7 May

Big Business + Government: Why Wall Street records don’t mean happy days are here again…

                                       

On Friday, the stock market, driven by record profits and a better than expected jobs report, – not to be confused with a good one – closed at its all time record high. Closing at 1,614, the S&P 500 closed up 148% from the low it reached in 2009. Not bad given that the economy is up a paltry 5.5% over that same period. Already the markets are up over 10% since the beginning of the year. There are a number of reasons for this.

One is the fact that the 500 companies represented the index have been reporting strong revenue and earnings growth, particularly among technology companies like Apple, Google and Facebook. Another factor is that the Fed’s money pump. The Federal Reserve has been pumping $85 billion a month into the economy since the beginning of the year, doubling the $40 billion a month it had been pumping in since 2010. By the Fed driving bond rates to close to zero, the stock market is the natural beneficiary of the dearth of competitive returns. Where else are investors going to put their money?

Then there is the economy. Last week the government announced that the unemployment rate had dropped 7.5% in March, down from a high of 10% in October of 2009. Those jobs numbers sound great, until you look a little closer. The primary reason the rate is down 25% in 4 years is not because of job growth, but rather because so many people have grown discouraged that they have stopped looking for a job all together. Basically, since Barack Obama became president, 9.5 million Americans have simply left the workforce and as such are simply no longer counted. Had those people still been looking for a job – U-5, the rate would be 8.9%, which might not be such good news for stocks.

The reality is that while the stock market may be going gangbusters, the country as a whole is a different story. The simple reason is the stock markets, by definition, reflect the fortunes of big businesses. Currently, for a company to be listed in the S&P 500 it must have a market capitalization of at least $4 billion. That leaves out 99.9 percent of all companies in the United States, including the jobs engine: Small businesses. Small businesses create 64% of all new jobs, employ tens of millions of people and are the places from which large successful businesses emerge.

Basically Wall Street is heading for the stars while Main Street limps along. This is no accident. Two pieces of legislation clearly demonstrate the problem. The first is Obamacare. In 2009 it was passed despite the fact that a majority of Americans never favored it. How? Collaboration between the Democrat party and big business advocacy. Companies as diverse as General Motors, Wal-Mart and Pfizer pushed for the passage of the sainted Obamacare because they understood that the legislation would create a significant benefits for them. In many cases big companies like Wal-Mart understood that they could unload some of their costs on the public, or more importantly, they could saddle small business competitors with healthcare costs they could not afford. As competition dried up, up would go their revenue and profits…

Just as expected, Obamacare has resulted in small businesses hiring fewer workers or hiring more employees on a part time basis to keep below Obamacare’s 50 employee threshold. The most recent jobs report shows this shift to part time workers. The April report showed that the average workweek per employee in the US dropped by .2 hours. That is the equivalent of firing over 700,000 people. That larger number of workers working fewer hours means that small businesses are saddled with greater accounting, training and management costs while simply seeking to maintain their current productivity levels.

The second piece of legislation that showcases the big business / government cabal is the Internet Sales Tax bill, euphemistically called “The Marketplace Fairness Act”. The legislation would force online retailers to collect sales taxes for every taxing authority in the country whether they have a presence there or not. Simply put, state and local governments cannot live within their means and seek to squeeze every dollar they can from largely defenseless small businesses. Big businesses meanwhile seek to kneecap potential competitors by foisting upon them regulatory compliance costs they simply can’t afford. A small business doing $1.5 million a year selling backpacks or tee shirts will typically not be able to keep up with the 9600 different taxing authorities that exist around the country. Although the legislation requires each state provide one clearinghouse for tax collection within its domain, it will still leave small businesses open to legal jeopardy from each of the 9600 local taxing authorities.

Here’s just one example. Have you ever looked at your grocery store receipt and noticed some items have a T beside them while others don’t? The ones with the T next to them are taxable and the others are exempt. Some jurisdictions tax staples like milk and eggs while others don’t – and each is constantly shifting the rules. Some communities exempt some forms of chocolate while exempting others. How is a small business selling gift cheese from Wisconsin supposed to understand if it’s fine cheeses count as untaxed staples or taxed luxuries in 9600 different jurisdictions with 9600 different sets of rules? If complying with that law sounds daunting, it is, and that is exactly why many big businesses, including Amazon.com are supporting it: Less competition = more profits.

At the end of the day this stock market bonanza should not be seen as a sign of a robust economic revival. Unfortunately it’s more like a pig wearing lipstick. It’s the result of governments who refuse to live within their means conspiring with big businesses who seek to eliminate competition. The hapless saps caught in the middle are the American worker, who has fewer employment opportunities, and the nascent entrepreneur who finds that maintaining or starting a business is simply becoming unsustainable or impossible. We expect that from government, but it’s a sad day in America when two shining beacons of free market success like Wal-Mart and Amazon embrace the antithesis of free markets – regulation – in order to undermine the opportunity for other entrepreneurs to enjoy that same success they achieved.

About Vince

The product of a military family, growing up in Naples, Italy and Guantanamo Bay, Cuba, and being stationed in Germany for two years while in the Army, Vince spent half of his first quarter century seeing the US from outside of its own borders. That perspective, along with a French wife and two decades as a struggling entrepreneur have only fueled an appreciation for freedom and the fundamental greatness of the gifts our forefathers left us.
This entry was posted in Uncategorized and tagged , , , , . Bookmark the permalink. Tuesday, May 7th, 2013 at 9:46 am
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7 Responses to Big Business + Government: Why Wall Street records don’t mean happy days are here again…

  1. Nan G says: 1

    Well done, Vince!
    I don’t think I’ve read anyone else’s explanation of what’s going on that is better.
    We were just remarking on how glad we are that we retired when we did, three months ago.
    Hubby’s business did tons of business across state lines and in different counties and cities all over the place.
    How daunting to be required to get each tax situation right.
    And isn’t there a substantial penalty for a small business if you get one tax transaction wrong?

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  2. johngalt says: 2

    It’s about time someone posted an article that refutes the nearly daily exclamations of ‘thisone’ and ‘john’, who exalt in the markets’ record numbers along with the miniscule drops in unemployment under Obama. The explanations for those phenomena are quite simple, but still seem to be beyond the grasp of what those two can understand.

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  3. Scott in Oklahoma says: 3

    About those job numbers… Consider this; many employers are cutting back on the hours of their full-time employees, getting them under the 30 hour limit, then in order to maintain production hiring part time employees. It’s a win-win for the government; the full time employees with the cut back hours are still listed as employed, and the newly hired part-timers are no longer listed as un-employed.

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  4. Nan G says: 4

    @Scott in Oklahoma: Great point, Scott.
    We as a country will have to post up to +700,000 in job creation to offset each .2 hours of work that’s reduced.
    And in April 2013 we lost an average of .2 hours of work per week nationally!
    So, that sort of good jobs’ report doesn’t look so good now, does it?

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  5. john says: 5

    Yeah the Dow has closed over 15000 capitalists are happy, workers not so much. John Galt sounds like a closeted socialist. When labor costs go down profits go up; and American corporations are taking in record profits. The free market is working well, for capitalists, for socialists….. well not so good. Shareholder value has increased very well under Obama, wages meh. Capitalists by definition are interested in the preservation and accumulation of capital. not “jobs”

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  6. Nan G says: 6

    @john: under Obama, wages meh.

    Must have been an unintended consequence of Obama applying the Bacon-Davis standard to EVERY job where even one penny came from the federal government.
    Because, under that rule a window caulker in Nevada was SUPPOSED to make a MINIMUM of $47/hour and a 4 hour minimum.
    That standard led to folks using their home energy saving rebates to ”do-it-themselves.”
    Private enterprise businesses which hired window workers ended up laying them off!

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  7. johngalt says: 7

    @john:

    John Galt sounds like a closeted socialist.

    Now that is funny. But alas, I am no more a socialist than I am part of the capitalist crowd you are talking about.

    What I support is the free market, which is something that we most certainly do not have. Nor do we have a true capitalist economy, but more of a bastardized version mixed with socialist and crony capitalist ideals, sometimes referred to as welfare capitalism.

    The laissez-faire capitalists cannot thrive in this economy, simply because the idea behind their economic principles, that of a true free-market, does not exist. In order to thrive in this kind of economy, one must be able to use the politics of pull to gain advantage, rather than be able to fall back on their product alone to gain market shares.

    It is this ‘politics of pull’ that is leading to such high stock market numbers, even as the economy itself is muddling along and in some eyes, barely surviving.

    ReplyReply

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