From the Desk of Joe Rollins
While driving down Peachtree Street earlier this week, I could not help but note that there was virtually no traffic on the road. In spite of this, I traveled through six traffic lights without once hitting a green light. Throughout the entire world, cities and towns have computerized traffic light systems that help the flow of traffic; the City of Atlanta has yet to acquire that sophisticated technology. In fact, if you ever want to test the efficiency of Atlanta’s traffic light system, just drive down Peachtree Street at midnight. Even when no one is on the road, you’ll be stopped by red lights more often than not. But I digress…
When I entered the Colony Square parking garage that day, there were almost no cars parked on the top level. I suppose all of the above is reflective of the slow, hazy days of summer. Because of vacation schedules, there aren’t many people actually working, and due to the heat, I suspect people’s thoughts are absorbed by taking a holiday.
If you haven’t noticed, we’ve recently had a major stock market rally. Perhaps the lack of news is positive for once. As I write this post, the Dow Jones Industrial Average is up a cool 7%. I’m not talking about the Dow’s performance for the year; I’m talking about for the week. Since the Dow bottomed on March 9, 2009, the index has gained an astounding 33%.
The Standard & Poor’s Index of 500 Stocks is also up a sterling 5.8% for the week. Since the S&P’s bottom on March 9, 2009, that index is up an incredible 37%. There’s no question that the true stellar index so far in this rally has been the NASDAQ Composite. This week, the NASDAQ has gained 7.3%, and since its bottom on March 9, 2009, it is up an amazing 49%.
While most Americans have been planning their summer vacations, there’s been a stealthy rally going on; most people haven’t even noticed it. The markets are not gaining because the economy has recovered. Rather, the markets are gaining because they anticipate the economy’s recovery. As I’ve often said, the stock market doesn’t need to see the economy improve – it only needs to see it quit going down. Today we have the evidence to prove that the economy has finally stopped going down.
During Thursday’s trading day, Nouriel Roubini, a long-time gloom and doom forecaster, proclaimed that the U.S. economy would be out of recession before the end of 2009. The market moved up a small amount with that surprising reversal proclamation. Later in the day, there must’ve been too much positive news for Dr. Roubini, and he reversed his position, indicating that he’d been misquoted. He then said that the U.S. economy was in a 24-month recession that he anticipated would not end until the end of 2010. Notwithstanding his complete 180-degree change in economic forecasting during the course of the day, we should examine his other economic forecasts.
If you read my post from May 16th titled “The Most Important Stock Market Week of the Year!” wherein I discussed the famous doomcasters, Dr. Roubini and Paul Krugman, you’ll see that both of them were forecasting a complete seizure by the U.S. government of all banking institutions. Both indicated that there would be no way for the banking industry to survive without the full and complete seizure of the banks by the U.S. government. In the last three days, CitiBank has reported a profit of $4.3 billion for the quarter, Bank of America earned a tidy $3.2 billion, and J.P. Morgan Chase earned $2.7 billion. I suppose the economic reality of positive financial results completely contradicts these doomcasters’ forecasts.
Just as I predicted in my “2nd Quarter Financial Review” post on July 2nd, banks are reporting blow-away profits. It’s often said that an investor would be ill-advised to ever discount the U.S. economy. It seems that these noted economists have discounted it, and therefore, their forecasts should also be discounted.
I also continue to hear from the financial news and others I’ve spoken with that the banks’ losses have yet to be realized. It seems that the public doesn’t understand how accounting really works. If you don’t believe that the accountants haven’t already fully and adequately reserved for these potential loan losses, then you don’t really understand the conservative nature of accountants. Due to the sheer cost of malpractice insurance, you may rest assured that not only are the losses fully recorded on the books of these banks, they are also grossly over-recorded. You may think I make all this stuff up, so here’s the information directly from The Wall Street Journal:
In Friday’s edition, The Wall Street Journal had a detailed analysis of J.P. Morgan’s earnings for this quarter, including information regarding loan losses. For example, they reported that non-performing assets at June 30th were $17.5 billion as compared to $6.2 billion one year ago. “Non-performing assets” is a bank term that doesn’t necessarily mean that the assets are bad, but that the holder of those assets is not currently paying interest. In fact, a vast majority of these loans will be later recovered. You may rest assured that none of these loans are uncollateralized, and even if the collateral has been reduced by 50%, the bank is more than likely going to collect at least half of the non-performing amounts. One might assume that this would be a worrisome sign for the banks, but as mentioned before, the accountants have already provided for this potential liability.
The article also pointed out that later in the quarter, J.P. Morgan set aside an additional $1.8 billion reserve for future credit loss reserves. With this addition, it brings the total reserves for future bad debts to $30 billion. Assuming that non-performing assets were 50% bad, which I consider to be ridiculous, it would mean a potential loss of $10 billion on these non-performing assets. The bank has already provided a reserve three times as high as the potential losses on non-performing assets.
I will also forecast that in the coming year, we’ll see these banks start to reverse these over-exaggerated loan loss reserves and return them to income. My analysis of these particular numbers is that J.P. Morgan Chase has excess reserves close to $15 billion against loan losses. As these amounts return to income during 2009, the financial press will express amazement at the profits suddenly earned by the banks. In fact, it will only be an accounting sleight of hand where it will appear that profits were generated at that point when they were, in fact, generated now.
You have to love the way the government pulls accounting sleights of hand. Even though California is technically bankrupt, they are still continuing to try to balance their budget for the fiscal year that started July 1, 2009. One incredibly creative means they’ve used to balance the budget is by changing the date of their payroll. By changing the June 30, 2010 payroll to July 1, 2010, that payroll is not included in the 2010 budget. It’s amazing how California just saved half of a billion dollars by moving its payroll out one day.
Profits reported this quarter through the first two weeks of the reporting season have been nothing short of “breathtaking.” Goldman Sachs, a company that was previously forced to take TARP money, reported record profits during the quarter. “Record profits” is a term that is used too often, but to put Goldman Sachs’ situation in context, they reported earnings higher during this quarter – in the middle of a recession – than they have ever reported in their entire history since going public.
In addition to Goldman Sachs, Intel reported blow-away profits along with IBM, and of course, the aforementioned banks. Profits have so far been nothing short of staggering given the so-called backdrop of an economic recession.
I told a client yesterday that I felt the need to write a blog on why the public is missing the correlation between unemployment and corporate profits. One of the beauties of technology today is that a manager who knows how to use it can adequately forecast upcoming trends. You’ll recall the gigantic layoffs that were announced over the last few years. During 2008, businesses were making significant personnel layoffs in order to cut costs. From an accounting perspective, they recorded the full cost of the layoffs immediately, even though some of the employees do not leave for weeks, months or sometimes years. Therefore, the layoff costs have occasionally been reported in prior years. Businesses are as lean and mean as they have ever been.
Without the additional payroll costs and because of other cost-cutting moves by corporations, they are able to report record profits. The good and the bad of this is, of course, that the corporations have record profits, but many Americans are without jobs. It is somewhat ironic that we celebrate the success of the corporations to the detriment of the people not employed. However, that’s the basis of capitalism, a concept we used to cherish in this country.
It’s often said that unemployment is a lagging indicator and is the last to turn up. The reason for that should be quite obvious: Corporate employers will continue to operate as lean as possible until the very last second. They’ll refuse to hire more personnel until they’re positive an economic recovery is at hand. Employers will first work their employees more hours and even overtime to get productivity up. They’ll use technology and better computer applications to avoid hiring personnel. It will be a significant amount of time before we start seeing employment start increasing.
It now appears that the employment base has stabilized, so it should be running on a replacement basis for six to eight months. I would not expect any significant improvement in the unemployment rate until at least this time in 2010.
I have been reading the daily articles written on the ridiculous national health plan as proposed by the Democrats in the House of Representatives. In fact, I dedicated an entire post on the subject (“Healthcare Relief without Universal Health”). However, yesterday’s events illustrate how completely out of touch Congress is when it comes to the business world. Yesterday, the House of Representatives pointed out their potential bill for revolutionizing the health insurance industry in America. I will not bore you will all the details, especially since many of them will be changed before the bill gets its final vote.
The bill does contain information on how the cost of the plan is to be financed. One of the proposed changes will be a major hit to the U.S. economy during a time when it certainly does not need additional taxes. What is even more interesting is that we have long been told by the administration and Congress that the proposed changes would bring down health costs, and that the plan would be neutral. Yesterday the Congressional Budge Office reported that the cost savings were just an illusion. Under the proposed plan, health costs would actually increase.
Mr. Elmendorf, director of the independent and non-political Congressional Budget Office, told the finance committee, “In the legislation that has been reported we don’t see the sort of fundamental changes that would be necessary to reduce the trajectory of federal spending by a significant amount. And on the contrary, the legislation significantly expands the federal responsibility for healthcare costs.” Therefore, we know that nothing in the proposed plan will reduce costs.
Speaker of the House Nancy Pelosi said yesterday afternoon that she would squeeze more costs out of the system. By “squeezing more costs out of the health system,” she means fewer services provided by medical institutions. Essentially, the government will pick and choose what medical procedures you need to have and what they’re willing to pay for them. It’s very clear that there will become a rationing of medical services, but the ultimate question is who will be deciding which services are rationed. Will that be you, or will that be the government?
In addition to the rationing of services, they are proposing an 8% payroll tax on all employees where group medical insurance is not provided. Therefore, if an employer elects not to provide medical insurance for their employees, they have the option of simply paying 8% directly to the government plan, which will then provide medical insurance to the employee. I anticipate that once this plan is implemented, virtually all employers will go to the government plan almost immediately. Here’s an example for you to ponder:
If you’re paying $5,000 to $6,000 per year, per employee for medical insurance, and the average employee in America makes $40,000, an 8% premium for this government-provided insurance would be $3,200. I anticipate the vast majority of all employers will gladly choose to get rid of the headache of providing healthcare for their employees and instead take a guaranteed 8% premium in the form of payroll taxes. I anticipate that within five years, there will be only one insurance company in the United States, and it will be the one run by our own government.
In addition, there’s a 2.5% tax on all individuals who do not buy medical insurance and who are not employed by someone, meaning that the self-employed would pay a 2.5% tax to get medical insurance. I can assure you that every self-employed individual in America would gladly pay 2.5% of their income to get medical insurance and avoid the hassle of finding an individual policy.
The logical question to all of this is how everyone’s cost of insurance can go down from where it is today with this sort of plan. Employers will be paying less, the self-employed will be paying less and yet we would supposedly be covered by a fully adequate, government-sponsored medical plan. It doesn’t take a rocket scientist to see that any proposed plan will be heavily subsidized from your tax dollars. Since only 50% of the U.S. population pays tax anyway, the full burden of the taxes to pay for this medical insurance will be assessed to only half of those who are receiving benefits. Duh?!?! Am I missing something here?
Also, the above provisions will dramatically change the perception of how employers will employ people. Take an industry where virtually no one is currently providing medical insurance – the restaurant industry. In that industry, the vast majority of employees are young and healthy individuals who have no desire to purchase their own medical insurance. Now the employer is faced with the legal obligation to provide medical insurance, whether or not the employee wants it.
Under the universal healthcare plan, you would be obligated to pay Social Security tax for that employee at 7.65% the very first day an employee is on your payroll. In addition, the employer would have to pay 3.2% Federal and State unemployment and the 8% government-mandated percentage on health insurance. Therefore, the first day on the job for a new employee, the employer is obligated to pay 18.87% in some form of matching taxation on this employee.
There are very obvious conclusions that will be reached by employers. The first and most important is that they’re going to hire everyone more slowly, which is the last thing this economy needs now. Remember that for every dollar you pay an employee, you’re paying almost 20% additional for these social services. This one act alone will make the recovery of employees working in America very slow. No employer is going to incur this cost without a lot of thought and evidence that the economy has recovered.
I’m sure none of you are concerned with how the government is going to efficiently run their proposed healthcare system. The Wall Street Journal reported on Friday morning that only one month after the United States became the principal shareholder in General Motors and Chrysler Group, LLC, our Congress is now interjecting in the business. Even though both of these companies eliminated 3,200 dealerships to cut costs so that they would to improve profits to pay back the government, Congress has already voted to have all 3,200 dealerships reinstated. I cannot even imagine what Congress will do once they get control of the healthcare system in the United States!
You may also recall that it was said there would be no tax increases on anyone making less than $250,000 under the new proposals. If anyone really believes that this is not a tax increase, then they really don’t understand business dynamics. Since the employer is going to be required to pay this extra 8% cost that they have never been required to pay before, where do you really think this money is going to come from? It will come dollar-for-dollar out of the payrolls of future employees. A clearer example of an indirect tax could not be better illustrated.
Whatever your thoughts are about former Georgia governor and U.S. senator Zell Miller, you must admit that he is somewhat amusing. He gave a speech recently to the American Legislative Exchange Council, wherein he remarked, “Today, we’re spending like we’re Paris Hilton, regulating like we’re Ralph Nader, nationalizing like we’re Hugo Chavez, printing money like we’re the Weimar Republic, and taxing like we’re well, the Democratic Congress.” Although Zell continues to be a member of the Democratic Party, he is clearly not in step with the current Democrats in Washington.
I’ll always be grateful to Zell Miller for one thing – against overwhelming odds, as Governor he was able to get the Georgia Lottery through a conservative and backwards Georgia legislature. Regardless of your feelings on the lottery, it has made affordable education for every student in the State of Georgia that desires an education and is willing to work for it. Due to the Georgia Lottery program, universities in Georgia now have more applications than they can even process. It was a bold move on his part, and in retrospect, it’s done a great deal of good for many Georgia kids seeking a higher education.
I hope you had the opportunity to watch some of the Congressional hearings this past week with former Treasury Secretary Paulson. This country needs to get a grip on how poorly educated and uninformed our Congress really is. I would think that in civics classes around the world, they are pointing out the complete illiteracy of our Congress regarding financial matters. If we learn nothing else from this economic crisis, we need to elect representatives that have more than a few IQ points to rub together.
Zell Miller’s statement above sums up how things are going in Washington today. As I’ve mentioned on numerous occasions, our government’s incredible mismanagement gives me great optimism that new legislators with better financial constraint and an understanding of economic reality will shortly be elected.
As always, the foregoing are just my opinions, and of course, I could always be wrong.
While driving down Peachtree Street earlier this week, I could not help but note that there was virtually no traffic on the road. In spite of this, I traveled through six traffic lights without once hitting a green light. Throughout the entire world, cities and towns have computerized traffic light systems that help the flow of traffic; the City of Atlanta has yet to acquire that sophisticated technology. In fact, if you ever want to test the efficiency of Atlanta’s traffic light system, just drive down Peachtree Street at midnight. Even when no one is on the road, you’ll be stopped by red lights more often than not. But I digress…
When I entered the Colony Square parking garage that day, there were almost no cars parked on the top level. I suppose all of the above is reflective of the slow, hazy days of summer. Because of vacation schedules, there aren’t many people actually working, and due to the heat, I suspect people’s thoughts are absorbed by taking a holiday.
If you haven’t noticed, we’ve recently had a major stock market rally. Perhaps the lack of news is positive for once. As I write this post, the Dow Jones Industrial Average is up a cool 7%. I’m not talking about the Dow’s performance for the year; I’m talking about for the week. Since the Dow bottomed on March 9, 2009, the index has gained an astounding 33%.
The Standard & Poor’s Index of 500 Stocks is also up a sterling 5.8% for the week. Since the S&P’s bottom on March 9, 2009, that index is up an incredible 37%. There’s no question that the true stellar index so far in this rally has been the NASDAQ Composite. This week, the NASDAQ has gained 7.3%, and since its bottom on March 9, 2009, it is up an amazing 49%.
While most Americans have been planning their summer vacations, there’s been a stealthy rally going on; most people haven’t even noticed it. The markets are not gaining because the economy has recovered. Rather, the markets are gaining because they anticipate the economy’s recovery. As I’ve often said, the stock market doesn’t need to see the economy improve – it only needs to see it quit going down. Today we have the evidence to prove that the economy has finally stopped going down.
During Thursday’s trading day, Nouriel Roubini, a long-time gloom and doom forecaster, proclaimed that the U.S. economy would be out of recession before the end of 2009. The market moved up a small amount with that surprising reversal proclamation. Later in the day, there must’ve been too much positive news for Dr. Roubini, and he reversed his position, indicating that he’d been misquoted. He then said that the U.S. economy was in a 24-month recession that he anticipated would not end until the end of 2010. Notwithstanding his complete 180-degree change in economic forecasting during the course of the day, we should examine his other economic forecasts.
If you read my post from May 16th titled “The Most Important Stock Market Week of the Year!” wherein I discussed the famous doomcasters, Dr. Roubini and Paul Krugman, you’ll see that both of them were forecasting a complete seizure by the U.S. government of all banking institutions. Both indicated that there would be no way for the banking industry to survive without the full and complete seizure of the banks by the U.S. government. In the last three days, CitiBank has reported a profit of $4.3 billion for the quarter, Bank of America earned a tidy $3.2 billion, and J.P. Morgan Chase earned $2.7 billion. I suppose the economic reality of positive financial results completely contradicts these doomcasters’ forecasts.
Just as I predicted in my “2nd Quarter Financial Review” post on July 2nd, banks are reporting blow-away profits. It’s often said that an investor would be ill-advised to ever discount the U.S. economy. It seems that these noted economists have discounted it, and therefore, their forecasts should also be discounted.
I also continue to hear from the financial news and others I’ve spoken with that the banks’ losses have yet to be realized. It seems that the public doesn’t understand how accounting really works. If you don’t believe that the accountants haven’t already fully and adequately reserved for these potential loan losses, then you don’t really understand the conservative nature of accountants. Due to the sheer cost of malpractice insurance, you may rest assured that not only are the losses fully recorded on the books of these banks, they are also grossly over-recorded. You may think I make all this stuff up, so here’s the information directly from The Wall Street Journal:
In Friday’s edition, The Wall Street Journal had a detailed analysis of J.P. Morgan’s earnings for this quarter, including information regarding loan losses. For example, they reported that non-performing assets at June 30th were $17.5 billion as compared to $6.2 billion one year ago. “Non-performing assets” is a bank term that doesn’t necessarily mean that the assets are bad, but that the holder of those assets is not currently paying interest. In fact, a vast majority of these loans will be later recovered. You may rest assured that none of these loans are uncollateralized, and even if the collateral has been reduced by 50%, the bank is more than likely going to collect at least half of the non-performing amounts. One might assume that this would be a worrisome sign for the banks, but as mentioned before, the accountants have already provided for this potential liability.
The article also pointed out that later in the quarter, J.P. Morgan set aside an additional $1.8 billion reserve for future credit loss reserves. With this addition, it brings the total reserves for future bad debts to $30 billion. Assuming that non-performing assets were 50% bad, which I consider to be ridiculous, it would mean a potential loss of $10 billion on these non-performing assets. The bank has already provided a reserve three times as high as the potential losses on non-performing assets.
I will also forecast that in the coming year, we’ll see these banks start to reverse these over-exaggerated loan loss reserves and return them to income. My analysis of these particular numbers is that J.P. Morgan Chase has excess reserves close to $15 billion against loan losses. As these amounts return to income during 2009, the financial press will express amazement at the profits suddenly earned by the banks. In fact, it will only be an accounting sleight of hand where it will appear that profits were generated at that point when they were, in fact, generated now.
You have to love the way the government pulls accounting sleights of hand. Even though California is technically bankrupt, they are still continuing to try to balance their budget for the fiscal year that started July 1, 2009. One incredibly creative means they’ve used to balance the budget is by changing the date of their payroll. By changing the June 30, 2010 payroll to July 1, 2010, that payroll is not included in the 2010 budget. It’s amazing how California just saved half of a billion dollars by moving its payroll out one day.
Profits reported this quarter through the first two weeks of the reporting season have been nothing short of “breathtaking.” Goldman Sachs, a company that was previously forced to take TARP money, reported record profits during the quarter. “Record profits” is a term that is used too often, but to put Goldman Sachs’ situation in context, they reported earnings higher during this quarter – in the middle of a recession – than they have ever reported in their entire history since going public.
In addition to Goldman Sachs, Intel reported blow-away profits along with IBM, and of course, the aforementioned banks. Profits have so far been nothing short of staggering given the so-called backdrop of an economic recession.
I told a client yesterday that I felt the need to write a blog on why the public is missing the correlation between unemployment and corporate profits. One of the beauties of technology today is that a manager who knows how to use it can adequately forecast upcoming trends. You’ll recall the gigantic layoffs that were announced over the last few years. During 2008, businesses were making significant personnel layoffs in order to cut costs. From an accounting perspective, they recorded the full cost of the layoffs immediately, even though some of the employees do not leave for weeks, months or sometimes years. Therefore, the layoff costs have occasionally been reported in prior years. Businesses are as lean and mean as they have ever been.
Without the additional payroll costs and because of other cost-cutting moves by corporations, they are able to report record profits. The good and the bad of this is, of course, that the corporations have record profits, but many Americans are without jobs. It is somewhat ironic that we celebrate the success of the corporations to the detriment of the people not employed. However, that’s the basis of capitalism, a concept we used to cherish in this country.
It’s often said that unemployment is a lagging indicator and is the last to turn up. The reason for that should be quite obvious: Corporate employers will continue to operate as lean as possible until the very last second. They’ll refuse to hire more personnel until they’re positive an economic recovery is at hand. Employers will first work their employees more hours and even overtime to get productivity up. They’ll use technology and better computer applications to avoid hiring personnel. It will be a significant amount of time before we start seeing employment start increasing.
It now appears that the employment base has stabilized, so it should be running on a replacement basis for six to eight months. I would not expect any significant improvement in the unemployment rate until at least this time in 2010.
I have been reading the daily articles written on the ridiculous national health plan as proposed by the Democrats in the House of Representatives. In fact, I dedicated an entire post on the subject (“Healthcare Relief without Universal Health”). However, yesterday’s events illustrate how completely out of touch Congress is when it comes to the business world. Yesterday, the House of Representatives pointed out their potential bill for revolutionizing the health insurance industry in America. I will not bore you will all the details, especially since many of them will be changed before the bill gets its final vote.
The bill does contain information on how the cost of the plan is to be financed. One of the proposed changes will be a major hit to the U.S. economy during a time when it certainly does not need additional taxes. What is even more interesting is that we have long been told by the administration and Congress that the proposed changes would bring down health costs, and that the plan would be neutral. Yesterday the Congressional Budge Office reported that the cost savings were just an illusion. Under the proposed plan, health costs would actually increase.
Mr. Elmendorf, director of the independent and non-political Congressional Budget Office, told the finance committee, “In the legislation that has been reported we don’t see the sort of fundamental changes that would be necessary to reduce the trajectory of federal spending by a significant amount. And on the contrary, the legislation significantly expands the federal responsibility for healthcare costs.” Therefore, we know that nothing in the proposed plan will reduce costs.
Speaker of the House Nancy Pelosi said yesterday afternoon that she would squeeze more costs out of the system. By “squeezing more costs out of the health system,” she means fewer services provided by medical institutions. Essentially, the government will pick and choose what medical procedures you need to have and what they’re willing to pay for them. It’s very clear that there will become a rationing of medical services, but the ultimate question is who will be deciding which services are rationed. Will that be you, or will that be the government?
In addition to the rationing of services, they are proposing an 8% payroll tax on all employees where group medical insurance is not provided. Therefore, if an employer elects not to provide medical insurance for their employees, they have the option of simply paying 8% directly to the government plan, which will then provide medical insurance to the employee. I anticipate that once this plan is implemented, virtually all employers will go to the government plan almost immediately. Here’s an example for you to ponder:
If you’re paying $5,000 to $6,000 per year, per employee for medical insurance, and the average employee in America makes $40,000, an 8% premium for this government-provided insurance would be $3,200. I anticipate the vast majority of all employers will gladly choose to get rid of the headache of providing healthcare for their employees and instead take a guaranteed 8% premium in the form of payroll taxes. I anticipate that within five years, there will be only one insurance company in the United States, and it will be the one run by our own government.
In addition, there’s a 2.5% tax on all individuals who do not buy medical insurance and who are not employed by someone, meaning that the self-employed would pay a 2.5% tax to get medical insurance. I can assure you that every self-employed individual in America would gladly pay 2.5% of their income to get medical insurance and avoid the hassle of finding an individual policy.
The logical question to all of this is how everyone’s cost of insurance can go down from where it is today with this sort of plan. Employers will be paying less, the self-employed will be paying less and yet we would supposedly be covered by a fully adequate, government-sponsored medical plan. It doesn’t take a rocket scientist to see that any proposed plan will be heavily subsidized from your tax dollars. Since only 50% of the U.S. population pays tax anyway, the full burden of the taxes to pay for this medical insurance will be assessed to only half of those who are receiving benefits. Duh?!?! Am I missing something here?
Also, the above provisions will dramatically change the perception of how employers will employ people. Take an industry where virtually no one is currently providing medical insurance – the restaurant industry. In that industry, the vast majority of employees are young and healthy individuals who have no desire to purchase their own medical insurance. Now the employer is faced with the legal obligation to provide medical insurance, whether or not the employee wants it.
Under the universal healthcare plan, you would be obligated to pay Social Security tax for that employee at 7.65% the very first day an employee is on your payroll. In addition, the employer would have to pay 3.2% Federal and State unemployment and the 8% government-mandated percentage on health insurance. Therefore, the first day on the job for a new employee, the employer is obligated to pay 18.87% in some form of matching taxation on this employee.
There are very obvious conclusions that will be reached by employers. The first and most important is that they’re going to hire everyone more slowly, which is the last thing this economy needs now. Remember that for every dollar you pay an employee, you’re paying almost 20% additional for these social services. This one act alone will make the recovery of employees working in America very slow. No employer is going to incur this cost without a lot of thought and evidence that the economy has recovered.
I’m sure none of you are concerned with how the government is going to efficiently run their proposed healthcare system. The Wall Street Journal reported on Friday morning that only one month after the United States became the principal shareholder in General Motors and Chrysler Group, LLC, our Congress is now interjecting in the business. Even though both of these companies eliminated 3,200 dealerships to cut costs so that they would to improve profits to pay back the government, Congress has already voted to have all 3,200 dealerships reinstated. I cannot even imagine what Congress will do once they get control of the healthcare system in the United States!
You may also recall that it was said there would be no tax increases on anyone making less than $250,000 under the new proposals. If anyone really believes that this is not a tax increase, then they really don’t understand business dynamics. Since the employer is going to be required to pay this extra 8% cost that they have never been required to pay before, where do you really think this money is going to come from? It will come dollar-for-dollar out of the payrolls of future employees. A clearer example of an indirect tax could not be better illustrated.
Whatever your thoughts are about former Georgia governor and U.S. senator Zell Miller, you must admit that he is somewhat amusing. He gave a speech recently to the American Legislative Exchange Council, wherein he remarked, “Today, we’re spending like we’re Paris Hilton, regulating like we’re Ralph Nader, nationalizing like we’re Hugo Chavez, printing money like we’re the Weimar Republic, and taxing like we’re well, the Democratic Congress.” Although Zell continues to be a member of the Democratic Party, he is clearly not in step with the current Democrats in Washington.
I’ll always be grateful to Zell Miller for one thing – against overwhelming odds, as Governor he was able to get the Georgia Lottery through a conservative and backwards Georgia legislature. Regardless of your feelings on the lottery, it has made affordable education for every student in the State of Georgia that desires an education and is willing to work for it. Due to the Georgia Lottery program, universities in Georgia now have more applications than they can even process. It was a bold move on his part, and in retrospect, it’s done a great deal of good for many Georgia kids seeking a higher education.
I hope you had the opportunity to watch some of the Congressional hearings this past week with former Treasury Secretary Paulson. This country needs to get a grip on how poorly educated and uninformed our Congress really is. I would think that in civics classes around the world, they are pointing out the complete illiteracy of our Congress regarding financial matters. If we learn nothing else from this economic crisis, we need to elect representatives that have more than a few IQ points to rub together.
Zell Miller’s statement above sums up how things are going in Washington today. As I’ve mentioned on numerous occasions, our government’s incredible mismanagement gives me great optimism that new legislators with better financial constraint and an understanding of economic reality will shortly be elected.
As always, the foregoing are just my opinions, and of course, I could always be wrong.
