Michael P. Fleischer, President of Bogen Communications, offers a business owner’s perspective on the costs of hiring new employees in the current economic environment. He walks through the costs of hiring a hypothetical employee (Sally), explaining why it costs his business $74,000 to pay someone a $59,000 salary, of which they will only keep $44,000, with $12,000 in benefits). Where does the extra money go? Various taxes and insurance premiums, including unemployment and disability, workers’ comp, and so on. Each item may be reasonable in itself, and some are quite small, but they add up.
In Fleischer’s view, these added costs increase his firm’s vulnerability to government decisions — and not just those made in Washington, D.C. While not all of the non-salary costs are due to government policy — Bogen could offer less generous benefits — many are, and this means firms like Bogen “have lost control of a big chunk of our cost structure,” and this makes Bogen reluctant to hire more. Fleischer concludes:
even if the economic outlook were more encouraging, increasing revenues is always uncertain and expensive. As much as I might want to hire new salespeople, engineers and marketing staff in an effort to grow, I would be increasing my company’s vulnerability to government decisions to raise taxes, to policies that make health insurance more expensive, and to the difficulties of this economic environment.
A life in business is filled with uncertainties, but I can be quite sure that every time I hire someone my obligations to the government go up. From where I sit, the government’s message is unmistakable: Creating a new job carries a punishing price.
UPDATE: More here. (Hat tip: Professor Bainbridge)
Ted Frank says:
If anything, $76,000 is an underestimate, because it does not include the marginal cost of the expected cost of employment litigation that comes from adding another employee, which is about $3000-$6000 for an employee making $59,000 (including the HR bureaucracy needed to protect employers from employment discrimination lawsuits).
August 10, 2010, 8:00 amJon Roland says:
It is an underestimate, because one must also add the costs of the capital investment in the workplace for the worker, which can exceed his annual salary, and a portion of the cost of employing supervisors and support staff for his job. That is why machines have a competitive advantage over human workers, even if the humans worked for nothing.
Most of these costs are avoided by offshoring, which is why so many jobs are being sent abroad. They can be partly avoided by hiring temps or contractors, which is why wo-called “permanent” employees are being so often replaced by temps.
Without new technology that has not yet spread to the rest of the world, the employment prospects for U.S. workers is bleak. We may very well be on our way to permanent unemployment levels of more than 33%, the end of all medical and pension benefits, and the collapse of debt-backed currencies. The landscape may soon be dotted with shantytowns, ruled by gangs.
August 10, 2010, 8:26 amElliot S. says:
I started a new job in January. On my second day, the CEO called an all-Staff meeting as per usual for early January. One of the announcements he made was that our insurance premiums were costing the organization $3,000 *more* this year *per employee*.
Note that this happened well before Congress passed the health care bill. If anything, this premium increase was put forth in anticipation of regulation, not directly because of it.
August 10, 2010, 8:36 amDJR says:
What a whiner.
Most of the extra cost he complains about comes from his own choice to offer benefits, not anything ordered by the government. Guess what Mr. Fleischer? If, as you would have it, employers didn’t pay for health insurance and individuals bought it themselves, it would be more expensive because there wouldn’t be group discounts, and you’d still have to pay Sally more because she would need the extra money to buy health insurance. And it is the market, not the government, that “pressed” you into providing this benefit, because you knew that you won’t be able to hire the quality of employee you want if you didn’t offer health insurance. Although health insurance reform now requires you to offer health insurance, it’s hardly a government punishment to require what you were already providing. If anything, health insurance reform leveled the playing field, by eliminating what was essentially free riding by employers who did not offer health insurance.
Also I’m a little confused. What does it matter to him that the worker only keeps $44K of a $59K salary? That certainly isn’t any price he pays. And the approximately $5,400 he does pay to the government amounts to less than 10% of the worker’s salary. Of that, the measly $300 he pays for the workman’s comp — a devil’s bargain that insulates him from unlimited tort liability for injuries to his employees — is probably worth the entire balance by itself. But in addition to that, the taxes pay for benefits like ensuring that if his worker becomes disabled or unemployed it will not be an immediate ticket to homelessness, and (theoretically at least) that she will have some benefit when she reaches retirement age. Maybe in a perfect world each individual would insure against these risks himself, but we don’t live in that world, and elected leaders have made rational decisions that this is a sensible way to pay for these risks.
Bottom line: For him, the cost is $74K, and he can decide whether to invest that amount in an effort to grow his business or not. Other than health insurance, which he was providing by choice already, he doesn’t complain that any of these costs have risen significantly or are not predictable. Be a man and take responsibility for your business in a tough market.
And quit whining.
August 10, 2010, 8:41 amalkali says:
I don’t buy some of the logic in that piece. The author writes:
1) The costs of medical and dental insurance are benefits. The government actually provides a tax break to Sally and the employer here because Sally doesn’t have to pay taxes on those benefits.
2) Suppose the libertarian fairy waved his or her magic wand and eliminated mandatory unemployment insurance, mandatory disability insurance, Medicare, and Social Security. Presumably Sally, a rational utility maximizer, is going to go buy some insurance privately and save for living expenses and medical care in old age. Is the contention that she would save a lot of money if that happened? How much?
3) Assume that Sally’s income tax liability on her $59,000 salary is $6,250. That’s an effective federal tax rate of less than 11%. Is the author really contending that she should be paying less?
August 10, 2010, 8:46 amDantheman says:
And of course it helps make the argument against government intervention in the markets when the WSJ fails to advise its readers that the author is someone with Bush White House connections who’s managed to screw up both privatization in Iraq and management of his own company during the most business friendly administration in recent memory.
See http://motherjones.com/kevin-drum/2010/08/wall-street-journal-editorial-page-outdoes-itself for more details.
August 10, 2010, 8:55 amSmooth, like a Rhapsody says:
alkali and DJR:
I think the point is not to try to engender sympathy for the employer so much as it is to explain that it requires a lot more than $50,000 in extra revenue to hire someone and pay them $50,000.
Also, this analysis did not take into account, AFAIK, the equipment, the support staff and other expenses incident to hiring someone above the lowest skill level.
August 10, 2010, 9:01 amIt might also be a veiled shot at those perceived to be pinheaded theorists in the administration (including the pinhead-in-Chief) who have never met a payroll and yet never miss an opportunity to cast aspersions on hirers for not hiring.
Steve says:
Another failed businessman blames it all on the government. Snore.
August 10, 2010, 9:13 amDJR says:
An essay on “Why I’m Not Hiring” that concludes that the government is punishing him for creating jobs is not about the unremarkable fact that salary is only one component of the cost of an employee.
If it were, then the essay would have been about the difficult business climate and how on balance, he cannot justify additional employee because the investment is not likely to produce an acceptable return. But the essay is about what he chooses to pay in benefits and what the government requires him to pay as an employer. The point is that all these extra expenses are too much and that’s why he’s not hiring. If that’s true, he’s a lousy businessman because the decision to hire should be based on the anticipated return on the investment, not whether he perceives himself a victim of too much government.
August 10, 2010, 9:15 amHouston Lawyer says:
If the employer’s costs are insignificant, why is it illegal to show on an employee’s pay stub the portion of FICA taxes that the employer must pay on that pay?
If government raises the cost on hiring an employee, fewer employees will be hired. Health care mandates are a significant portion of those costs.
August 10, 2010, 9:21 amB.D. says:
Based on the comments, I am more convinced than ever that law schools should beef up their economics and business course requirements.
August 10, 2010, 9:23 amkarrde says:
It is worth noting that some of the businessman’s fears are sudden changes in cost due to changes in laws concerning hiring, taxes, benefits, etc.
That is, the Return On Investment might swing from positive to negative based on decisions made by bureaucrats, Congressmen, and the President.
Whether or not the current level of intervention is “too much”, the rate at which new interventions are coming in from various levels of government makes any prediction of ROI a guess, at best.
August 10, 2010, 9:26 amcboldt says:
– Another failed businessman blames it all on the government. –
August 10, 2010, 9:28 amHe hasn’t failed, yet. He may find his profits increase by firing a few of the people working for him now.
cboldt says:
– It is worth noting that some of the businessman’s fears are sudden changes in cost due to changes in laws concerning hiring, taxes, benefits, etc. –
August 10, 2010, 9:38 amI wouldn’t call it a “fear.” Cost uncertainty arises in myriad ways. Raw material, energy, equipment breakdown, swings in demand (changing economy of scale), etc. A successful business is quick to adapt to the inevitable changes in business climate.
Allan says:
Well, I guess we could eliminate all the costs.
Taxes — who needs them. Let’s let everyone pay for their own schools, roads, defense, passports, clean air, clean water, disability insurance, retirement, housing standards, police, firemen, safety inspectors . . . All this without centralized government efficiencies (yes, efficiencies). I am sure that individual employees will be better off.
Even without taxes, it would cost more to employee a person than their base salaries. The business should only hire where the addition of the person covers the additional costs or creates a profit. It is simple. If the employee does not cover the cost, don’t hire.
That is, employers are not hiring because employing one more person will not result in a profit for their endeavors. That goes for hot dog vendors as well as GE.
And why won’t they cover the profits? Because there are not enough other employers hiring people who will buy hot dogs and GE products. It is a vicious circle, or death spiral. Enter Keynes.
I bet the businessman would hire up a storm if he had guaranteed contracts that required him to expand to meet the requirements.
August 10, 2010, 9:42 amDave Ruddell says:
This commenter at OTB seems to disagree with Mr. Fleischer.
August 10, 2010, 9:46 amwhiskey says:
http://www.outsidethebeltway.com/hiring-workers-too-expensive/#comment-1319294
August 10, 2010, 9:46 amwhiskey says:
fffffffffffffffffffffffffffffffffffffffffffffffffffffffffffffuuuuuuuuuuuuuuuuuuuuuuuuuuuuuuuuuuuuuuuuuuuuuuuuuuuuuuuuuuuu
August 10, 2010, 9:46 amnicehonesty says:
Alkali, Dantheman, DJR, Steve, Allan:
Do any of you run a business that employs others, or have direct relevant experience in the current economy of the actual cost/benefit considerations of hiring new employees?
The impression from your generic sniping (including the Booooooooooosh!!! chestnut) against this article, written by someone in such a position and who provided actual specific data to bolsters his points, is that none of you have any real information about the subject to contribute.
Perhaps each of you could tell us about the last person you hired for your company, the details of how little beyond their take-home pay it actually cost you to add them to your payroll, etc.
August 10, 2010, 9:52 amlgm says:
These numbers seem not to add up. salary+benefits=59+12=71, leaving only $3K overhead?
August 10, 2010, 9:55 amArthur Kirkland says:
Could the Republicans not find a better speaker for this than one of the guys who botched the occupation of Iraq (and evokes the nepotism- and ideology-laced hiring process that was used to select the people who botched the occupation)?
If this gentleman’s performance in the American economy the way reflects the record in Iraq, is it any wonder he is complaining?
The bench must be weaker than I thought.
August 10, 2010, 10:11 amBlue Neponset says:
One thing that really really bothers me about free market fanatics is that they only look at one side of the ledger. If hiring Sally doesn’t help increase your revenue then you shouldn’t hire her. Why is it that Mr. super smart business man doesn’t mention this in his whiny article? My guess is he has an agenda and doesn’t want to actually have an honest conversation about employment costs. There are valid reasons it is expensive to hire people. To hear Mr. Fleischer tell it the gov’t is burning every third dollar it receives in taxes. What an ass.
August 10, 2010, 10:17 amcboldt says:
– The world changed around them a decade ago and they failed to adapt. –
August 10, 2010, 10:20 amThat happens from time to time. Technology changes, etc. The volume of vacuum tube production is fairly low, for example, same for buggy whips, wagon wheels, wooden barrels and barrel staves. He may have a business that can’t adapt, making the best course to be cessation of work and liquidation of assets.
– These numbers seem not to add up. salary+benefits=59+12=71, leaving only $3K overhead? –
Probably incremental/variable overhead in an office-type business.
I think a fair rule of thumb is that gross revenue has to be double or triple the salary of an incremental employee, to make the risk worthwhile. And that incremental sales volume has to be persistent, not transient. If there are transient spikes in demand, then work OT or bank production in lean times to cover spikes in demand.
nicehonesty says:
Dave Ruddell, whiskey, Arthur Kirkland:
Companies that make too much money are evil and shouldn’t be listened to (e.g. BP, Goldman Sachs).
Companies that don’t make enough money are stupid and shouldn’t be listened to (e.g. Bogen).
Can any of you Goldilocks point out which companies are making just the right amount of money that they don’t fall into the evil or stupid categories?
Thanks.
August 10, 2010, 10:24 amJS says:
While the original article is completely off with regards to benefits (if anything, due to their preferential tax treatment, they increase the amount of people he can hire for the same money rather than decrease).
At the margin, it is likely the government mandated insurance/retirement programs change the level of employment from what it would be at a market set equilibrium. It is not clear however, whether they would increase or decrease the level from the equilibrium. Social security, for example, is actually a net benefit to its recipients (the average person takes out much more than they pay in for social security, hence the future crisis for social security) and thus should artificially encourage people to enter the job market.
Probably the biggest drain on employment is frivolous discrimination/sexual harassment law suits. This article does not even mention those costs. Overall, it was a poorly thought out piece.
August 10, 2010, 10:30 amAllan says:
Nicehonesty,
Actually, my family does have a business. We have hired when the extra person was needed to help us make more of a profit. And, yes, we realize that the cost to hire someone is more than just the base salary.
My point was not that the author was a crybaby, it was that he was looking only at one side of the ledger. When he hires an employee, it benefits everyone. Even the author. For, if it did not benefit him, he would not hire.
If there were not the extra costs, would he hire the employee for the difference (perhaps $80,000 per year as opposed to $59,000 per year) or would he pocket it? Well, I suppose it would depend on the labor market.
Right now, it appears that the market price for a person with Sally’s skills is $59,000 plus the extra costs.
August 10, 2010, 10:32 amtherut says:
I understand him perfectly. I am looking to fire 5 employees cause I can no longer afford them. With the .gov holding our Medicare checks 3 times this past year it has caused a severe cash flow problem. Had to borrow money to make pay-roll once because of their incompetence. Since .gov has me priced fixed with 60% of my fees and more to come some employees have to go. Or move to an area with more wealth and less .gov medical patients and opt-out of Medicare and Medicaid. Guess those people can just be without a physician if I am forced to that point.
August 10, 2010, 10:32 amMalvolio says:
So to sum up the previous posters:
1. The author of the article is a bad person, therefore the facts he adduces are unpersuasive;
2. 37% taxation isn’t that bad;
3. He had it coming (see #1).
I respond:
1. I’ve never heard of this guy Fleischer but let’s assume arguendo that he’s a serial killer who thinks New Coke was a great idea. Does anybody seriously dispute his numbers?
2. Yes, it could be worse. Let’s go further: in many countries, it is worse. Doesn’t affect his point, which is “If you put a 37% tax on doing something, you shouldn’t be surprised if fewer people do it.”
3. Maybe he does have it coming. I don’t have it coming, probably you don’t have it coming, the vast majority of people (except to the extent they are to blame for the supporting the policies that make the situation inevitable) don’t have it coming. But 37% tax on employment means, empirically, a 10% unemployment rate, which means collectively, we are 10% poorer than we ought to be.
August 10, 2010, 10:34 ampc says:
Or he could innovate in his company’s sector and raise revenues. But I guess it’s easier to blame the government for his failure.
August 10, 2010, 10:34 amDave Ruddell says:
nicehonesty, actually, I would listen to the successful companies, b/c they seem to know what they’re doing. Fleischer is running a business that is slowly but surely failing, and is trying to blame the government for it. Tough.
August 10, 2010, 10:34 amSteve says:
Yep! My company is doing very well. We are constantly hiring and are planning to open a new branch office soon, notwithstanding the oppressive hand of government forcing us to pay workers’ comp, etc. Thanks for asking.
Five years ago, 37% tax on employment meant a 5% unemployment rate. Like everything else, correlation ain’t what it used to be. If only we could eliminate all taxes so we could have 100% employment, which is of course how it works around the world.
August 10, 2010, 10:42 amBlue Neponset says:
I dispute his numbers. The going rate for a person with Sally’s qualifications is $74,000. Who pays for Sally’s health insurance, unemployment insurance, pension contribution and disability insurance is irrelevant to the price. If Sally had to fund all of those costs personally Fleischer would still have to pay her $74,000. This guy is just selling a taxes are too high meme.
August 10, 2010, 10:44 ampc says:
I wonder if the WSJ would print an article about how shocking it is that freelancers/contractors charge 2-3 times the rate of a full time employee?
August 10, 2010, 10:48 amMahan Atma says:
Oh dear.
Fleischer gets pwned.
And pwned again.
August 10, 2010, 11:00 amDavid M. Nieporent says:
Because it wasn’t relevant to his point? But it’s not “free market fanatics” who don’t understand this; it’s liberals, who think that corporations are magical money trees that exist to provide stuff to employees.
Example: possibly the dumbest column in the history of dumb columns, by Bob Herbert last week, which can be summed up as, “Corporations should hire people even though they don’t have anything for those people to do and the corporations will lose money on those hires.”
August 10, 2010, 11:06 amBlue Neponset says:
Exactly. It is brilliant of you to agree with me.
If Fleischer really wanted to discuss the high cost of hiring people he would have mentioned the current benefits of hiring someone. Instead, he is just telling us about one side of the ledger in order to confuse people into thinking that taxes and benefits are the reason the job market stinks.
August 10, 2010, 11:13 amFloridan says:
Other than health insurance benefits (perhaps), the other payments that don’t immediately end up in his employee’s pocket do not put his company at a competitive disadvantage since all his competitors have pretty much the same costs.
August 10, 2010, 11:15 amcboldt says:
– Or he could innovate in his company’s sector and raise revenues. But I guess it’s easier to blame the government for his failure. –
August 10, 2010, 11:16 amI don’t know his business, but by far the best innovation is to produce more with fewer workers, so the firing still takes place. As for “blaming the government,” I think it is perfectly natural for all businesses, even those doomed to imminent failure, to lobby to lower costs. It’s the nature of the beast. When relocating, shop for the locale that gives the best mix of operating cost, available workforce/skills, and local tax favors. The big companies negotiate for tax favors with Congress.
From the thumbnail sketch of his business, looks to me it’ll eventually fail regardless of the tax burden.
Zack says:
Hear hear.
I don’t get at all the statement that “added costs increase his firm’s vulnerability to government decisions.” Vulnerability to future government decisions is independent of current costs imposed by the government. A good businessman will be able to adjust to changing circumstances.
If the argument is that HCR and financial reform are likely to impose more costs on the business, I don’t see how the cataloging of current costs is relevant. It’s the marginal cost (or more accurately, the predicted marginal cost) imposed by new regulations that will presumably affect whether he decides to hire Sally or not.
August 10, 2010, 11:18 amscattergood says:
Do those that criticize the article actually read it? His issue isn’t that taxes are too high, it is that they are TOO UNCERTAIN:
And as for an example he discusses the increase in costs with regards to health insurance:
Business people and investors can figure out how to make money, IN A STABLE REGULATORY ENVIRONMENT. It is the lack of transparency and clarity on everything from ObamaCare to the Dodd-Frank regulatory reform act that cause a ton of problems. And the biggest uncertainty is the coming income tax increases with the refusal to renew of Bush tax cuts and the EXPECTED other tax increases to pay for the exploding debt and social services.
The issue is that a small business person just doesn’t really know what the regulatory and tax environment will be like in 12-24 months, and certainly doesn’t know what the economic environment will be like in that time frame either. So given the lack of control and uncertainty, why would you take the risk to expand?
August 10, 2010, 11:20 amShelbyC says:
He’s not whining, he’s just not hiring. It’s the people complaining about the unemployment rate that are whining.
August 10, 2010, 11:26 amSciFi_law says:
I wonder why business community does not want universal health care. I have never heard any businessman ever complained about inefficient and expensive private health insurance system.
August 10, 2010, 11:26 amTollhouse says:
Just innovate guys. Just do it. That will save everyone. Sprinkle
August 10, 2010, 11:28 ammagic fairy dustinnovation over it. Just do it! It’s sooooo simple. What stupid businessmen these guys are. I should get hired by McKinsey & Company, but alas, I’m not politically connected.Ted says:
I take it you’re a physician. What’s your take home pay? Could you share some of your own pay to retain your best employees? I mean, would it be acceptable to you to live on 50 or 60k per year? If you did so, could you retain your employees?
Also, regarding the OP. If Bogen expects the subject employee to increase revenue by $240,000/year (gross salary x4), is his point still valid?
August 10, 2010, 11:34 amBlue Neponset says:
To hear the free marketeers talk you would think the most important factor in any business decision is what the government is doing. The guy who paints houses doesn’t mull over what the regulatory environment is going to be like in 24 months before he hires someone. His main concern is being able to keep a new hire busy. If he can then he should hire that person. If not, then he shouldn’t hire that person. Please game out for us this small business person’s thought process when it comes to government regulation. You seem to think it is vitally important to the employment market. Please use real world examples to show us why this is the case. Thank you.
August 10, 2010, 11:38 amZack says:
This does appear to be his argument, but he’s doing a piss poor job of presenting it. As written, it’s almost like a long form LSAT flaw question: “Taxes are high, therefore taxes are uncertain.”
If he’s making an argument about uncertainty, I don’t see the relevance of his current cost catalog. Even if his current tax costs were only 5%, fears of impending drastic changes in the tax code would have a chilling effect on his ability to hire new employees. However, you’ve quoted the only two paragraphs of the essay that deal with changes is costs. Everything else about total cost, which is irrelevant to his argument.
August 10, 2010, 11:41 amcboldt says:
– So given the lack of control and uncertainty, why would you take the risk to expand? –
August 10, 2010, 11:52 amThe generic way to manage this is to transfer the risk. If the cost of your goods has a large energy component, then you price the goods in an indeterminate fashion: X + cost of energy. Same for goods with significant raw material content.
With labor, you can tell the employee that the business will pay $75,000 total, and that their take home pay will vary depending on items beyond the control of the business, such as cost of mandatory health insurance, payroll tax, unemployment tax, and so forth. The upside to this approach is that it creates a greater number of squeaky wheels.
Dan Weber says:
do not put his company at a competitive disadvantage since all his competitors have pretty much the same costs.
To a first approximation, yes, unless his competitors are dodging the law.
However, just because the entire sector is being hit equally doesn’t mean no one is being hurt.
At a big company, hiring an additional person isn’t all that hard. They already have the processes and personnel and experience to deal with all the forms and laws. For small companies, and especially solo people, taking on even one more person can be incredibly hard. Michael Kinsley wrote about this back in 1994, around the time of Nannygate:
Small businesses are horrible at lobbying and you don’t read about their failures in the newspaper. It might be that all these forms and hassles are worth it, but you don’t demonstrate that through attacks on the OP.
August 10, 2010, 11:59 amjib says:
boo fucking hoo.
If Fleischer can’t take the heat he should go work for the fucking peace corps or something.
August 10, 2010, 12:29 pmalkali says:
Yes! Thank you for asking.
To clarify: my point is not that Fleischer is incorrect that it costs more to hire an employee than the salary number, or that an employee does not take home the salary number as pay. Everyone knows that, or should.
My point is that Fleischer’s calculation includes (1) the costs of benefits that he chooses to offer, and that are actually tax-exempt, (2) the costs of government social insurance programs that individuals would have to bear, plus or minus, even under some hypothetical libertarian alternative arrangement, and (3) income taxes which, expressed as a percentage, are not all that high.
In other words, if there is a policy prescription in Fleischer’s e-mail, I’m not sure what it is.
Also, for what it’s worth, I don’t think it’s particularly relevant that the author is Ari Fleischer’s brother (except to the extent that the author is describing his purported concerns about the stability of the tax/regulatory regime, which is subjective).
August 10, 2010, 12:34 pmscattergood says:
Ok, I am a commodities and forex broker and trader. The Frank – Dodd act explicitly prohibits all leveraged based forex transactions and gold transactions for US based clients and brokers, unless some (any) Federal agency steps in and creates some rules.
Effective 90 days from its inception, the Dodd-Frank Act bans most retail OTC forex transactions. Section 742(c) of the Act states as follows:
So who is going to step in? The Commodities and Futures Trading Commission (CFTC) who is nominally resonsible for the $3T per day market? The Fed? The Treasury? And what rules are they going to come up with? What happens if two agencies come up with competing rules? What are the effects on my ability to trade, or get and retain customers? What is the marginal value of sending customers to a different regulatory environment, like the UK?
Last year the National Futures Association mandated that all trades in the forex market be done as First In First Out, a change to the marketplace. This sent 5-10% of all trading funds out of the country in the first 12 months. That’s tens of billions of dollars, jobs, and revenue out of the country. The CFTC proposed 130 pages of regulatory changes which created tens of thousands of comments. For a comparison, SEC proposals get between 1-5K comments on a regular basis. The impact of the CFTC changes is unknown because the CFTC refuses to tell anybody what they are, when they will be decided, or what is going on under the Frank-Dodd act.
So, should I go and hire sales people, traders, IT people and the like? What happens if I do and in 60 days the CFTC and the Fed make contradictory proposals to regulate forex and commodities? Do I spend money on marketing to get customers when the CFTC may well radically change the trading environment for my customers and make it better to move their accounts to the UK, Switzerland or Australia? Do I hire marketing people and support staff to do so?
The point the article was making was that roughly 40% of the total cost of an employee is in government effected areas of taxation and mandated health care and only 60% of that cost actually goes to the employee as cash. The lack of control and transparency, and the risk and expectation of alterations / changes to the 40% because of regulatory and tax changes that are coming makes hiring people questionable.
Most people forget that it is called a RISK / REWARD ratio. Most people ONLY focus on the reward part, i.e. profits. However risk and the understanding of risk changes substantially over time.
August 10, 2010, 12:38 pmMoneyrunner says:
Scattergood understands the point of the article. Has anyone bothered to read the headline? It’s “Why I’m Not Hiring.” The rest of the article explains why. The uncertainly makes the risk of hiring too great.
I realize that everyone on this forum can run his business better than Fleisher. Your comments have convinced me. Unfortunately, the business owners on this forum seem to be doing a piss poor job of hiring because you guys haven’t moved the employment needle enough to notice.
The answer from the legal profession is “stop whining” and “innovate you cretin.” Meanwhile the article is written to answer the question: why is unemployment stuck in the 10% range? Maybe there are just not enough government jobs to go around.
Businessmen can and will run a business if they know what the rules are and what their costs are going to be. But the business environment right now is an economy that doesn’t appear to be growing and a government that is imposing new and unknown costs on business. So businesses that don’t have a printing press in the back, or are just too stupid to do that innovation that is the answer to everything are just not hiring. Is that so hard?
August 10, 2010, 12:41 pmscattergood says:
I can agree that his argument is unclear. However I think the cataloging of the taxes is important to show the proportional effect the uncertain has.
Let’s say taxes and regulation were only 5% of the total cost of an employee. If you had zero certainty about that 5% as an employer you could say ‘eh, 5% is a small amount, and even if it doubles (unlikely) that’s only a 5% change in costs’. However by showing that the gov’t effected areas are roughly 40% of the cost of an employee, the level of uncertainty goes up significantly.
August 10, 2010, 12:43 pmByomtov says:
The going rate for a person with Sally’s qualifications is $74,000. Who pays for Sally’s health insurance, unemployment insurance, pension contribution and disability insurance is irrelevant to the price. If Sally had to fund all of those costs personally Fleischer would still have to pay her $74,000. This guy is just selling a taxes are too high meme.
Exactly. Fleischer chooses to pay about $10K for medical/dental insurance for Sally, and then complains about how much extra it costs to pay her a “nominal” $59K in salary. News flash, Mr. Fleischer. Benefits are part of employee compensation. If you just want to pay salary, with no benefits, then ypou are going to have to pay more, because, guess what, Sally is going to have to buy her own insurance (if she can get it). Not only that, it’s going to cost her more than it costs you for various reasons.
this analysis did not take into account, AFAIK, the equipment, the support staff and other expenses incident to hiring someone above the lowest skill level.
So what? Those aren’t taxes. If you hire an engineer it’s a good idea to give him a computer to use. What does that have to do with this silly whine?
August 10, 2010, 12:45 pmMr. Do-As-I-Say.... says:
Looking forward, the only real complaint the author should make is the marginal excess cost of hiring an additional person. Unless, of course, he was exempt from employment costs in his pre-Obama world.
Perhaps, he should consider the benefits of having a larger pool of talented prospects. Or the fact that his competitors are also at a disadvantage in the new environment and greater market share is available to the clever ones. Or other costs are in decline. Or not, depending on what he wants to complain about.
People make money in distressed markets.
August 10, 2010, 12:48 pmMoneyrunner says:
Byomtov:
August 10, 2010, 12:52 pmI’m not sure what your argument is. Do you understand that uncertainty about the economic and regulatory environment make it very hazardous for a small comapny to hire people?
Allan says:
If the problem Fleisher has really is that there is uncertainty in the marketplace, perhaps he should encourage his politicians to put more certainty there.
The reason we do not have certainty is that the Democrats want to change and the Republicans do not. Presumably, if the Republicans would negotiate in good faith, the market would be restored and Mr. Fleisher would be able to hire again.
I don’t think the Democrats will try to stop their agenda, they are the majority in the legislature and executive, after all. So the onus is on the Republicans to come up with a deal everyone can live with. They did it with the amendments to the ADA, they can do it in other places. But they don’t, because they think that resistance (in the form of filibusters) will restore them to the majority (and it may well).
August 10, 2010, 1:09 pmZack says:
I disagree. If taxes were 5%, they would be much more likely to double because just a small change would lead to that. If we accept his claim that taxes are at 37% (and enough commenter have addressed why that’s probably not a valid number), there’s no way that taxes will double to 76%. In either case, though, it should be equally likely that taxes would rise by 5-10% of the total salary. In making his business decisions, I don’t see how a potential rise from 37% to 47% would lead to more uncertainty than going from 5% to 15%. In either case, the $75,000 he spends results in $7,500 less to the employee.
Now, if we accept the idea that taxes may rise by 10% of total salary, that’s a pretty big deal. I’m not convinced that’s a realistic fear, though. The article’s primary support for the idea is the author’s subjective determination that “[w]ith government spending and deficits growing as fast as they have been, you know that more tax increases are coming—for my company, and even for Sally too.”
The only part of his argument that indicates costs are actually increasing is the part about his health care premiums. If you ask an Obama supporter, they’d tell you those increases by private health care providers are exactly what HCR reform was passed to prevent. I’m not sure that I agree with that statement, but Fleischer hasn’t really presented anything that addresses that argument. Instead, he merely states the truisms that (1) paying taxes sucks and (2) employers pay more money than employees actually receive.
August 10, 2010, 1:12 pmdan says:
I guess Fleischer thinks he should be able to spend billions of government money but not pay anything in taxes.
Fleischer was a big proponent of the Iraq war who, as “Director of Private Development” played a part in distributing that $8.7 billion that has gone missing.
http://en.wikipedia.org/wiki/Michael_Fleischer_(businessman)http://flowingdata.com/2010/08/08/8-7b-iraq-development-funds-unaccounted-for/
http://www.devex.com/articles/iraq-oversight-body-urge-defense-department-to-improve-financial-management-controls
http://www.bbc.co.uk/news/world-south-asia-10774002
Yet, now that he finds himself back at his failing company (http://www.bogen.com/aboutus/financials/#historical), he whines that taxes are too high.
More than a little hypocritical.
August 10, 2010, 1:29 pmpc says:
It appears that Bogen has been in a slow, steady decline over the last decade. Have they been uncertain for a decade? How much stability do they need to turn their business around?
I work in a different industry than Mr. Fleischer and I’ll admit that our company is not as big as Bogen. However, during all of this economic uncertainty caused by the Democrats (versus the economic crash caused prior to Jan. 20, 2009), we’ve managed to hire 3 new full time employees this year (not including the freelancers we bring on from time to time) and we will be opening our fourth office in Q3.
Maybe Mr. Fleischer’s problem is something other than big government?
Also, this.
August 10, 2010, 1:42 pmptt says:
I don’t know. Looking at his company’s financials, the real burden seems to be executive compensation…
http://www.bogen.com/aboutus/financials/
August 10, 2010, 1:44 pmMahan Atma says:
He much prefers working for the war corps. It’s a lot more profitable.
August 10, 2010, 1:44 pmMoneyrunner says:
PC,
Thank you for “It appears that Bogen has been in a slow, steady decline over the last decade. Have they been uncertain for a decade? How much stability do they need to turn their business around?”
Since Bogen is unique in this respect, perhaps you could explain the reason for the millions of other small businesses that are not hiring.
August 10, 2010, 2:32 pmbailey says:
Yep, this executive is delusional-all of the economic geniuses above think companies are hiring left and right. That’s why the numbers that come out every month on employment are always unexpected-the cream of the headline writing crop is here at the VC.
August 10, 2010, 2:42 pmDavid Welker says:
Also keeping his costs higher:
The inability to use child labor, comply with safety regulations, and not commit fraud on his customers also drives up the costs of doing business. Also, if we made his and everyone’s marginal tax rate 0%, this would mean he could cut the salary of his employees and they would have the same take home pay, which would result in more profits and enable the hiring of more workers. Also, he would have an incentive to work harder himself if he didn’t have to pay any taxes. Instead of 60 hours a week, he would work 70 or 80 hours a week. Also, as everyone knows, cutting tax rates always increases revenue, so cutting the tax rate to 0% would increase revenue and the deficit. It is the laughable curve errr… I mean Laffer curve! Oh, and cutting back on regulation which imposes costs on businesses never has any negative side effects. The financial crisis had absolutely nothing to do with foolish deregulation. Don’t you know that the entire problem is caused by irresponsible minorities who took on loans that they couldn’t afford all because the government made the banks lend them money??
* Non-sarcastic response *
These regulations existed back when unemployment was near 5%. So obviously, these regulations do not explain the high unemployment rate. Guess what. If you don’t think there is enough demand for your products or services, you are not going to hire people. If there is enough demand, you will either hire people to supply that demand or lose business to your more intelligent competitors who will be more than happy to take advantage of your bad decisions. What we have here is an aggregate demand problem.
One thing is always certain. Intellectually dishonest conservatives will always push their ideas as a solution to current conditions, no matter what those conditions are.
(1) The economy is doing well and we have a surplus after the fiscally responsible Clinton administration?
The Conservative Solution: It is time to cut taxes and regulation. It is time to turn that surplus into a deficit with a trillion dollar tax cut whose benefits disproportionately go to the top 1%. Also, regulation only produces costs and no benefits. Those people who regulated banking after the Great Depression didn’t have any reasons for the regulations they passed. We know better. After all, do we ever act like we are uncertain about the right answer to anything, do we? We know what we are doing. Please ignore the fact that it is our policies that created the current crisis in the first place.
(2) The economy is doing badly and deficits have gone up as a result of that and our irresponsible deregulation of the financial sector.
The Conservative Solution: It is time to cut taxes and regulation. Look, as a matter of principle, if you provide unemployment insurance, you better not increase the deficits. But, as a matter of anti-principle, it is fine to allow tax cuts to increase the deficit. Don’t you understand, our “principles” are that we do whatever we want. And we always want lower taxes and less regulation without regard to the costs or benefits or the situation. Sure, when we make an argument that cites our policies as “the solution” for the current the situation, we are being intellectually dishonest (since for all situations we cite the same policies as the solution). But it is for the greater good! And besides, we know voters aren’t actually smart enough to recognize our intellectual bankruptcy, so there is nothing you can do. You unpatriotic America-hating Communist pinko bastards who thinks that the solution to the current crisis is to do anything other than what we have always wanted to do all along are the real problem!
August 10, 2010, 2:43 pmByomtov says:
Moneyrunner,
I’m not surprised you don’t understand my argument. On the off-chance you’ll understand this time I’ll try again.
Per Adler, Fleischer is:
Gee, $15K missing. The trouble is, it’s not missing. Most of it – $10K – is actual non-salary compensation to Sally. In claiming he’s only paying her $59K he’s lying. As for the rest, well he has taxes to pay. Cry me a river.
By the way, I notice his sales dropped about 25% from 2008 to 2009 and his gross margin dropped as well. Meanwhile his overhead jumped by 50% – Obama’s fault no doubt. I’d bet his lack of hiring has a lot more to do with those numbers than staying up late worrying about what the next change in the tax laws is going to be.
Now, Moneyrunner, do you understand? The guy is full of it.
August 10, 2010, 3:40 pmbailey says:
Are the millions of others full of it too? In your obamabot fantasy world, the economy is doing great, right?
August 10, 2010, 3:47 pmSarcastro says:
Yes, because if it’s not the existence of taxes that’s causing economic problems, then no problems of any sort can exist!!
August 10, 2010, 4:10 pmDavid Welker says:
What part of same taxes and regulations before with 5% unemployment rate, therefore the taxes and regulations are not responsible for the increase in the unemployment rate do you not understand?
Ridiculous.
August 10, 2010, 4:11 pmByomtov says:
Are the millions of others full of it too? In your obamabot fantasy world, the economy is doing great, right?
Don’t be an idiot. Just because the economy is doing poorly doesn’t mean that the reason Fleischer gives is the cause.
I’m aware that, “Oh, it’s the uncertainty, and the taxes” is a recent winger talking point, which the WSJ is all too eager to push, but that doesn’t give it any credibility. In fact, its appearance in the WSJ detracts considerably from its credibility.
I do wish Adler would catch on to that, and be more cautious about linking to the WSJ.
August 10, 2010, 4:36 pmbailey says:
Let’s see. He explained how, in a rough economy, new hires have difficulty paying for themselves due to the taxes the company currently has as well as those most suspect are coming in the future. In response, the economic giants here discuss his Bush era experiences. Tell us, oh grand economic giants, how business will hire more if it is more and more costly to hire that worker due to rising taxes and costs. If you don’t think taxes have an effect on business decisions, kindly explain why Texas is doing well and California isn’t (without taxes at least being in some small way discussed).
August 10, 2010, 4:42 pmadjunct says:
I find it amusing that people note that this is a “whine” about paying taxes.
Not at all.
What this columnist is saying is that, given the current tax climate, he’s not interested in hiring someone. So he’s not paying any taxes. He tries to explain why his hypothetical employee is pricey given the current system, and this explains why he’s not hiring someone.
One would think that with unemployment hitting 9.6%, according to the Bureau of Labor, people would be concerned about the lack of job creation. But nope. I imagine a non-existent job with benefits and high taxes is better than a real job for less money and less regulation.
But don’t worry; the federal government can hire us all with some sort of stimulus. Oh, wait: the US now has a $1.4 Trillion deficit. No matter: the pit is bottomless.
Somehow, with all these attorneys without jobs that I see virtually every day, this claim seems somewhat hollow. Welcome to the new world.
August 10, 2010, 4:44 pmDavid Welker says:
First, these are the same costs and regulations that were in place before the recession.
Second, if an 18 billion (yes billion!) dollar budget shortfall makes Texas into some standard of success to be emulated in your skewed world, I would hate to see how bad it has to be before you declare it a failure. More ignorant nonsense. Despite its unusual good fortune with respect to oil wealth, Texas still faces a severe budget shortfall.
August 10, 2010, 4:56 pmDavid Welker says:
I am sure the 25% drop in sales as noted by Byomtov has absolutely NOTHING to do with why he is not hiring anyone. Because that doesn’t fit the narrative. “Nothing to see here folks! Move along. It is all about the taxes and the regulation. Never mind they were the same before. The decrease in sales has nothing to do with the decrease in employment. Lack of aggregate demand is never a problem.”
August 10, 2010, 5:06 pmMorat20 says:
After slogging through that, did he have much a point beyond “What we spend, yearly, on an employee is higher than the employee’s gross salary”?
I mean, I saw a lot of whining, but in the end it was “I can’t hire because it costs me 75k per employee”. I’m not sure what the employee’s actual take-home pay had to do with it.
Maybe I’m just more aware of it, since I work in a field where a lot of people do free-lance contracting, or revolving 6-month or year-long contracts. I might make, say, 70k if I take a permanent position. If I stick with contract work, I’d make closer to 100k. But I wouldn’t get paid vacation, sick leave, or health benefits. But is this actually news to anyone?
He’s not hiring because he’s not selling. End of story. Sure, I bet he’d LOVE to slash his employee’s pay by 25% — but then, they’d probably quit, even in this crappy economy, since he’d be paying them well under independent contract rates.
It’s like he doesn’t want the free market to work on labor’s side at all, just on his. Well, in the real world — if you don’t pay something close to the prevailing wage, you don’t get good employees — even in a crap economy. He’s not even working in an industry with a sizeable union, so he’s not even facing collective bargaining. He’s whining about paying the bare minimum to attract semi-decent employees for whatever area he lives in.
Yeah, blame the government because your employees ridiculously demand to be paid the prevailing wages. Whether it’s 75k straight to their pocket, or 59k to their pocket and 15k in benefits — it doesn’t matter. (Actually, it’s probably cheaper to offer the benefits. Employers are more likely to qualify for group rates. Otherwise Sally the Employee would need even MORE take-home pay to handle the sizeable increases in cost in the individual market).
August 10, 2010, 5:29 pmbailey says:
Yep, he’s just a whiner. Taxes have no effect on hiring new workers because the economic giants of the VC tell us so.
August 10, 2010, 5:33 pmbailey says:
And there’s all sorts of independent contract positions out there-that’s why we have double digit unemployment.
August 10, 2010, 5:34 pmJeff says:
Freelancers cost 2-3 times the rate of full-timers? I suppose. But the question is, why would anyone hire a lazy white American? I go straight to China and India and invest in their big brains and strong, can-do work ethic. While all the SWPL crowd rejoices over healthcare mandates and forcing their will upon others, I have created four new jobs in India and each costs me a straight $2,000/month for an employee of astounding ability. I have moved 100% of my packaging sourcing to China and my costs are so far down that I will soon be hiring a full-time Indian customer service rep with a perfect American tongue. When I hire a marketing director, that person is 100% sure to be an Indian and to operate from India. When I hire a full-time scientist that employee is sure to be an Indian and working in a lab in India.
Those who want to argue Fleischer’s finer points miss the obvious: increasingly there is little need to hire Americans. Even in law, a subject of intense desire among this crowd, why would my counsel be an American attorney when I can go straight to a high IQ Indian for 25% of the price and twice the quality? I haven’t had need for legal counsel, but I imagine that when I do, I will find a way to use an Indian to the maximum and an American to a minimum. When the Federal government, and all those violence loving liberals, create an edifice of regulation, enforced by threat of violence, so steep as to force people to seek oversee relief, then you have a problem.
To those that suggest Mr. Fleischer is complaining because he cannot succeed, your stupidity about the world is nothing short of epic. An economy is far better off with 10 people employed in a struggling company, then with 10 unemployed people. If you have ever run a business that was failing, then you too might have been in a position where FICA and other taxes ruined you. I have been in that position. I was hired to turn a business around. I failed. However, were it not for those oppressive taxes, we might have survived. Employees will take pay cuts, and will cancel benefits to maintain employment, but huge checks to the government cannot be skipped since liberals have decreed that not paying your taxes is worthy of death! That taxes are not optional and that they will often make or break a firm is the worthy message of Fleischer’s piece.
Jeff
August 10, 2010, 5:42 pmPaul says:
A couple observations – from a small business owners perspective
1) “Investing” by hiring an employee is giving up current income in order to have a higher future income. With tax rates increasing the government has created an incentive to increase current income at the expense of future income. This will be true until we are thru the increase but for now it is a disincentive to hire (then the disincentive is the lower aftertax return on the risk). There are VERY few businesses in which an employee can generate profits that exceed their start up costs right off the bat.
August 10, 2010, 5:43 pm2) I run a small business – it costs approximately 28k to carry an employee’s payroll and the material costs for their work thru the cycle from when I have to pay them and suppliers until I get paid for their work. I can borrow the money for this or It can come from retained earnings. There is a fear factor that has led most small business owners to question why they have leveraged their house, life etc to the hilt (you have to sign away your life to borrow from a bank). I know my wife has had enough of cosigning on all the papers. Thus as one deleverages I can afford fewer employees. The only way to cover the carry costs is to have AFTER TAX retained earnings in the business. The rising tax rates means that it will take longer to accumulate this. This also delays hiring.
3) I am extremely committed to keeping the employees I have carried to this point. They are also committed to going the extra mile. Paying them to work extra hours costs no additional health insurance, unemployment insurance etc (the max payments have already been made). It is cheaper, less risky and better for moral to let everyone work more than it is to hire another employee. I lay the workload out to them on a regular basis and say what do you want to do. May of them have spouses who are out of work – they are thrilled to work extra. I run regular craigslist ads so I have a stable of resumes of people who could be hired.
adjunct says:
“I am sure the 25% drop in sales as noted by Byomtov has absolutely NOTHING to do with why he is not hiring anyone. Because that doesn’t fit the narrative.”
David Welker, I think your point proves mine. In a difficult market, with sales down, why would a private company want to pay a sizable amount to hire someone? It’s particularly true if the potential employer is suffering a sales drop that he’d be more sensitive to costs. However, just because an employer wouldn’t pay $74,000 doesn’t mean he wouldn’t pay less. His point is that taxes/government bump up the cost of hiring someone substantially, to the point that he’s not doing so. I’d think there would be concern about this.
Truly, though, I find this argument confusing: You appear to be happy this private employer is hurting and not hiring someone. Are we all pleased with 10% unemployment and lawyers with six figure loans not finding employment? Are we truly all content with this status? Personally, I know many young attorneys — and many not-so-young attorneys — who are now without salaries, health insurance, and all that other wonderful stuff that comes with employment. Is someone seriously arguing that taxes and regulation provide incentives to hiring?
August 10, 2010, 5:44 pmEndowmentFor11Years says:
Its amazing the number of comments from people who have obviously never owned a business with 10+ employees. The distorted views of reality are nothing short of delusional.
August 10, 2010, 5:52 pmbailey says:
Wow, three straight common sense posts that won’t even make the slightest impression on the economic giants here.
August 10, 2010, 6:00 pmDavid Welker says:
adjunct,
Well, let us look at this particular employer. If he has X sales, he only needs Y employees to service those X sales. If there is a tax cut that decreases the cost of employees and sales (and hence the amount of work that needs to be done) does not increase, he doesn’t really have much incentive to hire more employees. He might hire some, if there are opportunities to substitute manual labor for automated processes. But I tend to think that such instances are rare, unless the price paid for labor (including all wages, benefits, and taxes) falls to a very low level. In general, a company is wise to automate as much as possible. And in general, I would say that we would not want to regress to an economy that uses more workers when automation is possible; in general, we are much more wealthy as a society when we automate all work to the maximum extent possible.
The bottom-line is that I don’t think it is likely that Bogen Communications is likely to hire very many more workers unless sales increase. I am assuming that he has enough employees now to provide the X number of sales he has now with quality service. Most of such decreases in taxes would probably go to shareholders of Bogen Communications as increased dividends or improve the companies balance sheet.
Now, it is possible that the shareholders of Bogen Communications will take their increased wealth and spend it on personal consumption or investment. That would certainly stimulate aggregate demand somewhat. But is unlikely that one would engage in investments in an economy without belief in adequate demand (in accounting terms: sales) to actually provide a return on that investment. If one was very uncertain about such demand being forthcoming, it would make sense to wait to invest until the economy gets better.
The bottom-line is this. I would expect a tax cut reducing the cost of labor to increase employment a little bit. But it isn’t going to solve our problems. It is not some sort of magical silver bullet.
Also, a tax cut would increase our deficit. That means that me and you and everyone else are going to have to pay interest on the increased debt that goes to pay for the tax cuts enjoyed by Bogen Communications and that our fiscal situation will further deteriorate, leaving us fewer options in the future.
I am not absolutely against stimulus expenditures that increase the deficit and the interest we all (especially future generations) have to pay in the form of temporary tax cuts. But I am absolutely against such Keynesian fiscal stimulus in that form unless we also have more stimulus in the form of temporary spending increases to prevent the layoffs of teachers and other government employees. And also expenditures to further invest in our infrastructure and in general very targeted spending designed to have the maximum stimulus effect possible.
But lets not pretend, as dishonest Republican politicians like Senator McConnell do, that tax cuts do not increase the deficit (and the interest we all have to pay on the debt) just like spending increases do. Such scum politicians talk about how we absolutely MUST not let a 30 billion expenditure on unemployment benefits increase the deficit, but instead such expenditures must be paid for by spending cuts elsewhere, as a matter of principle. And then these same supposedly principled (but really deeply dishonest and unprincipled) politicians then assert that massive tax cuts that dwarf the size of such expenditures don’t have to be paid for with spending cuts! That is, they argue that deficit only matters when it can be used as a weapon to pay for proposals they don’t favor, but there is no need to be responsible when it comes to proposals they do favor. That is the same irresponsible mentality that got us into this problem in the first place!
August 10, 2010, 6:27 pmDavid Welker says:
What a loser. You are blaming your failure on FICA taxes? Why don’t you face it. You failed. Man up. Quit trying to blame someone else.
August 10, 2010, 6:32 pmdan says:
…except that more than half of the amount he’s talking about is health insurance. That’s not “taxes/government.” It’s a benefit he chooses to provide. In fact, if you read the article, most of the text is complaining about the cost of health insurance and the variability of that cost. So it’s not true that “his point is about taxes/government.” (Either that or he should be excluding health insurance from his argument, which would make the article half as long and the numbers much less dramatic).
His point apparently is that hiring someone costs more than he wants it to.
I empathize. Most things cost more than I want them to. Maybe I should write an article about how unfair it is that the cost of sails and rigging drives up the total cost of a new sailboat?
August 10, 2010, 6:38 pmVVVVV says:
Yes, but the public voted him into office anyhow.
August 10, 2010, 6:42 pmAdam Wilhite says:
This is one of the most terrifying things about being a small business owner.
August 10, 2010, 7:20 pmptt says:
Well, obviously Texans must have some cool work-around that lets them avoid paying all the federal taxes that the author is complaining about.
I’m surprised no one has pointed out that new hires actually don’t come with all those same tax burdens. When I filled out our latest 941, there were several new questions related to new hires and the tax abatements that go with them. I ignored it all as we don’t have any new hires, but it looked like some significant savings. (I could be wrong, but I thought in included dropping the company’s SS contribution or maybe just cutting it to some extent. I stopped reading once I realized it didn’t apply to my company.)
August 10, 2010, 7:22 pmPaul says:
I am not sure I would write the column the way he did – but the observation that it is a shame that employees take home as little of what it costs a business to carry them as they do is reasonable. It is also reasonable to point out that there are a lot of costs that an employer pays that employees are not aware of
A few more observations to add to what I say above (5:43 pm)
1) Health care is something that employees need. I used to pay 100% of all employees family coverage. 100%. Employees had no appreciation of the cost. I now charge $25 per week for an individual and $65 for a family plan. This is for an HSA where we contribute the deductible for the employee (ie we pay $1200 per year for the individual and 2400 for the family). Approximately 15% of the employees dropped coverage when we did this. Some additional ones moved to their spouses plans – which we pay some for – but less than it would cost to have them on our plan – that was a win win. The lowest paid full time employee we have makes about 32k per year – almost all make over 50k. Most are in the 75-90k range – plus benefits. Think that through in terms of the choices people make and the value they place on the extra dollar of income. That takes me back to the shame I noted above.
2) I run a business that has averaged 20+% growth over the 18 years since I started. We have had 3 down years of revenue in that period. This year I think we will have our highest revenue ever. I have not and will not hire any new long term employees (I am considering a few “short term” – see the post above – but the long termers are against it) – why won’t I hire? In addition to what I said in the earlier post.
a – The government has said that we must stay under 50 employees to avoid “regulations” – I am down from 75-80 but still over the 50 – It is quite a quandary but I must figure out how to outsource more rather than grow employment.
b – The uncertainty of future taxes, regulations and mandates is pretty daunting. I can manage the people. I can manage the business. I can manage growth. More government involvement in it all scares the crud out of me
c – I am tired of the pressure – I enjoy the “game” but the future is for the first time pretty darn uncertain. By this I mean government/Tax/Regulatory uncertainty. I’m paying down debt. That has come out of retained earnings. This is a lot of capital out of the system. Future growth will be based on internally generated retained earnings rather than borrowing. I expect the higher future taxes to limit this. Regardless in 2 more years (this and next) we’ll be done with debt. Economics 101 would say this is awful for the overall economy – but it sure feels great. I think other small business owners have similar goals.
d – My business will not be outsourced overseas. I could create jobs – I am arrogant enough to think I am very good at what I do. I have clients who have asked me to expand more than I have (they would take the work away from competitors). I have employees who would do it if I would back them up. Unfortunately – Its just not worth it right now. When people like me see it as being worth it again – the economy will take off.
3) Will it be worth it again? I have some opinions thoughts hopes and fears but that is probably for another thread. For many of the commentors here I would say this – The writer of the article may not have reached his conclusion not to hire the way you or I would – but the conclusion “feels right”. Until that changes – we are in a rut. I saw very few comments that would even try to change his mind (or mine)
August 10, 2010, 7:41 pmdan says:
It is truly amazing how Republicans love to look only at one side of the balance sheet. In this case, you look only at cost, and not revenue.
Hiring will go up if the employer expects hiring to increase revenue more than it increases costs.
For a lot of businesses that depend on sales to government (including, ironically, Mr. Fleischman’s business), one would expect increased government spending to increase company revenues.
Of course, Republicans refuse to look at both sides of the balance sheet on government spending too, so they don’t see that increasing government spending should result in increased taxes. Fleischman, in particular, believes that we should massively increase government spending (in foreign wars, contractor payments, and payment to his company) while decreasing taxes. If he looked at both sides of the balance sheet, he might realize that his own demands have necessitated the taxes his business pays, and he might realize that it’s not just cost — it’s also a lack of revenue — that deters him from hiring more employees.
August 10, 2010, 7:45 pmTeabaggin' Barry says:
This thread delivers!!!
August 10, 2010, 7:48 pmPaul says:
dan says:
Hiring will go up if the employer expects hiring to increase revenue more than it increases costs.
NOPE – and when you can figure out why the answer is NOPE you’ll understand business more… and why we are where we are
August 10, 2010, 7:56 pmElliot says:
One of the ways of adapting today is to go to India rather than hire a new person. This can entail upfront costs since systems often have to be restructured to efficiently run with the Indian connection. But after doing it once, any subsequent systems work can be done with an eye to a potentially farming it out to India.
While it does nothing to eliminate the costs of new government fees on existing employees, it does offer a new degree of freedom in determining the resource that will be used to accomplish a given task.
Sure, it can’t be used for every employee, but that’s fine. It’s an opportunity, and more people appear to be taking advantage of it.
August 10, 2010, 8:02 pmTeabaggin' Barry says:
Hiring will go up if the employer expects hiring to increase revenue more than it increases costs.
Hilarious. The point of the article- irrespective of how desperate one is to avoid it- is that you can’t make reasonable determinations of costs in the current environment because your costs are subject to change based on government fiat. Couple that with the current downturn making your revenue assumptions questionable and you have a lousy climate for investment in new employees. And that means you get enormous unemployment numbers. Some people don’t want that- the rest of the people are known collectively as “Democrats.”
Good luck in November boys. One more “evil rich guy” comment will probably swing the election so don’t give up hope now.
August 10, 2010, 8:02 pmByomtov says:
adjunct,
. In a difficult market, with sales down, why would a private company want to pay a sizable amount to hire someone? It’s particularly true if the potential employer is suffering a sales drop that he’d be more sensitive to costs.
Of course he wouldn’t want to hire people. That’s my point. The sarcasm of some of the other commenters notwithstanding, I have over 25 years’ experience with small business. When sales drop the way Bogen’s dropped, you don’t think about hiring, and it’s not because of taxes. So his rant about how taxes are keeping him from hiring is BS. Of course, it’s not all about sales. Apparently Fleischer and some cronies are helping themselves to 15% of Bogen’s revenue from selected customers. (Go to page 21, “Related Parties.”) Wonder if they could use that to hire someone instead.
However, just because an employer wouldn’t pay $74,000 doesn’t mean he wouldn’t pay less. His point is that taxes/government bump up the cost of hiring someone substantially, to the point that he’s not doing so. I’d think there would be concern about this.
Maybe he could offer a lower salary to prospective employees. He doesn’t. Why? Because business sucks. That’s why. Not because of his neuroses about Obama.
August 10, 2010, 8:07 pmdan says:
Wow. I guess it’s true — the rationality assumption is out the window. Businesses will not take an action even when they expect that action will make a profit. Astounding.
Or, maybe it’s just Paul who will not take an action even though he knows that action will lead to profit. Must be a bang-up business you’re running there Paul.
August 10, 2010, 8:09 pmTeabaggin' Barry says:
Wonder if they could use that to hire someone instead.
Perhaps you should re-read that section.
August 10, 2010, 8:22 pmElliot says:
Who thinks taxes, government fees, and government mandates have no effect on hiring? Show of hands?
August 10, 2010, 8:23 pmdan says:
And he makes that point solely by pointing to the variability in health insurance costs, which are not based on “government fiat.”
August 10, 2010, 8:24 pmElliot says:
Sure they are. State government coverage mandates, community norming, the inability to deal across state lines have an effect on the price of health insurance.
August 10, 2010, 8:30 pmdan says:
AFAIK, no state requires an employer to provide health insurance to its employees (yet). So this cost is not imposed on him by government fiat.
August 10, 2010, 8:38 pmElliot says:
True. But the cost of those policies is effected by government. I’d also note that ObamaCare may indeed mandate coverage or payment of a sum to the government if coverage is not provided. That would figure into decisions about the future, which could include hiring decisions today.
August 10, 2010, 8:53 pmKamal says:
Right. I am sure if we make the wealthy pay less taxes, they will hire a lot more people and solve every problem. I mean, it’s not like they are hoarding money right now.
August 10, 2010, 9:16 pmTeabaggin' Barry says:
And he makes that point solely by pointing to the variability in health insurance costs, which are not based on “government fiat.”
As a threshold matter, he does not make his point by “solely” pointing to anything. Such a claim is dishonest. More importantly, I presume you’re suggesting that government action has no impact on health care expenditures. It’s almost impossible to imagine how ignorant that claim is.
August 10, 2010, 9:20 pmMorat20 says:
Looking at his actual business, his problems are falling sales. As noted above, that might have something to do with some sweetheart deals that are costing him a good chunk of revenue.
I’d take his complaints about what he pays his employees if he provided even a single shred of evidence that his competition didn’t face the same problem.
As it is, whining that benefits cost money is pretty dumb. Nothing’s stopping him from not offering benefits, or slashing salaries — well, except for his wanting to keep employees.
And the government isn’t compelling him to pay a competitive wage.
August 10, 2010, 9:54 pmByomtov says:
Perhaps you should re-read that section.
OK. I reread it. Now what have you got?
August 10, 2010, 9:55 pmShelbyC says:
Are you suggesting that FICA can never make the difference between success and failure? What’s your point?
August 10, 2010, 10:31 pmdevoman says:
dan says:
Hiring will go up if the employer expects hiring to increase revenue more than it increases costs.
Paul says (in response to Dan):
NOPE — and when you can figure out why the answer is NOPE you’ll understand business more… and why we are where we are
Teabaggin’ Barry says (in response to Dan):
Hilarious. The point of the article– irrespective of how desperate one is to avoid it– is that you can’t make reasonable determinations of costs in the current environment because your costs are subject to change based on government fiat.
I don’t get it. My company is hiring like mad. Dan’s reasoning is right on as far as I can tell. I.e. we can’t meet our revenue plan unless we hire more people to design and sell more products. And of course you can make a reasonable determination of the costs of hiring (or at least educated guesses). If you have a working business model, you can’t let the relatively minor uncertainty in employee benefit costs stand in the way of growing your business. For example, currency fluctuations are a far greater uncertainty that we have to deal with.
August 10, 2010, 10:31 pmptt says:
As far as “understanding business” goes, maybe it’s different if all you know is the Clinton/Bush boom. There was a time when you had to figure out how to make money without unsustainable tax cuts and profligate lending boosting your bottom line year after year.
It was hard slogging.
And if you think the way you had is ever coming back or that you can make things better for yourself and the country by holding your breath, good luck with that.
August 10, 2010, 10:47 pmSarcastro says:
I hear not long ago income taxers were 91 percent for the richest folks! I think we call that time the Great Depression or something.
August 10, 2010, 11:05 pmohwilleke says:
There is a difference between the cost of having an employee and the cost of creating a job.
There are costs to creating a job, but those are things like the cost of office furniture, the cost of advertising a position, the cost of interviewing applicants, and the cost of redesigning the work process to further distribute responsibility for getting the job done.
The cost of creating a job also involves the risks involved in that kind of commitment, even if it isn’t a legally binding commitment. Employers who routinely hire people and then lay them off not long afterwords may have a hard time hiring and keeping good employees. They avoid these potential future costs by increasing existing employee’s hours, hiring temps, and outsourcing work until they can be certain that they can support an employee for a prolonged time period.
Taxes are relevant, but primarily in the context of choices like “should I buy a robot or hire a factory worker?” Tax incentives to create unearned income and produce outputs with capital rather than producing earned income with labor do influence businesses to some extent. But, it is the relative tax treatment of the two options, that distorts the choices that would have been made in the absence of tax incentives that produces this result, not the absolute level of taxation.
If we wanted to encourage employers to create jobs, we could reduce the tax incentives that favor unearned income over earned income, we could create incentives the ease the one time burdens truly associated with creating jobs as opposed to having employees, and we could to take actions that promote stability and predictability in the economy, so that employers can be confident that a job created today won’t have to be eliminated tomorrow.
August 11, 2010, 4:46 amohwilleke says:
Not quite. That was during the post-war economic boom.
August 11, 2010, 4:47 amBruce Hayden says:
I am not sure where you are getting your information. Taxes have gone up a little all ready, and are set to explode at the end of the year – probably, unless the Bush tax cuts are extended and ObamaCare repealed. And, of course, investment income is going to take one of the biggest hits, again probably, but not guaranteed.
As for regulatory changes, try ObamaCare plus Frank-Dodd at a minimum. The former is more notable for most businesses because it will affect most of them. Again, the uncertainty is probably worse for destroying job creation than the actual tax and cost increases that are already manifesting. These two new 2,000 or so page bills, that no one read before enactment, both call for innumerable new boards and agencies, many empowered to issue regulations on this and that throughout the economy.
No one here has any real idea if it is going to cost the average business $10, $100, $1,000, or maybe even $10,000 per employee in additional costs as a result of all these regulations (and taxes) that are coming down the pike. I think it plausible that we might expect at least 5 pages of regulations per page of legislation, based on past experience, which would result in some 20,000 new pages of regulations that are in the works somewhere in the bowels of the federal government.
Another uncertainty that seems to have been missed is the ability of small businesses to borrow money right now. Frank-Dodd isn’t helping there, since it appears to hit smaller financial institutions far harder than the biggest ones (which were, of course, the stated goal of the legislation). Neither are the massive debts being run up by the federal and state governments right now. That money has to come from somewhere, and it appears to be, to some real extent, crowding out small business borrowing. Or at least a lot of small businesses are having a much harder time these days borrowing than they ever have before (I have talked to a number of business owners who have had long term lines of credit canceled, despite never having missed payments, etc. ) Again, the uncertainty hurts – it costs money to expand, and if you don’t know whether you can borrow to make payrolls, you may be less likely to hire.
Along those same lines, while we haven’t seen all that much inflation yet, there is a real possibility that we may soon see a bit of it. Why? The fed has been printing a lot of money essentially in order to compensate for the big drop in monetary velocity. But if velocity picks up anywhere near where it was a couple of years ago, they may have a hard time sucking all that excess money out of the system. And, inflation has the ultimate effect of driving up the cost of borrowing. Keep in mind that this is probably the first time in 30 years that we haven’t been able to rationally expect stable prices.
To rephrase this a bit, a prudent employer will employ a new employee when his expected marginal utility (or benefit) exceeds his marginal cost. Part of the problem right now is that both marginal utility and marginal cost are significantly in question right now. He will typically guess at what he expects these numbers to be for each potential employee or class of employees. But with the current uncertainty, a lot of employers are going to go with worst scenario numbers, which push down marginal utility and push up marginal costs per employee.
Finally, I think it silly to pretend that ObamaCare isn’t going to affect the decision making of the average business owner. Sure, you may be able to argue that the overall costs to the country aren’t going to change that much. But that is really irrelevant to his decision making. What is relevant are his expected costs, and the error level in those expectations. Pointing out that the employee will have to pay them if the employer does not ignores that wages are sticky downward and that is especially true with minimum, union, and “prevailing” wages. Pointing to tax advantages is similarly unavailing, since the government isn’t actually subsidizing health care, but rather is just taxing that portion of benefits less.
August 11, 2010, 5:25 amBruce Hayden says:
Well. No.
You are committing one of the typical Keynesian fallacies, which is to ignore where the money for paying that new worker or for the new robot comes from. It isn’t manna from heaven, but rather comes from investments. And in order to invest, investors must be able to make money investing. If they don’t, they won’t. Increasing the taxation on investment income reduces their return on investment, and, therefore, their incentive to invest.
This is one reason that Keynesian economics fails – because it invariably takes money from investors and gives it to the less productive people to spend.
So, yes, the difference in tax treatments between different types of investments and business expenses does matter, shifting capital from one to the other. But also actual tax levels are important too.
August 11, 2010, 5:36 amohwilleke says:
Nothing Keynesian here, it is pure microeconomics. When the post-tax choices are different from the choices that would have been made pre-tax, suspect the worst.
There is empirical evidence on actual tax levels, however, which shows that higher taxes levels are better for economic growth and productivity, while lower tax levels hurt it. Tax increases are associated empirically with economic growth. Tax cuts are not.
Likewise, greater income inequality is likewise an indicator of economic malaise, not prosperity. Trickle down economics is a fantasy.
It is counter-intuitive, but that is what a large and robust data set suggests.
August 11, 2010, 6:28 amDaniel J. Wojcik says:
No, no, no. That only happens when they do it on purpose, like raising cigarette taxes to encourage people to stop smoking. Raising taxes for other reasons don’t have any such effect.
August 11, 2010, 6:39 ampaul says:
This discussion is interesting – the two perspectives are pretty much just talking right past each other. Its like apples and oranges. My response to Dan was a little bit snarky but it was proceeded by two detailed posts. The response was essentially – you’re just not rational. I don’t think I’ve been listened to/heard and he thinks I’m an irrational idiot. So we’ll just write some more rules to make me behave “rationally” (and get me hiring). We’ll see what happens
August 11, 2010, 6:55 amSeaDrive says:
IMHO, the point missed is that the market tends to put business decisions at the margin. If taxes changed, for example, they would change for everyone, meaning tax rates and tax benefits would change for everyone. Prices and salary expectations would change. Any particular business might benefit or might suffer, but overall, life would still be a pain in the ass.
In many ways, government action reduces uncertainty. Certainly that is one of the mandates of the central bank.
August 11, 2010, 10:01 amKenneth Almquist says:
In my view, Michael Fleischer is simply not credible. I think Byomtov has it right: “When sales drop the way Bogen’s dropped, you don’t think about hiring, and it’s not because of taxes.” So I see no reason to believe the 40% figure.
Furthermore, the cost of hiring an employee typically includes a lot of costs that the article doesn’t mention, such as providing office space, providing equipment and supplies used by the employee, and supervising the employee. I find it unbelievable that the the marginal cost of these items is zero at Fleischer’s company, so even if I believed the rest of the article, I wouldn’t believe the 40% figure.
As I recall, at my last job (in software development), salary accounted for about 35% of the cost of hiring an employee. That’s very different from what Fleischer claims for his company.
August 11, 2010, 1:44 pmElliot says:
Often the decision is to replace a position vacated by attrition. In those cases, the costs of the items you mention are indeed zero.
August 11, 2010, 1:50 pmyankee says:
Also, the degree of taxation probably doesn’t have much effect on his hiring decision because the economic incidence of taxation falls mostly on the employee.
In other words, the employer’s total expenses are likely to be similar regardless of the tax rates. A higher tax will mostly be passed on to the employee in the form of a lower salary, because the supply of employees is fairly inelastic while the employer’s demand for labor is highly elastic.
August 11, 2010, 3:06 pmohwilleke says:
Those cases, however, do not involve job creation, by definition.
August 11, 2010, 7:26 pmHoboman says:
Every one of you trying to parce through the numbers have missed the point of the article. It’s very simple: every government action detracts from personal choice (i.e., freedom, liberty, rational utility maximization, etc.) by dictating the choice, action, or cost. In the business world, as in the article, these detractions from personal choice come most often in the form of monetary costs (having, of course, implications with regard to what beneficial use that money could have otherwise been put [i.e., hire yet another worker, purchase capital that in turn sustains other jobs]). This is the point. Who cares what you, in your Monday morning arm chair, think about this businessman’s math and choices. The fact remains that goveent intervention in his decisionmaking increases his costs. Period.
Now, should some of those costs be imposed nonetheless? Sure. Healthcare, liability coverage, workers comp. These are all things we, as a society, can generally agree upon being necessary to some extent. The question is one of degree. If we remember that with every imposition of governmental “wisdom” in individual decision making we are creating increased costs and inefficiency, we should be attempting to intervene only where the reason and justification is extraordinarily compelling.
You nay-sayers can keep spouting Keynes all day, but the writing is on the wall. Employers aren’t hiring. Period. You can tell them they’re bad businessmen all day long, but as long as you allow them the freedom to act on their own rational self calculus (which some would no doubt like to change), you will have to continue to argue against reality.
Liberal theory forsakes the most fundamental element of human psychology: logical, rational self utility maximization (when interests are broadly defined as “anything one finds to be in his interest, whether or not “you” agree that it is in his interest, it can be said that people are always acting in their own interest). If we as a society want to change that calculus, let’s have that debate, but let’s not forget the costs we are imposing when doing so (i.e., only do so when extraordinarily compelling). This natural human tendency towards free choice means that liberal theory ultimately fails (as it has time and again throughout history). The only question is: how much societal damage (imposed costs) will it do before people revolt.
August 11, 2010, 10:44 pmSarcastro says:
Sweat shops, child labor and hobos! Those three things always means Freedom to me. Stupid Court overruling Lochner, screwing everything up with humanity in labor laws.
August 11, 2010, 11:03 pmHoboman says:
Each of these are examples of the things upon which I stated that a debate about the degree of intrusion into free choice is necessary. Should we ban sweatshop type working environments and child labor? Probably so, and we’d get a good majority to agree that such things are an aforementioned “extordinarilly compelling” case, into which we should intrude into free choice to the extent necessary to prevent them. Hobos? There are so many places to go with that one that I’m not even going to start.
The post ‘Lochner’ Court didn’t introduce some new-found humanity into law that people had previously been unable to comprehend. The Court dealt with a serious systemic disparity in bargaining power that existed because of monopoly control over entire industries; an issue that, once again, we could certainly find broad support for dealing with in a limited way. The problem was that the court went entirely the other direction. It authorized the removal of the human element from the equation and paved the way for the few in power to treat all persons as skulls full of mush who need to be directed in order to make “good choices.”
August 12, 2010, 12:16 amMike says:
This one made my head explode:
So according to Allan: 1) uncertainty is bad, 2) the Democrats want to change things, and 3) the Republicans don’t want to change things. This shows that the Republicans are the bad guys, because their not wanting to change things is creating the evil uncertainty.
Ouch, my head!
August 12, 2010, 5:23 amSeaDrive says:
Not true. Not even close to true. I’m sure EV could list quite a lot of government action meant to guarantee the freedoms and liberties of the Bill of Rights. This thread is more interested in the economy, so let me suggest that quite a lot of government regulation is aimed at keeping markets open and preventing monopoly. Monopolists do not maximize rational utility.
August 12, 2010, 9:39 amHoboman says:
Yes true. The moment a person is forced to make a choice other than that which they would have made absent government intervention, his or her freedom has been curbed. My point is simply that we should always bear this in mind and thus not intervene in peoples lives so readily. Understand my point: even those laws and government Actions which are supported by 100% of persons (i.e., your example of civil rights laws or other enforcement of the bill of rights) curb liberty and freedom. And despite this fact, I support most of these government actions, but not all. Your example of economic regulation preventing monopolies is yet another example of an area in which there is an extremely compelling reason for limited regulation. The question is: should we open the door to wholesale regulation that errs on the side of supplanting the rational decision making of individuals for that of persons making decisions from DC, or should we err on the side of preserving the inherent efficiency and rationality of people making choices for themselves. People are not just skulls full of mush roaming around and bumping into each other, and the American economy will continue to perform well below its potential until the Fed (Democrat and Republican) stops treating them as such. Moreover, as many of the above posts confirm, in this economy, liberals are reduced to telling businesspersons (rational people) that they are simply irrational for their actions (not hiring) rather than recognizing that it does not matter whether the businessman is right or wrong, but rather what the businessperson does, regardless of what you think of it. Thus, you continue to argue against reality.
August 12, 2010, 1:35 pmSeaDrive says:
You mean like Afghanistan?
August 12, 2010, 2:31 pmRandy says:
Eliot:” Often the decision is to replace a position vacated by attrition. In those cases, the costs of the items you mention are indeed zero.”
Only if your company isn’t growing at all. Which may be true in a downturn, but when the economy is fairly normal, most companies decide that growth outweighs any taxation consideration.
The question isn’t really whether the employer is paying all these taxes and other mandated costs out of a salary. The question is whether the employer is getting the *value* out of that employee.
In other words, if hiring someone new costs you $100,000, of which only $60,000 goes to the employee in cash, who cares? If they employee delivers $100,000 worth of value to the company, then it’s worth it.
That’s why some employers shower their employees with benefits, and others are stingy — because some of have decided that the higher benefits attract a higher value employee who makes the company grow more.
I will agree that government mandates raise the bar — the employees have to provide more value to justify the higher costs.
August 12, 2010, 4:03 pm