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.
One organization works hard to make a profit by serving the public, and takes losses when they happen. The other organization works hard to make a profit and avoids losses by making up the difference with money from people who've never visited the park (taxes).
I'm struggling to see why the latter is more honorable. (No slam on the Park Service. I'm glad they do what they do.)
When people object to making profit on public lands they're channelling a thought that the common is everyone's.
They're really objecting to having to pay the use fees on top of their taxes; translated through many, many years of socialist and liberal language manipulation.
But the fees end up being a clever way to prevent a tragedy of the commons.
Too bad the point did not arise that without profits, no one would do the job that you are doing and that he would quickly be out of a job period.
Similar discussions when I worked as a defense contractor on an Air Force base. Our project manager warned us repeatedly not to take the bait. That just didn't sit well with my nature, unfortunately. If I had a nickel for every time I heard the word "slimy contractor", I'd be retired in St. Thomas right now, on a beach with a drink with an umbrella in it. But we always got the last laugh when the Air Force personnel would retire and first thing we'd see is their resumes floating across our desk.
It's the FPM principle. You want a job done? Pay me.
The State is the mother and father of all things. Anything that is not of the State is an abomination and must be treated as such.
Pretty much the mindset of the typical leftist.
You would at least think the irony would provide inspiration for his work.
I think the vendor was encouraging visitors while the ranger wants no one to show up.
I have a real problem with the analogy that profits are an "emergency fund" . Profits are a return on investment. So, the closer analogy is that when you put money in a bank or buy a bond from the government, you earn interest. That interest is your "profit" from your investment (ignoring inflation here, of course). In a similar manner, when you put money in a corporation, you receive in exchange the right to a share of the profit (eventually). For smaller businesses, where there are no external shareholders (who are not managers/employees), you can always arrange things such that there is no profit -- just pay the management more in salaries/bonuses.
The decision as to whether to invest in new equipment, more services, keep paying employees wages (versus firing them) should not be made based on whether a company was historically profitable or otherwise had profits to reinvest. Those decisions are made based on the potential return on that new equipment, the new services and whether you expect the work the employee is doing to be valuable enough to justify their pay. If it makes sense to do so (and provided the company has the credit to do so), the company can even borrow money to make the investment in question. So, unless a company is liquidity constrained, its investment policy should never actually be driven by its' profits.
I do agree with your last point - profits (before shareholder/manager wages) are a signal that you're doing things right and customers are happy.
Management guru Peter Drucker pointed out that there are no such things as profits, simply costs that must be covered. Any money a business makes over its costs go to cover what the business owner deems necessary to support the business now and for the future.
The Big Problem here is the lack of basic economic education, formal or informal, through all the years of schooling.
My immediate gut level response is that wages are not the profits from labor, they are the price paid for that labor. Wages for an individual are closer to gross revenue for a corporation. They do not reflect a variety of associated costs.
So, to figure out how much in those wages are "profits" to the individual, I think you'd have to look at the cost of that individuals' education/the historical capital invested in that individual, the cost of upkeep for that individual, any student loan payments still being made, etc. Profits, in that analysis, would be closer to the teacher's savings + discretionary spending (minus some depreciation for a variety of sunk costs associated with creating the asset (the teacher) that were generally incurred before the teacher was able to work).
I'd object to the sale of the National Park Service lands to private enterprises. A fair and open bidding process to get outside contractors to run those parks and monuments strikes me as a good idea - if only to get the National Parks and associated monuments out of the general US budget - but there are positive externalities associated with having "public" lands that cannot be developed and are used only recreationally. That would reduce the USFS to a group which simply enforces the various contracts with those outside vendors. I'm also in favor of stripping USFS of its' police powers and allowing local law enforcement to assert jurisdiction while we're at it.
With respect to the BLM lands, I see no reason why the Federal government is still in that business. It is clearly time to move ownership of those lands out away from the Federal government. I don't necessarily think that parceling them and selling them to the public is necessarily the right answer. For all Federal land not currently used by (i) the armed forces, (ii) National Park Service, or (iii) any other agency of the Federal government, how about the following:
Years 1-2:
For any piece of land described above within a town, city or other local governmental's jurisdiction:
(a) Get the land in question appraised by an independent third party.
(b) Offer to transfer the land to the local entity provided the local entity promises to pay 85% of the valuation back to the Federal government over the next 10 years.
Year 3:
For any land described above within a county or other similar construct:
(a) Get the land in question appraised by an independent third party.
(b) Offer to transfer the land in question to the county or other similar construct provided the county promises to pay 75% of the valuation back to the Federal government over the next 10 years.
Year 4:
For all remaining land in each state not previously purchased in years 1-3:
(a) Get the land in question appraised (in bulk as a single transfer) by an independent third party.
(b) Transfer the land in question to the States on the condition that the state pays 50% of the valuation back to the Federal government over the next 20 years.
All proceeds are used to pay down Federal-level debt.
Before liberals went off the deep end a decade ago, they had a different name for dirty profits. They called it sustainability, they called in new hires, they called it cost of living raises, they called it sharing the wealth with your employees. Now consider this, why is the government seen as altruistic when it derives ALL of its money from business in the private sector?
Wages are not pure profits - they aren't even close. Go pull out a paycheck. What percentage of your wages are you able to take home? My bet is that between 20-35% of your wages off the top go directly to government at various levels. If you are fortunate enough to have employer-provided health insurance and/or certain other health related benefits, that typically comes out of your paycheck as well - and is a current expense of that worker. Food and lodging are both non-trivial current expenses for that wage earner as well. (Now, there is an argument that the wage earner could live in less space and with less amenities, so part of the food and lodging related expenses are more than strictly necessary for the wage earner to survive - but put that aside for a moment.)
Now, let's talk about that accumulated knowledge. That knowledge was typically imparted to that individual as an investment. Fortunately for most of us, it was an investment by those who were not looking for any return other than for us to pay it forward to the next generation. Student loans, from that perspective, are a way to allow an individual to invest in themselves at a point in time when they might have otherwise been liquidity constrained. So, that repayment of student loans is actually a very real cost associated with that individual enterprise.
Time is not a capital good. Labor is a transitory thing. As such, the time of a laborer is a perishable good. If the laborer is unemployed and doesn't find something productive to do with the time, it is lost.
Using the classical definition of liberal, progressives are the exact opposite of real liberals. Progressives are statists. They want more and more power and control given over to government and by extension, to themselves. Classical liberals want the greatest possible freedom for the greatest possible number of people. You can't have that and big government at the same time.
Wut? You mean government services are not free?
And yet some liberals do become conservatives. One way to do that is to engage them in conversation and point out the fallacies. Despite the Othering that is part and parcel of the liberal worldview, they are human just like us, and individually should be treated as such until shown otherwise.
If that's not possible to accept, consider that arguing your point lets you test your understanding of the issue and your ability to formulate a response. You benefit no matter if you change the person's mind or not.
And yet businesses will go a long way to abuse its workers in search of that profit. Some amount of regulation is necessary to ensure that doesn't happen.
I prefer the term "gliberal"..... a smug liberal, glibly liberal with the truth.
In this case, any savings from wages would be considered a profit.
Taxes are only on that income (profit) over the cost of earning that income. Healthcare, food, lodging are not expenses related to earning income. Commuting expenses, say, could be a cost, as is any job specific clothing or protective gear, or a mechanics tools. As you say, training, schooling are prior "investments" but in general the expense, other than the student's time and effort are borne by others. The recipient is not even required to give anything back to the community that funded their education, ever.
Capital goods are just saved up old labor. Labor goes into converting natural resources into useable feedstock and/or capital goods. That labor becomes a part of the value of the capital good.
Yes, labor and time are transitory and are expended over the life of the person. But capital goods also degrade over time and produce less as they age, in general. Similarly, education, a capital good for a person, becomes less relevant and possibly less readily available. The life of capital goods (and education) can be extended by the continual or cyclical addition of more labor to revitalize it.
The fact remains that most wage earners do not have a large capital investment that generates their income and therefore almost all of their earnings are profit. They then use all or a portion of that profit in consumption for food, rent, healthcare, etc. Compare this to a business that may seem to have a lot of earnings, but after deducting expenses in producing that income, etc., their profit is small, if at all.
Frankly it wouldn't surprise me if this guy gets some serious blowback from the Forest Service over this article. The left, especially those in the government, don't appreciate it when the proles get uppity.
Sales taxes in a corporate setting have nothing to do with profits and everything to do with gross revenues. Much of our wage-based taxation is actually similar - no deductions allowed for your social security taxes for example.
"Healthcare, food, lodging are not expenses related to earning income."
I know that is how we have the income tax defined for individuals, but after thinking about it, can I get you to reconsider? If I'm sick, if I don't have food, if I don't have anyplace to live, do you really think I can put in the same level of labor or be able to provide the same level of services? Now, not all of the food, healthcare and lodging expenses are necessary for survival - but then again, a charitable contribution is typically treated as an expense/deduction to income and therefore not included in a corporation's calculation of "profit", even though it is not strictly necessary in realizing that profit and/or generating revenues. Thus, the "profits" from such labor should normally be roughly measured by the change in that individual/enterprise's savings.
The USFS doesn't manage Park Service lands. That's a separate agency. The USFS has evolved into a defacto competing Park Service for lack of anything better to do as they barely sell any timber anymore, particularly in Region 6.
With all the ENGOs and private land trusts and celebrity noise there is no excuse for not making them pay for what they have essentially acquired for little more than the cost of political campaigns. Designated Parks can stay in public ownership.
They somehow believe that it is better to leave a forest to be completely infected by pine bark beetles, than to cut trees around the infestation to limit it's spread. And to cut down and burn the infected trees.
Which increases atmospheric CO2. If we logged the trees, and then grew more, all the CO2 would be tied up in the lumber.
Oh, and we'd have greater employment, lower costs for home building, more sustainable forests, all kinds of follow-on effects. Why does the Left hate forests, jobs, and housing? Why do they love increased atmospheric CO2?
ISWYDT
If the economy was a zero sum game, we'd all still be living in caves.
Thiel's recent book Zero to One is a real eye opener on the subject of competition. I recommend it.
Ask the Ranger to look at every article of clothing on his body and every appliance and piece of furniture in his house. How many of them were made by people seeking a profit? Without the profit motive, how many of them would have been made at all? By whom?
Something else to consider: Profits on an investment not only need to be positive for a company to survive, but they need to be *greater* than the zero-risk rate of return. So if an investor has a million dollars and can invest that in government bonds returning (for example) four percent, using that same million to run a company that only reliably returns *three* percent is a loss, particularly if that is the return *before* the investor puts their blood, sweat and tears into the project. It gets worse for the enterprising business owner who is *borrowing* money from the bank at a much higher interest rate than government bonds, particularly when the business experiences a bad period and still has to make a payment.
Fair enough - you made the point better than me. And Georgfelis below got to the point that was rattling through my head. Profits are not guaranteed, they are like the payoff for the risk you take.
You're going to the opportunity cost of the investment in the company - and I agree with you entirely. That being said, the actual investment of time and money does not actually have to return the 4%. For the investor to be willing to make the investment, the investor merely has to have a reasonable (risk-adjusted) expectation that the resulting payoff on the capital investment will be greater than 4%.
In other words, for a given investment, if there is a 20% chance at a 30% return, a 20% chance at a 20% return, a 20% chance of a 0% return (just getting their money back) and a 20% chance of a 10% loss, the expected return, before we see whether the investment actually pays out, is 10%. Depending on the investor's risk tolerances, that may or may not be an acceptable return on the risk. Let's go a bit further - the investor is looking at 3 opportunities: (A) the 4% bond (which we assume will be safe 100% of the time), (B) the opportunity I just described above (20% chance of either +30%, +20%, +10%, +0%, -10%) or (C) the following wager:
Outcome Probability Return(on top of investment)
Smash hit!..........10%...........300%
Great success.... 20%..........100%
Break-even..........30%..............0%
Bad idea..............20%...........-50%
Really bad idea....20%.........-100%
The expected value of each alternative is (A) 4% return, (B) 10% return and (C) 20% return. The standard deviation of each alternative is significantly different as well: (A) 0% (risk-free), (B) 14.1%, and (C) 114%. Alternative (C) is actually quite interesting for our purposes - it is a long shot idea with a 70% chance that you will not actually make any profits at all. Yet for someone with sufficient wealth, (C) clearly provides the highest expected returns. Most venture capitalists are looking for (C) as well, of course, and it is (C) where taxes can change the math the most. Many small businesses start ups are created with (B) in mind, however - taking on a certain level of risk but not necessarily swinging for the fences.
Similarly, the entrepreneur has to have the reasonable expectation that the long-run payoff for their time is greater than what they could get by selling their time elsewhere (i.e. by taking just a salary). So, for an entrepreneur without a separate investor, the opportunity cost is the entrepreneur's time (for which he or she may have been able to receive a salary) in addition to the out of pocket investment.