Dear Mr. Berko: I continue to read in the local paper and 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.)
Because the economy is soft, you’re only selling 50 Oxies a week, which is a 50 percent decline in sales. And because the selling price is lower, your profits fall from $10 a pop to $5 a pop, 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. You may have to think this one through. But trust me, the math is correct.
Now, 10 percent is a very attractive number, so the administration and the media fall over this 10 percent number as if the Lord declared a miracle. Newspaper headlines proclaim “the recession is over.” The radio stations’ news blare “happy times are coming back,” while TV stations’ evening news competing for coverage 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.
While the 10 percent numbers are gospel, many Americans don’t understand that sales and profits are still down 45 percent from 2009. Sadly, many Americans are so dumb and can’t compute that if sales and 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. And American consumers (half of whom are below average intelligence), thinking this is free money, rush 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 it takes longer to connect with a customer service rep at Verizon or United Airlines. And, of course, more corporations are using computers rather than human beings because computers don’t demand pension plans, health insurance or belong to unions that constantly 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.
Now the 40- to 45-year-old worker who made $30 to $40 per hour is being replaced by a younger, educated worker who will make $15 to $20 per hour.
Business will recover, but it will be a long, slow recovery without the excesses jeweled by the biotech, the high-tech and housing bubbles.
Please address your financial questions to Malcolm Berko, P.O. Box 8303, Largo, FL 33775 or e-mail him at email@example.com.