A business allocates capital based on some value added formula. Various projects must compete for scarce capital based on the present value return of each investment over some period of time. The projects that give the best return get the capital, those that don’t get scrapped or delayed.
We have a so-called Super Committee supposedly working to reduce costs. If they fail, costs will be automatically cut beginning in 2013. Why 2013, because there is big election in 2012. It appears that the Super Committee may fail. We had our credit rating cut for the first time in our country’s history. We have no surplus cash flow until the budget is cut or revenue is increased. We must borrow to meet current needs.
A business, faced with this problem goes about cutting expenses. When expenses are cut or revenue raised and cash flow goes positive, capital budgets are resumed. Until then, only maintenance is done. Especially if the business can’t really borrow more without further credit downgrades. Assets are sold, business lines cut, unprofitable businesses eliminated, personnel reduced, and all the stops are pulled out. Without capital infusions the business will die.
We have our President standing before bridges all over the country telling us that businesses are losing billions because those bridges need to be built or rebuilt. What happened to the no shovel ready projects joke? The truth is shovel ready is not going to happen in this country. Every project the President is standing by needs an environmental impact study. Those studies take months if not years. In many cases they don’t happen or the cost to meet the environmental needs raise make the project too expensive.
How would you like to be on that Super Committee, doing the work the President should have done, while the CEO is out touting new capital spending with money we don’t have. Spending money that can’t be spent because the government has put regulations in place that prevent the project going forward.
A local community near me needed a traffic light. Too many accidents. It took six months, an environmental study that cost $30,000, and a “meet the union rate clause” to get the traffic light.
President Obama would not last 6 months as a CEO of any corporation of any size. Yet, we tolerate him as the CEO of the biggest corporation in the world.
