What makes an economy grow?
As I mentioned in my post on the new healthcare legislation, the growth of an economy is dependant in large part on two factors, (1) the quantity and quality of the labor pool and (2) the amount of available investment capital. In order to take advantage of the availability of these two inputs, an economy needs (1) a tax code that is conducive to risk taking and business growth and (2) a stable and predictable set of rules. I’m fairly certain that this isn’t exactly a brilliant revelation to anyone, as much as I would love to be an incredibly insightful and terribly witty economist. This is just common sense. If a tax code penalizes growth, which is the natural consequence of increasing marginal tax rates, then an entrepreneur’s incentive to take the risk to generate additional profit has been hampered. If the rules of the game are unclear and likely to change, then everyone hunkers down. That’s just a rational and responsible course of action. You don’t want to be running down the field, approaching the 1 yard line, ball tucked in tight only to learn that as you were running the rules changed and now you must go back to the 35 yard line and dribble the pigskin down the field. (That does make for one great visual though doesn’t it? Even Jerry Rice wouldn’t have been able to pull that off.)
So where do you think we are? How does this affect the investing world? Clearly the rules of the game have gone all wonky, (that’s a purely technical term). One of the strongest wonky indicators for me was the treatment of GM’s bondholders whereby their interests were subordinated to the UAW in violation of contract law. That had to make bondholders everywhere nervous and anyone who lends to a unionized company is paying a lot more attention as a risk they never considered has been introduced. Now we’ve got significant sweeping legislation impacting a variety of industries on a much more regular and significant basis than we’ve seen in the past. This is not the recipe for an environment that supports entrepreneurial activity. Then there are these completely bizarre add-ons in the legislation that just make me wonder what in God’s name those in DC are thinking. How is it that imbedded in the healthcare legislation is a new law that requires businesses to file 1099s for any expenditure with another company that exceeds $600? This means that when I travel to a conference and my flight costs over $600 I have to send American Airlines and the IRS a 1099. I’ll have to file yet another for Hilton as my hotel stay was over $600. Then there is the printing company that produced the materials I handed out, another 1099. My laptop died during the trip when I spilled coffee all over it as I attempted to wake my sleepy self up, so another 1099 to Dell when I order a new laptop. What kind of insanity is this!? Just imagine all the additional IRS employees our tax dollars will now have to support to sift through all this additional paperwork and the additional cost to my company. Keep in mind that the additional cost to my company did nothing to grow GDP. It is purely a non-productive drain on resources.
We’ve got irrational and unproductive rules of the game being introduced and an unstable tax code that is expected to most likely become more burdensome. What’s an investor to do? In this market, placing your bets on investments that will require healthy GDP growth would be very risky as in my opinion, the fundamentals just aren’t there right now. This doesn’t mean we won’t have any growth, just don’t expect a strong recovery anytime soon. We look more to take advantage of market volatility, of which there will be plenty, rather than relying on consistent growth.
