Bad Economics Doesn't Help Anyone

UPDATE July 30, 2013, 11:05 pm: Since the article I discuss here originally ran, HuffPo has added a correction at the bottom that the "researcher" in question is actually registered as an undergraduate at the University of Kansas. As yet, no substantive changes to the general thesis of the story, though.

Forbes.com has also updated their story, tacking on 3 paragraphs at the end in which a UK economics professor splashes a little cold water on the undergraduate's "leap of faith."

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I would like to start this off by stating that I fully support raising the minimum wage and that I am not comfortable with the notion that the median hourly pay for a fast food worker is less than $9.00 an hour (which translates to around $18,000 a year for a full-time employee).

And it's for this very reason that ledes like this one from the Huffington Post raise my hackles: "McDonald's can afford to pay its workers a living wage without sacrificing any of its low menu prices." Their source for this sweeping statement is "a new study" provided to them by "a University of Kansas researcher." 

That "researcher," it turns out, is a research assistant at the University of Kansas School of Business. One assumes that he is still in training and has not yet learned how to read an annual report much less how corporate finance operates. The mistakes of a student are understandable. What isn't so understandable is why paid journalists (even poorly paid online journalists) don't bother to do a basic fact check on it.

If you take the six seconds required to pull up McDonald's 2012 Annual Report, you can see exactly where the "researcher" got his numbers. They're on page 28, the consolidated statement of income. McDonalds' total revenues for 2012 were $27.567 million. Later in the same chart, the line item for "Payroll & employee benefits" is $4.71 million. Divide payroll expense by total revenues and you get 17%, which is the number the "researcher" used for the argument that you could double wages and only have to increase menu prices by 17%.

Here's problem #1 with that thesis: he used the wrong revenue number. McDonalds doesn't own all its restaurants. Most are franchised. The salary expense figures used in the "study" are for company-operated restaurants, while the revenue number is for the whole company, which includes fees from franchisees. If you do the same math exercise with just the revenue figure for the company-owned restaurants (which is $18.6 million and is available right there on the same income statement), you see that payroll and benefits makes up 25% of the revenue from company-owned restaurants.

So, the whole "study" starts with an elementary mistake, but it's a supremely flawed premise in the first place, as if a corporation is machine which you can steer just by pushing a couple of levers. It assumes that the price of food is inelastic and that you can just blindly raise prices 17% and not see a fall off in demand, because it's "just 68 cents per Big Mac" (or, $1.01 per Big Mac if you use the 25% figure.)

And yet other outlets like Forbes.com (who one would think understood corporate financials better) have started picking up the same report and publishing it without a bit of scrutiny. In fact, their description of what the "researcher" did sounds pretty impressive: "he did some financial modeling based on McDonald’s annual reports and data sets submitted to investors." This "modeling" involves, basically, dividing two numbers, one of them the wrong one.

Ultimately, "analysis" like this is so simplistic and reductive as to be meaningless. It makes a great splashy headline, but it implies that the problems of wage inequality and affordable food is black-and-white simple: if these damn corporations just stopped being so greedy all the problems would go away.

But it's not that simple. Since the 1950s, the fast food industry has been defined by a low-margin, cost cutting model with cut-throat price pressure from the market. And consumers, literally, have been eating it up. The notion that there's so much headroom lying around in the financials that companies could simply double their labor costs is laughably naive.

I think it galls me so much because I'm on the side of the people who want fast food workers to make more money (and for fast food quality to be much better, too.) And, there are some very interesting and dedicated people out there trying to make that happen. I've written about a few of these folks in the past, like Nick Pihakis of Jim 'n Nick's BBQ, and I've got a lot more stories in the works.

It's not as simple as us all just paying 68 cents more for a Big Mac, but for me, at least, it's a lot more promising because it's a future that might actually happen. I'll take a look at some of the practical things that could happen in a couple of future posts.

Staying Sober, 1830s Style

In 1830, the Macon Weekly Telegraph of Macon, Georgia, printed a letter under the perhaps not totally accurate headline “Temperance”, advising the newspaper’s readers on how to avoid drunkenness. Signed, “A Friend to Temperance,” the letter’s author revealed that he fell into his former drunken ways by “taking a dram in the morning” on the recommendation of an old neighbor, who was fond of morning drams himself. 

“I was told that a glass of bitters before breakfast was an excellent thing to give a body an appetite”, the writer related, and admitted that it did indeed make his blood circulate faster and his appetite stronger. So, he adopted the plan and “every morning took my bitters, mint julip, or gin cocktail.” 

Before long he found his appetite so stimulated that he ate breakfast to excess, and by mid-morning, heavy and languid, needed another dram to pick him up. And then another glass before the afternoon dinner, and a few more afterwards, and the next thing he knew he was never sober at any point of the day.

He tried total abstinence on multiple occasions but kept lapsing back to his old ways. The solution? Never take a drop of spirituous liquor before breakfast, nor anytime afterwards on an empty stomach. By keeping to this rule and drinking only after a hearty meal he had been able to avoid drunkenness for over five years. 

Just passing this along as a public service.

“Temperance”, Macon Weekly Telegraph (June 26, 1830), p103

What are they Cooking in Dubuque Tonight? The New York Times Goes Global

The New York Times' restaurant critic Pete Wells just filed a review of Hog and Hominy, which is not in Manhattan or even Brooklyn but way out in the outer borough of Memphis, Tennessee. It's part of a calculated move. As Wells explained it back in May in a post in the now-defunct Diner's Journal blog, "it’s time for the restaurant critic of The Times to cast a wider net. The Times has been a national paper for years now, and its Web site is seen all around the world."

But, this isn't a move that's limited to the Dining section. The New York Times is making moves across the board to not only making itself a fully national journalistic organ but an international one as well. In the Sports section, for instance, international soccer matches have now displaced baseball from front page coverage, a move that isn't sitting well with everyone.

I wouldn't be surprised if we start seeing restaurant reviews from Europe and Asia in the near future, too. It's a curious new direction from one of the lead voices in a publishing world that once famously considered civilization to end at the banks of the Hudson.

I've no strong opinion one way or another about whether this is a change for the better or worse. But, one wonders if such a widening of the focus will serve to highlight the splendid variety of cooking across the country and around the globe or advance the general blurring of regional and national boundaries into a single fusion cuisine that bounces from one hot spot to the next.

Time will tell.