Are We At the Top?

Are We At the Top?

The stock market has corrected some, but things are still frothy in the financial world. Unfortunately, when things are frothy, the economic forces of gravity come into play at some point, and the pain ensures. Why do I think things are at the top?

I believe t is several things. First, the Fed has flooded the economy with funds through the CARES Act, the Main Street Lending Program, to name a few. The money has to go somewhere, and there is FOMO – Fear of Missing Out – so everyone is piling into the leading tech stocks. Further evidence is:

1. Junk bond debt issues, as shown above. The demand for yield is high as government debt, and AAA debt is offering such low yields. Thus record amounts of questionable paper have been issued to meet this demand.

2. SPACs. Look no further. Everyone and their dog is jumping into the SPAC space. These blank-check companies have raised about $41 billion, year to date, which is more than the last ten years combined, and Since July 1, about $29 billion. Currently, I understand that over 40 SPACs are looking for merger partners. As I have mentioned before, SPACs tend to overpay, reducing the returns for investors. Given that there are so many buyers right now, we can expect the prices of merger partners to rise and the quality to fall. Of course, the people who make the real money buy the founders’ shares and get the “promote.” Take the case of Alec Gores, who put just $25,000 into his SPAC when went public in January. Once their acquisition is closed, their 0.6% stake will be worth $96 million. Not bad work if you can get it. However, if the founders are doing so well, my advice is to stay away. The SEC is concerned that investors don’t understand how the incentives relate to pay in a $PAC compared to a traditional IPO. There may be regulation.

3. Is Palantir the latest WeWork? According to the Wall Street Journal, bankers have told investors that shares may start trading at $10, valuing Palantir at almost $22 billion when it goes public through a direct listing on September 30. Valued at $20 billion in 2015, Palantir has seen some increase in value. However, in the private markets, it is trading below $20 billion, and this month PitchBook valued Palantir at just $8.8 billion. As I mentioned last week, Scott Galloway in PalanThiel: The Uncola pointed out that “But at 17 years of age, and after raising $3 billion, the ‘start-up’ has never made money. In 2019, Palantir lost $580 million on approximately $740 million in revenues. The idiot client they serve (U.S. government) lost 25 cents on the dollar ($1 trillion deficit vs. $3.5 trillion in revenues) in 2019 vs. 78 cents at Palantir. The firm spent $911 million in marketing over the last 24 months, roughly half of what Tide detergent spent over the same period. The firm has 125 clients, 3 of them accounting for 28% of revenues. Palantir feels more like a services firm, with tech at its core (e.g., Accenture), but one that, unlike a services firm, is massively unprofitable.” Driving all that success if CEO Alexandar Karp, who paid himself $12 million. If the market is valuing this at $20 billion, we must be close to the top!

 

The Housing Market

For those that haven’t noticed, the housing market is booming. Many of us stuck inside have realized that we don’t like our homes are moving. In August, new-home sales increased at the fastest rate since 2006. All this demand is causing a supply and demand problem driving up prices.

However, not for long. As I predicted in April, many people are straining to pay their mortgages. Industry analyst Keith Jurow expects “several million” people will have gone nine months without making a payment when the Federal Housing Finance Agency’s foreclosure and eviction moratorium expires at the end of the year. In July, 17% of FHA-insured mortgages were delinquent, according to the Department of Housing and Urban Development. In NYC, 27.2% of mortgages were delinquent in July.

With so much new supply coming online soon, prices may drop, and those that bought now may find they purchased at the top.

Recent Posts

You Have to be Famous For Something

You Have to be Famous For Something

In a meeting last week, one of my Vistage members discussed his expansion into a new business area and how to price his services. The way he described the new market was comprehensive. As usual in Vistage, this lead to a great discussion challenging his assumptions...

How do you price your products and services?

How do you price your products and services?

Many businesses do not take full advantage of the value they offer to price effectively. Many struggle to price at a point that makes them a great margin. Here is a way to look at it see where you can price to improve your business.

Do you know your Profit per X to drive dramatic growth?

Do you know your Profit per X to drive dramatic growth?

I recently facilitated a workshop with several CEOs where we worked on the dramatic business growth model components. One of the questions that I had asked them beforehand was, "What is Your Profit/X?" The results showed that there this concept is not clear to many....

Five Ways to Attract Prospective Employees

Five Ways to Attract Prospective Employees

There is a war for talent. How do you attract talent to your company and have them apply for jobs there? You have to show why they should consider you, who you want, what you offer, and how your current employees feel.

Are you killing your firm’s WFH productivity?

Are you killing your firm’s WFH productivity?

Productivity remained during WFH with COVID. However, further analysis found that hourly productivity fell and was compensated for by employees working more hours. What was the culprit – Meetings. Want to increase productivity, have fewer meetings.

EOS is just that, an Operating System

EOS is just that, an Operating System

For those of you who are not aware of EOS, it is the Entrepreneurial Operating System. It seeks to improve businesses by getting six components aligned to enhance business operations. The six are: the vision the people the issues traction - meetings and goals...

What has COVID done to Company Culture?

What has COVID done to Company Culture?

COVID has affected everyone. However, companies need to examine if they have lived their core values during COVID, how they are reinforcing them in a WFH environment, and especially with the onboarding of new hires.

Where Exactly Are We Headed?

Where Exactly Are We Headed?

What is happening out there? Airbnb confidentially filed for its IPO last week. In the spring, the company laid off 2,000 employees and was negotiating over the terms of two fundraising deals totaling $2 billion in debt and equity.

However, total consumer spending on Airbnb in July was 22% higher than in the same period last year, according to Edison Trends. According to the company, it surpassed 1 million bookings on a single day that same month, led by an increase in stays at nearby destinations.

So, are we returning to normal? I would answer no, but there is hope. Normal is a long way away as people are still scared and want to social distance. However, given we can only take so much of staring at the same four walls, we are heading on vacation. Those vacations may not be the ones of pre-COVID days with cruises, trips abroad, or all-inclusive resort, but booking a house for just our family or close friends that we trust, works! Thus as the company reported, bookings are up for close to home destinations, basic economic substitution.

Along with other reports, consumer spending has increased during the pandemic, and I put that down to the fact that we are not spending as much on other things, e.g., commuting, sports, and meals out. However, will that spending last? Last week the Labor Department reported first-time jobless claims increased to 1.1 million, and it was the 22nd consecutive week claims exceeded those during the worst week of the Great Recession. On the positive side, the total number of Americans collecting unemployment fell from 15.5 million to 14.8 million, the lowest since early April. This data goes to show that the recovery will not be quick and a V-curve.

Where exactly are we headed, I am not sure. I hear lots of talk of continued layoffs ahead with about Wells Fargo and Boeing announcing more cuts as well as many smaller companies planning layoff. There is a sense of uncertainty over Q4 2020 and Q1 2021, and expect many are taking a wait and see approach. However, with school restarting, albeit in a confused manner, the Federal Unemployment Benefits in unchartered waters, and Congress in gridlock, there is a lot of confusion out there.

However, as an old Keynesian, the amount of stimulus that the government has poured into the economy is why we are experiencing a robust recovery to date. According to economic theory, in a world of excess capacity and mass unemployment, a combination of vast government borrowing with monetary expansion will not fuel inflation until most of the excess capacity is exhausted, which is where we are now. A Keynesian fiscal stimulus financed with negative real interest rates will boost private consumption and investment and should generate above-trend economic growth. Before the cry of “Crowding Out,” arises from many as I heard during the Great Recession, where all indications showed none. Currently, with central banks worldwide committing to financing this Keynesian stimulus with zero or negative interest rates for years ahead, there is no risk that public borrowing will crowd out private investment.

Thus, will this Keynesian stimulus lead to a healthier and longer growth economy? I would put that down to two factors.

  1. As always, public health. The sooner we adopt and proactive, data, and science-driven approach to the COVID crisis, the sooner we return to a functioning economy. Cases are rising again in Europe, which indicates that this is a marathon and not a sprint. I know for many, it already feels like a marathon, but the more apt analogy is the British in September 1939 saying, “It’ll all be over by Christmas!”
  2. The Stimulus. The actions by the Fed and the Congress, through the CARES Act, have injected substantial stimulus into the economy. However, as these have ended, we will have to observe to see what happens. As in the Great Recession, Congress stopped the stimulus too soon, for political reasons, which lead to a much weaker recovery than there should have been. Hopefully, this time, they will put the country first and give the economy what it needs to recover.

A lot of economists are arguing that the stock market is pricing in continuous stimuli for the economy, and if Congress fails to deliver the will, a market correction to accompany the economic contraction.

For those gnashing their teeth and anguishing over a Keynesian expansion, it is worth remembering that the 20 years of broadly Keynesian macroeconomic policy in place from 1946 until the late 1960s saw the most robust economic growth and productivity advances ever recorded. At the same time, we experienced generally moderate inflation and almost continuous bull markets in equities, property, and other real-value assets.

Recent Posts

You Have to be Famous For Something

You Have to be Famous For Something

In a meeting last week, one of my Vistage members discussed his expansion into a new business area and how to price his services. The way he described the new market was comprehensive. As usual in Vistage, this lead to a great discussion challenging his assumptions...

How do you price your products and services?

How do you price your products and services?

Many businesses do not take full advantage of the value they offer to price effectively. Many struggle to price at a point that makes them a great margin. Here is a way to look at it see where you can price to improve your business.

Do you know your Profit per X to drive dramatic growth?

Do you know your Profit per X to drive dramatic growth?

I recently facilitated a workshop with several CEOs where we worked on the dramatic business growth model components. One of the questions that I had asked them beforehand was, "What is Your Profit/X?" The results showed that there this concept is not clear to many....

Five Ways to Attract Prospective Employees

Five Ways to Attract Prospective Employees

There is a war for talent. How do you attract talent to your company and have them apply for jobs there? You have to show why they should consider you, who you want, what you offer, and how your current employees feel.

Are you killing your firm’s WFH productivity?

Are you killing your firm’s WFH productivity?

Productivity remained during WFH with COVID. However, further analysis found that hourly productivity fell and was compensated for by employees working more hours. What was the culprit – Meetings. Want to increase productivity, have fewer meetings.

EOS is just that, an Operating System

EOS is just that, an Operating System

For those of you who are not aware of EOS, it is the Entrepreneurial Operating System. It seeks to improve businesses by getting six components aligned to enhance business operations. The six are: the vision the people the issues traction - meetings and goals...

What has COVID done to Company Culture?

What has COVID done to Company Culture?

COVID has affected everyone. However, companies need to examine if they have lived their core values during COVID, how they are reinforcing them in a WFH environment, and especially with the onboarding of new hires.

We Need Honesty About the Economy

We Need Honesty About the Economy

Larry Kudlow is at it again. Last Sunday, on CNN, he said the economy is getting better, fast. Among his many statements were:

  • “I don’t think the economy is going south; I think it’s going north.” The economy fell 32% on an annualized basis in Q2. While there was an improvement in late Q2, it appears to be reversing as cases and deaths rise in the South and West.
  • “You’re in a housing boom right now.” Building permits fell by 30% in Q1 and 10% in Q2 over 2019.
  • “You’re in a retail-sales boom right now.” While retail sales recovered in July, they were down 25% in Q2 and are still below last year.
  • “You’re in an auto car boom right now.” On July 29, GM reported second-quarter U.S. vehicle sales declined roughly 34.1% over the last year.
  • “Manufacturing—look at the ISM indexes—all are booming.” For Q1, manufacturing productivity was down 30% over the prior year, for Q2 70%. While there was a glimpse of recovery in June, we will have to see if it holds, but we have a long way to get to “booming.”
  • “New business applications are skyrocketing.” Business applications were down 2.9% in Q1 and rose 2% in Q2 over the prior year. Again some improvement, but skyrocketing, I think not.
  • “The jobs picture remains strong.” The unemployment rate declined from 14.7% in April to 11.1% in June; however, the trend is once more reversing. With such high numbers, “strong” is far fetched.
  • “Economic recession? I don’t buy it.” The Definition of an economic recession is two consecutive quarters of economic decline. A 5% fall in Q2 and 32% fall in Q2, I believe, meets the criteria.
  • “The V-shaped recovery is in place. There is going to be a 20% growth rate in the third and fourth quarters.” The Conference Board is expecting 20.6% GDP growth in Q3 but 0.8% in Q4.

Now I understand that the administration is trying to push the narrative that the economy is excellent, and we must return to “normal.” However, as I have said many times before, this is a public health crisis, and until we fix the public health crisis, we cannot fix the economy. The surge in cases and deaths through the South and West have harmed the economy in those areas. As the COVID cases stabilize and fall, they should rebound. However, we are now seeing cases starting to surge in the middle of the country. Next up is the winter with flu season and more COVID cases as people stay indoors.

Many good CEOs believe that when talking to your employees during times of crisis, you need to be honest, and I totally agree. They can see what is going on, and if you paint everything in a positive light, you diminish credibility and lead them to fear the worst. So it is with the country. The administration needs to be honest, stop promoting solutions that are ineffective from people that believe “endometriosis and other potentially dangerous gynecological conditions are the residue of sexual intercourse with demons.”

For me, Larry Kudlow lost credibility with after his piece in 2005, “The Housing Bears are Wrong Again” in which he dismissed “All the bubbleheads who expect housing-price crashes in Las Vegas or Naples, Florida, to bring down the consumer, the rest of the economy, and the entire stock market.” His piece in 2007, “Bush Boom Continues,” where he predicted the economy would continue to grow just as it was collapsing, only confirmed my views. A banker who worked with Kudlow at Bear Stearns was quoted in Vanity Fair, “Over his entire career, I can’t recall a single forecast that he made that was accurate. You know, there’s the old joke about the economist that predicted seven out of the last four recessions. Kudlow makes that guy look good.”

Sending out Kudlow weakens the belief in the Administration by Wall Street and CEOs, which slows any economic recovery. Be honest and this time “Is the public health crisis stupid.”

Recent Posts

You Have to be Famous For Something

You Have to be Famous For Something

In a meeting last week, one of my Vistage members discussed his expansion into a new business area and how to price his services. The way he described the new market was comprehensive. As usual in Vistage, this lead to a great discussion challenging his assumptions...

How do you price your products and services?

How do you price your products and services?

Many businesses do not take full advantage of the value they offer to price effectively. Many struggle to price at a point that makes them a great margin. Here is a way to look at it see where you can price to improve your business.

Do you know your Profit per X to drive dramatic growth?

Do you know your Profit per X to drive dramatic growth?

I recently facilitated a workshop with several CEOs where we worked on the dramatic business growth model components. One of the questions that I had asked them beforehand was, "What is Your Profit/X?" The results showed that there this concept is not clear to many....

Five Ways to Attract Prospective Employees

Five Ways to Attract Prospective Employees

There is a war for talent. How do you attract talent to your company and have them apply for jobs there? You have to show why they should consider you, who you want, what you offer, and how your current employees feel.

Are you killing your firm’s WFH productivity?

Are you killing your firm’s WFH productivity?

Productivity remained during WFH with COVID. However, further analysis found that hourly productivity fell and was compensated for by employees working more hours. What was the culprit – Meetings. Want to increase productivity, have fewer meetings.

EOS is just that, an Operating System

EOS is just that, an Operating System

For those of you who are not aware of EOS, it is the Entrepreneurial Operating System. It seeks to improve businesses by getting six components aligned to enhance business operations. The six are: the vision the people the issues traction - meetings and goals...

What has COVID done to Company Culture?

What has COVID done to Company Culture?

COVID has affected everyone. However, companies need to examine if they have lived their core values during COVID, how they are reinforcing them in a WFH environment, and especially with the onboarding of new hires.

Inflation or Deflation, That is the Question?

Inflation or Deflation, That is the Question?

So far, the Federal Government and the Federal Reserve have both pumped lots of money into the economy to slow the downturn and prevent a significant recession or depression. The Federal Reserve is buying all manner of private and public debt, which has increased its balance sheet from $4.1 trillion in late February to over $6.5 trillion by mid-April. Analysts predict that its balance sheet will reach $9 trillion by year-end. This massive injection of money has many people claiming that inflation is coming as they did in 2008. In 2008 inflation didn’t appear, at least for consumer goods, but it did for assets. Today, who knows? There are two camps, inflation or deflation.

Inflation

Many are clamoring, because of the substantial increase in public debt, that inflation is inevitable and coming soon. This camp points to the hyperinflation of the Weimar Republic as the basis of their argument. However, at the end of WWII, most countries had a much larger debt to GDP ratios than they do today, and inflation was modest at best. Before the COVID crisis, Japan’s net debt was 154 percent of GDP and Italy’s 121, yet neither was experiencing inflation. Japan was close to deflation.

Taking the equation of exchange, MV=PQ where:

  • M = money,

  • V = velocity,

  • P = prices, and

  • Q = quantities.

P*Q is equal to GDP. Velocity is the same as turnover. So, money “turns over,” or gets spent multiple times, until it equals GDP. Thus, if V remains constant while M grows, P will rise, and price inflation will happen until Q catches up.

In 2008, QE and its progeny offset the contraction of credit-backed money as banks stopped lending. As broad measures of the money supply have grown slowly since the 2008 crisis, and wages remained stagnant until about two years ago, resulting in MV remaining relatively constant. In 2008, the crisis was a financial crisis; thus, quantities didn’t fall much, resulting in prices not increasing.

Today, U.S. M2 and Divisia M4 have both shown significant increases over the last two months. Rapid increases in monetary growth with constrained output due to workforce and supply chain disruptions forecasts a rise in inflation. This latter argument, rather than historical comparisons, worries me the most.

 

Deflation

Other commentators are arguing that deflation is coming and base their arguments on the following:

  • Money acts as a cushion for unexpected expenses. When facing an uncertain future, people tend to hold onto money balances.

  • Money velocity peaked with the end of the stagflation of the 1970s and has been falling since. When inflation is high, people don’t hold money as it loses value; when inflation is low, they are willing to hold more.

  • Low-interest rates further dampen velocity as the opportunity cost of holding money is low.

  • For 30 years, Japan has experienced near-zero interest rates, massive government borrowing, and growth in the money supply without generating growth or inflation.

  • While oil prices have recovered slightly, they are still down dramatically from pre-crisis levels. Low prices for oil – and commodities more generally –  following the COVID lockdown will likely keep consumer price inflation very low for a while.

  • Producer Price Inflation, the price of goods at the factory gate, is showing a fall. Lower costs for producers will result in lower prices of products.

  • To survive, many companies are heavily discounting prices to sell off inventory and raise cash. As things open up, businesses may continue this trend to lure consumers back into stores.

  • The U.S. has lost 30 million jobs over the last six weeks. With significant unemployment, wage disinflation is now a  concern. There is anecdotal evidence of companies lowering wages to lower costs. Lower wages means lower production prices and ultimately lower retail prices.

  • The Weimar Republic’s hyperinflation of 1923 was the result of a political crisis, as are most cases of hyperinflation. Hyperinflation is not the result of a central bank printing excess money, nor an overly generous level of government spending.

  • The trade war between the U.S. and China, if neither side gives, will lead to an increase in prices, but lower profits and investment by companies. This overall may lead to deflation if the price increases, don’t boost employment and investment sufficiently.

Hamilton Bolton summarized his observations in a 1957 letter as follows:

“In reading a history of major depressions in the U.S. from 1830 on, I was impressed with the following:

  • Some outside event, such as a major failure, brought the thing to a head, but the signs were visible many months, and in some cases years, in advance.

  • None was ever quite like the last, so that the public was always fooled thereby.

  • Some panics occurred under great government surpluses of revenue (1837, for instance) and some under great government deficits.

  • Credit is credit, whether non–self-liquidating or self-liquidating.

  • All were set off by a deflation of excess credit. This was the one factor in common.

  • Sometimes the excess-of-credit situation seemed to last years before the bubble broke.

  • Deflation of non-self-liquidating credit usually produces the greater slumps.”

The question that will decide the fact is if COVID has lowered the velocity sufficiently to prevent inflation or take us into deflation. No one knows at present. I am leaning towards deflation; however, in the 1970s, there was an unexpected surge in inflation, which could happen again.

I was taught inflationary accounting at business school, so there are several CFOs who have experience of an inflationary environment. However, deflationary environments have been absent from the Western world for generations, and we have little experience in how to manage in such a world.

Keep watching the data and be prepared either way.

 

Copyright (c) 2020, Marc A. Borrelli

Recent Posts

You Have to be Famous For Something

You Have to be Famous For Something

In a meeting last week, one of my Vistage members discussed his expansion into a new business area and how to price his services. The way he described the new market was comprehensive. As usual in Vistage, this lead to a great discussion challenging his assumptions...

How do you price your products and services?

How do you price your products and services?

Many businesses do not take full advantage of the value they offer to price effectively. Many struggle to price at a point that makes them a great margin. Here is a way to look at it see where you can price to improve your business.

Do you know your Profit per X to drive dramatic growth?

Do you know your Profit per X to drive dramatic growth?

I recently facilitated a workshop with several CEOs where we worked on the dramatic business growth model components. One of the questions that I had asked them beforehand was, "What is Your Profit/X?" The results showed that there this concept is not clear to many....

Five Ways to Attract Prospective Employees

Five Ways to Attract Prospective Employees

There is a war for talent. How do you attract talent to your company and have them apply for jobs there? You have to show why they should consider you, who you want, what you offer, and how your current employees feel.

Are you killing your firm’s WFH productivity?

Are you killing your firm’s WFH productivity?

Productivity remained during WFH with COVID. However, further analysis found that hourly productivity fell and was compensated for by employees working more hours. What was the culprit – Meetings. Want to increase productivity, have fewer meetings.

EOS is just that, an Operating System

EOS is just that, an Operating System

For those of you who are not aware of EOS, it is the Entrepreneurial Operating System. It seeks to improve businesses by getting six components aligned to enhance business operations. The six are: the vision the people the issues traction - meetings and goals...

What has COVID done to Company Culture?

What has COVID done to Company Culture?

COVID has affected everyone. However, companies need to examine if they have lived their core values during COVID, how they are reinforcing them in a WFH environment, and especially with the onboarding of new hires.

Arthur Laffer, The Horror Sequel Maybe Coming

Arthur Laffer, The Horror Sequel Maybe Coming

Say it isn’t so! Sean Hannity is promoting the idea of putting Arthur Laffer in charge of getting American back to work, and Laffer has been advising the President. Laffer is the mastermind behind the Reagan-era tax cuts and a pioneer behind the notion that slashing taxes unleashes economic growth. While Reagan cut taxes, he had to raise them later as the economic growth Laffer promised never materialized to prevent huge deficits. George H. W. Bush had to increase taxes further as growth still wasn’t enough to overcome the deficits from the tax cuts. However, never one to let facts get in the way of a theory, in his 2018 book, Trumponomics, which he co-authored with conservative economic commentator Stephen Moore, Laffer argued that the Trump administration’s 2017 tax plan would raise growth rates to as much as 6% and not increase budget deficits. Wrong on both counts – 10pts. Of course, after Laffer’s great theory hit the proverbial iceberg in Kansas, one would think he would be more circumspect, but alas no. As I look at it, he is at least 0 for 4.

According to Reuters and Business Insider, Laffer is calling for three actions:

  • Impose taxes on non-profit organizations that encourage the arts and education, among others.

  • A 15% pay cut to the taxpayer-funded salaries of government officials and professors.

  • Enact a payroll tax cut holiday for employees and businesses until the end of the year.

Also, Laffer was against the current stimulus because he argues it would serve to discourage people from working and inflict more pain on the economy.

Let’s look at each of his proposals, in reverse order.

Against the current stimulus
The country is closed. With unemployment soaring, 16.6 million as of the latest count, many cannot afford the basics, like rent and mortgage payments. Their inability to work is not due to laziness; they were just laid off. If they don’t pay those bills, landlords and banks will suffer. Besides, without some form of help, they cannot afford car payments, groceries, or medical bills, to name a few things. The U.S. is a consumer economy, and consumer spending in the U.S. was about 71% in 2013. A reduction in consumer spending hurts companies that supply consumers who, in turn, lay off more workers as revenues fall. Thus, we get into a negative feedback loop, increasing the damage at each turn. When this is over, which it will be, those hurt through this negative feedback loop will be unable to quickly return to spend as they would have had their wealth decimated and will look to keep expenditures low while they rebuild their savings or come out of bankruptcy.

Enact a payroll tax cut holiday for employees and businesses until the end of the year.
The President has touted this many times, but as has is noted, it only helps that are working. With nearly 17 million now unemployed, this does nothing to help them. Those that have jobs are unlikely to rush out to spend the little extra they have as everyone is hunkering down financially due to the uncertainty. There is an expected tsunami of bankruptcies coming and possibly worse than in 2008. His proposal will do nothing to alleviate that issue, further depressing the economy.

A 15% pay cut to the taxpayer-funded salaries of government officials and professors.
Such a policy would harm those federal workers as such a significant reduction in their income will reduce the level of their spending as well since the federal government employs about two million people and pays about $136.3 billion a year in wages and salaries. Thus a 15% cut would reduce the wage bill by $20 billion. Economists estimate that the marginal propensity to consume in the U.S. is about 5%, so that the reduction would reduce U.S. spending by $270 billion a year. In effect, this would wipe out the stimulus and decimate the economy further.

Since Ronald Reagan’s statement that the worst thing was the government, those on the right have been seeking to cut the size of the government. However, as we think of cutting “worthless,” government employees consider that (i) if you pay peanuts, you get monkeys, and (ii) surely in relevant agencies we want the best people, not those that have no choice. Among government employees, there are:

  • The military – probably a “No-No.”

  • The FBI – what we need, more problems with law enforcement, and increase the probability of corruption.

  • The Justice Department and Federal Prosecutors – See FBI

  • Medical researchers and specialists who are working on COVID and other diseases. These people sacrifice a considerable amount for relatively little pay because they believe in what they are doing, unlike many in business who are just in it for the money. They work to keep us safe from COVID, Ebola, and other diseases. However, discouraging competent medical professionals and scientists is an excellent start to protect us from other pathogens.

  • The scientists are Los Alamos, N.W., and Oak Ridge, TN. We don’t need to take care of our nuclear facilities and weapons because hey look at Chernobyl.

  • International relations. Of course, we don’t need relationships with others now that we are going it alone. We may need someone to help us get essential medical products from a foreign county. I am sure Mike Pompeo or Jared Kushner can squeeze it in.

  • Air traffic controllers. We don’t need them, ask any pilot that has flown into Cairo.

  • Professors. Hopefully, the government hires excellent professors at its educational institutes. I am sure a pay cut will improve the quality of teaching and graduates.

I am sure, he didn’t mean any of these groups, so really what he is proposing is a non-event financially and just a personal vendetta against those he believes add no value.

Impose taxes on non-profit organizations that encourage the arts and education, among others.
I am sure that doing so would be a massive tax revenue booster. While false, the famous story of Churchill’s response, “What are we fighting for,” when asked to consider cutting funding for art programs to support the war effort, does strike a point. However, Churchill did say, “The arts are essen­tial to any com­plete national life. The State owes it to itself to sus­tain and encour­age them….Ill fares the race which fails to salute the arts with the rev­er­ence and delight which are their due.”

As I and others have noted, that those with a humanities background are better at management than STEM and business graduates. The arts are there to teach us empathy and what it is to be human. If we want to improve as a country, this is not the way to go about it.

As the saying goes, “When all you have is a hammer, everything looks like a nail.” Once more, it appears that Mr. Laffer is proposing his standard solutions without considering the facts. He should look to another economist, with a much better record, Keynes, who supposedly said, “When the Facts Change, I Change My Mind. What Do You Do, Sir?” Laffer has never changed his mind regardless of how the facts judge him. As someone whose views on many things have changed over the years, be it down to persuasion by others, more information and data, or just Bayesian logic, I find his position enough to disqualify him and his suggestions from any serious economic consideration.

 

Copyright (c) 2020, Marc A. Borrelli

Recent Posts

You Have to be Famous For Something

You Have to be Famous For Something

In a meeting last week, one of my Vistage members discussed his expansion into a new business area and how to price his services. The way he described the new market was comprehensive. As usual in Vistage, this lead to a great discussion challenging his assumptions...

How do you price your products and services?

How do you price your products and services?

Many businesses do not take full advantage of the value they offer to price effectively. Many struggle to price at a point that makes them a great margin. Here is a way to look at it see where you can price to improve your business.

Do you know your Profit per X to drive dramatic growth?

Do you know your Profit per X to drive dramatic growth?

I recently facilitated a workshop with several CEOs where we worked on the dramatic business growth model components. One of the questions that I had asked them beforehand was, "What is Your Profit/X?" The results showed that there this concept is not clear to many....

Five Ways to Attract Prospective Employees

Five Ways to Attract Prospective Employees

There is a war for talent. How do you attract talent to your company and have them apply for jobs there? You have to show why they should consider you, who you want, what you offer, and how your current employees feel.

Are you killing your firm’s WFH productivity?

Are you killing your firm’s WFH productivity?

Productivity remained during WFH with COVID. However, further analysis found that hourly productivity fell and was compensated for by employees working more hours. What was the culprit – Meetings. Want to increase productivity, have fewer meetings.

EOS is just that, an Operating System

EOS is just that, an Operating System

For those of you who are not aware of EOS, it is the Entrepreneurial Operating System. It seeks to improve businesses by getting six components aligned to enhance business operations. The six are: the vision the people the issues traction - meetings and goals...

What has COVID done to Company Culture?

What has COVID done to Company Culture?

COVID has affected everyone. However, companies need to examine if they have lived their core values during COVID, how they are reinforcing them in a WFH environment, and especially with the onboarding of new hires.