Kitchen Table Economics: An Invitation to Think Differently

BOSTON - EntSun -- I am a Turnaround Consultant. I have spent the last 25 years working almost exclusively with small business and middle market companies.

I want to be clear from the beginning: I am not an economist. My observations are anecdotal. They come from 25 years of looking at businesses at a very granular level—invoice to invoice, employee to employee, bank call to bank call, and sleepless night to sleepless night.

That experience has shaped the way I look at problems.

When a middle market company gets into financial trouble, we don't start by looking at the stock market. We start with the cash flow.

The 13-week cash flow is the Bible of a turnaround professional. It tells us what cash is coming in, what cash is going out, and when the company may have a problem.

So I started thinking about the U.S. economy in the same way.

What makes a 13-week cash flow go negative?

And just as important: What can make it positive again?

I believe two of the biggest drivers are the cost of money and the cost of energy.

High interest rates increase the cost of borrowing, whether it is a line of credit, equipment financing, or other debt. Higher energy costs increase the cost of operating a business and the cost of almost everything that business produces.

The employee feels the same pressure.

When the price of gasoline goes up, the employee sees it every time they fill their tank. When the cost of borrowing goes up, it eventually shows up in the price of many of the products they buy.

If wages do not increase enough to offset those increases, it is a real pay cut. The employee has less purchasing power.

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The small business and middle market companies have the same problem from the other side of the table. These companies often do not have easy access to the capital markets. They operate invoice to invoice and payroll to payroll.

Higher costs can reduce their margins and their cash flow. Lower cash flow can lead to covenant violations with their banks. The banks then become more concerned, which can make it harder for companies to obtain additional capital.

It can become a vicious cycle.

So, what if we looked at the economy differently?

Rather than starting with an economic theory and then asking what it will do to the economy, what if we started with the cash flow?

What is causing the pressure?

What is making businesses and consumers spend more?

What is making it harder for a business to remain cash-flow positive?

And then, once we understand those pressures, where should we adjust interest rates and the money supply?

My proposal is simple.

First, gradually reduce interest rates, perhaps over a set period of time, with a target of approximately 3%.

Second, reduce the amount of cash in the economy by at least the amount that was printed and put into the economy during COVID. This would also give us an opportunity to determine how much money the economy actually needs to support the goods and services being produced.

Third, produce as much oil and natural gas as possible, build more refineries, and continue investing in nuclear power. Lower energy costs would reduce one of the major costs facing businesses and consumers.

I would also look at the federal deficit as a loan workout.

That is not meant to be complicated. A distressed middle market company has a workout plan. It identifies the problems, establishes a plan, measures the results, and adjusts the plan when necessary.

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Why couldn't we approach the federal deficit with the same discipline?

The government has many of the levers needed to manage the process. The results could be transparent and monitored regularly.

Tax policy could also be part of the plan. For example, windfall profit taxes on oil and gas or changes to carried interest could provide additional revenue without increasing taxes on ordinary income, dividend income, interest income, or capital gains.

Ultimately, I would look at a simpler tax system.

I am not suggesting that I have all the answers.

I am suggesting that perhaps we should look at the problem through a different lens.

There is nothing wrong with economic theory. Economics is a moving target. Circumstances change, and reasonable people can look at the same information and reach different conclusions.

But after 25 years of doing turnaround consulting, I have learned one thing:

Start with the cash flow.

Look at what is actually happening to the business. Identify what is causing the problem. Deal with the biggest problems first. Measure the results. If something isn't working, change it.

That is how I would approach a troubled company.

Maybe it is also worth asking whether some of those same principles could be applied to the U.S. economy.

This is not an argument. It is an invitation to think differently.

Author's note

This article is intended to start a practical discussion. The author welcomes thoughtful responses, including disagreement and alternative views. For more information on New England Consulting Partners visit our website.