Will Swaim at National Review has an I-told-you-so piece today about the palpable effects of government interference in the microcosmic reaching of agreements beween buyers and sellers of labor:
Following Governor Gavin Newsom's decision - after some complicated political wrangling between Newsom and a furious fast-food lobby — to impose a $20 hourly minimum wage on the fast-food industry, Chipotle and McDonald’s announced on Q3 earnings calls yesterday that they’ll be raising menu prices in the state.
How big a hit will customers take – if they’re willing to take it at all?
“We’ve been studying that . . . it’s going to be a pretty significant increase to our labor,” Chipotle CFO Jack Hartung said on the company’s call. “We haven’t made a decision on exactly what level of pricing we’re going to take, but to take care of the dollar cost of that and/or the margin part of that, we haven’t decided yet where we will land. It’s going to be a mid- to high single-digit price increase, but we are definitely going to pass this on. We just haven’t made a final decision as to what level yet.”
“There is going to be a wage impact for our California franchisees. I don’t think, at this point, we can say exactly how much of that is going to work its way in through pricing,” McDonald’s CEO Chris Kempczinski said on his company’s earnings call. “Certainly, there’s going to be some element of that, that does need to be worked through with higher pricing. There’s also going to be things that I know the franchisees and our teams there are going to be looking at around productivity.”
It didn’t take an economist to predict this outcome. I called it in a National Review article about Assembly Bill 257, what was called the Fast Act. “In an industry that operates on razor-thin margins,” I wrote, the Fast Act “will have two immediate predictable outcomes”:
On the worker side, higher wages, richer benefits, and more cumbersome labor laws will lead to job cuts as franchise operators seek to curb their skyrocketing labor costs. In some places, restaurant owners will rapidly automate; ATM-like ordering kiosks will replace actual people — primarily immigrants and other minority people who, by way of the fast-food business model, are just beginning their ascent on the American economic ladder. Other business owners may simply sell off to larger enterprises whose high volumes will allow them to cope with slimmer margins. That will make it harder for workers to rise into positions of management and ownership.
On the customer side, as some franchisees simply close permanently, we’ll see the expansion of what progressives have called “food deserts” in poor communities already underserved by grocery chains. Customer service in the remaining stores will decline and prices will rise.
So, in a kind of grim partnership, poor customers and rising workers, immigrants and the native-born, will suffer together.
In that January article, I called this “the iron law of California progressivism: Claim that new laws will help the poor. When the actual effect turns out to be catastrophic for the poor, blame capitalism/markets/billionaires/racism, and expand government control of the business. Rinse, repeat, and promote as a national — even global — model for equity. And if Californians have anything to say about it, AB 257 will be coming to you, no matter where you live in the United States.”
My dad, who majored in economics in college, insisted that I take at least one Econ course at the school I attended. It had an outstanding faculty in that department, and my dad pointed out that he was paying for my enrollment. Alas, I never came through on my end. To my lasting regret. Economics is an excellent field of inquiry for understanding certain things about human nature.
Having studied economics informally on my own over the years, I have formulated a first law that I think is undeniably true no matter from what angle one approaches the subject.
Here it is:
A good or service is worth what buyer and seller agree that it is worth. Period. If any other entity - think government - inserts itself in the process of arriving at an agreement, there is no way to know what the actual value of the good or service is.
Behold menu prices at California McDonald's and Chpotle franchises.
The case of labor negotiations is a little different from government imposition of value-setting. Actually, the case can be made that a negotiation between a union and management is a clear-cut example of this free-market reaching of agreement at work - so long as neither side enlists government in its cause.
But it does make plain what I've formulated as a second law of economics: The money has to come from somewhere.
Which is why, in the wake of the UAW agreement ending the recent strike, car costs may well go up - or the wide selection of models to choose from may dwindle:
Ford withdrew its full-year forecast last week citing "uncertainty" over its tentative deal with the UAW, and CFO John Lawler told investors during the company's third-quarter earnings call that the new agreement will add another $850 to $900 in labor costs to each vehicle made.
Those increases will either be reflected in new vehicle price tags, absorbed by the company, result in automakers reducing costs in other ways, or some combination of the three.
"The concessions the automakers have made are already being positioned as significant by the automakers themselves, which is setting the stage for those costs to be passed through to consumers," Alain Nana-Sinkam, co-founder of industry tracking firm Remarkit Automotive, told CR. "However, given that consumers are already pretty well tapped out in terms of vehicle affordability, I’m not sure how much of that is going to end up sticking."
Cox Automotive chief economist Jonathan Smoke said in a statement earlier this week that the new UAW contract will have both positive and negative impacts on the economy.
Smoke continues:
He added, "Consumers will bear some of the cost burden over time but given that affordability is already a challenge for the market, the automakers will not have an easy time passing along all of the costs to buyers and will have to seek efficiencies in other ways, or further limit production to more expensive vehicles that can absorb higher labor costs."
Here's the thing about the free market. It's like grass growing through the cracks in an urban sidewalk. It will assert itself even in an atmosphere of value distortion. That's because it is the natural, ideology-free way human beings interact.
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