Thursday, April 10, 2014

Little Pink Houses

Wal-Mart's FY 2013 SEC 10-K filing.


Total Properties:                                                             11091
Total shares repurchased [avg price per share, USD]:     42,288,364 [69.60]

Total Revenue (millions of USD):                                    476,294
Cost of Sales:                                                                 358,069
Net Income:                                                                     16,695
Comprehensive Income:                                                   13,613

Total Assets:                                                                  204,751
Current Liabilities:                                                            69,345
Total Equity:                                                                    81,339

Accrued Wages and Benefits:                                            4,652
Retirement Liabilities:                                                         1,062

and from the Wal-Mart homepage,
Number of Employees:                                               2,200,000

Accounting works differently than economics. In economics, we're quick to point out that interventions have consequences. Third party interference with bilateral contracts may produce unintended consequences. Let's ignore that for a moment and simply straight-up assert that if Congress decides that Wal-Mart must pay workers more, there will be no disemployment effects, no rent capture, no substitution, not even a perceptible shift in the labor supply curve. Instead, we'll just shift cash flows from one bin into another.

But which bin?

Living wage proponents seem to assume that it'll come straight from the "Net Income" bin. R. Reich for example likes to talk about stock buybacks and $16B (for 2012), suggesting that he doesn't consider Consolidated Income to be particularly important.
Your typical employee is now earning $8.25 to $8.80 an hour. Most are adults, responsible for bringing in half their family's income. You can easily afford to pay them $15 an hour without causing layoffs or requiring price hikes. Your shareholders and executives are doing spectacularly well.
I'm not sure what he means by "typical" employee in this passage, so let's go with "median". Let's also restrict it so that the median is de minimis, that of the 2,200,000 employees working for WMT, 1,100,001 of them make at the top of the his low-wage band, the $8.80/hr. Let's also assume that the "typical" employee cares more about take-home pay than about a nominal hourly wage, so this employee both now works, and will continue to work, a standard 40-hour workweek, with 2 weeks off per year for vacation.

A little grade-school arithmetic shows (15-8.8)*(1,100,001)*(40)*(50) = 13,640,012,400

Ignoring incentive effects, Reich's proposed raise would have a minimum price tag of $13.6B. It would eat every penny of the most recent SEC 10-K filing Comprehensive Income. And even if you think Net Income is the proper line item (it isn't), it would mean cutting dividends. As a reminder, the lion's share of blue chip dividends go to big time institutional investors like pension funds, so it's not so much robbing plutocrats as it is transferring wealth from prudent retirees to current workers. If that's your idea of sensible redistribution, I'm not sure I can talk you out of it. But do please consider what that implies for your own retirement.

But yanking cash flows from the CI line is but one possible bin. Even dullard versions of capital pricing models insist that costs will be spread around. Will some of the cost come straight out of the bottom line? Sure, but some of it will also come out of the retirement liabilities, some of it from Total Assets (which includes, among other things, property/plant/equipment aka new stores, trucks, and the operating capital that makes employees productive in the first place). Winching down on this line item means giving up de novo employment opportunities for the many involuntarily unemployed people currently drawing UI across the nation. Again, if your model is that it's better to have no job at all than to have a low-paying job, that's another matter, but you might consider explaining your reasoning to the people who actively seek jobs at Wal-Mart at the prevailing rate.

Another possible bin to pilfer is Gross Revenue. Maybe customers could eat the increased labor costs. Of course, prices are information, and there's no reason whatsoever to ditch the first law of demand in consumer goods, particularly the sorts of goods sold at WMT. Holding all else constant, price is inversely proportional to quantity demanded. Consumers are likely to respond to higher prices with ordinary abstention.

There ain't no such thing as a free lunch. And while it's great to acknowledge that there are no solutions, but only tradeoffs, I implore anyone who reads this to please carefully consider whether or not you're being realistic when you imagine what the actual tradeoffs might be and whether you're willing to foist them on others without so much as a jot or tittle of accountability on your part.

Labor is not euvoluntary, especially for marginal workers. Temper your enthusiasm for intervention accordingly.

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Do you have suggestions on where we could find more examples of this phenomenon?