Thursday, June 23, 2005

The Law of Supply and Demand in the Labor Market

Faleomavaega attacked Del Monte, which owns StarKist Samoa (SKS), for opposing any increase in the minimum wage while paying its CEO “1.7 million dollars in salary, bonuses, and other compensation in FY 2004.” He seems to have a point. Why not raise the pay of its workers when the company can pay its top executives so much.

But hundreds of people can process fish. Hundreds of people in hundreds of other countries can process fish as well. The vast number of people willing to do the work outnumbers the number of positions needed to do the job. The high supply of people capable of performing the job lowers the price the company has to pay in wages.

This only makes sense. With more responsibility, more knowledge, more qualifications and more experience comes more pay. People who have more qualifications are in lower supply than those without. So obviously, if the company wants to keep its more qualified personnel, it will have to pay them more than the rest of the workforce. So is the case with top executives, whose backgrounds most likely include years of experience, qualifications and knowledge.

Wages, whether they are at the top end of the scale or the bottom, are set by what the employer is willing to pay and what the employee is willing to accept. If top executives don’t like the compensation, they can go somewhere else. If fish cleaners don’t like the compensation, they can go somewhere else as well. If employers can’t find anyone to do the work for the compensation they offer, obviously, they would have to raise the pay until they do.

Stockholders and a board of directors want to reward top executives who continue to do a good job, because it isn’t an easy thing to do. If it were, then the supply of quality executives would be higher, and as a result, their pay would be lower. However, that is simply not the case.

Can there be a cap on compensation for top executives? Ben & Jerry, an ice cream company, tried to do such a thing. They limited the top executive’s salary to seven times that of the lowest paid employee, an $8/hr scooper. Quality executives would not work for the relatively low compensation so the company got one unqualified CEO after another. Their profits plummeted and so did their market share. The company went from one CEO to the next until they finally smelt the coffee and removed the salary caps.

Faleomavaega wants minimum wage increases at the risk of higher unemployment in both the private sector and government. He should come forward and take responsibility for his position. Instead, he would rather try to divert the public’s attention to top executives, whose salaries are determined by economic law as everybody else.

Regardless of how many employees it has or how little they pay in wages, having the tuna industry in American Samoa is better than not having it at all. Whether it decides to stay or not is well within its right to choose.

Wednesday, June 22, 2005

Senators Stand in the way of Healthcare Reform

Opposition exists in the Senate against the LBJ Board decision to raise rates for medical services. Senator Alo says, “We cannot give the hospital a blank check without knowing the full impact on our people.” He wants LBJ to conduct and present an assessment to the Fono and the public “before doing away with current sections of the law dealing with the hospital.” I smell micromanagement in the air. Why not have the Fono run LBJ then? Surely, the omniscience of the legislature provides no need for the hospital’s board of directors. But let’s not stop there. The Fono should also make policy decisions for all our businesses, our schools, our families and anything else that tickles their fancy.

Obviously, democracy is a tool to run the state, not society. 60,000 individuals make billions of decisions every day in American Samoa. The Fono doesn’t have the capacity to consider all of the factors involved and decide in the best interest of the public. Neither does a board of directors, but at least they recognized what can: a flexible pricing system.

When the price for something is high, it signals that the market is profitable. Many would-be profit-seekers would join the action and increase the supply of services and jobs at the same time. A higher supply now lowers the price, thus lowering profits and cutting jobs. This process can go back and forth depending on hundreds of factors that countless assessments would fail to capture.

But Senator Alo’s concern is the “impact” of a flexible price system. But let’s talk about the impact of the status quo first. If price isn’t allowed to go higher when demand increases, society suffers shortages. If you don’t raise rates on water when there is a drought, you’ll still have people watering their lawns in times of crisis. People arrange their priorities according to the circumstances, and there no better indicator of the current situation other than the market price.

Higher prices not only make us prioritize how much we really need in times of uncertainty but they also encourage productive profit-seekers to direct their capital to areas where we need their business the most. Whenever the territory gets hit by a hurricane, for example, prices for hardware go up, which entices entrepreneurs to increase supply. No one motive other than profit does this unless the ASG plans to use the end of a gun’s barrel.

There are other consequences of artificially low prices of health care. Since the public perceives it to be free, people don’t take care of themselves as much as they would if they had to pay, instead of the mainland taxpayer, for what they receive. At the same time, low cost health care is a form of U.S. subsidy to the rich in American Samoa since they can spend the cash they save on luxuries.

Problems that readers of Samoa News usually blame on McDonalds and SUV’s are due to artificially inexpensive medical care. That is the impact Senator Alo should be considering.

Sunday, June 19, 2005

Waging war on the poor with GET increase (Issue in Hawaii)

The transit tax will punish the poor. Plain and simple. Yet, supporters of the 12.5 percent increase in the General Excise Tax (GET) continually try to make a traffic issue out of a funding problem. It will take 3 billion dollars to fund a rail transit, and the proposed raise in GET will only fund an infinitesimal fraction of the total costs. [1] Opposition to the transit tax is not just against the ambiguity in the state plans on how it wants to relieve Oahu’s traffic congestion. The people wholeheartedly oppose the raise on the basis that this is the most regressive tax increase in history of this state for a proposal its proponents hope will bring benefits in a “30- to 50-year time frame.” [2]

This is how the GET destroys the poor. It works in a pyramid fashion taxing every transaction involved in the sale of a good. The tax is applied from wholesaler to retailer than from the retailer to the consumer, who pays for it all. This multiplication takes place on not only food and medical supplies, but also on housing and rental prices. Food, health and shelter are three areas where the poor make day-to-day, paycheck-to-paycheck decisions. A family of four can expect an estimated increase of $450 in annual living expenses on top of everything else the state is raising. [3]

Democrats and double-crossing Republicans have waged a war on the poor in the name of traffic relief.

They have also failed to do their homework – the very reason we sent them to office in the first place. Alternatives, such as toll roads and tunnels, are working in other states and countries around the world at the expense of private investors. [4] In addition, people can afford access to these alternatives, and they are paying for them in cities like San Francisco and Sydney. [5] What that means for the rest of us poor folk is that there would be less people on the existing infrastructure right away instead of 30 to 50 years in the future.

At the same time, the use of rail is on the decline [6]. The same has been true of our bus monopoly. No one is willing to give up her or his private transportation for an inferior good called public mass transit. Anyone who studied economics would have learned that once an individual reaches an income threshold, he or she buys more of a normal good, which in this case, is the convenience of one’s vehicle.

The only way then for the state to make mass transit succeed is to keep poor people poor and make everybody else above the poverty line poor as well. The GET will do that and worse, and perhaps, that is the state’s plan all along.

References:

[1] http://www.honolulutraffic.com/
[2] http://the.honoluluadvertiser.com/article/2005/Jun/19/op/op11p.html Here's how to derail transit plans this time around by Karl Kim
[3]
http://the.honoluluadvertiser.com/article/2005/May/18/ln/ln12p.html Council advances tax hike for transit
[4]
http://www.rppi.org/transportation/ps164.html Congestion Relief Toll Tunnels
[5]
http://www.thetollroads.com/home/images/innovation_model.pdf Orange County Toll Roads: A Model for California
[6]
http://www.honolulutraffic.com/myth3.htm Myth #3 — “Rail transit will reduce the numbers of cars on the road.”

Monday, June 13, 2005

Abolish the Minimum Wage

Being part of a world community requires countries to compete with each other for employment. It’s funny how that all works out. Now, governments are like interviewees before entrepreneurs trying to qualify for job openings. Businesses determine whether a country’s tax levels, level of regulations and bureaucracy and flexibility of the local labor market make it an attractive location for investment.

One of the reasons why the US got away with its high level of taxes and bureaucracy since the infamous 30’s was that America was the freest nation of its time. Why would anyone relocate their business to countries where there was no rule of law just because of higher taxes? But that is all changing as more nations engage in trade, respect property rights and become freer.

That is why American Samoa can no longer consider itself isolated from the rest of the world. Nations in the South Pacific, Asia and South America are competing for the tuna industry. Their governments are doing everything they can to be more business friendly. If one country imposes higher taxes and regulatory measures, investors would take their capital, entrepreneurship and ideas elsewhere literally overnight.

In the meantime, prices of tuna are going up as its stock goes down. Mainland consumers, who have to scrounge up money in their battle with inflation, want cheaper tuna to lower their annual living expenses. The tuna industry is trying to meet the demand for lower prices while it faces rising costs of not only fish, but of also gas and other expenses. Tax credits may not be enough this time around.

The minimum wage will have to go.

On its way out, we can thank it for discouraging people from improving and moving up the economic ladder. With the minimum wage and rigid labor laws, employees get an occasional raise for doing nothing. We can also thank it for creating unemployment, as many unskilled workers cannot find entry-level jobs because businesses can only afford to employ so many at the minimum wage. But hey, if you volunteer, then it’s alright, but 50 cents or a dollar an hour to help you out while you “volunteer” would make your help illegal. What nonsense!

We can thank it just one more time for making it harder for small businesses to compete with bigger, more established ones. Big businesses love minimum wage increases because the law drives their smaller competitors out of the market and discourages others from starting up new ones. At the same time, employers have to raise the price of their products to pay for the across-the-board rise in wages. When the minimum wage goes up, so does inflation.

The ASG can make our territory more economically viable by throwing in the kitchen sink. Abolishing the minimum wage would not only make us competitive in the global market, but would also make our local workers, businesses and markets more competitive, productive and successful. The minimum wage destroys jobs, encourages people to make careers out of positions most consider temporary, shuts down small businesses and discourages others from becoming entrepreneurs themselves.

It's time for it to go.

Sunday, June 12, 2005

Correction

I made a mistake in my post “Recycling/Litter Control Bill is a Thief in Disguise.” I claimed that the Hawaii State government calculates its general excise tax after tacking the redeemable fee on top the price of a bottle. It turns out that that is not true and I apologize for the misinformation. The redeemable fee is exempt from taxation, so don’t be like me and jump to conclusions just by looking at your receipt.