Craig G. Francis

Government Stimulus - At What Price?

I recently came across a website called BankruptingAmerica.com. It is an interesting site that chronicles the use (misuse?) of government money and how it affect the country’s economy. The site is run by Public Notice, which calls itself a “nonpartisan nonprofit organization 100 percent focused on arming people with the economic facts and figures needed to evaluate the policies our leaders are proposing.” One of the features is a report on the so-called Recovery Summer and what all Washington’s spending has actually provided the states. The report highlights some of the questionable spending that has been a part of the government’s stimulus.

Here is an interesting statistic:  The federal government has spent, to date, $3,700,000,000,000 (that’s ‘trillion’ with a T) in stimulus money to 'save' the economy.  This spending took off in 2008. If you take the number of jobs 'saved' by these funds, you would end up with 654,000 new jobs.  That is the number of jobs created with government money.  Of course, there are about 17,000,000 unemployed - including the official rate of 9.5 million on unemployment and 7.5 million people who are now chronically unemployed.

If you took the $3.7 trillion and compared it to the number of jobs saved (forget about the 16,500,000 that are not 'saved'), then these 654,000 cost the federal government $5,657,000 per job.  What is worse is that nearly all of these jobs were federal and state workers.  Amazing.
If you took that same $3,700,000,000,000 and invested it at 2%, you would receive $74,000,000,000 (billion) a year in income.  With that you  could pay 2,000,000 people $37,000 a year tax free.  Pretty nice wages since you would have to earn about $54,000 to net $37,000 a year.

There are several other numbers games that you could play with these facts, but the simple recognition is that government does not create sustainable jobs. It can create jobs for its own people and empower a couple of new generations of votes for the 'moochers,' but it does nothing to create jobs in the private sector.

So when you hear a politician brag about jobs created or saved, you are not talking about the business sector.  They are talking about another generation of government employees.  There is no reason for the government to create jobs outside its own corpus when it does not benefit the sustainability of the government and its power brokers.  And the states that accept this pact with the devil are no better.

Of course the answer to the country’s employment and economy problems are, as they have always been, a stronger private sector. Allowing business owners and entrepreneurs to do what they do best without over-regulation and over-taxation will provide the impetus for a much more complete and lasting recovery than trillions of dollars in “stimulus” money will. Especially when that money will need to be paid back by future generations.

As to private sector recovery, there are still opportunities out there to both start and grow businesses. Although the extension of the increased SBA loan guarantees and reduced fees is still being held up by the failure of the Senate to pass the Small Business jobs bill, there is still money available for the right people with proper guidance. Obtaining an SBA loan can be a challenge but it is not impossible. If you are considering applying for an SBA loan your best first step is to learn all you can about the process. On the SBALoanStore.com site you can find answers to many questions, as well as two free reports that will help you better understand SBA lending procedures. If you feel you need more advice, feel free to contact me at the number or email below.

 

Craig G. Francis is the owner of Francis Financial and The SBA Loan Store. He has been a top producer of SBA Loans since 1981, and has worked with Dun & Bradstreet and Bank of Commerce. Craig Francis has the expertise to steer clients through the often confusing rules and regulations associated with SBA Loans, having helped over 2,000 businesses acquire over a billion dollars in loans. He can be contacted through CraigGFrancis.com, SBALoanStore.com, on LinkedIn, or at 888-666-9722

Why "Soaking the Rich" Doesn't Work

It is always nice to know that your thoughts have validity, and my recent comments about Presidents Ronald Reagan and John F. Kennedy have been validated by none other than Arthur Laffer in an article in the Wall Street Journal. In his article Mr. Laffer focuses primarily on President Kennedy and compares the President’s efforts to spur the economy in the 1960s to recent and historical efforts to “soak the rich.” Mr. Laffer and I both believe that raising taxes on the wealthiest 1% of the taxpayers will result in a decrease in revenues, and this is borne out by data from the IRS itself. Sadly, we are now facing not only the very real possibility that income taxes will be increased on top earners, but the fact that everyone will soon be hit with more taxes of all types. But more on that in a later post.

In the WSJ article Mr. Laffer points out that during the period 1978-2007, a time of what he calls “ubiquitous tax cuts,” the actual revenue from the top 1% of earners actually rose from 1% to 3.3% of GDP while that of the bottom 95% dropped from 5.4% to 3.2% of GDP. In other words, lowering taxes actually raised income tax receipts from the richest Americans. While this would seem counter-intuitive, it is actually very reasonable. As Mr. Laffer explains, the wealthy are much better able to avoid paying taxes through shelters, timing, composition, and other perfectly legal methods - some of which are still being used today. (Mr. Laffer uses Massachusetts Senator John Kerry’s recent yacht purchase in tax-favorable Rhode Island rather than is own tax-heavy home state as an example.) The less wealthy, on the other hand, are unable to afford the tax experts and accountants who would be able to advise them how to protect their income - as well as having fewer options of how they make their money in the first place.

To illustrate the opposing effect of tax increases Mr. Laffer compares how the top 1% decreased their tax bite from 1.9% of GDP to 1.5% of GDP during the tax increases of 1968-1981. He then presents data from the Great Depression, a period only slightly worse than our current one. From 1930 to 1940 Presidents Herbert Hoover and Franklin D. Roosevelt raised the top personal income tax rates from 24% to a whopping 83% - more than triple. And what was the result of these “soak the rich” moves? Tax receipts from the top 1% stayed flat (1% of GDP in 1940 compared to 1.1% of GDP in 1928) and the overall GDP dropped, sending the country into a double-dip depression.

What is the lesson from this? One we should all hope that some members of the government will learn - raising taxes does not raise revenue. Rather it tends to decrease revenue as those who would pay the most find ways to protect their money. In addition it inhibits investment into the economy, which will only prolong the current financial morass. As Mr. Laffer points out, “Higher tax rates on the rich create the very poverty and unemployment that is used to justify their presence. It is a vicious cycle that well-trained economists should know to avoid.”

Next time I will talk about the other tax increases the rest of us are facing.

Craig G. Francis is the owner of Francis Financial and The SBA Loan Store. He has been a top producer of SBA Loans since 1981, and has worked with Dun & Bradstreet and Bank of Commerce. Craig Francis has the expertise to steer clients through the often confusing rules and regulations associated with SBA Loans, having helped over 2,000 businesses acquire over a billion dollars in loans. He can be contacted through CraigGFrancis.com, SBALoanStore.com, on LinkedIn, or at 888-666-9722