Bad Assumptions Lead To Bad Decisions

Are voters more naive than politicians?  Maybe politicians are manipulative.  Maybe people just want to believe certain things even though there is solid evidence that says that the something will not happen.

Take the recent provincial election in  Alberta.  There are three promises that will probably be undertaken, but there will be no accrual of benefits to the people of Alberta.

  1. Raise the minimum wage to $15.00
  2. Raise the top income tax on the high income earners
  3. Raise the royalty on crude oil.

More money in the pocket of the working poor and more money in the treasury are the anticipated results but none will occur.  It is just arithmetic.  Money flow, the implicit idea behind raising the rates, depends on both the rate and base to which the rate applies.  Higher rates usually means smaller base.

Consider the minimum wage idea.  You cannot spend your hourly rate.  You can only spend what you earn.  That depends on the rate of pay and the number of hours you work at that rate.  The politicians and their delusional acolytes assume that the hours will remain the same at the higher rate.  That assumption is certainly wrong.

For many low wage earners, the question will be 40 hours at $10 per hour, or $15 per hour for zero hours.  The overlooked factors are these:

  1. Completion of the tasks within the job is worth some amount and no more to the employer.  If the cost rises, alternate methods become viable.  You may recall how robots replaced costly auto-workers.
  2. Employers are not powerless to adjust how tasks are carried out.
  3. Employers may not, or maybe cannot, pass the new costs on to their customers.  If they cannot pass it through, some will go out of business.  Again the zero hours problem.  If they can pass it through, the increase is an indirect tax on the people who buy the product or service and that group includes those who got the minimum wage increase.  How much do they really gain?

The same idea applies on the tax rate side.  Tax revenue is base times rate.  High income tax payers can usually change their base.  Alternatively they can pay the tax somewhere other than Alberta.  Rate shopping by jurisdiction is a well developed art.  Never assume the base remains the same.

Sometimes, (usually?) increased rates result in less tax being collected.

The oil is even more problematic.  Oil companies are generally well-capitalized giants.  They make investment decisions based on a very long time frame and they make decisions globally.  Alberta has some “trapped” capital, but that will not make the companies behave as the government wishes.

When I was in the accounting firm one of my clients was in the oil business. When Canada introduced their unattractive energy plan in 1980, their response was interesting. “That oil has been in the ground for a million years, twenty more won’t hurt it.”

Rates are easy to see, but they are an incomplete way to describe the money effect.  Learn to assess hidden assumptions.

Contact: don@moneyfyi.com  

Don Shaughnessy is a retired partner in an international public accounting firm and is now with The Protectors Group, a large personal insurance, employee benefits and investment agency in Peterborough Ontario.

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3 Responses to Bad Assumptions Lead To Bad Decisions

  1. Len says:

    Progressive Conservative thought process at it’s finest. Let’s try something different and see if that works because the Progressive Conservative lies are falling in on them selves. Large insurance firms won’t be deviating based on the government of Alberta, they thumb their nose at everyone. Loath in your retirement Don. We’ll work out the details of continued western success as we try something new out for a change. Fear is what the PCs thought they could use against their constituents. Now they get to sit by and watch the fear evolve. Maybe it will grow, we’ll see. Sure glad we can make a change when bad turns worse. The trick now is to make sure we continue to be heard and not just open our throats for the next force feeding.i think I heard your thoughts in my grade 10 economics class in about 1970. We probably still get fed that today. Must be sound economics I guess.

    I don’t know of any publicly traded stock market companies that have vision past the next quarter any more-certainly not past five years. Now is the only board room moment and it’s about more, now. The twenty year plans are the foreign investments buying up our resources and all they want is concession! They will stick it to us later.

    We all have our opinions, I try not to hide behind safe out of fear. I have been wrong before and I will be again, ’till then…

    Len

  2. Francine says:

    The Conservatives acted as if the party would never end. They squandered Alberta’s oil wealth and governed with a sense of entitlement. Albertans were fed up and wanted change. Look next door at Saskatchewan. With many NDP governments they have managed to diversify their economy and protect it from the wild swings Alberta has endured.

    Of course politicians are manipulative but voters are not naive. They are intelligent citizens and I think Albertans knew what they were doing.

    • I have no problem with tossing the old crowd. There is nothing that excuses incompetence. However, it is smart business to do what works and avoid doing things that feel good but on inspection tend not to work. Eventually it comes down to spending efficiencies not revenue increases. No one wins by making the resource smaller.

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