As any experienced CEO will acknowledge, you can never save a company by cutting expenses alone. Republicans, with their newly found status in the U.S. Congress, and now democrats alike are focused on reducing the budget deficit and doing so in a dramatized manner for political gain along the way. Perhaps with all good intentions, but you can only reduce expenses to a point. Without sufficient revenue growth and expansion, such reduction is a failed effort. The continued economic recession has front row in the lives of all Americans. While long-term deficits matter, they are long-term.
Anemic Gross Domestic Product GDP growth rate is what matters today. Increase the GDP growth rate and you produce jobs, tax revenue, and investment. The U. S. real gross domestic product increased at an annual rate of 2.0 percent in the third quarter of 2010, (from the second quarter to the third quarter), according to the “advance” estimate released by the Bureau of Economic Analysis. In the second quarter, real GDP increased 1.7 percent. China’s GDP growth rate is approximately 9%.
Cutting expenses on a mass level does achieve lower expenditures, but also reduces services to millions of people who are already over their heads in trying to make ends meet. Unable to live a productive life and pay for the life’s essentials, major cuts in programs further reduce revenue from their taxes had they been working and spending on discretionary items. For some, survival is at stake here.
A higher GDP growth rate causes revenue, that causes tax revenues, and that causes deficit reduction.
Companies increase their revenue in a variety of ways. They may invest funds on research and development (R&D), subsequently bringing a product to market and generating new revenue. Other methods include introducing enhancements and variations to existing successful products. A warm customer is a good customer to re-sell to. The cost of that sale is far less than new customer development. Yet a third proven method is the fast track way to market share and revenue—company and product acquisitions. The acquisition of an entire company or a hot upcoming product fuels the revenue hungry parent company. Expenses and duplication efforts are pared down at the target company, and new revenue netted.
All of this is American Business 101.
Where is the public and political discussion about, and plan for real revenue creation? Cutting taxes at the mid and upper segment of the population in the hope of boistering GDP growth (because people will be spending more) is a wishful and perhaps a long-term idea. It may have worked in prior years (Reagan’s trickledown plan) but this country’s GDP is too anemic for that now. The path to balancing the budget and long-term deficit reduction is real revenue increase.
The ideas being presented in today’s discussions are void of these ideas. Perhaps new taxes on upper income Americans, and significant tax reductions for firms that invest hundreds of millions into the U.S. economy – resulting in jobs, product development, revenue etc. – are the key.
Tax cuts to the masses, decreasing services, and wage freezes are expense reductions, not solid new revenue ideas. We may have to live with long-term deficits for the next 5 years but the fuel for an economic recovery is new ideas for revenue.
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