Too Smart by Half
It is unwise to give the Obama economic team "points for intellectual progress". You may have heard it said that even the Devil believes in God, but that doesn't seem to change his behavior any. Obama may now believe in tax cuts to spur the economy, but it does not change the basic fact that he is a Liberal or Socialist or Progressive or however you want to label big government intervention.
If you are taking the nation’s economy in the wrong direction, the smart thing would be to turn around and go back the opposite way. This is called “doing a 180”. Being too smart by half means you do the 180, only to continue another 90 degrees until you are now heading 90 degrees off on some economic tangent. In policy terms, this means implementing tax cuts, but erasing the positive affects by not making them permanent and raising other taxes that are more burdensome than the ones temporarily being lifted.
I hesitate to call it common sense, because I have come to realize that it is not as common as one would hope. Nevertheless, the average Joe has enough brains to realize that getting a bonus check at Christmas may allow for one time splurge in spending, but it does not translate into increased purchasing power on a permanent basis. Banks have now returned to the practice of requiring proof of earnings before awarding loans. This is why getting a small raise from an employer has a greater impact on an individuals behavior than the annual Christmas bonus. If my income goes up by five percent, assuming my bills are paid, I can increase my spending by five percent. A bonus check is most often unpredictable in its amount, and in the past few years, it has been uncertain whether it will even be forthcoming.
Common sense business practices use a simple mental calculation. On a scale of one to five you are one of the following:
1. Certain of unprofitability in the next year
2. Uncertain but likely to be unprofitable
3. Certain to break even
4. Uncertain, but likely to be profitable
5. Certain of profitability
The energy that moves decision making forward in a business is certainty. Even being certain of unprofitability it preferable to any form of uncertainty. Being able to predict or forecast allow for planning. Planning means strategic decisions and finding opportunity for taking risk. Uncertainty kills risk. No risk means no reward. If the economy is slow and business is unprofitable, two other factors come into play. The opportunity to eliminate waste presents itself and you can emerge better suited to take advantage of the next business upturn. More importantly, it is fairly certain that your competitors are also facing the same struggles. This is often where the men are separated from the boys. The weak or poorly run competitors go out of business. Again, this proves to be a positive when the next upturn comes.
Certainty of breaking even is like kissing your sister. Very undesirable, but it won’t kill you.
Certainty of Profitability is ideal. Too often it leads to complacency, excess and visions of infallibility, but that is the nature of man.
Uncertainty of any kind leads to hesitancy. It also leads to internal division within a company where marketing and R&D scream for more spending and the Accounting Department says “wait”. In the end, people start guessing and mistakes get made.
So now the Obama economic team wants to embrace some tax cuts, but implement new ones. At the same time, they want to let some Bush tax cuts expire but target renewing others, creating a winners and losers list. Each business lives with uncertainty whether they will be a winner or loser. This is on top of the uncertainty of the healthcare legislation and the possible increase in taxes coming from environmental legislation.
Too smart by half is doing the right thing in the wrong way for the wrong reasons. Tax cuts that do not create certainty in income miss the point. Tax cuts that pick winners while punishing losers with tax increases creates division and uncertainty, because there is no guarantee anyone will stay on the winners list. (insert lobbyists here)
Republicans need to say to the Obama economic team, “either do it right or don’t do it at all”. What should not happened is for Hillary to run in 2012 claiming that they tried tax cuts in 2010 and they didn’t work. Let’s hope the Republican economic team is NOT too smart by half.