Thursday, September 15, 2011

What Would President Sam Walton Do About the National Deficits and Debt?

Yesterday we discussed our nation's seemingly insurmountable debt problem. We also touched briefly on the long and difficult road ahead with respect to reaching a successful resolution to our deficits and debt issues.

Today I want to expand on the analogy concerning the similar problems faced by companies and governments when strong economic growth is followed by weak or stagnant conditions.

To reiterate, a period of strong growth often obscures existing financial problems. At such times, the country's or company's condition may appear to be better than it truly is. On the other hand, periods of stagnation or recession necessitate a much different leadership or management approach.

When the revenues of countries or companies are growing strongly, we're apparently doing well. That's also when we're prone to let our guard down and make our biggest mistakes. Conversely, when things later get tough and growth is slow or non-existent, a totally different and entirely sober leadership and management approach is required.

The analogy between government and business caused me to think about the entrepreneur Sam Walton, the fabulously successful founder of Wal-Mart, and his simple and straightforward approach to managing a successful and strongly growing enterprise. As perhaps the most successful entrepreneur of the late 20th century, his views are well worth considering.

In two short sentences, here's what Sam believed the essence to be about managing growth, expenses and maintaining the overall profitability and growth trajectory of the business.

(1) If Wal-Mart was earning profits of more than 4% on its sales, it was then time to reduce prices. (2) If the company was earning less than 3% on sales, however, it was time to reduce its expenses and cost structure.

In other words, it was always time to grow and satisfy customers and the company's many other constituents. As such, profitability (defined as the cost of staying in business) between 3% and 4% of sales would enable the company to grow, invest and prosper continuously. Walton's formula for success recognized that ongoing revenue growth is essential, and that customers demand value for money paid, meaning quality goods and services accompanied by everyday low prices.

In other words, raising prices wasn't part of the formula for growth. How did it work out? Well, Wal-Mart grew from its beginning of zero in 1962 to its current annual level of sales of more than $400 billion today. It also became the world's biggest private employer with more than 2 million employees.

Let's try to apply Wal-Mart's teachings to our national government's financial situation and see what happens. In other words, what would President Walton do that President Obama isn't doing?

First, he would face facts. If we are spending $1 and borrowing 40 cents to do so, as we are, he would question whether cents 61 through 100 were benefiting the health of the enterprise. He would then make and implement spending priorities on an urgent basis. We would then spend considerably less than $1, and what we did spend would be prioritized to achieve revenue growth.

Second, he wouldn't raise tax rates (prices) but would focus on increasing revenues/taxes/sales by increasing sales volumes and selling more of the current offerings as well as selling additional products and services, too.

In contrast, President Obama wants to hire more teachers and build more government structures, and he wants to pay for these efforts by raising taxes. As I interpret things, that's pretty much the opposite of what Sam Walton (Jack Welch and many others, too) would recommend that he do.

Hiring more teachers with borrowed money will only exacerbate our spending and debt issues, as will the construction of additional public buildings. And increased revenues won't be the result of that spending.

What would add to the revenue base? Drilling for more oil and natural gas would add government revenues and concurrently reduce spending on foreign oil. It would also add jobs, income and payroll taxes.

Making more globally tradable goods by manufacturing them for export and also selling them domestically would also increase revenues, jobs and tax receipts, while reducing spending for current imports.

Getting focused on economic growth is the single biggest thing we must do, and it's about the only thing we're not focused on doing. Cutting non-value added government spending comes in second place. Third, stop building government buildings we can't afford.

'Grand Bargains' Are a Budgetary Dead End makes the point crystal clear about the silliness of trying to tax our way out of the current financial mess. Here's what it says about taxes as the solution: "If we repeal the Bush tax cuts for those families with incomes over $250,000, we get $700 billion over the next 10 years—not much of a dent in either the deficit or the debt. If we repeal the Bush tax cuts for all Americans—something that Mr. Obama says he opposes—we get an additional $3.5 trillion over the same period. Again, pretty puny in relation to nearly $100 trillion in debt and long-term entitlement obligations. Confiscating all earnings over $250,000 in any year will only yield enough to meet one year's deficit.

The confiscation idea raises in stark terms the trade-off between tax increases and economic growth. There are only two ways for the U.S. to address the debt and entitlement obligations it has already assumed—inflating the currency and increasing the rate of its economic growth.

Inflation will create even greater burdens on the growing number of retirees living on fixed incomes, so that's not acceptable. Yet repealing the Bush tax cuts and placing even greater burdens on American taxpayers as part of future "grand bargains" will stifle the necessary economic growth. Even the 10-to-one spending cut to tax increase ratio famously rejected by Republican presidential candidates in a recent debate will place an unsupportable burden on American taxpayers."

Simply put, implementing higher tax rates won't help at all. What will bring higher tax revenues is economic growth and more competitive pricing and costing for tradable goods and services worldwide, pure and simple.

Accordingly, our only realistic way out is through a Sam Walton type approach to growth. Let me explain.

If our national debt plus unfunded entitlement obligations will amount to some $100 trillion by 2021, and it will, what would it take to service that debt over forty years, or by 2061?

Simply put, it would cost $7.5 trillion annually, or three times more than the total government annual revenues of $2.4 trillion today. {$100 trillion at 5% interest equals $5 trillion annual interest expense, combined with the $100 trillion in debt being amortized over forty years at $2.5 trillion annually, equals $7.5 trillion per year.} So that won't work.

Here's some more math. Our economy's GDP presently is approximately $15 trillion, and our present total national debt is roughly the same amount. {We'll set aside for now the other $85 trillion in government debt obligations, including entitlements, housing related mortgage guarantees and all future projected debt additions, even though these dwarf by several times the publicly acknowledged liabilities of $15 trillion.}

If we borrowed $15 trillion for ten years at a stated interest rate of 5%, our annual interest bill would be $750 billion. Our principal amortization in a sinking fund would be $1.5 trillion annually.

Thus, in year one we would have to pay or set aside a total of $2.25 trillion to service the loan. We collect about $2.4 trillion today. That leaves $150 billion to spend, in comparison to the $4 trillion we're spending today.

In other words, we'd have to virtually eliminate all government spending to pay off the $15 trillion loan over ten years.

Thus, we need to find a way to grow our tax base without increasing tax rates while reducing all non-value added spending at the same time. A walk and chew gum approach, to be sure.

{To repeat, since we will only collect ~$2.4 trillion in taxes, the $2.25 trillion for debt service leaves $150 billion to operate the government, inclusive of social security, medicare and all other government related spending. In other words, we'd go from spending $4 trillion to spending $150 billion, or a more than 95% reduction. Of course, that's not possible.}

The essential point to grasp from the foregoing is that each day we continue to make the already far too onerous debt situation even worse than the day before. As informed citizens, our basic concern must be that, albeit perhaps well intentioned, almost all of the politicians apparently have no clue that what they are doing will hasten our nation's ruination, let alone taking steps to address the dilemma in a straightforward and truth telling way.

Sam Walton wouldn't have gotten us into this mess, but had he inherited it, he would have known what to do to get us out.

He would have emphasized economic growth through volume increases, while working tirelessly to reduce non-value added government spending at the same time.

He would not have raised tax rates, but he would have done everything possible to raise tax revenues (through more drilling, more manufacturing, more exports and more jobs).

More importantly, he would have made every effort to sell the idea that we're all in this together instead of pitting interest group against interest group. He wouldn't have practiced class or generational warfare. Not for a second.

Most important of all, he would have told us the pure and unadulterated truth about the magnitude of the problem, the steps necessary to solve it and the status of those remedial actions on an ongoing basis.

Then we the people all together would have set about fixing the debt and deficits problem, once and for all.

See how simple this could be with a little leadership and truth telling? Not easy, that's for sure, but surely simple.

And despite the difficulty of the task, we'd all feel really good about what we were doing for future Americans, too.

Thanks. Bob.

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