Economic Stimulus
If Obama really wanted to get small businesses to start investing again, he could announce that both cap-and-trade and the health care bill are dead-dead and will not be disinterred this year. These two bills affect nearly 2/3 of our company's cost structure. Since we have single digit margins, small changes in the wage and fuel cost lines can completely wipe out our profits. Not knowing what 2/3 of our costs were going to look like into the future, we have been sitting on our hands.
Unfortunately, this may not be enough. The third leg of the uncertainty stool is income taxes, and its seems likely that some huge increase almost has to be forthcoming given Congress's predilection for taxes and marked unwillingness to cut spending in any meaningful way.
Here is a very specific example. We have an opportunity to invest about a half million dollars in a new operation in Texas. Financing is available. But in my evaluation spreadsheet, small changes in income tax rates combine with a potential 8% health care tax on wages and an unknown fuel tax increase to move the net present value by enormous amounts. I am not going to risk a half million dollars on a 20-year investment when the government is considering so much legislation that will arbitrarily move the value of this investment.
This is why Obama's offer of small business financing is meaningless. In the last decade, government sponsored cheap money lured people into housing "investments" that eventually went upside down. Are they now luring small businesses into a new trap, encouraging them to take on debt, only to slam the door on them with future increases to their operating costs and taxes?
stan:
When I'm in a charitable mood, I'd like to think that BO-zo and his advisors are just ignorant to this reality. Unfortunately, I know they are aware of all this. They'd rather screw us and work on their propaganda soundbites than take the meaningful steps to revive the economy.
January 29, 2010, 9:58 amthe other coyote:
I think I remember you saying that politics wasn't your thing, but people with common sense are in such short supply that we really need you. I would back you for Shaddegg's seat. Didn't I hear he was retiring?
January 29, 2010, 10:04 amGreg:
The problem is no one in the Obama administration understands a word of what you said.
January 29, 2010, 10:13 amMichael Miller:
We seem to have been around this same block before. The third leg of the stool is income taxes. The argument was presented that the way to increase long term economic activity and growth, across the board, was to lower the tax rates. That was done, and two decades of rising prosperity was the result. Argument won. The dems still don't get it.
January 29, 2010, 10:19 amMethinks:
Obama has already responded to you and your petty concerns. It went something like this "What I don't want is....any backtalk from you."
He's at some Republican event right now telling them that all the policies he voted for are Bush's fault and "what I don't want....".
Paul Shanklin does Obama better than Obama.
January 29, 2010, 11:10 amExBanker:
It always surprises the non-finance set when I tell them in heavily regulated industries, the value of an investment almost without fail depends solely on the forecast for the regulation regime, and as such, political decisions, assumptions, and forecasts are expressly and explicitly built into financial models. In healthcare deals for example, the medicare reimbursement rate and percentage of low-income residents nearby, and the forecast for those numbers over the medium term, are the most important variables in the financial model, with changes akin in magnitude to changing the discount rate. The sensitivity analysis we'd undertake often showed that small changes to reimbursement by medicare would make whole swaths of healthcare businesses cash flow negative. Again, not that anyone in congress has ever seen a proper business model or valuation exercise, save the ridiculous GM charade a year prior.
January 29, 2010, 11:10 amWill Sawin:
Michael - Before people did that there were 5 decades of rising prosperity under the old/liberal model. So clearly just rising prosperity is enough. Since the Industrial Revolution, that's been the rule, not the exception. Instead you should look at the speed of the rise. Most economic indicators of growth did worse after 1980 than before 1980. Real GDP and real productivity growth, for instance.
I am skeptical that it should have that much of an impact. Looking at this from an economic perspective, if you have small margins, you should be able to pass most of the changes on to producers and suppliers. Your competitors, who have similar cost changes and similarly small margins, should do the same.
Furthermore if this was such a huge risk to businesses shouldn't they be able to buy insurance on it. Isn't this exactly the type of thing financial markets are for? Should the government intervene to make these insurance markets possible, so that you can buy the appropriate insurance, so that you can invest?
Getting rid of the bills to stimulate the economy is a strawman, anyways. Almost everyone who cares about politics thinks the bills are more important, either positively and negatively, than any conceivable temporary stimulus impact.
January 29, 2010, 11:15 amWill Sawin:
I really misused the word "strawman" there. Substitute "smokescreen".
January 29, 2010, 11:16 amLink:
What would be the result if you re-assess your current properties using the same model? Aren't they just as sensitive to these variables?
If you get a bad answer, you're not alone.
January 29, 2010, 11:17 amgn:
Try figuring out if you should convert a big IRA to a Roth IRA this year in the face of 20+ years of uncertainty regarding future tax rates, VAT taxes, future means-testing changes to SS, etc. Impossible.
January 29, 2010, 11:25 amFred from Canuckistan:
When you spend other people's money and are not responsible for success or failure, you don't have to care about "stability" or trusting that the rules won't be drastically changed right under you own nose.
Governments spend other people's money and are not responsible for success or failure and they derive their personal stability from having more power, more programs to manage, more decisions they can make.
Too bad governments don't generate any wealth.
Too bad the Obama Administration doesn't understand this.
January 29, 2010, 11:47 amMesa Econoguy:
I really do not believe that Obamalini and Rahm Emanuel and David Assholerod understand any of this.
To them, businesses exist in a vacuum, and can do whatever they want. They can hire people and fire people at will, and prices magically appear out of thin air, and can be unilaterally and arbitrarily changed by mandate at any time (see FDR, NIRA).
Operating costs, ROR/ROE calcs, competition, and regulatory uncertainty are completely foreign concepts to them. They have never studied, much less encountered these concepts, which is why it is so dangerous to elect academic idealists (who also happen to be lawyers).
January 29, 2010, 12:27 pmEvil Red Scandi:
To paraphrase Ayn Rand:
Progressives: "You'll make it work."
Entrepreneur: "How? Our costs are higher than our revenues."
Progressives: "That doesn't matter. You'll find a way. You always have!"
And mix in a little South Park:
Entrepreneur: "Screw you guys. I'm going home..."
January 29, 2010, 2:29 pmMethinks:
Thank you, exbanker. Many years ago I had to put together a forecast for a presentation to congress. What they required was nonsensical and their reasoning was hilarious. These people understand nothing but seek to dictate everything.
January 29, 2010, 2:46 pmMesa Econoguy:
It’s becoming very clear that Big O 1) doesn’t understand many economics concepts, and 2) sees only viewpoints which agree with his as legitimate, which also happen to be wrong.
I hope I’m wrong, but it sure looks like this guy really is below average intellect, including his advisors.
Maybe he’s just had a string of bad luck (and incredibly poor speechwriting and policy initiatives), but it’s been a very doltish presidency so far.
January 29, 2010, 6:29 pmhoya:
Just read in the local paper of the funding of two new $600,000 per bed prisons. All being built with stimulus money and only 60 miles from each other. I'm surprised that light rail wasn't included in the plans.
http://navajohopiobserver.com/main.asp?Search=1&ArticleID=12219&SectionID=74&SubSectionID=111&S=1
January 29, 2010, 7:57 pmBob Smith:
Given how Obama and Congress screwed over businesses who took TARP money (essentially rewriting the contract at will), would you take small business financing from them? Who knows what kind of onerous regulation they'll make you subject to after the fact.
January 29, 2010, 8:33 pmSam L.:
I'm sure you'll be certain to avoid any business opportunities in Oregon after the new tax bills passed. My local rag amazed me by saying this pitted state employee unions against business interests. And one of the provisions was retroactive (can you say ex post facto, boys and girls?) to 2009. Buncha looney leftists and unreconstructed hippies.
January 29, 2010, 10:39 pmclay barham:
The union of individuals in the herd, as promoted by Obama and his Rousseau-Marx Party, is stated as community interests being more important than are individual interests, completely opposite Ayn Rand’s belief, as illustrated by Howard Roark’s jury summation. America is different than all other nations because it was founded on much the same beliefs as Rand’s, although starting almost 400 years ago based on Christian individualism. It became the most prosperous because of this. The formation of local government no further than a day’s horseback ride, where people voted, held town hall meetings, even formed vigilante committees when needed, and Tea Parties as well, shows how well the tradition of individual freedom worked, and still does to some extent. Claysamerica.com
January 30, 2010, 9:25 amChazz:
Will Sawin, your economic model presumes a closed system. But that is not the real world case. The problem of declining profit margins has been, most notably since about 1980, resolved by going offshore and/or outsourcing. What do you think Home Depot would look like if they only carried goods made in the USA? If the communists do pass some version of the health care catastrophe, there will be a stampede of pharmaceutical companies moving most of their operations to Asia.
January 30, 2010, 11:33 amCraig:
"Furthermore if this was such a huge risk to businesses shouldn’t they be able to buy insurance on it."
No one in his right mind would issue insurance against possibly economically harmful actions by government. It would be a license for politicians to do as they pleased without having to consider their effects on the economy -- after all, business is insured!
January 30, 2010, 11:46 amNate:
Chazz: My thinking exactly. The system described by Will is only feasible under severe restrictions on boundary conditions, etc.
January 30, 2010, 1:03 pmjma:
Will Sawin: Listen to Ex-Banker, Chazz and Craig! Every time the pols try to micro-manage business, they set off a whole new series of consequences. Unintended? Perhaps not, as the more they keep us off balance, the more bickering amongst the voters...and the more voters give up their rights to let government solve the problems. An Emanuel trick learned at his daddy's knee.
January 30, 2010, 1:32 pmWill Sawin:
Now you're buying into stupid liberal trade theories? Bill Clinton-esque international competitiveness? I wouldn't have expected that. If other countries out-compete us overall than our overall wages need to fall a little bit - acceptable. If they out-compete us in a specific sector like manufacturing, then that's comparative advantage - excellent.
More individually:
Chazz: AFAIK the bill does very little to directly impact pharmaceutical companies, so you can't be talking about production. There will still be a demand for pharmaceuticals in the US, a demand which companies will compete to meet. This is Economics 101 stuff.
Craig: The people selling the insurance can hire lobbyists and make campaign contributions.
Generally:
If businesses are so vulnerable to small changes in government policy, why are they so resilient to small changes in things that aren't government policy?
January 30, 2010, 4:41 pmTerry Noel:
Outstanding! Yes, this is precisely the problem. As much as I advocate starting a business in my book, I find myself fretting over just how badly government can screw up most any business model. I think the real problems are going to come in 3-10 years as old businesses decline and entrepreneurs find it impossible to start new ones for exactly the reasons you cite.
Add to that government's weapon of choice: printing money. In order to make everyone feel better, they will inevitably start spending even more money they don't have on programs we don't need. My biggest concern, one that puts everything else in distant second, is that we are going to enter a period of hyperinflation. If we do, all bets are off for everyone, and it won't be pretty.
Empty Nest Egg: Why You Must Start Your Own Business NOW
January 31, 2010, 8:19 amhttp://tinyurl.com/y9lg6l7
Global Warming:
Coyote,
Thanks for succinctly stating what I felt as a vague objection to the President's proposals, and had not previously been able to express. Excellent, if alarming.
January 31, 2010, 5:38 pm