Sunday, October 25, 2009

Global Capital 3: Service Charges and Capitalism

Consumers are king. This is the most important motto for most or all enterprises operating in a competitive business environment. Consumers therefore, have the vested interest to keep the economy as competitive as possible. Once the economy falls into an oligopolistic, if not monopolistic structure, consumers fall from grace. They no longer are the king. They become slaves.

A friend asked, if the service charge of 10 percent of the bill in restaurants is legal. Since there is a mandatory 12 percent value added tax (VAT) imposed by the government, having a 10 percent additional service charge makes the cost of meals in good restaurants become 22 percent more expensive.

I think the 10 percent service charge is legal. It is the restaurant's way of saying, "We are keeping the cost of our meals cheaper by cutting some salaries of our staff. But our staff are efficient, hardworking, polite and friendly, they need to be rewarded with some tip to augment their income. So we are passing the cost of such additional cost to you. Thank you."

Now this might seem an imposition without consultation, on the consumers and restaurant clients. Not exactly. If customers do not like this policy , then they can opt not to go to those restaurants, and look for other good food outlets which do not have mandatory service charge, a customer may or may not give a tip. And there are plenty of restaurants that practice this policy too. So it is additional competition among food outlets to attract more customers.

This makes competitive and free market capitalism beautiful, no matter what the anti-capitalists and the statists would say. Competitive capitalism allows one important factor that socialism or heavy regulation economies don't have: choice. Consumer choices. Lots of it.

The 10-percent higher cost of one’s food bill in a restaurant due to the service charge, the customers get value for that -- good service right there and then by efficient, smiling, and friendly waiters/waitresses. The latter perfectly know that if they do not smile and be polite to their customers, they may not see said customers again next time, they may even tell their friends not to patronize their restaurant because waiters and waitresses just collect service charges and they do not even know how to smile, how to be polite to their customers. So the restaurant will lose money, and later, waiters/waitresses will lose their job. So the mandatory or voluntary tip of 10 percent you give, you get clear, explicit additional service.

It's the 12 percent VAT that has no clear, explicit service to you. Some of the taxes you pay on VAT may go back to you in the form of street lighting or road maintenance, and some of it will simply be stolen, or be used for wasteful spending by the politicians and government officials.

For competitive capitalism to flourish, there should be few and low taxes. Not zero taxes. But few and low taxes. Not having 47 different taxes (and fees) that medium size companies are required, obliged, coerced, to pay to the government (local, national) every single year (WB-IFC "Doing Business" and WB-PWC "Paying Taxes" annual reports).

The hotel industry is another example of an industry under intense capitalist competition. Travelers and tourists can choose a variety of hotels and inns, depending on their budget and other personal or professional considerations. From backpacker type of small rooms, no frills but very cheap, to the most gallant, most elaborate architectural design, and very expensive rooms and other service charges.

I stay in hotels only when I attend international conferences and/or meetings abroad. So far this year, I have traveled four times, twice to Singapore and twice to the US (NY and LA), and consequently, stayed in 4 different hotels. My sponsors, all fellow free market think tanks and institutes that receive zero government funding (local or national government or foreign aid), pay for my plane fare and hotel accommodations.

What amaze me in those hotels is their uniqueness, the variety of their exterior and interior designs, their lobbies and swimming pools, and so on. But despite such variety of physical designs and amenities, there is one single common trait among them: the politeness of their staff, the quick and efficient services. These are hotels under certain global chains and hence, they compete for global visitors in a stiff global competition. Any dissatisfied hotel guest can always move to another hotel the next time they visit the same city. Or write something negative about their hotel which will then be posted in the internet and be made available to anyone who happens to stumble on such posting.

It is this fear of any negative publicity (and the desire for optimum customer satisfaction), whether in traditional media or in the blogosphere, that keeps those hotels – and restaurants, airlines, banks, spas, etc. – on their toes always. There is very little room for complacency and lousiness.

And we go back to the earlier observation on restaurant service charges. It is the rawness of capitalist competition that results in better services to the consumers, and competitive and rational prices. Price differentiation for different services for different people with different needs is one characteristic of competitive capitalism.

Next month, I will go back to the US for the third time this year, to participate in an international conference by a free market institute, to celebrate the fall of the Berlin Wall 20 years ago, one of the symbols of the failed socialist economic central planning and political prosecution, and to discuss the new walls erected by big governments around the world, including the Philippine government, in perpetuating old coercive regulations and taxations and in creating new ones.

The not-yet-over-the-brink economic difficulties due to the recent global financial turmoil, is often used by the anti-capitalist groups and people, to criticize the “evils and irrationality” of free market capitalism. But they do not realize that it is precisely free market capitalism that penalized personal and corporate irresponsibility. Capitalism without failure is like religion without sin. Corporate expansion and corporate bankruptcy are 100 percent part of capitalism and the competition that is inherent in it.

It is those attempts and various government regulations that claim to “prevent” future crisis that distort the natural system of reward and punishment in capitalist competition. The forthcoming elections in the country just 6 ½ months from now is a good opportunity for the various political parties competing for voters’ support, to distinguish themselves from others. Political competition based on clear ideology of supporting or discouraging personal responsibility, of abetting or dampening more government intrusion and taxation.

Voters need not listen to political pundits and other self-styling political analysts and commentators. Voters only need to look at their community if there is enough freedom and choices for them as consumers. Absence or insufficient level of choices and competition for their basic needs should be an indicator for them to support one or two particular political parties or candidates that advance a more competitive economy.

Last October 06, 2009, I wrote this.

Miscellaneous Economic Views

A friend in our economics alumni ygroups asked about our "economic crystal ball". I offered the following quickie comments.

On the Philippine peso appreciation, the US$ is suffering an endless beating, thanks to trillion dollars annual budget deficit of the federal government alone, and nearly 14 trillion public debt. The trend is there: the US government is spending like any irresponsible guy who spends more than what he earns, every single year for many years and decades, and just relies on endless borrowings to finance its irresponsible spending and lifestyle. So the days of huge debt payment are always with it.

Last year, migration of $ investments, many went to buy petroleum and related commodities. This year, the net "attractive" commodity is gold, reaching almost $1,100 a pound (or has it breached this level already?).

More people will be dumping the US$ in the coming days and years, causing it to depreciate and other currencies traded or exchanged with it (like the PhP) to appreciate, even if the economic fundamentals of the countries of those other currencies are not exactly good and improving. That is, even if the Gloria Arroyo government is corrupt and wallowing in various robbery scandals, and the next administration that will succeed her government will also corrupt and a theft, the peso can still appreciate.

The budget deficit will always remain high, with or without "Ondoy", "Pepeng" and other succeeding typhoons. The current administration will only worry about its spending and patronage, this year until early next year. Then it will leave the problem to the next administration. And the next admin will likely think too, "Heck, my government is paying for the debt, profligacy and robbery of the past administration. I might as well over-borrow also and let the next admin worry about my newly contracted debt and borrowings."

About effect on food production of the recent big typhoons, no doubt the effect is negative.
a) those to-be-harvested rice, many of those are gone and felled by heavy flooding, can no longer be harvested.
b) those already-harvested rice (before typhoons Ondoy and Pepeng came), the persistent cloudy skies disable rice farmers to sun-dry their harvest. A few days delay in removing the moisture content on newly harvested palay will result in blackening of the palay, affecting negatively it's color, taste and price

One quick solution is to abolish import tariff (currently around 50% I think, beyond quota level) and bring in cheaper rice from Thailand and Vietnam to come in quick. Government always asks the public to sacrifice, but government is always an arrogant and hypocrite institution that does not want to sacrifice by waiving any tax on essential commodities (rice, medicines, etc.), that contributes to their more expensive price. Time for the government to reduce its arrogance and hypocrisy.

So, will the economy "recover"? In the first place, the economy is never down. Some sectors are sputtering, but others are humming with activities and increased production.

But one shackle that will hound the country is the persistent call to "prepare for global warming and climate change". Global cooling is staring us in our faces and yet we prepare personal and government resources waiting for drought and warmer days and years. The government is evern creating new climate bureaucracies -- funded by tax money, where else -- like the Presidential adviser/consultant on climate change, and soon, a climate change commission to be created by Congress.

One result of this voodoo science thinking, is that energy policies are biased against cheap energy sources (like coal) in favor of "renewables" which may even get subsidies from our tax money even if they produce very little power. Also, it is possible that in the future, the government will increase the tax on oil -- like a WB Manila proposal to hike the current P4.50/liter excise tax on gasoline, to help plug the deficit and help "fight global warming".

One consequence will be another spate of brownouts. What production increase and economic growth can we expect if we depend on candles and expensive generator sets for our electricity?

* See also 
Global Capital 1: Why Market Turbulence are Necessary, November 19, 2007
Global Capital 2: ICT, Capitalism and Government, December 18, 2008

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