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February 28, 2009

Buffett Speaks

Warren Buffett has written his annual letter to shareholders. Money section:

In poker terms, the Treasury and the Fed have gone "all in." Economic medicine that was previously meted out by the cupful has recently been dispensed by the barrel. These once-unthinkable dosages will almost certainly bring on unwelcome aftereffects. Their precise nature is anyone's guess, though one likely consequence is an onslaught of inflation. Moreover, major industries have become dependent on Federal assistance, and they will be followed by cities and states bearing mind-boggling requests. Weaning these entities from the public teat will be a political challenge. They won’t leave willingly. Whatever the downsides may be, strong and immediate action by government was essential last year if the financial system was to avoid a total breakdown. Had that occurred, the consequences for every area of our economy would have been cataclysmic. Like it or not, the inhabitants of Wall Street, Main Street and the various Side Streets of America were all in the same boat.

Amid this bad news, however, never forget that our country has faced far worse travails in the past. In the 20th Century alone, we dealt with two great wars (one of which we initially appeared to be losing); a dozen or so panics and recessions; virulent inflation that led to a 21 1⁄2% prime rate in 1980; and the Great Depression of the 1930s, when unemployment ranged between 15% and 25% for many years. America has had no shortage of challenges.

Without fail, however, we’ve overcome them. In the face of those obstacles -- and many others -- the real standard of living for Americans improved nearly seven-fold during the 1900s, while the Dow Jones Industrials rose from 66 to 11,497. Compare the record of this period with the dozens of centuries during which humans secured only tiny gains, if any, in how they lived. Though the path has not been smooth, our economic system has worked extraordinarily well over time. It has unleashed human potential as no other system has, and it will continue to do so. America’s best days lie ahead.

It's not just that, over the last century, we in the US -- and for that matter, in most of the First World -- have been astonishingly fortunate compared to most people around the world and throughout history. It's that we still are.

It's important we remember that.

February 27, 2009

Rewarding the Old Economy vs the New Economy

Thomas Friedman is advocating that we use recovery / stimulus funding to encourage promising new startups instead of bailing out failing businesses:

G.M. has become a giant wealth-destruction machine -- possibly the biggest in history -- and it is time that it and Chrysler were put into bankruptcy so they can truly start over under new management with new labor agreements and new visions. When it comes to helping companies, precious public money should focus on start-ups, not bailouts.

You want to spend $20 billion of taxpayer money creating jobs? Fine. Call up the top 20 venture capital firms in America, which are short of cash today because their partners -- university endowments and pension funds -- are tapped out, and make them this offer: The U.S. Treasury will give you each up to $1 billion to fund the best venture capital ideas that have come your way. If they go bust, we all lose. If any of them turns out to be the next Microsoft or Intel, taxpayers will give you 20 percent of the investors’ upside and keep 80 percent for themselves.

If we are going to be spending billions of taxpayer dollars, it can’t only be on office-decorating bankers, over-leveraged home speculators and auto executives who year after year spent more energy resisting changes and lobbying Washington than leading change and beating Toyota.

I understand the desire to save the Big Three auto firms (well, two of the three; it looks as if Ford may make it on its own). I can imagine the powerful depressing effect their failure would have on our economy. But what makes them special?

Banks are special because they provide credit, and without credit, the economy stalls. Investment banks and reinsurers are special because their failure could lead to cascading effects in the financial sector. Hence we give these businesses special treatment in that we take extraordinary steps to ensure they don't fail. Whether we're taking the right extraordinary steps is up for debate, but most experts seem to feel we need to do something.

But auto manufacturers? What makes them special? Is it their size? GM is the largest manufacturing firm in the Fortune 500 (number four overall, after Wal-Mart, Exxon Mobil, and Chevron), but we're also subsidizing Chrysler, and it has about one-fifth the employees of GM. If we save GM and Chrysler, where do we stop? Would we save General Electric? Hewlett-Packard? IBM? Boeing?

The Big Three are in trouble for the fundamental reason that they've been making bad business decisions for decades -- decisions that have now caught up with them as a result of the current economic crisis. They have vigorously and consistently resisted steps to force them to build cars that are safer, more fuel-efficient, and more environmentally friendly. They have bought labor peace in the short term by committing themselves to providing expensive benefits down the road. They have demonstrated an inability or an unwillingness to build cars that are as reliable as their Japanese counterparts. This leads to an obvious question: what rational basis do we have for believing that if we bail them out now, their behavior will change? No one has yet explained this to me.

Is the right move to force GM and Chrysler into bankruptcy? I don't know. What I do know is that if we are going to bail them out, we need to have extremely clear reasons for doing so -- reasons that don't imply we'll start bailing out other manufacturing firms. And we need to have a clear understanding of why we believe they're going to succeed.

Meanwhile, Friedman is right on in suggesting that if we want to stimulate the economy in a productive way, we should look to entrepreneurs. I'd suggest co-investing as a more workable strategy, but that's a detail. Pumping $20 billion into the venture market is an awe-inspiring thought.

February 24, 2009

Revisiting the Stimulus

A friend of mine said to me recently,

"You haven't blogged about the stimulus. Actually, you haven't blogged about anything lately."

Fair point, that last. But as for the stimulus, my very late thoughts are as follows:

I accept the need to stimulate the economy. I dislike deficit spending, but understand that failing to take steps to boost the economy right now could have long-term, highly unpleasant impacts (such as Japan's "lost decade"). I also accept that not all stimulus can be infrastructure-related -- that it wouldn't be practical to spend that much money on construction projects that quickly, and there are many people hurting right now, and we can help them in ways that are stimulative.

That said, I feel that an opportunity was missed with this package -- not permanently, but lost for the tine being. I feel that we missed an opportunity to take dramatic steps to improve our nation's infrastructure in ways that could have positive and long-lived economic and environmental impacts.

For example, in Decembe 2007, three authors wrote an article in Scientific American proposing a massive program based on solar power to end US dependence on foreign oil and dramatically reduce greenhouse gas emissions. From the article's summary:

A massive switch from coal, oil, natural gas and nuclear power plants to solar power plants could supply 69 percent of the U.S.’s electricity and 35 percent of its total energy by 2050.

A vast area of photovoltaic cells would have to be erected in the Southwest. Excess daytime energy would be stored as compressed air in underground caverns to be tapped during nighttime hours.

Large solar concentrator power plants would be built as well.

A new direct-current power transmission backbone would deliver solar electricity across the country.

But $420 billion in subsidies from 2011 to 2050 would be required to fund the infrastructure and make it cost-competitive.

Obviously we couldn't spend $420 billion on a new plan in a year and a half. But could we have made a substantial start on it? Say, $40 billion of effort?

Or for another example, California voters approved a ballot measure to begin work on a high-speed rail system linking San Francisco to San Diego. Trains would travel between San Francisco and Los Angeles in 2 hours, 38 minutes -- that's downtown to downtown. The estimated cost to build the system is $45 billion.

California's project is 1 of 10 Federally recognized Designated High-Speed Rail Corridors around the country. I'm guessing that, all told, they represent something like $300-500 billion in total spending, if all were built. Yet the stimulus package has only $8 billion for high-speed rail, and that was a last-minute increase (from $2 billion) pushed by the Obama administration.

I hope there's a plan for more dramatic investments in our infrastructure. I'm disappointed there isn't more of this in the stimulus package as signed into law. Here's hoping there's a plan for addressing this.

February 22, 2009

The Boeing 747

This month is the 40th anniversary of the first flight of the Boeing 747.

I'm familiar with Bernoulli's principle. I understand how lift is generated. I know that aircraft lift off literally because, at that moment, the forces causing them to do so are overwhelming. Rationally, I comprehend powered flight and am completely comfortable with it.

And yet when I see an airplane like the 747 up close, I can't help but be amazed that it actually flies -- that the thrust generated by its engines is strong enough to propel it down the runway at such a speed that it lifts off the ground. I've been flying in commercial aircraft since I was 9 and I don't think I'll ever get over my amazement.

If you're in Seattle, the original 747 that flew 40 years ago is on display at the Museum of Flight at Boeing Field. Recommended.

Boeing 747 2

My daughter Kelsey in front of the first 747 at the Museum of Flight.

So Many Blog Entries in My Backlog...

...so little time.