Lee’s Summit, August 30, 2010 – Washington DC, Capital of the United States of America and the brain trust of our government still cannot figure out what makes an economy thrive; even after it has been demonstrated many times.
Lending by banks does not spur the economy; it simply provides one of the mechanisms needed. Business borrows money when they KNOW they can pay it back. If they are not certain, then they don’t borrow. Why would business today not be certain it can pay back loans? That too is simple, too much uncertainty.
What is there to be uncertain about from a business point of view? Well let me lay it out for all of us to see.
- What is the cost of the health care bill known as Obamacare going to cost businesses? The law is in effect, the impacts are being felt, but none of the services are in place. All the bad things from a business perspective are here and none of the benefits.
- What are the new tax laws going to be starting January first? Will the Bush tax cuts only be extended for the lower income brackets, the middle class, everyone or no one? If it everyone that presents one scenario. If it is only the lower income brackets then the government will siphon off the financial wherewithal of the middle class, starving out some of the big ticket item sales. If it is everyone but those making over $250,000 a year then small businesses will have to cover these extra costs and the labor market won’t see any improvement. The worst case scenario, they are not extended and business costs go up, consumer costs go up, and the buying power of consumers and businesses is reduced.
- Will Cap and Trade Tax be passed in the lame duck congress after November? What costs will be associated with that?
- Will the continued spending by the Federal Government dry up lending beyond the difficulties of today?
A business works on an annual business plan to make the current profits. But all businesses, whether large or small, have to evaluate future market conditions to determine if a new product introduction will be well received. Further, the businesses look to see whether or not consumers and clients will be buying their services and allow them a reasonable profit margin to recover their investments. Some product launches have one or two year cost recovery periods. Others, far more capital intense require several years to pay the investment back.
It is the profit from these investments, over and above the cost of borrowing (the interest rate) that businesses evaluate to see whether or not to invest in new products and new services.
When a business cannot decide what the future may hold, it sticks with what it knows: the current products and small adjustments to them, minimizing risk. When you minimize risk, you also minimize potential gains. Thus, any businessman knows that when there is doubt, increasing costs – including labor cost – is not something that you want to do.
The uncertainty created by the Obama Administration is permeating the entire business community and forcing good business managers to take a “wait and see” approach. Not because of greed as you may be thinking, but because families depend on them making the right choices.
Our company has investors. Other public companies also have investors in the form of stock holders, pension plan investors, 401K investors, retirement plan investors and others, including banks. They also have people who depend on them far more directly, the employees. None of these people who invest time or money would be happy with managers who will borrow money that they cannot afford to pay back.
For those of you shaking your heads, think of the sub prime mortgage fiasco that set off this economic downturn: People who did not know how they were going to pay the loans back, borrowed money and ended up not paying it back.
Business in America and all over the world is based on a sound balance between risk and financial reward. No good businessman ever takes risks without some way to mitigate it. It takes planning and a vision of the future that is reasonable. In today’s environment, under the Obama Administration, reasonable expectations of the future are clouded by uncertainty. In the midst of uncertainty, business controls that which it can: internal costs.
If the Obama Administration, with its vast majority in Congress wants to do something about the economy and quickly, stop spending needless money, extend the Bush Tax Cuts, put a freeze on Obamacare for 36 months, and all new needless regulation, and let the economy get a couple of solid growth years behind it.
Stop kicking the economy while its down.
The Lee’s Summit Conservative.