Thursday, July 28, 2011

The Lights went out

The lights went out yesterday. An orchestra of beeps, honks and bleeps echoed throughout the house. Was the bill paid? Phew. A few minutes later I venture outside. It’s the middle of a bright, sunny Southern Californian day. No extreme heat sucking up all of the electricity. Others in the neighborhood have the same issue. Call Department of Water and Power. Mr. Automation replies: “There is a power outage in your area.” No kidding. Estimated repair time: 8 hours. (Actual time: 4 ½.)  Whatever the cause of the outage, I’m sure the result will be increased rates.

The DWP has increased rates twice per year for the past several years. They claim it’s to cover the cost of repairs of an aging infrastructure. It’s true that the Los Angeles DWP system, one of the largest in the nation, is beset by equipment that is older than I am. The problem is that we’ve paid for the upgrade a few times already.

Built into the rate structure are funds to cover the eventual replacement of the equipment. But that money is now gone so the only way to raise the needed dollars is to continually increase rates.

The fund is raided by the City Council every year. LADWP is a municipally owned utility and when it’s had a surplus the City has dipped into its coffers, the very dollars that were supposed to be for the repairs.

Last year the City and DWP got into a huge fight – with the Mayor threatening that if the LADWP didn’t make the payment then the City of Los Angeles would go bankrupt. They sorted it out.

Residents are frustrated having to paying for something we’ve already paid for. It applies towards other issues as well.

Last week Congress failed to re-authorize the FAA, resulting in a lapse in the fees and taxes that are collected for the Federal government. Instead of passing the approx. $65 per ticket savings to consumers, airlines increased their base fares so that the cost per passenger stayed the same but the profit went to the company. Clever on the part of the business community, but infuriating to the public. The unintended message is clear that paying fees/taxes provides little direct benefit to those who pay them.

The result of all of this chicanery is that Americans feel tricked and taken advantage of. The longer term impact is more severe: a lack of trust and faith in our leaders and our institutions. This loss of belief has been slowly dimming. Like bipartisanship, compromise and the spirit of being one nation – it’s done and over. Rebuilding trust is extremely hard to do, and in some instances, impossible.

I’m a smaller government guy. No news flash there. In a country of approx. 300 million people we have a budget of approx. $4.5 trillion – or about $15,000 per man, woman and child. That seems excessive. Are you getting your $15K worth of services? Maybe that’s the wrong way to look at it.

The late, great Harry Browne, Libertarian Presidential candidate in 1996 and 2000. He asked a great Reaganesque question: Name one Government program that works well or better than a private enterprise could. The most popular answer over the years? The National Weather Service. Even that's debatable. There are government programs that do work. But they are few and far between. Having faith in our public institutions starts when results are delivered. 

When a President says that a stimulus plan and taxes on the top 2% of wage earners is going to save jobs and grow the economy – we all want to believe and see it happen. When a President says that tax cuts are going to save jobs and grow the economy – we all want to believe it and see it happen. When jobs are not saved and the economy isn’t on a strong growth pattern we lose faith that any of them know what they’re talking about.

Pox on all their houses. Time for results. Maybe that means getting government out of the way. Not to the point of anarchy, but something less than what we have today. Republicans and Democrats have each delivered a growing government for decades, regardless of the rhetoric.  Why not look at one area of government and try something different instead of a total overhaul? Produce a result. Build confidence. Move on.

Power was restored. A result was achieved. Maybe this can be replicated.

Tuesday, July 26, 2011

The big and easy solution to debt crisis

My personal financial situation, along with millions of my fellow Americans, mirrors the debt ceiling “negotiations” in Washington. We have few prospects for new income and there’s only so far we can go in cutting expenses. Credit lines are maxed. There’s been months of haggling back and forth with a new plan with virtually every news cycle. They’ve all missed the one big, easy solution.

It’s time to sell something. Americans are pawning and selling to make ends meet. (Ever seen Pawn Stars?!?) Why not the U.S.? What to sell? Following the fairness doctrine of last in first out – we’d have to spin off Hawaii. Maybe just one of the islands would fetch a trillion or two? By unloading only one of the islands we wouldn’t have to change the flag, though it’d be a huge economic boon to have to re-do everything for 49 states again. If we’re hedging then perhaps a lease-back --- I’m sure the Chinese would see it as fair collateral to their $1.152 trillion.

There’s always Alaska. It’s the 49th state (second to last) and it is huge. Only grizzlies live up there from what I heard. Maybe we sell parts of the state to the oil companies? That’d help with national security and the worries of foreign ownership. Gas prices are sure to go down as a result. That may take some time.  It’s probably easiest to slice off bits of the state and sell some to Canada. I understand Russia’s very close – they might want part of the state too if the price was right.

Another option would be splitting off the bottom part of Texas and selling it. Governor Perry suggested the possibility of secession. Knock off the boot --- how many people would really notice?

Riverside County Supervisor Jeff Stone proposed a few weeks ago to create South California. It is the 251st attempt to split the state. If it works then we could auction the North to the highest bidder. Maybe if San Diego county was lobbed off and sold to the Mexican drug cartels that would be more incentive?

In addition to pawning or selling land – there’s always a landmark or two that wouldn’t be missed. The Brooklyn Bridge has been sold a few times before, so we could always try to sell it again. Or the Hollywood Sign (like the con artists did in an episode of Hustle).

A more serious solution: refinance. Turns out that $3.2 trillion is held by private investors.  Foreign investors own $4.4 trillion – just about the same amount as is owed by intra-government agencies ($4.6). The Federal Reserve own $1.4 trillion.

The potential damage that a default would do to the global economy would be significant. A forbearance by Ben Bernake of the $1.4 trillion might help while the politicians figure things out.

The debt ceiling has been raised 10 times in the past 10 years.  The big and easy solution is that when Congress approves a budget that is out of balance, there must be a provision to borrow the shortfall and raise the borrowing limit. It only makes sense, which is why it’ll never happen.

Thursday, July 21, 2011

Wanted: A Decider

What do Rupert Murdoch, Barack Obama and Mike Barbour have in common? They each were in the news this week regarding their ability to take responsibility on major issues. Mike Barbour oversaw “Carmagedden” which never materialized and actually opened the 405 Freeway nearly 18 hours early. Rupert and James Murdoch went to a Parlimentary Hearing to disavow knowledge and responsibility for the hacking scandal in England that has resulted (so far) in 1 death, multiple arrests, payoffs, resignations and the demise of a 168-year old newspaper. President Obama has yet to get a solution to the debt ceiling and Republicans and Democrats seem no further along in preventing default.

A key characteristic of leadership is the idea that decisiveness equates to results. Mike Barbour managed hundreds of personnel, interfaced with dozens of government agencies, neighbors, politicians and the media. His leadership is hailed thanks to preparation and wasn't a solo effort.

The Murdoch’s appeared to be out-of-touch and laid responsibility at those whom "they trusted." News Corp. is a multi-billion enterprise with 53,000 employees. Holding the CEO responsible for every decision of a subordinate is a stretch. True leadership would have been the Murdoch’s taking accountability for the culture they fostered that permitted the alleged activity while not being personally responsible for a particular act.

President Obama has been trying to get the debt limit increased for months. Republicans blame him for not entering the fray earlier. Democrats fume that when he arrived at the negotiating table he had already shown his cards. With divided government the President is expected to get a solution. Names have been called, fingers pointed and whatever resolution the country winds up with will have been done in a most irresponsible manner.  The solution will be a default resolution…not necessarily in financial terms, but ceding to the bare minimum of acceptability by all involved.

Political decision making isn’t as neat. It’s not supposed to be. The founders worked from 1774 to 1789 to finally establish the Untied States. It took 2 Continental Congresses, the Revolutionary War and a myriad of conflicts over 15 years before the Constitution was fully ratified and the first Presidential election held. Today we wax poetic about the founders, often forgetting the substantial and almost insurmountable conflicts that existed.

Simon Schama, a noted historian, said  recently on CNN's In the Arena: “The miracle is that Hamilton and Jefferson ever collaborated enough to craft the Federalist Papers. Both of them - and it's a lesson for us - were prepared to sink their fundamental differences about what American government was to get the Constitution ratified. The issue that is the hot button issue for us now is actually in the best tradition of American politics. It is whether or not to take a relatively expansive view of what government should do. Is government only entitled to do those things, which were enumerated in the late 18th century?”

The differences between Hamilton and Jefferson foreshadowed the establishment of the political parties and the differing views of the role of government that rule today’s political discourse.

The founders differed philosophically and each side was as passionate about which way they felt that the United States should go as each side is today...maybe even more so. One point of view didn’t prevail. Instead they painstakingly crafted a mechanism that permitted dissenting opinions while still allowing for the country to be governed. There was no Decider.

Today’s politicians stand in the shadow of those who built this country – literally and figuratively. When campaigning for the position (whether it be a legislator, a governor, a congressperson, a senator or a president) each candidate promises that they’ll accomplish X,Y and Z. It makes for good entertainment, effective politics and bad policy because it ignores the reality that they’ll face upon election.

The victor will arrive at their chosen position and discover that they aren’t in control, that the mechanisms for establishing law and enforcing it is cumbersome and difficult. It's supposed to be.  Consensus is required.

The rise of the Imperial Presidency is one response to the frustration of being unable to unilaterally implement a particular agenda. It’s destined to fail because the Executive Branch was never intended to allow for more control than the Legislative or Judicial Branches. The idea (floated most recently by President Clinton) that the Executive Branch can simply go around Congress and raise the debt ceiling on its own is the most glaring example of Washington disfunction and Constitutional ignorance.

Americans want a Decider. The last President even titled his autobiography “Decision Points.” There is comfort in knowing that one person stands up and takes responsibility. It is iconic American folklore:  taming the West and man conquering the elements.  It built the nation. The reality is much less sexy. Consensus is required – it’s the only way the country came into existence. I’ve decided: it’s the only way the country will thrive.

Thursday, July 14, 2011

To Tax or Not to Tax: is that the question

July 15 2006 at 9:50pm was the first public tweet. Jack Dorsey, founder of Twitter wrote: "just setting up my twttr.” Today there are more than 200 million tweets per day. As the world celebrates the fifth anniversary of the latest evolution in communications the conflict between the digital world and its physical counterpart is growing. Amazon, the world’s largest online retailer (triple its nearest competitor), and the State of California are poised to go to battle over the state’s newest law requiring online companies to charge and collect state sales taxes. Previously only companies with physical locations in the state were required to charge sales tax. Amazon and others are refusing and there are legal battles as well as PR fights underway in California and elsewhere.

Business owners and legislators in the 12 states that have tried similar efforts argue that online retailers are at a competitive advantage because they don’t have to charge the tax. Consumers by law are supposed to pay the use tax regardless of whether the retailer charges them. (How many of us do?) In California the sales tax rate for the past 2 years was nearly 10%. So if you buy a product for $100 at the store you have to pay $110 whereas ordering the same item on your computer you would pay $100. (For most sites consumers have to pay shipping and handling so any price advantage in total seems to be negligible and having to charge tax on top of that might way become a competitive disadvantage.)

Online retailers argue that since 1922 the law has been clear: sales taxes are to be charged by companies that have a physical presence in the state. When online commerce was in its infancy in the late 1990’s Congress passed several laws (and have subsequently reaffirmed them) that continued the legal precedent of nearly a century.

The internet is the fastest growing, most successful economic innovation in human history. From 1994 to 2011 – seventeen short years – the consumer commercial Internet went from zero to 2.095 billion users (30% of the world population.)

Revenues are significant. E-commerce in 2009 for retail sales was up 4% to $145 billion, part of total online spending of $3.371 trillion.

Sales taxes fund a variety of programs and services – from education to public safety. The idea has always been that if a business resides inside of a particular city, county and state then it’s likely that it and its customers will use and need community services. The merchant collects the tax and pays it to the state on behalf of the consumer is a pass-through proposition where the business has to incur accounting and reporting costs. That cost of business is the result of that company deciding to have a physical presence in that community.

What about those companies who choose not to have a physical presence in that community? Why should they incur costs and increase the price of their product if they’re not going to benefit from the services that the community provides?

The better question is which taxes are effective. Governments have been imposing, collecting and spending tax money since early Egyptian times.  While it would be easy (and naive) to demand that there be no taxes whatsoever, the more productive issue is looking at some of the different types of taxes – sales, personal, corporate, etc.

Most people support corporate taxes because they don’t directly pay them. Consumers pay those taxes indirectly as that cost is passed through in the cost of goods and services. There is much talk these days about closing tax incentives (“loopholes”). Incentives are created as a way of legislating behavior towards a particular result.

When the U.S. government wanted ethanol to become a competitor to oil as a way to reduce reliance on OPEC, launch a new U.S. industry and support farmers --- companies who invested in the development of ethanol were rewarded for this risk by getting tax breaks. The government felt that the potential loss of tax income would be far outweighed by the emergence of a new industry. It didn’t quite work out that way. Take the ethanol example – a well meaning idea with poor results – and multiply it by thousands of other programs and you have a picture of the U.S. corporate tax code. A mess riddled with programs for every conceivable industry. It’s these incentives that result in GE not paying any taxes last year despite record profit.

51% of Americans do not pay personal income taxes. 30% get money back from the IRS without having paid any tax through a variety of programs that largely target and benefit the poor. The top 20% of wage earners pay 68.9% of all taxes.

Sales taxes are generally considered the most regressive. People with limited means wind up paying more in sales taxes as a percentage of their overall income than people who have more money. 45 states have them and there is no national sales tax.

The fact that taxes are used to drive political policy is the problem. The tax code is used not to raise revenue to pay for services, but rather to engineer a society - whether at the individual or the corporate level. After a century of tinkering it’s unwieldy and unfair.

To tax or not to tax isn’t the question, is how to tax. Sounds like a great tweet.

Thursday, July 7, 2011

My way or the highway, the bridge, the….

Whether it’s sung by Frank, Liza or Elvis - “My Way” captures the zeitgeist that we all want to have when our time comes. “I've lived a life that's full … Regrets I've had a few… I took the blows … I did it my way.” It’s an anthem of independence and assurance that when reflecting on one’s life one can do so proudly. Doing and living “my way” is distinct from getting “my way.”

Successful entrepreneurs often create value for themselves and their companies with a passionate and exacting belief in their vision done in their own way. These innovators have been the driving force of innovation and the economic engine of the world from the beginning of time. For over twenty years I’ve worked with entrepreneurs in a variety of capacities, largely as a consigliere (one who advises and guides the principal). My expertise is in strategically delivering results whether for-profit or not.

In a not-for-profit situation the challenge is magnified since the Board of Directors is in the role of principal – there are more dynamics (and agendas) in play. It’s especially rewarding to work with a volunteer group of individuals who are passionately committed to a cause and guide them towards a result that grows the organization and benefits their constituents.  (Wait...isn't that the description of Government service?!?)

There are commonalities between all types of organizations that allow results to be produced. Fundamental is the premise that the result is specific and universal. With a business that usually is to generate a profit. With a charity the premise is the organization’s mission statement – it’s stated reason for existing. Frame actions around the premise and results can be produced. Easier said than done, which is why I'm available for hire!

I have a very particular process that I like to use when I work with an organization to identify issues, evaluate opportunities and implement solutions. The baseline of  the process is flexibility. Arrive with a preset agenda then there is no benefit to the organization being serviced.

Wouldn’t it be nice if our elected leaders had the same commitment to the country? It has become heretical for politicians to approach the issues of the day with a commitment to resolution, which requires at its core flexibility. Compromise doesn’t equal capitulation.

Both the Democrats and the Republicans have deep divisions on the philosophical approach to nearly every issue.  At least they do rhetorically.  Those divisions once were the beginning for forging a middle ground. Today those divisions are the end point. “It’s my way or the highway.” (With earmarks, that includes bridges, tunnels and other assorted projects for their districts.)

Both parties would benefit politically to let the debt ceiling deadline pass, have the government stop payments on some obligations. The 2012 campaign would be President Obama saying that the Republicans drove the country to default while the GOP will say that in less than 1 year in office they got the country to a balanced budget. Meanwhile the credit markets will be spooked, the cost of the existing debt will increase and cable TV news will delight in the finger pointing.

California is a good lesson for the GOP. For years Republicans were able to control the budget process through their minority representation in order to extract concessions that met their philosophical goals. In early 2011 Governor Brown reportedly had ceded on nearly every demand they had just to agree to have the public vote on continuing the 2-year old sales tax rate increases. (The GOP wasn’t being asked to extend the increases, just to allow the voters the ability to vote on them – which faced an uphill battle.) After much back and forth, including the vetoing one budget, the Governor and Democrats created their own solution and California started its 2011-12 fiscal year with a balanced budget, only the third time in the past 25 years. The Republicans got nothing. Congress: take note!

There are some reports that the President might go around Congress (again) under the theory that the 14th Amendment requires him to “keep the validity of the public debt.” It’s a suspect approach since the Constitution very clearly puts all funding (including debt funding) with Congress. What to do when nobody is willing to move off of their philosophical ground?

We need leadership.  Any member of Congress can introduce a bill. Why doesn’t a group of Democrats – perhaps led by Nancy Pelosi – submit a compromise bill, one based on the (flawed-but-still-better-than-nothing) Bipartisan Debt Commission Report? The “tea party” activists would be outraged, spitting fire. The left wing activists would be jumping up and down waving and wailing. The problem would actually be addressed.

Entrepreneurs make it their way; Toddlers get their way. Politicians try to do both. It’s time for us as a nation to do it our way – together.  Cue the orchestra.

Related:  Ready my January blog about the Debt situation
Follow me on Twitter:  @craigbcoogan