Thursday, October 21, 2010

More Current Events Discussion

All of my blog posts are imported into Facebook, and I responded to some questions there.  Since I do not have anything else to write about at the moment, and it is easy to do so, I will repost the explanations for people who did not see the earlier question thread:

Tax Plans:  We have to raise revenue somehow. No elected official's career could survive the spending cuts needed to balance the budget. I would prefer a tax on carbon, pollution, and other externalities, or alternatively a VAT, but without those, higher income taxes are inevitable. The best solution would be to keep the tax cuts for the bottom 98% and let the taxes on the top 2% rise.

More Detail on Health Care and Labor Markets:

Following the requirements of the health care law would mean that companies would have to pay costs per worker that are about $2.30 an hour for an individual health plan and $5.90 an hour for a family plan. Forcing companies to provide health insurance is like increasing the minimum wage by two to six dollars. If the fine for not providing insurance was larger than six dollars an hour, they would provide benefits to everyone, but otherwise, they will choose to pay the fine.

The problem with the mandate is that it is impossible to keep someone on staff if you are paying them more than the marginal value of their work to the company. You will go out of business if you do this too long. This is basically why GM went bankrupt; they paid their workers too much.

Specifically, if hiring a worker increases your profits by $8 an hour, then the maximum total value of their compensation package is $8 an hour. Any law that forces you to pay more than that in either money or benefits will result in the worker being laid off or the company going bankrupt.

This is true because workers are probably in the job that pays them the most possible money for their skills. If they could earn more doing something else, they would quit the job and take the better one. If any company could use them to generate marginal benefits that are more than they are currently being paid, that other company could increase profits by offering to hire then at higher wages.  If you can identify a group of people that is being systematically exploited, that means a massive profit opportunity.  You could could go into business competing with the exploiter, hire the workers away, pay them more, and make a good living.

The health care mandate will not help any workers in the long run. For people who are earning well above the minimum wage, it will cause their salaries to go down by the cost of the health care. For people earning slightly more than minimum wage, it will result in unemployment.

The South is full of textile and furniture mills that closed down because their wage bill was too high. Specifically, the wages were too high to compete with cheap overseas labor. Any business that is vulnerable to foreign competition is equally vulnerable to anything that increases wage costs in the USA. The health mandate will make the foreign competition and outsourcing situation even worse for the affected workers.

In the long run, this mandate will not pay more to lower-income workers and will therefore not stimulate the economy. In the short run, you can sometimes force a company to pay higher than the market wage for labor. They will operate as long as revenues can cover variable costs. But in the long run, when they have to renew their investments in fixed costs, they will exit the industry.

Executive Pay Controversies:

It is certainly possible that executives are earning more than they should, for a variety of reasons. There is a lot of debate about that.  Many executives do earn their salary. Differences in managerial skill can make millions of dollars difference in efficiency and corporate profits. Just look at Apple with and without Steve Jobs. The supply of people who can successfully run those companies is quite small. In the places where there are overpaid executives, the best way to deal with them is to make life easier for corporate raiders, private equity, and other people who do hostile takeovers to get rid of bad management. 

But in either case, large executive salaries do not mean that a government mandate will increase worker pay. Either the executives are being paid too much are they are not. If they are being paid a fair amount, then the company cannot function well if it paid them less. If they are using their power to get paid too much, then they will inevitably use their power to lay off workers rather than pay them more and suffer a pay cut.

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