Alex Green: How to explain capitalism to your kids…

From Alexander Green, Chief Investment Strategist, The Oxford Club:

My last column, “Why Your Kids Hate Capitalism,” generated a ton of feedback.

One reader asked how I explained the capitalist system to my own kids.

Personally, I’ve had no luck with my 19-year-old daughter Hannah, whose primary interests are clothes, makeup, music and boys. (But not in that order.)

My 13-year-old son David, however, is more curious. So I recently tried my luck while waiting in line to order at Panera Bread (PNRA)…

“David, you realize that while we like to stop here for lunch, we don’t have to eat at Panera Bread. We can go to any sandwich shop we want.”

“Yeah, but I like their chipotle chicken avocado melt.”

“Me too. But there’s plenty of competition. We could go to Jersey Mike’s or Schlotzsky’s or Wendy’s instead. Yet so many people choose Panera Bread that the company sells over $2.8 billion worth of sandwiches… per year.”

“Wow, that’s a lot of money.”

“Yeah. And on those sales, the company earns a profit of over $150 million. The stock has gone up nearly five-fold over the last 10 years.”

“Do we own that in my college fund, Dad?”

“Unfortunately, no.”

“Why not?”

“Well, you can’t kiss all the pretty girls.”

“Ha! Right.”

“Now, if we visit Starbucks after this for a treat, we don’t have to stop there. We can choose any coffee shop we want.”

“But I like their Caramel Cocoa Clusters.”

“Yeah, your dentist does too. So many people – like us – choose Starbucks that the company takes in over $22 billion a year.”

“Wow! $22 billion?”

“Yes, and on that the company nets over $12.8 billion a year.”

“Whoa.”

“Okay, now let’s turn to Amtrak, the government-run train service. If you’re riding the train, how many choices do you have if you want a sandwich or a cup of coffee?”

“Just one,” David said. “The café car.”

“Exactly. There is no competition on the train. And last year Amtrak carried a record 31.3 million passengers. So how much do you think it made on its food service?”

“Hmm. It seems like they could make at least two dollars a person, so I’m gonna guess $62.6 million.”

“Nope. Over the last 10 years, Amtrak’s food service lost an average of $80 million a year. And more than a billion dollars over the last 15 years.”

“Selling sandwiches and coffee?” David asked, puzzled. “What, are they just giving it away?”

“No. I just took the train from Baltimore to Charlottesville last week. A vegetarian salad is $12. A chicken breast is $17.50. A beer is $6.”

“How can they charge so much and still lose millions, Dad?”

“Well, think about it. If the food service makes money, nobody at Amtrak profits. And if the food service loses money, nobody at Amtrak suffers. So there is no incentive to run things efficiently. The government subsidizes it. In other words, taxpayers pick up the tab.”

He thought about this for a moment. “Dad, why don’t they just let Panera or Starbucks come in and run the café car?”

“Good thinking. That’s called privatization. But some politicians in Congress oppose privatizing the food service.”

“Why?”

“Because they want the votes of the people who count on the status quo.”

“So Amtrak makes up for the losses in the café car with the profits from ticket sales?”

“Oh, no. It has lost many billions more on ticket sales than on its food service.”

“Many billions more?” he asked, incredulous.

He thought about this for a moment. “Dad, Amtrak isn’t in my college fund, is it?”

“No, that’s the whole point,” I said. “It’s not part of the private sector.”

“Good,” he said, stepping up to place his order. “Because I don’t wanna go to community college.”

Good investing,

Alex

Crux note: Alex and his team at the Oxford Club recently uncovered a new, little-known (and legal) tax trick. It allows many folks to get a cash rebate on virtually every single purchase made this year. As many as 119 million Americans are eligible for this tax break. Learn all the details right here.

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