November 22, 2008
Future White House Chief of Staff, Rahm Emmanuel, was recently quoted as saying “You never want to let a crisis go to waste…it’s an opportunity to [get things done]….” I sure hope that Barack Obama is smart enough and courageous enough to listen to his appointed advisor. There are two immediate areas where we have the chance to be opportunistic in a crisis scenario and move the country forward. These chances don’t come along very often. Since Barack Obama is at the dawn of his presidency and his early decisions will set the tone, I urge him to do the right thing now and put his administration in motion the right way. This opportunity will probably not come again.
Detroit: To Bailout or Not To Bailout
I’ve written about this issue previously but I’m even more concerned now. GM is the poster child of a storied American auto industry that reached its peak in the 50s and 60s and has been declining ever since. In the first half of the 20th century, America was the auto industry. We invented the things and made them better and more efficiently than anyone else for a long time. Starting in the 70s, though, that began to change (see chart). 
While their market shares were consistently declining, Detroit automakers fought tooth and nail in Washington to avoid more aggressive fuel efficiency standards, in turn, exponentially growing our demand on foreign oil and generally being a nuisance to the environment and the long-term sustainability of our economy. To make matters worse, in 1999, GM decided to buy Hummer and start production of a vehicle that goes 9-10 mpg, and is exempt from federal fuel standards.
GM currently burns (loses) $2B of cash per month! Being in the startup/venture world, I know a little about burn rates, and GM’s is outrageous. Their operating costs, driven largely by UAW demands, are universally 2x above market rates. With this setup, they will never compete favorably with Toyota, Honda and new emerging car-makers in Korea and China. This past week, Detroit auto execs flew down to Washington to plead their case. They each flew their own private jets to a meeting for which they were not prepared and did not have a plan. At roughly $2,500 per hour, the airfare alone cost the companies roughly $30,000. Now, forgive me for judging, but if I were a CEO with less than six weeks of capital in the bank going to meet with the only venture capitalist left who is considering funding my company, I’d prepare a detailed presentation for the meeting and would probably not lavishly and publicly waste my firm’s capital on my way to town. No venture capitalist I know would consider giving that management team a second meeting so why is Ms. Pelosi? Hedge fund managers currently oversee about $2 trillion and private equity adds roughly $1 trillion more. As far as I can tell, not a single one of these investors is jumping at the opportunity to own a big chunk of GM. Why? Because investing in GM means investing in America’s past. No smart investor wants to invest in the past. If the U.S. treasury wants to use our tax-payer dollars to make good investments, let’s invest in Google, Apple or RIM. Let’s prop up levered industries like real estate that are suffering right now. Let’s invest in geothermal, solar and wind energy. Let’s invest in America’s future, not it’s past.
Energy Policy: Time to Institute Gas Tax
This past week, the price of oil dropped below $50 a barrel from $147 in July. That’s a drop of 65% in four months!! This is an equally important opportunity that Obama should not let go to waste. The conventional move that we’ve seen repeated every time we experience rising and falling energy costs is to preach about the need for alternative energy when prices are high and go back to driving our gas guzzling SUVs when prices fall. In fact, those words could have been taken right out of Obama’s mouth on the campaign trail. These low prices (average last week was $1.98/gallon) are an opportunity to finally put in place the gas tax that has been discussed for the past decade. There’s been renewed talk of how this should work with many advocates calling for a price floor, and the money generated could fund the clean energy movement that is going to help revitalize our economy and get us out of the current mess. It woud also put pressure on all the necessary constituents to put their money where their mouths are and commit to eliminating our dependence on foreign oil within 10 years. That’s the timetable Obama presented on the campaign trail and it’s an ambitious one. For us to have any hope of achieving it, he needs to capitalize on every opportunity and that means starting now.
Summary
Neither of the above two proposals are popular in Democratic circles. Detroit and the UAW have been traditional Democratic supporters for decades and Washington Democrats have traditionally protected them. This time, however, is different. We all know that times have changed and the notion that we should consider investing tax-payer dollars in a dying dead industry during a massive economic recession is beyond the pale and Change We Cannot Believe In because it’s not change, it’s more of the same and exactly what Obama protested for the past two years. Yes, a GM bankruptcy could cause untold disruption to the market, but as one pundit explained, the market is drunk and won’t get better until it pukes it all out. Similarly, implementing a gas tax during the current economic cycle will be unpopular. Raising taxes during tough times is never easy, but it’s too big an opportunity to pass up. Consumers are accustomed to paying higher gas prices and the cliff that prices have fallen off in recent months represents a rare oppotunity to take action. There is concern that Obama’s apointment of Clinton advisors, including Hillary herself as Secretary of State, represents a return to politics of old. I hope that’s not the case. I’ve been a supporter of Obama from day one of his candidacy and I have as much hope for his presidency as ever. Though squandering these two opportunities will make it very difficult for him to live up to the promises of the campaign, because they won’t likely come again (GM will probably fail again and we’ll have the chance to fund or not fund them again, but the shrinking U.S. Treasury will have $50 billion less in it’s coffers). Let’s hope he does the right thing and achieves a new outcome.
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November 18, 2008
Everyone seems to have an opinion lately of how the government should handle the current economic crisis. Normally, these would be easy to dismiss, given our relative inexperience compared to the authority of those in charge, however watching Hank Paulson waffle back and forth, seemingly each week, on the best strategy to secure the economy, I’m less convinced that our leaders truly know what to do this time around. Granted, these are unprecedented times so Paulson deserves some slack, but I find it auspicious timing that we have a president-elect who has pledged put an unprecedented level of information on the web, detailing government spending and lending transparency to an institution that historically lacked it. Given the critical nature of the present, this may be the best opportunity we have to go one step further and leverage technology to harness the massive intellectual firepower of this country, and efficiently share ideas to find the best solutions. I hope Obama recognizes the opportunity presented by this crisis and wastes no time in putting his transparency/technology plan into action.
Nicholas Kristof wrote last week that education was essential and shouldn’t be relegated to 5th on Obama’s list of priorities. Apparently, Obama’s website – Change.gov – took down an ordered list last week and replaced it with five domestic priorities, in no particular order:
The principal priorities of the Obama Administration include: a plan to revive the economy, to fix our health care, education, and social security systems, to define a clear path to energy independence, to end the war in Iraq responsibly and finish our mission in Afghanistan, and to work with our allies to prevent Iran from developing a nuclear weapon, among many other domestic and foreign policy objectives.
This past Sunday, 60 Minutes presented his priorities in the following order:
- Economic Recovery
- Energy Independence
- Health Care
- Social Security
- Education
Personally, I disagree with Kristof and support this order. Certainly, the travails of the economy are hard to ignore and that’s why it needs to be a pervasive priority, but I believe energy independence is the single-most important issue facing our country and one that directly affects our ability to rebuild the economy, create sustainable and universal health care and indirectly help fix social security. As both Al Gore and Paul Krugman have recently explained better than I can, a robust clean energy economy can create millions of jobs, replace dying industries (read: auto) with a new and burgeoning one that’s full of promise, and create a vast new exportable good for the country. An equally important motive, reducing our dependence on foreign oil will boost national security because we’ll have less incentive to meddle in middle east affairs, making the country safer. During the campaign, Obama said he would eliminate foreign oil imports within 10 years. It was such a popular claim that McCain pledged to do the same. It’s an aggressive timetable, but one the country should commit to. We’ll all be better off for it.
As for the issue/question of the day – what to do with the ailing auto industry and specifically GM – Michael Levine lays out one of the best arguments I’ve read in today’s WSJ on why bankruptcy is the best option for GM. There partially exists an image problem for Bush/Obama because having already bailed out Wall Street and AIG, not doing so for Detroit would seem elitist and contrary to the guiding principles of the Democratic party. Also, UAW did Obama a big favor by waiting til Nobember 6 to mention that GM had less than two months of cash in the bank. Doing so earlier would have made it a campaign issue, which likely would have hurt Obama’s chances. They also donated heavily to his campaign, which makes this Obama’s first real test. Will he cave to the pressures of Pelosi and protect traditional Democratic interests possibly leading to an appeasing administration that never gets anything big done, or will he do the right thing from the start and set his presidency in motion?
His mantra during the campaign was Change and allowing GM to go bankrupt would represent a much-needed one from the politics of old that are dragging down our country. Fundamentally, GM is not a competitive organization. We’ve all watched their market share consistently slide for the past several decades. If the smartest pe funds aren’t interested in the investment, why should the tp fund (tax-payer) consider it? I visited Detroit twice in the past year and the pervasive urban decay that’s impossible to miss tells the whole story. The best course of action is to help GM engineer a well orchestrated bankruptcy plan with federal assistance. Directing federal funds towards unemployment insurance and pension guarantees is a far better use of cash than life support for a dying business. As Levine explains:
If GM were told that no assistance would be available without a bankruptcy filing, all options would be put on the table. The web could be cut wherever it needed to be. State protection for dealers would disappear. Labor contracts could be renegotiated. Pension plans could be terminated, with existing pensions turned over to the Pension Benefit Guaranty Corp. (PBGC). Health benefits could be renegotiated. Mortgaged assets could be abandoned, so plants could be closed without being supported as idle hindrances on GM’s viability. GM could be rebuilt as a company that had a chance to make vehicles people want and support itself on revenue. It wouldn’t be easy but, unlike trying to bail out GM as it is, it wouldn’t be impossible.
Levine goes on to point out that a GM bankruptcy will make addressing health-care coverage more urgent, which is a good thing – it will lend a hand to the next major priority on Obama’s to-do list. To President-elect Obama: this is your first test and it’s coming before you even take office. If you get it right by doing what’s unpopular within your own party, you’ll win the respect of some of your foes and set a strong precedent that will commence your presidency the way you ended your campaign, seeking to repair what’s wrong with America, without missing a beat.
November 11, 2008
In last week’s election in California, Proposition 8, a measure to reverse the right of same-sex couples to marry (a right that had been granted them by the State Supreme Court in May with a 4-to-3 vote), passed 52% to 48%. An interesting wrinkle here is that, according to exit polls, Black voters came out in favor of the proposition more than any other voting group, by a 70/30 split. In an election year when as many as 90% of Black voters supported Obama and the Democrats, a large majority of them also voted to take away a right that had been granted same-sex couples in their state. (In all fairness, Obama voiced opposition to Prop 8 as well, though that was widely considered to be a political move.) Many of the articles I’ve read on this topic point to churches and religious groups as key influencers on this vote that drove many to vote the way they did. No matter, it strikes me as odd that so many people care so much about the behavior of others. Has there ever been an initiative on a ballot that contained so much hatred? A vote in favor of Prop 8 is a vote that same sex couples SHOULD NOT have the right to marry, a right that had already been granted. The only rational reason I can think of for someone to feel this way stem from fundamental religious beliefs or severe homophobia. Though even in the case of the homophobic voter, I have a hard time envisioning why they would want to strip the rights from this group that scares them so. Keith Olberman gives a particularly poignant op-ed on this topic comparing it with slavery, during which rights were stripped from fellow human beings. In this case, we’re repeating the exact same injustices, except the rights are being stripped because of their behavior or lifestyle rather than the color of their skin. Is being gay legal? If so, then gay people deserve the same rights as everyone else. Exerting control over who has the right to marry and who doesn’t seems to me to be a gross merger of church and state and a bastardization of one of the fundamental principles on which this country was founded.
November 5, 2008
I’m riding on the train back to New York from a whirlwind two nights in DC. On Monday night, I went with some friends to the Redskins-Steelers game – a Monday night tradition before Election Day – and the mood was electric. Last night, after the results arrived and we watched Obama’s acceptance speech, we left The Willard and walked two blocks away to the White House. On the street closest to the front of the house, thousands crowded the plaza to revel and celebrate. All sorts of people – white, black, arab, asian – gathered to celebrate together. On 16th Avenue, throngs of cars crowded the street forming a huge traffic jam of honking horns with people hanging out of windows and sunroofs, slapping high-fives to all who passed. Never, in my 18 years of living in DC (which included several Super Bowl victories) did I ever see anything like last night. It seemed like the whole country collectively exhaled. Exhaled from nearly a decade of injustice and unpopular leadership. Exhaled from the knowledge and reassurance that this country is still of and by the people. Exhaled with rejoice in the confirmation that we live on a more level playing field today, where nearly any one individual can achieve any thing to which they commit themselves. While I would have supported Obama regardless of his race, I do believe his victory represents a particularly special achievement for black men and women in the country. Though there are plenty of racial injustices committed daily still, President Barack Obama and the Obama family will serve as role models with which black men and women can identify far better than any leader before. I think that for the first time in our nation’s history, black men, women and children will truly feel that they have a voice and a leader who understands their position. That is just an incredibly powerful occasion. Moreover, Barack Obama is not just a role model for African Americans, but a role model for us all, and this reality should accomplish much to heal wounds within communities and reduce racial divisions. Beyond our shores, some of the effects have already begun to be felt. I received messages from friends in Europe with whom I hadn’t spoken in years. Friends of friends from Spain showed up at our party, which was already attended by several expats, to help us celebrate. CNN showed video from Kenya and Time reported on Desmond Tutu’s reaction from S. Africa, where a good friend, Tal, also commented as he watched from afar. I truly believe that some of the “hate” directed towards us around the world softened last night and some of the militants rested their arms. It’s just a lot harder to hate a country led by Barack Hussein Obama, than the one led by George Walker Bush. There is a ton of work to do and Obama has just won an incredibly difficult job, but should he accomplish absolutely nothing during his term, the significance of his election will still remain. It truly is a new morning in America.
While their market shares were consistently declining, Detroit automakers fought tooth and nail in Washington to avoid more aggressive fuel efficiency standards, in turn, exponentially growing our demand on foreign oil and generally being a nuisance to the environment and the long-term sustainability of our economy. To make matters worse, in 1999, GM decided to buy Hummer and start production of a vehicle that goes 9-10 mpg, and is exempt from federal fuel standards.
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