We need more great founders

Cross posted from the Engineering Entrepreneurship blog.

Successors to successful founders rarely do as well, according to two Bain consultants who’ve studied the topic.

The headline in Monday’s WSJ made it clear:

The Company Founder’s Special Sauce
No one leads a firm as effectively as the person who started it.
By CHRIS ZOOK and JAMES ALLEN
Dec. 18, 2016 5:03 p.m. ET

‘The Founder,” a new film starring Michael Keaton, tells the story of McDonald’s Corporation founder Ray Kroc as he turns a few small restaurants into a ubiquitous international chain. It’s a tale of founder-driven corporate growth—something that has become too rare today. This breed of entrepreneurial spirit makes for a good story, but it’s also crucial for the economy.

Research we published in July finds that of all newly registered businesses in the U.S., only about one in 500 will reach a size of at least $100 million in revenue. A mere one in 17,000 will attain $500 million in revenue and sustain a decade of profitable growth. Despite their rarity, these successful firms are a bedrock of the U.S. economy.

A study out earlier this year from Bain & Company, where we work, shows that over the past 15 years founder-led companies delivered shareholder returns that are three times higher than those of other S&P 500 companies.

Such performance can sometimes continue long after a founder leaves. We analyzed examples of sustained success at 7,500 companies in 43 countries, visiting many in person, to determine what made them stand out. Great founders imbue their companies with three measurable traits that make up what we dubbed “the founder’s mentality.”

Those three traits: insurgency (i.e. disruptive innovation), obsessive focus on customers, and permeating the vision of the founder throughout the entire organization.

I have not had a chance to read their research, but it rings true. I did my dissertation on Apple, once led by Steve Jobs — perhaps the most unique founder of the 20th century; in America, only Henry Ford, Tom Watson Sr., Hewlett & Packard and maybe Howard Hughes come close.

Jobs was driven to make “insanely great” products, to the point of being a tyrant (slightly more human after he had kids). Since his death five years ago, they’ve had mediocre leadership and nothing they have done has come close (something us shareholders must lament).

One caveat: while I lionize great founders — and aspire to be a good founder once again — there is an important confound. Firms have their best people, best ideas, greatest disruption and greatest impact during their initial growth phases; a second round of growth and disruption (as in the Jobs II era, 1997-2011) is virtually unheard of. Big companies don’t grow as much as small ones, nor is the CEO (of any stripe) able to have the same impact. (And unlike Jobs, most tech founders have their greatest impact in this initial period, not running the stable successful mature company).

Still, nothing I’ve seen this year does as good a job summarizing the great debt society owes to those who roll the dice, take great chances and endure years of high-stress intensity to create a new company. The decline in US startups is troubling not only for economic growth, but for the lost opportunities for employees, customers and complementors as well.

Silicon Valley's ambivalence towards growth

Last month, the latest mayor of Palo Alto explained his slow growth philosophy against both economic and housing growth. An interview with Curbed San Francisco began

Curbed SF: Everybody agrees that too many people can’t afford Palo Alto. So why is it like this?

Mayor Patrick Burt: There are a number of factors. First, we’re in a region that’s had extremely high job growth at a rate that is just not sustainable if we’re going to keep [Palo Alto] similar to what it’s been historically. Of course we know that the community is going to evolve. But we don’t want it to be a radical departure. We don’t want to turn into Manhattan.

Curbed: But there’s a pretty big margin between Palo Alto and Manhattan. What are you comfortable changing?

Burt: We're looking to increase the rate of housing growth, but decrease the rate of job growth.

Curbed: You want fewer jobs?

Burt: I know, it’s a strange idea to contend with. But this doesn’t mean we want no job growth. And it doesn’t mean we want reckless job growth. We want metered job growth and metered housing growth, in places where it will have the least impact on things like our transit infrastructure. …

The interview seemed in response to the resignation of a city planning commissioner who resigned two weeks earlier because her family could no longer afford to live in Palo Alto. It’s hard to disagree with part of Park’s argument that economic growth requires housing growth — but Burt (a medical device CEO) seems ambivalent about the latter as well.

In today's Wall Street Journal, former hedge fund manager Andy Kessler notes that the cheapest house in Palo Alto has 959 square feet, backs to the train tracks, and costs $1.35 million. (That's roughly double what a comparable house cost when we looked at moving to Palo Alto in 2002).

Kessler continued:

I wanted to ask Mayor Burt: Is stifling job creation really going to help? Or would that only boost surrounding towns? Palo Alto has already capped the annual growth of office space. It took years to approve a new $5 billion Stanford Hospital extension, which the area desperately needed. Even worse, there is a funny quirk in the zoning laws that limits what’s allowed in so-called Pedestrian and Transit Oriented Development areas (downtown). This includes restrictions on research and development, a catchall for limited manufacturing, “storage or use of hazardous materials,” and “computer software and hardware firms.”

I can tell you outright that the only hazardous materials in an office of software coders are their high-test caffeine concoctions. But the software firms are many. Amazon has its search team in Palo Alto. The big-data firm Palantir has been gobbling up buildings for its engineers. Facebook had several before moving to neighboring Menlo Park. SurveyMonkey has a huge site near the train station.

Even Palo Alto’s residential areas are filled with startups, real-life versions of Erlich Bachman’s house from HBO’s “Silicon Valley.” They’re easy to spot, having more cars parked during the day than at night. These companies offer high-paying and productive jobs that are great for society.

In the 1970s and 1980s, San Francisco was decrying “Manhattanization” but today that is a fait accompli. Meanwhile, most of the Bay Area (particularly the City and the Peninsula) is emulating the trends of excessive living costs that drove large companies and jobs out of New York City during that same period.

The explosion of housing prices in the Bay Area over the past five years is pricing ordinary workers out of the market. Yes, it is possible to commute from New Jersey (which here is called "Contra Costa County"), but such commutes strain highway and mass transit infrastructure (and push suburban and exurban housing prices up too).

Kessler notes that the solution to high housing costs is (surprise!) building more housing. I understand the importance of making available single family homes, and I think it is a strength of both California and the U.S. more broadly. Still, anyone driving along I-280 knows there are large swaths of undeveloped land in the Bay Area — that in LA would be houses but in the Bay Area are called “open space.” According to Wikipedia, the housing density of Palo Alto (2,500 residents/acre) is half that of nearby Cupertino, and less than one-fourth that of Santa Monica — another upscale, highly desirable community. (Burt’s hyperbole is demonstrated by noting that the actual housing density of Manhattan is nearly 30 times that of Palo Alto).

So will Silicon Valley voters (let alone politicians) embrace the full implications of economic growth by developing undeveloped land or increasing housing density? Or will it continue down this path of being available to well-paid tech elites, while ordinary (non VC-funded) entrepreneurs and businesses have to move elsewhere?

If Facebook kills entrepreneurship, what’s next?

Cross-posted from Engineering Entrepreneurship.

The $19b that Facebook paid to buy WhatsApp is shaking up Silicon Valley, as other Internet startups try to figure out how they can get their own inflated multiple.

But for the rest of the world of tech entrepreneurship — such as life sciences — it could further starve the flow of investment capital they need to get off the ground.

Entrepreneurship guru Steve Blank tweeted Monday

steve blank ‏@sgblank Feb 24
Why Facebook is killing Silicon Valley http://steveblank.com/2012/05/21/why-facebook-is-killing-silicon-valley/ … more relevant today

The earlier article talked about his work teaching entrepreneurship for science-based startups:

The irony is that as good as some of these nascent startups are in material science, sensors, robotics, medical devices, life sciences, etc., more and more frequently VCs whose firms would have looked at these deals or invested in these sectors, are now only interested in whether it runs on a smart phone or tablet. And who can blame them.

Facebook and Social Media
Facebook has adroitly capitalized on market forces on a scale never seen in the history of commerce. For the first time, startups can today think about a Total Available Market in the billions of users (smart phones, tablets, PC’s, etc.) and aim for hundreds of millions of customers. Second, social needs previously done face-to-face, (friends, entertainment, communication, dating, gambling, etc.) are now moving to a computing device. And those customers may be using their devices/apps continuously. This intersection of a customer base of billions of people with applications that are used/needed 24/7 never existed before.

The potential revenue and profits from these users (or advertisers who want to reach them) and the speed of scale of the winning companies can be breathtaking. The Facebook IPO has reinforced the new calculus for investors. In the past, if you were a great VC, you could make $100 million on an investment in 5-7 years. Today, social media startups can return 100’s of millions or even billions in less than 3 years. …

If investors have a choice of investing in a blockbuster cancer drug that will pay them nothing for fifteen years or a social media application that can go big in a few years, which do you think they’re going to pick? If you’re a VC firm, you’re phasing out your life science division. As investors funding clean tech watch the Chinese dump cheap solar cells in the U.S. and put U.S. startups out of business, do you think they’re going to continue to fund solar? And as Clean Tech VC’s have painfully learned, trying to scale Clean Tech past demonstration plants to industrial scale takes capital and time past the resources of venture capital. A new car company? It takes at least a decade and needs at least a billion dollars. Compared to IOS/Android apps, all that other stuff is hard and the returns take forever.

Two years ago — ironically a few weeks before Blank’s blog posting — I started writing my own posting along these same lines. What I wrote (but never posted):

Did software ruin entrepreneurship?
On Friday, I sat between two entrepreneurs at an office party for my old job. One of the entrepreneurs is in clean tech (hardware) while the other is in IT (software). One is in his 30s and one is in his 50s.

The hardware guy was talking about his challenges raising funds. One VC told him (I'm paraphrasing): “I gave Instagram $5 million and got back $200 million. Why should I give you money?” [after their $1 billion acquisition by Facebook].

The remainder of my (incipient) argument was that software promises abnormally low cap short returns, and the amount of money needed to fund a software company is getting smaller by the week, as VC Mark Suster wrote back in 2011.

How will this play out? I see at least four possibilities:

1. During the dot-bomb (dot-con) era we had too much money chasing too few good ideas, and what resulted was what economists call excess entry. Eventually the bubble burst — and it could again.
2. Another possibility is that these other ideas don’t get funded. There are business models that made sense in the 1890s or 1950s that no longer make sense — such as ones that are labor intensive or based on craft work — and new businesses here don’t get launched.
3. Blank points to the genius philosopher-king model — where a really rich guy (it’s almost always a guy) puts his money where is mouth is (again, almost always a big mouth). In a previous century it was Howard Hughes or Richard Branson, while today Blank points to Elon Musk.
4. The final possibility is that politicians play kingmaker, not with their own money but with Other People’s Money, i.e. yours and mine. (They will be egged on by a incantations of “market failure” of a few economists.) While this may make sense for public goods such as public health, we saw how such large scale private intervention worked with firms like Solyndra.

Of course, these are not mutually exclusive. Musk depends on public subsidies to support the business models of Tesla and SolarCity, although — unlike Fisker and Solyndra — he’s at least offering something people want to buy. SpaceX depends on public procurement, but I believe his announced plans that this is just a bootstrap to get the business off the group (so to speak).

Is there a happy ending? Like Blank, I think the Facebook effect is going to get worse before it gets better.

No accountability without choice

I went swimming this morning with a pro triathlete. It wasn't my intention, but there’s a triathlon in town tomorrow and a number of pro athletes are visiting and working out.

I got talking with her manager/trainer, who said they live in Florida. Because the triathlons are around the country (and the world), they can live anywhere they want. Like many athletes, they (and other triathletes) live in tax-free Florida, while others live in Texas.

The triathlon was invented in San Diego and popularized in Hawaii, and handful of professional triathletes still live here. But — between taxes and housing costs — most find it cheaper to live elsewhere and pay an accountant $5-10K a year to keep track of various state laws that require they pay the nonresident athlete tax for the days they work in high-tax states. The St. Louis Cardinals didn’t care whether the Tigers or Red Sox make the World Series, but clearly the Red Sox are better off playing three games in St. Louis (top rate 6%) than in Los Angeles (top rate 10.3%).

Pro athletes can arbitrage tax rates (for endorsements) and live where they want (off season). San Diego native Phil Mickelson was roundly criticized for the (factual) observation that he pays a 60%+ tax rate living in California and was considering living elsewhere.

Entertainers can also live anywhere also, and this should work well for musicians. However, it appears that actors still tend to cluster in Los Angeles and New York City, two of the highest tax jurisdictions in the country. I’d argue this is because while athletic performance is directly measurable, acting performance is not: do we care which 25-year-old starlet or 45-year-old aging acting star is cast in a big-budget movie? Probably not. Actors have to stay in the network, attending parties etc., so the decision-makers don’t forget them when casting the next movie, TV show or high-visibility stage production.

Still, other types of professionals and business owners lack job mobility. At one extreme, Silicon Valley is largely about access to venture capital (since it has no monopoly on smart people or good universities). At the other extreme, restaurants and dry cleaners can’t move to a low tax state and take their customers with them. With its unfavorable business climate, California will hold these two extremes and has been driving out the average business in the middle (such as manufacturing).

California is now a one-party system and the ruling party assumes it can charge what it wants. I have a fairly low salary for a b-school professor and I’m at the 9.3% marginal tax rate. This used to be the tops until they instituted two millionaire surcharges (bringing the maximum rate to 13.3%), the latest being including a retroactive tax increase passed last year to capture Facebook IPO gains.

Even worse, California taxes capital gains as regular income, and thus the long-term capital gains rate is higher than New York, France, Finland or Sweden (let alone notorious tax havens like Hawai‘i and D.C.) If you are a Google or Facebook founder, it isn’t going to change your standard of living, but trying to sell a $1-2 million business to retire would leave a lot less money to live on in your old age.

In a one-party system, there is no accountability for bad ideas — only for overt corruption. So if people can’t have a choice of economic policies, what remains is the option to vote with their feet ala Hirschman’s Exit, Voice and Loyalty†. Despite increasing centralization to the national government, the US — like Canada and to some degree Germany — has a Federal system that allows policy experimentation and competition of ideas.

New York and Massachusetts paid a price (in terms of employers and job growth) for their high tax policies — but apparently not enough of a price to cause them to rethink their policies. Like California, they have a small cluster of high end jobs (Wall Street and drug companies respectively), the immobile local jobs and have discouraged or driven away the jobs in the middle.

Since Hollywood’s business model is in decline, California’s ability to pay its bills seems tied to what fraction of the global tech economy remains in Silicon Valley. No matter how much you believe in Silicon Valley’s uniqueness, this is a bold (if not foolishly optimistic) bet on a small fraction of the state’s 38 million people. However, with term limits, politicians have a short-term mentality and are betting they will be long gone if something bad happens 5 or 10 years down the road.

† Writing in 1970, Hirschman (p. 84) assumed that a lack of voice would cause people to quit organizations but they cannot exit the “state” (i.e. national government). But this was before intra-EU job mobility and even the flight of jobs from the northeastern to the southeastern regions of the U.S.

Empowerment brings economic growth

There is no doubt that some are better equipped than others to navigate the challenges of the 21st century. Our purpose is not to fear or deny those inequalities – in resources, or skills, or confidence – but to understand and overcome them.

This is not a matter of more spending or more government. It requires putting members of the public in charge of their own destiny so we can prevent problems rather than just mitigating them. Such people-led politics is the way in which we save money and secure better outcomes for all. Radical and difficult to implement though it may be, it is the progressive future for which we fight.
…
Education policy has been defined by an obsession with who is running schools, when our children need preparation for a digital economy where “jobs for life” no longer exist.
…
With the pace of change in the global economy, no one can take his or her job for granted. … As the economist Adam Lent argues, the means of production are increasingly in the hands of workers. Starting a business once required considerable capital outlay. Now broadband and a PayPal account will do. Our youth embrace this. In 1998, just 17 per cent of 18-to-29-year-olds wanted to start a business –now it is 30 per cent.

This ethos hasn’t been created just by the rise of the internet. The new enterprising spirit is no more defined by new hardware than the 1980s were defined by fax machines. This is a grass-roots, pioneering mindset – and it can be harnessed by the left.

Stella Creasy, MP (Labour) for Walthamstow
New Statesman, September 18, 2013

Dirigisme wins, French entrepreneurs lose

By now, the whole tech world has heard the story first reported Tuesday afternoon in the Wall Street Journal about Yahoo’s failed effort to buy Dailymotion. As the story opened:

Dailymotion was on track to be the first big acquisition for Yahoo Inc. YHOO +2.76% Chief Executive Marissa Mayer, after her company signed a provisional deal to buy control of the online-video website from France Télécom FTE.FR -0.59% SA. Then Ms. Mayer's No. 2 executive met with French Industry Minister Arnaud Montebourg.

At an April 12 meeting in Mr. Montebourg's Paris office, the minister told Yahoo's chief operating officer, Henrique de Castro, and France Télécom's chief financial officer, Gervais Pellissier, that he didn't want 75% of a rare French Internet success story to be sold to an American Web giant, according to people briefed on the meeting.

"I won't let you sell one of France's best startups," Mr. Montebourg told Mr. Pelissier, his voice raised, according to people briefed on the meeting. "You don't know what you're doing."

Facing an uproar, the minister clarified:

“The minister has expressed his desire that a partnership between Yahoo and Orange should be built on an equal base, mutually beneficial to both companies,” his office said in a statement.

It was widely reported that the government was willing to let Yahoo get 49% — or maybe even 50% — but not beyond.

This has so many fascinating implications. First, Yahoo is back to the drawing board in trying to build up its video capabilities.

Second, are the policies of the socialist government — after five years of crypto-Gaullist Sarkozy — going to hurt trade and investment with France. From the New York Times:

The government’s intervention has alarmed entrepreneurs in France, who say it sends a bad message to foreign investors, especially at a time when the country is seeking their money to help jump-start its economy.

“I’m sure France will be downgraded in foreign investors’ eyes because they will think it is too complicated,” said Frédéric Montagnon, co-founder of OverBlog, a blogging platform.
…
The move to block a takeover by Yahoo comes even as France has been stepping up its efforts to attract foreign investment — much needed, analysts say, to pull the country out of a slump in which gross domestic product declined by 0.3 percent in the fourth quarter of last year.

Or, as the headline on the Financial Times proclaimed: “Dirigisme dies hard in France”.

The rebuff to Yahoo comes after Montebourg feuded with other foreign capitalists. From the London Telegraph:

But it is not the first time Mr Montebourg, on the Left flank of President Hollande’s Socialists, has been accused of damaging the country’s business image.

Last year he threatened to nationalise an ArcelorMittal steel plant in Floranges, north-eastern France. More recently he got into a spectacular public spat with American tyre tycoon Maurice Taylor, calling the Titan International CEO “extremist” after he pulled out of talks to buy a Goodyear factory over worker demands.

“The extremists are in your government, who have no idea how to build a business,” Mr Taylor fired back.

But what I think is most important is the message it sends to French entrepreneurs, who know that for the next four years (at least), they can’t build an economically significant firm and sell it to the highest bidder. From Business Week:

“It sends a very bad signal to the outside world, saying that because you aren’t French, we prohibit you from being involved,” says Christophe Chausson, managing partner of Chausson Finance, a Paris-based venture capital group. “To develop startups, you have to do the opposite of what the government has done. Dailymotion needs a lot of capital, hundreds of millions of euros, to develop and buy rights to content.”

The same article noted that the decision hit home for the company’s founders:

Perhaps the most poignant reactions to the collapse of the Yahoo deal came from Dailymotion’s co-founders, Benjamin Bejbaum and Olivier Poitrey, who started the company in Poitrey’s Paris apartment in 2005. “It shouldn’t have been THEIR decision,” Poitrey posted on his Twitter account on April 30. He recently moved to Silicon Valley to head a team that’s developing Dailymotion’s mobile offerings.

Added Bejbaum in a tweet today: “On Monday, there was hope. On Thursday we freaked out. The French economy is not a toy.”

Like Poitrey, some expatriate French are thriving in Silicon Valley. But I see a huge opportunity for French-speaking Switzerland (with access to capital and home of a first-rate technical university) or Belgium (already home of French tax refugees) to create entrepreneurial clusters and attract the best and the brightest minds trapped in President Hollande’s workers’ paradise.

Strong US support for increasing unemployment

A USA Today poll reports that 71% of Americans back the president’s plan to raise the minimum wage: 87% of Democrats, 68% of independents and even a 50-47% plurality of Republicans. Only the tea party supporters oppose the move (64-32%)

The only problem with the plan is that — based on more than 100 academic studies — it will raise unemployment, particularly among the least employable workers (e.g., minority teens).

A 2006 NBER study by David Neumark of UCI (go Anteaters!) and William Wascher of the Federal Reserve — later published in Foundations and Trends in Microeconomics — reviewed nearly two decades of research on the impact of increasing minimum wages. Here’s the abstract:

A sizable majority of the studies surveyed in this monograph give a relatively consistent (although not always statistically significant) indication of negative employment effects of minimum wages. In addition, among the papers we view as providing the most credible evidence, almost all point to negative employment effects, both for the United States as well as for many other countries.

Two other important conclusions emerge from our review. First, we see very few - if any - studies that provide convincing evidence of positive employment effects of minimum wages, especially from those studies that focus on the broader groups (rather than a narrow industry) for which the competitive model predicts disemployment effects. Second, the studies that focus on the least-skilled groups provide relatively overwhelming evidence of stronger disemployment effects for these groups.

While individual studies have reached varying conclusions, such comprehensive literature reviews are the way that science reaches a consensus on an unsettled question of causality (whether innovation policy or global warming). The administration wants to be guided by science when it supports its policies, but ignores inconvenient truths.

When our educational system turns out high school graduates that are illiterate or innumerate, they pay the price. When it turns out economic illiterates — leading to bad policies — others pay the price for those policies.

Whither public higher education?

On Saturday the Wall Street Journal ran an article that uses the sticker shock faced by parents of a CU Boulder freshman to illustrate the broader financial pressures on U.S. public universities and their students.

Who Can Still Afford State U ?
By Scott Thrum
…
Public-college enrollment exploded after World War II and the adoption of the GI Bill. As recently as 1951, more Americans were enrolled in private universities than public ones. Sixty years later, more than 15 million students were enrolled at the nation's 678 public colleges and universities, nearly three times the number attending private ones…

State subsidies for these public colleges and universities fell 21%, on a per-student, inflation-adjusted basis between 2000-01 and 2010-11 … Over that same period, tuition at two- and four-year public colleges rose an inflation-adjusted 45% to $4,774 in 2010-11, according to the association. At public four-year colleges this year, tuition averages $8,655, according to the College Board.

But education experts say wrenching decisions on the state level about how to allocate limited public resources are having a very big effect.

"Over the last 25 or 30 years, public higher education has lost out in the competition for state funds with Medicaid," says Cornell University professor Ronald Ehrenberg, director of the Cornell Higher Education Research Institute. "There's so much pressure to spend money on other things."
…
State funding for the University of California system has fallen 25% over the past decade, to $2.4 billion from $3.2 billion, triggering tuition increases and student protests. At the University of Michigan, state funding has fallen 26% in the past decade. The state now covers 17% of the university's budget, down from 33% in 2002-03.

"The state obligations in Medicaid, prisons and K-12 education are just swallowing up state budgets," says John Vaughn, executive vice president of the Association of American Universities, a group of 62 research universities, public and private.
…
The financial pressure on CU isn't expected to subside soon. A 2010 study by the University of Denver, a private school, projected that Colorado, given its other funding obligations, might run out of money for colleges and universities within a decade. "We think it's sooner than that," says CU President Bruce Benson.

The article highlights a phenomenon long-visible here in California. When it comes to politicians getting elected to state office — whether measured by popular votes or campaign donations — public higher ed is near the bottom of the list, after transfer payments, K-12 teachers, prison guards, general state bureaucrats, even home care workers. At the same time, administrator salaries (and non-instructional spending more broadly) has been exploding at these universities.

As in other states, CU is pushing politicians to limit the cap on foreign students, so they can aggressively recruit full-fare enrollees at the expense of state residents. I suspect such a philosophy this would be anathema to those who founded these public universities or the national Morrill Act land grant college system that made many of these universities possible.

California holds education hostage

From the WSJ, November 1:

[California Governor Jerry] Brown and his labor allies say Proposition 30 will fix the state's budget deficit and ward off education cuts. But the real choice before voters is whether to issue Sacramento's incorrigible spendthrifts another blank check.
…
Mr. Brown has threatened to "trigger" $5.9 billion in education cuts if his initiative fails, but he'd make less than $100 million in other trims. How's that for balance?

Such "trigger cuts" could easily be re-configured with a modicum of political will in Sacramento. Instead of slashing $500 million from higher education, Democrats could kill their quixotic bullet train, which will cost about $360 million this year alone in debt service, and chop $100 million in tax credits to their Hollywood friends (who are bankrolling the tax campaign).

Or they could restructure retirement benefits, which cost $6.5 billion this year—up from about $1.4 billion in 1999. There's millions more to be found in modifying current workers' pensions and retirees' cost-of-living adjustments as nearly a dozen states have done. In Rhode Island such reforms have cut the state's pension liability by half.

Barring such reforms, pension costs will continue to balloon and eat up all new revenues. The California State Teachers' Retirement System has projected that it will need between $3.5 billion to $10 billion annually over the next 30 years to stay solvent. So any money allocated to schools will merely backfill the teachers' pension fund.
…
The only way California can escape its recurring fiscal Frankenstorms is through reform and economic growth. The former would stimulate the latter while the Governor's tax initiative would squelch both. Raising taxes on small business owners when one in five Californians is out of work or employed part-time because he can't find a full-time job is the definition of insanity.

Eroding freedom has its price

During my first visit to South America, I was struck by the contrast between Chile (one of the economically freest nations of the Western Hemisphere) and Argentina (only Venezuela and Cuba are worse). Chile has enjoyed the benefits of its economic freedom, as the only Latin American country in the OECD, and through economic might that enabled it to cope with natural disasters and potential national tragedies.

Meanwhile, Argentina is suffering from a man-made disaster of more than a century of corrupt and incompetent rule, first by the oligarchs then by the Peronistas. As Stef Haggard noted in his book Pathways from the Periphery, Argentina was one of the wealthiest countries in the world in 1900, but was easily passed by Korea and Taiwan with their access to education and the concomitant labor mobility.

Last week, the AP reported on the stark consequences Argentina by President Cristina Fernandez. With inflation running at 25% annually (10x that of neighboring Chile) none of the locals want to hold pesos, so for years they have been rushing to trade them in for foreign currency or goods:

Legally trading pesos for dollars or euros has become ever more difficult as President Cristina Fernandez tries to keep dollars inside the country and bolster the Argentine peso's sliding value. And new rules taking effect this week are squeezing them still further by going after credit card spending.

Until now, travel has offered a limited exception to the currency controls first imposed last November: People up to date on their taxes and poised to cross a border, tickets in hand, can get permission to buy no more than $100 per person for each day abroad. The process is bureaucratic and intrusive, and many say their requests are rejected for reasons they don't understand.

Credit and debit cards provided a legal way out, enabling people to make purchases and get money while abroad. But now the government is cracking down there as well.

The new measures make using plastic inside or outside the country less affordable by charging 15 percent in taxes on all foreign purchases that appear on credit or debit card bills, plus a 50-percent customs duty on any goods from abroad that might be brought back to Argentina. Internet purchases on sites such as Amazon, eBay and the Apple Store are included, along with anything bought using online services such as PayPal.

The measures are Fernandez’s attempt to protect her sagging popularity by reducing the symptoms of economic mismanagement, but they don’t do anything to resolve the underlying issues.

Brazil once had an inflation problem too, but seems to have a more competent government that has promoted industrial development and economic growth. I don’t know a lot about Brazil, but the socialists seem more pragmatic (with an economic freedom index comparable to Italy) than in Argentina (which is more like Angola). Both are plagued by corruption (unlike Chile) but Brazil has average property rights and financial freedom versus Argentina’s abysmal record on both counts.

Despite their abysmal economic record, the Peronistas have dominated Argentinian politics for decades. Apparently populist demagoguery trumps actual competence — thank God we don’t have that problem in the U.S.

More bullet train OPM

Facing a $17 billion annual deficit — and, unlike the Feds, no ability to print money — Gov. Edmund G. (“Jerry”) Brown has come with a novel solution: commit the state to spending an additional $70 million (perhaps $100 million) on a money-losing high-speed rail system.

Unfortunately, for Gov. Brown, the public no longer supports the plan, with voters now opposed 59% to 33%.

This morning, the San Jose Mercury News (which supported the plan in 2008) came out in opposition, saying

There is a fine line between visionary and delusional. California's high-speed rail project whizzed across that line long ago and now is chugging toward the monorail station at Fantasyland.

Two of the state’s other major papers, the Los Angeles Times and the San Francisco Chronicle, seem fully committed to spending millions of other people’s money on the system.

However, railroad historian Richard White of Stanford explained to LA Times readers how the high-speed rail yarns parallel those used by 19th century railroad barons Leland Stanford and C.P. Huntington:

The ghost of Huntington hovers over the California High-Speed Rail Authority. Its members are supposed to protect the California public, but there is too much money to be made from this project to do that. They are boosters who tell us what they want us to know. They sell the Legislature short, and in this they may be right. They sell the governor short, and in this too they are probably right. They also sell the California public short. They think we are suckers.

I hope they are as wrong in this as they are in their calculations.

The state’s senior political correspondent, Dan Walters of the Sacramento Bee, noted last week how Brown claimed the rail system paralleled that of the Bay Area’s great bridges of the 1930s. However, while those bridges were successfully financed out of their respective revenues, Brown wants to use other people’s money — the state’s general fund — to guaratee the “bullet” train debt:

If the train is as financially viable as Brown and the authority insist it is, why wouldn't they have the guts to do what the bridge-builders did – float revenue bonds to be repaid from the train's supposed operating profits?

Public works projects make sense when they fill well-documented needs.

When they don't, they are just political ego trips.

The Tarnished State

While driving last week I heard reporting of the latest annual survey of US CEOs by Chief Executive magazine, which ranked California #50 out of 50 for its unfavorable business climate.

As the San Jose Business Journal reported:

"CEOs tell us that California seems to be doing everything possible to drive business from the state. Texas, by contrast, has been welcoming companies and entrepreneurs, particularly in the high-tech arena," said J.P. Donlon, editor of the magazine, in a prepared statement.

The magazine said that CEOs surveyed said California's poor ranking is because of its hostility to business, high state taxes and overly stringent regulations, which it said is driving investment, companies and jobs to other states. According to Spectrum Locations Consultants, 254 California companies moved some or all of their work and jobs out of state in 2011, an increase of 26 percent over the previous year and five times as many as in 2009.

One company that's leaving is CafePress, the crowdsourcing innovator that was launched in San Mateo. Apple is not leaving, but is adding 3,600 new jobs in Austin Texas (the state that ranked #1 on the business climate survey).

In the CEO scorecard, California earned the worst possible rating for taxation and regulation. It also has a terrible economy, with negative 2.1% growth from 2007-2010 (1.7% worse than the national average), unemployment in Dec. 2011 at 11.1% (2.6% above the national average), and net out-migration from 2000-2009 of 1.49 million (#49 in the country). About 5% of the state’s population are state or local government employees (5% of the whole population, not 5% of the workforce.)

Chief Executive offered these choice quotes:

“California continues to head in the wrong direction as its tax policies will drive more businesses and people to relocate in other states. State politicians feel business and commerce are “necessary evils” that provide the funds to enable pursuit of their misguided agendas.”

“California government is difficult to work with and very bureaucratic. Taxes and regulation are high and unruly.”

When google’ing to find the story, I also found a series of pro-California claims being made by Gov. Brown and the Commerce Secretary Bryson during an April 24 meeting of the “CEO Business Climate Summit 2012”. Gov. Moonbeam (as he called himself) was bragging about being unconventional — and about all the innovative companies being formed in the Bay Area — but not about the performance of the economy under his tenure.

The website reporting on the April 24 event is also advertising a May 11 “California Economic Summit” which — as in Brown’s earlier tenure — will likely be long on symbolism and short on actual results. The summit is sponsored by the Think Long Committee for California, an effort sponsored by the center-left Nicolas Berggruen Institute.

Brown’s plan to help turn around the economy is now to join the American Federation of Teachers to promote a $7-9 billion annual tax increase, to protect government employee jobs at the expense of the private sector. (The tax increases are claimed to be “temporary,” but the “temporary” transit taxes in the state’s major cities seem to have lasted 20-40 years thus far.)

California right now is behaving like New York in the 1970s — assuming that it can jack up taxes and regulations because companies have to be here. Back then, the major NYC-based companies reacted to high costs by either moving the entire company out of state (the airlines) or the bulk of the back office jobs (the retail banks).

Of today’s companies in California, some of the highest value-added jobs — like Apple and Google — are likely to remain in Silicon Valley, just as the top Goldman Sachs and Morgan Stanley jobs stayed in Manhattan. However, no matter how successful they are, Apple and Google are not going to provide jobs for the state’s 37 million population.

The apparent indifference by California’s ruling caste to its destruction of the state’s economy — and its denial of its culpability in this outcome — pains me greatly. I was born here and will die here, as my ties to the Golden State run deep: my paternal grandfather came to California over 100 years ago, while my mother’s side was here 150 years ago. But I can’t recommend that my students start companies here; worse yet, I don’t expect that my daughter will settle here after college, unless she lands one of those elite Silicon Valley jobs.

Fossil fuels: they're not gone yet!

From an interview with Daniel Yergin in the April 2 issue of Business Week:

Charlie Rose: Why have gas prices become such a huge political issue in America?
Yergin: There are two reasons. One, this is the one price everyone sees every day. And secondly, it’s something that, you know, people feel very directly and immediately. They feel it in their pocketbooks and feel it in their wallets. Seriously, for a lot of people, when prices go up like this, it’s a big and unexpected financial burden.
…
How much difference would the Keystone pipeline make?
It’s not only U.S. oil production that’s gone up, it’s also Canadian oil sands production, which has almost tripled since the beginning of this century. Canada’s now our most important source of oil by far. And the Canadian oil sands—to get the volumes in perspective—they’re greater now than Libya’s output before the civil war. The oil that would flow through Keystone is equivalent to about a third of Iran’s total exports. There are a lot of arguments about Keystone, but the argument that people haven’t paid as much attention to is what it would mean for our energy security. Keystone would signal that, within two years or so, there would be major new oil that would help shrink the number of Iranian barrels on a tight world oil market.

How does fracking change the picture?
The development of shale gas has created—my company [Cambridge Energy Research Associates] did a study—indirectly something like 600,000 jobs. It is a major stimulus to the revival of manufacturing in the country, and in ways that were not anticipated a few years ago. This inexpensive, abundant energy, directly and as a source of electricity generation, makes the U.S. more competitive in the world economy.

What about environmental risk?
I was on a committee that did a report for [Energy Secretary] Steven Chu and Obama. What we concluded is that there are environmental issues to be addressed, and we identified 20 pragmatic ways of addressing them. There’s this public debate, and then there’s what seems to be reality. The scientists on the committee were firm: The chemicals that are used that have gotten attention, it’s very, very unlikely that they’re getting into the water supply. What needs to be managed is what you do with the spent water from the drilling.

A full-time consultant, Yergin is perhaps America’s most famous energy economist — a former Harvard lecturer and the author of several energy policy books, including the famed Carter-era book Energy Future from the Harvard Business School and more recently The Prize and The Quest. While predicting the future is always a matter of opinion, it’s hard to think of a more authoritative source on this subject.

Qualcomm joins chorus for MNC tax reform

At Tuesday’s Qualcomm shareholder’s meeting, the company’s executives joined the chorus of Fortune 500 leaders who called for reducing taxation of multinational US companies when they repatriate foreign income that’s already been taxed offshore.

The list of proponents is heavily skewed towards high-margin IT companies, including Apple, Google, Microsoft and Oracle, as well as more traditional market leaders like GE and Pfizer. Bloomberg estimated that 70 US companies hold $1.2 trillion offshore.

In response to a shareholder question, CFO William Keitel said that of Qualcomm’s more than $20 billion in cash, about 60% of that is offshore. CEO Paul Jacobs said that 75% of employees are onshore, but that 90% of revenues are generated offshore because that’s where companies build products. That money “has a little note attached to it: don’t spend me in the United States,” Jacobs said. He also said he was leaving Tuesday for a meeting Wednesday by proponents of the change.

As I see it, there are three issues here:

• Economics. Clearly encouraging bringing that money back would encourage more capital investment and hiring in the United States.
• Budget Deficit. Reducing taxes would theoretically widen the deficit. In practical terms, if firms don’t repatriate their money — and thus don’t pay any repatriation tax — then there’s no loss. There’s also the issue of whether economic growth (e.g. increase in jobs) would increase other tax receipts, but that’s hard to measure.
• Politics. In an election year, it will be difficult for either side to openly support big business. Democrats are attacking big business (although in the past they’ve been closely aligned with big NYC Wall Street financiers). Republicans are already wary of being too aligned with business interests: Romney is wary of being seen as more of a plutocrat than he already is, while his two main rivals have more of a Main Street than Wall Street bias.

If either side wins a clear mandate, it’s possible there will be a settlement next year (or during the lame duck session). However, given the recent rhetoric, I can’t see how a Democratic Congress would support such an effort, so to me the only way it would pass is if both houses are decidedly GOP (give or take a few centrist Democrats) to work with whatever initiative next year’s president proposes.

When will the 'temporary' raid on Social Security end?

Another in a series of outsourced political commentary — this time from an unexpected source, Michael Hiltzik of the Los Angeles Times:

[W]ith every extension of the payroll tax holiday, which was first enacted in 2010, the prospect that Congress will ever restore the tax to its statutory 6.2% of covered income recedes a little bit further over the horizon. And that's bad medicine for Social Security.

To be fair, thus far the payroll tax holiday hasn't impaired Social Security's fiscal resources one bit. By law, 100% of the cut must be compensated for by transfers from the general fund; those transfers have come to about $130 billion since 2010, covering the original "temporary" one-year holiday and a two-month extension passed late last year.

The new extension will require a further transfer of about $94 billion, according to the Congressional Budget Office.

Yet because of the unique features of the program's financing, tampering with its revenue stream is playing with fire. The payroll tax is currently set at 12.4% of wages, split equally between employer and employee, up to a maximum of $110,100. The tax holiday cuts the employee's 6.2% share to 4.2%.

Sen. Tom Harkin (D-Iowa) put it well when he excoriated President Obama and his fellow congressional Democrats for approving a measure that places Social Security's financial stability on the table. "I never thought I would live to see the day when a Democratic president ... would agree to put Social Security in this kind of jeopardy," he said. "Never did I ever imagine a Democratic president beginning the unraveling of Social Security."

Even conservatives who aren't fans of the program's current structure acknowledge how hard it will be at any point in the foreseeable future to restore the old rate.

"Who is ever going to say, 'Now the economy's so strong that it's the right time to raise taxes'?" Andrew G. Biggs, a former Social Security official who is now a resident scholar at the American Enterprise Institute, told me.
…
But the worst aspect of the payroll tax holiday is that it erodes Social Security's standing as a unique government program with its own revenue stream, a tax dedicated to its upkeep alone. …

The more the program has to rely on general income tax revenue, the shakier becomes its claim to being a special case among government expenditures. When program-slashers sharpen their axes in Washington, the line has always been drawn at Social Security because it's funded by a source distinct from the income tax.
…
"If the holiday doesn't automatically expire," says [social security activist Eric] Kingson, "you're risking long-term economic security for a short-term economic gain, however important that is. We hope people understand that."

Legacy of an OPM addict

Despite bad news after bad news after bad news, California Governor Jerry Brown doubled down this week in his commitment to spend nearly $100 billion to build a permanent legacy to match his father’s: the California High-Speed Rail. Unfortunately for the state, his desired legacy is an unaffordable white elephant — while his father provided water for the state and expanded both the UC and CSU systems.

I heard Brown on the radio Thursday, defending spending the money to build the proposed 520-mile system. Pressed by fiscal conservatives, he argued that state’s growth requires development of the Central Valley to handle the population than won’t fit in existing cities — and linking the Central Valley to these cities.

Once the price ballooned from $30 billion (1999) to $45 billion (2008) to $99 billion (in November), that should have been it. After the latest budget estimate, the project attracted editorial opposition from reliably progressive sites like the San Jose Mercury News and Huffington Post. Or as a Bay Area TV commentator put it:

Here are three things that claim to be living but are still dead:

1. General Francisco Franco (see Chevy Case, Saturday Night Live circa 1975).

2. That dude in "Weekend at Bernie's" who was proppped up, dressed and carried as though he were alive.

3. The California high-speed rail project.

This week saw the latest attempt to breathe new life into high-speed rail. Something similar was done to the high-speed rail plan. The dead body of high-speed rail was propped up and made to look more life-like with a new business plan.

But it's still dead. … [H]igh-speed rail costs billions in a state with persistent budget deficits. Its costs exceed — by about 800% — the amount of money the state and feds have to devote to the project.

Even the California Rail Foundation now opposes the plan, arguing that it assumes ridership that exceeds comparable European bullet trains by an order of magnitude.

If that wasn’t bad enough, earlier this month the independent financial review board recommended that the state not issue the (voter-authorized) rail bonds, because they posed an “immense financial risk” for the state of California. The next week, two key officials of the rail authority resigned. In criticizing the plan, Washington Post columnist Charles Lane wrote:

It’s “more important than ever,” [President Obama] said, to get “recommendations not based on politics, not based on narrow interests, but based on the best evidence, based on what’s going to do the most good for the most people in this country.”

If only the president and his political ally, California Gov. Jerry Brown (D), would follow that advice regarding their pet project for the Golden State: high-speed rail. No matter how many times they tout the mega-project as the job-creating wave of the future, they can’t change the mountain of evidence that high-speed rail is, in fact, a boondoggle.
…
It’s especially odd for a Democratic president and governor to saddle California with the cost of bullet trains when the state is facing chronic deficits, tax increases and social spending cuts. Maybe this is why polls show that a majority of Californians have turned against the project. It’s still not too late to hit the brakes.

Like Jerry Brown I, the latest incarnation of the would-be Jesuit is nothing if not stubborn. Still, his impassioned defense of the project was surprising. One of my former SJSU coworkers put it this way:

"It intrigued me that he put all his marbles behind high-speed rail and that he's willing to spend political capital on it," [Prof. Larry] Gerston said. "These big infrastructure projects do provide a whole bunch of jobs, but it would also put California back on the map. It's almost a status thing as much as it is a transportation thing, a way that Californians can say: Yes, California is back on top."

Brown argued that because other big ideas proved prescient, this one would too:

“During the 1930s, the Central Valley Water Project was called a 'fantastic dream' that 'will not work. … The Master Plan for the Interstate Highway System in 1939 was derided as 'New Deal jitterbug economics.' In 1966, then Mayor Johnson of Berkeley called BART a 'billion-dollar potential fiasco.' Similarly, the Panama Canal was for years thought to be impractical and Benjamin Disraeli himself said of the Suez Canal: 'totally impossible to be carried out.' The critics were wrong then and they’re wrong now.”

The former Governor Moonbeam needs a little reminder about the laws of economics, particularly the importance of substitutes in limiting pricing power.

The Interstate Highway System was the first way for many people to travel across and between states, reducing travel times by as much as 50% over the old windy US highways and serving far more of the country than rails did. The water project was the only way that parts of the state could get water — from any source — fueling growth in both farming and residential development.

By comparison, the proposed bullet train has two entrenched competitors — airplanes and private cars — which challenge both the convenience and pricing assumptions. The “bullet” train will never threaten Southwest for travel time, at least from the Bay Area to L.A. or San Diego. Even assuming that costs will come in as projected — unheard of for a public works project of this magnitude — the claimed revenues assume a pricing power that is unrealistic (absent $200/barrel oil prices).

If it’s like Amtrak — or California’s regional rail transit systems — it will require ongoing operating subsidies. Meanwhile, California would have to spend tens of billions of dollars before the system generates first revenues, and the system wouldn’t be finished until (at least) 2033.

Jerry Brown will be long-retired by then. He’s hoping that generations of Californians will agree to pay for his legacy — perhaps in perpetuity.

It’s easy to build a legacy with Other People’s Money. If Brown really believes in his legacy, he should step down in 2014 after his third term, and raise the billions in private investment needed to build this system.

Fixing the economy: we need long-term solutions

Excerpt from a Business Week interview with Arminio Fraga, who helped turn around Brazil’s economy as president of the Central Bank from 1999-2002 [emphasis added]:

What do you think America needs?
The U.S. is clearly the most amazing economic machine ever put together. It’s an amazing model. And it may have, as a result, gotten complacent. The U.S. needs to blend the sort of firefighting that’s been taking place—you know, zero interest rates, very expansionary fiscal policy—with longer-term policies, longer-term reforms … including this budgetary situation that cannot go on like this forever. And then, more structural things: job creation, business confidence, education, infrastructure, all of that. So there’s a big agenda. I just feel, having spent my life looking at countries that went into a crisis situation and emerged in pretty good shape, in every single case there was this mix of short-term emergency measures and long-term building-the-future-type moves.

But politicians have always been reluctant to inflict pain.
[In the U.S.] It’s been a tough decade on the jobs front. There’s been very little growth if you exclude transfers from the government. There’s no way you can live without the business cycle. This notion that you only keep the upswing—you get rid of the downswing—is an illusion. And you end up paying a price.

Does it come down to regulation?
There is this excitement now because many people believe that markets were a complete failure. And they forget that markets operate in an environment where there is regulation. There are laws, there are rules. And one could argue in a pretty powerful fashion that sure, markets are far from perfect, but a lot of the regulatory aspects were pretty bad as well. Now I see the pendulum swinging, let’s call it to the left. If you have a system where the rules are such that the losers don’t pay, that’s a bad thing, and not just for economic reasons. I can argue all night long that that’s inefficient. I also think it’s terribly unfair. And I think society doesn’t put up with that for very long.

When fiction becomes reality

From a column by Stephen Moore of the Wall Street Journal, Saturday July 9:

Many of us who know Rand's work have noticed that with each passing week, and with each successive bailout plan and economic-stimulus scheme out of Washington, our current politicians are committing the very acts of economic lunacy that Atlas Shrugged parodied in 1957, when this 1,000-page novel was first published and became an instant hit.

Rand, who had come to America from Soviet Russia with striking insights into totalitarianism and the destructiveness of socialism, was already a celebrity. …

For the uninitiated, the moral of the story is simply this: Politicians invariably respond to crises -- that in most cases they themselves created -- by spawning new government programs, laws and regulations. These, in turn, generate more havoc and poverty, which inspires the politicians to create more programs . . . and the downward spiral repeats itself until the productive sectors of the economy collapse under the collective weight of taxes and other burdens imposed in the name of fairness, equality and do-goodism.

In the book, these relentless wealth redistributionists and their programs are disparaged as "the looters and their laws." Every new act of government futility and stupidity carries with it a benevolent-sounding title. These include the "Anti-Greed Act" to redistribute income (sounds like Charlie Rangel's promises soak-the-rich tax bill) and the "Equalization of Opportunity Act" to prevent people from starting more than one business (to give other people a chance). …

These acts and edicts sound farcical, yes, but no more so than the actual events in Washington, circa 2008. …

The current economic strategy is right out of Atlas Shrugged: The more incompetent you are in business, the more handouts the politicians will bestow on you. That's the justification for the $2 trillion of subsidies doled out already to keep afloat distressed insurance companies, banks, Wall Street investment houses, and auto companies -- while standing next in line for their share of the booty are real-estate developers, the steel industry, chemical companies, airlines, ethanol producers, construction firms and even catfish farmers.

The take home message?

Ultimately, Atlas Shrugged is a celebration of the entrepreneur, the risk taker and the cultivator of wealth through human intellect. Critics dismissed the novel as simple-minded, and even some of Rand's political admirers complained that she lacked compassion. Yet one pertinent warning resounds throughout the book: When profits and wealth and creativity are denigrated in society, they start to disappear -- leaving everyone the poorer.

Oxymoron: government efficiency

From The Great Stagnation by Tyler Cowan (pp. 19-21):

Sometimes government outputs are worth a lot more than what we spend on them, and sometimes they are worth a lot less. The proper role of government is beyond the scope of this discussion. But still it is a general principle that the most fundamental functions of government are wroth more than the extra, add-on, or optional things that governments do.

A dollar spent on very basic police and courts and army protection is worth more than a dollar spent on refurbishing a warehouse in Minneapolis under the guise of urban renewal. A dollar spent on welfare for the poorest is more valuable than a dollar spent extending the program to better-off but still poor cases. And so on. Yet when it comes to national income accounting, and measuring GDP, we are valuing every one of these different expenditures at $1.
…
Over time, an increasingly percentage of what we spend on government is spent on optional rather than core services because the core services tend to have been around longer. ANother way of putting it is to say that the marginal value of added government, even if positive, falls as government grows larger. This statement is not antigovernment; it’s just common sense. …Government, at the margin, is becoming less productive.
…
To better measure how well we are doing as a nation, remember this about productivity:

The larger the role of government in the economy, the more the published figures for GDP growth are overstating improvements in our living standard.

…“government consumption” … commonly falls in the range of 15 to 20 percent of U.S. GDP. … If we go back to the peak time for innovation, estimated by Jonathan Huebner to have been the mid- to late nineteenth century, government at all levels was usually in the range of about 5 percent of U.S. GDP.

From the Wall Street Journal, June 10, 2011:

My Summer Road to Perdition
What did I learn as a young man laboring for the Virginia Highway Department? How to work slowly to slipshod standards.
By James Bovard

Mayors, governors and congressmen are busily hyping summer jobs programs. Kids can learn a great deal from a season on the government payroll. I benefitted from my 1973 experience at the Virginia Highway Department, digging postholes, cutting brush and, best of all, wielding a chainsaw—an experience that proved invaluable for my future work as a journalist.

As a 16-year-old flag man, I held up traffic while highway employees idled away the hours.
…
I was assigned to a crew that might have been the biggest slackers south of the Potomac and east of the Alleghenies. Working slowly to slipshod standards was their code of honor. Anyone who worked harder was viewed as a nuisance, if not a menace.
…
In the following decade, I hammered federal training and make-work programs in articles for this newspaper and other publications. Studies later proved that many of the participants in the two largest programs, the Comprehensive Employment and Training Act (1974-1982) and the Job Training Partnership Act (1983-1997), earned less later in life than those who never received government training.

The government has always been radically incompetent at imparting job skills or good work habits. Unfortunately, as long as politicians can profit from handing out jobs and paychecks, the waste and character damage will continue.

If you build it, they may go

In the past 24 hours I’ve had a chance to spend considerable time at two major US airports — Pittsburgh and Denver — thanks to my once-favorite airline, United Megalith Airlines. (“We try to ream you™”). In fact, UMA gave me multiple chances to enjoy Denver by canceling my flight home.

But both were examples of airports built in a period of boundless optimism by civic boosters hoping that massive government spending would boost the local economy.

Pittsburgh is pretty clear cut: when the new airport opened in 1992, US Airways was using the city as a major hub. However, the airline filed for bankruptcy after 9/11 and ended the hub in 2004. The airport is vastly over-built and under-utilized, just as the Kansas City airport expansion in the 1980s was tied to TWA’s brief experiment with hubbing there.

Denver is less clear-cut. United still has a hub here, and the airport gets considerable traffic from the 2.5 million people in the metropolitan area. However, the big planes are now medium sized plans and the medium sized planes now commuter jets, as United seeks to increase load factors and reduce service as part of its ongoing march toward high-volume, low-quality service.

However, after the merger with Continental, United is reducing its hubs to 10 worldwide, a pilot told me yesterday. Airlines have been eliminating their Western hubs — Delta has pulled back from Salt Lake City and Southwest from Las Vegas — and United no longer has the flights from Denver that it once did.

When (if) I get home, one terminal at San Jose airport was built for American’s hub there, now gone. With airline traffic less than expected, city fathers are wrestling with a range of options to pay what it borrowed for the $1.3 billion expansion.

The best analog I can think of is the sports stadium — worthless if the major league team leaves town. This seems a little different — you have the case of a single individual shopping his team (almost always a he) to the highest bidder. The airlines seem to be more dropping hubs than moving them and thus seem less likely to abandon a facility on a whim.

The fundamental problem is that capital investments like this have a 20-30 year amortization period against a planning horizon that may only be 2-3 years. Betting on local boardings/deplanings is a bet on the local economy — as long as there are local businesses and residents, there will be airline traffic. However, the hub bets are vulnerable to acquisitions, bankruptcies, or merely business incompetence.

I think this falls under the category of the fallacious “will,” as in statements like “this investment will bring $2.4 billion in economic growth over the next 20 years.” Obviously this is not true — the correct form is “is predicted to” or “is expected to” — but economically (or mathematically) challenged reporters seem to play along with this snow job by reporting these political claims unchallenged.

Of course, this ties back to the inherent short term/long term disconnect between our ruling caste and the common citizen. Politicians make promises to get re-elected next year, while taxpayers have to pay the bill s for decades to come.