I Am Tired of Hearing About Liquidity Traps

Here is as good a reason as any why many businesses (like mine) are currently reluctant to invest:

I've noted any number of times that government taxes comprise 14% of the national income and government spending is at 25% of the national income.

OK, so politicians have two alternatives -- they can make tough choices to reduce spending and reduce their own power, or they can just take more money from taxpayers and in so doing increase their personal power.  Gee, I wonder which will occur?

Combine this is a health care bill no one understands but everyone suspects will raise the price of labor and a climate bill that won't quite die that will raise the price of energy and therefore most other inputs, and is it any wonder that businesses are reluctant to invest when their three highest costs (taxes, labor, energy) are going up by some undetermined amount?

  • Will

    The 14/25 figure is absurd. Taxes go down and spending up in a recession, but recessions are temporary. When the economy recovers, there will be a much smaller deficit.

    An individual politician's power is only slightly correlated with the size of government. Party leaders, committee chairs, and swing voters in a tiny government are much more powerful then back-benchers in a huge government.

    Even looking at Congress as a whole, Congress's powers don't come from the size of government - they come from its ability to increase or reduce the size of government.

    Under your theory legislators would never do anything so crazy as pass massive tax cuts, which they do all the time.

    Your health & energy analysis neglects the nature of competitive markets in setting prices. All serious economic projections say these bills will have very small impacts on the overall size of the economy - why should they have large impacts on the size of your business.

    Energy prices fluctuate massively. You can predict this all perfectly, except for the mysterious influence of bills which have been remaining essentially the same for a year, but have not yet passed? I am skeptical.

  • spiro

    Will, have you run a business?
    Coyote's figures come undoubtedly from his balance sheet, your skepticism comes from...what you believe?

    As far as govt spending vs. income, only govt can get away with spending more than they acquire. Any business spending nearly twice as much as it brings in would fail, quickly.

  • Will

    No.
    My skepticism comes from a) economic theory, which says that small changes create small distortions, b) Noticing that such distortions, from governmental and non-governmental sources, occur all the time and the world hasn't ended.
    His balance sheet depends heavily on prices. I think that prices adjust based on changing economic conditions. (If they didn't, economic theory would fall apart and capitalism would not have an advantage over socialism.) He thinks that...?

    Businesses spend more than they acquire frequently - they, like the government, take out loans. Because the government has the power to tax, it can take out debt cheaply, which means it can take out more debt than businesses do. But it is a difference of degree. For example, businesses typically spend more than they acquire when they are starting up or going through a rough patch, while governments do so near-indefinitely.

  • WSJevons

    Is your basic premise that you won't invest in your business because input costs are uncertain? If so, I don't follow that logic at least with respect to your statement. Lets take taxes, labor, energy as inputs in reverse order.

    1) energy - the climate bill exists and persists. For every given level of your output a certain percentage is direct and indirect energy costs. To the extent that you can sell your product a price marginally higher than expenses, then you will generate an economic profit. Sell more product make more profit. In the worse case scenario, energy costs drive expenses higher than sales price. This will happen irrespective of whether or not you sell 100 widgets or 1,000,000 widgets and rational people will stop making widgets once they become unprofitable.

    2) labor - the cost of labor is always increasing. It is rate of increase that is undetermined. Regardless, labor is marginal. To the extent that you are able to sell your widgets marginally higher than the labor costs, then you make an economic profit. To make more revenue, hire more people. Once it becomes unprofitable to increase production, stop hiring and/or reduce workforce.

    3) taxes - payroll tax is covered under the marginal cost of labor. Income tax is based on income. Sell more widgets at a marginal profit and make more money.

    If any of these marginal costs increase, you will have to sell more widgets in the future than you are now to make up for the lost income. If follows that you should invest in your business now to build your revenue / market share / product line while marginal inputs are relatively low. That way, when your inflation forecast hits, you will be better positioned to absorb the increases than your peer companies.

  • IgotBupkis

    Will/WSJ (assuming you're two different people since you seem to argue from the same positions) -- you both show no signs of actually operating a business ever.

    You're both ignoring the critical need for reserve capital in any endeavor to deal with unexpected events occurring as a result of business externalities.

    If your power bills go up by 50% and you don't have the cash to pay them, then your power gets cut off. Then you won't be making anything. You MIGHT be able to borrow the money, but then you're not only paying the extra expense of the power, but the rental price on the borrowed capital. This would be called "bad management technique".

    If your employee costs (often a very large part of ongoing operating expenses) surge by 25% due to new regulatory burdens, and you don't have any reserve capital to cover them, you have several options:
    1) Fire people (expensive in terms of severance, negative in its effects on both employee morale and overall business efficiency, and ill-thought of in terms of PR)
    2) Not paying some or all of your people their salaries (likely to cause people to quit, and generally illegal)
    3) Not paying some or all of the monies you owe to the government (Yeah, that one will go over really, really well).

    First off, you guys need to operate a real business a bit. Most of your knowledge is egg-head presumptions. I suggest you start small, as you're going to go under the first few times before you learn what works and what doesn't in terms of What You Know.

    Second off, you need to realize the first part and analyze where it is you might be wrong.

  • WSJevons

    I actually have owned three businesses. I currently own an insurance wholesaler. So instead of the ad hominems, lets stick to facts and arguable positions.

    "If your power bills go up by 50% and you don’t have the cash to pay them, then your power gets cut off. Then you won’t be making anything."

    Absolutely. However, we know that energy expenses are going higher. (See my earlier comment.) I make certain to have cash on hand to cover unanticipated expenditures. For me, it is approximately 10% of annual operating income. (I have significant non-operating income that is dividend like i.e., it takes no incremental expense to generate an additional dollar.) My business, though seasonal, is pretty stable and I am able - apparently better than most - to forecast expenses. My reserve is pretty conservative.

    "If your employee costs (often a very large part of ongoing operating expenses) surge by 25% due to new regulatory burdens, and you don’t have any reserve capital to cover them, you have several options:
    1) Fire people (expensive in terms of severance, negative in its effects on both employee morale and overall business efficiency, and ill-thought of in terms of PR)
    2) Not paying some or all of your people their salaries (likely to cause people to quit, and generally illegal)
    3) Not paying some or all of the monies you owe to the government (Yeah, that one will go over really, really well)."

    1) I have wound down 1 company (not as an owner). It is a soul sucking experience. All of your assertions are true, but you can't only sign up for the good things in owning a business. Uncertainty is scary and you never have satisfactory answers for remaining employees. You try and manage through it by being open and honest.

    2) & 3) are spurious arguments.

    In general, your 'examples' are based on the presumption that input prices don't go up for your competitors and/or you have no pricing power. If your business is in this situation, then you need to get out fast: either [China or India or Malaysia or Vietnam] is kicking your arse or you don't know what you don't know.

    To people that wish to debate my original post

    I think, that in this time of economic uncertainty, I can pick up cheap assets and enter new markets. Why? There are tons of people out of work and they are TALENTED and hungry. There are businesses that couldn't control costs and wouldn't acknowledge the downturn until too late. I am going pick over their decaying carcasses by poaching their best talent or buying their rotting corpse at a discount. Their mismanagement is my opportunity.

    I have little sympathy for the business owners who did not reserve for the bad times - personally or professionally. What is truly heartbreaking is the impact they have on the innocents and the downstream effect on suppliers et al that these business owners are going to stick with a uncollectable.