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Perishable Pundit
P.O. Box 810425
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Ph: 561-994-1118
Fax: 561-994-1610


email:
info@PerishablePundit.com

a

Produce Business

Deli Business

American Food & Ag Exporter

Cheese Connoisseur



How Does The Industry Change Retail And Foodservice Incentives?
To Boost Consumption We Have To Sell Our Best!
We Often Promote Our Cheapest!

Few issues so engage the produce industry as the drive to increase consumption. Whether from a moral fervor of looking to encourage healthy eating or from the practical business sense that it is hard to grow sales and profits unless consumption grows, the industry stands united on the desirability of boosting consumption.

Yet, the industry has not been successful in converting this passion into anything that translates into actual increased consumption.  Countless programs such as The Fresh Approach, 5 a Day, Fruits & Veggies — More Matters and dozens of variants around the globe have come and gone with no notable boost in consumption patterns.

Many in the industry long ago came to the conclusion that the “finger-wagging” or “nanny state” approach, focusing on the health benefits of eating produce, was not going to move the needle on consumption. This is partly because the idea that produce is healthy is well-accepted and partly because such prudential concerns don’t seem to drive many decisions. This is why auto dealers, who mostly sell blue sedans, fill the showroom with red convertibles.

Last year, PMA came out with a study, titled Beyond Health: Promoting Produce Consumption with an Understanding of the Experiences People Want from Food, that focused on an alternative approach to marketing. As PMA explained in announcing the study:

“Our results also confirm that messaging around healthfulness is a powerful foundation that should be built upon. However, healthful claims should not be relied on solely to drive consumption. Marketers, health professionals, government agencies and advocates interested in promoting produce consumption need to attend to those underlying experiences people are looking for when eating in different contexts, and how produce can fit those needs. By appealing to the experiences people are seeking at an implicit level, produce marketing can deliver on consumers’ broader needs and hold its own as a viable, healthy and enjoyable food choice. “

Beyond the message, many in the industry have focused on marketing dollars as the “missing ingredient” in efforts to boost produce consumption. Coca-Cola, for example, spends around $5.8 billion a year on advertising and marketing. The produce industry’s marketing expenditures are a rounding error compared to such numbers.

Yet it is not clear that even vastly increased marketing dollars will boost produce consumption — the problem being that the product is inconsistent, and thus marketing can actually do more harm than good. Marketing expenditures work for Coke because each and every experience of drinking Coca-Cola is equally satisfying. Produce is not like that. A peach can be delicious, or it can taste like cardboard. Blueberries can be sweet as sugar or tart.

Marketing to differentiate a Four Seasons or a Ritz-Carlton from budget hotels can work fantastically — as long as those brands deliver on the promise of the advertising. If the product itself is inconsistent, massive amounts of advertising may bring in customers who are then dissatisfied and turned off from the brand — the opposite of what was intended.

In other words, the factors holding back consumption may be intrinsic to the product itself and not a function of the marketing at all. Fortunately, with investment in advanced genetics in fields such as grapes, berries, stone fruit and apples, combined with more controlled planting and distribution, there has been a dramatic improvement in both the taste and consistency of many produce items.

Yet, massive consumer campaigns aside, there is a sense in which retailers and foodservice operators are failing the production side of the industry — and making it less likely that consumers will increase consumption of healthy produce — by not promoting the very best product.

Think about schools. If there is a consensus in the industry, it is surely that we should focus on building consumption among children — the consumers — and purchasers — of tomorrow. Yet a typical school lunch involves a food cost of less than a dollar. Fruit might cost 13 cents. No surprise that, operating under these budget constraints, few schools are able to offer the proprietary varieties that typically have the best flavor. If we want to get children turned onto grapes, isn’t it a natural to offer them a variety such as Cotton Candy? Unfortunately, most schools buy the cheapest grape they can get.

Foodservice in general hasn’t focused on selling the best produce. Even when chains identify provenance, say naming a local farm as a supplier, they rarely explain why the produce itself is better tasting or distinctive than other produce. In large measure this is because it isn’t! Rare indeed is an explanation that the Waldorf Salad is made with a particularly delicious apple or that the fruit platter is worth paying up for, because it contains particularly flavorful or distinctive grapes. The industry has made some progress on getting operators to pay up for safety, but having reached that hurdle, the operators purchase based on cost. The fruit platter at even a luxurious resort is treated as the purchase of a series of commodities.

Retailers also are very focused on price. We returned from the Global Grape Summit in the UK — our event focused on exciting advances in grape varieties — truly enthused about the future of the grape industry. Shortly after, we had an opportunity to travel to Ithaca, NY, and we stopped by one of America’s truly great retailers, Wegmans. We felt some kind of cognitive dissonance. In London, the leaders of the global grape industry were focused on one great new variety after another, yet, here was Wegmans, with a massive grape display selling something called solely “Green Grapes,” ”Red Grapes” and “Black Grapes.”

Sure there were some organic varieties in smaller displays inside, but the blow-out display at the entrance was generic. Now the executives at Wegmans know what they are doing, so we have no doubt this is the kind of marketing that draws traffic, boosts sales and builds profits. Indeed, we have heard of supermarket CEOs demanding that if their produce teams are to feature an item such as grapes in their ad, it must be at the cheapest price in the market!

Still, it seems that if the future of the industry — and the key to boosting consumption — is not just selling generic grapes, but, rather, educating consumers as to the nuance of different varieties and their flavor profiles, retailers and producers need to find another path.

This problem ricochets through the produce department. If you look at fruit bowls and similar products created by fresh-cut processors, they literally are just marketed with names like “fruit bowl.” So what incentive would producers have to fill their fruit bowls with the most flavorful and more expensive proprietary grape varieties or the best berries, or apple slices, etc.?

The consumer wouldn’t even know!

It is as if the marketing is a relic of an age before product differentiation.

It is not that stores don’t know how to differentiate. In the same Wegmans, a short walk over to the cheese displays reveals many cheese assortments with beautiful little flags describing the name, the age, the origin of each beautiful cheese included in a flight. This creates an incentive to include the more expensive cheeses, and it conditions consumers to recognize which cheeses have superior taste.

Now we have heard of UK retailers sometimes specifying that their fresh-cut processors use only a particular berry variety they prefer. But these are still private-label products sold under a generic fruit bowl identifier. It is possible, of course, that consumers might prefer one retailer’s bowl over another, but this approach does nothing to educate the consumer as to the reason for this preference.

Industry investment in superior flavored varieties is essential to boost consumption. If the industry is to be encouraged to invest in superior varieties, it will be necessary to allow producers to earn a return on such investments. So, just as retailers would not sell a cheese selection just identifying the product as “yellow cheese” and “white cheese,” we need to move past the sale of “fruit bowl” and “green grapes.”

Some producers have packaged and branded product as well as marketing heft, so Driscoll’s, for example, is able to ride a flavor trend. In fact, the same Wegmans selling generic grapes also featured Driscoll’s Rosé Raspberries.

We are all in favor of industry marketing efforts, but we suspect the future of the industry is more likely to be built by working out a way so that children and adults both get exposed to the best fruits and vegetables, not the cheapest.




Preaching To The Choir:
Shouldn’t The Industry Seek To Persuade
Constituencies Who Have Other Priorities?

The produce industry has many articulate and knowledgeable advocates. Yet, it doesn’t seem we are being particularly effective in advancing our public policy objectives. Think about how many years the industry has been advocating a guest-worker program without effect – this is true under both Democrat and Republican administrations — and it goes back long before President Trump was in office.

President Trump’s negotiating philosophy holds a particular challenge to special interest bargaining groups, because President Trump is unwilling to confine disputes. In fact, he seeks negotiating leverage by broadening the field of dispute. This is why Germany became apoplectic when President Trump threatened to consider Germany’s unwillingness to meet its defense expenditure commitments in his decision on whether to impose higher tariffs on German cars:

“European Budget and Human Resources Commissioner Günther Oettinger argued in a Sunday interview with Germany’s ARD television station that the talks to resolve the dispute should exclude defense spending.   

“This should be only about trade. Defense, NATO or other topics should not get mixed up,” he said.”

Of course, there is no particular validity to Mr. Oettinger’s claim. If a country is depending on the US for defense, it can offer its industry lower tax rates. So, failing to meet defense obligations is a de facto subsidy to the industry of a country. And a country that is subsidizing an industry is a textbook case for compensatory tariffs. 

So why should it be forbidden to consider contributions to collective defense in assessing the appropriateness of tariffs? This is just a problem because it is a kind of three-dimensional chess game that opponents would rather not play.

None of this should be a surprise to anyone who has read President Trump’s book, Trump: The Art of the Deal. In the book, he highlighted his philosophy, which Arjun Reddy of Business Insider caught in a piece titled, Trump is deploying a tactic from “The Art of the Deal” This was published after President Trump had announced tariffs against all Mexican products:

President Donald Trump's sudden announcement of tariffs on Mexico takes a page from his book "The Art of the Deal." In the book, Trump highlights the importance of having leverage in any negotiation.

"The best thing you can do is deal from strength, and leverage is the biggest strength you can have. Leverage is having something the other guy wants. Or better yet, needs. Or best of all, simply can't do without," Trump wrote.

Tariffs represent a critical threat to Mexico, given the country's heavy dependence on trade with the US. Mexican exports to the US totaled $346 billion in 2018, representing more than 30% of the country's gross domestic product. 

"Mexico, given its high dependence on trade with the US, cannot afford to risk high tariffs causing substantial loss to competitiveness and the economy," the Société Générale research analyst Dev Ashish wrote.

Trump delivered the news in the form of a tweet, saying tariffs would be in place "until such time as illegal migrants coming through Mexico, and into our Country, STOP." The migrants have typically been people fleeing violence in Central America, with these migrants passing through Mexico to reach the US.

Ashish sees few options for Mexico other than agreeing to a deal with the US, which may not back down given the importance of the immigration issue to Trump's base. Immigration was among the most critical issues of the Republican presidential primary, with voters favoring Trump's hard-line positions.

"The Obrador government will negotiate with the leverage it has in terms of trade relations with the US and business leaders' interest in continuity. Nevertheless, in all probability, Mexico would have to offer concrete assurance to the Trump government if the US stands firm," Ashish added.

Ashish said it would take time to put a solution in place. However, the pressure on the peso, which dropped markedly as the tariffs were announced, as well as the tariffs potentially rising to 25% by October, will place intense pressure on Mexico to broker a solution.

Then the Fresh Produce Association of the Americas (FPAA) came out with a statement in response to President Trump’s tweet about his plans to impose these tariffs: 

A New Tariff on Mexican Goods Will Impose A $3 Billion Food Tax on American Consumers, According to U.S. Produce Importers and Distributors 

May 31, 2019 - Nogales, Arizona – Americans will be paying an extra $3 billion for avocados, tomatoes, mangos and other fruits and vegetables if 25% tariffs on Mexican imports into the U.S. take effect in October, according to the Fresh Produce Association of the Americas.

“This is a tax on healthy diets, plain and simple,” said FPAA President Lance Jungmeyer. “With the obesity epidemic, this is completely unacceptable and counterproductive in dealing with the migrant issue at hand.”

Americans consume $12 billion in Mexican fruits and vegetables a year, according to the U.S. Department of Agriculture.

“The latest threat from the President will harm American consumers and U.S. businesses first and foremost,” Jungmeyer added. “This takes us backwards as a country and threatens USMCA passage at a critical time in moving this agreement forward.”

This comes on top of 17.5% duties recently imposed by the Administration in Mexican tomatoes, duties which could raise prices 40 to 85%, according to an analysis from Arizona State University economists.

Additionally, fruit and vegetable growers from Florida and Georgia have convinced their Congressional delegation to withhold votes on USMCA unless Congress passes a Marco Rubio-led bill that would add even more duties or tariffs on Mexican produce.

Not only are these punitive tariffs and duties a tax on American consumers, they must first be paid by American companies.

“This is going to be a drain on Southwest border communities, where employers have already cut jobs due to other moves by the Administration to put pressure on the border,” Jungmeyer added.

It was a perfectly sound statement, emphasizing the cost to American consumers when tariffs are imposed. The issue became moot when Mexico and the US reached an agreement. Perhaps the statement would have ultimately roused some congressional opposition. We don’t think it likely though. President Trump didn’t say that this plan would reduce costs for American consumers or encourage healthy diets; he said it would put pressure on the Mexican government to fulfill its responsibility of not allowing their country to be an illegal transit point for Central Americans to enter the US.

Although President Trump was able to get a deal with Mexico, we still can’t really say if this approach will ultimately work. But the point is that the produce industry is not really responding to the interests that are pushing the policies it doesn’t like. If your main concern is illegal immigration across the Mexican border, then you will hope this works, and then, after Mexico steps up and controls the immigrants coming from Central America, the tariffs will be dropped. The issues of the short-term financial impact on American consumers and US businesses are really secondary in the minds of the advocates for such policies.

The point is that the produce industry is not really responding to the interests that are pushing the policies it doesn’t like. If your main concern is illegal immigration across the Mexican border, then you will hope this works, and then, after Mexico steps up and controls the immigrants coming from Central America, the tariffs will be dropped.

Similar thoughts came to mind when we read Kevin Murphy’s op-ed in The Wall Street Journal, “American Farmers Need Immigration Reform.” Kevin was the CEO of Driscoll’s and is an immigrant from South Africa, so he is well positioned to make this case. His plan is simple:

The American Farm Bureau Federation notes that “50-70 percent of farm laborers in the country today are unauthorized.” Why so many? Because “few U.S. workers are willing to fill available farm labor jobs.” It’s not possible, then, simply to replace this workforce with American citizens. The only question is whether foreign-born workers will produce our food here in the U.S. or in other countries for us to import.

There’s a three-step solution: First, ensure a viable guest-worker program for the effective inflow of farmworkers. They’re often called low-skilled, but many are highly skilled for specific and essential jobs.

Second, workers who are otherwise in good legal standing should have the opportunity to earn legal status. That would provide safety for them, and much-needed stability for their employers.

Third, pass laws that enable a system of legal workers and secure borders. This will ensure we’re not back at this same place 30 years from now.

None of this is new, though, and it is hard to see why it will suddenly be persuasive. Even within the produce industry, though few see an upside in publicly challenging big growers, we often hear of a different opinion. As far back as 2006, one of the most important buyers in the industry wrote us with his thoughts and we will reprint that piece here:

Some very incisive thoughts in response to our piece on immigration:

On immigration, much to the dismay of my shippers, I’ve long contended that the agricultural community is hooked on the drug of cheap labor. In the 60’s, people were mechanically harvesting certain vegetables for Campbell’s Soup. They had to quit doing it because labor was so cheap — they couldn’t beat the cheap labor rates — and the machine wasn’t efficient enough to overcome it. The point is, it was being contemplated 40 years ago, and it should have been an industry-wide effort ever since.

We haven’t worked on mechanization and automation in this industry because we have had no motivation to do so. Now, with fear of labor shortages, we see a frenetic pace of R&D on mechanical harvesters. I’m already hearing tales of at least four companies that will be mechanically harvesting lettuce in Yuma with less than 50% of the labor previously needed, and they also claim better quality! And this is only the start of an industry revolution.

And we haven’t attributed the correct cost to our cheap labor. Thirty percent of California prison inmates are in the country illegally. There are 20 murders per year in Salinas, a city of 150,000 people. The city spends almost $1 million on a gang task force every year. These are social costs that are borne by all the citizens of the city and state, and aren’t accounted for in the cost of the produce.

Where there’s a will, there is a way. We haven’t had the will because there was no need to abandon our reliance on cheap labor and find a better way of doing things.

This reader, who has extensive experience at the highest levels in our industry, makes the point that often gets lost in all the political battles, namely, that the industry of today is shaped based on the incentives in place today. Only a fool would extrapolate from the current situation and assume in some kind of linear fashion that if we were short 10% of the produce harvesting work force, then ultimately production must decline 10%.

Wages can go up, mechanization can change both the amount and the nature of the labor needed, consumer product preference can shift as higher wage rates lead to differential price changes on various products depending on the difficulty with growing, harvesting and packing.

In the piece we ran last week, the Pundit linked to an article by Professor Philip Martin from U.C. Davis, and we’ll link to it again for those who missed it. It is a fascinating piece that talks about what impact guest workers really have on an economy. His basic point is this:

Guest worker programs tend to increase legal and illegal immigration for two major reasons: distortion and dependence. Distortion refers to the fact that economies and labor markets are flexible: They adjust to the presence or absence of foreign workers. If foreign workers are readily available, employers can plant apple and orange trees in remote areas and assume that migrant workers will be available when needed for harvesting. Dependence refers to the fact that individuals, families, and communities abroad need earnings from foreign jobs to sustain themselves, so that a policy decision to stop guest worker recruitment can increase legal and illegal immigration.

In talking about the failure to pursue mechanization, our reader is basically referring to the distortion effect that Professor Martin refers to in his report.

In addition, our reader points to something economists call externalities. Basically, this is a cost not paid by the parties in the transaction. Pollution is the classic example. In the absence of regulation or taxation, a seller of product could have a factory that bellows pollution in the air, and neither the seller nor the buyer of the goods made in that factory has to suffer the effects of the damage caused by the pollution. That price — bad health, increased medical expenses, closed fisheries, etc. — is paid by an external party, typically the general public.

This reader is pointing out in his note that there are many costs to farm labor and not all of it is reflected in the price of the goods. If there are external costs to hiring the current classification of farm labor and we restrict that classification from entering, from a societal standpoint, it means there will be more resources available to deal with any problems that come about if labor does become constrained due to restrictions on immigration.

The reader’s two points together are astute and point to something problematic about both trade associations and governmental bodies: Both tend to be responsive to the industry only as it is today. The people who are going to work in factories that will produce automated harvesting equipment don’t know it yet, so they can’t lobby for their interests. The only voice that typically gets heard is from those who have something to lose from a change in the status quo.

We are glad to serve as a forum for such unheard voices here at the Pundit.

Kevin Murphy echoes many of the industry’s leaders when he concludes, “The only question is whether foreign-born workers will produce our food here in the U.S. or in other countries for us to import.” But those two scenerios — either foreign-born workers producing our food here or in other countries for us to import — are simply not a complete listing of all available options. 

No less a publication than The New Yorker recently ran a piece, The Age of Robot Farmers, which starts with the interesting efforts of Gary Wishnatzki of Wish Farms. (Gary’s grandfather bought produce from this Pundit’s grandfather and great-grandfather, and both of our families eventually became wholesalers off both the Washington Street Market and, eventually, the Hunts Point Market in New York.) 

Now Gary is a true industry leader on the production side. In his Gary’s Post Blog, he tells a funny story:

“You Have Less Than a Year to Live”

For the last five years, I have dedicated a significant amount of time to Harvest CROO Robotics. In the summer of 2017, we were invited to the Forbes Ag Tech Summit in Salinas, CA to be recognized for our efforts to bring an autonomous strawberry harvester to market. Along with co-founder Bob Pitzer and Head Electrical Engineer Scott Jantz, we set up a booth display with a looping video of the technology in action.

An estimated 2,000 growers, academics and technology experts throughout California attended the event. In addition to the exhibits, there were speakers and panel sessions that went on throughout the day. Along with numerous produce industry leaders, guest speakers included Janet Napolitano and namesake Steve Forbes. 

The session on farm automation particularly interested me, so I made a point to sit in on it. The panel included Brian Antle of Tanimura & Antle, Dan Steere of Abundant Robotics and independent strawberry grower Javier Zamora. The discussion centered around robotic solutions for the farm. Brian Antle and Dan Steere spoke of the technologies they are using for planting lettuce and picking apples, respectively. 

When Javier was asked about automation in strawberries, he made a point to say how hard it would be for a machine to pick strawberries. He described the delicate nature of the fruit and the difficulty with identifying ripe berries. He ultimately said it was nearly impossible and he would not see an automated solution for strawberries in his lifetime.

At this point, I’m getting agitated. We’ve spent countless hours trying to bring a solution to market, so this subject has been very near and dear to my heart. Now, here I am listening to a person who was totally oblivious of our developments, and he was speaking as if he was some expert in the robotics industry! I was more than a little miffed. As I sat there, teeth gritting, I remember thinking “not in his lifetime, huh?”

When the panel discussion was over, I spontaneously sprung to my feet and made a beeline toward Javier. As he came down the steps, I greeted him and extended my hand: “Hello Javier, my name is Gary Wishnatzki. It’s very nice to meet you.” I got up close and put my hand on his shoulder. I stated in a somber tone: “I am very sorry to be the one to inform you, but (I took a dramatic pause) … you only have a year to live.”

At first, Javier was taken aback by my brash statement. Eventually, he began to chuckle once I explained the context. I urged him to come by our booth and see the video of our technology. After he did, I’d like to think that his perspective shifted on the prospect of a robotic berry picker happening in his lifetime.

We are headed for great things, as long as we live long enough to accomplish them.

Whether Gary’s efforts succeed or not, the point is that simply saying Americans won’t do this work is not going to be persuasive. The key phrase in the Farm Bureau statement is “fill available farm labor jobs,” and the key word is “available” – but in capitalism, if you can’t attract labor, you change the job or the compensation so you can attract labor.

The letter to the Pundit from the big buyer and Gary’s work with robotics both allude to a kind of tipping point. Surely in an age when we can do robotic surgery, and artificial intelligence applications are becoming commonplace… surely we can develop the technology to limit the need for laborers. The challenge is that the availability of inexpensive labor makes it uneconomical to do so.

In any case, there are so many reasons different people oppose using immigrant farm labor:

1) Some see externalities in their employment — crime, cost of law enforcement, social and medical costs, etc. — as our letter-writer alludes to.

2) Some see the immigrant labor force as depressing wages for unskilled Americans.

3) Some see a political issue as in a democracy if people become citizens they become, in a sense, your partners. Fully able to vote. But not everyone wants to become partners with new people.

4) If they believe we should have a certain number of new immigrants each year, they would prefer us to prioritize on other criteria, such as allowing in people who are well-educated, who have resources to invest in the country, etc.

We’re not completely persuaded by any of this, but if the industry is going to move the needle on public policy, we need to engage heavily in the debate. 

That means taking a greater role in communicating on tariffs, labor and a host of other concerns. It also means understanding the concerns of those who think differently and doing the difficult work of changing their minds.

 




Animal Spirits Lift The Economy, But
Representative Katie Porter Seems Willing To Depress Them If It Riles Up Her Base

One of our problems politically is that our politicians — on both sides of the aisle — are often more interested in firing up their base and scoring political points than in actually trying to solve problems.

JP Morgan CEO Jamie Dimon is a super smart and accomplished guy. Freshman Representative Katie Porter has a resume filled with Harvard and Yale. You can actually fantasize that these two people, sitting quietly in room, might actually be able to make progress on a problem. But there was recently a hearing that exemplified why we disagree with newly retired Brian Lamb that the “transparency” of C-Span is a blessing.

Brian Lamb launched the cable network in 1979, and he defends it on the basis of transparency. But the problem is that transparency changes the nature of what you are being transparent about. In this case, Representative Porter was more interested in playing to the cameras — complete with visual aids — than in actually analyzing and moving toward solving any problem

The gist of the Congresswoman’s speech — it would be unfair to call it a question — was that it would be a tough life for a single mother of a six-year-old with a take home pay of $29,100 a year to live in their own apartment in Irvine, California. CBS news says Orange County, where Irvine is located, is the 9th most expensive city in America. Irvine’s cost of living is 211.5% of the average in the US.

The numbers worked out like this:

The $35,070 includes a $750 bonus the bank pays.

The congresswoman asked Mr. Dimon to redo the budget for this hypothetical employee so she could make ends meet. For the most part, Mr. Dimon refused the bait and simply explained he would have to think about it.

The congresswoman asked a series of odd questions, asking Mr. Dimon if he would recommend that this hypothetical employee should get a Chase credit card and pay interest or if she should write bad checks and pay overdraft fees.

Jamie Dimon knew she wasn’t actually interested in exploring this problem, so he mostly deferred answering as anything he said would just be attacked.

So we thought we could be a voice and let the congresswoman know what we thought about this line of questioning.

First— Representative Porter does something terrible in making it seem like JP Morgan Chase did something bad to this hypothetical woman. Obviously, the hypothetical constituent is tight on money so probably goes for an income-maximizing job, so it is reasonable to think that she “works” for JP Morgan specifically because JP Morgan is willing to pay her more than anyone else.

One wonders if Representative Porter realizes what harm she does to the country with a presentation like this. We credit a lot to tax policies, regulation policies and so forth when looking at the economy. But John Maynard Keynes spoke of the Animal Spirits that animate commerce.

Who wants to be in business knowing that if you reach the pinnacle of success and offer jobs to people better than they can get anywhere else you have to sit there and be attacked?

It is such a terrible thing.

Second— Representative Porter is focused on the employer, but Mrs. Porter fails to account for the government's contribution to this woman's financial burden. This hypothetical woman’s dilemma is quite substantially influenced by her tax burden.

Representative Porter shows that the hypothetical woman paying $5,970 in tax, or 17.02% of her income. This is a lot, but this significantly understates her tax. For example, of that $150 a month this hypothetical person is spending on gasoline about 98 cents per gallon is taxes, which are government-dictated costs. Right now gasoline is Irvine, California, is just over $4 a gallon (Costco is $3.85) — so, roughly 25% of her gas cost is actually taxes, fees and regulatory costs:

  • Federal excise tax — 18 cents
  • State excise tax — 42 cents
  • State and local sales tax — 8 cents
  • State underground storage tank fee — 2 cents*
  • Additional costs for compliance under Cap & Trade, as well as the Low Carbon Fuels Standard — 28 cents
  • Total — 98 cents

* Note: The state and local sales tax is calculated at an average state sales tax rate of 2.25% percent although actual sales tax rates vary throughout California.

Of course, this understates how much of our hypothetical employee’s money actually goes for taxes. When it comes to gas, every service station pays real estate taxes, and everything from refineries to pipelines to tanker trucks are all taxed. These taxes are factored in to the base price of gas at the pump.

And, beyond taxes, government policies can raise costs. Right now although in California, gas is over $4 a gallon, the national average is only $2.90; Alabama is $2.51. This inflated price is heavily influenced by challenges California puts up to building pipelines, refineries, oil exploration, etc.

The general sales tax in Irvine, California is 7.75%. Although property tax rates are low in California, the value of each unit is high, so taxes can still be substantial. Cell phone tax, which combine Federal and State, is 19.87% in California.

Obviously it is impossible without knowing specifics, but it seems highly likely that direct and indirect taxes are costing Representative Porter’s hypothetical constituent a good third of her income.

Yet Representative Porter seems completely uninterested in adjusting this burden, even though only a small adjustment would cover the $567 per month gap she identifies.

Third— Representative Porter doesn’t deal with the reality that loads of people work more than 40 hours a week. Now, perhaps, Chase won’t offer overtime hours, but, if so, again, this may be due to Federal Legislation that would require Chase to pay time-and-a-half to her — but not to another employee. In other words, if they add a Saturday opening to a branch, the government legally disadvantages this woman as Chase would have to pay her 50% more than if they hire someone just to do the Saturday shift. Again, this is a problem that Representative Porter seems completely uninterested in solving!

But, of course, the hypothetical constituent could work elsewhere to pick up extra money. Many people do.

Fourth— It is certainly nice to be able to live and work in the same town and avoid commutes. But Irvine is pricey and lots of Americans have to commute. Maybe if she looked in Costa Mesa or southern Orange County, our hypothetical constituent might be able to shave a few hundred dollars off of the rent. Or, maybe they could get a bigger apartment and split it with a friend or relative.

Fifth— Why, exactly, is housing so expensive in Irvine, California? We can investigate lots of possibilities, but the median rent for a one bedroom apartment nationally is $951, and right next door in Arizona it is $849 and in Arkansas it is $574. Factored into rents, there are zoning rules, density restrictions, union work requirements, and lots of other factors that have little to do with Jamie Dimon and a lot to do with government regulations.

Sixth— Representative Porter seems to have left out the father of the child. In America, fathers are required to help support their children. Now, possibly this is a father who can’t or won’t pay or is dead, but there is no mention of him at all. If he was contributing $150 a week, that would also cover the deficit with room to spare. Even if he is dead and had no private insurance, there would still be Social Security benefits for children.

Seventh— friends and family. There is a mention that this is a first job, so, presumably the hypothetical mom and hypothetical daughter were living somewhere else up to the moment she got this job — probably with a parent or grandparent. Someone was watching the child while Mom was in school, etc. Yet, somehow they are now kicked out without any help at all.

This is not the typical experience — certainly not for someone together enough to graduate high school, get a job at a bank and sustain a $1,600-a-month apartment. Maybe grandma or an aunt will step in and watch the child after school for an affordable rate. Maybe someone has an older car they will give her when they are done with it.

Even without family, many people are able to make agreements with friends and neighbors. Sometimes they may watch each other’s kids as they are on different schedules, for example.

Eighth— there is a hint in here that companies can just pay people whatever they want. In the very short term, this may be true. But, very quickly, if JP Morgan Chase overpays its employees, Bank of America will be able to underprice Chase, and quite quickly the JP Morgan Chase jobs will disappear.

Ninth— Higher wages sound great, but they often lead to either consumers taking on the work themselves or to automation. Remember the minimum wage is always zero if you cannot get a job. The idea that if you just pay more you will do employees a favor is not necessarily true.

Tenth— It would be desirable if Representative Porter said a word about personal responsibility. We don’t know how old this hypothetical person is, but Representative Porter says it is her first job out of high school, and she has a six-year-old child, which might mean the mother was raped at 11 years old. If so, shame on Representative Porter — she uses as an example a woman who was raped at 11, has a baby at 12 and who is thrown on the streets without a friend or relative willing to help at 18. Since the percent of 10- to 12-year-old girls who have babies is less than 0.1% of the age group, and many of those surely are taken care of by their families, Representative Porter is trying to make public policy based on extreme circumstances, which pretty much guarantees bad public policy. She should be ashamed of herself.

If, instead, we assume that the hypothetical constituent is older and she had her six-year-old as an adult, wouldn’t it be helpful for Representative Porter to use her platform to point out that the entire financial problem she details is due to the fact that her constituent had a child both out of wedlock and before she could afford one?

If she had postponed having a child until she could afford a child, the hypothetical constituent wouldn’t have the child care costs, food costs would go down, etc., and it would be easier to have a roommate and split the housing cost. Representative Porter gratuitously noted that Jamie Dimon has a big compensation package, $31 million, and that, somehow, this is reason the Congresswomen’s hypothetical constituent can’t make ends meet. Of course, only $1.5 million of that compensation package is salary. The rest is various kinds of performance-based pay. Besides, JP Morgan Chase has 256,105 employees, so if Jamie Dimon worked for free and the $31 million was divided among all the employees, that would only be $121 for each employee.

******

Many are concerned about pay gaps between CEOs and the lowest paid employee or some other metric. The use of computers and other technologies allows for much larger organizations. Rowland Hussey Macy had one store. He was a big success and expanded into neighboring buildings. But it was difficult to manage other stores. To compare that job to say, the CEO of Amazon.com, who can use modern technology to work on a totally different scale, is simply bizarre.

The truth is that the pay of the CEO is almost always insignificant in the scale of these organizations. What most benefits their employees is not having a low-salaried CEO; it is having a CEO that is successful, can make the company grow and thus create new opportunities for its employees.

Representative Porter could help people like her hypothetical constituent, but she would have to thank people like Jamie Dimon for creating opportunities and urge her constituents to be responsible. That doesn’t sound like a way to fire up a base.

 

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