Crony Capitalism: How the Sausage Is Made

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It is surprisingly hard for many people to understand that government regulation is often more of a boon to big business than it is a burden to them, but the current debate on minimum wage serves as a simple illustration.

When I saw a recent headline: Costco CEO: Raise The Minimum Wage To More Than $10 Per Hour, my first thought was, “How does this guy benefit from a higher minimum wage?”, and my second thought was, “Aha!” I cracked the code in an instant. Costco I thought, must pay more than $10 per hour already, while its competitors must pay less. That means Costco would not be affected at all by an increase in the minimum wage to $10, while any of its competitors that pay below $10 per hour could see their business models severely impaired. And so it is.

Costco’s minimum salary is $11.50 per hour while Wal-Mart pays new workers only $8. Costco is very light on service and very high on efficiency, with each customer spending much more per visit than Wal-Mart customers. A skillful, efficient workforce is integral to Costco’s business model. On the other hand, Wal-Mart has myriad employees, some of whom do nothing but greet customers, and with lower priced items and higher customer volume, each employee-customer interaction generates only modest revenue to the company.  Its larger but lower-cost sales force is the only way for Wal-Mart to keep volume up and prices low.

 

 

Costco’s current CEO, Craig Jelinek, as well as its former CEO and founder, James Sinegal, claim that they pay more to their employees because it’s the right thing to do, and it is, but not morally right as they imply, just right for their business model.

Here are the numbers that prove my point.  Costco makes $617,623 in revenue and $14,973 in operating profit annually for each of its 160,000 employees, while Wal-Mart makes a “mere” $203,182 in revenue and $12,091 in operating profit annually for each of its 2.2 million employees.  Costco makes much more per employee in sales and profit than Wal-Mart.  As a matter of fact, Costco could actually increase its pay to employees by $2,882 per year, or $1.39 per hour (assuming a 40-hour work week), before its profitability per employee fell to that of Wal-Mart.

If Obama’s so-called Fair Minimum Wage Act of 2013 were passed (which calls for minimum wage to be phased up to $10 per hour) and Wal-Mart had to increase its starting wage by $2 per hour, Wal-Mart would shut down marginally profitable locations, cut staff and demand more productivity per employee at retained stores, and raise prices across the board. These actions would hurt the lowest skilled employees who would be fired in favor of more productive workers, it would hurt employees who would lose jobs in areas no longer able to support a Wal-Mart, and it would hurt low income consumers who would no longer have a local Wal-Mart to shop at or who would have to pay higher prices all around and consume fewer goods overall.

Costco, on the other hand, would benefit from Wal-Mart’s higher costs as higher-end Wal-Mart shoppers would begin to go to Costco if their local Wal-Mart closed down or if the new higher price/lower service Wal-Mart experience no longer seemed worth it to them.

In this example, many people would be hurt by a higher minimum wage, from Wal-Mart employees to Wal-Mart customers to Wal-Mart shareholders, but Costco shareholders would benefit without a doubt.  And who is the largest Costco shareholder? James Sinegal, founder and former CEO of Costco, who still owns over $100 million worth of Costco shares–nearly five times as much as the third largest shareholder, current CEO and fellow minimum wage advocate, Craig Jelinek, who owns a still sizable $20 million chunk of Costco stock.

Sinegal and Jelinek simply “advocating” for a higher minimum wage to gain a competitive advantage doesn’t fully complete the circle of cronyism, however. Yes, favoring government regulation that benefits you over your competitors is the essence of crony capitalism, and I would go so far as to say that this sort of privilege-bestowed-by-government is both the primary purpose and original driving force behind the modern state. But the insidiousness comes when the mutual financial benefit is consummated, and in this case the circle is indeed completed.

After handing the reins of Costco over to Craig Jenilek in 2012, Jim Sinegal became a “bundler” for President Obama, raising $1.4 million for his re-election campaign.  I’m not speculating as to whether Obama’s Fair Minimum Wage Act of 2013 is pay-back to Sinegal (some say it’s pay-back to the unions who also benefit from an increased minimum wage) or if Sinegal supported Obama’s re-election simply because he knew the Democrat was actively trying to raise the minimum wage. Regardless of where the circle begins or ends, big money flowed into Obama’s campaign from someone who benefits financially from a higher minimum wage and Obama is now advocating for a higher minimum wage. Outside the circle, Wal-Mart’s largest shareholders, who were financial supporters of Mitt Romney in 2012, garner no sympathy from Obama for the danger his minimum wage proposal poses to them, or the benefit it promises their competitor.

Just for the record, I LOVE Costco–it’s my favorite store by far.  I go to Costco more than I go to all other stores combined and I never go to Wal-Mart.  I will continue to go to Costco (assuming they don’t revoke my membership for writing this article), but their samples will leave a sour taste now that I know that the chain’s fantastically wealthy owners would use the force of government to deprive low-skilled workers and low-income consumers the option to work and shop as they choose in order to take a little more for themselves.

Monica Perez

Monica Perez

The Monica Perez Show is a call-in radio show about current events, politics, economics and life in general from a libertarian perspective. The show is broadcast every Sunday 1-3pm on News/Talk WSB 750AM and 95.5FM. You can also listen live online streaming right here and on your mobile device with the app iheartradio