A Tale of Two Headlines

By Jim Ramsay

Against the backdrop of Kentucky facing a two year budget shortfall estimated to be $1 billion, two headlines this week caught my attention.

They tell us as much about the economy and our government. The WKYT articles were headlined, “Kentucky unemployment rate hit 26-year high in 2009” and “Tax package clears Ky. House; Senate fate unknown.” The first article simply related the facts. The 2008 annual unemployment rate was 5.8 as compared to the 2009 rate of 9.3. It mentioned that the record prior unemployment rate was from 1983 which was 11.3. This gives us the backdrop for the second article.

The second article discusses HB 530, a two year $300 million tax measure “to help fill a gaping shortfall in the next state budget.” The bill was voted along party lines with two Democrats opposing the tax changes and one Republican supporting it. The Republicans referred to the measure as a tax increase, but Democrat Harry Moberly from Richmond insisted that it was not a tax increase. The bill does in fact delay a business loss write off schedule that allowed states to take a loss over a period of several years. The net effect of which is that in these difficult economic times, businesses will pay more taxes over the next two years but they will be able to resume the claim of the loss thereafter. The practical effect is that rather then being able to hire or buy new equipment; hundreds of millions of dollars will go to government spending. One could argue that spending is spending. The government will spend those same dollars; however, the question is how will that money be spent?

When a worker or an employer in a small business earns a dollar, they can then determine to spend it as they see fit. If that individual or business decides to give that dollar to a charity or buy a good, the entire dollar goes to that purpose.

When a dollar is spent by the government, it is only spent after being filtered through the inefficient government system. The government first had to go to the person who earned it, thereby creating collection costs. Jails and law enforcement must be maintained to enforce those collection efforts. Whether paid directly or indirectly, money and effort is used to comply with the tax code. There is then overhead in government workers receiving the payments, processing checks, etc. Buildings need to be built to house those government workers and utilities must be paid to allow them to operate. Leaders must be elected to then decide how that money will be spent. Once those decisions are made, the money is transferred to some sort of administering agency who then decide their budgets internally and then must hire workers to interact with the public to spend the money or administer it to the population. Only after this long trail through which each stage takes its toll, is the dollar spent. How much the government consumes in overhead varies widely by agency and program, but it is intuitively obvious that these steps consume rather then add value, so the money coming out of the program is considerably less then the dollar that went into the system.

Back in the second article, Rep. Moberly is quoted as saying, "We have offered this as a solution ... to keep us from facing that catastrophic budget cut that would set this state back for many years…." The article also reads, “the alternative would be painful cuts to education and human services.” The article concludes with the statement, “…House Democratic leaders have been trying to soften those reductions.” This suggests the government views what it does as essential to the progress of the state. The premise seems to be that their spending levels must be maintained at all cost: reducing spending is a potential catastrophe. In government, the few set spending levels and decide who will receive their largess. If they spend money poorly, they simply demand more in the form of taxes, bonds, or federal grants.

The question then remains, how does business spend money? The largest expenditure in a business is often labor costs. When a dollar paid to a worker, there is an exchange of value for value. The worker gives his or her time to make a tire or build a vehicle. The market (aka you and me) by our choices determine the value of that tire or vehicle. Those prices combined with the costs of materials and the cost of capital (profit for the investors who loaned the business the money again, often us, the stock holders) largely set the value of that worker’s labor. The market demands efficiency. Competition continually improves businesses through invention, process improvement, and automation. If a business fails to do so, competitors will and the market will purchase those tires or vehicles freely from that competitor. When WE stop buying from the original business, they begin to starve for cash. WE will cause “gaping shortfalls” for them. WE will cause the business to make “painful cuts” to their staffing levels, and if they fail to improve after that, they will cease to exist and others will purchase their assets. WE the consumer, will destroy businesses that do not produce. In the end, we find that the many set spending levels by our everyday purchases. This may sound harsh, but this discipline brought our society out of the mud huts of our ancestors.

How do these two headlines interact? This tax plan will have direct effects on profitability, which will either be passed on to the consumers in rising prices, or be added to overhead which hampers the business’ ability to hire new people. With unemployment at the levels they are, is this the time to take more from the most efficient job creators and spenders in society and transfer it to be spent inefficiently through the government filter producing dramatically less then $300 million dollars worth of value?

Can you see the differences in the way the market deals with revenue fluctuation and the way government deals with them? Business adapts or folds. Government demands more. The market is about all of society having a say in the distribution of wealth. The government is about the privileged few deciding the distribution of wealth. Rather then viewing the budget deficit as the government overspending or shortsightedly expecting a fluctuating revenue stream to be stable, they view it only as a shortfall in revenue. The profligate spending and poor planning are at the heart of the issue, yet all they seem to see is their manna from heaven upon which they rely is mysteriously absent. We see it as our hard earned money funneled to the wasteful wishes of the few.