April 19, 2011

A Tale of Two Computer Companies

Different leaders use different tactics to achieve their definition of success. The examination of two computer companies may provide some insight into the direction in which Rick Snyder is taking Michigan.

Computer company #1, founded in 1985 in Iowa, decided on a low-cost strategy to achieve success. The company took technologies created by other companies, repackaged them, and sold them at retail. Its innovations were limited to retail sales, focusing on telephone orders and later company-owned stores.

To reduce its costs even more, it relocated to "the middle of nowhere", South Dakota. South Dakota does not offer technological excellence, but it did offer low taxes, low wages for workers and low costs for land.

It found that it needed to do more. The low costs of South Dakota weren't enough to flourish. To grow beyond its model of selling high-end PCs by phone, and to attract top management and engineers, it relocated its base of operations to high-cost La Jolla, California, in May 1998.

Company #2 used a different business strategy: rather than trying to be the lowest-cost manufacturer, it focused on being the best.

It invested heavily in innovation. The company, founded in the Silicon Valley, established its headquarters in an area that offered some of the highest business costs, but also offered access to the top engineering talent in the world as well as a superior quality of life. It developed a reputation as a company which paid its employees exceedingly well.

Company #2's computers set the standards for the industry. Even though its products were the most expensive in the marketplace, they were cherished and built an almost cult following.

As you have likely deduced, Company #1 is Gateway computer. Company #2 is Apple Computer.

How have the two business models worked?

Gateway, which focused on cost-cutting and low prices, went public in 1993 at $3.75 (split adjusted) per share. It hit its peak in 1999 when its stock reached $84/share. But by 2007, the stock had plunged to $1.90/share. The company was sold to Acer Computer for $710 million, which shut down Gateway's direct sales operation. The entire Gateway board of directors, led by chairman Rick Snyder, resigned.

Apple Computer, which focused on innovation and premium-priced computers, is now one of the world's most valuable publicly traded corporation. It has a market cap of more than $300 billion. Its public offering was at $2.75/share (split adjusted); the stock trades today at about $340/share.

The company that built its business model on low costs and spent little on innovation failed. The company that built its business in what most would call a very high business-cost location, and invested heavily in innovation, is now one of the most valuable publicly traded corporations in the world.

Rick Snyder made his fortune with Gateway and its business model. Even though the company failed, it succeeded in making him a multimillionaire. The Gateway model does not bode well for the future of Michigan.

Clearly Snyder believes that economic success is all about cutting costs. His budget slashes funding for universities, for quality of life, and for workers.

Is Michigan destined to become the government equivalent of Gateway?

April 12, 2011

Snyder: "Say 'NO' to Michigan

One of the key jobs of a Governor is to promote his/her state to the rest of the world. That should be pretty obvious.

In the 1970s Governor William Milliken, the moderate Republican widely viewed as perhaps Michigan's greatest governor, initiated the slogan "Say YES to Michigan". It was modified by his successor, Democrat James Blanchard, to simply "YES Michigan".

Recruiting for a state is just like recruiting students or student/athletes to a university: you know going in that no state has all the answers for everyone, so you must emphasize the best your state (or university) has to offer. Harvard sells the urban vitality of greater Boston; MSU focuses on the advantages of living in a smaller midwest city on a beautiful campus.

So here we have Rick Snyder. Instead of extolling our state's virtues, the message he is sending to businesses is "our business climate kind of sucks." In an effort to sell his tax policies, he cherry-picks the vast array of business climate studies and chooses the one that makes us look the worst.

The survey he promotes ranks the Michigan Business Tax 48th nationally. He chooses to ignore studies showing Michigan's overall business tax climate is one of THE BEST in the nation. That's like Tom Izzo telling recruits about the years MSU has not won the Big 10 championship, and ignoring the six times he's taken his team to the Final Four.

The Tax Foundation, a business-oriented group that is generally anti-business-tax and very conservative (it is chaired by a Koch brothers employee!) ranks Michigan 17th for overall for business taxes, and 2nd in the midwest. (Illinois ranks 23rd and has just raised business taxes, Wisconsin 40th, Ohio 46th. Indiana, which faces the same economic difficulties as the other states, is 10th.) Yet our Governor, in a recent presentation to the Lansing Regional Chamber of Commerce, completely ignored the favorable view of our competitive position. His representatives focused exclusively on the ranking that made us look the worst.

He also ignores a warning from the Michigan Economic Development Corporation about placing too much importance on the various rankings:

There are those who advise not the use of business climate indices altogether. Noted economist Peter Fisher in his paper for the Economic Policy Institute called Grading Places: What do Business Climate Rankings Really Tell Us, states that “...none of them actually do a very good job of measuring what it is they claim to measure, and they do not, for the most part, set out to measure the right things to begin with.” He further states “...these rankings are ignored by the business people actually making the decisions. They should be ignored by policy makers for the same reason.” This paper does not suggest that business climate indices should be ignored; rather, they should be viewed in proper perspective, understood clearly for what they are really measuring, and not overstated in their importance in business location decisions.

It is time the Governor, who is supposed to be our state's chief promoter, started promoting Michigan instead of running us down just to promote his political agenda.

And, while he's at it, it would be nice if he'd explain why some of the highest business tax states in America are also the most prosperous. Business climate is a lot more than taxes. It's infrastructure, education, public services, utility rates and reliability, climate, and quality of life. Impoverishing state government through business tax cuts might well hurt our overall business climate.

April 6, 2011

The Conservative Media: Median CEO pay jumped 27 percent in 2010

The Conservative Media: Median CEO pay jumped 27 percent in 2010: "While teachers, police officers, firefighters and public employees are being blamed for the Bush recession that has state and local governm..."

April 5, 2011

March 24, 2011

Airplanes Falling from Sky

By now you have likely seen multiple breathless stories about how two airplanes miraculously landed at Washington D.C.'s Reagan National Airport while the tower controller was sleeping. The tone of the stories is that this was a catastrophe avoided.

It is what I have come to expect from people talking first and researching second. In this case, the only sane reporting probably comes from CNN's Miles O'Brien who is a licensed pilot.

I got my pilot's license 40 years ago, logged 2,000 hours flight time in everything from a two-seat Cessna to a Mitsubishi prop-jet, and have landed at DCA several times. That doesn't make me an expert, but at least I know more than the well-groomed folks on CNN or MSNBC. (Full disclosure: I let my pilot's licenses lapse several years ago.)

A few facts that make the story a lot less important than it appears on first blush:

Airplanes, including commercial flights, land at airports without towers every day. I learned to fly at three different airports in the Lansing area: Capital City, Mason and Charlotte. The latter two have no control towers. For several years the Lansing tower was closed from midnight until 6 a.m., but airplanes still landed 24/7.

Last time I checked the only airport in the northern part of the lower peninsula with a control tower was Traverse City. Pellston, Boyne, Petoskey, Mt. Pleasant and Mackinac Island are among the more popular Michigan destinations with no tower.

Pilots don't need tower controllers to land. The job of the tower is to sequence planes in the traffic pattern along with those preparing for takeoff. There are standard procedures pilots learn from Day One of flight training for entering the traffic pattern and then landing at an uncontrolled airport. There are published standard traffic patterns, and they communicate with other planes on designated radio frequencies.

There are redundant air traffic control systems for air-carrier airports, especially DCA. You can't fly within 25 miles of the largest airports without the advance permission of air traffic controllers staffing the enroute control centers (ARTCC) or the airport radar approach control facilities (RAPCON).

Every pilot planning on landing at National, Dulles or Baltimore-Washington International is in constant radio contact with enroute or approach controllers who watch them on their radar screens. Those controllers routinely advise the pilots of other traffic in the area. Approach control generally doesn't hand off the plane to the tower until it is within a few miles of the airport. If there is a problem (as happened in DC) the pilot can stick with approach control right up to the point the wheels touchdown.

For Washington D.C. there is additional unspecified monitoring added in the aftermath of 9/11. Fly anywhere near Capitol Hill or the White House without the proper clearance and you may have an up-close-and-personal encounter with a military fighter jet, or even a sudden collision with anti-aircraft weapons.

The tower controller should not have dozed off, and the incident should not have happened. But the biggest problem with the situation is that this sleepy (and now suspended) civil servant violated the twin rules of public relations:

• Don't screw up on a slow news day, and
• Don't screw up in a town that is loaded with reporters looking for something to do

24/7 news channels are often a welcome improvement in our information infrastructure. But when you hear the breathless stories like this, remember that the first obligation of news media is to fill the airtime or the web/print space with "compelling" content so they have something in which to wrap the advertising.

"Compelling" doesn't necessarily mean "important." Remember this the next time you see a story on some splinter group of three whack-jobs or "grass roots event" ginned up by someone hoping for some free news coverage.

Just because it is on the internet doesn't make it true. Just because it's on the TV doesn't make it important.

March 17, 2011

Balancing the books

Everyone is talking budget cuts. Even though polling shows statewide and nationwide support for some tax increases, everybody wants to cut government spending. Nobody can agree on what needs cutting but, in our dysfunctional world, we all agree that something needs to be done.

Let's start by repealing Prohibition. It didn't work in the 1920's (except for Al Capone, Joe Kennedy and the Purple Gang). It still doesn't work.

We can save tens-of-billions of dollars by simply legalizing marijuana. Pot laws are like speed limits: many people take great pleasure in ignoring the law, and most get away with it.

Even so, a lot of people actually get caught and punished for doing what so many others are doing every day.

A recent report by the Drug Policy Alliance stated that in New York City alone, there were 50,000 marijuana possession arrests in 2010 which cost taxpayers $75-million. That's just one city!

I'm willing to wager that a secret poll of Congress would show that a majority of members have, at some point in their lives, used marijuana. Our last three Presidents have all admitted that they partook of the vile weed (yeah, I know ... Clinton didn't inhale).

Taking pot out of the criminal justice system brings huge immediate benefits:
* Law enforcement could spend more time on crimes that actually constitute a clear-and-present danger to society, like drunk driving and white-collar offenses
* Same goes for prison, prosecutors and the courts
* We'd relieve a lot of the pressure along the Mexico border (illegal marijuana fuels border crime; legal marijuana creates a job-producing industry)
* We would eliminate a major source of revenue for organized crime
* Regulating and taxing marijuana in a manner identical to our regulation of liquor would raise billions that could rescue our education system and maybe even help balance the budget

I have heard the arguments against legalization and I just don't buy them:
* "Marijuana is a gateway drug to the opiates and meth." No, that would be alcohol.
* "Marijuana abuse will increase other criminal activity." Have you ever seen someone who is stoned? I'd rather deal with a stoner than a drunk any day.
* "Smoking marijuana simply isn't healthy." Probably true, but the same can be said of smoking cigarettes, getting drunk or eating at McDonalds. The libertarian in me says pot should be a matter of personal choice, not government edict.

To me the most important reason to legalize, though, isn't about money. It is about hypocrisy.

Alcohol and nicotine are the two most destructive addictive drugs in our society, the two major causes of preventable deaths, and major drivers of healthcare costs. They are legal and even glamorized by popular media.

Marijuana is no worse than alcohol or nicotine, but we sometimes put people in jail for simply possessing it, even as many of us wink at its use just as we giggle when Charlie Sheen talks about using cocaine. Marijuana is today's version of 1920's bootleg liquor.

I have no problem jailing people for anti-social behavior resulting from marijuana abuse (such as impaired driving), but the double-standard has to end. What message do we send to our kids with such a transparent hypocrisy?

March 11, 2011

Term Limits Bite Us in the Ass

It has taken a decade, but the damage to our state from term limits has now fully taken root.

Term limits started as a well-intentioned but incredibly naive idea that government works best when run by amateurs. Voters with minimal knowledge of governing (garnered mostly from superficial general news coverage) figured that the few examples of ineffective, corrupt or morally bankrupt elected officials represented the norm. Thus, they voted to change the entire system.

The irony was that it was approved during the administration of John Engler, arguably the most effective Governor in state history. Engler was the quintessential career politician: elected to the state House at the age of 21, serving for two decades in the Legislature before becoming Governor.

We lost the benefit of having legislators who understood the process and complex issues involved in leading a $40-billion enterprise, people like Bobby Crim, Lynn Jondahl, Dave Hollister, Harry Gsst, Bill Ryan, Paul Hillegonds and dozens of others who served with distinction for 10-to-25 years.

Term limits took hold in the Granholm years. For the first time, we had a Governor and legislative leaders who had minimal (or no) experience in political leadership. Combined with split control of the Legislature, it led to eight years of stalemates, confrontation and bickering which put a premium on short-term political advantage and zero premium on long-term policy. They were unprepared to deal with the fiscal crisis imposed on Michigan by national and world economic forces.

Now we have a government trying to deal with the impact of continued international and national economic turmoil, and it is run by amateurs:

• Governor Rick Snyder, with no government experience at any level
• Speaker Jace Balger, in his third year as a legislator after four years as a county commissioner
* Senate Majority leader Randy Richardville, in his first Senate term after four years in the state House

(Snyder has the additional disadvantage of having no core constituency. He won the Republican nomination only because three other candidates divided up the core conservative GOP vote, and won the general election because it was a year in which just about any Republican was preordained to win.)

All three are very smart people. But none of them has the knowledge of leadership in a political setting that can only be gained with time. And none of them has had the time to build the personal relationships that lead to trust, something critical in a political setting. (Just look at the dysfunctional Wisconsin government!)

More than half of the House members are rookies; 30 of the 38 Senate members are in their first term.

It's on-the-job training for the leaders of a $40-billion enterprise. What business would survive with such a poorly prepared leadership team? How would you like having our war in Afghanistan being run by someone with four years Army experience, instead of career soldier David Petraeus?

A veteran local school district official said it best when he lamented that there was nobody in the Legislature who actually understood school finance. He was lamenting the fact that most legislators wanted to punish school districts for maintaining rainy day funds, something any business management consultant will tell you is smart management.

We have well meaning, intelligent, motivated people making decisions on issues about which they know little or nothing, and it is a very steep learning curve. Instead of having the facts to make reasoned decisions, they are forced to make "gut" judgements based on truthiness.

I wouldn't choose a plumber on that basis. Why should we use that as the standard for out government leaders?

(I run into it with Facebook friends all the time. They will make a political statement that runs contrary to the state of U.S. Constitution not because they are anarchists, but because they don't know better.)

No government system is perfect or even close to it. But making mandatory ignorance a prerequisite for being elected is a guarantee that the results will be bad.

March 9, 2011

The Upside of $5 Gasoline

One of the most frequent bumper-sticker arguments from politicians in tough times is that we have to share some short-term pain for long-term gain. Usually you hear it from conservatives who contend lower-income Americans will have to do with less so they have more in the future (trickle-down prosperity). (You never hear the conservatives call for a little pain for their core constituency – the well-to-do – but that's another rant for another time.)

Most days my wife and I go to the YMCA for an hour of short-term discomfort. I'll ride the stationary bike, she'll attack the treadmill, and then both of us will work on the weight machines. We get a little sore sometimes but we know the long-term benefits cannot be denied.

My feelings on energy policy are the same. We can benefit from some short-term pain, specifically the pain of significantly higher fossil fuel taxes.

It's like cigarette taxes which are now massive. It is a fact that the higher taxes have 1) raise a lot of money for vital public programs like healthcare, and 2) encouraged people to quit smoking. Duh: win-winning!

We know we need more money to repair our transportation system (roads, bridges, airports), and we know the long-term benefits of evolving our energy production to renewable resources for both economic and environmental reasons. (I also support nuclear, by the way. It is proven safer than coal, it is environmentally more responsible, the technology is proven, and it is for all practical purposes an unlimited resource.)

This isn't just a theory. Western Europe and Japan have been doing this for decades and they have reaped the rewards. Have you ever used public transportation in Tokyo? London? Berlin? Rome? It's awesome. Urban subway systems and intercity railroad networks in the rest of the world should embarrass Americans.

We drive the highest percentage of low-mileage cares of any developed nation in the world. And everyone else is now or will soon generate most of their electricity with nuclear and/or renewables, because the economics make sense.

Americans simply have been unwilling to voluntarily accept the short-term pain. Going back to my exercise comparison, it is comparable to the reluctance all of us fatties experience when we first consider starting a workout regimen. Too many of us wait for the heart attack before we actually do something.

Our friends in the oil companies are doing it for us (and doing it to us). Relying on the oil companies, though, means we'll get less benefit from the pain.

We will still be pushed in the direction towards fuel efficiency and alternative fuels, but instead of taxes being used for the public good the extra money goes into the rather humungous treasuries of Exxon-Mobil, BP et. al. I'd rather have my money fixing roads (and creating jobs) than funding 9-figure bonuses for oil executives and buying another mansion for some Saudi sheikh.

Our politicians, including the President, continue to pander to our desire to avoid pain. Republicans, unwilling to learn from a long history of environmental disasters, continue to scream "Drill, Baby, Drill." President Obama talks the talk when it comes to our energy future, but he's looking at artificially lowering the cost of gasoline by releasing oil from the strategic reserve. Bad move. He should run the political risk of walking the walk, and letting market forces move us towards a more rational energy future.

As for the rest of us, Americans should stop complaining about $3.50 or $4 or $5 gasoline and do something positive. In addition to buying a Volt, I've started riding the bus. I live one block from a bus stop and can get just about anywhere in metro Lansing in a reasonable amount of time. It is selfish and stupid for me to ignore a low-cost alternative to driving.

And I will continue to argue in favor of our governments doing what foreign governments have done for years: investing as much as possible into alternative fuel research that is vital for our economic and environmental future.

Do we really want to be held hostage by Middle East sand barons forever?

February 28, 2011

When Good News is Really Bad News

I just received the latest assessment on our home from the city of Lansing.

It is down another 15%, reducing my property taxes by about $220/year. The knee-jerk reaction is "damn, that's great!". Of course it means my home is worth less than it was a year ago but, since we have no plans to move, the value shouldn't matter (unless we want to refinance or get a home-improvement loan).

Then I started thinking about the real-world implications of my little tax bonanza.

We bought our home 4 years ago, paying about 30% below SEV. Within days, I had called the city assessor and immediately had my SEV lowered by 30% (without argument).

A year later my appraised value went down another 12%. A year later, another 10% or so. And this week, it dropped another 15%.

The cumulative decline in my home's tax value from closing until now is nearly 60%, meaning my property taxes are 40% of what they would have been had the housing market not collapsed.

Good news? No way. That $1,500 or so I'm saving on taxes means significantly less money for the services I expect from local governments: police/fire, road maintenance, parks, LCC, CATA, the library, the airport, the county health department and Lansing schools.

Their costs haven't gone down 60%+. Even with major pay concessions by public workers, there's no way the various government agencies can absorb this kind of hit without significantly reducing the services I expect from them.

On top of that, our Governor has decided that he's pulling the plug on revenue sharing which takes even more money out of local government budgets.

Lansing City Council has proposed a four-mill increase in city property tax rates. Some of my conservative friends call this a tax increase. I see it as a small tax restoration. Even with the new four mills, my net property taxes are down about $1,000/year from where they started four years ago. This won't help the other governmental units that rely on property taxes, but it is a start towards protecting our quality of life.

Like the good people in East Lansing (who have already restore a portion of their property tax), I want services maintained. I don't like the idea of driving on rural Ingham County roads with no road patrols. I want snow plowed so I can get to work safely. I want potholes repaired. I want Hawk Island Park to continue as a safe, low-cost place to spend a summer afternoon. I want decent schools for our kids which means smaller class sizes, and teacher salaries that will attract the best teachers. I want the cops to show up when I call them, and I want to know that an ambulance is just minutes away if I need help.

I'd also like the downward spiral in my home to value to stop. If Lansing has to cut basic services to balance the budget, it will accelerate or extend the loss of value in our homes.

Falling home prices make us prisoners. We lose the option of moving. In my condo complex, units that once sold for up to $125,000 now go for as little as $29,000. We can't move unless we are able to absorb a huge loss.

One way to fight back is to support a modest millage that will help stop the bleeding away of our quality of life. I'll vote 'yes' on the millage, and I'll campaign for the millage.

February 26, 2011

Sending Seniors South is Stupid

One of the silliest arguments I've read in favor of taxing pensions is that Michigan would become a mecca for retirees seeking favorable tax treatment. That, apparently, is a bad idea in the mind of some editorial writer.

While Rick Snyder and his policy team at Business Leaders for Michigan argue constantly for Michigan to be a low-tax state for businesses (right now, we're right in the middle), they don't like the idea of being a low-tax state for retirees.

Kiplinger rates Michigan as one of the ten tax-friendliest states for retirees, and one of the 18 friendliest states for pensions.

So let's concede Michigan can continue to be a magnet for retirees because it doesn't tax pensions. Is that a bad thing?

Seniors are an economic plus for Michigan. They tend to consumer fewer government services, but continue to pay other taxes (notably sales and property taxes, plus Lottery games) and spend most of their income in our state:

  • They don't have kids in school
  • Their major medical costs are covered by either insurance or Medicare
  • They bring federal money (Social Security and Medicare) into the state's economy
  • They are "economic givers" — they don't compete with younger folks for jobs but spend their money here
  • They tend to stabilize neighborhoods by being less transient than younger people
  • They generally don't create a lot of business for the police, the courts or the prison system
So if the Snyder plan to significantly raise taxes on our seniors results in a loss of this demographic group, we all lose.

And it could happen. When you are retired, it's a lot easier to relocate. Many already succumb to the lure of a warmer clime, especially those senior-friendly states like Georgia and Florida which offer lower taxes and higher temperatures. Drastically increasing their taxes makes those sunbelt states even more attractive to those of us who are approaching retirement.

The last thing I want to do is take my pension, guaranteed to me by the Michigan Constitution, and spend it somewhere warm. The Snyder plan makes it much more tempting.

You'd think a nerdy accountant could have figured this out.

February 25, 2011

You Can't Override Reality with Ideology

I really admire people of conviction, even when they disagree with me. Folks like Congressmen Dennis Kucinich and Ron Paul are amazing people.

I dislike with equal fervor people whose values are based on the most recent polling data. The name John McCain immediately comes to mind.

But I’ve found that sometimes rigid ideology butts heads with reality. That’s when I move towards the latter.

I’m one of those who believes controlled substances should be legalized, regulated and taxed. Alcohol and nicotine cost our society far more in terms of healthcare, crime and human angst than any other drugs, yet they are legal because Prohibition does not work. Yet marijuana, the drug of choice for several generations, can get you an all-expenses-paid vacation at the Jackson Graybar Hilton.

As Mr. Spock would say, that is not logical. Or consistent.

I’m also of a mind to rid our society of handguns. All the data tells me we’d be safer without them. (There goes any future political career!). To me, the Second Amendment is about muzzle-loaders and the National Guard, not the right to have an armory in my basement.

But my ideology doesn’t fit reality.

My ideology simply is not practical at a state level. Anything short of national legalization of drugs would lead to cross-border insanity; the idea that we could actually clear out all the handguns even as a national priority is Utopian. (We have as many guns as we have people.)

That brings us to Governor Snyder’s desire to end state tax incentives and other bribes to bring targeted industries into the state. His argument – that state incentives constitute an unwarranted intrusion into what should be a free market –has some merit. In a perfect world, I’d agree with him.

The problem is that is totally unrealistic, just as Michigan can’t unilaterally ban handguns or legalize marijuana. We are in a global economy, competing not just with other states but with many nations.

The Governor’s call to end state subsidies to prime the pump for a battery industry may be ideologically consistent, but it is totally unrealistic and potentially horrific policy. We are competing with the world to be a center for one of the most critical technologies of the 21st century. South Korea and China have made batteries a national priority. The governments of those countries provide massive subsidies to nurture the new technology. As a result South Korea and China have a virtual monopoly on production.

Many states are battling as well to be home of the battery industry. We had a head start thanks to 1) the domestic manufacturing hub in metro Detroit, and 2) some vision on the part of the Granholm administration. It appears Gov. Snyder wants to piss away that early lead by moving to a laissez faire economic policy.

Relying on the “free market” to promote the industry in Michigan is recklessly unrealistic. The same holds true for the renewable energy industry where we are competing with one fiscal hand tied behind our backs.

When ideology trumps reality, we are in deep trouble. We need reality-based policy.

Rick Snyder is trained as an accountant, a profession based on numbers (reality) rather than ideology or “truthiness”. His views on state tax incentives may be ideologically consistent, but they defy reality.

It’s time for the Governor to “get real.”

February 24, 2011

Lessons Learned from Bill Collectors

Chad was getting worn out.

Working 40 hours/week was more than he wanted to handle, so he cut back to just 30 days/week. It cut his income by 25%, but he was OK with that because his priorities were elsewhere.

But then, the letters and phone calls started. He wasn't able to meet his financial commitments. The bill collectors were all over him.

First it was his insurance carrier, then his cellphone company, then his mortgage holder. They all wanted him to pay them what he had promised to pay. Chad told them all the same thing: "My income has gone down, and I simply don't have the money to pay you. You will have to accept less from me" with the tacit assumption that they would continue to provide him with the same services.

When the collection agents probed a little, they discovered that Chad had voluntarily cut his income. He chose to have less income, so they weren't in a mood to adjust his bills. In fact, they became more insistent.

What Chad really wanted was to renege on agreements he had made. The result was inevitable: his homeowners and car insurance was cancelled, his cellphone was turned off (but he kept running up a bill), and he found a foreclosure notice taped to his front door.

When his insurance was cancelled, his car loan and mortgage were automatically in default. Even though his cell service was cancelled, he faced either continued accrued service charges or a $250 early cancellation fee. The complications from his decision to reduce his income escalated.

Chad found that other businesses wouldn't extend him credit because he had developed a reputation of someone who didn't keep his financial commitments. His creditors took him to court. He faced a choice: restore his income to its previous level, or file for bankruptcy.

Chad could have been the model for Gov. Rick Snyder's approach to state government: voluntarily cut your income, plead poverty, and tell your folks you were reneging on commitments made to them.

"Voluntarily cutting state income?" you ask. Yes, and I'm not just talking about Gov. Snyder's $1.5 billion proposed gift to Michigan businesses. It goes back more than a decade.

Michigan's current financial crisis is solely not the result of the international recession, or even the collapse of the domestic auto industry. The "perfect storm" of economic chaos gutted income tax, sales tax and business tax revenues.

But state tax policies enacted during the Engler administration made it far worse. As a state we tried to cut our way to prosperity. We bought into the argument that cutting taxes was the pain-free path to wealth.

According to the non-partisan Senate Fiscal Agency, the state has been on a tax-cutting binge for a decade.

"What?" you say. "I don't believe taxes are lower than they were under John Engler."
But it's true. The rates may not be lower, but the effective rate (what we actually pay) is down 25%. (They measure effective taxes as the percentage of personal income paid in taxes.) In 2000, you would have paid about $95 for every $1,000 of income. A decade later, it was about $70 for every $1,000.

Much of the reduction has been through "tax expenditures" (tax breaks for various interest groups).

If Michigan's EFFECTIVE TAX rate had held constant from the Engler years, the state would be collecting an additional $8 billion.

Rather than recognize that more than a decade of tax-cutting hasn't brought prosperity to Michigan, the Snyder administration proposes to
1) Cut taxes even more for businesses, and
2) Plead poverty and renege on longstanding financial commitments made to seniors, local governments, public employees, children and college students.

When Gov. Snyder says "we no longer can afford" things like revenue sharing, what he is really saying is "we have decided that we'd rather continue to cut taxes than meet our commitments. When we made those promises, we had our fingers crossed."

I don't propose fully restoring Michigan's tax rates to collect the full $8 billion, although that kind of money would allow the state to again "walk the walk" on things like education. What I do propose is

  • Expand the sales tax to cover all end-user services, and cut the rate to 5.5%
  • Raise the ridiculously low tax on beer
  • Extend the sales tax to vending machine sales
  • Do a complete review of tax expenditures, repealing those which don't work or are outdated
And then we can keep out commitments. Our economic future depends on it. What business is going want to move into a state that unilaterally decides it no longer is willing to keep commitments? The business lobbyists are fond of saying that businesses want predictability and certainty. The message from the Snyder administration is just the opposite. Because, as my fictional friend Chad found out, voluntarily reducing your income and then pleading poverty isn't a smart strategy. You can try your hand at balancing the budget by checking out this game from The Center for Michigan

February 23, 2011

Not All Problems Solved in 42 Minutes

Tim Nester made some good points this week on his TalkLansing.net radio program.
Tim pointed out that success in a strategy requires patience. The Chinese have a long-term plan for economic success, and they stick with it even when things get a little rough.

Tom Izzo, Suzie Merchant and Mark Dantonio have long-term strategies for success for their teams. They stick with it, even if it means throwing excellent players off their teams because the have failed to meet team standards.

But in politics, we don't have any patience. We want instant solutions to problems regardless of the size of the problem, and regardless of who has the true power to resolve the problem.

And we want solutions that are painless.

I call it "TV Drama Syndrome" because most television has trained us to believe that all issues can be resolved in 42 minutes plus commercials – the length of an episode of a drama show. Problem, investigation, complications and solutions in an hour. With sitcoms is a half-hour from problem to solution. It's that simple.
In Washington, Barack Obama had about 6 months to clean up the huge economic mess left behind by George W. Bush (recently ranked the 5th worst president in our history).

Turning around an economy is like reversing the course of an aircraft carrier: you can't turn it on a dime. It has been a challenge that even Aaron Sorkin couldn't solve in one hour of prime time TV.

So Obama's opponents start complaining that his economic program wasn't working even before it was enacted. (Republicans announced their intention to fight everything he proposed before the inauguration so, for them, failure was the only option.)
The facts show the stimulus program has worked, preventing the loss of an additional 2-to-3 million jobs, significantly increasing the GDP, restoring confidence on Wall Street.

Republicans, who wanted the program to fail so they could win in 2010 elections, immediately labeled the stimulus program a "failure". They ginned up the ridiculous concept that the stimulus could only be considered a success if unemployment dropped to 5% immediately.

They hope to gut the Affordable Healthcare Act by tanking by withholding funding for implementation. They will cripple it just enough so it doesn't do enough to reform our healthcare system, and then claim the original plan was at fault when the reality will be the half-assed implementation demanded by Republicans.

My conclusions:

1. We need to give big plans time to work. The Obama economic plan and healthcare plan should be given time to work before the opposition starts chipping away at it.

2. As Americans, we've got to stop falling for the the demagogues who tell us it's always someone else at fault (e.g., public employees, school teachers, unions) and take some personal responsibility.

3. As Americans, we should demand that we back off the Republican drive to give complete functional control of government to business leaders, the brilliant visionaries who gave us things like the Wall Street meltdown, oil-flavored Gulf of Mexico seafood and $39 overdraft fees. Making rich people even richer is not a formula for building a strong middle class.

Above all, we need to recognize that not all problems will be solved in 42 minutes (plus commercials).

February 22, 2011

Businesses Don't Create Jobs

The folks at the Michigan Chamber of Commerce are a little like Rudy "9-11" Guiliani. Most of their policy statements consist of "Noun, Verb, Job-Providers". Their argument for shifting business costs to the rest of us consists, basically, of the concept that businesses exist to create jobs.

Hooey. Double Hooey.

Businesses exist to make the largest profits possible for their owners. If that means hiring people, they hire. If that means laying people off, they lay them off. If that means shifting production to another country, they outsource.

Businesses, by and large, have no social conscience. They aren't supposed to have a conscience (even though the activist Supreme Court says companies are really people). They are created to generate profits for their owners. Period.

Government doesn't create jobs either, but at least it is supposed to have a conscience. In a democratic society, government has a responsibility to all of us. Unlike a business, it isn't designed to operate as a profit-generating machine. Its job is to help all of its people live a more profitable life.

What creates jobs are customers. All the tax breaks to business in the world won't create a single job without increased demand for services or products. (In fact, many tax breaks reward companies for eliminating jobs: tax credits for investment into robots is just one of many examples.)

The mantra of the corporate representatives in government is that freeing up more capital for business through lower taxes, regulation etc. will allow them to create jobs. Then why do we have a combination of a booming stock market, record corporate profits, record executive bonuses, trillions in liquid corporate assets sitting in the bank ... and sky-high unemployment?

The auto industry has recovered because people started buying cars. To do that, it's PEOPLE who need more money. If PEOPLE are buying, companies will find the money to meet the demand. Only at that point companies will 1) add more employees, and 2) start buying from suppliers.

Government policy, therefore, needs to maximize the money available to those who drive economic growth: consumers of services and products.

So what does Rick Snyder do? He calls for an end to taxation for most businesses, but pays for it by taking money out of the pockets of their potential customers. Compounding the mistake, he focuses his tax increases on those most likely to spend money quickly: lower- and middle-income families. His budget takes money away from seniors, college students, government employees and the working poor. Is it going to help sales at the Mom-and-Pop convenience store when many of their customers have less money to spend?

This strategy may give businesses better return on their current sales by reducing costs, but it won't create jobs.

Making things even worse: to finance higher profits for the economic elite, they mortgage the future. Economist Paul Krugman calls it "Eating the Future".