by Gary Shapiro
Uncertainty causes all private investment to wither, and innovation investments wither the most. For example, venture capital (VC) firms, which have financed such successful start-ups as Intel, Microsoft, Google, and eBay, typically have an investment horizon of five to seven years. Unless VCs have reasonable certainty about tax and regulatory policies over this horizon, their risks will skyrocket, and their innovation investments will shrink.
As a final note about our desperate financial situation, consider that as annual deficits build up our mountain of debt, the annual interest on that debt will account for an ever greater share of annual spending, leaving less for good and essential programs. Interest payments are expected soon to reach more than $500 billion, exceeding the entire annual defense budget, leading U.S. military commanders to warn Congress that this is a grave threat to our nation. The 2009 “stimulus” alone added $280 a month to the debt of every American citizen. Put another way, the 2009 $1.4 trillion deficit means that future generations will have to pay $58 billion annually just to serve the single year 2009 deficit (assuming a 5 percent interest rate and no principal payments). The 2009 total U.S. accumulated debt of $7 trillion requires $350 billion in annual interest payments using this formula.
To put the interest issue in non-technical terms, consider this recent observation by columnist George Will:
In 1916, in Woodrow Wilson’s first term, the richest man in America, John D. Rockefeller, could have written a personal check and retired the national debt. Today, the richest man in America, Bill Gates, could write a personal check for all his worth and not pay two months interest on the national debt. By 2015, debt service will consume about one-quarter of individual income taxes. Ten years from now the three main entitlements—Medicare, Medicaid, and Social Security—plus interest will consume 93 percent of all federal revenues. Twenty years from now debt service will be the largest item in the federal budget.60
SOLUTIONS
What can be done? Our federal government never reduces spending, seldom cuts obsolete or ineffective programs, increases the complexity of taxes (the Internal Revenue Code is at more than 3.4 million words and counting), and incessantly augments the scope of business regulation. And then our politicians appear dumbfounded that our economy is struggling and jobs are scarce.
I believe our situation is so dire that we cannot talk about merely slowing the rate of government spending. Instead, our goal must be to cut the spending, and cut it past the point where it symbolically “hurts.” I liken this to the medical strategy in war and other major crises where the resources are limited compared to all possible needs: triage. This is where the injured are divided into three groups: those who can survive without immediate medical attention, those who need immediate medical attention to survive, and those who are almost certain to die and will receive no attention other than painkillers.
Similarly, our government needs to triage its spending to those programs most important to our future, especially the future of our children. In doing so, we will stop spending for programs and people that either do not need or do not deserve taxpayer funding, focusing instead on those programs and people that need and deserve taxpayer funding.
If you doubt my sincerity about this approach, consider my opinions and behavior when confronted with government spending that would have benefitted the industry I am paid to represent. As indicated earlier, the Consumer Electronics Association has never asked the government to spend money to benefit our industry. This was awkward for me when I was testifying before Congress.
Democrat and Republican members pressed me to specify how they could get money to consumers to subsidize the transition from analog television to digital television. They were concerned that consumers, especially poor and elderly consumers who did not own digital TVs or get cable or satellite service, would lose television service when the analog service was cut off. I consistently responded with data challenging the extent of the problem. (Both the Congressional Research Service and the National Association of Broadcasters had data that indicated the “at risk” population was almost double the size we had estimated—but we at CEA were quickly proved to be correct). I told Congress then that we did not advocate that the government spend money on this program. Nevertheless, despite our lack of support, Congress allocated $1.2 billion to provide each American family two $40 coupons toward the purchase of an analog-to-digital converter box for use on analog televisions. This subsidy would go to members of the CEA who made these boxes— but I am proud the CEA was never on record as supporting it.
To some extent, the coupon program was the political price Americans had to pay for a transition that would bring in an estimated $20 billion in revenue for the U.S. Treasury (from auctioning off spectrum freed by the analog signal cut off). In any event, I then threw myself and CEA into working to make the transition succeed. I sought my counterparts from the cable and broadcasting industries, and the three of us quickly agreed to work together to inform the American public about the February 17, 2009 transition. We solicited some two hundred groups to support our efforts and, within months, had gone from near zero awareness of the transition to nearly 100 percent awareness among Americans of the February 17 transition date.
Along the way, in 2007, I was summoned to the office of the Federal Trade Commissioner (now Chairman), Jon Lebowitz. Commissioner Lebowitz expressed concern about public confusion about the transition and asked whether I thought the FTC should get involved to regulate how the message on the transition was conveyed. I said that he should keep this in perspective: a few people might lose television service for a few days. I suggested he compare this to the fact that millions of people were signing mortgage documents when they bought their homes which they simply did not understand, and this would likely result in them losing their homes. Hearing that, he agreed.
But true to form, the government managed to turn a straightforward program into another boondoggle paid for by our taxpayers. Only days away from the February 17 analog shut-off, the demand for coupons was strong, as we had projected. But the government bean counters had assumed that every request for a $40 coupon counted as a government expenditure. At the peak of program demand, they said they had run out of money, and they stopped sending coupons.
A simple fix would have been for Congress to allow them to use historical redemption rates and even provide a modest amount of back-up funding authority in case demand and redemptions exceeded projections. Indeed, this was the bipartisan approach being discussed. But some Obama advisers had convinced the presidentelect that the transition date had to be delayed and that more funding had to be provided. So before he even was sworn in, Obama asked Congress for another $250 million in funding and to delay the transition date until June 12, 2009. We at the CEA opposed the delay and the entire financial request, even though it meant more money to our industry.
In the end, Congress decided to spend an additional billion dollars, which was a total waste of money. Just about everyone in Congress knew it was a waste, but being frugal in spending taxpayer funds was less important to the Democrats in the majority than not crossing the new President. If we had stuck with the February 17 date, at worse a few Americans would have lost television service for a few days. Despite representing television and converter box makers, I keep asking how losing television service for a few days compares to how that money could have been used for important things like cutting the deficit or educating our children.
LEADERSHIP MATTERS
Fortunately, we have some politicians who are also demonstrating common sense and backbone in response to our crises. Case in point is Minnesota governor Tim Pawlenty, a Republican who inherited a financially troubled state but turned the state’s finances around simply through priority setting and discipline. In a column for Politico, he wrote:
Not everything the government does is equally important. When faced with a budget shortfall in Minnesota, we considered the importance of programs. We decided to protect funding for the mos
t important ones: the National Guard, veterans’ support programs, public safety and K–12 schools. Nearly everything else has been cut. [In 2009] we cut overall spending for the first time in the state’s 150 year history.61
This is triage of government spending in action, as well as courageous political leadership in action. Along with Governor Chris Christie of New Jersey and a few other politicians, Governor Pawlenty is demonstrating what must be done and can be done to reverse our economic fortunes.
In the next chapter, I suggest some principles and strategies to help extract our country from our economic mess and once again put us on the path to real growth in our economy and jobs. But I should end this chapter with a paean to leaders like Governors Pawlenty and Christie.
Leadership matters because it sets a tone for governing and gives a behavior example for all of us. It matters both in the private sector and the public sector. It has been regularly and widely written about, but it’s doubtful too much can be made of it. Fortunately, when real leadership is demonstrated, it galvanizes clear-minded citizens and rewards those leaders; and when it is absent, it is readily apparent, disappointing to those same citizens and unrewarding to those who fail the leadership test.
Americans see vivid examples of top government officials repeatedly failing to lead on matters of fiscal responsibility and integrity. They see it when the President travels to another city by Air Force One for a date to see a show and have a meal, and when the first lady takes her daughter to Europe for a vacation at a cost to U.S taxpayers approaching a million dollars. They see it when the Commerce Department takes out a $2 million, thirty-second ad on the Super Bowl to promote the Census. They see it when the Obama Administration insists on putting terrorists on trial in a major U.S. city and ignores the additional security costs of $150 to $200 million compared to a relatively inexpensive and secure trial in the demonized Guantanamo base. They see it in the lavish pensions and gifts Congressional leaders bestow on themselves when they retire.
I vividly remember a 2007 meeting in Washington with two top executives from Best Buy and Circuit City. The Circuit City executive had flown on the company’s private jet from Richmond (barely 100 miles away) and had been picked up in a stretch limousine to be taken to our meeting. In contrast, the Best Buy executive flew the cheapest commercial flight possible from its Minneapolis headquarters—a dawn flight to Dulles Airport—despite the inconvenient time and location. He then took a bus to the Washington Metro, where he boarded the subway to our meeting place. At the time, Circuit City was in financial trouble whereas Best Buy was doing well, but the Best Buy’s executive’s message of frugality resonated positively through his company.
In the incredibly competitive, cost-conscious consumer electronics industry, this focus on spending prevails. Crutchfield, Wal-Mart, and Panasonic are somewhat famous for their focus on costs, and their leadership not only talks the frugal talk but walks the frugal walk.
Similarly, I was impressed when Britain’s new leader, David Cameron, flew a commercial jet to the United States, explaining that he was cutting government spending and raising taxes and needed to lead by example.
Yes, leadership matters. And leadership with integrity matters even more.
11
Government Spending: Modest Proposals to Restore Sanity
INFRASTRUCTURE
The five-hour drive in a rickety old bus from New Delhi to the Taj Mahal is one I wish every American could take. It is not that the road is unpaved or bumpy; in fact most of the trip is on a straight road of smooth concrete. Nor is it the multitude of animals, overloaded rickshaws, vehicles of every type going every speed, or the constant blaring of horns that stand out in my mind. The confusing cacophony and constant shifts in speed are at first amusing and then just accepted as part of the reality of Indian transportation.
Rather, it is the human misery. On my 2008 trip, this unbelievable impression I had as we drove is one that has stuck with me. I just kept thinking we were in the bad part of town and would soon be out of it. We never did get out of it. The abject poverty, the beggars, the high incidence of deformity, and the medley of people living alongside the garbage simply trying to survive under the deplorable conditions— which includes oppressive heat and undrinkable water, inadequate plumbing, and hardly any electricity—this is what has stayed with me. Meanwhile every American takes these basic services for granted.
Americans just assume the basics of life: shelter, clean water, electricity, safe food, and a functioning toilet. Few Americans give real thought to our bounty, our luck, and our health. All were the result of the huge sacrifice and investment our predecessors made so that we could live this comfortable life with heat in winter, air conditioning in summer, wonderful showers, clean parks, schools, libraries, highways, working plumbing, and clean air. The average American has over twenty-five consumer electronics products, and the electricity that makes them work is just simply assumed.
But our future is clouded by a lack of investment in the most basic infrastructure. Our bridges are crumbling; our water systems were designed to last only fifty years, and many are hitting their limit; and our politicians refuse to invest in infrastructure.
Moreover, our partisan political system makes infrastructure a low priority. Republicans use infrastructure debates to find deficit discipline. Combined with their refusal to raise taxes of any kind, Republicans often see infrastructure investment as a politically painless way to cut the deficit. On the other extreme, Democrats fight to make all government-funded infrastructure projects as expensive as possible. For Democrats, infrastructure projects are ways to boost employment numbers, which is why they insist that union labor be used for all these projects. So this unhealthy political elixir of financial prudence, tax-increase avoidance, and union protectionism combine to deny Americans real investment in infrastructure.
When the parties’ political worlds suddenly combine to allow an investment in infrastructure, they do so in political rather than strategic fashion. Thus the 2009 stimulus packages were more a wish list of “shovel-ready” projects designed to gather votes and protect political constituencies, rather than focused attempts at rebuilding our crumbling systems. It was like hiring lots of painters to spruce up the house while ignoring the termites destroying the home’s foundation.
President Reagan had the courage and leadership to propose and obtain a five cent per gallon of gasoline tax increase to fund infrastructure. This example is valid today, and these types of user taxes are necessary, for any entity, for long-term survival. So while activists and the New York Times editorial page harp on the “rights” of every group to use taxpayer money and government intervention to obtain equal status, I am more concerned that our entire nation is moving to second- or third-world status.
When our electricity flickers and shuts down more frequently, our running water becomes polluted, and our bridges and streets and highways crack and break, then we will blame our government. Only when we can’t heat our homes will we ask the government to respond immediately to ease the crisis, when what we should be doing is accepting that tough decisions are necessary now to avoid the certainty of a collapse of a geriatric infrastructure. We are becoming India, and it saddens and angers me.
I mention this now in a chapter on ways to cut our suicidal deficit because I want to be clear about my position on government spending. Not all massive government projects are bad. But they need a focus, they need a strategy, they need to be started with the expectation that we are solving a grave national threat. Our crumbling infrastructure represents just such a threat. When Americans are worried that there’s not going to be enough electricity to power their lights, they aren’t going to be worried about innovating the next great product. Innovation is defined by the context in which it occurs. No one in the Middle Ages could have invented an iPod, even if Steve Jobs traveled back in time and gave someone every detail of the design. Similarly, no American will invent the next iPod or smartphone if we cannot provi
de clean water.
Infrastructure investment requires resource allocation. Briefly, some principles for infrastructure include:
Any federal funding should be matched by state and local governments.
Excise taxes can be used for funding as appropriate: gasoline taxes for highways, water taxes for water, etc.
Projects should be selected outside the political realm by an independent commission. Decisions must be based on expert assessment using objective criteria (impact, age, etc.).
Congress should be forced to vote up or down on the independent panel’s recommendations. (This process has been successfully used to decide which military bases should close.)
Our politicians are getting in the way of ensuring that the quality of life all Americans take for granted will be there for the next generation.
CUTTING THE DEFICIT
What neither Republicans nor Democrats have the courage to tell the American people is that if we want to put the country on a sound fiscal path, it’s going to take hard, painful choices. There is no other way. Some of the following proposals might seem harsh; others, I’ll admit, are a bit peculiar. But it’s the kind of unconventional thinking that we need our lawmakers to be engaged in, as opposed to the popular but insignificant call to “end earmarks.”
The abomination of our federal government’s annual spending is beyond the scope of this book to definitively address. Instead, I will set forth some highly personal opinions about the principles that should guide our citizens and our politicians. I’ll start with some first principles.