What President Obama Doesn't Understand about the Economy

What President Obama Doesn’t Understand about the Economy

Posted on January 30, 2014 @ 2:42 pm by Mark Skousen in Politics

“The triumph of persuasion over force is a sign of a civilized society.”
– Mark & Jo Ann Skousen, Persuasion vs. Force

President Barack Obama should have earned an MBA or a Ph. D. in economics at the University of Chicago rather than a law degree. He then would know why wages rise, and why unilateral government edicts like the minimum wage law often backfire.
In Tuesday night’s annual State of the Union address, President Barack Obama highlighted companies, such as Costco, which have raised wages “as a smart way to boost productivity and reduce turnover.” He also talked about the co-owner of Punch Pizza in Minneapolis, who decided last month to raise the minimum wage to $10 an hour for its 300 employees. “It’s got nothing to do with politics,” he said, “it’s good business.”
What Obama apparently doesn’t understand is that companies can’t afford to raise wages unless they have the profits to pay those higher wages. Costco made a sizeable profit before it decided to raise wages. It made $2 billion last year and has $6 billion cash in the bank. Punch Pizza is first and foremost a highly profitable company. It can afford to pay its workers more and only then is it a win-win situation.
In my classes at Columbia and Chapman universities, I always told my students about when Henry Ford began paying his workers $5 a day, more than doubling their wages in 1914 because he had record profits.
Profits must come first. Wage increases can follow. Study after study shows that companies that earn higher profits pay their workers more.
Costco has received a lot of publicity lately for paying its employees more than Walmart. Costco’s stock has done a lot better lately than Walmart’s. But there is a cost (no pun intended). Costco’s profit margins are thin, only 2%, while Walmart’s profits are double that.
One final point: There’s a big difference between persuading business leaders to raise wages and them making that important business decision voluntarily instead of government forcing them to raise wages. Profitable companies can and do pay higher wages; unprofitable or breakeven companies can’t. It is business or economics 101.
President Obama needs to read our pamphlet, “Persuasion vs. Force.” I suggest you send him a copy.
You Blew It! The Ugly American Redux

“The system of America [should be] commerce with all and war with none.” — Benjamin Franklin

How would most Americans and Congress react if a foreign government passed laws regulating U.S. businesses and people in the United States? Probably with justified outrage. The Foreign Account Tax Compliance Act is U.S. financial imperialism at its worst and is causing great resentment in much of the world, which is hurting U.S. interests.
The above words come from Richard Rahn of the Cato Institute in a column recently about the Foreign Account Tax Compliance Act passed three years ago by Congress.
It is an absolute disaster costing billions of dollars in compliance and ill will with foreign countries, all in a vain effort to catch tax cheats. But the IRS is expected to garner at most only $800 million in lost revenue — small change for a big price tag.
Nobody bothered to do a cost-benefit analysis when they passed this stupid piece of legislation.
Basically, the new law requires foreign banks and institutions to report transactions to the IRS. As a result, most foreign banks won’t have anything to do with U.S. citizens. According to Richard Rahn, it also “may drive hundreds of billions of dollars of job-creating foreign capital out of the United States; that could trigger a global financial crisis by driving up interest rates that the U.S. government pays on its bonds; that makes it almost impossible for Americans living abroad to open bank accounts; and that violates international trading agreements that the United States has signed.”
Thanks, Congress.
In case you missed it, I encourage you to read my e-letter column from last week about President Obama’s attack on investors. I also invite you to comment in the space provided below.