In the Silicon Valley, a frequently proffered term is that of “pivot”, which elegantly refers to the action of a company to fundamentally change its business model, targeted market, or make some other major shift in strategy, as the existing model has proven deficient if not lethal. While many have failed in the pivot, there have been great stories of successful “pivotees”: PayPal, Twitter, Nintendo, Nokia, even IBM and HP. Starting in one direction, but realizing survival and ultimate success requires a concerted and thoughtful effort to change direction, identifying new ways of conducting business and executing away from dysfunctional and ineffective practices. Sometimes, market conditions, lack of successful outcomes, financial condition, or other exigent factors lead to a necessitated pivot.
One entity that may be well poised for a pivot is the federal government. Think about the government as a business, and might one conclude that the business model isn’t working so well? There are certain responsibilities and roles only government could or should take on. Defense and statecraft, infrastructure, education and select safety net programs. And certainly the responsibility to legislate. But the basic business model, the ability to generate sufficient revenues to cover requisite costs is broken. Analogous to leveraged buyouts overwhelmed with debt, expense reduction is a strategy but that only goes so far. We talk of bloated government, and the need to cut, but little discourse is allocated to revenue growth. And to be clear, revenue growth is not merely income tax increases, particularly on the 15% of the populace that pays 80% of the taxes. Secular increases are mere redistribution of the existing revenue base, very much a zero sum game. What is needed are new methodologies, policies and practices that create opportunities to grow revenues, but in a meaningful and “investment” oriented way. We need to pivot into new thinking, pivot into new revenue sources and fundamentally pivot into a new model for sustainability to address the burgeoning needs of our government and overall economy.
So I hereby submit a five point PIVOT plan to shift the Federal government’s business model, with some old thoughts and some new, recognizing that there is only so much a turnip can be bled, this is about increasing revenues through new sources.
1. Pivot the source of revenues into government. Taxes come from companies and taxpaying citizens, those that are employed. We need strategies to increase both, in essence opening new markets of revenues. Many countries have industrial policies to invest in new industries and companies and reap the reward of the economic value being created by those, as well as the echo effect of broadened employment. The current thought of repatriation of foreign profits is specious, as such profits emanate from regions that are growing profitably for corporates, and thus, the reason to reinvest in those markets, without penalty. So, why not establish a National Venture Capital Fund, say a couple of trillion dollars, to really invest in next generation businesses and not participate in just the corporate and income tax revenues, but in the value creation as equity investors. Pivot our receipts to include investment gains not just taxes. Yes there have been limited attempts, but largely funding provided in long term loans, as opposed to equity investments, that ride the value creation. Some will win, and some will lose. We did experience some wins in the financial institution reset, as well as in the motor industry, but those were examples of stemming current bleeding, and hoping for a return. Why not take a proactive approach to growth? Consider the equity value created by Google, or Tesla, or Amazon. And with their success, there are more jobs and more taxpayers. Of course, this would need be overseen by those that have experienced or created value in the past, rather than a bureaucratic approach. Possibly pull in guys like Buffett and Musk, Bezos, Skoll, even Branson. Target spaces, resources and make a difference. Reflect on how third-world countries are leapfrogging with wireless technologies, rather than being saddled with legacy wiring. We should ask what is next and federally invest as part of an “economic compact” with the citizenry.
2. Pivot away from the existing tax system toward as value-added-consumption tax. Yes this has been debated ad nauseum, but it’s time to consider something new, as the existing system is not working. Does anybody ask why every other OECD country has some form of VAT? Sort of like why the US is one of only four countries that still maintain the Mortgage Interest Deduction, which has promoted the use of debt, and is a skewed benefit to high-income taxpayers. Is it because we’re smarter, or that we don’t do our research and see what works as alternatives in other places? Canada has a higher homeownership rate than us, coupled with a higher average home price, but sans an MID. Though the new administration is advocating for tax cuts, thereby motivating an entrepreneur-culture, the private sector doing the “investing”, we have learned through the last sixty years, that “trickle-down” economics is more alchemy than chemistry, and a considerable contributor to wealth disparity. Government needs to review the theory of binary economics, and enable asset building and wealth recreating methods availed by the lower-economic classes, as tax cuts largely benefit those with means, rather those lacking.
3. Pivot from the banking industry consolidation. Currently, the top ten banks control over 60% of banking assets, yet we promote the discourse of “too big to fail”. In 1985 we had 14,000 banks, now we have under 7,000. Independent banks serve a tremendously important role in small business and Main Street USA, which the money center institutions have impersonalized and centralized credit decision-making. One of the five C’s of credit is “character”, but rarely now does the credit officer even meet the borrower. Ask who’s your banker, and the response is Wells Fargo or Chase, rather than Joe Smith, Vice President at the 123 Main Street Branch. And with Dodd-Frank, increased compliance costs, low interest rate environment, non-bank competition and other factors, the community bank has become a relic due to inability to survive. Community banks bring many things, such as local economic stability and more creative and endearing solutions to their markets. The government should deploy funding to invest in new banks as well as small institutions (less than $5 billion in assets), building both capital and capability to compete and to thrive. Increasing the flow of capital into small banks translates into more funding for small business, leading to new jobs and new taxpayers. And yes, financial technology firms are enabling the consumer and small business owner in specific areas like personal and SME loans, payments, and robo-advisory services, but they are also eroding the commercial viability of smaller banking institutions, while extending the impersonality of the market. An obvious supporter of the world’s oldest profession (yes, it IS banking), we need programs to blend the new world with the old, particularly at the local, community level.
4. Pivot the education system, which is a critical investment for the future viability of American society. Laden with the student debt problem, impacting many parts of the socio-economy, we need to find ways to educate economically, effectively and broadly, to bring current and future generations into the growingly competitive world economy, not just an “America First” thematic. On a global stage, the US is falling behind in academic ranking, placing 38th out of 71 countries in math and 24th in science according to the PISA study, and among the 35 OECD countries, the US ranked 30th in math and 19th in science. And that is recognizing that we spend the highest level per student (>$15,000) of any developed country. Something is broken, including now troves of underfunded teacher pension funds: the payments of the past are in part bankrupting the future. Over the last three decades, our economy has shifted from agricultural and manufacturing to one that is services-oriented. And as such, we have seen a major dislocation in who’s seeking jobs and where the jobs actually are – simply there’s a mismatch. We need to educate prospectively not retrospectively. Should we look to badges not parchment when establishing the goals of education? Within large companies, technology has been advanced to achieving higher levels of productivity with reduced payrolls, so jobs of yesteryear are permanently gone. Robotics, machine learning, IOT and other methods, improving overall productivity, are challenging the yield of labor, which is the sole economic contribution many have to play. And there are demonstrable signs that the greater disparity in education, the greater disparity in income and wealth levels. Back when, Obama Administration claimed healthcare is a right. Shouldn’t education be too? A recent unattributed quote suggests that the US will be the worst market for unskilled workers in years to come. And of course, the inability to employ adds to the mounting unemployment costs, which over ten percent of existing tax revenues go to unemployment benefits. True, the Trump administration suggests that we have a new low in unemployment, but one must dive through the numbers. Consider those leaving the workforce, those involuntarily underemployed, and the overall labor participation rate. Something to think about. Unsustainable? Need to pivot.
5. Pivot away from commercial activities that don’t sustain themselves financially. Spinoff activities that can create value in the private sector, attracting both capital and expertise. Think about how the postal service has been altered with the inclusion of UPS and Federal Express. Space, the domain of NASA, now is closer than ever with Space X and other private entrants. The country has been benefited by the insertion of someone doing something better, faster, and cheaper. Excessively distressed companies resort to asset sales to raise cash. Might someone take a look at the government’s balance sheet and are there assets that could be monetized, even on an interim basis? Might there be investment appetite for a $2 trillion government building REIT? More private-public partnerships need be considered, with the public enjoying the upside along with the private. The constant debate between the D’s and R’s on which is the best arbiter of funds – the public sector or the private – may need to be reframed, in terms of defining worthwhile programs, designed to achieve a long-term end game and assess the best resources to apply, rather than a default into the historic camp. And when did anyone in DC suggest a twenty-year industrial plan for the US, much like so many other first- and second-world countries? Might the 2-4-6-year election cycle have something to do with the lack of long-term thinking? And certainly, we acknowledge an underlying reason for continued low interest rates, namely the $14+ trillion of federal debt, as its interest payments are the fastest growing part of the federal budget, amounting to nearly $250 billion per year, accruing on an average rate below two percent (2.0%). According to the Committee for a Responsible Federal Budget, we spend more on our federal capital structure than on the Departments of Education, Labor, HUD and Transportation combined. Interest rates will move up eventually, with leveraged structures becoming more challenged, and resources pulled from advancing propositions to servicing the past. Maybe it prudent to unload federal assets, rein in (and paydown) the debt level for a bit of future financial flexibility.
Simply, we need a reorientation of what becomes a sustainable government franchise financially. We need to create new sources of revenues from new sources. We need more companies, and more tax payers. We don’t need to take more from fewer and fewer payers, rather we need to grow the “revenue side of the market”, and that doesn’t not mean “higher prices”, read higher tax rates, but rather we need to increase the number of participants in the system. There is a pivot necessary in creating a new model of fiscal health, creating a growth economy, investing in opportunities that will bear fruit, new fruit. The vapid discourse on shutting government down, e.g., holding Obama hostage regarding Obamacare, and the silliness of the infamous 21-hour soliloquy on the House floor does little to advance the future of the country. Now we have a stacked deck in the hands of the Republicans, pregnant with all branches of government, but still failing to deliver. As Nokia started as a paper mill, or Nintendo as a taxi company, there is a time to change direction as to one’s model. The “Jobs-ian” philosophy to think differently is now exceedingly prescient. If something is not working, and yet needs to survive, maybe new thinking be applied. Might we suggest a pivot?
©SAC – Q1:2014; rev. Q3:2017