Thursday, September 10, 2009

Profit = Overhead?

From the president's health care address to Congress: "[B]y avoiding some of the overhead that gets eaten up at private companies by profits, excessive administrative costs and executive salaries, it could provide a good deal for consumers."

I've heard Obama mischaracterize profit as "overhead" several times now. defines overhead as "The operating expenses of a business, including the costs of rent, utilities, interior decoration, and taxes, exclusive of labor and materials." No mention of profit there.

That's because profit is an entirely different thing than overhead. Profit is what's left over after overhead costs are paid out. To suggest that overhead is "eaten up" by profit is get things exactly backwards. It is overhead that eats into profits, since overheard costs must be payed before any profits are realized. As any business owner knows, if overhead costs aren't met, there is no profit.

I'm not nitpicking here. This is an important distinction, and the president's confusion about it reveals a basic misunderstanding of how businesses work. This isn't surprising as the president has never run a business, but it's worthy of concern because he's advocating policies that hugely impact the economy and the businesses that feed it.

Based on this misunderstanding, it's easy to see why the president is so critical of "the profit motive" in American business. He sees profit as just another cost of doing business. It's a bad thing, he suggests, just soaking up value and preventing consumers from getting a "good deal."

But this cynical, and inaccurate, view fails to recognize that that "evil profit" is someone's income. It's what allows him to live in a house, buy food, and support his wife and children. It also fails to recognize that the business owner who makes that profit is also a consumer, and that he too is looking for a "good deal." He will use that profit to "spread the wealth" to other business owners so that they too can support their spouses and children.

Now I wouldn't go as far as to argue that no one should be president unless they have run a business. But an understanding and appreciation for how businesses work and interconnect is important when you start tinkering with something as complex as the American economy. And this president's apparent animosity toward the private sector and the profits that drive our economy is troubling.

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