Knowing the price of everything but the value of nothing

Last week in “The Magic Marketplace can be malevolent” I wrote that the marketplace for labor is not always a benevolent mechanism.  This week I would like to consider some cases where companies have ignored value for price and where companies have put value ahead of price.

Management of a large electronic chain decided to fire all their high-paid floor employees and let them reapply at a lower pay level.  The company ignored the fact that the high-paid employees had gained considerable experience and were providing exceptional customer service.  Unfortunately, many customers lost their favorite go-to employees and found the remaining help unsatisfactory.  And this attitude spread rapidly, years before social media.  The company rapidly declined and has become a textbook example on how not to treat employees.  Remember Circuit City?

Sometime ago I read a letter in a newspaper complaining about firefighters going for groceries with a fire truck.  The writer questioned why they didn’t take a smaller vehicle.  Did the writer consider the increased response time of a crew returning to the fire station to get the big rig?  If the crew returned to the fire station to get the big truck, how much more value would be lost in a burning house?

“If you can read this, thank a teacher!”  But too many begrudge teachers the salaries they get, using among other wild-eyed statements “greedy teacher unions”.  After he resigned, Nevada Superintendent of Schools James Guthrie said the top tier of teachers should be paid $200,000.  This would give teachers a salary commensurate with other skilled professionals.  Do those who decry the lack of qualified workers see any connection to their unwillingness to pay sufficient taxes to educate future employees?

Some of those who grouse about teachers’ or others’ pay keep pushing their own pay up.  Many CEOs and board members are getting pay far in excess to the value they give to shareholders.  They often play games about comparing salaries “with comparable companies”, but it is the board or if the board is hand-picked by the CEO, it is the CEO who determines his or her own salary.  Doesn’t sound like the marketplace is determining salaries.  Sometimes they get the boot; sometimes they run the company into bankruptcy.  Many CEOs groused about a law that strove to let shareholders have a say in executive pay; it was watered down so that the vote was non-binding.  See “Time to Make CEO Pay Match Shareholder Performance”,  Suzanne McGee, The Fiscal Times, 2015-05-01.  She wrote that often the pay of the CEO is inversely related to the performance of the company.  Interestingly, a proposal was made by the Securities and Exchange Committee to make corporate top executive pay more transparent to shareholders. It was voted against by the two Republicans on the committee.  Could it be that Republicans aren’t business-friendly but CEO friendly?

As an example of the inverse relation of pay of the CEO to the performance of the company consider Walmart, Target, and Costco.  The CEO of Costco gets a hefty pay package but it is far less than those of the CEOs of Walmart and Target.  The Motley Fool published an interesting comparison on five measures of company strength.  I haven’t fully understood it yet, but the Fool’s conclusion is that Costco is a far better long-term investment than either Walmart or Target.

Costco pays its employees about $20/hour compared to a third less for the other two.  It has only about four percent of its employees as part-time.  On the other hand, Walmart has one-half of its employees as part-time.  Part-time is great for students, but it is lousy for people who have to support families.

Speaking of part-time, as a college student, I was getting $1.74 an hour for around 14-16 hours a week at Kroger.  I did stocking, cashiering, and bagging.  According to PayScale, Kroger pays its cashiers $7.26 to 11.99 an hour.   Assuming an inflation rate of three percent, then somebody with equivalent experience should be earning about $10.88.  I’ll let you play around with various inflation rates; for example, do these same calculations with the actual inflation rate for each year.

But average inflation doesn’t tell the whole story.  Some things are a lot cheaper relatively than in 1958.  Somethings are a lot more expensive.

When our daughter was born in 1962, I was a graduate student earning $75 a week.  School insurance paid most of the cost.  I do remember the room cost was $10/night and the obstetrician cost was about $700 total.  At three percent inflation the room cost should be less than $50/night.  In 2010, the average cost of a hospital stay was $1,600 to $2,000/night.

We bought our first new car in 1963, a Ford Falcon.  Its cost was about $2,200.  Assuming the average inflation it would cost over $10,000.  You would be lucky to get a two-year old car for that price now.  Of course, the cars of today are packed with comfort and safety features that were only dreams in 1963.

The cost of transportation has become a big part of the budget of those with lower incomes.  And as we have spread out more, public transit becomes less available and a car has become more of a necessity.

Meaningful discussion about these issues, as it has always been, comes down to point of view.  We are right and you are wrong.  Too many of us ignore our wrong choices and give too much importance to being in the right place at the right time.

It reminds of Pete Seeger’s tale of two slugs that fell off a shovel.  One falls in the gutter and the other in a dead cat.  After a few days of eating and eating, the lucky one goes looking for the other.  When asked how he became so fat and sleek, the lucky one says, “Brains and personality!”

Many may dispute Mel's brains and personality, but he knows that a bit of pluck and a lot of luck helped.

Smaller package? Blame Shrinkflation

Years ago we stopped buying fresh orange juice because the packer reduced the containers from 64 ounces to 59 ounces but kept the price the same.  When I emailed the packer I received the answer that is what consumers wanted. “Our consumer research shows that most shoppers, when given a choice between a price increase or slightly less contents, prefer to hold the line on prices.”

I wonder if the “consumer research” was focus groups.  I don’t trust focus groups ever since I was in one.  The moderator kept the session going until we as a group affirmed the client’s choice of brand name, even though few of us liked it.

Today I read Yahoo’s repost of Bloomberg’s “From Chocalate to Beer, Shrinkflation Hits the Supermarket”, Simon Kennedy, Bloomberg, 2014-09-03

Former advisor to George W. Bush, Pippa Malmgren, worries that inflation pressures are rising.

Up to no good about public goods

On April 2, the Duluth News Tribune had an “Our View” titled “Road repairs: Hold on to your wallets” about the report of a task force on the repair of city streets.  Why is it that increased taxes to pay for necessary public goods is a bad thing, but increased prices of things provided by the private sector are just seen as “passing on costs”?

It is estimated that a thirty percent increase over two years in property taxes is necessary to pay for the needed repairs.  This is partly required because Duluth can no longer count on the money it had received from the Fond-du-Luth Casino.  In other words, the “tax” paid by gamblers will now have to be paid by all the citizens.

The oldest real estate tax record I have is from 2002.  Our 2014 Duluth property taxes are 2.28 times as much as 2002.  Assuming the proposed 30 percent increase, our 2016 taxes will be 2.97 times as much in 2002.

Now lets compare this to the price increase of Duluth News Tribune.  When I first came to Duluth in 1999, the DNT costs 50 cents.  I’m not sure whether it first went up before or after 2002.  It now costs $1.25 for a single copy.  That is 2.5 times as much.  That’s “worse” than the increase in my Duluth property taxes up to now.  Will it go to $1.50 by 2016?  If so, that will be 3.0 times as much.  Where’s all the shouting about the Duluth News Tribune not living within its means?

How about food prices?  The price of Stonyfield yogurt sticks in my mind from years ago as 54 cents for an eight-ounce container.  One can now get it online for about $1.42 for a six-ounce container.  That is 3.5 times as much per ounce!  Can’t Stonyfield and the grocers live within their means?

The lowest I remember gas prices being in Duluth was 99 cents a gallon.  Now the price per gallon has been around $3.59 per gallon.  That is 3.6 times the low.  Can’t the oil companies live within their means?

What are some major costs in repairing streets?  Asphalt, gasoline, and diesel fuel!  Maybe we can keep our taxes at the 2002 level if we can keep the price of oil and the derivative products at the 2002 level.

But this year, the city took a big hit on fuel expenses.  Lots and lots of snowplowing.  Should the city cut back on the snowplowing to “live within its means”?  How loud would the howls be from the public if the city “lived within its means” for snowplowing?

The same goes for street repair.  It seems many expect city streets to be built to Interstate standards, but they complain both about the potholes and the taxes to fill the potholes.

We could go back to an ancient custom of every road being a toll road.  Barons and other large landowners charged everybody to use the roads across their lands.  This was a big drain on commerce.  In fact, some writers say that the British economy in the 1700s did much better than the French economy because of internal tolls.  The British had practically none.  A French merchant couldn’t travel 20 miles without encountering an internal tariff.  Add that to the super-rich in France ripping off the peasants even more than the super-rich in Britain did.

Ah, toll roads!  Some think that the toll prohibition on Interstates should be lifted.  Actually, there is no blanket prohibition as anyone who has driven I-90 in Illinois or the Ohio Turnpike knows.

As the need and costs of repairs to the Interstate system increases, so does the talk of charging tolls for use of the system.  See “Agreement on Interstate Repair Needs, but Not on How to Pay for Them”, New York Times, April 3, 2014.  Interestingly, some of the big shippers like FedEx and McDonalds object to the tolls.  Many smaller businesses such as restaurants and convenience stores object because they think people will avoid the Interstates to avoid paying a toll each time they exit for a short stop.  Another consideration is what will be the cost to add on the infrastructure to collect tolls?

I bet you dollars to donuts that many of those who want and even demand public goods such as a highway system also object to almost every single tax that makes them possible.

In many ways, taxes are a good bargain.  If we didn’t pay taxes for fire departments, we would be paying a lot more for fire insurance.  If we didn’t pay taxes for an extensive sewer system, we would be paying a lot more for hospital bills.  If we didn’t pay taxes for snowplowing, we would be paying a lot more for auto insurance and maybe even lawyers.

Yeah, I was grumbling as I filled out my state and federal taxes and robbed my bank account to pay what’s due.  And I’m grumbling as I try to figure out how to better spread out payments for the 2014 tax year.  But then I think of the words of George Washington and Justice Oliver Wendell Holmes, Jr.

In his “Farewell Address”, George Washington wrote, “that towards the payment of debts there must be Revenue; that to have Revenue there must be taxes”.

Justice Oliver Wendell Holmes, Jr. supposedly wrote, “I like taxes; they buy me civilization.”

Minimum wage, inflation, and personal experience

My first wage job that I remember was at Saywell Drug in Cleveland, Ohio.  I probably started in the summer of 1951 after I quit my paper route.  I started at fifty cents an hour.  This was a low-skill entry job.  I was a soda jerk, stocker, and small-item cashier.

Using the US Inflation Calculator, anything I bought for fifty cents would now cost $4.50.

Note: these figures were requested on March 16, 2014.  A week later, many were a few cents higher.

I had a couple other jobs in that range.  Then in late fall 1954 I started at Kroger’s as a stock clerk and bagger.  My starting union-negotiated salary was $1.05.  A dinner at a small diner then would cost $9.13 now.

When I flunked out of Case Institute of Technology in January 1958, I was earning $1.75 at the same Kroger’s store.  Anything I bought with an hour’s wage then would cost $14.16 now.  I was also a relief cashier on weekends.

No Kroger store had any full-time openings then.  I eventually was hired as “third man” at a new Pic’n’Pay.  Third man was sort of meaningless.  I was after the assistant manager in groceries only.  Produce and meat were separately run departments under the manager.   I was only a glorified stocker and bagger.  They wouldn’t let me be a cashier because I wasn’t bonded.  They also did their best to make sure I never worked close to 40 hours per week.  They would have to give me more benefits.  My wage, in a union store?  $1.54!  I had to get the help of a union business agent I knew to get my $1.75.  That $1.54 is now $12.46.  Don’t you think a fast-food manager has a harder job with more responsibilities than a grocery clerk?

When I went to Ohio Wesleyan in the fall of 1958, I worked my first year at a local Kroger store.  My wage was $1.54!!!  I made the mistake of not putting that in writing to the union steward.  He was sort of in the pocket of the manager and never really acted on my behalf.  When I called the union office in Columbus they pointed out that I had waited too long without filing a written claim.

In June 1960 we were married and I started graduate school back at Case.  I also had a graduate assistantship that paid $75 per week.  Our upstairs apartment cost $65 per month and $75 when we moved downstairs.  That $75 per week would be $592.69 in 2014 dollars.  If I supposedly worked 20 hours per week, that would be almost $30/hour.   I checked current graduate assistant salaries; the average is about $20,000/year or about $384/week.  I was treated like a king!  I was allowed nine credits per semester, I had use of the gym and library, and I had free parking in the lower lot.

I didn’t go on to a PhD program and opted for a full time job.  My interviews were with Sikorsky in Framingham  MA, GE in Syracuse NY, and Univac in St. Paul.  I don’t remember the exact offers from each, but it was something like $8,400, $7,900, and $8,100.  All things considered, I took the job nearest the Boundary Waters starting on Feb 3, 1963.  The things I could buy then with that money would cost $61,918.94 today.  Ah, a bright spot!  A computer software engineer with a master’s degree can start around $85,500!  But, the complexity of the work is far, far greater than when I started on mainframes that were giant toys compared to my iPhone.  No wonder the computer industry wants to increase the number of H-1B visas for programmers.

When personal computers came along I saw no future in mainframes and started my own one-person company.  I never implemented my grand visions and after over ten years tried getting a computer job.  Ha!  The checklist for “skills” was far longer than just a Masters in Mathematics.  I eventually wound up driving a school bus in the Twin Cities and then moved up to transit buses, aka city bus.  I started at $8.50/hour in 1995 and wound up with over $12/hour in 1999.  These translate into 2014 dollars as $13.05 and $18.42 or $27,144 and $38,314 per year.  According to salary.com, twenty-five percent of school bus drivers in Duluth earn over $35,623 per year.  I assume that those have to get a lot of charter work.

My last job was as a ski instructor.   I think my final pay in 2007 was around $8.00 per hour.  That would be $9.03 in 2014 dollars.  But the work was spotty depending on the weather and the people who show up.  I don’t think I ever got more than 30 hours per week.  I don’t know what the current pay is, but I did get nominally priced season passes for my wife and myself, a nifty jacket at a good price, and discounts at Ski Hut.

Other than the ski instructor, which often is a fun job, a computer programmer, which takes far more specialized learning than I had, and some school bus drivers, I think too many workers are worse off than I was way back then.

I think Adam Smith is being shown right again, it is lawful for the masters to organize to keep wages down, but it unlawful for the workers to organize to raise wages.

- Mel

You can find more of my thoughts at
http://magree.blogspot.com

The price of gas and other things, a perspective

Many are complaining about the cost of gasoline as the price approaches $4/gallon.  Consider that about fifty years ago gas was often 25 cents/gallon.  The price is now about 16 times as much.  But consider also the use of those gallons of gas.  Fifty years ago many cars got 10-15 miles per gallon; now many cars get 30 or more miles per gallon.  In other words we are getting an effective $2/gallon or better of travel compared to fifty years ago.  So, as far as our use of gasoline, the price could be considered only eight times as much.

Consider postage.  Fifty years ago the price of a first class stamp was three cents.  Now it is 47 cents (I don't know exactly because I buy forever stamps).  Hm!  That's about 16 times as much, about the same as the increase in the price of gasoline.  But postage is now a better deal.  Fifty years ago a first class letter would take five days or more to go across country.  Now it can go coast to coast in three days and even four or less to Hawaii.  To get that kind of service fifty years ago, you had to buy an airmail stamp at eight cents.  So, in one sense, postage has gone up about six times as much as fifty years ago.  Pretty low inflation considering it is a government service continuously hobbled by Congress.

Consider newspapers.  Fifty years ago the price of a daily paper was five cents.  Now it is one dollar, twenty times as much.  And they are a lot smaller.  And in most cities there is only one newspaper rather than two or three.  Worse, the last newsstand increase was from 75 cents to one dollar.  A 33-1/3 percent increase, and I never saw a single complaint in letters to the editor.  A newspaper is produced by a "free market" company.

The list of items whose prices have "skyrocketed" goes on and on.  I remember sixty years ago going to the movie (sometimes a double feature with a cartoon, a short, and the news) for ten cents for the ticket and ten cents for a box of popcorn.  I wouldn't buy a candy bar at the theater because they cost six cents compared to five cents at the drug store next door.  Ice cream cones were five cents a scoop.  Sundaes and milk shakes were 25 cents.  "Pepsi-Cola hits the spot / Twelve full ounces, that's a lot / Twice as much for a nickel, too / Pepsi-Cola is the drink for you!"

The Star Tribune can't live within its means

Governments are supposed to live within their means, but I guess this doesn't apply to corporations.  If a government raised taxes five percent because of inflation, there would be a great hue and cry about government living within its means.

I haven't seen any complaints yet, but I bet there won't be many letters to the Star Tribune about living within its means instead of raising its copy price 33 percent, from 75 cents to one dollar.

Another business not living within its means

A couple of weeks ago I bought some facial tissue on sale, thinking I was getting such a deal that I bought 2 three-packs.

Last week opened a box because an old box was almost empty.  When I put the new box next to the old box, I discovered that the new box was about 2/3 the size of the old box.  What's going on here?

Neither box contained a count, but the pack wrapper for the new boxes listed it as 132 tissues per box.  132?  What kind of count is that?  Oh, that's about 2/3 of the old count of 200.

So, Proctor & Gamble, the distributor of Puffs has effectively raised its price per tissue by over fifty percent.

I bet the board of P&G would be hollering bloody murder if government raised taxes by the same percentage.

See also http://magree.blogspot.com/2010/10/businesses-dont-live-within-their-means.html.

P.S. Our other favorite fresh-squeezed orange juice producer also went from 64 oz. containers to 59 oz. containers.  Maybe we'll just buy fresh oranges and get more fiber.

A perspective on prices

Many people complain about the cost of postage, claiming it has risen way out of proportion to anything else. Let's do some simple arithmetic to check this.

Postage: was 3 cents, now 44 cents - 14-2/3 times as much

Daily newspaper: was 5 cents, now 75 cents - 15 times as much (and in Duluth half as much stuff to read)

Bus fare (Cleveland OH): was 10 cents, now $2.25 - 22-1/2 times as much (but many routes are longer)

Gasoline: was 25 cents, now $2.70 - 10.8 times as much (of course, this hasn't been adjusted for a much needed gas tax for highways)

Doctor office visit: was $5, now $100++ - 20 times or more as much

Haircut, man: was 50 cents, now $10+ - 20 times or more as much

Ice cream cone, double scoop: was 10 cents, now $3.00+ - 30 times as much

It looks like three of the prices that many people complain the most about are the best bargains!