30 July 2013

Rock chalk! KU Undergrad's brilliant economic analysis: Big Mac + 68 cents = Utopia!

The Huffington Post helpfully reports on a "study" that shows doubling the pay of all McDonald's employees would only raise the cost of a Big Mac by 68 cents! Further, dollar menu items would only rise to $1.17.

The study, though, is no such thing. It is a simple calculation done by a KU undergrad who, while he obviously owns a calculator, clearly doesn't know how to read, and has not the slightest understanding of business, economics or, in short, the real world.

Had he given this "study" to his economics professor, he would no doubt have had a somewhat less friendly reception than he got at the Huff Post.

Our aspiring social justice economist has looked at the Consolidated Statement of Income on Page 30 of McDonald's 2012 Annual Report, and calculated the total "Payroll and employee benefits" as a percentage of "Total revenues." Thusly:

4,710,300,000/27,567,000,000=.17 or 17%

Our child prodigy therefore concludes that in order to double pay and benefits for all employees, one need only raise prices by 17% - and who among us wouldn't be willing to pay that in the interest of social justice? Inconveniently left out of the equation is the "Pay and benefits" of employees at about 80% of McDonald's restaurants, a fact one might glean by reading the rest of the report.

Nor does this scholar account for potential changes in sales due to price increases. Believe it or not, when prices go up, sales often go down. Nor does the "analyst" note the increased payroll tax expense that doubling pay would entail.

The real problem with the whole study is the notion that somehow this college student can glance at a summary financial table and say, "There's your problem right there!" and all the McDonald's execs will slap their foreheads and say, "How could we have missed that!"

I hope that the suffocating arrogance of that young man is not emblematic of his generation. The very idea that he could so easily figure out how to double pay, that only he cares enough to do so, that all the managers at McDonald's really want is to crush the little guy and roll around in their piles of ill-gotten gains.

News flash: bad businesses don't make money. Companies that don't serve customers don't make profits and don't stay in business. Companies that underpay don't get employees to work for them. Companies that overcharge lose business to competitors. Companies that go out of business don't have any employees.

And nothing happens in a vacuum. Raise the price of McDonald's employees and see how long it takes to build a robot that makes fries. The idea is hardly far-fetched.

I could go on all day and still be oversimplifying.

Guess what, Mr. Undergrad researcher? There are a lot of people at McDonald's who get paid to think about this stuff all day long. It's their job. No business ever became a success by trying to crush its own employees, but plenty of them were crushed by busybody know-it-alls who thought they knew better.

My advice is to stop trying to be a CEO unless you plan to start your own business, then apply your long division business principles to your own books and let us all know how that worked out.

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