Category Archives: politics

Pro-Profit for Antiviral Drugs: A critique of NPR’s goofy coverage on flu vaccines

Yesterday I found myself listening to NPR’s Morning Edition and its coverage of swine flu.  This story, Antiviral Drugs Discounted For Government : NPR, discussed the deep discounts governments negotiate and the resulting shrunk revenue and profit streams that big makers Roche and GlaxoSmithKline make on these drugs. 

My sense of NPR’s tone was decidedly anti-profit, and I find this worrying.  In addition to a tone that discussed how drug makers were not on track to reap a “windfall” from this, the following quote struck me as emblematic of NPR’s anti-profit tone:

To be sure… other instituations will put in more orders.  And more orders, means more profits.

We should not be anti-profit on flu vaccines, we should be pro-profit.  

First off, the amount of money at stake is very small—for something so important, minimizing a pandemic is something I’m happy to see someone profit from.  According to NPR, Roche made $120M in revenue on its key flu fighting drugs, roughly 50% less than the New York Yankees’ 2009 Payroll.   I’d far rather see Roche making more on flu vaccines than the Yankees.  I’d have no problem with that. 

Second, more profit would mean more investment in the distribution, safety, and efficacy of these drugs.  I don’t buy that this is all optimized.  According to some experts cited in the NPR piece, they’d advocate not taking the potential swine flu vaccine this fall as its won’t be proven safe, a la the 1976 vaccine.  Also, the logistical challenges to getting these drugs built and distributed are quite large.  Though I can’t point to how the safety and logistical problems would be fixed with greater investment, I’m confident that with greater profits in the segment, greater investment would be in place, leading to better solutions here.

The capitalist system has taken a body blow over the last year.  That said, we need to remember that we shouldn’t cut off our nose to spite our face.  It is dangerous to put an interest in profit minimization ahead of a drive to maximizing public health.  I fear that if we continue demonizing profit-making entities,  and we continue to push organizations to minimize their profit motives, that we’ll put ourselves at more risk here and elsewhere.

 

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Building on Hoffman’s Recommendations Re: Stimulus 2.0

Last week, LinkedIn Chairman/CEO Reid Hoffman wrote up his recommendations on ways to address the current economic crisis with pro-startup policies.  His article, Stimulus 2.0: It’s The Startups, Stupid., is worth a read. 

His recommendations are a strong start.  I’d like to see more thinking on this front, as I think there is good value in pushing several elements of startup and high tech sectors in the US economy into the broader economy.  Here are a few additional recommendations that I’d make, FWIW:

Enact the “Shrimp v. Weenies” act on all companies taking government money.  An eon ago (in 1993), Microsoft’s head of HR, Mike Murray, penned the infamous “Shrimp & Weenies Memo.”  It extolled the virtues of frugality (weenies) and the need to not let Microsoft’s success in the marketplace drive folks to start spending on needless stuff (shrimp).  Note this, from the memo:

we address each other on a first name basis; we have an informal dresscode; we fly coach class; we stay in reasonably priced hotels; we don’t ride in limos; we don’t have executive dining rooms; our office furniture is of good quality, but reasonably priced; when dining at company expense, we order weenies not shrimp.

It’s important that our administrative assistants, event planners, and managers see it, hear it and get it:

Given the choice, we prefer weenies over shrimp. (Lest we throw the baby out with the bath water, there are legitimate times for shrimp, but these are the exception, not the rule).

This is good advice for all companies, of course, but now reconsider the source and the time and reflect on where we are today.  This was written by a Microsoft executive in 1993(!), at the literal heyday of that company.  At most, a handful of companies before or since have achieved the profitability and growth Microsoft achieved, and yet here’s Mike saying spend less.  I don’t see memos like this coming from GM.

Now let’s think about today’s crisis companies—banks and autos.  They –- and anyone else asking for a bailout—should be on a strict Shrimp v. Weenies plan.  I want GM, AIG, Fannie/Freddie, etc., etc. to do the following:

  • Everyone flies coach.  NO EXCEPTIONS
  • Economy hotels—Motel 6s are perfectly fine; so are Red Roof Inns
  • No exec dining rooms
  • I’m sure there are a host of additional perks that execs at places like GM get that I couldn’t even fathom.  (I heard once that based on level, some get carpet in their office; while others don’t—??)

This won’t get companies out of the mess they are in, but it drives an important mentality into the company at all levels—namely, every dollar counts. 

This is a no-brainer, I’m surprised that the US Government hasn’t been more hardcore on this.  It’s simple to do and it’s the right thing for American business. 

Unions need to shift comp towards greater stock-based incentives.  Unions drive a higher cash cost burden into American manufacturing companies.  Health care reform is going to be needed in order to tackle one key element of this.  The other is around shifting the cash comp towards more of an equity based approach.  This conserves cash, and it can lead to greater upside to the worker.  This approach has has fueled technology companies, and its a straightforward compensation philosophy—get stakeholders aligned.  While this is a more controversial proposal in this market, it makes sense.  My argument is that if union leadership truly believes that these companies can compete in the marketplace, then they should support a greater equity based component to employee compensation.  If union leadership is unwilling to take on more equity, especially for younger workers, then why should we as taxpayers bail them out—it’s an admission by them of failuer.

Introduce personal finance courses into Junior High School curriculum.   The events of the last 18 months in the housing market have shown that a shocking number of grown, home-owning adults have little concept of the financial implications of decisions they’ve made.  As a  nation, we have an interest in more people knowing this stuff.  Many entrpreneurs and businesspeople I know from Silicon Valley and Microsoft have been interested in business from a young age.  Warren Buffett talks about how he started investing in stocks at I think age 6.  This early start is great for the small minority of people who have the bug or have parents who teach them this stuff, but we should broaden this access.  Kids at all income levels—especially those less fortunate—should get a sense early on of what it means to budget.  They should get a sense of the lifetime value of achieving different educational degrees (an undergrad engineering degree, an MBA, JD, or MD).  This information is useful and impactful to kids, and I fundamentally believe that kids are savvy enough to understand that when money’s involved, it’s worth paying attention.  I’d love to see the public school education system inject a personal finance course into the curriculum at grade 7.  Help kids setup businesses, run mock stock market simulations, etc.  If this helps kids get a sense of money, that’s great.  It will assure that they make better educational choices later in life, and it will help them potentially ask a few more questions when they take on purchases.

 

Those are the three that I’d add. 

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The Auto Bailout Issue—Posner

I’ve enjoyed Justice Posner’s writing elsewhere, and I enjoy his blog. Interesting take on auto bailout, basically advocating this to delay bankruptcy / liquidation until the US economy has enough positive sentiment to stomach it.

via The Becker-Posner Blog on 12/14/08

We blogged on November 18 about whether the government should provide money to the U.S. auto manufacturers to keep them alive. (I was for; Becker was against.) In the short period since then, there have been important developments bearing on the issue, culminating this past Friday in the blocking by Senate Republicans of the Democrats’ modest ($15 billion) auto bailout bill, and the announcement by the Bush Administration that it might, after all, agree to use part of the $700 billion financial-sector bailout to keep the U.S. auto manufacturers going until President-elect Obama takes office. So Becker and I have decided to return to the issue.

The issue has a political and an economic dimension. From a political standpoint, the current position–no bailout legislation, but possible allocation of part of the financial-sector bailout money to the domestic auto manufacturers–represents, unusually, a victory for both political parties. The Republican Senators have stood up for principle–that freedom to fail is basic to capitalism, that wages and benefits should be set by free labor markets rather than by powerful unions, which are worker cartels, that government should not manage businesses, and that government expenditures should be minimized–and for the interests of Toyota and the other foreign manufacturers that have plants in the United States; for those plants are mainly in the South, which is the stronghold of the Republican Party. By opposing an auto bailout the Republican Senators have also distanced themselves from the Bush Administration, which is at once unpopular and believed by many Republicans to have betrayed Republican small-government principles. There is a grave risk that, as I argued in my November 18 posting, a collapse of the domestic auto industry could have serious adverse consequences for the U.S. economy as a whole, which would expose the Republican Senators to criticism. But that risk is buffered by the Administration’s apparent willingness to bail out the auto industry without new legislation.

The Democrats (including the incoming administration) have scored points among their constituencies by standing up for union workers, for the “greening†of the automobile industry, for states in which the domestic auto industry is centered that voted Democratic in the November election (Michigan, Ohio, and Indiana), for the principle of active government, and for trying to avert a deepening of the current depression.

The bailout bill was a mess, but a harmless one, if I am right that the domestic producers should not be allowed to collapse at a time of profound and, it appears, worsening economic distress. The bill was a mess because of the conditions that it would have imposed on the industry, conditions that earned the justified ire of the Republican Senators because of its failure to lean hard on the collective bargaining agreements negotiated by the United Auto Workers, because of the divided control of the industry that the bill if enacted would have brought about–divided among the manufacturers, a federal “car czar,” and intrusive congressional oversight–and because of the considerable element of fantasy in the idea that Congress plus the President can revitalize the domestic auto industry. Nowhere is it written that the United States, let alone the midwest, where the domestic auto manufacturers are centered, has a comparative advantage over other countries, or other regions of the United States, in manufacturing motor vehicles. Evidently it does not, and Congress and the President cannot change that, as Japan learned from the failure of its “industrial policy” administered by Japan’s once-admired Ministry of International Trade and Industry.

For the problem of the Detroit manufacturers is not just a matter of higher wages, to be solved by renegotiation of their collective bargaining agreements. The wage difference (actually the benefits difference–the hourly wages of the auto workers employed by the domestic manufacturers are only slightly higher than the wages of the workers employed in the U.S. plants of Toyota and other foreign manufacturers) is an important but not the decisive factor in the decline of the domestic auto industry. The difference in the wage and benefits package between employees of the domestic manufacturers and of the foreign ones in the United States has been exaggerated by treating as a part of that package the annual payments to retired workers divided by the number of hours worked annually by current workers. The money owed the retirees is a fixed cost, like any other debt. Eliminating those payments, like reducing the industry’s bond debt, would improve the industry’s balance sheet by reducing its fixed costs, but would not reduce the cost of making cars, or increase their quality. Merely wiping out existing debt, the main consequence of reorganization in bankruptcy, does not improve the efficiency or competitive position of the reorganized firm, which is why most reorganizations end in liquidation. What would improve the efficiency of the domestic auto manufacturers, besides reducing wages and current workers’ benefits, would be jettisoning union-imposed work rules; that was part of Republican Senator Corker’s ingenious proposal (of course rejected by the union) to condition a bailout on the union’s agreeing to a reduction in the wages and benefits of the Detroit auto makers’ workers to the level prevailing in the southern automobile plants of the foreign auto companies. The adoption of his proposal would have been tantamount to putting the United Auto Workers out of business–if unionized workers have the identical wages, benefits, and working conditions as nonunionized ones, why would anyone pay union dues?

I doubt that anyone in Congress or in either the outgoing or the incoming Administration really thinks that a bailout bill will place the domestic industry on the path to salvation. The conditions imposed to achieve the “reform” of the industry are window dressing. All three domestic manufacturers (yes, Ford included) are insolvent, and while they are unlikely to close down and liquidate completely if forced into bankruptcy–Americans will probably buy 10 million motor vehicles in 2009 and they are unlikely all to be made by foreign companies (the foreign share of the U.S. car market, including both imports and cars manufactured in the U.S. plants of foreign companies, is about 50 percent, though they could take up some of the slack created by the collapse of the Detroit manufacturers, since the foreign companies’ sales are down too). Even with an infusion of federal money, there will be many plant closings and layoffs and many bankruptcies and liquidations of auto parts suppliers and auto dealers.

But formal declarations of bankruptcy by the domestic manufacturers would, I believe (as I argued in my November 18 posting), have a substantial added negative effect on the economy. Consumers are markedly reducing their purchases of durable goods because their savings are so depleted that they cannot, as in previous economic downturns, reallocate savings to consumption. Instead they are reallocating income from consumption to savings. The result is a downward spiral: consumers spend less, so output drops, resulting in layoffs that result in further reductions in consumption and in turn in output. The spiral will eventually bottom out, but it will bottom out at a lower level if hundreds of thousands of employees of auto manufacturers, auto parts suppliers, and auto dealers are terminated more or less all at once and consumers planning to buy a car in 2009 are scared off by the uncertainties associated with bankruptcy. (Will warranties be honored? Will parts be available? Will the dealership from which one bought a car survive? Will service standards slip? What about the car’s resale value? And should one believe the soothing assurances that bankruptcy is no big deal for the customers of the bankrupt firm, as long as it does not liquidate, when all the other soothing assurances by the government have proved unfounded?) Because motor vehicles are highly durable, it is easy to be prudent and defer replacing one’s existing vehicle until one’s economic situation clarifies.

Granted, with General Motors having publicly acknowledged hiring a leading bankruptcy lawyer to counsel it and announced that it will be shutting much of its North American operations for a period of months, there is increasing public recognition that the Detroit automobile industry is bankrupt in all but name. But I still fear the psychological effect of a formal declaration of bankruptcy at a time when many–probably most–Americans are anxious about their economic situation. Individually, consumer prudence is wise; collectively, it will exacerbate the depression.

The realistic goal of an auto-industry bailout is not to reform, revitalize, or restructure the domestic industry; it is merely to postpone its bankruptcy for a year or two, until the end of the depression is at least in sight and consumer confidence is restored to the point at which the bankruptcy of the domestic manufacturers can be taken in stride. To attain this goal does not require imposing conditions on the use that the auto manufacturers make of the bailout moneys. The conditions that the bill would have imposed and that any other form of government funding will impose are not an economic but a political necessity because of widespread anger at the incompetence of the industry; a majority of Americans oppose any bailout of the Detroit manufacturers.

At the very least, the Obama administration should be allowed to decide the fate of the companies; that argues for a modest government loan that will keep them out of bankruptcy until, say, February.

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Memo to President from Congressional Dems: Please Save Detroit

Memo

TO: President George W. Bush

FROM: Senate Majority Leader Harry Reid; Speaker of the House Nancy Pelosi; Congressman Barney Frank; and Senator Christopher Dodd

DATE: December 4, 2008

RE: Our Christmas Wish List — Please Bail Out Automobile Industry For Us

**As reported in the New York Times, the above congressional leaders sent a letter to President Bush asking him to save the auto industry.  I’ve secured the only known copy of the letter and published it below.**

Dear Mr. President,

Merry Christmas, we hope that you, Laura and the kids are having a wonderful holiday season.  It must be really weird to be considering your last holiday season in Washington. 

Its been quite a year, amazing how fast the time flies.  Oh geesh, it sure has been busy since Labor Day.  We all got back from vacation and the Olympic games, and wow, there was this huge financial crisis that’s kept us all so busy.

Anyway, we wanted to reach out and wish you a happy holiday as you and Laura .  We also wanted to see–in the spirit of the season–if you might be willing to do something special for us.  Would you be willing to unilaterally just ‘give’ $30 billion give or take to the auto industry?  Think of this as our Christmas wish to President Santa. 

See, we’ve been meeting with the auto execs, and we know we need to do it to keep Big Labor on board with us, but it sure is unpopular.  As you’ve been so willing to do unpopular stuff unilaterally, we thought that it might just be a whole lot simpler if you did it. 

We know we haven’t always been that good to you, but if you could forgive us and just consider all the good things we talked about, then you’d probably see that we deserved some kind of present.  If you could give us all just this one thing for Christmas, that would be great.  It’d be even better than the free-range buffalo jerky from Plano that you sent us last year. 

As you know, saving the auto industry is super critical to the entire economy. 

Don’t listen when your advisors tell you that the average worker in the Big Three is making around $80 / hour to make a car, don’t focus on that, whereas their competiors have the same workforce at about $30/hour.  Also, your advisors will tell you that neither investors nor Congressional representatives have the will to do this.  Don’t worry about that either–investors may think this is a suckers bet, and we in Congress know its unpopular, but we’d implore you to realize that this is exactly your kind of move.  Here’s what we mean:

  • It’s an ill-conceived plan, hastily thrown together
  • It does not have Congressional support, so you’d act unilaterally
  • There’s no data that shows that action will lead to the result we desire

In short, it’s right up your alley!  It’s got the Bush Doctrine written all over it.  As we’re getting a lot of heat, we’d really appreciate it if you could consider doing this for us. 

All our best to you, Laura and the rest of the family.

Go Longhorns!

 

PS–Seriously, if you did this and gave us what we wanted for Christmas, we’d be really thankful.  We’d say nice things about you.  We’d call it statesmanlike, forward-looking, compassionate, and maybe even environmentally friendly.  We’d even probably say a thing or two nice about you personally.

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Case Study: Online Savvy of the Presidential Campaigns

I’m going to write more about this in the coming weeks, but one of the big historic elements to the Obama versus McCain campaigns is the innovation that the Obama folks have used in technology.

In 2004, the GOP trounced the Democrat party on the vector of far better database marketing and statistical models.

In 2008, there’s no question that the Obama campaign has raised the bar in a big way on the front of using technology, social media, and good old-fashioned technology marketing to get the word out, build relationships, and drive conversations.

One example I came across today on YouTube–a calculator to check your tax savings based on the two competing tax plans.  Pretty simple, pretty effective. 

 

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A Counter to RWW’s Analysis: LinkedIn’s keeping it simple

Bernard Lunn writes a useful analysis of the recent LinkedIn deal in ReadWriteWeb.  While I found it thorough and detailed, if I were to critique it, I’d say that it’s myopic and thus over-complicated.

Here’s what I mean.  First off, Bain Capital is a top, top tier private equity firm with over $50B in capital.  This sterling reputation implies a huge war chest–money which they need to put to work.  LinkedIn similarly, is a top tier tech firm, which while a start-up, has certainly reached a level of maturity that comes with a proven business model, revenue stream, and clear growth plan.

The question — why the linking of the two versus an IPO for LInkedIn–is pretty straight-forward, when you consider the broader context of markets today.

For starters, the markets stink with oil at $140 a barrell, repeatedly sour revelations from banks related to the credit crunch, and the dow hovering around 12K.  The coming election is having two additional  impacts which will likely last through the end of the year: (1) the Fed cannot shift rates, as there is too much political capital tied up in that; and (2) the markets expect Obama to win, he’s viewed as more negative for business, and the markets are figuring out how much worse right now.

In short, if public markets stink and will for a while, and you want/need the money to grow, then go elsewhere.  That’s what it looks like LinkedIn did.

Add to it the overhead of Sarbanes Oxley, and it’s no wonder LinkedIn went the Bain Capital route.  There are a ton of seasoned execs in big companies and recently public start-ups with whom I’ve spoken who can’t believe the headaches involved with Sarbanes Oxley.  It’s a mess.  For those of you in tech land dreaming of an IPO, beware (or be sure you have a rock solid CFO)–it’s painful.

For Bain Capital, the case is also pretty simple.  They’re going to want to put money to work.  The credit market turmoil is creating a ton of opportunity in buying stuff distressed and on the cheap.  (Bear Sterns e.g.)  That’s all well and good, but it’s hard to know where the bottom is with this distressed stuff (GMAC, e.g.)  Bain Cap’s model has seemed a little less chop-shoppy (buy cheap, fix, and flip) and tended to be more about helping franchises expand and extend their brands with ruthless efficiency.  Given Linked In’s premier brand status and position, and Reid Hoffman’s reputation as an execution madmand, and LI and BC are a great fit.

Rather than assess the state of what all this means for high tech and IPOs, etc., as Bernard does, I’d look at it more simply and optimisitically.  It’s terrific for Silicon Valley that a top tier company like LInked In could close a transaction like this with such a top tier private equity firm.  Maybe others will get more active.

That this deal wasn’t an IPO is a sign of a weak market and too stringent regulations–hopefully both will get fixed.  We need a rebound in the economy and a rewrite of SarbOx, in the coming window so that the rest of us start up guys may one day have a shot at a more open IPO window.

PS–for those with a more political bent on this, to get a more open IPO window will likely want to see oil at or below $100 / barrel.  It also will likely highly desire not having a “surge” in the capital gains and dividend taxes.

Multiple choice bonus question–the US Presidential candidate more likely to deliver lower oil and lower taxes and thus better financing conditions for tech and other companies is : John McCain or Barack Obama?

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A Man in Full : Timothy J. Russert

I was travelling to Las Vegas to meet my father- and brother-in-laws when I saw the news that Mr. Russert had passed. As I’ve started blogging, I’ve found it interesting to pause and reflect on the lives of people who’ve touched me. It helps me pay some little respect, and to clarfy in my mind some of my own thoughts on how and why certain people impact or teach me something.

As a professional, Mr. Russert was the “gold standard” according to many. My behavior reflected this: Tim Russert hosted the only news program that I Tivo’d and watched every week. I would watch other news, but Meet the Press was must see TV. Others have reported how this occurred: his hard hitting, yet friendly approach.

What I always loved about Mr. Russert’s show was his clear passion for the Buffalo Bills, literally his humanness. Few others in journalism match this. Others at the top of the heap–Stephanopolous, Koppel, Blitzer and even George Will are all tremendously talented political journalists, but none had anywhere near the human connection that Mr. Russert could bring.

And this makes it all the more telling, I think. As many of us, I work hard and am trying to do big things at work. I also aim to be present and dialed in as a parent, son, and friend. A very hard balance, it’s one some claim is impossible to achieve.

Timothy J. Russert is a great case in point that it can be achieved. We will miss you!

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