The A,B,C's of Economic Recovery Through Job Creation
Thursday, December 3, 2009 at 10:44PM President Obama held a jobs summit today and while I disagree with much of his policies he did get one thing right. Obama said "true economic recovery is only going to come from the private sector." As true as this statement might be it is hard to stomach when uttered by an administration that wants to pile additional taxes, regulation and compliance costs on the back of that private sector recovery engine. But politics aside there is a lesson here that is so simple.
To understand job creation as a source for economic recovery you need to think like a small business owner, not Bill Gates. Bill has to go overseas every chance he gets. And you can't blame him. He needs cheap labor because Google is giving the stuff away for free. And you won't pay $15 for a pack of underwear at Wal-Mart so don't gripe when they make the stuff in China. That's life, get over it.
But think about the kid down the street that just came up with a killer iPhone app. He WILL hire American. In spite of all the stories about the four hour work weeks it just isn't feasible for a small business to outsource work overseas. They need to see each other, collaborate in person and play ping pong once in a while. So if you're looking to create American jobs you should look to small companies not big ones.
Now. Ask yourself the following questions (answers provided)
"Who hires employees in small companies?" The owner.
"What does the owner need to hire new employees?" Money.
"Where do owners get money?" Profits.
"What can the government do to increase profits?" Cut taxes and decrease compliance costs.
Most small business owners want to hire more people. They understand that putting additional people into productive roles increases profits. But you are not going to convince a small business owner to roll the dice and hire someone without the cash needed to cover traning costs, draws for beginner sales people, additional overhead for insurance, desk space, office supplies, etc.
But if you tell a business owner making $250,000 that his tax rate just went down 5% that's real money that can be used to invest back in the business. Instead this administration is saying taxes are going to go up, we're going to take more of your money, AND we need you to go out and hire more people to help out the economy.
Someone needs to pull Obama aside and explain it to him this way. Imagine Malia and Sasha have a lemonade stand. Business is good and at the end of their first day they have $10 in profits on $20 in sales. Malia decides to recruit a friend and pays that person $6 to man a second stand the next day. Now the girls have $14 in day 2 profits ($10 per stand less the $6 labor cost). But then daddy steps in and demands $7 of their profits so he can give it to the thirsty White House tourists who can't afford lemonade. He gives the girls plenty of assurance that they'll get the $7 back because these people will use their "stimulus" to buy lemonade. But even if everyone does buy lemonade the extra $7 in revenue only yields $3.50 in profit. But that's not really the point.
Picture yourself in Sasha and Melia's shoes at the end of day two. Business is booming. There are dreams of a third lemonade stand and possibly a franchise. But then comes the daddy tax. If you are in their shoes do you spend $6 of your remaining $7 "after tax" dollars to open a third stand? I can tell you the answer is "no."
And there's the rub for Obama. You must give money back to business owners FIRST in the form of reduced taxes now if you want them to invest in the economy today. Tax credits they can cash in next April won't do it. Promises of forthcoming economic stimulus won't do it. Giving them the opportunity to go deeper into debt with cheap bank loans won't do it.
Ten year olds on a neighborhood street corner understand this implicitly, but today 130 of the country's most powerful politicians, business leaders and economists met and didn't get it.
Reader Comments (5)
Joey: I have been sharing the lemonade story with as many as will share their ear. I am equally passionate about the need to privatize health insurance. by relieving the business owner from ANY responsibility towards it he/she will have more profit to spend on labor. By allowing each American to purchase what they need and can afford, we are not "stuck" in a job we despise because of healthcare. As a business owner, I am empowered by the control I have in my catastrophic policy and the cash negotiation power of my HSA.
So, Unite we Lemonade Stand!
Michelle
I like your blog and will be following it. I think the jobs summit Obama held was more of a get together where the government is trying to find out about the best possible solutions to bring jobs to main streets America.
I agree with some of your suggestions, but I also know that more that 80% of defined small businesses do not make more than $250.000/year and the " Lemonade story " isn't practical at this moment. You and I know too well that " Business isn't good " at this moment.
During Clinton's years, "Business was good" and we paid taxes. All Obama is trying to do is bring the current "tax breaks" to Clinton's years standard.
I was a victim of "downsizing" 3 years ago and my job went to Canada. You will not believe your eyes when you read the statistics of jobs which left the U.S for Canada and the #1 reason those companies left is " Health Insurance Cost".
Thank you,
Erick - Dallas CPA
Thanks for the comment Erick. I really look forward to your feedback and insight in the future. Best,
Joey
Hello Joey.
Looks like Obama and the Congress in part may be reading some of our suggestions. What do you think of some of these ideas floating out there now? The best one so far for me is to reduce tax to companies who hire or increase employee salaries here in America. I like globalism, but I think major corporations have abused it.
I still think health care will play a major role in re shaping our economy.
really well said @ERIK
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