twenty.

Did it teach us anything? I don't know. It teaches me that if I am going to depend upon stock investments for my retirement, and that stock is SBUX it doesn't matter how much the share apreciates because I need the cashflow from the dividends for 25 years so I am not selling. Actually with austerity and declining incomes and kids starting out with a choice of excessive debt and/or low pay I'm not counting on someone buying. I only hope they can afford to drink enough expensive coffee to maintain the dividend. The $.68 dividend/share is what I am counting on. The $20,000/ year a $10 Barrista is making is scrape by money. In order to get that much out of my investment in barrista's I would need to accumulate 29,500 shares. At todays SBUX price that would cost me $1,416,000.

If I reinvest the dividend into more shares starting in year one I could probably average buying 400 shares/ year to get there, or spend $19,000/ year from income other than dividends. 

Of course, if you work at SBUX, you probably aren't starting on an investment plan this year unless you are an executive, printing shares in order to sell retirements to 'investors' faster than your barristas pump out the coffee. 

And that does not even consider the likelihood that global warming will cause coffee beans to dissappear. 

Best wishes,

Steven 

 

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#38) On February 22, 2012 at 3:03 PM, Valyooo (99.46) wrote:

Absurd.  P/E and dividend are functions of the same thing; profit.  You think that if SBUX stock loses its appeal, it is going to be able to negotiate the same sort of interest rate on its debt? Or that the dividend won't shrink when earnings do, only the p.e?

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