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The Misadventures of the Street Strategist Vol 1 to 13
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Hyperwage Theory Part 22
Hyperwage Theory
Part 22
The Street Strategist is taking on the entire world of economics and politics with his Hyperwage Theory. Thus, the probability that the Street Strategist is correct is zero. When it’s the Street Strategist against the world, well, you know which side you should be on.
However, before you dismiss the Hyperwage Theory, let me open up your minds.
In everyday life, we know that mass couldn’t pass through mass. Your body cannot pass through a wall.
Yet, in quantum mechanics, such phenomenon of your body passing through a wall happens every second. Yes, mass passes through mass in the realm of quantum mechanics although the probability is very very low, almost zero, (actually 40 zeros after the decimal point.) This is called quantum tunneling and it is a very important phenomenon. Without it, computer chips will be as large as a room. Your FM radios cannot fit in a thumb-sized MP3 player, and your mobile phones will be as large as refrigerators.
Almost all electronic equipments now use the tunneling effect.
What’s the relevance to Hyperwage Theory? Quantum tunneling has almost a zero probability of occurring yet, every second it is happening. How come? Because the events are being replicated trillions and trillions of times until a tunneling occurs. It’s like this: You can find one genius in a million people.
But if you are in China with 1,400 million people, then you have around 1,400 geniuses.
In other words, given infinite number of trials the probability of occurrence is unity. Which is my way of saying, even if the probability that Hyperwage is correct is zero, who knows it could still be correct?
Again, when it’s the Street Strategist against the world, don’t side with the world. Remember the time when millions of accountants in the world did not think that there is a better way to explain debit and credit? How lucky is the Street Strategist in his ignorance because he has invented the world’s fastest way to learn debit and credit without realizing the world had already said it can’t be done.
Res ipsa loquitur
Anyway, I hope I have open your closed minds. Let’s go back to the Hyperwage Theory.
Can the government being the biggest employer in the country, and the small businesses being 95% of the enteprises afford hyperwage salaries?
The Street Strategist says yes. In the previous chapter I used another favorite argumentation technique of mine which is the res ipsa loquitur (the thing speaks for itself).
Will the government collapse under hyperwage? Will there be no small businesses? I have illustrated that in hyperwage countries, there is a government, and there are small businesses. Res ipsa loquitur. The thing speaks for itself. There are small businesses in hyperwage countries therefore that speaks volumes about the myth that small businesses will collapse.
Apple and Microsoft
Let’s analyze Apple Computer and Microsoft. Are these large companies? Of course, they are worth billions of dollars in the stock market. Were they big companies when they started? What about Dell Computers or Intel Corporation?
If you have read their histories, these companies started out in the garage with almost zero capital. Now, how did they become big?
Simple, there were people who can afford to buy their inventions. Come now, and stretch your minds a little bit.
Did Microsoft become a huge success because of its low labor cost or did it succeed because it has customers with extra money to buy something called a computer.
How could our economists miss this very obvious lesson? Small businesses survive and even grow into corporate giants not because they have low labor costs but because the people have purchasing power.
And this is exactly the logic behind the Hyperwage Theory.
High wages give more purchasing power to the lowest class of society and they spend it to generate more demand thereby increasing the profits of small businesses.
Do you think SM will build a shopping center in southern Leyte because the labor cost there is lower than in Metro Manila? No way, that’s not the decision point. Labor cost is never the decision point. It is purchasing power. SM opens in Cebu or Davao or Ilo-ilo because of the purchasing power of the residents.
Think of this guys. If I invent a biocomputer using microorganisms for artificial intelligence and it will cost you a year’s salary will you buy it? Of course not as eagerly as I would want you to. But what if it will cost you only a month’s salary? There, you might buy.
That’s exactly what is happening now. A notebook computer will cost you a year’s salary in a Third World country but only a month’s salary in the U.S. That is why computer companies in the US are growing despite very high wages. They sell in volumes because the people have purchasing power.
And do you think they will reduce their selling price to only 1/10th when it is is sold in a Third World country because the salaries in the poor countries are only 1/10th? No way, Jose.
Margin vs. volume
How does an enterprise address the issue of increasing payroll costs? There are two basic ways: 1. increase the profit margin for each unit of product sold, and 2. sell more units without increasing the profit margin.
In hyperwage countries, they focus on more volumes, and that is why they sell their products overseas, maintaining almost the same selling prices and margins while increasing volume.
Of course, if some stupid government in Africa or Asia adopts the strategy of poverty by forcing their wages very low to attract the foreign investors, then they have no choice but to exploit this stupid strategy. The hyperwage countries will setup their call centers, car assemblies, their dirty kitchens, their pig sties in these masochistic countries.
Guys, come on, Apple grew because of purchasing power, not low wages.
Let’s take a look at computer distributor in the Philippines. Their workers are paid about P8,000 per month. They are selling computers at P30,000 per set. Now I ask, what will happen to the price of computers if the salaries are raised to P20,000 (2.5 times)? Will the computers become P75,000 (2.5 times)?
No way. These computers are being only sold at P25,000 in Hong Kong, Singapore, Taiwan, and the US, and yet their salaries are almost 700% higher.
Instead, the distributor will sell more volume to recoup the increased payroll. And course, since the maids earn P20,000, then they can buy their own computers in no time at all. See what I mean? Markets that were never there, will become new sources of income for the businesses.
Isn’t this neat? Creation of entirely new markets.
Micro-enterprises
What will happen to micro-enterprises? When the wages of the maids or store clerks are set to P20,000 will the vegetable vendor close shop? No. Why? Because he has no employee at all, therefore he is not subject to a payroll increase. Instead his volume will increase because the customers will buy 2 kilos instead of ¼ kilo of cabbage.
How about the fish vendor? Same thing, she doesn’t have a maid at home, therefore she is unaffected.
But her selling prices will go up and so does her volume.
How about the sari sari store? No more sachets. No more single tablets. Do you know that you can’t buy a single piece of tablet of paracetamol in Singapore? You have to buy an entire pack.
How about the rice dealer? He cannot afford the laborers to haul the rice. Then, he can subcontract the delivery to another micro-enterprise doing only deliveries, much like a postal courier.
Who will watch the kids? There will always be a grandmother or an enterprise providing day-care services.
And again, population control. Given hyperwage, you will think twice about having five or ten children.
And productivity will rise because every enterprise will be cost conscious.
Exploitative FDI
Is Jollibee in the US because of low wages there? Or are they expanding there because of the purchasing power of the people? Can you imagine the implication of this scenario? A Third World country like the Philippines is now a foreign investor in the US? That’s foreign direct investment (FDI).
Did San Miguel Corporation expand in Australia because of their low payroll costs there? No way. And yet, the Philippines is now an FDI in Australia. Isn’t this ironic?
This simply proves the point that the purchasing power of the people is the decision point, not the low labor cost. In fact, low labor cost means low purchasing power means low foreign direct investment.
Of course, the Third World countries are getting their share of FDIs but these are the ones that exploit the host country’s natural resources or exploit low wages, but never FDI that are meant to improve the host country. In other words, the low wage regime invites the wrong kind of FDI – the exploitative ones.
Phoenix
Can companies afford hyperwage? Yes, they can. And if they can’t afford it, then they will have to close their businesses. Will there be new ones that will attempt to operate? Yes.
If Fortune Tobacco will close down, then RJR Reynolds will come to the Philippines. If SM City will close down, then Walmart will come here. If San Miguel will close down, hey, why would it close down? It is the biggest selling beer in Hong Kong, one of the most expensive places on Earth.
In fact, San Miguel will be ecstatic with hyperwage. Why? Because beer demand is elastic. It is taken out of disposable income. Hyperwage gives the people more of this type of income, and therefore beer becomes less elastic. In fact, beer demand will increase.
The demand for telecom services, for beauty services, for any kind of service will increase not decrease.
Don’t fall for this mind trap of closures. If a business will close down because of hyperwage, there will always be a phoenix that will rise out of the ashes. Probably in another industry with another product.
Tax deductible
Who will pay for the hyperwage? Remember that payroll expenses are tax deductible, therefore the government pays for a part of the payroll. The actual formula for this tax shield is that the company will only pay for (1-tax rate) while the government pays equivalent to the tax rate.
For example, if the tax rate is 35% (corporate income tax), then the company pays for 65% of the increase in payroll while the government in effect pays for the 35%.
Isn’t this neat? Instead of giving 35% more to the government, the amount is given directly to the people with no filching due to government corruption. And again, don’t forget that money in the hands of the people is subject to the Keynesian multiplier whenever they spend it.
So, the enteprise pays only 65% of the increase, but how to pay it? Again, more sales volumes and a possible increase in margin.
Tax evasion
How about those enteprises who do not declare their correct income? At least with hyperwage this will be minimized. Why? Since all their clerks are at hyperwage salaries, then that is a form of taxation that is given direct to the people instead of to the government.
Let these companies continue cheating the government but at least this cheating is minimized because the hyperwage salary is a form of taxation that they cannot avoid.
What if they underpay their employees? Well, if the saleslady is earning P2,000 and she only gets P1,500, the latter has little incentive to complain. But if the salary is P20,000 or the equivalent of four cellular phones a month, do you think the employee will let this thing pass without a whimper? No way.
And by the way, did you notice one thing? We have partially solved the problem of under declaration of corporate income. And this is a non-economic problem.
Do you now realize what I’ve been hammering all along – the non-economic benefits of Hyperwage?
Is there any other economic theory that is more comprehensive in effect and yet tweaks only a single variable in the entire economic system?
Poverty solutions
The elegance of Hyperwage is the way it handles non-economic issues in addition to directly solving economic ones. We solve population explosion, tax evasion, brain drain, low productivity and many more.
I hope this far, I have proven enough that hyperwage is affordable. If a company cannot survive there will be another that will rise out of the ashes.
Anyway, I am just glad that with my exposition of the Hyperwage Theory, the cause of the domestic helpers has been top of mind lately. There has been a gathering of domestic helpers, and I am glad the importance of the wages of the domestic helpers is being given attention lately.
By the way, before I go, I would like to share this with you. I browsed a textbook on economics by two great economists in the US, one author was once a presidential adviser on economics and the other one is an icon in financial economics having written more than 500 articles.
Do you know what’s their idea of addressing poverty? It’s so amusing. They said, education is the way out of poverty. Guys, the Philippines has over 95% literacy rate and yet still one of the poorest in the world. I don’t agree with you guys. Nice theory though. I mean, yes, education helps but it helps the US or the Middle East because our brains are migrating to hyperwage countries.
In short, our doctors and engineers have realized that going to a hyperwage country is the ticket out of poverty. Why can’t you see that?
Another solution they offer is through some kind of welfare. This is good but not the solution for the Third World country.
I have read the economics of poverty and I conclude that they are all aimless strategies, all talk, all theory, all trickle-down, all anti-hyperwage. If they are in the right direction how come the Gini coefficients have worsened? How come only 5% of the country own 1/3 of the wealth? How come after 500 years of economics many are extremely poor and and few are wealthy? How come there is a thin middle class?
Call me crazy but at least I have applied my mind to a direct solution. Or maybe the economists couldn’t just accept that the solution was this simple: rectify the mispricing of labor in Third World countries.
In the next installment, I will finally discuss the magic of the Keynesian multiplier.
(Thads Bentulan, Oct. 6, 2005)
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To join the mailing list send an email to streetstrategist-subscribe@googlegroups.com
A PDF copy of the entire book on Hyperwage Theory is available currently for free.
Send an email to streetstrategist@gmail.com for the latest edition.
Want to order other books by Thads Bentulan?
The Misadventures of the Street Strategist Vol 1 to 13
..................................................................................................
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