Quotes of the Day

We contend that for a nation to try to tax itself into prosperity is like a man standing in a bucket and trying to lift himself up by the handle.
- Winston Churchill

A major source of objection to a free economy is precisely that it gives people what they want instead of what a particular group of people thinks they ought to want.  Underlying most arguments against a free market is a lack of belief in freedom itself.
- Milton Friedman


(And no, the picture shown above is not me trying on my Halloween costume a few days early to make sure it fits.  Then again ....)


    

Learning Economics From An iPad

Far too often, books about and teachers of economics attempt to give us theoretical answers to questions on the subject as illustrations of their knowledge and wisdom.  Whether from the Austrian school or the Keynesian one, these answers begin with the assumption that their theory is correct and that certain answers will be the result, on the basis of their theoretical assumptions.

I don't know about you, but I'm a skeptic by nature and training.  I tend to reject out of hand solutions that are correct only 'in theory'.  They tend to have the same accuracy level as a coin flip, and since they don't or can't show the work used to reach them ... they are sometimes even less credible.  So I decided to see what happened if you worked an economics problem in the real world, using the facts that we know and some assumptions taken from other areas of capitalism to bolster the credibility of our calculations.

I decided to use the i Pad as the basis for this little experiment, not because I have one, but because of the recent furor over the pay rates of the workers of the Foxconn factory in China that makes them. I also chose it because there seems to be a bit of a stink (pun intended) about the conditions of this plant and why these devices are not being assembled in this country by a company that seems to be doing very well while based here.

In the spirit of full disclosure, I must admit I'm not a fan of Apple; and that my only concession to it is my I tunes account, begun when it was the only legal music download alternative.  I have a natural abhorrence for Apple products, cool as they are, because the company's proprietary application restrictions prevents anyone from playing their game on their home field.

Let's begin with some 'facts' to enter into our equation (and remember, I'm trying to keep this simple):

- The current i Pad 2 carries a price tag of anywhere from $499 to $829 (depending on the specs of the unit), so for the sake of argument and in the hopes of making calculations simple, let's set the price of the device at a median of $650. 
- The wage earned by the average worker, at least according to the ABC report on Foxconn, is $1.78 per hour.
- The Minimum wage in the United States is $7.25.
- The Minimum wage in the State of California, where Apple's Cupertino headquarters is located is $8.25.
- China's environmental restrictions for manufacturing are close enough to being non-existent so that they need not be considered; those in California are the toughest in the nation.

Bear with me and follow closely as I attempt to exhibit my supremely inferior maths skills, in combination with some knowledge that I picked up as the Director of Operations for an equipment manufacturing plant down in Georgia.

There are two types of cost in any given product.  There is a simple cost, which includes the cost of the materials alone; then there are 'burdened costs', which take into account the cost of overhead (including labor, building, regulatory compliance, etc.) and fully burdened costs (which take into account the costs of Administration, sales, marketing, and profit).  In order to make a profit and stay in business, a company must sell its product for at or for more than this fully burdened cost, which would include manufacturing costs plus administrative costs.  (This must have been the part of capitalism or a business plan that many of the 'green energy companies failed to understand.)

Now if we start off with the assumption that the unburdened cost of materials is about half of the final sell price (a pretty good assumption based on my past experience), we start with a base cost of $325.

$325 x 1.4 (40% for mfg overhead) = $455
$455 x 1.4 (40% for Admin overhead) = $637, pretty close to our original $650 number, which shows that most likely my assumptions on cost and burdening factors still hold true; and likewise showing a modest additional profit of $13 to be shared between plowing money back into the company and dividends for stockholders if I were strictly correct.

But that's all based on wage costs at Foxconn in China....

Now if we move our manufacturing facility back to the good old USA and build near the Corporate headquarters, our costs are going to go up.  Why our labor rates alone will see an increase of 460%, and the building, property, regulatory costs and taxes (CA is a high tax and regulation state after all) are likely to go up correspondingly.  But again for the sake of argument, let's use the wage rate as what is probably a pretty accurate bellwether of such cost increases.

$325 x 6.44 = $2,093 (our original 1.4 markup multiplied by 4.6 times to cover the increase in salary alone that go from $1.78 to $8.25 per hour, as well as the increased real estate and regulatory costs of operating in CA), and now we have our burdened cost.
$2,093 x 1.4 = $2,930.20 for our fully burdened cost. (We'll give ourselves a break and assume that our Admin costs are and always will be a US cost.) 

Now remember that in this example, I just used a minimum wage comparison in CA.  It seems highly unlikely that such a manufacturing operation would be allowed to operate with workers at minimum wage.  Far more likely in fact is that it would be a union assembly plant.  Now again, just to keep me from taking off my shoes and socks to perform the calculations, let's say that union scale is 10 times the $1.78 per hour in China, or $17.80 per hour (certainly not an unreasonable union wage, especially on the West Coast).

(Building, taxes and regulations and real estate won't increase, but with wages going up and staying up, I'll be nice and use the 1000% increase in labor previously mentioned to equal a total 8.5 times increase of the 1.4 burdened costs for a total cost factor of 12 ). 
$325 x 12 = $3,900 is now the calculations for our burdened cost.
$3,900 x 1.4 = $5,460 (again using the fixed Admin burden) gives us the fully burdened cost of an i Pad 2.

What is the likelihood that the i Pad would be as popular, or even a marketable product, at a price approaching these levels?  How likely would Apple be to even bring such a product to market, let alone to be 'knocked off' by other manufacturers, if this were the case?

Come to think of it, what do you think would be the cost of those fancy tennis shoes, those designer jeans, or hundreds of other products manufactured in factories around the world if similar math were applied to them.  Now while you are digesting that, ask yourself what kind of wages you would have to earn in order to be able to afford such products in your daily life.  Then ask what earning such wages would in turn do to the original calculations used for moving such manufacturing processes back into the US. (But don't do the calculations more than once, since the answer is a runaway spiral of costs and price that never ends.)

Now lest you think that my efforts here are purely selfish and uncaring (remembering that I am an unreconstructed Capitalist), what would losing all of these jobs do to the lives of employees in China?  Having perhaps taken away the jobs of these workers around the world for all of these products, how would they be expected to feed their families?  If we left these jobs in place but raised the salaries of the workers and working conditions of the factories in China to our levels, what would that do to the cost of the items just calculated? 
(Oh you don't care about these foreign workers as long as these jobs can be brought back to this country?  Who's being selfish now?)

See ... It's amazing the economics that you can learn on an i Pad, even if you don't own or use one.  

So endeth the lesson ....


                                 

Government Protection Racket

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Everywhere we turn these days, we find constant reminders of the lousy economic numbers in this country; and while economists refuse to talk about a 'double-dip recession' that hasn't yet met their strict definition, we all know it's here.  Many of us know the culprit as well.  It's not evil corporations or the wealthy 1%.  It's not even really the bankers, though they certainly haven't gone out of their way to help the situation. In fact, it's those in government telling us that something must be done for our protection, when the only thing that they're really trying to protect are the cushy jobs that most of them will have to attempt to keep, some 12 months from now.  

Government is something that we created in this country over 200 years ago to do for ourselves together what we could not do alone.  It was not instituted to do things we have apparently now become too lazy to do for ourselves. Look at the Government's latest answer to fixing the economy if you'd like an example, as the Senate passes legislation seeking tariffs against the Chinese for flooding the US with 'cheap goods', and preventing our own from being competitive.  Really?

Isn't that the same government that's telling us that the biggest problem is that consumer demand for goods is down?  Do they think that demand will improve if the costs of those goods are increased through tariffs on produced in China or the sale of more expensive goods from elsewhere (even the US)?  What will happen to a cost of living calculation that's already little more than pointless fiction, since it doesn't include the costs of food and energy, if we add to it what will now be the higher costs of imported goods?  

Politicians complain that the Chinese are pumping money into their own economy to artificially prop it up (which seems rather disingenuous of those who passed two different Stimulus plans and would like to see a third passed).  But so what?  What's wrong with taking advantage of China spending their money to makes its goods cheaper to buy until they can no longer afford to do so?  Aren't we glad that China is using this money to prop up their exported goods, rather than using it to build fleets of ships, squadrons of airplanes, and silos full of missiles?  If they think that the best use of their national treasure is an attempt to sustain something that cannot be sustained forever, let them.  In fact, let's applaud and encourage them to continue to do so while enjoying the fruits of ignorance that allow us to buy more and cheaper stuff with our own money. 

Of course placing tariffs on goods coming out of China will likely spur retaliatory ones on US goods being shipped to China and lead to a trade war, but what's wrong with that?  Well for one thing and like so many other times, Washington will be fighting the last war and not the one one we're facing.  We are no longer in a position of strength to bully other nations on the world stage.  The economy is a house of cards and the windbags in Washington are doing little more than seeking to blow it down.  For another, these are the same policies that proved a dismal failure during the Great Depression when they signed in 1930 the Smoot-Hawley Tariff Act into law.  Rather than helping the economy recover, this bit of odious political economic theory in fact extended the damage of the Depression far beyond what it should have.  Is repeating one of the poorer examples of legislative governance in this country's history the only way that we can prove its lunacy? 

Perhaps what we need to be asking ourselves more often is whether much of the very protection that the government is attempting to provide is what's stifling the economic recovery that it claims to be seeking.  Cheap energy is a necessary component to fueling a recovery for example, but the govt refuses to issue permits for drilling on land and sea in this country.  When Canada offers to ship us less expensive oil that it's choosing to recover from its own lands, we refuse to allow them permission to build a pipeline across the US for processing.  Such thinking not only ignores the necessity of obtaining such energy from a friendly source, but the large number of good paying jobs that will result from looking for it, getting it out of the ground, and building the pipeline across this country to move it to refineries.  What kind of protection is that?

The president demonizes the TEA party movement seeking a return to a limited government as defined by the Constitution that it was created under.  He finds sympathy however, for an Occupy movement that seeks not equality of opportunity but equality of result.  Doesn't this kind of equality stifle the very spark of potential genius this country was built on under a pile of stinking egalitarian mediocrity?  In the rush to seek some imagined progressive government utopia of uniform opportunity, are we instead getting a conformity mandated by the force of law?  In the seemingly constant incremental surrender of individual freedom, could we be dooming ourselves to stagnation instead?  Have we exchanged a true diversity of ideas for little more than a divergent set of paths to failure?  While decrying a lack of competitive edge in this country, has government itself instilled a placidity whose only goals are illusionary props to self-esteem?

This protection by legislation and regulation is not only doomed to failure by the faulty thinking it comes from, but by the imperfect assumptions it's based on and the defective methods involved in writing it.  What makes all of it even worse however, are the inevitable strong-arm tactics that will be used to enforce what are little more that crooked, flawed, and unsound policies for no other reason than that those in power believe that they know what's best for you.  Growing up in Chicago around the stories of mob influence during the days of another flawed government mandate, Prohibition, we knew what to call this kind of protection.  Used very effectively by criminal enterprises that often seemed far more organized that our government (then or now), we called them Protection Rackets.    


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Social Security Taxation - A Brief History Lesson

Nothing truly inspirational has come across my path this week that deserves a full-blown rant, but I did come across an interesting bit of the past where Social Security was concerned in my continuing education course, "Things this dummy never learned in college".  

Since I am all but incapable of maintaining the structure required for 'higher education' these days, I have been force to audit even this class; which has no lectures, no syllabus, and no testing (and therefore no grades).  Apparently the ne'er do well leading the program has no plan in mind except the acquisition of knowledge, regardless of the department or discipline involved. This would be an admirable goal in and of itself normally, but I am familiar enough with this reprobate to recognize that no praise for this tortuous effort is warranted.

At any rate, I came across this bit of the history of Social Security in "Economics in One Lesson" but Henry Hazlitt.  While last updated in 1979, Hazlitt provides a wealth of information in just over 200 pages that could help even the most moronic of students understand the basic principles of the Austrian school of economics (and I ought to know).  

Concerning our 'Senior Safety Net', he said:

"Social Security was to be entirely a self-financed insurance plan based on strict actuarial principles.  A reserve fund was to be set up sufficient to meet future claims and payments as they fell due.

It never worked out that way.  The reserve fund existed mainly on paper.  The government spent the Social Security tax receipts, as they came in, either to meet it's ordinary expenses or to pay out benefits.  Since 1975, current benefit payments have exceeded the system's tax receipts.  ....

In the original 1935 bill the salary taxed was only the first $3,000.  The early tax rates were very low.  But between 1965 and 1977, for example, the Social Security tax shot up from 4.4% on the first $6,600 of earned income (levied on employer and employee alike) to a combined 11.7 percent on the first $16,500.  (Between 1960 and 1977, the total tax increased by 572 percent, or about 12 percent per year compounded.) ...  At the beginning of 1977, unfunded liabilities of the Social Security system were officially estimated at $4.1 trillion." (Emphasis added)

Now if that period after 1965 seems oddly familiar, those of you old enough, or who have studied your history might remember that Medicare and Medicaid were added to this program in the Social Security Act of 1965.

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