Looking Through the Wrong End of the Telescope

In my fiscal geekery, I've read and listened and watched as much as I've been able to about the recent financial crises. Something Nouriel Roubini said recently triggered a new line of thought.

All of the conversations revolve around what this or that government is going to do to solve the problems. This has the problem exactly backwards. Governments generate nothing, they only spend their nation's profits. Everything comes from profits. While austerity measures are all well and good, perhaps the more important issue is how to increase profits and how much they need to increase. Let's take the US as an example.

The US is currently running a $1.5T deficit. Assuming a 33% Federal tax rate on profits, this means that American companies need to increase their aggregate profits by $4.5T to balance the budget. Exxon, the most evil and hideous company of all time (except for Goldman-Sachs) hit it's peak in 2008 with a whopping $83.4B in profits.

Let's work with those numbers and figure out how big the gap is. Since we need an additional $4.5T in profits, we need another 54 peak Exxons (or about 120 current Exxons since their profits have fallen dramatically). How likely is that? Well, by comparison, Microsoft, a company that essentially prints money in its basement, had a peak of $23.8B in profit in 2008. Exxon is about three and a half times the size of Microsoft.

Where will we find 54 more peak Exxons? 120 more current Exxons? How about 420 more current Microsofts? Will increasing regulations and taxes help bring this about? Will Cap and Trade help create another 420 Microsofts? In which direction are we going?

Everyone is talking about austerity measures. The Greeks and the UC students are rioting over budget cuts. The alternative to these budget cuts is to generate another 120 Exxons worth of profit. Meanwhile, we're condemning profits in every sector of the economy and decrying greed as often as possible. In fact, we need lots and lots more greed and profits if we're going to keep being so filled with compassion™.

Here, Milton Friedman takes the Eurosocialists to school. Rather than learning from him and pursuing greed and profits so they could afford all of their beloved compassion™, they showered hate on the profitable and attacked them at every turn. And now, as a certain racist maniac might say, their chickens are coming home to roost.