You are Either Growing or Dying: America and Top Line Growth
First, what is “top line growth” and what does it have to do with the U.S. economy? The term “top line growth” comes from the top line of a company’s income statement which is basically gross sales or income. A company that is able to increase its sales and grow its top line is shown to be doing a good job as it is organically growing the business and not relying on things like laying off workers to look more profitable. A company that has a hard time growing its top line or has a long-term decline in these numbers is typically unhealthy and many times gets “beat up” on Wall Street.
So, what does this have to do with the U.S.? Well, if you look at the U.S. as a company over the last 4 years, ask yourself a question: “Is it growing its top line?”
Look at the chart below:
If you notice, after the crash in 2008, revenues to the government came back a little after things settled down, but have started to go downward in 2011 and 2012. Why?
One of the questions that has to be asked, when looking at a company that has declining top line revenue, “what is/are the causes?” Many times, in companies, it can show up in industry changes or changes in customer base away from their products, or maybe the company has become complacent and has ceased to innovate. At any rate, if these types of reasons are prevalent, it usually signals the decline and possible future downfall of that company.
What has changed over the last four years in the U.S. economy to make its “top line” begin to decline? Especially since the current administration has spent trillions of dollars of stimulus and over $6 trillion total in deficit spending.
The reason lies in understanding how the US economy works and how the government gets its revenues. First, remember, that over half of the U.S. Government spending is on entitlements. In fact, the spending on Social Security, Medicare, and welfare is more than the military and all government agencies combined. The problem with this is that these programs do not help to create new wealth in the marketplace, they simple shift wealth from the private sector (you) to the public sector to be given to those that, in many cases, do not contribute back to government revenues.
The other and most important component of government revenues and really the main factor that drives top line growth for the US economy, is consumer spending — our spending within the economy on everything from groceries to a night out. And, 70 percent of the US GDP is created by our spending and thus, is the where the lion’s share of tax revenues come from.
Common sense would dictate that if the American people and private sector have less money, they have less to spend. So what happens? Revenues go down.
These factors are precisely what we are seeing unfold under the Obama administration. Because of the fact that the government has grown under Obama, there have been hundreds of thousands of new regulations passed on the private sector that have to be complied with (this costs money for companies internally and decreases their ability to spend), per capita incomes have decreased by an average of $4000 per year on the middle class, and that fact that taxes have gone UP on everyone who receives a paycheck, it absolutely makes economic sense that revenues to the government will go down and the economy will suffer because there is simply less money to spend.
And since government does not create new wealth, every dollar that is taxed has less of an impact on revenues than a dollar spent in the economy, as with government there is no velocity of money like there is in the economy.
So what does this mean? It’s simple — the US economy will continue to be anemic and our deficits will continue to go up all because we have less money to spend, thus slowing the velocity of wealth growth and tax receipts to the US.
Just imagine what would happen if you were allowed to keep every dime you made, your property. What could you do? What would you buy? How much more would you spend? How many more businesses could be started that employ people?
If you look at US history, you find two things. The US grew as a country at exponential rates from its founding because there were no taxes and there was freedom of enterprise. In fact, there were no income taxes until the 1900’s, except for a short stint during the civil war. The other thing you will find is that every time taxes have been cut, whether under Democrat John F. Kennedy to Republicans Reagan and Bush, the government has seen record revenue inflows — top line growth. This happens because we have more to spend.
What about the bubbles? Well, in the chart above you can see the impact of tech bubble. Really, the tech bubble was a true bubble. It was an explosion of innovation the world had never seen before. And the housing bubble? Sorry Liberals, you are not going to like this, but it very much caused by Democrats. From Jimmy Carter with the Community Reinvestment Act in 1974 creating “Entitlement Community Grants” to Clinton and Janet Reno doubling down on it fueled the bubble as it forced banks to lend to unqualified people and established minority quotas all to “provide equal opportunity for housing.” It sounds great, but not everybody can afford or manage the responsibility of owning a house and that is the way it is. So when you give them a house for nothing down, based on a signature and then tell the banks, “don’t worry, we will buy the loans through Freddie and Fannie,” what do you expect them to do? Banks wouldn’t dare not make the loans as they would have been called racists, bigots, etc. — which they were. And the Republicans, including Bush were sounding the alarm as Barney Frank said “there are no problems whatsoever at Fannie and Freddie” and people like Franklin Rains (D) lined his pockets making $100 million managing them.
So, in the end the fact is that cutting taxes and putting more money into people’s pockets is the only way to create exponential revenues to the government…taxing all the wealth we have as Americans, every dime from our paychecks would still not be enough. If the United States wants avoid national bankruptcy, it has to grow its Top Line Revenues. This can only be done by having the right leadership in place to foster this growth. John Mariotti, who co-authored Hope is Not a Strategy: Leadership Lessons from the Obama Presidency with me, has recently penned a new book that addresses just that. It is called Roadmap to Profitable Growth. The book was born from discussing the challenges that face CEO’s in business. Most notably, the top two issues were…you guessed it, “Finding profitable revenue (top line) growth and managing the growing complexity of their business and the global environment.” It would seem to me that government’s biggest challenge is creating top line growth and managing the growing complexity that Washington seems to permeate daily. Maybe our leaders should pick up a copy of John’s book when it comes out and actually do some real work for once.
Still don’t believe me that giving Americans more of their money to spend is the way out of this mess? Read the Yahoo Finance article proving just that.
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- U.S. economy shrank in final quarter of 2012, Commerce Department says (jacksonville.com)
- U.S. economy shrinks for first time in 3½ years (jsonline.com)
- Federal Reserve Says U.S. Economy ‘Paused’ (albanytribune.com)
- U.S. economy contracts for first time since recession (money.cnn.com)
- U.S. Economy Slowed in 4th Quarter (abcnews.go.com)
- US GDP unexpectedly shrinks, decline seen temporary – Reuters UK (uk.reuters.com)
- GDP Shows Surprise Drop in Fourth Quarter (cnbc.com)
- Loonie lower as U.S. economy contracts (theglobeandmail.com)
- Robert Reich: The Non Zero-Sum Society (huffingtonpost.com)
- Prepared Testimony of Robert E. Litan Before the U.S. Congress Joint Economic Committee Hearing (kauffman.org)