California has a budget. Too bad.

I’m delighted to know that I will not be getting my California tax refund in the form of an IOU.  California has a budget.

My only issue with the entire empasse is a simple one.   It’s not really a “Budget” problem.  It’s a “Spending” problem.  Even before the current economic problems, the California legislature was growing expenses by 5 times inflation.

The 2008-2009 budget is 35% larger than the 2004-2005 budget.  Accumulated inflation over that time period accounts for only 7%, leading to an increase in real dollars of over 25%.  So despite the fact that revenues have grown by 22%, more than three times inflation, we’re still faced with the problem.

The problem is we can’t stop bribing ourselves with our own money.

The state deficit is only part of the bigger self-bribery picture.  More on the Federal Debt later, but suffice it to say that it currently stands at $37,851 for every man, woman, and child in America as of February 19th, 2009.  It’s also over 75% of GDP.

But to make it more real, the average household has 2.59 members, making the Federal Debt per Household $98,034.  Hey, let’s just say you owe $100,000.  Your average yearly income per household is $50,233.  So, you owe twice as much as you make in a year.  Just send it in over the next two years, please.  Because the latest stimulus package is going to add another $10,000 to your bill.

Why Republicans should be happy

It’s now pretty clear why no one party can maintain a long-term hold on the political machinery of the country.  Each party’s success has embedded in it the risks of its doom.

The Republicans swept to power in part by appealing to their base.  In turn, this disenfranchised liberals, who over eight years built up a countering position.  Swapping “family values” for “change we can believe in”, we’ve switched administrations in a wave of hope for an end to some of our embarrassing stumbles.   WMDs in Iraq, Guantanamo, an warrentless wire-taps, an economy in shambles.

And now the Democrats have sowed the seeds of their eventual demise.  While trying hard to save the economy, the stimulus package has enough pork for every political challenger to find a reason to attack once the economy is on firmer footing.  Even my mom can find the pork in the massive stimulus bill.  The expansion in government programs will  be hard to decrease in the future.  Stimulus spending will become the baseline of future budgets.

Thus, the Republicans have one of their best issues handed to them on a golden platter.  Two years from now, with an improving economy, we will here strain after strain complaining of “tax and spend” Democrats and calls for reduced government.

More later, as events develop.

“Buy American” is bad for the economy

The massive economic stimulus plan contemplated (now passed) by Congress has one buried feature that is wrong-headed:  “Buy American”.

The idea behind “Buy American” is seductive to President Obama and Congress.  To shore up the economy and protect American jobs, infrastructure projects will be forced to use only American steel, iron, and other construction equipment like picks and shovels.

“Buy American” is a mistake.  It will cost American jobs and cost international cooperation in American security.

Win some, lose some more
“Buy American” can generate 1,000 jobs in the steel industry according to analysts at the Petersen Institute for International Economics.  The cost? 63,000 Americans will be added to unemployment lines when our trading partners retaliate.

And retaliate they will.  While United Steelworkers Union President Leo Gerard claims that “Buy American” is not protectionism, the EU has already threatened retaliation should the plan go through, with similar saber-rattling from other friendly nations like Canada and Mexico.  Together, these trading partners account for nearly half of all US trade (US Census Bureau).

Economic retaliation against the US could begin an economic downward spiral similar to the Great Depression.  The protectionist Smoot Hawley tariff act of 1930 increased tariffs on imports, which quickly led to retaliatory tariffs on US exports.  The result? Unemployment rates increased from 8.7% to 24.9% by 1933.

That’s 1 out of 4 Americans out of work.

Manufacturing job losses have been a legitimate concern for years.  Nevertheless, U.S. exports have risen by nearly 70% in the last decade, driven by sectors in which America is the global leader – high tech and services.  The venture capital industry is the envy of the world, with world leaders trying to recreate the “Silicon Valley model” of entrepreneurship and technology.  If the goal of the stimulus plan is to revive the US economy and the US steel industry in particular, a far better use of the funds is to invest in technologies and education that increase US industrial competitiveness.

We are not the lowest cost manufacturer of most items. We are not a standalone economy.  Most US households own cars from Japan, clothing from Malaysia, and dog food from China.  The popular Apple iPhone is “designed in Cupertino, CA” but assembled mainly from parts sourced in Singapore and Taiwan.  Apple makes more profit (50% according to iSuppli) than their entire foreign supply chain.  And they would make substantially less profit if they had to produce the whole thing in the USA.  It’s not Apple’s specialty.  The healthy flow of trade keeps our standard of living the envy of the world and reduces the impact of this economic crisis.

Trade One War for Another?
As we begin the long process of restoring our international image as a world leader and beacon of freedom, we are about to break a commitment that could squander the international goodwill and spirit of cooperation inspired by the inauguration of President Obama.

As the worldwide financial market spun out of control last year, representatives from twenty nations – the so-called G-20 – met in Washington to devise a global strategy for containing the economic crisis. The centerpiece of the strategy was simple: no new trade barriers. The logic of this move was equally simple: we may not know how exactly to get the economy moving again, but we do know that increased trade barriers will make the situation worse.
If we renege on the G-20 commitment we made just three months ago, we likely create greater difficulties across our relationships. Canada, Germany, Britain, Italy, and France are all NATO allies deployed in Afghanistan, and are all among our top sources of steel. They are likely to be less willing to deploy more troops in Afghanistan if we harm their economies. China, our second largest source of steel, will be less willing to reexamine its artificially undervalued exchange rate – a major cause of job losses in the United States. And protectionism will further exacerbate a belligerent Russia, another major steel resource.

A New Deal Better
Smoot Hawley led not just to a trade war, but deepened the destabilizing economic conditions that led to the rise of Adolf Hitler, Nazi Germany and the last World War.  While the world landscape is drastically different than the 1930s and “Buy American” is smaller than Depression era policies, America deserves a better deal.  A New Deal Better between the laissez-faire dismantling of financial regulation that contributed to our current economic crisis and the protectionism represented by “Buy American”.  Investments that will build infrastructure, educate the workforce, and stimulate innovation for the future.  Investments that will reap benefits decades in the future.  Investments that can start immediately.

Venture Capital Bailout

Amidst the weekly reports of over 500,000 layoffs at U.S. corporations, another contraction is going under-reported.  The number of venture funds is shrinking, with membership in the NVCA dropping from a reported 1,000 firms in 2000 to around 600 today.

But not to fear, the fiscal stimulus package currently in joint committee has something for everyone, including for out-of-work VCs.  The bill increases the dollars headed to SBICs, or Small Business Investment Corporations, by 50%.  SBICs are, essentially, venture capital firms that have Uncle Sam as one of their major investors (known as Limited Partners in VC legalese).

The 50% increase in government allocation to these firms is regardless of their prior performance.  If the VCs lost every dime of their initial investments, they get some nickels to try again.

The rationale for this VC stimulus package is that venture capital firms allocate money to small promising companies prudently, which is true, and quickly, which is not.  Speed is of the essence in saving the economy, but venture capital firms spend several years deploying their initial capital and several more years until the follow-on capital is deployed.  This is not a quick stimulus for our beleaguered economy.

Lack of speed is only part of the plan’s problem.  Venture firms do not allocate their dollars without first extracting a fee.  These fees range from 2 to 2.5% of the money per year, plus 20% of the profits.   With $17 Billion of capital already committed to SBICs, (according to NASBIC, the industry association of SBICs) an additional $8 Billion of new capital in this stimulus plan will generate a windfall of $800 million in fees for the venture firms over the next 5 years.  Those fees don’t save jobs in floundering technology start-ups.  They pay venture capitalists and their staffs.

The fees paid to venture firms to distribute this money represent a tax on deploying this capital, and do not include the costs of the Small Business Administration to administer the funds.  Contrast this with a reasonable alternative – reducing the income or payroll taxes on technology companies to spur growth, innovation, and employment.  The reduction in taxes on these companies is immediately felt by the organization rather than the VC’s one to three year investment delay.  The tax reduction allows dollars to flow completely to the technology company without the bureaucratic tax of the SBA and the intervening VCs.
But perhaps the VC business needs propping up?  No. More capital in the industry will harm venture capital rather than save it.

Even though the number of venture firms has declined over the decade, practitioners and observers still believe that the industry, investing about $20B per year, is over-capitalized.  As recently as 1994, before the dot com bubble, the venture capital industry deployed just over $4B, according to the National Venture Capital Association.  That’s a 13% per year growth rate.  With substantial growth, the competition for investing in start-up companies has increased, raising prices for companies and depressing returns for the entire industry.  The average VC fund has not had a positive return for their investors since 1999.  The venture capital industry needs less, rather than more, money.  More money might continue the malaise for additional years.

While the local economy might benefit from the increased investment dollars and fees spent in our community, the long-term effect on the ecosystem of venture capital and entrepreneurship will be net negative.  The continued poor performance of the venture capital community could permanently break the engine of economic growth that makes Silicon Valley the envy of every Silicon Alley, Silicon Desert, and Silicon India in the world.

The speed with which the stimulus package is being assembled is apparently warranted to head off doom, but the VC bailout is one of many programs we will discover, later, to be under-vetted and susceptible to unintended consequences.

iPhone redux

I was wrong about the iPhone last year.  It’s a great phone.  I own one.  Actually, I’ve owned three.  One had a battery problem and the second wiped its mine clean daily.  Still, compared to the crash-a-holic Treo 670, I’ll take it.  Nothing new to see here versus billions of other blogs.  Move along.

One Billion viewers for Academy Awards? Er, no.

Playing fast and loose with the numbers, in the last year I’ve heard claims by gushing actresses and supposedly sane television talking heads that both the Academy Awards and the Superbowl garner 1 Billion worldwide viewers.

Poppycock.

I was going to complain about it, but the New Yorker has better writers than me:

http://www.newyorker.com/archive/2005/02/28/050228ta_talk_radosh

Wall Street Bonuses. Should we be outraged?

It’s all the rage right now to slam Wall Street bonuses that are about $18 billion.  Is that number, taken out of context, worthy of outrage?

Probably not.

I think $18B is about 3% of the cost of the problem they created, so that’s a pretty low bonus by Wall Street standards.  :-).

Bonuses look bad politically (kind of like taking the company meeting in Hawaii, even if it was cheaper than Cleveland).  It’s a pretty cheap shot for politicians to make.  It’s not going to solve the problems the economy faces to mess with this small stuff.  We should be equally indignant that the regulators allowed the CDS market to balloon to $45.5 Trillion (twice the size of US GDP) and remain entirely unregulated and off the books.  But that doesn’t play in Topeka, as they say.

Still, never wanting to miss an opportunity to wade in over my head, here is some data:

1. Bonuses were down 40%, the largest year of year decline in 30 years (OK, should have been 80 years, but still)
2. With the average employee earning nearly $400k and the number of employees around 165,000, the total salary number for Wall Street is around $65B
3. That means bonuses were about 25% of base salary (versus a historical 50%)

While one wishes that the management of these firms was different on many many levels, I shudder to imagine a world where the government dictates the salary of private employees.  How much would they say you or I were worth?  It approaches socialism’s “a day’s salary for a day’s work”

This sort of fun with large and small numbers always has to be taken in context for me.  The Microfinance argument of “1Billion people make less than a $1 a day” is a great tag line for western ears.  But it is heartening to realize that decent shoes in those countries cost about a dollar.  A decent pair of Nike’s can’t be purchased in the US for a day’s minimum wage, but yet we let lots of youth in America work at McDonalds without (too much) outrage.  If we can get those billion people up to about $4 a day we’ve done a great deed.  They won’t be buying plasma TVs, but they will have drastically improved housing, education, and health.

Another numbers game is to talk about interest rates by MFIs as being egregiously high.  Compartamos’ 80% interest rate sounds high when US credit card rates are 20%, but low in consideration that Prime customers at Mexican banks are charged 30%, and credit card rates were 70% in 2008.  Sure, we’d like to get those rates down, but that’s a challenge for the Mexican economy, not Compartamos.