Saturday, December 6, 2008

The Right Bailout

http://www.courier-journal.com/article/20081204/NEWS01/812040398/1008

The book I am recommending to people is, The Post-American World, by Fareed Zakaria. Non-technical, meant for the everyday Joe to read, the book is worth the read. Fareed sets forth in very clear terms what we, as Americans, will have to face as more and more countries close the gap between themselves and the United States, and the developed world, in general.

Let's get right to the chase. What industry in the United States is arguably the most important industry in the United States? I'll give you a minute . . . . .

Automobile? . . . nope.  Computers?  . . . nope.  Software? . . . . .  nope.  Uhm, what about finance, with all the banks and mortgage companies it must be the financial sector, right? . . . . nope.

According to one of the later chapters in Fareed's book, he argues, and I have to say my bias agrees with him, that EDUCATION, and specifically HIGHER EDUCATION is the most important industry in the United States.

Higher Ed? How can that be?

Ok, let's break it down. Where do our business leaders come from? How do they get their education? Accountants? Economists? Software programmers? Engineers? Scientists?

Most of our business leaders all receive their training within the United States, at U.S. universities. Some may travel abroad to receive more robust training - study abroad is a great experience and I recommend it for everyone - but, by-in-large our universities churn out the leaders of the largest free market in the world.

And not only that, we also train and churn out leaders for the rest of the world, too. Thousands of students come to the United States every year to enroll in school and receive their education. They may already have received one degree already in their home country, in fact. That degree, while of value, pales against a degree from a U.S. institution of higher learning. Foreign students study in the United States, then take that education and put it to use here in the U.S., or they may relocate to another country to study, or they may put their education to use when they return to their home country.

To return to the question, the question was not which industry has the largest market share, or has the greatest income, the question was, 'what industry is the most important?'

Now, that is not to say that some intrepid, entrepreneurial people might strike out on their own and develop something, like Google, or Facebook, or Microsoft. In most cases, these groundbreakers where in school when they developed their software. Smart people tend to hang out at universities and seek out other smart people.

What is happening now, because of the financial state of the United States, is the undermining of our educational system. Specifically, I am focusing on the budget cuts faced now by all higher education institutions in Kentucky. Other states are also faced with tough decisions.

An analogy I thought of likens the budget cuts of higher education to removing the support pilings under a very tall building. You can only remove so many before the building looses stability and cracks begin to appear. Remove more, the foundation fails, and the building collapses.

Higher Education is fundamental to economic growth, economic well-being, and social well-being for the United States. Cutting higher ed funding weakens us as a country as we lose a little ground on our competitors. Rather than leading, we may have to follow. We may lose our privilege as a country, our global respect, and our status as the world's leading economic force. Of course, that may happen, anyway, with the growth of China.

I like what the Western Kentucky University's President Gary Ransdell was quoted as saying the Louisville-Courier Journal on Wednesday (the link is above): "You cannot continue to cut your budget and return money to the state ... and still grow."

The Council on Post-Secondary Education (CPE) for Kentucky has an initiative for univerities to grow their student body populations. Murray State must add 2,000 students by 2012 to comply with the initiative. Add, serve, and educate 2,000 additional students over the next 3 years, on top of giving back $2 million dollars in 2007-2008. MSU is supposed to give back about 4% of its budget, or about $2 million dollars, in 2008-2009. Salaries will be frozen, hiring for some positions will be suspended, and programs may be suspended or eliminated. The Murray State budget will be more like the budget available in 2001, nearly eight years ago.

I argue that Higher Education is a better place to invest, a better place to put "bailout" dollars. The effect would be huge, albeit not very immediate. After all, it takes 3-5 years to for someone to graduate college. The money could be used to improve and repair current infrastructure, fund student loans and scholarships, fully fund programs, fund research, and, of course, educate people.

The Wrong Bailout

First, we had the Fannie Mae / Freddie Mac bailout. With 5$ trillion dollars in assets to lose, they were too big to allow to fail.

Then, we were faced with a slew of banks needing bailouts: Washington Mutual, IndyMac, First National Bank of Reno, Nevada, to name a few. Check out this site for a complete list. Along with those, we have the mortgage company crisis. This is $700 billion dollar blank check that Henry Paulson was given.

Now, the Big Three auto makers have entered the fray. Ford, GM, and Chrysler want money. GM says they need $4 billion dollars right now, before the year ends.

The CEOs look and sound like drug addicts. They claim they will reform themselves, but they need a fix right now. They claim they will fail if we don't help them. They claim that a bankrupt U.S. auto industry will weaken us militarily and will undermine our national security (Chrysler CEO Robert Nardelli). They try to bargain, then use fear-mongering to try to keep from losing their gravy train, or their addiction to their own largess.

Would auto bankruptcy really be a bad thing? Sure, there would be a stigma, perhaps, attached to the auto maker(s) that got hit by bankruptcy. If, on the other side of darkness, a good product that people could be proud of was produced, that might lessen or eliminate the stigma. But stigma is not a good reason not to do something . . . to me, anyway.

Here are some thoughts about a potential bankruptcy plan:
  1. Bankruptcy does not mean the doors on the plants are closed and locked forever, probably not at all.
  2. Done the right way, bankruptcy could keep people in their jobs (at least some) while the company was reorganized.
  3. Labor contracts would be nullified, allowing more reasonable labor contracts to be created. Sure, getting paid 90% of your salary should you be laid-off sounds great, but is that really feasible? This would help them get their costs under control, for sure.
  4. Bankruptcy would force a restructuring of the Board of Directors. These are the real felons. They are the ones that control the flow of funds and stimy innovation. Remove them and in their places put in people who know how to innovate.
  5. Bankruptcy may help create a new Ford, GM, or Chrysler that is lean, mean, and able to compete in the global marketplace.
  6. The automakers need to realize that this is not the 1950's. Thought processes must change or adapt to meet the needs of the 21st century. To me, it seems like the automakers would rather spend millions lobbying Congress to impede progress, than be the forerunners of progress. I say this specifically to comments regarding the cost associated with fuel efficiency and alternative fuels (that are not corn-based). There is a market for such cars.
  7. GM was bailed out in 1979. Why did they not learn their lesson then. Why are they repeating the same mistakes 30 years later?
  8. If there is money available, why not give $1, $2, $4 billion dollars to finance those companies like Tesla Motorcars to get them up to production levels?
  9. Bankruptcy might finally force the car maker culture to wake up and smell the coffee. The fact that this industry is in the shape it is in is humiliating and embarassing. The U.S. was once the world leader in automobiles, in innovation, technology, design. Now, all we have proven is how sedentary and entrenched we have become, lazy and boring.
In my mind, bailing out GM, Ford, and Chrysler is the wrong bailout.

So, if that is the wrong bailout, what is the proper bailout? ...