Note - as the article suggests, this is loosely (if at all) tied into investing; I promise to keep such rants to a minimum, though I do believe the overarching point is relevant to investors.
According to Wikipedia, The Wall Street Journal is an international daily newspaper with a special emphasis on business and economic news. Most would agree that’s a fair description.
As such, I’d assume the WSJ has a team full of individuals with a deep understanding of business and economics. The paper’s quality is a testament to that expertise. I would assume that when articles come across the editor’s desk with questionable facts or figures, they are checked for accuracy. Anything that fails to pass the smell test is likely rejected until proven otherwise.
This may be a bit of stretch, but I would also suggest that should extend to the editorial page. One’s opinion should not take priority over financially accurate information. Any questionable data should be rejected, or require citation and explanation by the author; if one places an emphasis on integrity and impartiality, this is a must (of course it’s questionable whether this is a top priority at most “news” organizations these days).
That brings me to the point of this article. In Monday’s edition of the paper, The Wall Street Journal featured an editorial by Robert Strayton, the former chief strategy officer of Hill & Knowlton, entitled “A Minimum Wage That Will Work” (here). Here’s the first paragraph, in full:
“The president's call for a $10.10 minimum wage applies the worn-out notion that higher wages create more jobs. Despite repeated minimum-wage increases over the years, we have seen a continued flight to the sidelines by people who are unable to find jobs because they don't exist. Many jobs don't exist because employers refuse to hire people at such wages. Isn't it obvious that, with a higher wage, McDonald's $1 menu, for example, would cost $3, few would buy it, and Mickey D would have less revenue and far fewer jobs?”
That’s a pretty astounding change: With an increase in the minimum wage to $10.10 an hour, Mr. Strayton believes — actually, states as fact (“McDonald’s $1 menu… would cost $3”) — that MCD would be forced to charge $3 per McChicken. Unfortunately for the reader, he does not make any reference to where this number came from. Let’s look at the numbers on our own to see if that meshes with reality.
In the year ended Dec. 31, 2012, McDonald’s reported $18.6 billion in sales from company-owned restaurants (we’ll use data from company-owned restaurants because we do not have franchised restaurants operating expenses); of that $18.6 billion in sales, McDonald’s spent $4.7 billion — or 25.3% of revenues — on Payroll & Employee Benefits.
With the federal minimum wage currently at $7.25, a move to the $10.10 called out in Mr. Strayton’s article would result in a nearly 40% increase in this line item; increasing a quarter of the company’s expenses by 40%, assuming all others remain constant, would result in an overall increase in company owned operating expenses of about 10%. The price increase to the consumer, in order to cover the additional expenses for MCD, would actually be less than 10% of what Mr. Strayton has estimated (this is before adjusting for the fact that nearly half of all states currently have a minimum wage rate in excess of the federal minimum, employees that get paid the least tend to work the fewest owners, many employees make somewhere between $7.25 and $10.10 and might not receive a proportionate raise to the lowest paid employees, etc.).
(I want to be clear about something — this is not a political statement on my part; if someone wrote an article saying a hike in the minimum wage would have no impact on the cost of fast food, I would be writing the same thing from the other perspective. I have not looked at the issue of minimum wage increases closely enough to have a firm opinion one way or the other.)
That’s math that requires no interpretation besides a few readily available facts. The numbers put forth by Mr. Strayton appear to have no basis in reality. Either Mr. Strayton or (in my opinion) somebody at the WSJ should have run these numbers; if they don’t own a calculator or know how to read a 10-K, they could’ve searched online to find supporting evidence for Mr. Strayton’s figures. If they’re like me, they will end up searching for a long time, with nothing to show for it.
But all is not lost – looking for minimum wage and fast food studies yields some results. One of the first links that popped up in my search was a study from the University of Massachusetts, Amherst, completed less than six months ago (here). For our purposes, here’s the result of the study:
“We presented these findings in a petition supporting H.R. 1346 signed by over 100 professional economists. In particular, we described how raising the minimum to $10.50 would impose a cost increase to the average fast-food restaurant equal to 2.7 percent of their sales revenue. In other words, assuming all else equal, the average fast-food restaurant could fully cover the costs of the $10.50 minimum wage by raising their prices 2.7 percent. This is equivalent to increasing the price of a $4.50 Big Mac to $4.60… We extrapolated our 2.7% figure from the findings of five empirical studies firmly grounded in industry-specific data. Each of these studies measures how the business costs of fast-food establishments increased in response to minimum wage hikes in the range of 10% to 65%.”
This study from David Card and Alan Krueger looks at a minimum wage hike in New Jersey in the early 1990s — with a conclusion that’s comparable to the study presented above (here). Finally, a 2006 paper from the Employment Policies Institute (which according to Wikipedia is a fiscally conservative non-profit think tank) also suggests the figure from Mr. Strayton is wildly inflated (link in article here).
As I noted, I’ve looked through plenty of articles on the topic, trying to find any that would support Mr. Strayton’s claims — but I can’t (though I found some claims that were even more outlandish, with a notable one from Congressman Mullin of Oklahoma: when asked about the minimum wage, he responded “you guys want to pay $20 for a hamburger at McDonald’s?”)
Even industry trade groups only offer vague claims; for example, here’s a statement I found in an article from the Wisconsin Restaurant Association: “If you double the minimum wage and that takes everybody's wages up, that's going to be a cost increase that a restaurant owner can't just absorb.” That’s a fair point, and well worth consideration; unfortunately, we don’t know if that means a cost increase of 2%, 200%, or somewhere in between. An article from The Heritage Foundation (here) takes a similar approach — it discusses the risk to manual labor at higher costs of being replaced by previously uneconomic automated systems (again, worth consideration).
But none of those items suggest prices will triple — not even close; how can numbers that have no apparent basis in reality be published in one of the leading financial newspapers in the world?
“Recognize reality even when you don't like it — especially when you don't like it.”
While this article may not relate to investing directly, I think it says a lot about human nature; just like in financial markets, people in the religious and political world are often “sure” of things that are simply unknowable, and seek out information that confirms what they already believe.
As an investor, reality must trump consistency of belief; push yourself to seek out evidence that contradicts what you currently believe to be true.
About the author:
I think Charlie Munger has the right idea: "Patience followed by pretty aggressive conduct."
I run a fairly concentrated portfolio, with a handful of positions accounting for the majority of the total. From the perspective of a businessman, I believe this is sufficient diversification.