The citizen vs the consumer

The Citizen vs. The Consumer

www.theevansgroupllc.com

Chip Evans, Ph.D., Sola Lamikanra, Ph.D., Joy Marshall and Dziko Thunde, MBA


Chip Evans, Ph.D. et. al. www.theevansgroupllc.com

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The use of the words “citizen” and “consumer” to many would appear to be synonymous when in actual

fact, there are often conflicts between their desires and aspirations that could lead one to believe that

these are two different groups of individuals. For example, the citizen wants the best health care, very

high wages and minimal control of our economic system by the elite rich and corporations. Their

actions suggest the desire for a system that generates less profit for business and improved "fair

trade” that is linked to the "cost of living". The Consumer, the other side of the citizen, wants to buy

everything at the lowest price, eat as much as they can, and shop for bargains. Many of the citizens are

outraged that firms like Wal-Mart or fast food restaurants appear to pay less than a livable wage. At the

same time consumers demand the lowest prices and expect the corporation or franchisee of a

restaurant to absorb the higher labor cost. As the citizen and consumer are the same person we create

conflict in our own thinking and in what we communicate about ourselves. This is the schizophrenia of

how the U.S. deals with business today.

Since the 2008 massive worldwide economic crash, moods have changed. Most citizens did not know

what actually caused the economic crash. They have had to rely on false and/or incomplete information

about why it happened. Bank improprieties for example are blamed for the loose mortgage financing

that was further fueled by government institutions worldwide such as Freddie Mac, etc. helping to push

loans through for citizens with inadequate abilities to finance mortgages. At the same time the stock

market in the U.S. was in the “Wild West” state of non-regulation, stock trading, cash derivative bets

and options trading that were at all time highs. The Citizen subsequently learnt about the vast

corruption within the financial sector, the improprieties involved with the housing market, government

supported mortgages and the impending burst of the massive bubble.

The citizen was caught off guard by the consequent economic crisis and naturally blamed others for

everything that went wrong. Citizens believed they had nothing to do with the ensuing crisis, forgetting

their role every step of the way, including contributions through the votes they cast in support for the

acts that occurred. When the citizen or consumer is “the prey” they believe fully that they have no

responsibility for acts against them. In reality, they voted for and supported each financial step until

the bubble burst. It was easier for the citizen to place guilt solely on the corrupt rich or greedy financial

sector with no responsibility ascribed to the combined citizen/consumer.

The year 2008 was a trigger year when businesses, who are also employers of the citizen/consumer, became the “evil rich”. The citizen also became outraged at huge CEO pay levels, bonuses and profits. Five years earlier citizens worldwide wanted greater business profits, participated in purchasing goods and services that they could not afford, hunted for bargains and pretended that they were rich themselves. For example, the 50 year old white woman driving her $80,000 4 Wheel Drive Range Rover meant for scaling the deserts on suburban Florida streets to the grocery store to buy bottled water became the norm. This was not even considered the black comedy of greed itself that it was. Sadly, the Ford F150 truck still sells better than other vehicles in the U.S, while in reality few people buying a truck in the U.S use one as a truck. The citizen here becomes the consumer out of desire, not utilitarian need. With the lower gas prices that we now have, SUV and big truck sales have gone up. How quickly we forget about fossil fuel and the environment when we want to drive the big trucks. On the one hand



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citizens want clean air, and renewable energy. The consumer on the side of us is out buying big trucks and SUV’s as soon as gas prices go down. Interest in fuel-efficient cars wane when pump prices aren’t part of the consumer equation when buying a new car1. We want what we want, when we want it, and we only review what we did after we’ve done it. Even now, as some believe that our consciousness is changing with increased awareness of sustainability, climate extremes and controlled capitalism, the group labeled as “greedy and rich” continues to maintain full authority and is getting more powerful. No meaningful laws are being passed to reverse this progression, and the citizen argues within himself, the consumer. The Citizen and Consumer are the cause and effect. As income inequality worsens, globalization has concentrated wealth among corporate executives, Wall Street traders, popular entertainers and other financial elite. At the same time, factory workers now compete with 3 billion people in China, India, Eastern Europe and elsewhere who were not working for multinational corporations 20 years ago. 2The citizen sees outsourcing of manufacturing and services by corporations as greedy. In reality the consumer by wanting low priced goods and services forced the citizen out of high paying jobs. The consumer’s obsession with low prices has for the first time put corporations to new challenges of how to maintain profits and dividends. Few understood also that much of outsourcing was driven by the consumer’s unwillingness to work for less. That same consumer expected, however, to purchase at bargain prices. The citizen owning stock in companies ironically expected good profit and dividend from rich firms to invest for their retirement. These expectations were decimated by a market crash stimulated by lack of government regulations. Post 2008, the U.S market followed by global markets, began a gradual trend upwards with intermittent feelings of fear (of loss), greed (what they did not get) and fear again that further losses could occur. Gold that was at all time highs subsequently declined as faith in the economic market returned. Citizens now went back to demanding high returns from their stocks and consumers want the lowest priced items. As U.S. wages stagnate, food stamp use has been growing fastest among workers with some college training.3 A slow economic recovery with high unemployment, stagnant wages and an increasing gap between low-wage and high-skill jobs all contribute to this trend. The government now spends $80 billion annually on food stamp programs. This is twice the amount spent five years ago. Nearly three-quarters (73%) of enrollments in America's major public benefits programs are from working families. The annual cost of public assistance to families of workers in the fast-food industry alone is about $7 billion4. A new minimum wage only makes sense. 5Most Americans (73% of them including 50% of self identified Republicans) want the minimum wage to be raised. Big Business, however, wants to fight an increase and has enlisted allies in Congress to block it. Sen. Elizabeth Warren (D-MA), for example, deftly dismantled the notion by some business owners that a wage hike may force businesses to fire workers, citing as an example that it would only cost McDonalds four cents more per meal to provide a $10.10 minimum wage to all of its workers. It is, however, important to note that citizens want higher

1 http://blogs.wsj.com/corporate-intelligence/2014/02/18/with-stable-gas-prices-who-still-cares-about-fuel-economy/ 2 http://www.timesdispatch.com/business/ap/wealth-gap-a-guide-to-what-it-is-why-it/article_875e183c-56c8-55f1-8083-

1789457bdac9.html 3 http://www.foxnews.com/politics/2014/01/26/new-face-food-stamps-working-age-americans/ 4 Allegretto SA, Doussard M, Graham-Squire D, Jacobs K, Thompson D, and Thompson J. Fast Food, Poverty Wages: The Public

Cost of Low-Wage Jobs in the Fast-Food Industry. Berkeley, CA. UC Berkeley Center for Labor Research and Education, October 2013 5 http://boldprogressives.org/2013/03/watch-elizabeth-warren-bat-down-right-wing-talking-points-about-the-minimum-wage/

http://boldprogressives.org/2013/03/watch-elizabeth-warren-bat-down-right-wing-talking-points-about-the-minimum-wage/



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wages for themselves with little regard for our immigrant and migrant workers who get paid slave wages, yet work twice as hard on an incentive based piece price model. The migrant worker spending 12 hours picking blueberries is paid slave labor, and few citizens will do such work. Yet, the same citizens expect $15.00 wage scales in cities with higher costs of living for workers that perform jobs that often require less than 5 working skills and 8th grade literacy level. Recent events demand that we understand what “cost of living” is to the extent that municipalities now want to determine and enforce their subjective minimum wages with no oversight, regulation or forethought. They do not assess the reality of what a business would have to do to stay competitive for the consumer in their argument of “fair employment wages”. Rule-makers now proliferate municipalities enacting tax laws that will reduce business profit and subsidize their own mismanagement and errors. Citizens are appalled by what they see being unfair to the poor. Again, the consumer (also the citizen) creates this very cause and effect. Wal-Mart, for example, is currently fighting the District of Columbia 6 over similar laws. The retail giant has suffered same-store sales declines in the U.S. over the past few years (for the first quarter of 2013, the decline was at 1.4%). Wal-Mart is claiming that it is being unfairly singled out among other retailers in D.C. by creating an unlevelled playing field, especially with two of their largest grocery competitors. Wal-Mart claims that its slim profit margins (3.6% for fiscal year 2012) bind its ability to simply absorb costs associated with a boost in wages. The retailer would be forced to increase prices, thus weakening what is arguably its strongest competitive advantage and would hurt the lower income consumers that benefit from Wal-Mart's low prices. Best Buy’s earnings also recently dropped by 37.5% and their market share was adversely affected by online sales. This trend if it continues will ultimately result in huge jobs losses and migration of the employees from the Wal-Marts and Best Buys to the Amazon distribution centers. These centers hire considerably less workers than retail stores, primarily leveraging third party shippers and modeled to reduce work force. The municipality would have lost the large volume stores. The smaller retailer will also have to pay higher wages and pass on the increased cost of doing business to the consumer. Wal-Mart, for example, as of February 2014 is eliminating 2300 workers at its Sam’s Club division as it reduces the ranks of middle managers in a bid to be more nimble. Sam’s Club represents 12% of Wal-Mart’s net sales of $466.1 billion that generated $56.4 billion in 2013. The cuts come as Sam’s Club strives to compete with Costco, and Amazon’s Prime membership service. They also follow layoffs from Macy’s, Penney’s and Target. The layoff of 116,000 employees that represents 2% of its U.S. workers is the largest since 2010 when 10,000 workers were laid off as the company moved to outsource food demonstrations at its stores. About half of these cuts are aimed at salaried assistant managers, and hourly workers. There is no logic or rational for government and municipal governments to enact laws that “reduce margins” and ensure that there are no “undue profits” under the guise of protecting the employee, this time at the expense of the stockholder. Citizens are determined to "help the poor" as they ironically continue to spend billions of dollars on items such as PlayStation 4, while small business owners are being coerced or forced into paying much higher wages. Businesses are effectively being taxed in new ways to help people earn “cost of living”. Cost of living based wages will fail miserably as companies will only pass the cost of the "morality laws" on to the consumer. The citizen for example believes that McDonald's defines the wages its franchisees pay while in reality, the franchisee does. Meal prices will have to increase by 35% or more to cover $15.00 an hour workers. The consumer, however, wants the lowest price. With this scenario, the consequence of the citizen’s municipality driven wages only hurts small businesses. The municipality in numerous ways can raise small business taxes. In reality many more small businesses 6 http://management.fortune.cnn.com/2013/07/18/walmart-wages/



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will fail or simply locate outside municipalities that create "anti-business laws". The frightening new trend around this is that the U.S. citizen wants more rules and laws that would legislate “morality”. Interestingly, this is the same U.S. citizen that cannot control its own members of Congress and has allowed the Affordable Care Act health plan to become no more than "how to trick the American to be against it", when 11 months ago 72% supported it. Also, are these the same citizens that legalized marijuana use in Colorado with record cash sales because banks are unable to accept money generated from a marijuana business? An important factor in this argument is the value of work skills in relation to compensation. Does someone that works with 4 skills, reads to the 8th grade level at best truly deserve $31,200.00 a year? Can a company truly afford to pay this, keep prices down, and keep revenues up for its stockholders? The citizens want strong stock earnings for their retirement. With jobs needed, it is bewildering that a lower skilled worker could be rewarded by government mandate, or a municipal regulation. Do municipalities have the moral right to raise taxes without a vote of citizens, or input the business community? Are we going to allow local, municipal, county, state and federal taxation on businesses? We are setting a dangerous precedence if we cannot support our businesses and allow bankrupt municipalities to force wage increases. Businesses on the other hand need to provide incentives and reward for employees that show initiative, are self-motivated and productive, and proactively provide opportunities for employees to develop new skills that will mutually benefit them and the company. The conventional belief is that while worker productivity and associated profit by businesses have increased significantly since the 1970s worker compensation has stagnated. This is sometimes used as the basis to justify a minimum wage increase. In arguing for the need for increased minimum wage, liberals point out that productivity in the economy grew by 80.4% between 1973 and 2011 with most of the growth occurring in the late 1990s, growth in median employee compensation was 10.7% over the same period of time. They argue that reestablishing the link between productivity and pay, as was the case before 1970 is essential for shared prosperity7. Some conservatives in their argument against minimum wage increase question the assertion that compensation has not increased with productivity. They indicate that analysts adjust for inflation using Implicit Price Deflator (IPD) unlike the Consumer Price Index (CPI) used in adjusting wages and compensation. Additionally, they indicate that with comparable adjustment for inflation and inclusion of total compensation (health insurance, retirement, others), employee compensation closely follows productivity. Data often presented with these adjustments, however, still show significantly lower net-income and median income that they ascribe to skill-biased technological changes8. There is also a real possibility that we may also be under accounting for hours worked, which would mean that employees are putting more hours than is been accounted for and productivity lower than currently estimated. Minimum wage should not be determined based on what citizens consider being unfair profit by companies. It should be a fair minimum employee compensation rate for their contributions to business. A thriving business has the duty to provide employees decent labor standards and support the overall socio-economic health of the community. Businesses should also strive to be self-sustaining. A system where three-quarters of enrollments in public benefits programs are working families, costing tax payers billions of dollars, is a broken one that needs to be fixed. This, in effect, is taxpayer subsidy for cost that should be borne by the business. The reduced amount of tax-payers funds going towards

7 Lawrence Mishel, “The Wedges Between Productivity and Median Compensation Growth,” Economic Policy Institute Issue

Brief No. 330, April 26, 2012. 8 James Sherk, “Productivity and Compensation: Growing Together” Backgrounder, No 2825, July 17, 2013, The Heritage

Foundation



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public assistance that will occur with increased minimum wage could be diverted to help develop skills such as in providing subsides for higher and vocational education. The national minimum wage debate is, however, totally different from that which empowers municipalities and local governments to arbitrarily and unilaterally set minimum wages. An integral part of the employee compensation debate outside the minimum wage discussion is that when you pay employees more productivity increases. The theory is based on a premise that wages deliberately set above their equilibrium level will increase worker productivity, hence the name “efficiency-wage theory”. Some of the points raised in support of this approach are that it will reduce worker turnover and increase quality of the workers that a company chooses to hire. Additionally, better-paid workers take better care of themselves and healthier employees are usually more productive. They also exert more effort and hence are more productive9. This is just another case of the citizen and consumer effort to drive the cause and effect. There is no evidence to support these claims. To fact check this, we looked at a number of companies in biotechnology, a sector that has had a leading record-breaking bull run for U.S. stocks. A comparison of five companies trading on NASDAQ with comparable size within this sector, two (United Therapeutics [UTHR], and Acorda Therapeutics [ACOR]) of which were identified as companies paying among the highest wages of all companies in America10 and three others (Halozyme Therapeutics [HALO], Cubist Pharmaceuticals [CBST] and Bio Marin Pharmaceuticals [BMRN], showed no performance advantage over a period of five years as a result of higher “efficiency wage” to employee (see chart).

Comparison of stock performance of five biotechnology companies (ACOR, UTHR, CBST, HALO and BMRN) over a period

of five years11.

9 http://economics.about.com/od/factor-markets/a/The-Efficiency-Wage-Theory.htm

10 http://www.bloomberg.com/visual-data/best-and-worst/most-profitable-employees-companies 11 www.nasdaq.com/symbol/ndaq/stock-comparison

http://economics.about.com/od/factor-markets/a/The-Efficiency-Wage-Theory.htm

http://www.bloomberg.com/visual-data/best-and-worst/most-profitable-employees-companies



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A recent study concluded that in 42% of the companies, the employees who do the worst job are the ones who feel the most “engaged.” At the same time, the middle and high performers in those firms feel disconnected from their jobs and not very motivated to come to work every day12. Also, more than a third of US companies are so dysfunctional, the best people don’t really care about what they are doing and the worst people do not know that they are doing a lousy job. Should people who don’t really care, and are doing a lousy job be paid more money? The market is at all-time high worldwide in spite of each doomsayer and our massive debt. The U.S., economy is strengthening and being supported by quantitative easing with increases for business and a strong market. Outsourcing remains higher for jobs that require better skills than for lower end labor. We have fewer higher-level jobs as the citizen, the owner and stockholder has outsourced all technology. The rate at which North Americans learn new skills or even new languages continues to be sluggish at best. Unless more citizens learn to innovate, the consumer will drive the market and our consumption will be of product and service that uses the lower waged employee. Customer service will continue to be poor or eliminated altogether. We have lost the war on poverty, the war on drugs, the war for better education, and allowed a “freeze on society” to take place in the U.S. Congress. Jobs are going to continue to be harder to come by, especially the low skilled kind as technology trends indicate that the newly dominant information companies are not job producers. Wikipedia, for example, with only 150 employees arguably subdued the giant Encyclopedia Britannica that dominated the global information business for about 245 years. In 1955 General Motors employed nearly 600,000 people. Today, in a much larger economy, Google employs fewer than 50,000; eBay employs only 20,000 in the U.S. and Facebook employs fewer than 6,000. 13 The numbers for Apple, Microsoft, and Amazon, which each employ between 80,000 and 100,000 worldwide are better, but very small compared with General Electric or Ford. By one calculation the development of the IPod created less than 14,000 U.S jobs. Meanwhile, Americans work harder and are quipped with devices that allow them continue to work even when off duty at home, commuting, or on vacation. To help us understand that we are the problem and that business may not necessarily be the “bad guy”, lets take a look at the definition of Schizophrenia. Schizophrenia is a long-term mental disorder of a type involving a breakdown in the relation between thought, emotion, and behavior, leading to faulty perception, inappropriate actions and feelings, withdrawal from reality and personal relationships into fantasy and delusion, and a sense of mental fragmentation. This should by now be sounding familiar. For a possible solution we have to give considerable thought to revamping our educational system. According to the latest government data, tuition paid at public colleges in 2012 was $62.6 billion. This is less than what the government currently spends to subsidize the cost of college through grants, tax breaks, and work-study funds, which is about $69 billion. An additional $107.4 billion is spent on student loans. Thus, it is conceivable that money presently being spent by the government to make college affordable could instead be used to subsidize public college tuition, thereby making it free for all students. This would not only mean that anyone could attend a higher education institution without worrying about cost, it could incentivize private colleges to reduce their costs in order to compete with the free option.14 The consequent elevation of the overall skill of the U.S. work force would logically

12 http://www.forbes.com/sites/susanadams/2013/04/02/in-42-of-companies-the-best-workers-are-the-least-engaged/ 13 Jeff Madrick, Harper’s Magazine 14 http://thinkprogress.org/education/2014/01/12/3151391/cost-public-college-free/



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lead to increased innovation and productivity, which will in turn drive up wages and even job creation. The resulting increased job opportunities will cause a shift in the number of individuals looking for minimum wage jobs as they take up more technical jobs or start new companies. Minimum wage jobs will then open up for the less skilled entry-level workforce as they were first intended. These will mainly be individuals in high school trying to pay for their first car or earning their way through college, or vocational type institutions. Moving away from entitlement pay to incentive based programs is another way to deal with arguments over minimum wage and cost of living increases for low skilled jobs. If businesses make more as a result of increased productivity and improved customer service they are better able to increase investment in innovation and job creation that will ultimately fuel the economy. Incentive based programs would appear to be a better alternative to passing regulations that further tax businesses and create hardships that citizens and consumers will all share. Citizens & Consumers are part of the problem if not the main cause of the problems. These issues affect everyone, yet we want to act in a manner that only suits our individual and immediate wants that are many times no more than our selfish aspirations. We then complain about the fallout and push our lawmakers to regulate and blame businesses for our desires and extreme waste as consumers.