“It’s the economy, genius”

What a time we live in.  The past few weeks have been fascinating, historic, scary, depressing, opportunity-laden, transformational and ominous all at the same time.  The convergence of the economic meltdown with the presidential election is a one-two power punch combo.  Since the two topics are virtually intertwined at this point, I think the handling of the economic situation will probably go a long way towards determining the outcome of the election, though that’s nothing particularly new.  I’ve had a bunch of interesting conversations over the past week about the economy and felt like jotting down a few (sometimes disconnected) thoughts on it.

My dad forwarded me this article by William Chafe (a Duke prof) on the parallels between 1929 and today.  I find it quite frightening.   Similarities between the two eras are:

  • Growth in salaries of workers fall way short of growth in executive pay (480x difference in current wage rates).
  • Strong Wall Street growth fueled by only 10% in equity.
  • No consumer savings, consumption growth on credit (living beyond our means).
  • Employment decline causes tightening of credit beginning downward spiral.
There are multiple possible solutions to fixing any problem, but two high-level approaches are (1) pump a bunch of money into the economy to prop it up or (2) focus on the structural weaknesses in the overall system and fix them.  The first approach is faster and easier, but might only be a short-term fix. The second is harder and more rigorous, but could set us up for the future.  Of course, a combination of the two may also be best.

The article digs into the differences between McCain and Obama’s approaches, and to avoid making this post too partisan, I’ll let you read it yourself if its of interest.  There are several other structural questions that have arose in recent conversations though, that I want to raise for discussion:

FDIC Insurance – The current FDIC insurance cap of $100,000 was set in 1980.  Inflation-adjusted, $100,000 then is worth approx $250,000 today.   By keeping the cap at $100,000, the program discourages saving and encourages investing. Since a predominant form of investing is in the stock market, the bond market or mutual funds, keeping this cap low serves the economy well and fuels growth at the expense of savings.  I’d argue that growth under those circumstances is somewhat artificially produced.

SBA Governance – On the surface, the SBA is a great program that gives citizens the opportunity to be entrepreneurs and start business, something I support.  From what I understand though, in recent years, the SBA has been judged by the number of loans issued, rather than the quality or credit-worthiness of those loans.  This smells a little fishy to me given the current credit crunch and rate of default.

Tax-Free Housing Sales – Since 1997, Americans have enjoyed the benefit of claiming up to $500,000 in real estate appreciation tax-free on sale of a home, provided they’ve lived in the house for two of the past five years.  First, this really benefits the wealthy, because the average home doesn’t cost anywhere near half a million dollars, let alone achieve that in appreciation.  Second, this makes selling a home easier and more attractive, which encourages flipping and discourages stability.  Third, since you can live in two separate homes for two years each, it encourages second home consumption.  It also encourages borrowing, building and increase in housing supply.  When the supply outstrips demand, we have problems.

Finally, on a political note, undecided voters keep telling me that Obama wants to spend, spend, spend.  Yes, its true that Obama probably plans to spend more than McCain.  I’d argue that much of that investment in domestic programs is long overdue.  Regardless of one’s opinion on that issue though, what’s planned and what actually transpires during a presidential term are often very different things.  To use the past eight years as an example, Bush certainly didn’t have a spend philosophy when he came into office.  He brought a classical Regan Republican small government approach to Washington.  But look what’s happened since he’s been there.  We’ve spent more annually during his administration (inflation-adjusted), and incurred more debt, than during any administration in the country’s history.  Now, he’s pressuring congress to approve a somewhat hastily assembled plan that would increase the cap on national debt from $10.6 trillion to $11.3.  The morale of the story is that making poor, short-sited decisions costs far more in the long run than spending money intelligently today.  This is as true in the startup world where I operate as it is in the national government.  Given the circumstances our country finds itself in, every American should vote for the candidate he/she believes is best equipped to (1) represent our country on the international stage and (2) invest the necessary resources to setup a framework that will assemble the sharpest minds, open dialogue, explore and make the best decisions possible.  That is the primary role of a president so let’s put everything else aside.

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