Mailbag: Corporate Citizen

December 9, 2005 - Minyanville.com

Vitaliy,

With regard to your Wal-Mart (WMT) piece. You should be ashamed of yourself. The idea of exploiting those less fortunate is not the type of thing I have come to expect out of the Minyanville. I would think your typical long term Wal-Mart employee fits the bill of those that haven't made the cut. Happy Holidays, Michael

Michael,

This is a very late response to your comment, but better late than never. It is a very holiday-like thought: let’s help the less fortunate ones. There’s nothing wrong with that in my book. However, how would you expect Wal-Mart to accomplish it? By paying higher wages? Ok, instead of paying $8 an hour (which is above minimum wage by the way), they'll start paying $10. This insignificant two-dollar increase in wages is not enough to solve the problem of the un-affordability of health care coverage or the higher cost of living in the U.S.

So, let's say Wal-Mart becomes "a responsible corporate citizen" and starts paying $16 an hour instead. Wouldn’t that be great? Now a person without any hard-earned skills or any investment of time and money into education will be making $32,000 a year - a starting salary of a college graduate.

Would anybody want to make the investment of spending four years of their life going to college and being indebted with college loans if a relatively skill-less job at Wal-Mart would pay a similar wage? You have to realize that getting an education is an investment; one makes sacrifices at the present (i.e. time from family, forgone income, cost of tuition, etc.) for higher future income.

Some people will still choose college, no question about it. There is more to life than money; it’s hard to put a price tag on thirst for knowledge. In Russia, the "working class" made more money than college educated engineers. Yet Russia is one of the most highly educated countries.

Russia figured a way to deal with this problem in a "Russian-like" way: College graduates did not have to serve in the Russian Army. That was a form of compensation for going to college. Please don't confuse the Russian no pay, three years of hell, high security prison-like Army with a civilized (if any army can be civilized) American army.

Supply and demand is at the core of capitalism, and it regulates the wages that employees receive for their skills. On Monday, when I was wheeling out the trash bin for Waste Management to pick up, I thought, “That must be a very unpleasant job; riding around in the garbage truck in this weather," (it was -5F in Denver at the time).

However, then I thought that the supply of labor that can do that job is virtually unlimited (similar to Wal-Mart’s employees). There are plenty of people that possess a single skill: a strong back.

If for some reason, like unwillingness to deal with other people's garbage and enduring unpleasant smells, Waste Management could not find enough people to do the job, they'd have to raise wages to attract the talent. It comes down to supply and demand every time. Should garbage men make less money than college graduates? I have no idea, I know I would go to college so I didn’t have to be a garbage man (or work in Wal-Mart), but that is just me. Supply and demand will sort it out – it always does.

If Wal-Mart started to pay wages that were equivalent to college graduates, the economic impact would be enormous. We'd be going back to Stone Age; we'd be rolling back the clock on progress. Disincentives to receive education would be enormous. Allowing capitalism to go wild and being capitalists sets the great U.S. of A apart from other developed “socialized” countries. We let (most of the time) market forces sort things out. Yes, supply and demand is cold, but it is the only way to allocate resources efficiently.

Should we help the less fortunate? Yes, we should and we already do. The government sponsors scholarship grants - I was a recipient of one when I started going to college. That is how you help people, teaching the man how to fish, as opposed to being “compassionate” and giving him a fish.

Let’s touch on the health care issue just a little. If one is sick in the U.S., no matter that person's income and health coverage, that person will receive medical care – it is that simple. It may be the neighborhood's general hospital (which is still better than most hospital facilities in emerging and already emerged countries) that will provide Medicaid, Medicare or free clinics. If one makes it into the emergency room of a local hospital, the hospital will NOT turn a patient down for inability to pay. In fact, they'll spend tens of thousands of dollars on his/her care and then charge it off as charity if one’s income is below a certain level. It’s another form of the rich paying for poor, but I'll leave it for a later discussion. Take a look at hospital stocks; that is the number one issue that is impacting their performance.

I believe in helping the less fortunate, no question about it, but let’s not confuse paying higher than market unwarranted wages and helping the less fortunate. They are two different things.

Vitaliy N. Katsenelson, CFA This article is written for educational purposes only. It is not intended as a recommendation (or advice) to buy or sell securities. Author and/or his employer may have a position in the securities discussed in this article. Security positions may change at any time.