McDonald's Caves

Under the direction of new CEO Steve Easterbrook, who took the corporate helm on March 1st, McDonald’s is “finally deciding to give some of its workers a raise,” the Huffington Post declares in an article from April 1st.   McDonald’s had just announced its commitment to “give employees a 10% increase in wages” just “two weeks ahead of a planned international strike organized by the movement Fight for $15, which urges fast food employers to pay workers a minimum wage of $15 per hour.”

Despite the context in which the media (and pretty much everyone else) frames the decision, according to the Wall Street Journal, the company insists that the “increasingly vocal” criticisms by labor groups and recent protests “weren’t a factor in its decision.”

Au contraire, said New Hampshire Union Leader Mark Hayward after the strikes took place last week.  McDonald’s is committing to this minimum wage increase, he says, “in the face of pressure from a number of sides: states and cities looking to increase their minimum wage, tight labor markets, and union-backed efforts such as Fight for $15, which wants to raise hourly wages to $15.”

While it might be possible for McDonald’s to potentially profit from offering higher wages by attracting better employees and providing a better dining experience to customers, the decision doesn’t appear to have anything to do with hiring better workers; just paying all workers more, as might be expected from a “union-backed effort.”  And none of the discussion seems geared toward any actual added profits that McDonald’s might reap.  The bulk of the talking points and commentary surrounding the decision seem to focus on the overarching social benefits of the decision and the precedent it could set in advancing minimum wage hikes among other companies, invariably regressing into the same boilerplate nonsense we’ve become accustomed to about raising minimum wage being a benefit to society. 

Economist Patrick O’Keefe, for example, offers that this and other such moves have the potential to “bubble up” through the economy.  “More money in workers’ pockets,” he says, “should provide a boost in consumer spending and aid overall economic expansion.”   This is specious and irrational reasoning at best, as anyone who understands inflows and outflows enough to balance a checkbook could tell you.  When a business’ cost of production rises, prices of products offered will increase to compensate for added liabilities on the company’s balance sheet.  And when things cost more, people buy less. 

The broken logic supporting the “bubble up” nonsense driving this quest to hike minimum wages may be described as the blending and compounding of two fallacies described by economist Thomas Sowell, which he calls the “fallacy of composition” and the “chess-pieces fallacy.” 

The “fallacy of composition” describes the fondness of social engineers to “come to the aid of some group, industry, state, or other special interest, representing the benefits to them as if they were net benefits to society, rather than essentially robbing Peter to pay Paul.”  Indeed, the raising of minimum wage may increase earnings for some unskilled workers, but the company’s added cost in production will negatively impact consumers who will pay higher prices for the same product that previously cost less, and very likely, it will also negatively impact stockholders which may see diminished returns via dividends and stock valuations due to second fallacy...  

The “chess-pieces fallacy” describes social engineers’ idea that individuals will remain inert as social and market manipulation takes place, forgetting “that human beings have their own individual preferences, values, plans, and wills, all of which can conflict with and even thwart the goals of social experiments.”  Consumers will unquestionably change spending patterns in response to higher prices offered by said company, either by shopping at other stores or purchasing less of that more expensive product altogether -- especially when that product is not a necessity, but a chosen indulgence.  Either result is bad for the company and its stockholders, and  also potentially bad for the economy as a whole, summoning the specter of another, less-discussed-but-nonetheless-highly probable result of raising minimum wage -- the large loss of jobs for unskilled laborers as the company’s balance sheet is rectified in response to lower consumer demand and, ultimately, less revenue.

It’s easy to understand why unions, politicians, and fast food workers all subscribe to these fallacious assumptions, afflicted though they are with either a lack of understanding about free markets, or an outright contempt for them.  What is less clear, though, is why McDonald’s is offering itself as the lab rat in an experiment to see if appeasement and negotiation is a successful business method in dealing with union thugs, activists mobs, and politicians who are, at least publicly, hostile to large corporate profits. 

I’m giving Steve Easterbrook and McDonald’s management the benefit of the doubt here in saying that I believe they understand that providing an outstanding product at a competitive price while driving large corporate profits is a corporation’s primary goal.  But the elements to which he is caving have no misapprehensions about how they expect the demanded wage increases to be financed.

To say the least, the union thugs at “Fight for $15” were not impressed with McDonald’s recent announcement to pay their workers more, calling it a “weak move for a company that made $5.6 billion in profits last year.”  Essentially, they expect McDonald’s to cede a large portion of its profits (which, in the left’s formulaic fashion, are implied to be “obscene”) to pay for a company-imposed minimum wage that would be double the national minimum wage.  

Fight for $15 and other critics are also upset that McDonald’s is not yet imposing its national company policy to raise wages upon independently-owned franchise establishments.  This is certainly to McDonald’s credit, despite the criticism the decision has drawn.  If McDonald’s had or does opt to impose any company directive to raise minimum wages absent franchisee consent, it would make the prospect of opening new franchised establishments less attractive for investors, which would only exacerbate the McDonald’s brand’s apparent problems on the open market.

“Right now [McDonald’s] is dead money,” says Cowen & Co.’s head of sales trading, David Seaburg.  “When you look at the comps going back to 2013 and compare it to its peers, you can see that McDonald’s looks terrible.”  What can McDonald’s do to right the ship?  Three things, he suggests: “accelerate dividend growth, increase the franchise mix and buy back stock.”

Dividends to shareholders are paid in accordance to observed and expected profit trends -- the same diminishing profits already under intense social and political pressure to be reinvested in higher wages for unskilled laborers, not in paying more attractive dividends.  And how attractive might the prospect of opening a new franchise or buying stock actually be when the leadership of the company has shown signs that it will kowtow to fringe activists rather than protect the company’s bottom line for franchisees and shareholders?

Not all of McDonald’s problems have been functions of poor leadership, to be sure.  Increasing social emphasis on healthy eating has deterred many customers, and the fast food marketplace is perhaps more competitive than it’s ever been.  Regional startups have been expanding market share these past decades, not to mention the increased competition from larger corporations like Burger King and Wendy’s. And due to the simple fact that McDonald’s is the marketplace’s most visible company, it has been the most prominent target of union thuggery and malicious social campaigns to demonize the labor practices and product of the fast food industry.

But in light of these other challenges, and its perceived caving to activists’ and critics’ demands as it has, McDonald’s current management has given no evidence that course correction is on the horizon.  It’s hard to believe that the recent decision was made with consumers or stockholders in mind.  And what’s more, it’s has emboldened leftist and socialist radicals who will accept nothing less than the full capitulation to their demands, lending credence to their fallacious and economically destructive beliefs at a large scale.  Namely, the ridiculous notion that $15 an hour is a sensible holistic minimum wage for unskilled laborers, and the even more ridiculous speculation that imposing such a travesty might actually help the economy as a whole.

William Sullivan blogs at Political Palaver and can be followed on Twitter.