Wednesday, February 23, 2011

It's All About the Pie or Tera's View from Madison

I live in Madison, WI.  For the past week people I know around the country has been asking me whether these protests are as real as they appear on TV.  They ask me what I think about them; what would be ‘tera’s way’ of solving this.   Would I raise taxes on everyone? Cut spending?  Cut salaries?  Aren’t we just squeezing one side of the balloon only to have it pop out somewhere else? Isn’t this all just inevitable?

I think that all of this -the labor protests and the tea party counter protests and the anti-intellectual animosity, and the anti-science belief system, and the increasingly bellicose values system -  are just symptoms of a much, much bigger economic problem that we’ve been denying for years: our country’s economic competitiveness is eroding at an accelerated pace.   If we use the typical pie analogy, we live in a country where the pie is no longer getting appreciably bigger every year.  In fact, we’ve come out of a period where the pie actually shrank quite considerably and at the slow rates of growth we are going to be lucky to produce in the future, the pie may take years to get back to where it was, never mind get bigger.

So what happened when the pie was getting bigger?  It used to be that people in the highest income brackets could look forward to their wealth increasing every year at an accelerated pace.  Thanks to financial engineering, they could actually troll for investment deals that yielded 50% annual return.  They came to expect at least 30%.  Meanwhile the investor class in places in Asia were still entrepreneurs who were thrilled to see a 5% return and would work their hands to the bone to see these businesses succeed.  There were still entrepreneurial people like that in the US, but they had a hard time justifying the risk when they could work for someone else and make decent money and they had a hard time finding people to invest in their businesses.  The companies that started tended to be those with low upfront investment and high potential for leverage. Even the poor did better as a rising tide did in fact raise all boats.  Governments had increasing tax revenues without increasing tax rates and everyone seemed somewhat happy.

Then came the great unraveling.  Suddenly investor returns dropped for everyone.  The banks were in trouble.  The institutions that guaranteed the banks were in trouble.  The stock market – where most of the middle class had their 401k’s – fell.  The layoffs began.  The pay freezes and pay cuts began.  Meanwhile our population got older, used more expensive medical care.  The pie shrank.

What is happening in Madison is a fight for the crumbs that are left as we race to the bottom.  We won’t hit the bottom overnight, but it will happen, because we are spending all of our energy fighting over our shares of a shrinking pie instead of grappling with the things that are causing the pie to shrink in the first place. 

We cannot do things the same way we’ve always done them when the rest of the world is doing them cheaper and better than we are.  We have to be innovative and create opportunities in emerging economic sectors, things like green energy and biotechnology.  So how have we done at this?  Our manufacturers of solar panels are moving to China.  The largest wind turbine companies in the world are not in the US.  China is pushing capital into the sector with the goal of becoming the global leader in a decade; we can’t even manage to create a predictable enough incentive system to encourage investment in the sector.  In biotechnology, places like Korea have made advances in biomedical research that cause our ethical stomachs to roil.  But instead of advancing our ability to drive the ethics of how the technologies are developing by being the technical leaders in the field, we refuse to allow the research here and surrender both the economic promise and ethical leadership to countries we already know we don’t feel comfortable with.  China and India will soon become the largest consumer markets in the world, the largest manufacturers.  When that happens, they will own us.  And you think the pie is shrinking now…

Meanwhile our leaders punish the most vulnerable among us.  Medicare and Medicaid benefits are set to be cut.  Already doctors are refusing to see more Medicare and Medicaid patients, so the most vulnerable among us are going with no medical care.  Our global competitors, not just in Europe but also the so-called developing world, have governments that cover basic care for all of their citizens.  The result is that US companies are less competitive because they have to cover expenses that governments cover elsewhere.  Why business leaders are so resistant to government-funded health care is beyond me. 

And why the rich are so angry is also beyond me.  The Gini coefficient in the US, which measures the distribution of income across income groups, shows that incomes in the US are more unequal and skewed toward the wealthiest among us than at any time in our entire history.  We look like a South American dictatorship. Private sector ideology about the role of government is as much at fault as government’s failures to do what’s right.

No one seems to be doing anything to help grow the pie.  In its zeal to fix the financial crisis, the SEC has imposed the same regulations on small community banks as it did on the big banks.  The only problem is that most of the lending that creates jobs in the US comes from smaller banks and they didn’t cause the problem in the first place.  Small banks are now disappearing at an alarming rate because they can’t recapitalize fast enough, taking their small business lending with them. 

Even the SBA, supposed to be an institution that supports entrepreneurs and entrepreneurship, now has such onerous clauses buried in the unlimited personal guarantees they require of entrepreneurs that no one in their right mind would sign up for them.  Banks that have survived have added the same language.  Basically, the only way an entrepreneur can get a lender is to sign up for unlimited personal guarantees that now continue even if the entrepreneur no longer runs or even works in the company.  The bank can change the amount, term, interest rate of the loans without even consulting the guarantor as long as there is someone in the company that is authorized to sign for the company. 

Finally, investors are still more interested in chasing 50% returns even if they come from overseas rather than investing in companies that will create the jobs of the future at home. With all of this going on, what entrepreneur in their right mind would start a business in the US? The best and the brightest graduating from places like MIT are voting with their feet and moving overseas. 

It didn’t used to be this way and it doesn’t have to be this way now.

So what would I do in Madison?  It’s actually quite simple: equitably share the pain and address the real problem.  As long as the pie is shrinking, government will have to shrink with it.  We have to cut spending and raise taxes.  And if we want to stop this death march, we need to use every means at our disposal to create a climate that encourages innovation and entrepreneurship. 

We need to grow the pie again.

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