Thursday, December 6, 2012

192. Be willing to pay a fair price

In an amusing MetLife television commercial, an executive for the company-- who is boasting about the cheap insurance rates they offer--argues with Lucy of the Peanuts that while it is inexpensive, it cannot be five cents. "Not everything can be five cents," he says.

As we continue to endure a number of debates about unions, strikes, plant closures and "right to work" amendments, I find credence in the argument that not everything can be five cents. While people are often quick to takes sides--maintaining an inherent bias toward supporting business interest or worker's rights-- there are additional factors that are often not considered. Mostly specifically, I wonder if we are considering the true costs of our products.

Consumer pressure to keep prices low affects labor costs throughout the supply chain--from production to distribution. And our taxes, through government subsidies, particularly in agribusiness, works to keep prices low. It's impossible, as I have written before, no matter the economy of scale, to produce and sell a double cheeseburger for less than a dollar.

Thus, the cost we are willing to pay affects everybody and everything that is needed to produce, distribute and sell a product.

Company disputes about production costs are really about profit. Even slight increases in costs can dramatically affect profits. Employee wages are like most economic factors--subject to supply and demand. Corporations will pay the least amount the labor market will provide. And with high unemployment, and the availability of outsourcing, recent trends have indicated record corporate profits and record low worker wages.

Likewise, each employee-- turned consumer-- has an interest in making as much as possible, while paying as little as possible for goods and services. His or her salary goes further when prices are kept low. It's a personally relative function--and it's best when my company pays high wages and the companies I purchase from pay low wages.

So what can be done?

First, executive compensation must be reduced. In many corporations and industries it continues to be excessive--unfair to both employees and the consumers. Reasonable executive compensation would still permit all the available luxuries available in life.

Second, prices should be increased slightly to reflect domestically-made products, increased worker wages and the cost of healthcare. For example, couldn't Wal-Mart slightly raise prices to pay its workers fairly without affecting corporate profits? Papa John's said that it would have to raise pizza prices fourteen cents to pay for healthcare for its employees under Obamacare.

Third, consumers need to be willing to pay those slightly increased prices to ensure that all Americans have fair wages and healthcare. Lower prices mean lower wages-and what happens to our middle class if workers' wages continue to hit record lows? Who will buy the houses or cars-or take vacations? We need to close the gap between the best paid workers and the lowest paid workers.

Finally, shareholders have to accept a reasonable return on their investments. The pressure placed on management to continually increase profits and raise stock prices is unsustainable and harms everyone in the supply and distribution chain. Under that pressure, of course management is going to choose to outsource and fight to keep wages low. Isn't interesting that in this difficult economic time that the stock market has continued to do very well?

I understand that it is not quite as simple as I suggest-and that there is also a supply and demand curve dependent on price. However, as John Schnatter, Chief Executive Officer of Papa John's said, it's not a competitive disadvantage if everyone has to do it.

It is a change of mindset-- and paying a few extra cents can have widespread benefits. It's the same philosophy that asks consumers to support small businesses-even if prices are slightly higher.

The true cost of a product-- to me-is one that includes fair domestic wages and the cost of healthcare for all or nearly all of the employees in the manufacture, distribution and sale of a product.

Sorry Lucy, MetLife is right-- everything can't be five cents.

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