1 January 2013 : its over the cliff we go!

[update] This pretty much says it all. [update 2] … and … they … fold. A bad deal, about to be voted into law. As they said, elections have consequences. Whatever happens, they (WH and Senate) now own it. No cuts, just taxes. Even though our problem is way too much spending and mis-targeted tax increases.

Less than 10 hours into the new year for us here in GMT-5. There is some aspect of humanity whereby many view this as a hopeful time, a chance to “begin anew”. Having recently watched some of the episodes of Battlestar Galactica that I missed previously, the contrarian in me wants to say “All of this has happened before and will happen again”. I’ll post a restrospective and prospective later on this week. But there are some things worth noting. First, on the economic front, the US is indeed over the fiscal cliff. What this means is across the board spending cuts and tax hikes. There is a tentative deal to “fix” this. This deal calls for $41USD in new taxes for ever $1USD in new spending cuts. Put another way, it is a very bad deal.

We in the US are in deep trouble, due to run-away, completely uncontrolled spending. Until we reign it in, we can’t even begin the financial healing process. Every small business that has ever bled cash recognizes this, and every small business that has survived this understands exactly how to fix it. You stop, as in bring to a halt, in a complete and absolute sense, spending on non-essential things. You skip what you do not need. You spend only upon what you need to spend. Everything else does not matter. Both parties are to blame here for this, though the democrats certainly have won the recent “I can spend more than thou” sweepstakes, at least since 2006 when they regained control over the purse strings. GWB wasn’t precisely a fiscal conservative, and he certainly didn’t help the situation. But many of the things that contributed to where we are now began in the Clinton era. The housing bubble bursting, and the subsequent financial mess can be directly traced back to legislation Mr Clinton signed into law to do a number of things, specifically to reduce racial discrimination in lending, to effective repeal or defanging of Glass-Steagal which was very much a republican led operation. What we need to do is to reign in spending. Hard. Like sequester should do if given the chance. My (free) advice to our house of representatives is to not go into session for the next quarter or two. Let the sequester do the cutting the congress as a whole and the president in particular are both unable and unwilling to do. Then vote down the deal, send it back to the senate with one of the deals that passed the house previously (mostly spending cuts). What we should do is enact all spending cuts (permanent) up front with increasing taxes (sunsetted of course) a few years down the road if we need them, when the economy is on better footing and more able to absorb them. Any small business would tell you that you need to do this to right the ship. To increase your revenue as a small business, apart from the obvious “sell more”, raising your prices doesn’t work unless the market is able to absorb the higher prices. You see sales at businesses for a reason. Because they need more revenue, and they are willing to take a little less per item sold in order to sell numerically more stuff, and therefore increase their overall revenue. This is literally moving along the price elasticity of demand curve in such a way as to make the product/service more desirable. The taxes you pay are directly analogous to the prices you pay. Taxes are a price for a set of services the government provides, though the price is a function of many things and is not fixed. Nor is it comprehensible by mere mortals, but that’s a concern for another time and day. If the government lowers the prices of its services, the resulting greater economic activity will increase tax revenues substantially. Only partisans are still debating this particular fact. One may even argue that this is related in some way to optimal placement on the Laffer Curve. So cutting spending, and finding or even approximating a guess at a growth maximization position for taxes makes sense. It works. We know it works. We have recent modern examples of it working. This isn’t setting taxes to zero, this is trying to find a growth maximization tax rate while cutting spending across the board. Sure, you can argue that Estonia is a small country, and it doesn’t have as complicated economy as the US. But its missing the point. That being, we can solve the problems, or at least reduce their impact. But if you look at the European countries that tried the same Keynesian nonesense we tried, not so surprisingly, they are in similar spiral trajectories. From the previous link:

There are many groups here, to which our politicians, our elected representatives, our employees, are beholden to. Technically, they work for us, at least on paper. The reality is that they work for whomever keeps giving them money to get elected. Which is a problem, as groups (not necessarily the individual members of the groups) whose aims and goals are anathema to economic recovery hold sway over the president and the majority in the senate. That coupled with others in their “constituency” create a terrible situation for someone trying to solve the real problem. You have to cut spending by quite a bit, across the board, and do it intelligently with no economic/accounting gimmicks, and the tax increases need to be highly targeted where they will actually do good without negatively impacting growth. Raising taxes on small businesses, that is, businesses between say $500k and $5M/year revenue? Not so smart … quite stupid actually.

Of course they have the counter argument in the same article that other small businesses don’t care and will “just increase sales”. Ummm yeah. Having done the small business thing for a decade, being pretty successful at this, the increasing sales bit requires more capital resources, investment, and expenditures to do this. Which means you either locate external sources of capital, or free up internal sources (e.g. someones salary gets cut or you lay them off). It is entirely possible that some small businesses are either shielded from the impacts of this, or their owners don’t quite grasp the relationship between capital investment and ability to grow sales. I’ve met some very bright entrepreneurs, and some less so. Understanding what will and will not impact your business, and planning for the increased costs and lower capital, while trying to maintain and grow your business is very much a concern of the brighter entrepreneurs. What I am getting to is that our choices were between a bad deal that won’t work, or no deal where it hurts but it gets some of the things we need. The latter is going over the cliff. The former was negotiated last night in the senate.