Blog: Lessons from the Lemonade Stand

There is a neighborhood in an influential area that has a country club in it.  The families there are well off and enjoy time at the pool, golf course, clubhouse etc. Some of the children in the neighborhood decide to start a business and make some money.  They decide to start lemonade stands in the country club for those spending time there. When they go to the club owner and ask permission, he thinks about it and says yes, under certain circumstances.

#1 They must donate 5 percent of the money taken in to a charity that he will choose.

#2 They must meet standards so all the lemonade is the same no matter which stand it is bought at.

#3 They must have a person who checks the stands for cleanliness, supplies, cup size and proportions of sugar, lemon juice and water.

#4 They must purchase uniforms to indicate what their job is and that they belong there.

The kids all agree, figuring that soon they will have a job and make some money.

They go about their work setting everything up and getting ready. To insure that the products are measured correctly, they need to buy matching pitchers for all the booths. Henry, a neighborhood teen, has been taking glass blowing courses and offers to make them specialty pitchers that have marks etched into them for the sugar level and water level.  He also makes a matching cup marked for the amount of lemon juice. This set cost them $15 per stand. But it is worth it because it satisfies the club owners #2 request. When figuring out how much each gets paid, they figure in the owners #3 request of a person to do all the inspections. They purchase matching uniforms and are under way. The cost is $1 a cup and business is booming.

However, Henry the pitcher maker wants to sell more pitchers and measuring cups. The club has all they need. So he goes to the swimming pools in the less fortunate areas near by. He explains how the system works and tries to sell them his goods. They know that they can’t get the $1 price per cup. But they can get 50 cents. They figure out that this will work for them because they won’t buy uniforms, give away 5 percent to a charity and don’t need someone to do inspections. The problem is that the standards are always different at each stand. Henry again approaches them and explains that for $15 a stand this will be resolved. They tell Henry that they will buy the pitchers but only if he gets them permission to sell lemonade at the upscale club. That will allow them to make more money and in turn will justify spending $15 for the tools.

So Henry goes to the club owner. He explains what is going on. He explains that he will donate 10 percent of his sales to the owner’s charity if he allows the poorer kids to sell their lemonade at his club as well. The owner knows the poor kids can’t afford uniforms but that 10 percent of $15 for each of Henry’s sales ($1.50) will add up faster then 5 percent on each cup of lemonade ($.05).  He also thinks it will be good for the first group to know what competition is. 

So the day arrives. The poor kids come and set up their stands. Their labor works for less, they don’t have an inspector to pay and they did not buy uniforms. They sell their lemonade for 75 cents a cup. The patrons at the club think this is fine because they are saving 25 cents a cup. The owner thinks it’s fine because he is making more money and his customers are saving money. The poor kids are cleaning up because the price is lower. The first kids are forced to lower their prices to 75 cents to match the competition. 

With only so many weeks in a summer season, the original kids are having trouble raising enough to pay off the uniforms, especially while paying someone to be the inspector and 5 percent to the club owner and lowering their prices. The second group pays none of these things. Half way through the summer the first group realizes that they will make nothing after all the work they put in. They will only pay the expenses they incurred starting the business.

The second group will make out pretty good because they keep the 5 percent, the cost of the uniforms and the cost of the inspector’s labor.  To make things a bit sour for the first group, the club owner donates the money he made to the pools in the less fortunate neighborhoods in the area. The same places the second group of kids came from.

This is what the United States of America has been doing. We open free trade with countries that don’t and won’t live up to the standards we require of our own companies. They have no health care, no benefits, vacation time, no OSHA to deal with, no workers compensation, no overtime pay, they work their workers to death. On the other hand we tax our companies and provide a supply of money in the form of aid to these same countries to help out the workers that can’t afford health care. We supply small quantities of goods compared to what we receive from these countries and tout how many people are employed because of the exports. All the while our companies are falling like flies or moving out of the country.

We ask what must be done to bring companies and employment back to the USA? The answer from our politicians is open more foreign markets. More free trade. And in doing so we shoot ourselves in the foot.

We need to tax the products coming into this country based on our regulation costs. If they pay their workers $1 a day and ours are paid $15 an hour how will we compete? If we have to pay social security, Medicare, Medicaid and unemployment and they don’t, how will we compete? We have 2 choices: tax their products to bring them up to our costs or become a third world country.  Use that tax money to pay down our debt. Yes, there will be inflation. But yes our people will be back to work. And yes companies will not move over seas because they will not get an advantage for doing so. And yes our companies will come home.