Government, government contracts, college tuitions and pricing by hospitals are examples of heavily influenced government cost based pricing. In these monopolistic situations, the taxpayers underwrite the institutions getting away with the cost based pricing. Costs escalate and taxpayers pay -- and pay -- and pay -- and pay some more. But the values of what they pay for and receive don't improve. They frequently just get worse.
Unlike market based competitive price based costing, government and government influenced provider productivity and the incentive to offer outstanding and competitive customer values aren't even part of the pricing equation. Sadly and unfortunately, that's generally the costly and monopolistic government controlling way of doing things.
On the other hand, private businesses have to compete in the competitive market. They only do so effectively by offering values which combine competitive prices with goods and services that offer competitive values compared to their market based competitors.
Wal-Mart and McDonald's are examples of low cost market based competitive providers who have done exceedingly well over the years by offering to their customers what they want and demand -- compelling values featuring low prices.
But what if, like Costco does, Wal-Mart charged its customer base $110 annually for the pleasure and privilege of its customers shopping at Wal-Mart? Or raised its prices dramatically? Or what if McDonald's charged a membership fee or increased the price of a hamburger to $6 or more?
We all, including President Obama, know the answers to those simple questions. Customers would go elsewhere, and that's where the price based costing approach and business necessity of competitive values, including pricing. come into play in the non-monopolistic private sector competition based free market.
Why Subway Doesn't Serve a $14 Reuben Sandwich is subtitled 'President Obama touts raising the minimum wage at pricey restaurants, not at fast-food places where it would hurt.' tells the story of the minimum wage proposal in its proper context:
"Why can't every business be more like Costco? The Washington-based retailer received a glowing endorsement from President Obama in January for paying entry-level employees above the federal minimum wage. "It's a company that's looking out for workers," Mr. Obama said in a speech in Maryland. Two other businesses were also recognized in recent stops on the White House's minimum-wage promotional tour: Michigan-based deli Zingerman's and the East Coast burger chain Shake Shack.
In reality, these businesses are case studies in why the president's plan to raise the minimum wage to $10.10 from $7.25—a nearly 40% jump—is such a bad idea. Not all businesses can afford the cost of Mr. Obama's good intentions.
Start with Costco, whose CEO, Craig Jelinek, is an outspoken advocate of raising the minimum wage. "At Costco, we know that paying employees good wages makes good sense for business," Mr. Jelinek said in a statement in March of last year. Mr. Jelinek offers new employees $11.50 an hour, but his narrative omits a few key details. First, Costco charges its customers as much as $110 a year for the privilege of shopping at the store. That's a $2 billion-per-year luxury no grocer or restaurant enjoys.
As a result, the warehouse retailer rakes in what amounts to a more than $10,000 profit per employee, according to data from business research company Hoovers. A casual dining restaurant, on the other hand, earns a roughly $2,000 profit per employee, which explains why most businesses aren't following the president's "just be more like Costco" advice.
There are exceptions. In a visit this month to the University of Michigan, for instance, the president stopped at the local deli Zingerman's. He raved about its Reuben sandwich as well as the generous wages that the business offers. Like Mr. Jelinek, Zingerman's co-founder Paul Saginaw supports hiking the minimum wage. . . .
As Mr. Obama relished the perfect sandwich prepared by well-paid employees, he neglected to mention how much he paid for the happy experience: Zingerman's Reuben costs $14. That's about three times as much as a Subway foot-long. . . .
If every deli could charge $14 a sandwich, then perhaps an $11 or $12 minimum wage would be feasible. But your local sandwich shop cannot match the price points of a shop serving a parent-subsidized clientele in a college town. Expecting restaurants everywhere to do so is a recipe for business failure.
The president seems oblivious to pricing pressures that exist outside of high-end restaurant concepts in tony metropolitan areas. Labor Secretary Tom Perez's March visit to a Shake Shack in Washington, D.C.—again, to promote the company's above-minimum starting wage—was typical. While praising the restaurant's wage structure, Mr. Perez did not mention that the least-expensive double cheeseburger on the menu sells for $6.90, or more than 40% more than a Double Quarter Pounder at the McDonald's nearby.
If McDonald's could raise burger prices by 40% without losing customers, it would have done so already without input from Messrs. Obama and Perez. But customers are price sensitive. The same dilemma exists at restaurants, grocery stores and countless other service businesses across the country. If higher prices aren't an option for offsetting a wage hike, costs have to be reduced by eliminating jobs and other employment opportunities."
Summing Up
That's the difference between ugly politics and the free market reality.
Taxpayers and jobless workers end up paying for the political folly, and their choices don't often enter the political picture.
On the other hand, customers reign supreme in the market based economy and their choices determine who is successful and who is not.
What's so hard to understand about that? Not a thing.
This election year minimum wage proposal is just our ugly pandering political system at work again, and there's nothing new about that.
Sadly and unfortunately, there's nothing hard to understand about it either.
America's politics sucks. It really does.
That's my take.
Thanks. Bob.
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