My Letter To The Editor

The Heritage Foundation’s study makes that happen by immediately raising prices to cover the wage increase, then systematically re-raising prices again-and-again as traffic and profits drop. It’s the equivalent of using a shovel to get out of a hole!

registerlogo2013blackservice

The OC Register published my letter to the editor today. I will too.

This is in response to an op-ed column by Mark Landsbaum arguing against raising the wages of fast food and other minimum wage workers.

As is to be expected the Register edited my letter to their style and made a few small changes. They also removed my last two paragraphs. I can’t say why. Maybe to make me look less cranky?

Mark Landsbaum’s, “Beware the true costs of economic good will,​” published Saturday in the Register ​is a nearly perfect example of bending facts to justify a conclusion. The column is based on a Heritage Foundation report, itself based on a report on the fast food industry from IBISWorld.

Mr. Landsbaum references McDonald’s, but uses figures from a report where 48% of restaurants have nine or fewer employees. That’s not the fast food industry anyone is talking about, certainly not Mr. Landsbaum.

The cited survey lives in a world where the average profit per restaurant is $27,000 per year. We can’t tell exactly how much each privately owned McDonalds franchise makes, but 247wallst.com says you’ll need $750,000 in non-borrowed assets just to start the process of buying one. You can borrow the rest, but no one would finance that investment if the average profit was $27K.

We do know McDonalds Corporation made $8.2 billion (pre tax) last year. Add to that what the mainly successful, small business, privately owned, individual franchisees made.

Mr. Landsbaum worries about a 38% increase in his Big Mac’s price tag. But, hold on. According to Heritage the total cost of labor is only 26% of gross. So how does an incremental increase get you to 38%?

The Heritage Foundation’s study makes that happen by immediately raising prices to cover the wage increase, then systematically re-raising prices again-and-again as traffic and profits drop. It’s the equivalent of using a shovel to get out of a hole!

No one runs a business that way. It’s a trick to make fair wages look bad.

In the real world McDonald’s has limited latitude in raising prices. The majority of additional wage dollars will have to come from de-super sizing McDonald’s profits.

For years McDonald’s has built a successful business by paying employees less than their fair worth. McDonald’s bottom line won’t be as good if they do right by their crew. Too bad.

Seriously, too bad. I have no sympathy.

What was actually published:

Irvine, Geoff Fox: Mark Landsbaum’s “Beware the true costs of economic good will” is nearly a perfect example of bending facts to justify a conclusion [Opinion, Sept. 13].
Mr. Landsbaum references McDonald’s, but uses figures from a report in which 48 percent of restaurants studied have nine or fewer employees. That’s not the fast-food industry anyone is talking about.
The cited survey lives in a world where the average profit per restaurant is $27,000 per year. We can’t tell exactly how much each privately owned McDonald’s franchise makes, but you’ll need $750,000 in nonborrowed assets just to start the process of buying one. You can borrow the rest, but no one would finance that investment if the average profit was $27,000.
We do know McDonald’s Corp. made $8.2 billion (pretax) last year.
Add to that what the mainly successful, small-business, privately owned, individual franchises made.
Mr. Landsbaum worries about a 38 percent increase in his Big Mac’s price tag. But, hold on. According to the Heritage Foundation, the total cost of labor is only 26 percent of gross. So how does an incremental increase get you to 38 percent?
The Heritage study makes that happen by immediately raising prices to cover the wage increase, then systematically re-raising prices again-and-again as traffic and profits drop.
It’s the equivalent of using a shovel to get out of a hole.
No one runs a business that way. It’s a trick to make fair wages look bad.
In the real world, McDonald’s has limited latitude in raising prices. For years, McDonald’s has built a successful business by paying employees less than their fair worth. Perhaps, the majority of additional wage dollars should come from de-supersizing McDonald’s profits.

13 thoughts on “My Letter To The Editor”

  1. Geoff, I’m not sure what your point is? Are your saying that McDonald should lower their profits to give their workers more? Personally I don’t agree. If what they are doing works then fine. If as a worker you find that the pay is not good enough then you should leave. Like any other job I use what I call the compensation / aggravation ratio. If the compensation does not exceed the aggravation then you should leave. If too many employees were to leave then wages would have to go up to attract more people to the job! It is another part of supply and demand!

    1. Alan – Basically this all goes back to whether corporations are entitled to reap 100% of the benefits of increased productivity and automation? Today, they do. Our wage and tax system is based on a world where more work means more jobs. That’s not true anymore.

      McDonald’s and minimum wage is the tip of the iceberg. Fewer and fewer people are needed to produce more and more. How should we deal with that? We may never again need as many workers as we have people!

  2. Bravo Geoff! The same people that do not want the min wage raised to a living wage are the same ones that carry on about food stamps and other social programs for the poor. It’s inhumaine and a disgrace.

  3. Way to go Geoff. I’m so sick of the rich making up stats to support their notions that poor people and minimum wage workers somehow don’t need help. If it were up to THEM they’d get rid of all social programs and labor laws (as well as environmental laws and anything else they find ‘inconvenient’)and we’d go back to the 19th century ways of 5 year olds running big machines and getting paid pennies for it. People working 18 hours a day 7 days a week for pennies an hour. If you get sick or hurt….too damn bad.
    Businesses and conservatives have railed against teh minimum wage ever since it was created and yet they seem to survive and still make millions even BILLIONS a year in profits in spite of all that.
    I think everyone in the middle and upper classes should be REQUIRED to live like a poor person for 3 months (as part of school curriculum), apply for aid, live in a dump (or in a shelter) and see how ‘the other side’ lives. Would be an eye opener. Nothing like ‘walking in the other guys shoes’ to teach you a lesson.
    Me? I’d be more than happy to spend 3 months living like a WEALTHY person and see what kind of problems THEY have. As long as I could take whatever I buy back to my hovel when it was over.

  4. I am not going to delve into all of the economics of this, but a profit of 27k on a 750k investment is 3.6%, which is a fairly good return in today’s environment. I would look favorably on a stock that paid a 3.6% dividend. They are out there. The investor/franchisee is presumably taking some salary as well and getting tax benefits, but also is probably putting a ton of hours into the operation as well.

    Where does the money for higher wages come from? Yes, higher prices. Also, more productivity (efficency or more work for the same pay), a redistribution of pay (less money for more responsibility), and lower profits (less incentive to invest). I am not against a higher minimum wage, but it does not come without costs. Those cost may be outweighed by specific and macro benefits. Is the system closed or open? How elastic is the demand for the food and low skilled labor?

    I know there are many questions across a wide scale of issues, but that’s all I have for now.

    Great letter. Glad you weighed in.

    1. Alexy – $750k is just the price to talk. The actual price of the franchise is multiples of that. And, of course, the debt you’ll undoubtedly have to assume will need to be serviced.

      I am willing to pay a few cents more per meal for the betterment of society. Call me a dreamer. It’s worth it.

      But, the truth is, there’s plenty of profit Mcdonald’s makes because they’re paying employees less than fair value. McDonald’s 2013 net margin was 19.87%. They paid shareholders $3.12/share dividend — over $3 billion. Their net profit was $5.585 billion.

  5. Another reason to raise these workers’ wages is to clarify the fact that we already pay much more for fast food and Walmart items than we realize. Many of these workers earn so little that they qualify for various government assistance programs and we taxpayers then have to subsidize their rent, groceries, health care, etc through Medicaid, welfare, section 8, and other programs. So in effect McDonalds and Walmart are receiving tens of billions of dollars in subsidies from the government so that they can pay people much less than it takes for these people to to actually survive financially. Does that sound fair?

    Well if these workers were paid what they need to survive you’d see that your Big Mac actually costs you $8 not $4. Instead you pay $4 for the Big Mac and an extra $4 in taxes so that these corporations make billions. That doesn’t make any sense.

    History is full of cycles – one of them is that every time wealth gets concentrated in the hands of too few, there is some kind of revolution that occurs to set things straight. The last one was during the great depression and happens every hundred years or so based on past cycles. As one article puts it: “Eventually, this concentrated wealth is redistributed downwards, either by peaceful means (as in America in the 1930s and the 1960s), or by violent means, as in France in 1789, in Germany during the Reformation (when German princes confiscated Church holdings), or in Russia after 1917. The warning is clear.”*

    One can see the seeds building for the next one. You can’t suppress a major chunk of people for the benefit of the top few and expect it to last forever. Minimum wage is simply too low when indexed for inflation.

    See a graph of some of the recent cycles here: http://cdn-imgs.aeonmagazine.com/images/2013/02/two-centuries.jpg

    * quote from: http://www.returnofkings.com/32017/the-cycle-of-societal-wealth

  6. Whom FORCED these minimum wage earner’s, to work at ____? They chose to work there, at the prevailing wage. If they are WORTH a higher wage, why don’t they change jobs???

    1. By taking nearly 100% of the gains in productivity and automation for themselves, corporations have weakened the labor market. Productivity has gone up while wages remain stagnant. In essence, screwing their employees brought additional rewards to employers.

      Dave – You’ve got to make a choice what kind of country you want to live in. There will not (in the foreseeable future) be enough jobs in America for everyone who wants to work. That’s not the worker’s fault. Every business, wherever possible, has done everything they can to employ fewer people. Fine. But our tax system is totally based on more profit meaning more employees. That’s changed. The question is how do we as a nation adapt. Your answer is a permanent underclass. I find that answer uncaring and un American.

      1. The current lack of entry level jobs, ala McDonald’s, is a key reason why the US needs to take a strong stand (deport) against illegals. As you note, the US does not have enough Unskilled jobs for its own citizens, much less those of whom are here illegally.

        With an ever increasing minimum wage, I expect to soon see auto hamburger and french fries making machines. Maybe McD will follow Home Depot, and also replace most of the cashiers with self check-out?

        I do not see McD as an apt employer, for a person with a family. It is a place where a Youth can get a first job, maybe saving for college and a career?

  7. By the year 2016 minimum wage in Ct. will go up to $10.00. I’m afraid that still won’t be enough for a family of 4. How do you explain to a child they don’t know where there next meal is coming from.

  8. Very enlightening Geoff! McDonald’s can easily pay their employees $15 and hour but they choose to hire some flunky for $7.25 to mess up my order at the drive-thru! Ridiculus!

Leave a Reply to Mike Cancel reply

Your email address will not be published. Required fields are marked *