Monday, October 16, 2017

Business Success Despite a Lack of Economic Understanding?

A very well-known businessman and politician said this:
“As you know the last eight years, they borrowed more than it did in the whole history of our country. So they borrowed more than $10 trillion, right? And yet, we picked up $5.2 trillion just in the stock market. Possibly picked up the whole thing in terms of the first nine months, in terms of value.”
“So you could say, in one sense, we’re really increasing values. And maybe in a sense we’re reducing debt.”
 This statement has confused a lot of people who understand business and economics. Apparently, the speaker of these statements isn't confused. I wonder if his real estate property would increase in value, the government deficit is reduced. That's a comparable scenario.

Just because value goes up doesn't mean revenues go up and taxable income goes up and government tax receipts go up. When the stock market goes up, value is created...if the stocks are sold. If the stock value goes down, value is lost...if the stocks are sold.

And nothing happens in terms of taxable income until stocks are sold. And given the current rate of capital gains tax, if everyone sold their stocks and incurred $5T in gains, only 15% (maybe a bit more depending on proportion of long-term gains--at a lower tax rate--and short-term gains) would be taxable and turn into tax receipts. That means $300B would be available to reduce the $20T debt. It's a debt and only that.

This whole thing is not too dissimilar from cost reduction projects in businesses that are based on incremental labor savings (a few hours/wk). Those savings do not drop to the bottom line unless you reduce salary and wage burden. As long as you are still paying the same number of people for the same number of hours, there are no savings. Yet too many managers and executives ignore this simple fact and still propose and approve projects that have no real savings. It's a big waste of corporate effort.

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