I may not be the greatest authority on economics, but I can tell you that 90% of those who claim to be experts are not either! This blog is a simple lesson in Economics 101.
I have been involved in business decisions for over 50 years and know how the rubber meets the road. I have administered multi million dollar capital budgets for some of the largest companies in the USA and there are some simple lesson that can be learned. I want to take just two. (1) What and how much should we spend our capital budget on? (2) What products should we make that we can make a profit on?
When it comes to capital spending we have a choice between various projects and each has some kind of rate of return. Remember that an investment is one that "pays off" and you measure that with the rate of return. It is like putting money in the bank. You want to put your money in the bank that pays the most interest. Right now the interests rates are very low so in many cases it is not that you can not find the money. The problem is that many investments don't yield a profit. Why is that? Let's say that the potential investment is for more sewing machines to make shirts. If it costs more for fabric and labor than it does to buy the shirt from China, it does not matter how cheap the sewing machine is or how low the interest rate is for money borrowed from the bank. An investment in more sewing machines is a "bad" investment. Every company has many proposals like this that are just below the cut-off line for being acceptable investments. This is an important part of the critical economic lesson.
In many cases, it does not take much of a change in fabric an labor cost to make a marginal investment a very good investment and vise-versive. Obamacare added extra cost to making a shirt by mandating that additional items be added to the companies health insurance such as birth control, pre existing conditions and keeping kids on the family health insurance to age 26. These are not "free" items. They make the shirt more expensive to manufacture here in the USA while the shirt from China still costs the same. Obamacare, alone, has thus killed a lot of jobs here in the USA. If it had gone the other way, it would have made a lot of jobs that were slightly none competitive, competitive.Think about it this way. There are high tech jobs at the top that don't have to compete with cheap labor around the world, but these are limited because there is a limited number of people world wide who have the necessary intellect. That is not true of lower skilled and lower tech jobs. Obamacare does not kill these high tech jobs, it kills the jobs of the middle class. Got it?
The second group is products that companies would like to make, but can't make them at a profit or not at a high enough profit to justify. GMC just decided to move their small car manufacturing to Mexico for just this reason. This was a close decision that was decided by a small difference in profitability; With the high tax rate on GMC, it was enough to swing the decision. I am sure that GMC was making a small profit on their small cars, but it was just not enough. With a reduction in the tax rate for companies like GMC, many of these types of close decision would be made in favor of keeping the manufacturing here along with the jobs.
Why people feel that companies should pay so much in taxes is beyond me. In the end, the people end up paying the tax anyway with higher priced cars from GMC while Toyota does not have to pay the same amount of tax. It is one thing to have competition between companies here in the USA who all play by the same rules compared to competition with the rest of the world who play by different rules. It is not the same thing. To make many of these marginal products profitable here, we need to level the playing field by taking taxes off businesses and putting them on "all" products equally including imported products. If this is not crystal clear to everyone, I don't know how Trump or any government can help you.
What people need to take away from this blog is that there are many jobs and products that are right on the line between being profitable or justified and it does not take much to push them one way or the other. Look at buying gas for your car when the average price of gas is $2.00 per gallon. Which station are you going to fill up at? The one selling gas for $1.98 or the one at $2.03? We are only talking about 2.5% difference here when we burden manufactures with 7% for social security and another 7% that they pay you that you then pay in! The Toyota is not burdened by any of this!
That is my economics lesson 101 for today!!!
PS---Here is an example: Let's say that you are considering investments in stock, real estate or a new product and have a big list of ideas where each yields higher or lower returns. It would look much like this:
% Return Number of ideas Total acceptable ideas
12% 1 1
11% 2 3
10% 4 7
9% 8 15
8% 16 31
7% 32 62
6% 64 96
5% 128 234
4% 256 480
If your criteria was 7% return, you would have 62 acceptable projects or jobs. If Obama made your cost go up just a little and your new criteria was 8% you would have to cut 31 projects or half your jobs. If Trump was able to cut costs for businesses so that your new criteria was 6% you would add 64 new projects or jobs. It cuts both ways and small changes have big impacts as you can see. That is a difference of 95 projects or jobs!!!
PS---Remember your history lessons about the early USA? Remember the "Customs House"? There was one at every port of entry. That was because it was the easiest place to collect sales tax. There was no income tax back then. Think how difficult it would have been to let goods come in tax free and then send out thousands of tax collectors to collect the sales tax one dollar at a time? You have to ask yourself, "Who had the idea to load so much of the taxes onto payroll and business in the first place?" Did you ever hear the expression, "The authority to tax is the authority to destroy?" We have to stop shooting ourselves in the foot and correct some of these major errors of the past.
I have been involved in business decisions for over 50 years and know how the rubber meets the road. I have administered multi million dollar capital budgets for some of the largest companies in the USA and there are some simple lesson that can be learned. I want to take just two. (1) What and how much should we spend our capital budget on? (2) What products should we make that we can make a profit on?
When it comes to capital spending we have a choice between various projects and each has some kind of rate of return. Remember that an investment is one that "pays off" and you measure that with the rate of return. It is like putting money in the bank. You want to put your money in the bank that pays the most interest. Right now the interests rates are very low so in many cases it is not that you can not find the money. The problem is that many investments don't yield a profit. Why is that? Let's say that the potential investment is for more sewing machines to make shirts. If it costs more for fabric and labor than it does to buy the shirt from China, it does not matter how cheap the sewing machine is or how low the interest rate is for money borrowed from the bank. An investment in more sewing machines is a "bad" investment. Every company has many proposals like this that are just below the cut-off line for being acceptable investments. This is an important part of the critical economic lesson.
In many cases, it does not take much of a change in fabric an labor cost to make a marginal investment a very good investment and vise-versive. Obamacare added extra cost to making a shirt by mandating that additional items be added to the companies health insurance such as birth control, pre existing conditions and keeping kids on the family health insurance to age 26. These are not "free" items. They make the shirt more expensive to manufacture here in the USA while the shirt from China still costs the same. Obamacare, alone, has thus killed a lot of jobs here in the USA. If it had gone the other way, it would have made a lot of jobs that were slightly none competitive, competitive.Think about it this way. There are high tech jobs at the top that don't have to compete with cheap labor around the world, but these are limited because there is a limited number of people world wide who have the necessary intellect. That is not true of lower skilled and lower tech jobs. Obamacare does not kill these high tech jobs, it kills the jobs of the middle class. Got it?
The second group is products that companies would like to make, but can't make them at a profit or not at a high enough profit to justify. GMC just decided to move their small car manufacturing to Mexico for just this reason. This was a close decision that was decided by a small difference in profitability; With the high tax rate on GMC, it was enough to swing the decision. I am sure that GMC was making a small profit on their small cars, but it was just not enough. With a reduction in the tax rate for companies like GMC, many of these types of close decision would be made in favor of keeping the manufacturing here along with the jobs.
Why people feel that companies should pay so much in taxes is beyond me. In the end, the people end up paying the tax anyway with higher priced cars from GMC while Toyota does not have to pay the same amount of tax. It is one thing to have competition between companies here in the USA who all play by the same rules compared to competition with the rest of the world who play by different rules. It is not the same thing. To make many of these marginal products profitable here, we need to level the playing field by taking taxes off businesses and putting them on "all" products equally including imported products. If this is not crystal clear to everyone, I don't know how Trump or any government can help you.
What people need to take away from this blog is that there are many jobs and products that are right on the line between being profitable or justified and it does not take much to push them one way or the other. Look at buying gas for your car when the average price of gas is $2.00 per gallon. Which station are you going to fill up at? The one selling gas for $1.98 or the one at $2.03? We are only talking about 2.5% difference here when we burden manufactures with 7% for social security and another 7% that they pay you that you then pay in! The Toyota is not burdened by any of this!
That is my economics lesson 101 for today!!!
PS---Here is an example: Let's say that you are considering investments in stock, real estate or a new product and have a big list of ideas where each yields higher or lower returns. It would look much like this:
% Return Number of ideas Total acceptable ideas
12% 1 1
11% 2 3
10% 4 7
9% 8 15
8% 16 31
7% 32 62
6% 64 96
5% 128 234
4% 256 480
If your criteria was 7% return, you would have 62 acceptable projects or jobs. If Obama made your cost go up just a little and your new criteria was 8% you would have to cut 31 projects or half your jobs. If Trump was able to cut costs for businesses so that your new criteria was 6% you would add 64 new projects or jobs. It cuts both ways and small changes have big impacts as you can see. That is a difference of 95 projects or jobs!!!
PS---Remember your history lessons about the early USA? Remember the "Customs House"? There was one at every port of entry. That was because it was the easiest place to collect sales tax. There was no income tax back then. Think how difficult it would have been to let goods come in tax free and then send out thousands of tax collectors to collect the sales tax one dollar at a time? You have to ask yourself, "Who had the idea to load so much of the taxes onto payroll and business in the first place?" Did you ever hear the expression, "The authority to tax is the authority to destroy?" We have to stop shooting ourselves in the foot and correct some of these major errors of the past.
