In Defense of Profits -- Why They Are At Least As Moral as Wages
Quick background: my company privately operates public parks, making our money solely from the entry fees voluntarily paid by visitors and campers. We don't get paid a single dollar of tax money.
A major partner of ours is the US Forest Service (USFS), which actually operates more recreation sites than any other agency in the world (the National Park Service has a higher profile and the Corps of Engineers has more visitors, but the USFS is the most ubiquitous). Despite the USFS being an early pioneer of using private companies to reduce the operating costs of parks and campgrounds, the USFS still has a large number of employees opposed to what we do. The most typical statement I hear from USFS employees that summarizes this opposition -- and it is quite common to hear it -- is that "It is wrong to make a profit on public lands."
It would be hard to understate the passion with which certain USFS employees hold to this belief. I discovered, entirely accidentally through a FOIA request my trade group had submitted to the USFS, that a Forest Supervisor in California (a fairly senior person in the USFS management structure) whom I have never met or even had a conversation with circulated emails through the agency about how evil he thought I was.
This general distaste for profit, which is seen as "dirty" in contrast to wages which are relatively "clean" (at least up to some number beyond which they are dirty again), is not limited to the USFS or even to government agencies in general, but permeates much of the public. As a result, I thought I would describe a conversation I had with a USFS manager (actually this is the merger of two conversations). The conversation below had been going on for a while discussing technical topics, and we will pick it up when the District Ranger makes the statement highlighted above (a District Ranger is the lowest level line officer in the USFS, responsible in some cases for the land management functions of an area the size of a county. I have cleaned up the text (I am sure the sentences would not be as well-formed if I had a transcript) but I think this captures the gist of it:
Ranger: I think it's wrong that you make a profit on public lands
Me: So you work for free?
Ranger: Huh?
Me: If you think it's wrong to make money on public lands, I assume you must volunteer, else you too would be making money on public lands
Ranger: No, of course I get paid.
Me: Well, I know what I make for profit in your District, and I have a good guess what your salary probably is, and I can assure you that you make at least twice as much as me on these public lands.
Ranger: But that is totally different.
Me: How?
At this point I need to help the Ranger out. He struggled to put his thoughts on this into words. I will summarize it in the nicest possible way by saying he thought that while his wage was honorable, my profit was dishonorable, or perhaps more accurately, that his wage paid by the government was consistent with the spirit of the public lands whereas my profit was not consistent
Me: I'm not sure why. My profit is similar to your wage in that it is the way I get paid for my effort on this land -- efforts that are generally entirely in harmony with yours as we are both trying to serve visitors and protect the natural resources here. But unlike your wage, my profit is also a return on the investment I have made. Every truck, uniform, and tool we use comes out of my profit, whereas you get all the tools you need paid for by your employer above and beyond your salary. Further, your salary is virtually guaranteed to you, short of some staggering malfeasance. Even if you do a bad job you likely would just get shunted to a less interesting staff position at the same salary, rather than fired. On the other hand if I do a bad job, or if one of my employees slips up, or even if some absolutely random occurrence entirely outside my control occurs (like, say, a flood that closes our operations) my profit can completely evaporate, or even turn into a loss. So like you, I get paid for my efforts here on public lands, but I have to take risk and make investments that aren't required of you. So what about that makes my profit less honorable than your wage?
Ranger: Working on public lands should be a public service, not for profit
Me: Well, I think you are starting to make the argument again that you should be volunteering and not taking a salary. But leaving that aside, why is profit inconsistent with service to the public? My company serves over 2 million visitors a year, and 99.9% give us the highest marks for our service. And for the few that don't, and complain about a bad experience, every one of those complaints comes to my desk and I personally investigate them. Do you do the same?
Why do I make such an effort? Part of it is pride, but part is because I understand that my margins are so narrow, if even 5% of those visitors don't come back next year -- because they had a bad time or they saw a bad review online -- I will make no money. Those 2 million people vote with their feet every year on whether they think I am adequately serving the public, and their votes directly affect how much money I make. Do you have that sort of accountability for your public service?
Postscript: Interestingly, though perhaps not surprisingly, the government ranger did not bring up what I would consider the most hard-hitting challenge: How do we know your profits are not just the rents from a corrupt, cronyist government contracting process. Two things let me sleep well at night on this question. The first is that I know what lobbying I do and political connections I have (zero on both) so I am fully confident I can't be benefiting from cronyism in the competitive bid process for these concession contracts. Of course, you don't know that and if our positions were reversed, I am pretty sure I would be skeptical of you.
So the other fact I have in my favor, which is provable to all, is that the recreation areas we operate are run with far lower costs and a demonstrably higher level of service than the vast majority of recreation areas run by the government itself. So while I can't prove I didn't pull some insider connections to get the work, I can prove the public is far better off with the operation of these parks in private hands.
sch:
Seems like a conversation you posted about some months to a year back....
September 22, 2016, 10:50 amsailor116:
You may be the exception, and not the rule. It's not improper to make ANY profit, but it's improper to allow a specific company or group to capture TOO MUCH profit.
This doesn't mean that we should not allow folks like you to work, of course. But it does make it a bit more complex. A lot of government contracts are done by folks who have managed regulatory capture and they can really work the system. And once the benefit gets high enough (public grazing lands, public fishing areas, etc.) then people go batshit when you try to take it away, which prevents new entrants. If I want to open a new cattle farm and graze my cattle on public land, I can't. That land is controlled (and profitably so!) by a bunch of folks sucking off the public teat.
Moreover, there's a moral issue. A poor use of private funds isn't my problem so I am perfectly OK with a higher level of risk. A poor use of public funds IS my problem, so I demand a higher level of scrutiny, even though I acknowledge that the result may sometimes be inefficient.
Again, this isn't personal. You sound like an exception. Also, the manner in which your contract is awarded (which i understand to be an open, annual, bid process) is close to the best way to get around the moral issues.
September 22, 2016, 11:13 amcraftman:
I think the hardest part to get across is that profit isn't "extra" money you arbitrarily charge on top of your costs. Non-profits get to ride high on their moral magic carpet because they spend everything they bring in. If more people understood that profits are like a type of "emergency fund" - to make a connection to personal finance - for companies, that those profits are re-invested in new equipment, more services, more employees, or that they can be tapped into to pay employee wages during slower years, I don't think they would object as much. But there is too much focus on shareholders and CEOs to get into the real nitty gritty about how a company's profits are used year-to-year.
Not to mention that profits are the single most important signal that you're doing things right and customers are happy.
September 22, 2016, 11:16 amcraftman:
"to allow a specific company or group to capture TOO MUCH profit"
Companies that enjoy extremely high profit margins will only continue to do so in the absence of competition. Anywhere you see profits that you feel are "excessive" - however you define that - I guarantee there will be high barriers to entry in that marketplace whether natural or man-made (read: government).
September 22, 2016, 11:19 amErikTheRed:
"Moreover, there's a moral issue. A poor use of private funds isn't my problem so I am perfectly OK with a higher level of risk. A poor use of public funds IS my problem, so I demand a higher level of scrutiny, even though I acknowledge that the result may sometimes be inefficient."
The problem with this is that, on a practical level, the absence of profit motive not only absolutely annihilates efficiency, it creates incentives that reward and maximize inefficiency. Being efficient with taxpayer dollars is about the only reliable way to get punished in a government job. In areas where I have extensive subject-matter expertise, I generally see governments overspending by between 500% - 1000%. Compare that to the typical corporate profit margin of around 10%. Absent protectionist regulation, it is extremely rare to see corporate profits exceed 25%.
This is not a problem exclusive to government - I see it in large nonprofits (to the point where I seldom donate to charities that I don't absolutely know are run well - usually small ones), and (to a much lesser but still significant extent) in large corporations. It tends to be worse in the large corporations that enjoy government protection from competition, and those that are the most heavily regulated (health care comes immediately to mind).
Yes, there are plenty of corporations that do things terribly and make a profit. Absent government protection, they die and go away. Government, on the other hand, has no such mid- to long-term constraints. It's not a matter of picking a perfectly reliable and failsafe system - there is no such thing and never will be as long as humans are human. The best you can do is pick a system that allows for the fastest and most efficient corrections.
September 22, 2016, 11:48 amTruthisaPeskyThing:
"A poor use of public funds IS my problem, so I demand a higher level of scrutiny. . ."
September 22, 2016, 12:05 pmActually, you do not get a higher level of scrutiny with public funds. In the private sector, the best scrutiny is competition; if you are not efficient, your competition will put you out of business. In the government sector, there is very little scrutiny. In the area where I work in government, we now use 14 people to do the work that 3 people did before. The reason that they took away almost 80% of my work? -- to level the work load . . . so that my work load would match what others do.
Occasionally you might see an investigative reporter get interested in misuse of public funds, and there are auditors and Inspector Generals, but their scrutiny is more of a joke than anything else. In general, reporters start the day convinced that big, bad corporations are the reason for every ill, and they are not interested in taking down government workers who are the alternative to the evil corporations. And government auditors are subject to the same lack of incentives as other government workers.
sailor116:
Well, that's the idea behind regulatory capture, right? The barriers to entry are often promoted by those who have incentives to close off access to a limited public resource.
So, for example, say that I want to become a commercial striped bass fisherman.
I can't just ask. Although they're public fish, they have been "promised" (Forever!) to others, who don't actually pay fair value for them. Even though that promise includes next year's fish who may not have been born yet, I don't just get a share of fish.
Nor can I become a commercial fisherman by making the highest bid at a yearly license auction.
Rather, I can only become a commercial fisherman by buying (or inheriting) someone else's license to catch striped bass.
September 22, 2016, 12:56 pmsailor116:
Sure. Government tends to be inefficient. Similarly, capitalism tends to avoid public good in favor of private good.
My point is that the GENERAL antipathy to private use of public resources does not, in fact, stem from a belief in inefficiency. Rather it stems from a belief in the "badness" of regulatory capture.
September 22, 2016, 1:00 pmErikTheRed:
Depends on how you define "public good" vs. "private good." I wouldn't want to go deeper into a discussion without understanding specifically where you are coming from there, because we would wind up talking at cross-purposes.
September 22, 2016, 1:12 pmJ K Brown:
First of all, in the legislation concerning income taxes, the law-giver calls salaries and wages “income” or “earned income.” However, the main characteristic of “income” in the economic sense is that it is that surplus over a businessman’s costs that may be consumed without reducing capital, i.e., without living at the expense of the future. You cannot consume “income” without deteriorating your opportunities for future production. The concepts of “capital” and “income” developed only within the system of economic calculation.
These income-tax laws also deal with “profits” as if they were salaries. The income-tax authors are very astonished if a firm doesn’t have a profit every year. They don’t realize that there are good years and bad years for an enterprise.
--von Mises, Ludwig. Marxism Unmasked .
Of course, the individual wage earner can be conceived up as an enterprise. They are paid wages for their time, effort and accumulated knowledge. Wages are, in general, pure profit as the wage earner has few current expenses and their accumulated knowledge was generally provided at the expense of others. We could see that the capital goods of time and physical stamina are consumed (sold) as one ages and both are reduced due to the effects of aging. But even this depreciation leaves a lot of "profit" from earned wages that can be consumed just as business profit can be consumed, although both are wise to re-invest some of this profit to compensate for wear and tear at least.
September 22, 2016, 1:33 pmMatthew Slyfield:
" but it's improper to allow a specific company or group to capture TOO MUCH profit."
Unless you can define what "too much" profit is in objective and empirically testable way, you are just blowing smoke.
September 22, 2016, 1:56 pmJ_W_W:
That public good vs. private good argument sounds a lot like the government worker complaining that he should be paid while the businessman should not....
September 22, 2016, 2:41 pmcraftman:
Right, we're agreeing with each other. I was merely pointing out that you don't really hear about "TOO MUCH profit" outside of industries with the sort of situations you describe. It's a man-made problem. In any other world, competitors simply come in and undercut your profits because you've made it so easy to do so.
I'm not sure where I stand on the way ocean fish stocks are managed, I don't know enough about it to say whether it's done the right or the wrong way (though I think a yearly license auction like you suggest would be a great start). They could look to the wireless spectrum auctions to learn a thing or two.
September 22, 2016, 2:42 pmAnn_In_Illinois:
Plus, we need to keep in mind that the cure may be worse than the disease. Once government steps in to 'fix' the problem of excessive profits, it could easily cause far more damage.
September 22, 2016, 4:12 pmsean2829:
I think you've got to look at profit as an incentive to innovate and an opportunity if you are successful. However to work properly it has to be based in a freely competitive environment. For many of the things the government pushes or purchases these days it caps profits at a certain level. In that environment, you get something akin to public utilities where increasing expenses increases your opportunity to make more money. That's why many regulated monopolies make a lot of money. On the other hand, if some upstart figures out a way to deliver a product or service at half the cost of the regulated monopoly, consumers might get that product at a 25% discount over the incumbent but the upstart is likely making double the margins of the regulated monopoly. Consumers get a more cost effective product, even though the upstarts profits are quite high. For some reason, I don't think people in the government think this way however.
September 22, 2016, 5:00 pmMatthew Slyfield:
Very true. But that only makes my point all the more important. The fuzzier the definition of excessive profits is the more likely it is that a government 'fix' will do more harm than good.
September 22, 2016, 5:46 pmAnn_In_Illinois:
Exactly! I was trying to add to your point, not quibble with it. Sorry if that was unclear.
September 22, 2016, 8:23 pmThane_Eichenauer:
A vast group of people in the US (perhaps the vast majority) have been taught to hate and distrust business by schools and television. I always compared the behavior of government to the behavior of business and found government wanting in the comparison.
September 22, 2016, 11:45 pmDaniel Barger:
You made a simple and honest mistake. You attempted to engage in a rational conversation based on facts, logic and reason with an irrational and illogical person. There is and can never be discourse, discussion or debate with a liberal. These are concepts they are not capable of grasping, conduct they cannot engage in. Talking with them is akin to the proverbial 'playing chess with pigeons'. They just knock the pieces over, shit on the board and strut around as if they won. It's a waste of time.
September 23, 2016, 2:22 amPaul:
I had a similar discussion with a teacher about private schools. She didn't think it was right that people made a profit from education. I asked if she worked for free then, because aren't wages the profit from labor?
Don't think I got an answer on that one...
September 23, 2016, 2:46 amsailor116:
Right, because the discussions of regulatory capture and moral risk can easily be distilled to a generic and idiotic claim that all private industry is bad. Give me a break, willya?
September 23, 2016, 4:54 amSeekingfactsforsanity:
Public good - a political statement by a politician who wants to be politically correct. The pursuit of happiness, the freedom of individuals, and a free market will eventually result in a desirable situation for the largest number of people. A government determined to structure where various groups fit within a social system pleases only the government and its favored groups.
September 23, 2016, 5:31 amAn Inquirer:
I prefer the term left winger rather than liberal. I think a liberal can be rational, but a person committed to left-wing causes shuts out all logic.
September 23, 2016, 8:30 amCC:
I think you left out the key point. This ranger has a supervisor who earns a salary. You are the supervisor of the people running that particular concession. The profit is part of your salary. Why is that hard to understand?
September 23, 2016, 8:44 amThere is also a weird belief people have about profits. A high profit margin for Apple is good, but a tiny margin for Walmart is bad. They completely miss that without profit no company could open a new store or innovate or even hire anyone. They want to make a return on their savings account and they want their retirement savings to grow, but this can only happen if someone is making a profit.
CC:
How is it possible to make TOO MUCH profit? If you are making so much profit, this is a signal to others that there is a business opportunity, and the competition will lower prices moving forward. One way to be sure to make too much profit is crony capitalism, by having the government restrict new entry (like Uber, or the dispute about moving companies preventing a new company from operating).
September 23, 2016, 8:50 amIn the case of public lands, a fair price is what private land owners would get for licenses to graze their lands. In the case of parks, what he offers is to do the job for less than the government can do it, and in a competitive bidding process. Hard to make TOO MUCH under those conditions.
Swami:
Last month I started talking to some stranger who was surfing the same spot as me off La Jolla. He mentioned he was a poet by profession. So I politely asked him if he did well as a poet -- you know by like selling poetry. He quickly clarified that one doesn't make money by poetry, instead he worked as a professor teaching poetry to other students. However, the non profit university he worked for treated him like shit, paying poorly, providing terrible benefits, never listening to employees and then firing him when times got tough in the last recession.
So he went to work for a for profit university. He remarked that he was treated better in every way, paid better with better job security and influence with management. He then went on to mention that for profit organizations go against every fiber of his being. He just thought it was ironic or something.
Mental frameworks are powerful things, for good or evil. I doubt this poet surfer will ever be able to make sense of the world.
September 23, 2016, 10:17 ammesaeconoguy:
Please define "too much profit."
September 23, 2016, 11:27 amjon spencer:
If some in the USFS thinks that profit is evil, then they ought to reduce to zero the amount that they charge for stumpage, stop charging to stay in the campgrounds and stop selling tchotchke's in Visitor Centers.
September 23, 2016, 6:04 pmmarque2:
I don't believe you Swami Beach is north of La Jolla in Encinidas. :P
September 23, 2016, 8:57 pmSwami:
Yep. I usually surf Encinitas.
September 24, 2016, 2:48 pmAnn_In_Illinois:
We certainly saw that with phone costs before deregulation. AT&T faced a cap on its profit rate, so it maximized dollar profits by driving up costs. After deregulation, there was competition but no limit on what phone companies were allowed to charge, and long distance rates went down, down, down.
September 24, 2016, 4:33 pmJonathan in NC:
"If we cannot make a profit, that means we are committing a sort of crime against society. We take society's capital, we take their people, we take their materials, yet without a good profit, we are using precious resources that could be better used elsewhere."
September 30, 2016, 4:27 pmKonosuke Matsushita
The Oatmeal Savage:
Can't fix stupid.
September 30, 2016, 6:19 pmJohn Chittick:
The US Forest Service is actually engaged in feudal landlord activities. Once an agency that managed public lands for all users including sustainably harvesting timber, it now pretty much practices "stand and stare" forest management. It used to return rents to the federal treasury but now is a liability. It's almost impossible to find data on their (lack of harvesting) but all PC mandates such as minority hiring and contracting is boldly highlighted in its reports. USFS and BLM lands should be parceled and sold off to parties on a competitive basis at market prices reflecting highest economic use. That means that property featuring intrinsic high value ecological or recreation land should go to those who place a high value on such things. As things stand today, the price is zero and apparent demand is therefore infinite,and it belongs to the King (federal government).
September 30, 2016, 6:44 pmmarc biff:
Do non profits pay any sort of tax on their non profits?
October 1, 2016, 12:25 amrichard:
Warren,
Somewhere along the way, a lot of people have been taught that the economy is a zero sum game. If you make a profit, somebody else gets less. That's also not very surprising because most things in life are zero sum: You drink my beer, I get less. I think the ability to look beyond this is not for everybody. I don't think there is an easy way out of this.
Btw: In stead of 'profit', you should relabel it 'performance based pay' or 'variable pay'. Comparable to what a waiter gets when serving coffee (apart from the loss / investment part)
October 2, 2016, 1:54 amChris:
I'm assuming no dent was made into his way of thinking.
October 3, 2016, 5:26 amRobert T. Ives:
Profit seeking creates better products and services at a lower price. The left thinks that profit just adds to the price of good and services.
October 3, 2016, 5:43 amRobert T. Ives:
I agree. The use of the words "liberal" and "progressive" play into the hands of the left.
October 3, 2016, 5:45 amRobert T. Ives:
I like to compare high competition industries to low competition industries (including government). Why do we have incredible electronic devices at incredible prices? The fight for profit.
October 3, 2016, 5:47 amRobert T. Ives:
If a company captures "too much" profit then other companies will enter the market and eat their lunch. Unless, of course, the government has created restrictions to market entry.
October 3, 2016, 5:49 amTMLutas:
There is a fundamental difference I get into with people from the old country, whether, after a certain age, it is a waste of time to attempt to teach people certain skills or facts of life. I have held firm to the idea that it is fundamentally american to believe people can continue to learn while it is fundamentally european to write them off, sometimes at a very young age, as not ever going to 'get it'.
October 3, 2016, 5:50 amRobert T. Ives:
"Avoid"? Why would you think that? It is simply not true.
October 3, 2016, 5:52 amTMLutas:
If you believe that the economy is a zero sum game, a great many opportunities to make the world better and to make your own life better are closed off to you. You simply pass them by as immoral. The creative world is opaque and closed to you in a fundamental way. This is crippling, disabling. This is why I have adopted the tack of expressing my sympathy whenever I meet an unfortunate who believes in zero sum economies. "I feel so sorry for you" is an excellent opener because, first, it's true, and second, it sets the right tone going forward that I have empathy and really want things to get better (also true).
October 3, 2016, 6:04 amBob Parkman:
Following the ranger's logic, any wage above minimum wage should be immoral.
October 3, 2016, 6:05 amTMLutas:
The best, and surest, way to eliminate the problem of a company earning too much profit is to form another company and take away their business by providing the good/service combination the over-profiting company provides but at a lower price point. People do this all the time and make a good living at it. It is a sustainable method that does not require heroic measures and, so long as we are a free country, comes at little cost to society (your state secretary of state has to manage one more entry in their database of registered companies, the republic will endure).
Given sovereign immunity, the repeated real world result is that private acts are put under a higher level of scrutiny than public ones as a rule. When land gets privatized, time and again we find all sorts of problems that had been swept under the rug for decades by the previous public use. The privatization of public military bases because we no longer needed them after the end of the cold war is a great set of case studies for that phenomenon.
October 3, 2016, 6:12 amdouginsd:
And your response regarding crony rents should be: "How do we know that your salary isn't artificially inflated by rents because you belong to AFSCME or some similar union who hold the Federal government hostage while contributing to the political campaigns of Senators and Representatives on the Committee that supervises National Parks and Forests"?
October 3, 2016, 6:14 amTMLutas:
There is a reliable way to get over 25% profit as a private company, become an invention factory. If you can figure out how to consistently create monopolies by inventing new things that people want to have but nobody else has figured out how to provide, you can maintain a high level of profit so long as the factory keeps churning out truly new things.
October 3, 2016, 6:15 amTexasJohn:
Typically, no. NPOs can actually make a profit, i.e. income greater that expenses, and use it to expand or offer new services, but the amount is limited. I used (1980s) to work in a NP hospital - IIRC the limit was 3.5 %. If doing too well in a year, you spend it and/or give employees bonuses to use up the excess. If you exceed the limits, it is taxed. Do that too often, and you lose your NP Status.
October 3, 2016, 6:16 ambbwh:
This person seemed so simple minded, it might have been better to use monopoly money to show him how it works. He/she did not get it. If you haven't run or worked in the private sector, it is very difficult to grasp. Hard work, risk, quality, and many hours of labor as well as good customer service are key. Riding on the government dole with a narrow scope of responsibility and no accountability - taking someone else's hard earned money (the taxpayer) makes you pretty ignorant.
I guarantee you he has no clue where his salary dollars even come from. Many believe the government just magically has (and makes) money for all to use in excess. That is why they love their Big Government. They haven't a clue what it is doing to the country.
October 3, 2016, 6:20 am