Larry Summers, the Harvard Economist that is heading up Obama's National Economic Council, wrote an op-ed piece in today's Washington Post. It is worth your time, as it probably was a strategic "leak" to the media regarding the proposal that will be headed to Congress in about 30 days.
A few highlights:
1) Similar to Warren Buffett's refrain regarding Paulson's TARP that "It is better to be mostly right than completely wrong," Mr. Summers states "In this crisis, doing too little poses a greater threat than doing too much."
2) As businesspeople, we understand that operating expenses are things to be controlled with fervor. For sure, some OPEX is necessary. Certainly, UPS can't deliver packages without fuel for their delivery planes and trucks. However, frivolous expenditures don't add value to the bottom line, and they represent a place where profits leak out of the income statement. Summers indirectly states that a "stimulus check" alternative would lead to this type of frivolous spending. When "Joe Sixpack" gets his $1000 stimulus and squanders it on consumer discretionary goods like hockey tickets and beer, he probably has had a good time, and he certainly injected his stimulus check back into the economy, but this expenditure represents unnecessary OPEX on the combined income statement of the United States. Likewise, folks in California using their homes as ATM's to purchase new BMW's or renovate their outdoor living spaces with custom stonework hearths also represents this type of spending.
However, we as businesspeople can also recognize the power of spending on a capital asset when that asset can provide a rate of return that is acceptable. For example, purchasing a new delivery truck that costs $80,000 but yields $20,000 of annual cash flow is a very appropriate employment of funds (a 4x multiple of cash flow or roughly a 25% annual return).
Summers attempts to compare the stimulus that Obama will propose to this type of spending. Spending to create jobs and grow the economy. Spending to ensure that the 50 years post 2008 are as prosperous as the 50 years leading up to 2008. The American dream only works in an economy with a growing GDP.
3) Summers also "slips" by mentioning Obama's tax cut plan. (Tax Cuts! That is quite a reversal from President Elect Obama's position during the campaign.)
Cross your fingers that the aptly named American Recovery and Reinvestment Plan can create inertia for entrepreneurship and begin to shift our domestic economy away from consumer discretionary spending.
A few highlights:
1) Similar to Warren Buffett's refrain regarding Paulson's TARP that "It is better to be mostly right than completely wrong," Mr. Summers states "In this crisis, doing too little poses a greater threat than doing too much."
2) As businesspeople, we understand that operating expenses are things to be controlled with fervor. For sure, some OPEX is necessary. Certainly, UPS can't deliver packages without fuel for their delivery planes and trucks. However, frivolous expenditures don't add value to the bottom line, and they represent a place where profits leak out of the income statement. Summers indirectly states that a "stimulus check" alternative would lead to this type of frivolous spending. When "Joe Sixpack" gets his $1000 stimulus and squanders it on consumer discretionary goods like hockey tickets and beer, he probably has had a good time, and he certainly injected his stimulus check back into the economy, but this expenditure represents unnecessary OPEX on the combined income statement of the United States. Likewise, folks in California using their homes as ATM's to purchase new BMW's or renovate their outdoor living spaces with custom stonework hearths also represents this type of spending.
However, we as businesspeople can also recognize the power of spending on a capital asset when that asset can provide a rate of return that is acceptable. For example, purchasing a new delivery truck that costs $80,000 but yields $20,000 of annual cash flow is a very appropriate employment of funds (a 4x multiple of cash flow or roughly a 25% annual return).
Summers attempts to compare the stimulus that Obama will propose to this type of spending. Spending to create jobs and grow the economy. Spending to ensure that the 50 years post 2008 are as prosperous as the 50 years leading up to 2008. The American dream only works in an economy with a growing GDP.
3) Summers also "slips" by mentioning Obama's tax cut plan. (Tax Cuts! That is quite a reversal from President Elect Obama's position during the campaign.)
Cross your fingers that the aptly named American Recovery and Reinvestment Plan can create inertia for entrepreneurship and begin to shift our domestic economy away from consumer discretionary spending.
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