Six principles for saving American capitalism
Filed under: Economy
The newspapers are looking ahead to this Tuesday's G-20 summit in London. Since the leaders who show up there represent countries that control 80 percent of the world's economy, it could be an important meeting. If you live in the U.K. or U.S., your leaders will be attacked by those in other countries who believe that they should not be asked to bail out the errors of Anglo-American capitalism. Beyond that, little of substance is likely to be accomplished.
However, in an alternative universe, the G-20 meeting might actually accomplish something. Specifically, it could get agreement on six principles on which to rebuild American capitalism. Here's what I think those would be:
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Grow through technology-based innovation. The United States used to be admired around the world for its ability to create new industries. In the 1990s, an Asian government wanted to emulate our success and asked me to discuss how the United States turns innovation into economic growth. Unfortunately, since 2000 our ability to take brilliant ideas from our top universities and turn them into venture-backed companies that sell their shares to the public to fuel the creation of new industries has largely been broken. If there is to be growth, it should come from reviving this process.
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Return Wall Street to a support role. As I posted, Wall Street has played too prominent a role in the global financial system and in our politics. As a result of that power, it has been able to shape a regulatory structure that frees it to capture and pay itself all the profit it generates and shift all its losses onto the taxpayer. Such a system has sucked the most talented people in the world away from more productive activities. Wall Street should stop being the tail that wags the dog and return to its role of supporting the capital raising activities of technology-based innovators.
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Free the global economy from excessive dependence on consumer spending. Seventy percent of U.S. gross domestic product (GDP) growth flows from consumer spending. This economic structure puts too much of the burden for growth on consumers whose incomes are dropping thanks to companies' eagerness to outsource work to the lowest cost country. Then consumers must make up the difference between what things cost and what they can afford by borrowing more than they can pay back. Instead, we should base economic growth more on enterprise and government spending and less on consumers.
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Limit leverage to create a post-bubble economy. Now that consumers are unable to pay back their debts, banks and regulators are clamping down on lending. But that won't last forever since lower interest rates are permitting banks to rebuild their capital war chests by paying zero to depositors and charging 15 percent to borrowers. Once banks have reloaded their balance sheets, they'll start lending again and keep adding more and more debt until borrowers can no longer repay. Then the bubble cycle will begin anew. As I posted, a key lesson of the past several decades is that debt must be tightly regulated so that borrowing induced bubbles do not become an excuse for a failure to innovate.
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Stop letting managers write their own report cards. At the root of many financial scandals over the last decades is a system that enables the people who are supposed to be looking out for the interests of shareholders to generate their own report cards. As I posted, Bernie Madoff would never have been able to pull off his fraud if a truly independent entity had been sending out account statements. Ratings agencies would not have AAA-rated toxic waste if they were not being paid by the investment banks that issued the securities. Enron would not have gone off the tracks if its CFO had not been able to hide its true liabilities. We need to take away financial reporting from managers and give it to a truly independent body.
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Put deal-maker pay into escrow. People will do what you pay them the most money to do. And as much as it would be good for it to change, deal-makers will continue to be powerful. Therefore it matters how deal-makers get paid. As I posted, if you pay deal-makers for bringing in big deals that later lose money, they will keep bringing in big deals that later lose money. Here's a better way: Put their pay in escrow and if their deals make money, after, say, five years they will get the money in the escrow account. If the deals lose money, the escrow repays investors for their losses. This pay change would change deal-maker behavior -- they'd be more careful before booking bad deals.
The basic idea is that we need to get back to what really propels the world forward -- new technology that makes life better for consumers and enterprises. And the rest of it should fly in unison behind that banner.
Peter Cohan is president of Peter S. Cohan & Associates. He also teaches management at Babson College. His eighth book is You Can't Order Change: Lessons from Jim McNerney's Turnaround at Boeing.
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Reader Comments (Page 1 of 1)
3-29-2009 @ 10:38PM
james burke said...
Plan to Cure the Economy
The Silver Bullet
TWIMC:
It is universally recognized that every man, women and child (and animal) has a carbon footprint that contributes to global warming on the planet. If everyone paid for his or her carbon footprint, the money generated would be an investment into the future (a Carbon Credit), and help to greatly slow the global warming problem. It is a complicated formula, but the evidence is there if you take the time to understand it. Carbon Credits are valuable because factories and industry that pollute MUST, under law, decrease their carbon footprints also. They are very large footprints, and the only way many of them will be able to reduce their footprints will be to purchase Carbon Credits at market value, until they can get their footprints under control with new technology, which could take years.
In order to maintain a long-term economic growth, you will need the following: a plausible idea, combined with support from our best minds.
The idea is to embellish the ambitions of the Kyoto Protocol. Learn from their mistakes, and produce a product an entire USA society will embrace. Eventually our success will be a breeding ground for all other countries to follow/adopt.
Here’s the foundation. All Americans (man, women, and child), will be eligible to purchase carbon credits for investment. In order to qualify a citizen must pay off their consumption of carbon for the life they lived.
Example, using 10 tons of carbon as the amount of carbon expended into the atmosphere per person, per year. If a person is 50 years old then they are responsible for 500 tons of carbon emissions. Today, March 4, 2009 the price of a ton of carbon at the CCX is $2.20. This simple qualifier is that a fifty-year-old citizen needs to pay $1,100.00 to get involved.
Next this citizen will need to purchase each and every year thereafter 10 tons of carbon at the current market value. And last but certainly the best, is that a qualifying person will now be eligible to purchase carbon credits for investment. The amount they could purchase will be regulated over time but $20,000.00 per year seems to be a good starting point.
All citizens will be able to qualify for bank loans to pay their own carbon footprint, as well as their investment money. The reason for freed up lending is that the banks will also be investors in carbon and will be glad to recover this valuable commodity from any and all dead beats.
Now look at the big picture. The US citizens are put first and foremost in a major trading strategy. All involved persons will become much more environmentally savvy. The banks will enjoy profitable lending, with very little risk. The mechanism generated by the CCX is in place and ready to go. Other exchanges may participate and compete. The new comers will need to rise to the stringent policies of the CCX, and the CCX will need to conform to any new protocols. The revenues generated by this mechanism could pay off the “National Debt” in a relatively short term. Now this process of kick starting our economy would be so lucrative, many, many jobs would be established for verifying a large multitude of carbon off set projects, also money for research and pricey projects that have merit could be funded.
The benefit to the environment will go beyond Green Peaces’ wildest imagination.
Our children and our children’s children will be brought into a cleaner world and a secure economy they can build on.
Our children will be given carbon credits that at the age of 20, with the stipulation they would need to pay for their emission of carbon first, than commit to purchase their future personal foot print. Now they are welcome to purchase their allotted carbon for investment.
Citizens will receive their carbon credits in the form of a credit card; they will only be able to purchase an item after the bank loan is paid. This process will be calculated instantly at the time of purchase. If you bought 4000 carbon credits for $3.00 each on credit (from a bank). This will be a $12,000 purchase. Then in the process of time the price of carbon escalated to $9.00. You would need to have been making the 4% annual loan payment. So if the carbon appreciated to $9.00 at the end of a year. Note: These numbers are selected for illustrated purposes. The result would be $480.00 out of pocket interest expense. A current $12,000.00 loan and a $36,000 gross value on your credit card. If you choose to make a purchase for $12,000.00, your credit card would pay your loan off in full (deduct $12,000.00). An additional $12,000.00 would be deducted to coincide with your $12,000.00 purchase. Then there will remain a $12,000.00 balance free and clear. Oh, but I almost forgot, Uncle Sam will take out his 15% capital gain, on your purchase, ($1,800.00). Not bad though.
The mandated obligation put forth to our countries businesses will be a pull-through to make for constant demand. The inventory of carbon will be at first plentiful, as there is plenty of low hanging fruit. Eventually carbon-generating projects may slow down. This inventory shortfall could be remedied as follows. The geography in which mankind inhabits is air, land and sea. Science can explain how all three of these conditions are forever intertwined. When viewed from a distance our living space should be perceive as a single home for mankind. Next, other pollutions in the air (not carbon) label them carbon equivalents. Well one last logical step is to put a carbon equivalent on contaminates in or on the ground along with water pollution as an equivalent to a ton of carbon.
The only thing stopping this plans success is a weak spirit which will cease to move forward at times of adversity.
Thank you for your consideration.
Sincerely,
James Burke
1229 Marlboro Road
Old Bridge, NJ 08857
Cell 908-581-8066
PS Call with any concerns or need for clarification.
Reply
5-12-2009 @ 6:47PM
john said...
James has drank the "cool aid"....the whole 50 gallons worth!. Global warming and CO2 pollution is a myth. It IS NOT universally accepted that this is a problem....most real scientist and engineers do not support this politically motivated balony!
This is just one more way to drain the wealth from everyone and lower the average standard of living of successful countries like the USA to that of third world countries. Registered Professional Engineer - PE and scientist who understands the chemistry and physics.......
3-29-2009 @ 11:23PM
bob said...
step number one get rid of obama and his socialist agenda and his trickle up poverty
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3-30-2009 @ 12:47AM
Robert said...
(1) Pay a fair minimum wage in proportion to cost of living
(2) Stop charging such high overhead on retail goods
(3) Don't punish people for "doing well" financially
(4) Spend a little, save a little
(5) Cut back on waste
(6) Lower taxes
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3-30-2009 @ 6:49AM
Lee said...
http://www.ManyMoneySavers.com
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3-30-2009 @ 7:19AM
Gary said...
You won't fix anything until you get American companies to invest in America and hire Americans. That won't happen as long as other countries subsidize their workers and companies while we encourage our businesses to go overseas. Change the tax laws to encourage business to hire Americans. No company is going to hire an American for $15 an hour when they can get a Chinese worker for about $5 a day unless there is some incentive. These companies have no moral compass, they only worship the almighty dollar, so tax them for going overseas and reward them for staying here. Its that simple.
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3-30-2009 @ 7:34AM
jeff said...
Okay carbon credits? come on... people will not invest in something with no tangible value. what happens when the govt. chages policy or a foriegn govt. does not adhere to policy. There is only so much money out there, so a new investment scheme will not pay off the debt of this country. stop spending foolishly and stop wasting taxpayer money on social engineering is the place to start.
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3-30-2009 @ 7:54AM
hagerkdl92 said...
If you live in the U.K. or U.S., your leaders will be attacked by those in other countries who believe that they should not be asked to bail out the errors of Anglo-American capitalism.>>>>No, you shouldn't be asked to bail us out, but don't ask us for money when your country is hurting either! How many times has America taken care of other countries!
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3-30-2009 @ 8:09AM
Gee said...
So far, from what I've read Gary or #5 makes the most sense. Greed has killed this country. Nafta and Cafta have every company moving out of this country but selling their goods in this country. There are more American cars made in Mexico than there are American made cars made in America.
When I was younger I used to see "Made In the USA" on so many products and now I don't see it at all. Greed has driven this country right in the ground. Oh, one other thing that would help get this country back on its feet. Get rid of the Federal Reserve Bank. That's the biggest scam going.
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3-30-2009 @ 8:26AM
iluvbass98 said...
no where on here does anyone mention the destructive forces of the federal income tax rate. drive through a town like youngtown, oh, flint, mi, gary, in, or east cleveland , oh and ask yourself: what have all these taxes I've been paying bought me? NOTHING. its all up to us as individuals to fix up our corner of this nation and with bureaucrats hundreds of miles away sucking up every bit of whats left to improve your local quality of life there's nothing left but things to continue to deteriorate. HOW ABOUT LOWERING THE TAX RATE TO ZERO IN THESE SEVERELY DEPRESSED AREAS SO WE CAN HAVE SOME HOPE ONCE AGAIN?
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3-30-2009 @ 8:28PM
nino said...
Answer, to illuvbass98; The tax structure should be changed to the flat tax. That's the only fair tax system that can limit the dummies in D.C. from spending at will. Understand, there as to be control at wall street, laws must be enacted to be fair for everyone. To sugest only certain parts of the country would be totally unfair to other parts. Also, understand that the infrastruture must be maintaned for your own good and the rest of the working people in the country. Good luck.
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3-30-2009 @ 10:35AM
iluvbass98 said...
isn't it quite pointless to maintain infrastructure in a city where the people are all but gone? youngstown is like a ghost town with boarded up high rises and cleveland hit its population peak in 1950. these days cleveland looks more like a war zone then a city in the USA. it is senseless to maintain the infrastructure for ghost towns. the only prudent decision to be made with these tax dollars would be to knock these cities down completely and move the people elsewhere.
4-14-2009 @ 4:00PM
earlthepearl said...
Mr. Cohan, the author of the artical about tomorrows nation wide "tea party" is obviously a flaming liberal. The liberals love a silent majority that doesn't make waves or question anything. So his artical slams the growing vocal majority that has finally had enough of liberals (read: socialists) who love to spend the tax payer's money anyway they like with no interference. A liberal's answer to any situation is to throw money at it, or to take the softest, easiest way to deal with it, available to them. And the "Stimulus Package" and the proposed Obama budget is just another example. This nation needs the people's involvement and understanding of it's government if it is ever to get back on track. And rolling over and saying "What can one person do to change anything?", isn't going to do it! They can get on a street corner and let their feelings be known. And when the number gets big enough even the liberals will listen, since all they really care about is getting reelected.
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4-14-2009 @ 6:28PM
obamalamadingdong said...
The reason there are no jobs and business has gone overseas is only partly due to tax policy or nafta or any other trade agreements. The reason is there is so much government regulation from eeoc, osha, environmental regs, wetlands certification, affimative action and the threat of law suit after law suit and so called activists that oppose any business from locating anywhere. These are the reasons business can no longer survive and thrive in the US. We asked for it and now we have it.
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