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FRONT PAGE How Business Works…And Why Obama Doesn’t

The July economic report showing continued slow growth and high unemployment, combined with recent utterances from the President such as “The private sector is doing fine,” show that President Obama doesn’t quite grasp how the economy works.  Despite all of his time in academia and politics, he has never been in the private sector, and it seems to be a foreign land to him.  He doesn’t get why his plans aren’t working, and many of his supporters don’t, either, because they don’t understand the basics of businesses and how they work.

I’m here to help.  A little background:  My father and grandfather were both small businessmen.  I worked for my father’s business during the summers when I was in college to help get me through college.  I currently work for a bigger corporation, but I will be getting laid off in a few months, after which I am going to join a new small business in which I will have a greater stake in the business’s success.  I do not have any degrees in business — I am an engineer by trade — but I understand the basics of business and why liberal policy is killing it.  I want to explain it as simply as I can, in the hopes of educating others who live under various misconceptions about how our capitalist system works.  The basic motto here is, “I figured this out on my own.  You can, too.”

Let’s just start right off with a simple multiple-choice question:

You are a woodworker who decides to start a furniture business. You take out a loan from the bank, purchase some retail space, hire a couple of employees, and start your business. You are successful. Twenty years later, you have paid off the original loan with interest, increased your staff to 20, opened a branch across town, and have thousands of satisfied customers.

Economically, you came out ahead in this scenario. Who lost?

a) your customers

b) your suppliers

c) your employees

d) the bank

e) the government

f) nobody

The answer, of course, is “f”. Your customers got a fair value for their money in their judgment, or else they would not have purchased your furniture. Same goes in reverse for your purchase of materials from your suppliers. You employed 20 people who may not have otherwise been employed, so they came out ahead. The bank got back more money than they lent, so they came out ahead. Even the government came out ahead, assuming that everyone involved in the process paid the various taxes involved.

So how does this happen? It’s quite simple, really: you and your employees take items of a certain value (such as wood, paint, etc.), and use your time and expertise to combine them into items which your customers determined have a value greater than the sums of their parts.  In other words, you and your employees are engaging in wealth creation.

This disproves the greatest liberal fallacy about the economy:  The economy is not a zero-sum game.  Business owners and investors do not get rich at theexpense of their employees and customers; they share the wealth they create with the help of their employees.  The only sector of our economy that doesn’t create wealth of its own is the government.  It can transfer wealth around, but it doesn’t grow it.  This is why we want the government to be as small as it can reasonably be: the more people who are participating in the wealth-creating sector of our economy, the more growth there will be.  Obviously, we need roads and bridges (to help move the wealth around) and cops and firefighters and a military (to protect that wealth from being destroyed), but the pencil-pushers and bureaucrats that our government is loaded with do nothing to make our economy work and grow.

How Business Works 

Here’s an even simpler question than the first one:  What is the primary purpose of a business?

The answer:  To make a profit for its owner(s).

Many liberals believe that “making a profit“ should maybe be in the top ten behind “employing people”, “making sure they have health care”, “improving their communities”, et cetera, but in the real world, a business must make a profit in order to survive.  If a business does not make a profit (especially a small business), it dies, in which case it doesn’t give anybody a job or health care.

So how is profit made?  Well, that’s simple, too:  The amount of wealth a business creates and sells must be greater than the cost of the materials and labor necessary to make it.  Both ends of this have many factors that blend in to the overall equation.  The biggest factor on the “wealth created” side is whether or not there is a demand for the product being created and what the market judges that value to be relative to what it costs to make it.  If the market judges a product to be of little worth, then there is little profit (and thus little point) in making it.  You also have to be able to create and sell enough of it to meet the costs of making it.  In most cases, the more of something is made, the less it costs to make it, so if there is a high demand, that demand can be satisfied more cost-effectively, and thus more profitably.

On the “cost” side, when it comes to raw materials, you have to find the least expensive materials you can to make the quality of product you want.  There are also “overhead” expenses:  renting or buying a space to run the business, lights, heat, etc.  The most complicated part, however, is labor.  Not all employees are of equal value, and their value varies over time.  Some are going to be more useful  — and thus more valuable — than others depending on their skills and experience.  Some jobs require a level of on-the-job training, which means taking an initial loss on the employee when they are hired in the hopes that they will be more profitable later.  There also has to be work for those employees to do – if there isn’t enough demand for the product, an idle employee is costly.

Business decisions are generally made based on whatever maximizes profits.  If a business is losing money and some of its employees cost more to employ than they add to the profitability, then those employees get cut.  On the other hand, if adding more employees or buying more operating space (either a bigger site or multiple locations) can help create more products and/or serve more customers, then a business will grow. Growth is the goal of almost all business, and growth is good.  Growth means more people are employed, and more wealth is being created, which means more people are making more money.

Reminder:  Government doesn’t work this way.  The primary reason that it doesn’t is that it doesn’t require making a profit to survive.  It simply tends to grow without regard to costs.

So how does government policy affect businesses?  Two primary ways:

  • Taxes.  Businesses must not only make a profit, but they have to make enough profit for anyone depending on that profit to survive.  This is especially true of small business, where those profits are the owner’s pay.  When government raises taxes, it raises the amount of profit required to meet that threshold.  This forces prices for goods and services up, and in some cases, it drives customers to competitors or to drop optional goods or services altogether.  If raising prices doesn’t work, then employees may have to take pay cuts, but this can cause some of them to leave for other jobs.  If neither of these methods solves the problem, then the business will not be profitable enough, and it will cease to exist.
  • Regulations.  Regulations force costs up.  For example, mandating that employers provide health care for their employees while doing nothing that actually makes the cost of health care go down (which can be summed up with the term “Obamacare”) makes it more expensive to employ people.  In many cases, it takes employees who are more productive than it costs to employ them and make the exact opposite true.  And as noted above, if an employee costs more than they produce, then they usually get cut loose.  Regulations also play a very large role in hindering the growth or even the initiation of a business.  Arcane building codes, costly permits, complicated tax laws that require professionals to help solve, compliance training and all sorts of other things pile on top of each other to cut into people’s productivity or add costs to businesses which can either make them unprofitable or make attempting to grow not worth the inherent risks.

In both cases, these factors have a disproportionate impact on small business as opposed to big business.  Big businesses can generally cut costs more easily and can often handle losses in the short-term, whereas a small business must constantly be profitable.  When people complain about big business running everything and demand more regulation, they make the problem worse, because today’s small businesses are tomorrow’s competitors for those big businesses, and if that small business cannot survive and grow, then the big business can do whatever it wants without the risk of losing business.  Competition is what keeps a big business in line, but that competition must come from somewhere.

It is also worth noting here that most businesses do not wait for things to happen, but will react to what they see on the horizon.  Many businesses see tax increases on the way (both via Obamacare and the expiration of the Bush tax cuts), and they are preparing for that now to soften the blow and avoid big losses later.  Stability is important, while uncertainty is bad.  So even though taxes haven’t gone up yet, the mere threat of it is an obstacle to growth.

That’s the short version of how business works.  Now let’s take a quick peek at why Obama’s economic policies aren’t working, because all of them are pretty quickly and easily deduced from the above.

Why Obama Doesn’t Work 

We’ve already discussed above the general impacts of taxes and regulations.  Obama wants to raise taxes on the “rich”, but two-thirds of the so-called “rich” are actually small business owners who file as individuals.  Pile Obamacare on top of that, and you’ve got a piano on the chest of small businesses attempting to make the necessary profit to survive, let alone grow.  Those in and of themselves are pretty obvious, but let’s take a look at some more specific areas that the Obama regime has invested resources and see why they don’t work:

  • General Motors.  GM has two major issues aside from the general ones.  The first is that their labor contracts demand that many former workers are paid at similar rates to people actually working.  Some of these are people who were laid off, and some of these are retirees.  Many of them are getting full health benefits as well.  From the employer perspective, it’s like having a whole bunch of extra employees on your payroll that create no wealth and that you can’t fire.  This forces costs way up, and foreign competitors can make less expensive products of similar quality, even considering the costs of exporting them here.  This in turn reduces the demand for GM’s products, so it’s a double whammy.  It also forces GM to build their cars outside the U.S., which is yet another problem for American workers.  The second problem is that various environmental regulations are forcing American auto companies to produce cars that there is no demand for.  People don’t want Chevy Volts, for instance, but they exist.  The consumer doesn’t judge the Volt to be of much value, so the people building them aren’t creating enough wealth to cover the costs of making it.  Removing these regulations and allowing auto companies to build the cars people actually want does wonders to increase profitability.
  • Solyndra and other “Green Jobs”.  This is another case where there is simply no demand for the product being created, because there are plenty of inexpensive alternatives already there, which means the company produces nothing of value.  The theory is that people would trade inexpensive energy that is supposedly damaging to the environment for more expensive energy that won’t damage the planet as much, but that theory is catastrophically wrong.  Most people prefer cheaper energy, and they don’t buy into the notion that using that cheaper energy is going to destroy us.  Obama and the environmental advocates believe that if they can throw enough propaganda at us about “global warming” or “climate change” or the like that they can artificially create a market for these products, but they can’t, chiefly because even if people believe the “science” behind it, they don’t see it as catastrophic enough to give up the cheaper energy.  (This is all on top of the fact that Solyndra couldn’t even produce anything close to what they were hoping to produce as far as energy generation went.  Even if Solyndra could have produced what they promised, it would have failed.)
  • Coal, gas and oil industries.  Here is a case where Obama is doing the exact opposite:  you have inexpensive and abundant sources of energy for which there is a very large market, but he regulates the industries to the degree where it makes it prohibitively expensive to hire people and start mining or drilling.  He then compounds the problem by limiting the amount of wealth that can be created in these industries by limiting where and how much energy can be produced.  Again, this is an attempt to artificially create a market for “green energy”, but it’s not working, and it’s not going to work anytime soon.  Smaller operations in these sectors cannot produce enough wealth to offset the cost of producing it, and it is costing America jobs and creating higher overhead costs for all other businesses.

What America needs right now is a leader who understands these basic principles of how businesses work and understands the concept of wealth creation.  That leader must understand that government does not create wealth-creating jobs that grow our economy. That leader is not Barack Obama.

Crosspost

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