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Wednesday, February 25, 2009

Will Atlas Shrug?

Unlike during World War II, it seems that the amount of spending by the Federal Government is not going to be a one-off deal, i.e., stimulus. Given the speech last night, it seems that government spending will be comprised of just about everything the government is spending now (there might be some minimal savings from cutting back on the military and research on parrot feces) plus a whole lot more.

I have long argued that the politicos in Washington could bicker all day long about how to spend actual dollars, which they do very well, as long as the feds didn't increase government spending much above 20-22% of GDP. Given what we heard last night, and the response by the market, perhaps we are heading for 30-35% of GDP?

This, I fear, is not good for future growth.

I quiz my students about the average profit margin for U.S. corporations. The majority of students suggest that profit margins are 40% or more on average. The reality is much more sobering - average corporate pre-tax profit margins are approximately 9-10% (see table 761 of the Statistical Abstract), with post-tax profit margins in the area of 6% on average . In other words, the entrepreneur, logistician, hard working capitalist is willing to provide other hard working capitalists and hard working workers (I love the "hard working" tag) all the goodies we see around us for an average of ten cents on the dollar.

If you had never seen the world as it is today and someone came up to you with a hypothetical: the world will be full of an amazing array of goods and services, ranging from Antibiotics to Zillow.com, and all people have to do is offer enterprising individuals ten cents on the dollar, I think most people would scoff at the idea.

And yet, look around us.

On the flip side, I think the entrepreneur, logistician, hard-working capitalist is willing to do all these great things if government strikes a bargain with them - don't take more than 20% of our overall production, or 20% of our overall profits (on average), and we will share the wonderful products we have conjured up out of thin air. I have thought in the past that the politicians tacitly understood this bargain and, while they argue over how to carve up a government pie that grows absolutely they would keep the relative size of the government pie fairly constant.

Those days might be gone - for a while or forever.

One very important question is whether the government changing the rules in the middle of the game - that is, increasing the burden to 30-35% of gross domestic product - causes Atlas to shrug. There is an implicit assumption by the administration and an explicit assumption by many left-of-center types that Atlas will not shrug, that the entrepreneurs and "doers" will continue to "do" even as their burden gets heavier.

Perhaps Atlas will not shrug and the statists will "get away" with their program. However, if Atlas shrugs and those households who "make more than $250,000 a year" are not able or not willing to fund the grand plan, what then? Walmart admits their mistake by closing misplaced stores but government rarely admits to a mistake by repealing bad policies.

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