Monday, January 08, 2007

Swift

A friend of mine started a conversation with me today regarding the Texas pizza chain that decided today to accept Pesos as payment. Then there were two great stories on NPR this afternoon (All Things Considered) and the next thing I know I'm writing an essay in response. I thought I would share that with any internet denizens that happen upon this post...

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When I sat down in the car to drive home, a great story popped up on NPR. The first segment was about a group of 17 (I think) current and former employees of the Swift Meat Packing Co. who are suing the company for conspiring to hold down employee wages by knowingly hiring illegal aliens. You may remember that Swift was the company that was raided by the feds about a month ago and some 1,200 employees were detained for suspicion of being in the country illegally.

I have too little information to judge the legitimacy of these claimants to make their case - the woman's story was certainly told as dramatically as possible. But I'm very comfortable, based on what I heard and what I read about the case when the raids happened, in judging the company as way out of line. The effort of hiring illegal aliens is an artificial restraint on natural market forces, something I very keenly support.

  • If the company did not hire illegals, it would naturally occur that their workforce cost would go up over time. Salaries go up over time across the board. As competitors offer higher salaries, or as other industries offer higher salaries, the Swift employees could leave Swift for greener pastures. It is nearly always cheaper to hold onto existing employees than to hire new ones. There are real costs involved in new hires, from the paperwork and admin time to the management's time spent hiring instead of managing to the cost of having an open position and that lack of productivity. By hiring illegal aliens systematically, who are always available and cost less to employ, they have a distinct and unethical advantage over their competition.
  • By hiring illegals, who will always be willing to work for the least amount of money, they hold prices down artificially. To some degree, that is desirable to the company - lower prices mean more people buy their product, kicking in more revenues. If their competitors are hiring legally, those competitors make thinner profits, while Swift walks off with the unnatural profits - they get to price their meats higher than required to make a profit, but lower than what is required of their competition. They benefit from the pain of their competitors. Price controls. Arbitrary. Unethical.
  • Lower prices initially seem advantageous to the consumer. We can buy more meat for less and love it. But that is only in the short term. If all competitors were playing on an even hiring field, prices would naturally climb over time. This has several effects:
    • Supply and Demand: If prices start going up, consumers buy less. But the businesses still want to make as much revenue as possible. So the current market players, or entrepreneurs outside the industry, begin to innovate. They strive to find ways to make meat production less expensive by innovating in the factory, the warehouse, the production facilities, the distribution channels. This innovation is GOOD for the economy - and necessary. Over time, it makes meat cheaper in both human and material ways. In the long run, we would all eat more meat at cheaper prices. As is, the prices are arbitrarily restricted and that innovation fails to occur. Eventually, this causes inefficiencies in the marketplace that cost everyone more.
    • Consumer buying power: Our total buying power is reduced through this unethical effort. Remember that extra profit that I mentioned Swift is able to sneak out of the pricing gap? That money should be yours and mine. In an efficient marketplace, WE decide where to spend that extra money. In this case, Swift pockets the gap. Who knows what they do with it, but one can be assured they don't reinvest it efficiently. Where's their incentive? They can always hire more, cheaper, people.
    • Back to the Supply and Demand thing: If prices go up and we buy less, that means that there will be less production at farms. This means less waste from the animals. Less strain on the feed supply. Less strain on the land. Less strain on the animals themselves. No, not making fun of you in this next line: PETA should really like that outcome. Fewer animals raised in captivity. Fewer abused to make veal. Fewer living in filth until they are slaughtered. Fewer animals slaughtered at all. Again, the efficient marketplace, allowed to operate normally, has incredible benefits.
  • And then there's the human cost. The management at Swift is terrible to their employees. The job previously required skilled labor, people who learned as they worked over the years, gained in experience, skills, confidence, earning power. Swift came up with a new production scheme that isolates each worker to one position on the line, one activity in the production process, for their whole tenure. No growth. No value ad for the employee. Cheaper for the company, thus less earning in the future for the employee. Since, as they mentioned in the story, the same employee might be making the same motion thousands of time in one shift, the incidence of injury (carpal tunnel, etc.) is increased. how hard would it be to simply be human in your management effort and deliberately rotate employees over the long or short term, so they all become smarter, are aquainted with more pieces of the production process, feel more loyalty to the company, place more pride in their work... and grow over time? It's not that tough. But Swift doesn't need to do any of this. If an employee is hurt, they can be quickly replaced with cheap labor. If an employee attempts to collect for htat physical damage, they are faced with deportation - so Swift saves money on the health care. If the employees complain that they have no growth opportunities, or demand more money, they again can simply be replaced at little pain to the company - despite the costs of hiring a new employee, it's likely made up for by the excess profits due to the inefficient market.
Swift should be drawn and quartered, Their management should be thrown in jail, and their company should be reorganized by other investors. Period.
Listen to the story here: http://www.npr.org/templates/story/story.php?storyId=6749042

The next short segment was on the pizza chain in Texas that is now accepting Pesos. I disagree that this is a bad thing. I agree with the business owner interviewed. It is a business decision. Whether it's smart is a story to be told in a few months. From his perspective, there are consumers who have pesos who want pizza and otherwise might not buy it. Now they can. The business makes more revenue. Plus, because they work on a fixed conversion rate, likely in the business' favor, they pocket a little (pennies) on each transaction as profit. Bingo!

But it's risky for the owner, as well. They run the risk of the conversion rate changing against their favor so quickly that they can't adjust and start to lose pennies (or more) on each transaction. They then must quickly shut the peso transactions down, or redo all of their charts (printing & education costs) or just take the loss. The other factor that can easily work against them is if they have misjudged the volume and intensity of the opposition to this vs. the number of peso transactions available to them. If their dollar-spending consumers take umbrage, and many will, those consumers will stop spending at the restaurant. If the Peso transactions aren't enough to make that up, the pizza business goes down the tubes.

Listen to that interview here: http://www.npr.org/templates/story/story.php?storyId=6749045

Great stuff. Seriously great stuff to think about. Practice for when these decisions fall into my lap someday...