Friday, July 11, 2014

Shameless Capitalism Explained! With Examples!

I've been making my way through Dinesh D'Souza's newest book America: Imagine a World without Her. I believe in supporting conservative media with my money, so it's a bonus that the book has something to say, as well as supporting the ideals on which the US was founded.

It's taking me a bit of time to read through the book, as I keep putting it down to think.

I know! It's shocking to most (especially my liberal friends) that I actually take time to think about stuff. But I digress.

D'Souza mentioned something early on in his book that struck me as true. Liberals and victims of liberal education don't understand economics. Instead, they rely on platitudes of socialist dogmas that view the world only in terms of class envy and economic disparity.

In other words, to liberals, the rich are evil because liberals are convinced that in order for a person to be rich, he must have stolen from the poor. Adam Smith debunked this idea over 200 years ago in his radical book Wealth of Nations.

Yet today in the US we hear ever louder and more shrill appeals to bring down the rich and elevate the poor. One tactic to promote this dogma is the trend to push for ever higher minimum wages, such as the group pushing MacDonald's to raise their minimum wage to $15 an hour. These appeals ignore or are oblivious to the basic economics of supply and demand.

As I thought on the misbegotten calls for income equality, I thought about how money actually works to build wealth, and how much damage to the economy a substantial increase in the minimum wage would cause.

Here's an example.

Let's say that I'm an entrepreneur who runs a successful graphics design business. I charge my clients $100 an hour for the designs my company can produce.

From the outside, that looks like I'd be rolling in the dough in a short time and would become one of the hated "rich" people who sucks money and life out of the poor. I've been identified as one of the Rich.

But just as liberals don't understand wealth creation, they don't understand how businesses work.

Since I own the business and hire employees, I must also provide a workplace. Out of the $100, I have to pay overhead: the lease on the office, electricity, water, waste disposal, phones, office supplies, and so on. Let's say that takes about $40 out of the $100.

Now I'm left with $60. Yay! I'm still rich. Except that I have to pay wages to my receptionist and my design grunt. The receptionist earns minimum wage to answer my phones, so she takes about $8 out of the $60. The designer is specialized labor and earns $12.

That leaves me with $40, nothing to sneer at. For an hour's work, I can almost fill up a tank of gas.

But I have to pay taxes. There are corporate taxes and sales taxes, withholding taxes, and Workman's Compensation. Let's say that takes $10 from the total, leaving me with $30. There's my profit!

Except that I have investors, who gave me money to create a business so that I could afford to lease a space and hire workers. They did this with the hope that my business would be successful and give them a percentage return on my profits. They loaned me $100,000 to start, so it will take a long time to pay them back. They take ten percent of my gross to pay back the loan. That amounts to $10.

Now I'm left with about $20. That's still more than my employees make, but not by much. I have to pay federal and state taxes on that money (after paying corporate taxes). My rate is about twenty percent, which leaves me with $16.

Yay! I'm a rich man! I've exploited the workers! I've stolen their future!

Now let's see what happens when the law forces me to raise my receptionist's wage to $10 (or $15).

That comes out of my huge profit of $16, so now my hourly wage just dropped below that of my two employees. In order to support myself, I must raise my prices so I can get back to at least that $16 an hour.

My clients complain about the rise in prices and I lose business. In order to keep my business, I have to "downsize." That means that the receptionist has to go. With the receptionist gone, I can keep my clients happy and still make a living.

Too bad for the receptionist, but at least the minimum wage increased and there are always food stamps and welfare payments.

I know this example of the way economics really works is difficult to grasp, especially for liberals. According to them, I should ignore my investors (the other Rich) and be happy that I'm making less than my now unemployed receptionist.

After all, I'm one of the evil Rich people.