Economic Ramblings, Part Deux

Warren Buffett got me going again. I won't rehash what I wrote last week, though I will throw out a few grins at the notion that I think like Buffett [:-D]. No, instead I want to briefly rant on the snake oil economy that America is allowing our politicians to sell them.

I heard the first intelligent thing I've ever heard from a Tea Party supporter. I know, I know, but even a broken clock is right twice a day. Matt Kibbe of Freedomworks made a seemingly innocuous statement on the July 29th Real time with Bill Maher. To paraphrase, he said that the Tea Party ideology was born out of the middle class's belief that they bear the burden of socializing the bottom class AND the upper class.

Now, again, that seems like a fairly innocuous statement, no? True to form, it was lost very quickly in the show. However, consider our progressive income tax structure and then juxtapose that with the points raised by Buffett and myself about the rich underpaying vs their own workforce as a percent of their income. It suddenly gives Mr. Kibbe's statement some foundation.

This gets me to my point about how our politicians try to present our economy. The old guard wants to harangue about our manufacturing Economy - we used to make shit, then we'd blow people up with that shit for the purpose of selling them other shit to drive our economy. The new wave is the Service Economy - everybody else makes shit, but we're the smartest people on the planet, and therefore they need us to come up with the shit to be made and then provide the service to keep it running at a premium.

They're both a complete load of, well, shit. We sold the Manufacturing Economy up the river a few decades ago. The Service Economy is a Utopian dream that we won't be able to fully achieve. Instead, I'd like to introduce my own concept: the Performance Economy.

This idea is not based on any sort of hard facts, loose statistics, or abstract theories. I've conceived this idea purely my own, solely based on my own professional trials and tribulations. My concept of the Performance Economy is quite simple: The value of our economy is based on what we do.

Way too easy right? Well, let me elaborate on the most important part of my statement, the word "do." See anyone can do anything. That is the very definition of freedom, but that does not necessarily create value. Conversely, creating something that results in value is not entirely what I'm going for either, as it may only be a one-time deliverable. No, my idea bears two key indicators: measurability and successful progression.

Measurability is key to making sure that progress can be accurately tracked. From the assembly line to the board room, anything can be properly framed within metrics that define the value of work being done. Those metrics can then to transitioned and transformed into guidelines by which business can operate. Think of this as the present value of an organization or venture.

Successful Progression determines the future value of an enterprise. Anything can work once. "The Real World" has had dozens of sequels, but none will approach its success. No, the way to grow is to take the metrics of a successful enterprise and evolve them to the next step that drives the next great venture. To build on the "Real World" example, the successful progression is "The Jersey Shore."

To pull the concept away from the MTV artificial universe, consider Apple vs. Microsoft. Apple picked itself up off the mat by embracing their failures, evaluating their metrics, and adapting to a new vision. They made the iPod and it blew up. so they took the framework of the iPod and evolved it to the iPhone. Now they're at the iPad phase. What's next? Who knows, but the point is that they're already on it. Microsoft on the other hand still thinks like a PC. That's not going to work. Microsoft either has to evolve of has to fail. It sucks, but it's a Performance Economy. Either get the job done or get left behind.

Combined, the two indicators create a very simple, yet elegant hypothesis:
Growth = Present Value [Measurability] + Future Value [Successful Progression]
Like all theories, it doesn't always work, but it works more often than not. I'm ready to pick up the ball and run with it. I hope others have the stones to come with me.

Disclaimer: After writing this post, I Googled "Performance Economy" and stumbled upon this book. From the description, it seems like it is at least somewhat in line with my thinking, so at least one other person out there thinks I'm on the right track. I'll get the book and report back on my impressions at later time.

How to actually fix the economy

"It's the economy stupid!"
-- James Carville during Bill Clinton's 1992 campaign

I was inspired by Mark Cuban this week. No, not because he's going to buy the Dodgers in 2012 and restore the luster to the franchise that was once the crown jewel of baseball. This is more about Cuban's highly insightful blog post that surfaced on Yahoo! Sports.
http://blogmaverick.com/2010/05/09/what-business-is-wall-street-in/
His write-up is very plainly put. In fact, I'll even admit to being jealous as to how well he talked about how I've always felt about capital gains taxes. As such, I've decided to put my money where my mouth is and put out the 3 things that I think are key to re-strengthening our economy:

1. Reform capital gains taxes


2. Reform venture fund tax rules


3. Promote employee equity ownership

1. Reform Capital Gains Taxes

Cuban covers most of this, especially the part about promoting long term outlays into businesses. I would take it a step further and make Capital Gains a reverse tax. Basically I envision a tax rate that starts at a person's income rate (probably 25-30%) for the first years, and dropping incrementally to 10% as long as they hold the investment for 4-5 years. This promotes people putting their money into companies they believe in, letting that company grow, and then rewarding them for a long-term commitment.

2. Reform Venture Fund Tax Rules

This is kind of similar to point 1, but addresses a MAJOR tax loophole. Basically the way a venture fund works is that an investor (or set of investors) wants to pool some money to be used to start businesses that hopefully mature and payoff within 5-10 years. This pool of money is given to people who run the fund - Fund Mangers - who then vet business plans and decide how to spend the investors' money. The money starts companies, creates jobs, pays salaries, and eventually - hopefully - cashes out gains for the investors (subject to my 5+ year rule above).

So what's the problem? Well, at the top of the totem pole, investors pay a fairly low tax rate. I'm OK with this because they are putting their money on the line. They are paying salaries, they are absorbing the risk, they've (hopefully) paid their fair share climbing the ladder. On the opposite side of the spectrum, the companies that have been invested in are paying employees who are paying regular income taxes. The problem for me comes in the middle - the Fund Managers. They are taking someone else's money, collecting 2% immediately off the top as their fee (remember these fund are millions of dollars), putting the rest into new companies, then taking 20% of all profits. The 2% fee and 20% cut of profits are all treated at capital gains, and therefore taxed at 10%(ish). HUH?!?! It's not their investment - the money came from someone else. This is their JOB. They should have to pay income taxes just like the rest of us. Think about that. If you work for a venture-backed company, the guy paying out your investors' money is paying 15-20+% less of their income to the government than you. How the hell is that fair?

Sorry fund managers. You've sold the government a bill of goods and it needs to stop. You are getting paid - as in payroll, income - to be a fiduciary for someone else's money and sit on a board of directors. Make some money, become an investor yourself, THEN start paying only capital gains. This is true top-5% loophole. 95% of the country should be with me on this.

3. Promote Employee Equity Ownership

This is a personal cause for me. I'm not a fan of venture and their tax loopholes and their "10x!" (their absurd benchmark for a "successful" exit). Employee ownership is an answer to this. Obviously it falls apart if you need a lot of start-up capital (ie: to build a factory), but the high-tech world allows for many new options. I could see myself starting a company where I ask a team to work for 3-6 months for a sizable piece of the company. When we get going and make some sales, the windfall goes directly to the guys who made the company work. The best example of this is SAIC. Their founder - Dr. Beyster - decided to start paying out some of the 80% equity of his company to his employees. Over 10 years, he went from 80% owner of a million-dollar company to 5% owner of a billion-dollar company. Which would you like to have? I thought so.

Government can easily help promote this. Tax breaks, grants, worker programs could all be linked to some employee equity benchmarks. It should come at minimal cost to government (maybe even gain if it keeps people employed). Again, common sense approach that promotes medium- to long-term job opportunities.

Hopefully we (Americans, the people) are learning from this. The "super committee" is garbage. I hope they pull something off, but they probably won't and things will stay ugly for a while. I have full-faith in the American people, and no matter what we will finally put ourselves back to work - most likely in spite of our assclown politicians. The steps above would help. We'll see if anyone has the guts or balls to enact non-self-serving policies.

Language

Two things caught my interest today:

1. This article: http://www.cnn.com/2011/LIVING/08/10/handwriting.horror/index.html?iref=obnetwork


2. My friend Amanda's comment on my chat status: "Stop using big words"

Now, it is a paradox that I critique those two things. I hand-write like an engineer and Amanda is a highly intelligent person who will more than likely push her kids to do things like have good handwriting and a strong vocabulary.

That being said, it still irks me how much I don't see that happening around me. When I was hiring a minion earlier this year (OK fine, "intern"), I was amazed at the poorly constructed the emails I received. These were Masters level kids, who supposedly are coached up by career people and they wrote like I was inviting them to a kegger at my house.

The same drivel has crept into all aspects of how we communicate. Spewing rancor is more effective than presenting a coherent point; verbal communication has become so cumbersome that everything must fall into 100 character texts and twits; if in the unlikely event something is written, it seeks to inflame emotions over inspiring the soul; and don't get me started on Internet comments.

They say write what you know. I tend to write what I do because I can only "know" so much at any given moment in time. I believe it is a privilege to get to express my thoughts, opinions, and experiences without censor. And I believe that right bears the responsibility of good-faith conjecture. It's too bad I also believe I'm in the minority.