Mar 4, 2013

Sequestration Sequel

Why are we talking about the sequel when we haven’t even had sequestration yet? The answer is – it’s going to happen. The cuts will begin a trend towards reducing the growth of spending in Washington. I realize most readers are cynical and don’t believe this will happen, but we’re finally going to get real spending cuts that are done from a top down approach – which in many cases is how the private sector works. In the private sector, a decision is made about how much of the expense line needs to be cut and managers are forced to make the tough decisions. This is what our small and independent business owners do every day and every year. We believe that the scare tactics regarding the financial decline and lack of government service have been way overplayed. This will then lead to the next debate about what additional cuts need to be made. It appears by all accounts that the sequester approved by the Senate, House, and signed by President Obama has everyone running away from it prior to Friday. We believe once the cuts go into effect the White House, Senate, and House will begin to adopt the real budget cuts and revenue increases in a $4 trillion reduction over the course of 10 years, which will be the meaningful plan that the market and our small business constituents have been looking for. The approved sequestration will not reduce total annual government spending from the year prior; it just reduces the growth in government spending. The sequestration is estimated to reduce government spending $1.2 trillion over 10 years (from $40-50 trillion of total spending). $85 billion of cuts will come out of a $3.5 trillion budget spend. These cuts will begin on Friday and last through the end of September, although many of these cuts will continue to occur in future years. It is estimated only half will hit during the current fiscal year. Whether it is $85 billion or $42.5 billion, we are talking about a 1-2% cut in spending out of $3.5 trillion. This is what is occupying the news. The media and some government officials are trying to scare American citizens into believing these cuts are Draconian. They simply are not. 1-2% spending reduction is a drop in the bucket over $3.5 trillion dollar total budget spend. Our small and independent business owners who have built their businesses up over the course of 3, 5 or 10 years understand that a long term approach and a long term plan is the only way businesses and economies are built to last. Our small and independent business owners want to see these cuts take place, they want to see a reversal in trend in Washington, and when they feel this trend has begun to reverse itself, they will begin to hire, invest in plant equipment and software and hardware. But what are we going to do after the sequel? The sequestration is a drop in the bucket. Bureaucrats will eventually do the right thing and feather in these cuts. Until then, the economy will continue to slow and report poor results in the near term. This is not because the government has reduced spending by 1-2% in a year, but because the government is crowding out the private sector and small business by becoming a bigger part of the economy each and every year. Small business owners see this and see that the only thing government is willing to do is tax their wealth and spend more money. If you were a small independent business owner with these facts would you: · Hire more staff? · Buy more property and equipment? · Invest in a new business? · Be optimistic about the future? No, you will stand by, listen to the media distort the facts on government spending, hoping that they are right and the facts are wrong. You will do the opposite of what Washington is doing. You won’t invest while they continue to spend. Why doesn’t any political body want to take credit or associate itself with a paltry small reduction in spending? The sequester will not reduce total annual government spending. It won’t reduce the deficit much. It won’t balance the budget. What it will do is reduce a bloated defense budget. It will reduce a bloated federal bureaucracy. It will reduce GDP and create unemployment in the short term. Why might this be good for small business? Why would anything that reduces economic activity in the short term be good for the economy? The answer lies in asset allocation. The answer lies in productive investment. The answer lies in Washington spending tax payer resources (wealth) by borrowing money and spending it on projects, bureaucracy and expenditures that do not create a return or benefit for taxpayers. This form of expenditure is a drain on the nation’s wealth and reduces the long and intermediate ability of the free market economy. To generate a return by creating jobs, wealth, cash flow. Consumption for consumption’s sake is a drain on U.S. resources. It wastes valuable capital and although it may prop up the economy in the short term, its wealth destruction at its finest over any lengthy period. If we want to prop up the economy why don’t we hire one million teachers and borrow the money to do it, or maybe hire one million firefighters and borrow the money to do it. Who can argue with the wholesome act of more teachers and firefighters? Of course more is better than the same or less. Wrong, Wrong, Wrong! Unproductive expenditures destroy wealth, jobs and incentives for the private sector to flourish. A balance approach to deficit reduction is near, with more spending cuts than revenue increases. Small and independent business owners are holding their breath and wallets, hoping for this trend reversal. We are hoping along with them for the sequel to sequestration.