President-elect Obama: Please invest in our country's future, not it's past
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.
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.
- Who's Who on Obama's Dream Team
- Change in Congress More Than a Slogan
- Barack Obama emboldened by economic crisis
- Analysts: Bush, Obama not taking lead in righting economy
- Who is taking lead in righting economy?