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Opinion — Understanding small business and inflation

Last week, I wrote regarding the dilemma created in the business world driven by COVID, the fear of COVID and the government’s mishandled responses.

A reader from Farmville responded that it appeared to her that if employers would simply pay employees more there would be no problem getting workers. In reference to restaurant employees, those businesses should just pay $14 hourly plus benefits. I have no doubt the writer is a very compassionate person; however, I seriously doubt that she has ever operated a business. If she had, she would better understand that businesses must be profitable, or they go out of business leaving employees with no job.

In her belief, the restaurant could simply raise prices to provide better pay and benefits. This is true. (It is also true that diners could tip more generously.) In the real world, that is not what would happen. Higher prices would drive some percentage of current customers out of the restaurants. Lower volume would, of course, reduce profit.

Restaurants are very labor-intensive businesses. Increases in wages will result in higher menu prices. Wage increases are not the only factor that have to be considered. Poor government policy has caused the price of fuel to increase over a dollar per gallon from last year. Everything arriving at that restaurant will be negatively impacted, suppliers and customers alike. Every product up and down the supply line must be adjusted upward to compensate for fuel prices and wage increases. Adding these increased costs to a government mandated wage scale will result in drastic price increases. Some can and will pay more, others will dine out less.

That reduced volume will drive some restaurants out of business. Because the chain restaurants have better economic power, locally owned restaurants that are the heart and soul of our communities are going to be the big losers.

The effects of inflation

Raising the minimum starting pay will force employers to raise most every employee’s wages. A business must increase the wages of skilled employees proportional to new, unskilled employees.

The cause of inflation is more money in people’s pockets when the supply of goods, because of rising costs, does not keep pace with demand. As an example, we saw massive price increases in lumber costs because many were building projects during COVID. With the combination of government payments and higher state established minimum wage rates, there is more money available. This and the additional costs to do business has and will continue to drive up prices on everything.

Last week, I referenced an editorial by Mr. Micek. He believes that raising minimum wages makes everything good with the world. He wrote “And then, something else happened, because of unprecedented, direct payments from the federal government — as much as $3,200 each — the number of Americans in poverty began to fall, according to Vox, from 12.8% in 2018 to 8.5%. That’s based on projections that researchers at Columbia University made in March. Separate research by the Urban Institute, also cited by Vox, projected that 2021 poverty will be about 7%, nearly cutting the 2018 rate in half. The Biden White House’s child tax credit program, monthly payments of up to $300 per child to American families, is similarly expected to lift millions of children out of poverty.”

These studies, and Mr. Micek, appear to not be aware that the poverty level is recomputed annually to adjust for inflation. A new poverty level will be quickly adjusted upward to protect the freebies that some have come to expect, such as subsidized housing, EBT cards, medical services, etc. Regrettably, Mr. Micek and too many others don’t understand this or how Washington politicians will attempt to manipulate the statistics in order to protect those who have come to expect these benefits.

Mr. Micek ends with this deep thought, “When you give people money, they are less poor, happier and more likely to inject that money back into the economy. In fact, economists expect economic growth of about 7% this year, and 4.9%, in 2022, fueled by the stimulus and vaccines, Reuters reported.”

Wrong again, economists are now expecting growth of 3%, not 7%. Much of that growth will be the result of inflation rather than real growth.

Frank Ruff Jr. represents Lunenburg in the state Senate. His email address is Sen.Ruff@verizon.net.