Speaking as a business owner, and recognizing the fact that more profits would be nice – if not an absolute necessity – here is the question. Could you wish those profits into existence just because you wanted them? Could you say, “Gosh. Not only do I want more profit from my business, I deserve more profit from my business. So I’m going to create that extra profit with a snap of my fingers.”
It’s a ludicrous idea, of course. Profits can’t be created from thin air. There are steps a business can take to increase profits... calculated risks with a good chance of payoff. But no entrepreneur or business owner in the world can just snap their fingers, click their heels three times, or otherwise summon profits into existence like a genie from a magic lamp. (Unless, of course, they have the right connections in government. But that’s another story...)
Business profits – of the legitimate kind, not the stolen kind – are the result of productive activity. They are a form of wealth creation. This is why, as a general rule of thumb, it’s a hard thing for a business to increase profits. To increase profits, you have to fatten your margins... cut down on your costs... increase your sales... or some combination of all the above.
This seems like common sense, right? Really basic stuff. And yet, two-thirds of Americans apparently don’t understand it.
Americans Don’t Understand Wealth Creation
All in all, the United States of America is the biggest capitalist success story in the history of mankind. That success was founded on the same basic principles that are used to run a shoe store... and yet we as a nation still utterly fail to grasp those principles. The mind boggles.
Too harsh an assessment? Consider this from a recent Bloomberg story, “Americans Want Government to Spend for Jobs, Send Bill to Rich:”
Americans want their government to create jobs through spending on public works, investments in alternative energy or skills training for the jobless.
They also want the deficit to come down. And most are ready to hand the bill to the wealthy.
A Bloomberg National Poll conducted Dec. 3-7 shows two-thirds of Americans favor taxing the rich to reduce the deficit.
This is crazy. And it is very bad news.
For those who would agree that the government should be spending to create jobs... and taxing the rich... some questions immediately spring to mind. First off, when it comes to creating wealth,
why would you want the government to do anything at all?
The government does not know how to create wealth. Look at the track record... it only knows how to dissipate it or destroy it. Look at the U.S. Postal Service. Look at what Congress does with our money. Look at how idiotically Congress operates.
Do we really want to give the government more money? Do we really expect that government will be able to spend that money in anything like an efficient manner?
The “Tax the Wealthy” Ruse
And as for handing the bill to the wealthy – who exactly counts as “wealthy”?
In any arrangement where the middle class attempts to make the “wealthy” pay, the result is a sort of Kafkaesque nightmare in which the truly rich and connected avoid paying their “fair share” as usual – that’s what $400-an-hour tax attorneys are for – and those who get soaked are the hard-working folks (like owners of shoe stores) who Washington targets as “wealthy” in the manner that wolves target sheep.
Creating artificial class divisions is a way to make Karl Marx fans happy, but it’s a crappy way to run a free market economy. The true fat cats will never pay their fair share, regardless of the system or the political leanings of the administration. (Does Goldman Sachs see a whit of difference between George W. Bush and Barack Obama? You tell me.)
This means that class-inspired exploitation efforts wind up cracking down on true wealth creators – the small and medium-sized business owners of America – who spend so much time and effort trying to create real productivity and wealth that they don’t have time to concentrate on tax shelters or lobbyist loopholes or other ways to insulate themselves from the grasping hand of government.
What a “tax the rich” mentality creates, then, is a sort of anti-free-market zombie land in which the oligarchic leeches at the top of the system continue to bleed that system dry, while the actual backbone of the economy crumbles into dust by way of fiscal discouragement and exploitation.
Jobs Need a Purpose
Going back to the shoe store analogy... let’s say that the mayor of your town comes to you – a respected businessman (or woman) of the community – and says, “You know, what we really need are some new jobs. Could you maybe create some jobs for us?”
This goes into the “thin air” problem again. Just as profits can’t be created from thin air, neither can meaningful jobs. As a responsible business owner, your job is to maximize profits and efficiency. That means having as many employees as you need and no more. If you needed more workers, chances are you would have already hired them... or you would already be looking for them. It doesn’t make sense for someone to come along and ask you to magically create more slots, unless they have ideas and suggestions as to how those new jobs could actually add value to your business.
Amazingly, Keynesians (and most all politicians are Keynesians) don’t think like this. They think more along the lines of a suggestion Keynes once made – that if the government were to bury trash in big holes in the ground, and then pay people to dig up that trash and bury it again, this would somehow be a good thing.
And it might indeed be a good thing, of course – for politicians, not for the country. When people hear that new jobs are being created, they feel better. But if those jobs aren’t actually adding productivity to the economy, then no new wealth is being created. And that means the pre-existing wealth saved up in the system is merely being transferred from one pocket to another.
It’s Your Money!
This leads to another maddening aspect of the current attitude towards the need for government to “do something.” Where, exactly, do Americans expect the government to get the money?
As a taxpayer, when the government spends money, they are spending YOUR money. Yours. (And mine too.) There is a hopeful idea that someone else can be made to pay – the whole “tax the rich” fantasy – but as we have already shown, this is a ruse. Those who truly exploit the system do not give back to that system. They only take.
Meanwhile, taking more from the pockets of hard-working business owners only discourages them... perhaps convincing them it makes more sense to cut the business back, or even sell out or shut it down entirely. On the corporate side, efforts to increase taxes on profitable international businesses only encourages offshoring and the moving of jobs and divisions overseas.
From Zero to Negative
Professor Robert Barro is a Harvard University economics professor and a senior fellow at the Hoover Institution of Stanford. He is also the author of a dry yet intriguing tome titled
Macroeconomics – a Modern Approach.
Professor Barro is brought up here for his rigorous research on the effect of government stimulus. In a nutshell, Professor Barro has determined that the long-run government spending multiplier is zero.
This means that, when the government takes a large chunk of money and spends it in an effort to “stimulate” the economy, the ultimate effect on the economy is nil. The very idea of spending to stimulate does not work... at least according to the research of an ivy-league-trained Harvard and Stanford economist.
At the same time, research suggests that changes in tax rates do have an effect. According to fund manager Van Hoisington, “the government problem is complicated by the fact that the tax multiplier is 3, meaning that a 1% change in taxes will change GDP by about 3% over time.”
The tax multiplier evidence suggests that when taxes are lowered, there is an outsized positive impact to the upside. Conversely, when taxes rise, there is an outsized positive impact to the downside.
Put this together with the zero impact of government stimulus, and here is what we get:
- The government cannot actually “create” jobs (and has a laughable record of wealth creation... or rather, if anything, a horrifying record of wealth destruction).
- The idea of “taxing the rich” is a ruse... cover for political exploitation of hard-working business owners and other mid-America-level wealth creators, which in turn has a direct harmful impact on businesses large and small.
- The long-run economic impact of stimulus spending is zero.
- The long-run economic impact of rising taxes and deficits is negative.
- Because stimulus efforts cost money (via rising taxes, deficits and currency debasement) but do not add value, the impact of vigorous government activity is always and everywhere net loss, not net gain.
What we see here is that
Uncle Sam can’t add – he can only subtract. When the government spends money, it is spending your money (and mine). And as we can see via the crooked incompetent blowhards in Congress, the government is functionally incompetent... all but systemically incapable of spending money wisely. To give the government a dollar is to get less than a dollar back.
And worse still, in order to pay for all the government spending coming down the pike – government spending that two-thirds of Americans seem to want – we are going to have to see taxes rise, which will only further weaken an already ailing economy... a finding which even Harvard-trained economists can support.
These realities, and the frightening myopia of the populace at large, are further reason your editor forecasts a roller coaster of equity market returns over the next few years... giddy upcycles of naïve euphoria punctuated by swift troughs of disillusionment and despair. More than ever, it is a good time to know how to not just go long stocks, but also how to hedge... how to use options... and how to go short.
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Justice Litle is Editorial Director for Taipan Publishing Group and Taipan Daily – a free investing and trading e-letter – as well as the editor of Justice Litle’s Macro Trader.
If his name sounds familiar, it’s because Justice is regarded as one of the top trading experts in the world. While pursuing a Ph.D. at Oxford University in England, Justice began his financial adventure that includes researching and investing in trading and commodities.
Because of his trading expertise, Justice has been quoted in The Wall Street Journal... written multiple articles for Futures magazine... given regular market commentary to the likes of Reuters and Dow Jones, and contributed to the book Trend Following. In fact, under his guidance, Outstanding Investments, a world-class natural resource newsletter, delivered a top-rated performance two years in a row.
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