Oceans: Power and Prosperity

Though the United State faces many economic challenges, one thing that is unlikely to change is that America has a very advantageous geographical position in regard to world trade. It faces the North Atlantic and Europe to the east. It faces the rapidly growing Pacific Rim area to the West. For a perspective on how important this could be, let's look back in history.

Looking at maps of Western Civilization at several of its high points, one is struck by a curious fact: they seem to be centered around oceans rather than land masses. Other civilizations have grown up around great rivers: Egypt, Mesopotamia, India and China. Western civilization has grown around seas: the Aegean, the Mediterranean, the North Sea, the Baltic and the Atlantic.

One usually thinks of Greece as a land-based entity, but at the height of its power in the days of Athens and Sparta, Greek settlements spread out over the shores of Asian Minor and the shores of the northern Aegean. The Greek world was thus to a large degree centered around the Aegean Sea. (The Greeks also traded far and wide across the Mediterranean.)

Similarly, though we usually think of the Roman Empire as a land-based entity, a quick look at a map reveals a curious fact: It completely encircled the Mediterranean Sea. Indeed, until Julius Caesar conquered Gaul, there really wasn't a whole lot of land mass to the empire in comparison to all that water. In those days, the civilized world was interconnected not only by the famous Roman roads, but also by sea, and held together by trade transported on ships.

To the north, there were trading areas centering around the North Sea and the Baltic Sea.

It was much faster and easier to travel and to transport freight by water than by land. Even today, though we can now carry freight by railroad, it is still easier by ship.

In addition, it appears that as the Western World grew, power flowed to the shores of ever larger bodies of water. The Greek world of the Aegean was superceded by the Roman world of the Mediterranean. Much later, when European powers facing the Atlantic Ocean (Spain, Portugal, England, the Netherlands, France) developed trade on that ocean, those countries became the preeminent world powers. The Western world became more and more built around the Atlantic, with America taking an ever larger role.

Eventually, the United States stretched from coast to coast, and it began to trade on the Pacific, too.

Since the Pacific is by far the largest ocean on earth, by this theory it could become (if it is not already) the richest and most powerful trading area in the world.

But of course the Atlantic is still a powerful trading area. And the United States faces both these oceans. It has the most powerful navy in the world to keep trade safe. The US trades by ocean to all points on earth.

Also America's east and west coasts are linked to all points of the continent by a well-developed railroad system.

By these facts alone, the power of the US economy is likely to remain formidable for quite some time yet. Of course it can decline, and of course other powers can rise. But it is not going away just yet.

Asian growth

It may be that the best long-term hope for the American economy will be the growth of China and India. Just as America was the world's engine of growth in the 1980s, these two, and other emerging economies, are projected to be engines of growth during the next couple of decades. They are already growing quickly.

Thus, even if America does not solve its own internal economic problems, it could continue to muddle through as a trading partner of economies that are actually doing well.

However, since the American economy is still about twice as big as the second largest economy in the world (China), it would still be a pretty tough job for any other combination of trading partners to pull us out of a serious ditch if we were to slide back into one. Thus it would be best if we could solve our own problems and resume a leadership role.

Long-term trends

1. Asian growth rates faster than Western growth rates
2. Decline of the dollar as the defacto international currency.
3. Population trends:
The United States is the only major developed country in the world that has a birth rate plus immigration rate sufficient to generate population growth. Western Europe and Japan are faced with a growing burden of elderly and retired people and with population declines down the road. In those countries the shrinking percentage of working-age people will have to support a growing percentage of retired people. Even China is facing that problem. For many years the Chinese government has imposed a limit of one child per family. Now it looks as though that policy is working to curb population growth. In fact the projection for China is population decline.
It is strange to think, after so many decades of hearing about the dangers of population growth, that the success of efforts to curb that growth could turn out to be a problem. The United States could turn out to be lucky that its population is growing, because that growth could turn out to be a solution to the problem of supporting so many Baby Boomers on Social Security. (Probably not a real solution, but perhaps an amelioration.) If we have more people entering the work force, that's more people paying into the Social Security pot. If we have enough growth, we might not go broke quite so fast. Theoretically enough growth, coupled with some reforms, could even result in our survival.
The people who are campaigning against letting more people into our country are really not doing us any favors. We need more willing and able workers. We need them not just to fund our Social Security checks. We need more dreamers of the American Dream, or simply more people with a practical conviction that they can do better here than elsewhere.
It may feel like there are too many people in the world, but that is more of an opinion than a fact. There are benefits to a growing population, not the least of which is that the alternative to growth is decline.
The supposed negative impact of immigration on the social welfare system may be exaggerated, especially in light of the potential positive impact on the Social Security equation. But in the areas in which the social welfare system is negatively impacted, the better solution would be to cut back on government-sponsored social warfare programs, not to cut immigration. If we made the availability of work (and freedom and opportunity) the main incentives for people to come here, we would obviously still get plenty of people. These things really already are the main incentives, but we could make it more so.
Our best days could still be ahead of us, not behind us.

Cross-Currents

There are a lot of things going on in the world economy these days. China on the rise, currency ups and downs, European bond crises, etc. It is tough to see a path forward through all this.

The US economy remains sluggish, and the recent decision by the Federal Reserve to do more "quantitative easing," has not met with universal approval amongst its trading partners. The Fed would probably appreciate some sensible help from Congress, but lacking that, it is probably doing the best it can.

Congress itself is in a bit of a bind. First of all, it is composed mainly of lawyers, an occupation that does not specifically prepare its members to deal with matters of economics, business or finance (except for the legal aspects of those fields).

Secondly, it is somewhat at the mercy of the various passions and fears of the general populace. E.g., we can't have too many foreign people coming into the country, because they would take jobs away from Americans.

A lot of things going on, a lot of mud to wade through...

Manifesto

Preamble: There is nothing wrong with wanting to help people, but it is a mistake to think that in order to do that we have to punish people who are doing well. It is a mistake on many levels, not the least of which is the fact that people who are doing well are a vital part of the economy, and it is better for all concerned that they not be punished for doing well. Among other things, they provide natural "stimulus" to the economy.

1. The fact that some people have more money than others is just a natural fact that flows from the natural differences amongst individuals. The statement in the Declaration of Independence that "all men are created equal" is just a statement of what happened at the beginning, not a statement of how everything should turn out in the end. We should all start out the same at the starting line, and in America we have tried hard to create that condition. What happens after that is up to the individual.

2. The fact that some people have more money than others does not make those who have money automatically bad. Similarly, the fact that there have been some bad people who acquired wealth illegally does not mean that ALL people who acquire wealth are not playing "by the rules." Furthermore, there are plenty of laws that can be enforced against those who do obtain wealth illegally or actually unfairly.

3. Americans, statistically, give more money to charity than any other people in the world. They want to help. Many of the richest give huge sums.

4. The economy is not a zero sum-game. If some people get more, it DOES NOT FOLLOW that necessarily others get less. On the contrary, the EXACT OPPOSITE can happen. Because of the GROWTH factor, EVERYONE GETS MORE!!!!!!!! If a business grows, provides needed goods or services and creates jobs, everyone benefits. If "everyone" includes the owner of the business, well, that is the fulfillment of the American Dream for him.

5. To expect everyone to end up with the same amount or even remotely similar amounts is unnatural and artificial. It is a nice thought, but to try to force that outcome gums up the whole works.

6. To take money away from key people in the economy (those in positions to enhance economic growth) and from productive businesses is DESTRUCTIVE to the economy.

7. To take money away from people who make a lot because they are highly skilled and do work that is of major benefit to the society as a whole (e.g., doctors, engineers and such) is DESTRUCTIVE to the society at large.

8. Rich people are as imperfect as everyone else. They can be obnoxious or caught up in the trappings of their wealth. This is not nice, but it is not a crime. They should get religion or something, but taking money away from them is not the answer.

9. If we stop punishing productive people and businesses by taking resources away from them, the scariest thing about it would be how fast we will grow. (And of course sometimes we would go too fast and have a crash. Then we would start this debate all over again.)

10. There would be plenty of money and resources to care for those unable to care for themselves. The flow of money to charity would be immense.

11. The government is NOT the best entity to help those who need help. It just creates jobs for politicians and bureaucrats.

Cover-of-Time Theory

Time Magazine's 9/6/2010 cover proclaimed "Rethinking Homeownership." Inside, the cover story speculated that homeownership may no longer makes economic sense.

Funny thing about the cover of Time. Many times over the years, trends that have appeared on the cover were just about played out and were on the verge of reversing.

They didn't miss the top of the housing bubble by very much in 2005 when they extolled the virtues of owning a home, wondering on their cover if your home would make you rich.

Many years earlier, when interest rates were the highest they've been in the memory of several generations, Time's cover featured those sky-high rates. Not long after that, interest rates were on the way down.

Maybe the editors are just very slow at recognizing a trend. Or maybe they don't put these things on their cover until the trend is on everyone's mind.

If it is the latter, it fits in with the contrarian view that when everyone is stampeding in a certain direction, the best thing to do is to head the other way. If the cover-of-Time theory is correct (i.e., the cover of Time is a contrarian indicator), your home may be about to make a comeback as a valid investment.

Let's hope that is the case.

That was then, this is now

There is a line of thought that has persisted amongst some people since the financial crisis began, that because it looks similar to what happened in 1929, we must be in for another Great Depression. (Similarly, some media pundits have referred to the current recession as the Great Recession.)

First of all, the fact that something looks similar does not indicate that it is the same thing. There are definite differences between then and now.

It has long been conventional wisdom that the Depression was caused by the stock market crash of 1929. That is not correct. The crash was an early symptom of what was going on at that time, but it was not a cause. It did precipitate a banking crisis which became very serious. But where 1929 diverges from 2008 was in the response to the banking crisis.

In 1929, the Federal reserve kept on following the tight money, deflationary policy it had been following for some time before the crisis. It was a course of action that had been followed many times in the past by those who controlled banking systems, to keep the currency stable and weed out weak and overextended players. However, this time the result was worse than ever before, because the imbalances in the economy, on a long term basis, were more extreme, and the powers-that-be of that time basically read the whole situation incorrectly (to put it charitably). The result was made worse by the persistence in the deflationary policy long after the crisis developed.

Conversely, in 2008 the Federal Reserve pulled out all the stops in an effort to provide liquidity to the system and even invented new ways to keep everything afloat. There was no deflationary policy in play. One might even argue that the crisis developed partly because the Fed had been too accommodating for too long in the years leading up to the crisis. The Federal Reserve did learn something from the Great Depression. They learned what not to do, and in our present day crisis they basically did just the opposite of what they did then.

Three other factors were different then. One is that, just as the Depression was getting started, major income tax increases were put into effect. That has not happened yet in the present. However, (1) the new health care law could act like a tax increase and be a damper on the economy, and (2) the tax cuts that were enacted during the Bush administration are scheduled to expire at the end of this year. If they are allowed to expire, the result would be an automatic tax increase. It is more widely understood today, even in Congress, that tax increases are counterproductive in a weak economic environment. Therefore there is some hope that Congress will extend those tax cuts for another year. But nothing is certain at this point.

Another difference between then and now is that in the 1930's, world trade was seriously hampered by extremely high tariffs passed by all the major trading nations. There has been a little of that today, but nothing like back then.

The third major difference is that during the Depression, the whole world was affected. Today, several important countries have already resumed rapid growth, in particular China. Germany, whose economy depends to a large extent on exports, is experiencing growth through its trade with China and others. The prospects for US exports to China and India, etc., are good, and some major companies (e.g., Caterpillar) are already benefiting strongly.

Looking back, it almost seems a miracle that we survived the egregious policy mistakes of the first half of the twentieth century, and we should keep in mind that today we are doing our best not to make the same mistakes. Also, today is not yesterday. Today is today.

Mass growth

Rosy payroll growth stats released by U Mass on 7/30/10 are thrown off a bit by US Census hiring. The 4.5 percent annual growth rate was the best since 1984, but government spending and hiring played a big role in it. Still, up is up, and the private sector did show some growth. The unemployment rate declined from 9.3% in March to 9.0 in June.

China and other developing countries are growing quickly again. This is good for any company that exports to them, including Massachusetts information technology firms.

Optimism

Lots of gloom and doom out there, but it depends where you look. A new book has come out bucking that trend. It is called "The Rational Optimist: How Prosperity Evolves," by Matt Ridley. Mr. Ridley is a science writer. His foundation for optimism is: innovation. The long term trend of human history has been upward, he says, because humans are continually innovating. Innovations have led to vast improvements in the human condition, and it is likely that trend will continue. The problem of feeding a couple of billion more people by the year 2110 can easily be solved by the advances in agriculture and biology that are occurring as we speak. In fact, we could have more than enough food, using even less land than we do now. The book is full of statistical evidence that things have been getting better all the time, not worse.

What can you do?

Realistically speaking, the state of the economy is, well, let’s just say not as good as it could be. We needn’t get into an exhaustive analysis of it here. There is plenty of that in the media, much of it conflicting. But it might not be a bad idea to look at the big picture for just a moment before we move on to things closer to home.


Usually an economy gets into trouble when there is too much debt in the system, and people can’t pay it off. The economy goes into a decline, and by various mechanisms (such as bankruptcy, or the action of creditors simply writing off hopeless debts), the excess debt gets washed out of the system. Then a recovery begins, assisted by renewed lending.
The perils of capitalism include the “business cycle,” which basically describes the action of the economy fluctuating between expansion and contraction. Many contractions over the years (and centuries) have been very painful, even catastrophic, and as time goes on, various governments have passed laws to try to prevent, modify or soften many of the conditions associated with the contractions.
However, you might as well try to legislate against old age. It just won’t work. The business cycle will have its revenge. Some things can be done to delay a contraction. But it just might be that the contraction, when it comes, will be much worse than it would have been if we hadn’t delayed it.
Currently, some debts are being washed out of the system through bankruptcy and such. The real estate bubble is slowly deflating, despite various government efforts to prop it up and ease the pain. “Troubled assets” in the banking system are being “resolved” by government action.
However, the big problem now is that government debt is growing at an alarming rate, and markets are showing investors’ concern about that. Surveys indicate most voters favor cutting the federal deficit, but many in our government want to spend more to stimulate the economy. There is little agreement amongst the so-called experts about whether that would make things better or worse.



These things are important when you vote, but what about now, in everyday life and business?
The lesson of the above considerations is that business and personal finances could be facing some headwinds in the immediate future. No one knows exactly how things will go, but it would not be the best strategy to just assume—or even just to hope--that everything will be hunk-dory by next January 1 (or some such date).
So, what is one to do?

Business strategies:
Businesses that are facing stresses can either (a) give up and go out of business; (b) try to muddle through and hope for the best; or, (c) try to do something effective to make things better.
There is plenty of advice about how to do (c), but if I may I would like to add another “big picture” suggestion:
Your most valuable weapon is communication. Communicating with existing customers and potential customers is paramount. Maintaining and using a mailing list (and/or e-mailing list) of existing customers can be of inestimable benefit to a business. There are also endless means of electronic contact available today—Twitter, You-Tube, etc, etc. (I can’t say I know how to use them all effectively myself, but they are definitely out there.)
Any and all means of contacting potential new customers should be explored: advertising, bulk mailings, etc. (Bulk mailings can be very effective, and cost effective.)
Communication also includes knowing who you are communicating to. Blind advertising and mailings are not the best idea. A little market research—in the library or online—can go a long way. Surveys are also an excellent source of information about your market.
Communicating one on one with customers and allowing them to communicate with you is also extremely important—if not vital. (And when I say vital, I mean it can be a matter of life or death to a business.)

Communication is not going to be the answer to everything, but it is certainly very high on the list of things to do to make things better.


Personal finances:
Although the government and the companies producing consumer goods would like you to resume consuming at all costs, that is not necessarily the best strategy for one’s personal finances. Sometimes one has to consider what is best for oneself and not sacrifice oneself for the common good. (Consuming is not usually thought of as a sacrifice, but in this case it could turn out to be that way.)
Some old strategies (and clichés) are still true. You should have savings. You should budget your money. Don’t put all your eggs in one basket. There’s no free lunch. Get rich quick schemes don’t work.
Making more money is also helpful, obviously. Investing in education is good for that. Or, some people start businesses on the side, get a part time job, or figure out other ways to make ends meet.
It is difficult to predict how the national and international economy will impact one’s life. Who knows if a particular investment will turn out to be good or bad? What unexpected event might happen that would throw off your calculations?
But there are things you can do to try to keep control of your situation. Having a big cushion (which is not all in one basket) to fall back on works well if one can manage it. Being able to handle problems when they come up is also a nice skill to have, if one has it.
Also remember the mustard seed, and don’t give up.

Cash Flow, Larger Organizations

Cash flow control for larger companies is generally a bit different from what we discussed in our "Cash Flow--Small Business" entries. (Also keep in mind that "large" and "small" are relative terms. What seems large on Cape Cod may be small in Boston.)

This is just a bare-bones outline of how it is done.

Cash flow control for a larger organization generally begins with a sales forecast for the coming year. Such forecasts are usually based on what has happened over the last five to ten years. An average rate of year-over-year sales increase is derived and used to estimate what the coming year's sales may be.

From the sales figure, a projected profit and loss statement can be put together. Many of the expenses can be estimated using the rate of sales increase. For others there may be specific data that can be used.

Once a projected net income figure has been calculated, it can be plugged into a projected balance sheet. Some of the assets and liabilities will naturally increase at about the rate of the sales increase. Others can be determined in other ways.

When the assets, liabilities and equity have been totaled up, it may come to light that additional funds are needed, for example to acquire new capital equipment. Then decisions need to be made about how to acquire the funds, and the costs of the funds (e.g., interest) have to be added to the profit and loss statement.

With these projected financial statements in hand, they begin to construct the cash budget. Various cash flow factors are taken into account, such as the average lag in collecting receivables and the lag in paying bills. A cash budget for the coming year is calculated, then it is broken down into monthly amounts. The monthly budget is for planning. Then a more detailed daily or weekly budget is drawn up for actual cash control during the coming month.

Then they have to lay the numbers out on a spreadsheet and figure out what their cash position will be each month for the next few months. A seasonal business may have large fluctuations in cash requirements. During some months there may be shortfalls that require short-term borrowing.

This is a lot more complicated than the small-business methods outlined in earlier posts, and it would likely require extensive attention from specially trained people.

Bonanza?

Possible tax-break bonanza for Cape businesses that hire a lot of students and other seasonal workers:

Employers who hire people who worked for a total of less than 40 hours in the previous 60 days can get an exemption from the 6.2% social security tax that would otherwise be due on the employee's wages. This is effective for wages paid from March 19, 2010 to December 31, 2010. The employee must start working after February 3, 2010.

People who were in school during the previous 60 days are not disqualified, and there is no minimum age.

New hires who qualify must fill out form W-11 (or equivalent) to enable the employer to take the credit. The credit will be claimed on form 941 starting with the second quarter of 2010.

The exemption is for the employer's matching 6.2% and does not affect the 6.2% withheld from the employee's pay.

Credit for employers who offer health insurance

The IRS recently sent out postcards to employers who might qualify for a new credit established by the new health care law. It is a credit worth up to 35% of health insurance premiums paid by employers who have less than 25 “full time equivalent” employees and pay an average of less than $50,000 per year to each employee.

The full 35% credit will be realized only by employers with less than 10 “full time equivalent” employees who are paid an average of less than $25,000 per year. The credit is gradually reduced above that level.

“Full time equivalent” means that you have to divide the total hours worked during the year by part-timers by the number of hours they would have worked if they were full time. (The simplest example is that is you have two employees who each work 20 hours per week all year, you have one full time equivalent employee.)

The average wages are determined by dividing the total wages by the number of full time equivalent employees.

To qualify, the employer must pay at least 50% of covered employees’ health insurance premiums, if they have coverage as a single individual. If they are on a family plan, the employer only has to pay the amount equal to 50% of the single plan.

The credit has a number of other complicated rules, as you may have guessed.

The credit is taken on the employer’s annual income tax return. For example, a sole proprietor will take the credit on form 1040. For a corporation that files form 1120, the credit will be taken on that form.

Tax-exempt organizations can also claim the credit. For them, it is a refundable credit (subject to certain limitations).

For employers other than non-profits, the credit is not refundable; it can only reduce the income tax down to zero.

Times A-Changin'?

According to a recent (last month) report in The Economist, the US economy is undergoing a transformational change that will make it more viable in the long run. There will be more exporting and less production targeted for domestic consumption, they say. We will change our spendthrift ways and start saving more. There are already signs of that, since the recession and last year's meltdown have scared us straight.

Apparently not all economists agree, but if true, it is big news and perhaps something for optimists to hang their hats on in their persistent belief that all is not lost for the American economy. The title of the lead editorial on the subject is: "Hope at Last."

Ethics

Many people do not realize how important the subject of ethics is in business.

I had to take a university course in ethics a couple of years ago, and unfortunately the course did not cover much about ethics at all. It was more concerned with social justice--another subject entirely, but one beloved by many university faculty members. Maybe actual basic ethics is too simple for the university level.

Ethics has to do with simple things like telling the truth. In business it means not lying about one’s product or service, not trying to put one over on customers or investors and giving honest value for money received. These things are the backbone of success in business and of the health of the whole economy.

We see the consequences of rampant dishonesty in a case like Enron. A lot of people get hurt, and then Congress thinks it has to pass a raft of new laws to prevent it from ever happening again. The new laws fail to prevent it from happening again, but they take up a lot of time that could be better spent on more productive things.

It should also be pointed out to all observers that if someone commits a crime it does not mean that everyone else in his neighborhood or racial group is also committing the same crimes. Similarly, if a corporation breaks the law, it doesn’t mean that all corporations are doing the same thing. There are actually quite a few American corporations that are founded on ethical principals and who behave ethically. Some of them have been around for a century or more, quietly doing good work, producing good products. The ones that don’t behave ethically make the news, and luckily they don’t have much longevity, either. People catch on that their products are inferior or the deals their customers or investors get are unfair. Or they get into legal troubles.

People who think there are no consequences for dishonesty as long as they are not found out are kidding themselves. Such people often end up in jail or on the scrap heap of failure. And on the personal side, such thinking leads to broken marriages and family discord.

Where a sense of ethics comes from is beyond the scope of these comments. Religious education? An innate sense of right and wrong? Parents and teachers can try to pass on rules and lessons in behavior. Some take it to heart; others don’t. A successful society is built by and of those who do.

Free Enterprise

ELEMENTS OF FREE ENTERPRISE
(And why it works)

I. Rewards and penalties.

If people work hard, they generally make more money. If they don’t work, they might be able to receive some public assistance, but that is usually much less than what they can have by working. Some choose not to work, but most choose to have more by working.

This arrangement is good for the society at large because it (by and large) requires production. It requires that people contribute something of value to earn their keep.

One of the basic laws of physics is that all things tend towards entropy (a physics concept that can be roughly translated as “disorder”). Energy is required to keep matter in an organized state. Similarly, a great deal of energy is required to sustain a large society, and if every person who can work does work, the job can be done.

The distinction between Free Enterprise and Capitalism.
The two are generally thought of as being the same thing, and indeed they may both be considered to be part of the same thing. But it is possible to make a distinction between them.

Free enterprise basically means that a person is free to go into any business he chooses and conduct his business in any way he sees fit, as long as it does not violate any laws. It is true that there are plenty of laws to be aware of, and some of them could be thought of as constraints on free enterprise. But within those boundaries, a businessman (or woman) has considerable freedom.

During the Cold War, the term free enterprise was often used in contrast with communism, which sought to control all aspects of the economy.

Free enterprise operates according to the strictures of Adam Smith’s “invisible hand.” That venerable economist used that term to denote the process of natural selection that rewards businesses that supply things the marketplace wants and punishes businesses that do not.

The term capitalism, however, though it is used as an umbrella term that includes the concept of free enterprise, more specifically refers to the use of capital. Capital is anything of value that can be used in business to make more money. Capital is often thought of as simply money, but it is not restricted to that. Machinery and equipment, for example, are capital assets. They can be used to manufacture goods to be sold, thereby making money.

Therefore the terms capitalism and free enterprise refer to different yet complementary aspects of our economic system.

II. Issues of capitalism.

People who object to capitalism generally think of the stereotyped fat capitalist who sits around doing nothing except making money on his money. He produces nothing, heartlessly refuses to pay his workers a decent wage and probably enjoys raping and polluting the environment.

This is a difficult stereotype to argue against if people have it fixed in their minds. But it is a ridiculous caricature. Undoubtedly such people exist here and there in the world, but that description is more likely to fit a dictator of a third world country than a capitalist.

The question of whether there are evil people in ultimate control of our capital system may be one best left to conspiracy buffs. It is not impossible that some positions of power are held by people of ill will. Nor is the opposite impossible, i.e., that competent people of good will hold many positions of power. Though the world is far from perfect (it never has been, nor is it likely to be in the near future), the fact is that the world’s economy is generally expanding and has been doing so (with momentary ups and downs) since the end of World War Two. Most of us would agree that this is a good thing. More and more people around the world are being lifted out of subsistence existences. Hunger is receding as a problem.

Could such general expansion happen under a regime whose intention is to crush and oppress people? We saw the economic stagnation and even regression that occurred under communism in the Soviet Union and in Red China under Mao. We can’t make progress if those at the top prevent it.

Given the above general shape of things, one could conclude that there are at least some people who are trying to make the system work for the benefit of all. Or, as Ayn Rand (author of Atlas Shrugged and The Fountainhead) postulated, they may be in it for their own self interest, but the way the system works, their self interest ends up benefiting all.

Could the system work better? Without a doubt. But the fact that it is working enough for growth and improvement to occur is a great thing. The history of the world is full of times when things were getting worse, not better.

A businessman (or woman) seeking to exercise his or her rights under the free enterprise system, may wish to start a business or expand or diversify an existing business. To do any of these things, he or she will need money. I.e., capital.

And where does that capital come from? It comes from banks, private lenders, venture capitalists, etc. These are the primary sources of capital.

The fact that the sources of capital—the capitalists—have the money is not the important thing. The important thing is how the capital is used. How the capital is used depends not so much on the capitalists as it does on the people who gain access to the capital through borrowing, sales of stock, etc.

The people who gain access to capital are established businesses, entrepreneurs, consumers, etc.

The question of whether borrowing and lending of capital is good or bad for the economy has long been settled. The existence of debt in the economy is good up to a certain point. It is true that the borrowing and lending of money is one of the major things that cause the booms and busts of the economic cycle. But without borrowing, entrepreneurs with brilliant business ideas would never get their ventures off the ground. The jobs they create would go missing from the economy, and important new products and services would never reach the market. Even established products would die out. There would be scarcity and massive unemployment.

OK, some might say, we need sources of capital. But does capital have to be in the hands of a rich elite? Couldn’t the government substitute itself for the rich elite and become the source of capital for all users?

The first step in answering such questions is to note that the communist experiments in China and the Soviet Union in the 20th Century did not go well. True, they were attempting to take over the whole economy. We saw that governments can never substitute for entrepreneurs, the dynamics of competition and the complex workings of the marketplace.

Secondly, the present extent of government regulation of and participation in the capital markets almost makes government takeover of capital a fait accompli. Although in reality the sources of capital are privately owned (except the biggest source, the currency itself), much of the power of capital concentrated in a few hands has been taken away, and much of the (theoretical?) ability of capitalists to harm individuals and the economy has been mitigated through anti-trust laws, securities and exchange regulations and various consumer protection laws regarding borrowing and lending.

Of course, this is not to say that the potential for abuse does not still exist. For example, energy consumers in California were badly mauled just a few years ago by market manipulators. But the fact is that there are some mechanisms in place designed keep the markets operating and to attempt to maintain a certain level of fairness in them.

If government regulation of capital markets has been such a boon, why not go all the way? Why not have government take them over completely?

First of all, banks and other sources of capital are businesses, just as are the businesses to whom they lend. They respond to the dynamics of competition and the laws of supply and demand. Government is a fundamentally different activity. Government officials have a different mindset and different purposes and goals from capitalists. Capitalists, if they are doing their jobs correctly, serve a definite function in keeping the economy working. Government officials may or may not understand and correctly performs those functions.

Capitalists who do not perform their functions in the way the market demands will eventually go out of business and be replaced by those who do. If government officials were in charge, they could go on going a bad job for a very long time without being replaced. Loans that should be made would not be made, and loans with no business or economic merit would be made. The economy as a whole would suffer, as would individuals affected directly by lack of needed loans or by debts larger than they can handle. Such things do happen in the economy as it is, but the penalty for them is that those suppliers of capital lose money. Again, that penalty would not work very well with the government as the source of capital.

An example:

A man wants to open a store in Yourtown, USA. He is skilled at operating stores and has a good plan for an efficient establishment that would supply things people in Yourtown need at better prices than the other stores in the area are able to offer. But he does not have enough money to get the store started—to lease a building, remodel it to his specifications, stock it, hire employees, advertise, etc. So he goes down to his friendly neighborhood capitalists, the local bank. The loan officer and other bank officials go over the plan with him. The bankers have some knowledge of general business operations and start-ups, and they offer some suggestions. After due consultation, they are satisfied that the plan is solid and has good money-making potential. They loan him the money. The store is started up, and it is a smashing success. The citizens of Yourtown get the benefit of paying less for things they need, leaving them with more money to spend on other things. The employees of the store have jobs. The store owner makes a profit. We won’t say “everybody is happy,” but overall it is a good thing.

And say the owner becomes very successful indeed. He expends, he opens stores in other cities. He becomes rich. What then? Is he a bad guy now? He probably does not keep his money buried in his basement. It is probably in banks and invested in stocks and bonds. As such it is in use, funding other businesses and doing its part to keep the economy going. Also, if the owner is like many people who acquire money, he is probably quite generous with it, giving to charities, perhaps even establishing a foundation for the benefit of his favorite cause.

Cash Flow, Small Business, Part 2

Weekly Planning
Once you have your average budget figured out (see Cash Flow, Part 1), you can begin applying it to operations on a regular basis.
Here is one system of organizing for cash flow control.
Allocate a regular time at the end of each week when you and perhaps some selected employees can plan how to spend the money that came in that week. Any employees can submit written spending requests, which will be adjudicated at this time.
Ideally, the first thing to do is to allocate a fixed percentage of the week’s income to a reserve fund.
Then, allocate payments to the following:
• Bills. If you can’t pay them all this week, pay them in the order in which they were received, or in the date order in which they are due.
• Take a look at the weekly budget. Set aside weekly amounts for bills or payments that occur monthly, such as the rent and utilities. Keep a record of amounts set aside each week, amounts spent and balances available.
• Go through the written spending and purchase requests of employees, paying attention to where (and if) they fit into the budget. Approve the ones that fit into the budget, if there is enough money this week.
• If the week’s income was more than the budgeted amount, you can use the excess to catch up on any shortages from prior weeks, or, if everything is caught up, approve additional spending requests that otherwise might not be strictly per the budget.

Even if you have no employees, it is a good idea to have a structure such as this for the control of cash flow, so that you can keep up with the bills, eliminate the unexpected need to write a check right now for something that was forgotten, to make sure there is enough money for the rent when it comes due, etc.