Business may be rising, but it’s still way down
Dear Mr. Berko:
I continue to read in the local paper and hear on TV that revenues and profits for many companies are increasing by 10 percent or more, and then the stock market jumps 200 points or more. A 10 percent increase is a good number, so why are we still in a recession, why is unemployment still 9.5 percent and why are friends of ours, who own their own businesses, complaining that their sales and income are still weak?
S.K., Columbus, Ohio
Dear S.K.:
I’m going to give you an answer that is so simple a high school graduate might understand it.
Assume that in 2009, you were selling an average of 100 OxyContin tablets a week to kids, friends and neighbors. In 2009, you retailed them for $20 each and made $10 on every pill. (Frankly, this is a darn good job — the income is tax-free, there’s no bookkeeping and you work only the hours that suit you.)
This year, because the economy is soft, you’re only selling 50 Oxies a week, which is a 50 percent decline in sales. Also, the selling price is down to $10, so your profits fall from $10 a pop to $5, which is also a 50 percent decline in earnings.
I know that the recreational drug business is impervious to recession, but humor me just for illustrative purposes. If you happen to sell 55 Oxies at $10 each this week, your sales will have increased by five pills, or 10 percent. Got it? Because your sales increased by five pills, your profits also increased by 10 percent.
Now, 10 percent is a very attractive number, so the administration and the media fall all over it as if the Lord had declared a miracle. Newspaper headlines proclaim “the recession is over,” and TV stations’ evening news programs excitedly shout every half-hour that the recovery is on track. So the stock market rallies. And the administration laps it up because it proves their policies are working.
Though the 10 percent numbers are gospel, many Americans don’t understand that sales and profits are still down 45 percent from 2009. Many are so dumb that they can’t compute that if earnings fall 50 percent, they must rise by 100 percent to equal last year’s numbers.
The reason revenues grew by 10 percent is that the stimulus package dropped more money into the economy. American consumers (half of whom are of below-average intelligence), thinking this is free money, rushed to spend it.
The other reason profits increased is that American corporations have figured out how to make more money with fewer employees. You notice that there are fewer cashiers at CVS and Wal-Mart. There are fewer salespeople at Best Buy and Macy’s. And of course, more corporations are using computers rather than human beings because computers don’t demand pension plans and health insurance, and don’t belong to unions that agitate for higher pay and more benefits.
Frankly, the stimulus package was poorly conceived. That money should be used to stimulate growth in investments that will yield more than their costs, rather than just increasing our national debt.
Business will recover, but it will be a long, slow recovery without the excesses of the biotech, high-tech and housing bubbles.
Please address your financial questions to Malcolm Berko, P.O. Box 1416, Boca Raton, Fla. 33429 or e-mail him at malber@adelphia.net. ©2010 Creators.com
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