©Copyright 2010 AirlineForecasts, LLC / All Rights Reserved
How Big Government Spending Impacts The
Economy and Airlines
Vaughn Cordle, CFA / November 15, 2010
Lots of folks have bought into the myth that raising $1 in taxes brings in $1 in revenue and that
raising taxes on the rich will allow the government to pay down the deficit. People buy into this
flawed [static analysis] naiveté because politicians that believe in big government, and benefit
from it, make campaign speeches about it. Obama must push the social agenda he campaigned
on because to not do so would alienate those that helped put him in office. To support the
aggressive social agenda, he must raise revenue to pay for the massively expanded government
required to deliver the goods. As president, he must promote policies that benefit the greater
good and majority, not the 20% that consider themselves liberal or progressive Americans [Gallup
survey]. The problem is that his social programs [as promised] will result in a higher deficit and
sharply lower economic growth. Recent comments from Obama suggest that he is finally waking
up to this reality, but only because he is forced to face this by the American people via recent
elections.
Moreover, various media supporters and advocates constantly beat the drum of class warfare and
the need to tax the so-called millionaires and billionaires. It's a mantra that works for those
promoting an ideology that is based on big government solutions, and it works for the constituents
that benefit from the programs. However, the mantra and tax policies pushed by Obama and team
represents a deeply flawed understanding of how the economy responds to tax increases,
especially policies that punitively tax capital and capital formation via the business owners that
create the vast majority of private-sector jobs.
As a group, progressives and liberals are great when it comes to helping the poor and working to
improve the public safety net, but they don't do math very well and apparently don't consider [or
understand] dynamic analysis, which takes into account how the economy is likely to respond to
changes in tax policy, especially when higher taxes are imposed on those that make more than
$200k [$250k for families]. At least half of these individuals/families are small businesses that
create the majority of the private-sector jobs in this country.
Bottom line: Obama's plan to tax the "rich" is bad government policy because it harms the
economy and results in higher unemployment. The current White House's budget proposals
would:
* Reduce the rate of economic growth
* Result in lower employment
* Reduce personal savings
* Reduce disposable income
* Reduce consumer spending
* Result in higher interest rates
Bush came into office in 2001, the year of 9/11. Federal receipts, outlays and surpluses or
deficits are a function of the economy. So, it's best to view these variables as a percentage of
GDP.
Average federal receipts / average outlays / deficits as a % of GDP:
Bush years [2001-2008]: 17.6% / 19.6% / -2%
Obama years [2009-2012]: 16.1% / 24.6% / -8.5%
The Obama years are based on the fiscal 2011 White House budget estimates and proposals for
expenditures. The most optimal level of outlays as a percentage of GDP is in the 18% to 20%
range, not the almost 25% that this White House is promoting. It really is a problem of too much
spending, something that the true believers of the false mantra refuse to accept. Outlays beyond
the optimal level result in LOWER receipts – hence, the flawed math of those that promote higher
taxes.
TSA costs and security screening costs are passed along to the consumer in the form of higher
fares. Airlines act as a collection agency for the government. The hidden cost is the travel hassle
factor cost that impacts jobs, shareholder returns and economic output. The good news is that
the TSA hassle factor forces businesses to invest in travel substitutes and seek air travel
alternatives, which can result in higher productivity and lower costs. Higher taxes are bad news
for the airlines.
Exhibit A: If Obama's tax policies are allowed, it would reduce Delta's top line revenue around 1%,
operating earnings 12%, but bottom line "net" earnings around 20%. This would result in a lower
market value of equity, a higher cost of capital and a big hit to shareholder returns for all of those
retirees, shareholder employees and other average Americans that hold stock in airlines.
Effectively, Delta would have less capital to spend and hire new employees because it will be less
profitable. This is the same for all other businesses, small and large, that will be negatively
impacted by a foolish tax policy designed to support a size of government that the economy simply
cannot afford.
Economy and Airlines
Vaughn Cordle, CFA / November 15, 2010
Lots of folks have bought into the myth that raising $1 in taxes brings in $1 in revenue and that
raising taxes on the rich will allow the government to pay down the deficit. People buy into this
flawed [static analysis] naiveté because politicians that believe in big government, and benefit
from it, make campaign speeches about it. Obama must push the social agenda he campaigned
on because to not do so would alienate those that helped put him in office. To support the
aggressive social agenda, he must raise revenue to pay for the massively expanded government
required to deliver the goods. As president, he must promote policies that benefit the greater
good and majority, not the 20% that consider themselves liberal or progressive Americans [Gallup
survey]. The problem is that his social programs [as promised] will result in a higher deficit and
sharply lower economic growth. Recent comments from Obama suggest that he is finally waking
up to this reality, but only because he is forced to face this by the American people via recent
elections.
Moreover, various media supporters and advocates constantly beat the drum of class warfare and
the need to tax the so-called millionaires and billionaires. It's a mantra that works for those
promoting an ideology that is based on big government solutions, and it works for the constituents
that benefit from the programs. However, the mantra and tax policies pushed by Obama and team
represents a deeply flawed understanding of how the economy responds to tax increases,
especially policies that punitively tax capital and capital formation via the business owners that
create the vast majority of private-sector jobs.
As a group, progressives and liberals are great when it comes to helping the poor and working to
improve the public safety net, but they don't do math very well and apparently don't consider [or
understand] dynamic analysis, which takes into account how the economy is likely to respond to
changes in tax policy, especially when higher taxes are imposed on those that make more than
$200k [$250k for families]. At least half of these individuals/families are small businesses that
create the majority of the private-sector jobs in this country.
Bottom line: Obama's plan to tax the "rich" is bad government policy because it harms the
economy and results in higher unemployment. The current White House's budget proposals
would:
* Reduce the rate of economic growth
* Result in lower employment
* Reduce personal savings
* Reduce disposable income
* Reduce consumer spending
* Result in higher interest rates
Bush came into office in 2001, the year of 9/11. Federal receipts, outlays and surpluses or
deficits are a function of the economy. So, it's best to view these variables as a percentage of
GDP.
Average federal receipts / average outlays / deficits as a % of GDP:
Bush years [2001-2008]: 17.6% / 19.6% / -2%
Obama years [2009-2012]: 16.1% / 24.6% / -8.5%
The Obama years are based on the fiscal 2011 White House budget estimates and proposals for
expenditures. The most optimal level of outlays as a percentage of GDP is in the 18% to 20%
range, not the almost 25% that this White House is promoting. It really is a problem of too much
spending, something that the true believers of the false mantra refuse to accept. Outlays beyond
the optimal level result in LOWER receipts – hence, the flawed math of those that promote higher
taxes.
TSA costs and security screening costs are passed along to the consumer in the form of higher
fares. Airlines act as a collection agency for the government. The hidden cost is the travel hassle
factor cost that impacts jobs, shareholder returns and economic output. The good news is that
the TSA hassle factor forces businesses to invest in travel substitutes and seek air travel
alternatives, which can result in higher productivity and lower costs. Higher taxes are bad news
for the airlines.
Exhibit A: If Obama's tax policies are allowed, it would reduce Delta's top line revenue around 1%,
operating earnings 12%, but bottom line "net" earnings around 20%. This would result in a lower
market value of equity, a higher cost of capital and a big hit to shareholder returns for all of those
retirees, shareholder employees and other average Americans that hold stock in airlines.
Effectively, Delta would have less capital to spend and hire new employees because it will be less
profitable. This is the same for all other businesses, small and large, that will be negatively
impacted by a foolish tax policy designed to support a size of government that the economy simply
cannot afford.
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