Driving around America for nine weeks and more than 10,000 miles, I’ve had a chance to see how our economy does and doesn’t work. The startups I visited were all good companies — reader favorites, after all — so they tended to shine. And their glow was generally green and even a bit altruistic, yet still based in for-profit philosophy. These are the kind of companies that create industries, build or renew cities and industrial centers — companies that create jobs in the kind of abundance needed to keep our nation prosperous. Yet in terms of government policy, it is as if they are unknown. The Obama Administration just successfully passed important small business legislation, for example, that has no value at all for tech startups. This probably shouldn’t surprise us: former President George W. Bush was clueless about this stuff, too.
The good news is that none of this really matters a lot: tech startups will continue to happen in great numbers no matter what Congress and the White House do. The bad news is neither institution would know a tech startup if they saw it and there probably are ways that government could help but won’t.
The new small business legislation intended to support startups is based entirely on debt — getting banks to lend money to small companies. But the only kind of debt that most tech startups know is credit card debt. Little tech companies grow by selling equity, not borrowing money. Short-term debt goes on plastic at 18 or 23 percent because no bank has — or will — lend to real tech startups in any significant amount.
They’ll finance new Burger King franchises, but lend money for electric cars or new kinds of data storage or — shudder — software? Forget about it.
Presidents Obama and Bush didn’t know this, Fed chairman Bernanke doesn’t know it, nor does Treasury secretary Geithner. None of these men have a minute’s experience with tech startups, yet our economy is almost entirely dependent on those startups for real recovery.
So since these distinguished bozos don’t know what to do, I’ll just throw out a couple ideas I came up with this summer on those long drives from town-to-town with the kids and Mary Alyce asleep in the back of the RV.
While equity is fine, debt is better: banks should lend to tech startups. They don’t because they can’t tell a good one from a bad one. They should because doing so would be good for both the economy and America. The way to do so is by lending not to individual companies but to baskets of companies. If banks don’t have the confidence to create such baskets themselves, heck, I’ll do it. I’ve visited enough startups to tell with a 85 percent certainty whether they have what it takes to succeed.
But even lending to a basket of companies that has a near-100 percent chance of delivering 3-5X on each loaned dollar, the banks still won’t do it because they are cowards lacking any — any — moral fiber whatsoever. They won’t do the right thing even if I make it low- or no-risk, because they don’t know what a right thing looks like anymore.
This is where there becomes a true role for government — to require that banks lend to those baskets of tech startups I put together. Make lending to tech startups a condition for even having a banking license.
While this make seem a wild-ass idea, isn’t that the essential nature of licensing? IF you want this privilege THEN you assume this obligation. And with tech startups representing only $20 billion in a $20 trillion economy, what’s the big deal? That’s the very chump change that can lead us out of recession and deflation and back toward world leadership.
Still they won’t do it.
Why? Because it’s too simple, yet not at all simplistic. But even more so because larger companies and institutions will lobby against it without even knowing why they do so.
So given that these no-brainer solutions are going to inevitably be ignored in favor of slap-dash programs that will benefit only special interest groups and not America with a capital A, I’ll throw out one last idea that just might make the cut, because it relies entirely on greed and self-interest to succeed. Those are two commodities we appear to have in limitless amounts.
We have here a syllogism, so stick with me:
1 — Since the Reagan era and the Laffer Curve we’ve time and again relied on tax cuts for the rich to stimulate our economy, the idea being that the money saved from taxation would trickle down to the rest of the population selling Big Macs and handing out shopping carts at WalMart.
2 — Alas, Laffer was wrong, in large part because rich people save most of their money, they don’t spend it, and spending is what expands (or in this case re-expands) economies. Hence the liberal idea of tax cuts just for poorer people who will actually spend their tax savings buying Big Macs and stuff at WalMart.
3 — Yet rich interests always win in these things because they are smarter about buying influence. This is a simple reality that is unlikely to change, so forget about the poor people. But cutting taxes for everyone is grossly inefficient as economic stimulus compared to cutting taxes for the non-rich.
4 — Rich interests have also shown an amazing willingness to do the most arcane and complex things to avoid paying taxes. Remember the tax shelters of the 1980s? Sheesh!
5 — Here’s the boffo payoff: the logical solution to restarting the economy, then, isn’t any of those crazy ideas like flat taxes or taxes on consumption. What will actually work is a short-term tax (or tax credit — they are the same thing if you squint) on savings. Forget about accelerated depreciation — make all non-reimbursed expenses of any kind 100 percent deductible in the current tax year.
It’s ass-backward, I know, but it would work. Give rich people a short term incentive to spend like poor people, then phase it out over time.
If we are metaphorically in the same position as FDR in 1938, this wacky policy would please the right while giving a financial boost equivalent to World War II but without the war.
Recession over.
Nice one Bob.
I was instantly reminded of the classic Ben Stein Ferris Bueller clip !
https://www.youtube.com/watch?v=dxPVyieptwA
Dave.
Bob, here’s something to chew on: When all those rich people “save” money, what do they do with it? Do you think they stuff it in the mattress, completely removing it from the economy? Put it in their Scrooge McDuck safe and go for a swim in it? Of course not. They make their money work for them by investing it. When they stick it in the bank, the bank has to loan it out to make the interest. When lots of rich people save, there’s more cash chasing fewer loans, so rates get lower and loans get easier to come by. (When the Fed does this, we call it “stimulus.”) When they save it in negotiable instruments like stocks, that’s a wash because every stock buy is a stock sale to some other rich guy. And then some of them, the brave ones, put it into new businesses, start-ups, or VC funds, and that’s where the magic happens–people get jobs.
I do, however, agree that none of this matters because, as you said, rich interests will make sure they get things their way regardless, and there’s not much we can do about it. So let’s move on to ideas.
In the past, I’ve had my salary paid by some of those rich startup benefactors, and now I’m at a point where I’d like to do it myself. Only, I’m not quite rich. Let’s say more like “nearly rich.” The VCs have a lock on the bigger start-ups, but won’t admit someone with less than 8 figures to throw at them. And banks don’t do this kind of thing because they’re not built to do it — they’re built to estimate the value of collateral so they can eke out 0.5% as a middleman by lending my savings, not estimate the value of ideas. And besides, why let the banks have all the fun?
No, if you really want to affect change, how about finding a way for all of letting us “nearly rich” into the game and connect us to all these “shoestring” startups you’ve found? There’s a lot more of us than there are of the “truly rich.” And even in a recession, some of us have money we can afford to lose on a venture. You teased us the other day about your new fund. I may not trust you to write an economics text, but I’d trust you to pick out good startups. So how do we get in?
What happens when the money is invested in foreign countries or in government bonds? What happens when the products are made in other countries? How does this put money in the pockets of people? How will this help more people buy more products when all the money is used to CREATE products and not BUY products? Money must move in a circular fashion. But it currently moves outside and there is none generated locally. This is a serious problem and won’t be helped by the rich having their tax cut not expiring.
Even if the rich put money in local banks, banks loan to people who already have money or collateral. How does this help regular people have more money to spend? Should we buy with credit cards until the economy collapses again?
and also:
https://www.bloomberg.com/news/2010-09-13/rich-americans-save-money-from-tax-cuts-instead-of-spending-moody-s-says.html
Well, when they invest outside this country, people in other countries win. I made no claims as to exactly which geographical sub-group benefits, only that someone does. When we’re talking about global economic meltdowns, I don’t think we can afford to apply isolationist thinking.
So when you write “…that’s where the magic happens–people get jobs.”, you actually mean people get jobs – but they may not be in the U.S. – ? So how will this help people in the U.S.? How will keeping the tax cuts help people in the U.S. and help pay for the U.S. debt? You know that the U.S. debt won’t repay itself on it own?
Banks are not lending:
“Tbe Federal Reserve outlined the dimensions of the problem earlier today. The central bank said JPMorgan Chase, Bank of America and Citigroup are sitting on $1.29 trillion in cash, quadruple the rate of June 2008, according to a report compiled by Bloomberg. That is equal to a record 98 cents in reserves for every $1 of outstanding business loans, Bloomberg said. By keeping cash idle, banks are depressing their own profits. But they are limiting their risk in the event of another downturn in the economy or the markets.
Unfortunately, the banks’ efforts to store up cash to ride out another financial shock make that shock all the more likely to occur. The banks and the economy are working against one another. In order to build a sustainable recovery, they need to be reinforcing one another in a positive way.”
https://www.portfolio.com/views/blogs/daily-brief/2010/02/16/big-banks-citi-jpmorgan-bank-of-america-hoarding-cash/
I’ll dispute your term, “invest”. By my perception, and I’ll admit that it’s not perfect, but I also believe it’s not completely incorrect, the stock market bears as much resemblance to horse-racing at the track as it does investment. What Goldman-Sachs does with their fractional-point high-frequency trading isn’t investing, it’s skimming the cream out from under everyone – including those who are trying to drum up funds from investors in order to build their business.
Then I’ll drop back to Marketplace on NPR the other night. They predicted rising food prices for various reasons, and then predicted that “stagnant investment dollars” were going to be rushing into the food commodities markets because of this. Aside from the fearful prediction of a “food investment bubble” and what that will mean to poor who can’t even afford to eat now, look at that term, “stagnant investment dollars.” That suggests that there’s investment money laying around NOW, and they’re NOT using it to fund American job growth.
It really comes back to the fact that we have a demand problem, not a supply problem, and supply-side economics aren’t going to be effective in solving it. Furthermore, those with the “stagnant investment dollars” already know that, and that’s why they’re not funding American job growth – because it really doesn’t work that way – in this situation.
“But even lending to a basket of companies that has a near-100 percent chance of delivering 3-5X on each loaned dollar, the banks still won’t do it because they are cowards lacking any — any — moral fiber whatsoever.”
Maybe I’m working with a different definition of Debt vs Equity, but a loan that has a near-100 percent chance of delivering 3-5X back to the bank isn’t a loan that I want from the bank. I’m just at the beginning of the startup journey, but I sure haven’t hit the point where I want to borrow money at 100% interest.
One of the foundations of our economy is the capital structure of our companies, defended by a robust judiciary (large auto manufacturers apparently have different rules). Creditors get paid according to their seniority both month to month and in the event of bankruptcy, but they only get paid what the loan documents say, never anything more.
Every loan officer worth his salt knows that the name of the game is capital preservation. If you make 11 loans at 5% interest and one of them goes bad and the bank can only recover half the principal in bankruptcy proceedings then it wipes out the profit of all the other loans. If the loan went to a tech startup, the company has less assets that can be sold off so that recovery rate is even lower (which is why any decent loan officer wants the personal guarantee of the founders, which means that a company failing can also mean losing your house).
Requiring banks to make riskier loans is a terrible idea. A substantial reason for our current economic slowdown is because banks were making bad loans before (subprime mortgages), government action forcing them to make more (especially loans not backed by assets) is moving in the wrong direction.
Sorry, Bob, you’ve been in the command chair of the RV too long. Banks can’t lend to start-ups because that would be gambling. That is the purview of the Vulture Capitalists.
Taxing savings goes against everything that we’ve needed to do for the last 4 decades as our savings rate has declined and those of Japan and other countries has increased. We need to save so we can self-finance our retirement as well as our everyday purchases. We need to get out of the endless cycle of deficit spending, both in our own personal lives as well as our government. By slowing down the consumer cycle and demanding better quality products, preferably American products (even if they’re made in Canada or Mexico).
‘Saved’ money boosts the economy as much as ‘Spent’ money does, just on the back-end instead of the front-end.
What we need to do is basically cancel all of these targeted government subsidy and so-called small-business assistance programs and concentrate on tax policy.
Removing the income tax would remove the penalty imposed on success. Substituting a VAT would probably enhance revenues significantly while not affecting consumption at all. Again, people would still need to use and buy the products, they would simply demand higher quality and value for their money.
Simplifying the tax code and removing any means of cheating via frivolous and targeted deductions while allowing businesses to deduct all legitimate expenses in the tax year they occur will boost productivity and revenue simply by removing the already onerous accounting burden.
I’m sorry I missed your stop here in Arizona; I have one of your books I was hoping to get you sign. And of course I missed my opportunity to meet the real star of the show, Mrs. Cringe.
Hello. Great job. Thanks!
You have not understood the argument for tax cuts for the rich. It has nothing to do with they will spend the money and the money will trickle down.
Rather it is that if you reduce the tax on something, you get more of it.
If you reduce the tax rates on income, then they are more likely to invest money to earn even more money. This new investment drives the economy, and that is what ‘trickles down’. So capital gains tax cuts are beneficial, because they encourage more money to be invested. Housing interest deductions encourage loans for buying houses, and have not as much economic benefit. Child tax credits have little benefit, at least in the short to medium term.
There is also a side argument that cutting tax rates discourages tax cheating, but that is less an argument for economic growth than for higher revenues to the government.
The problem is, it’s never worked. There were 28 years from the beginning of Reagan to the end of BushII. For 22 of those years, the Right Wingnuts ran at least 3 of the 4 branches of the Federal government. This mess is a Right Wing mess, not an Obama Socialist mess.
well… yes it did work.. and the laffer curve is right, just you do need to look at it.
Income from taxes goes down if you tax AT NEARLY 100 percent.
This was occurring about the time of FDR.
The Literal Laffer curve says you can increase taxes received by increasing the tax rate when you are taxing below the optimal amount (we’ve never been at a high tax amount in my lifetime). So, President Obama is following the Laffer viewpoint.
https://www.nerdpocalypse.net/Laffer%20Curve.html
(wow, I’m the only one who puts primary sources in…. heh, when everyone expects GOOD INFORMATION, then it’s the Nerdpocalypse, baby !)
Oh, and Bob…… taxing savings….. wow, Alvin Toffler was so right, our minds have limits. Everyone who ever took an economics course is looking at you very disparagingly and mouthing the word…..’INFLATION’. That’s ok… the head of the FDA expects to violate the incompleteness theorem.
— So capital gains tax cuts are beneficial, because they encourage more money to be invested.
Oh, and that nonsense. Buying stocks isn’t Investing, unless you buy from a Public Offering. 99.9995% of the time, you’re just a gambler. If you buy the stock, you’re gambling that the idiot you bought from sold out cheap. If you sell the stock, you’re gambling that the idiot you sold to bought high. NONE of the money involved purchased ANY physical asset. NONE. NADA. ZIP. NO benefit to the economy.
At the end of reading the article, I was left scratching my head wondering “Wouldn’t the drop in the stock market be a good thing for the economy?” Where did the money go? If it flowed into bank savings or spending, that should help the economy right itself. Why is a high Dow Jones Average considered the sign of good economic times?
Because the Banksters want you to believe that. There is NO connection between the stock market and the real world, the stock market is just a bunch of gamblers betting on stocks among themselves; the money doesn’t move to the companies. That’s why the “recovery” happened so fast. The money from TARP and stimulus went to the Banksters, so they bid up the price of stocks.
The crash happened in the Bankster world, not the real world. The bleed over happened because the Banksters no longer trusted themselves, thus stifling normal banking operations with the Real World.
I lost 30% – 40% of my retirement assets. That is certainly real world for me!
What you are describing are negative interest rates. Willem Buiter explains how it could be implemented:
http://blogs.ft.com/maverecon/2009/05/negative-interest-rates-when-are-they-coming-to-a-central-bank-near-you/
Of course, this will never happen because the rentier class owns the politicians.
Bob,
Please do not damage yourself further by making statements about what people and institutions possessed of a substantial amount of capital actually do with that capital. You will just embarrass yourself.
“Alas, Laffer was wrong, in large part because rich people save most of their money, they don’t spend it…”
I mean really. Didn’t you think about that for a nanosecond?
There may be some people so wealthy they no longer need a rate of return, but I haven’t heard about them.
Who are these uber-rich that are stuffing their massive dough into savings accounts for 1% per annum? We await your list of both their names.
Absent that, stop with the economic theorizing and stick with your day job.
The great irony of this is that these “rich interests” are the same ones from whom he will go hat in hand to with his list of tech startups.
So which is it, should these “rich interests” spend all their money, or invest in his startups?
If I were rich, I wouldn’t touch an investment proffered by this socialist. If I had a tech startup, I wouldn’t associate with a person so ignorant of fundamental economics.
And your class (that 1%) now suck up 24% of the economy. We’re so much better off since you folks started running the joint with Reagan.
Bob, I love your articles. Great turn from tech to economy or economics.
What you opine is simple common sense. Alas, we all know that’s usually uncommon.
Gandhi, I think, said that there is enough for everybody’s need but not enough for our greed.
Thank you for your common wisdom and its expression in simple words. Please keep it coming – even when you are not making killer money…!
Gandhi was a committed socialist. I’m becoming more convinced that Cringely is as well.
And the problem with that would be what?
Problem? Nazi Germany, i.e. The National Socialist German Workers Party. That’s your problem.
The Nazi’s were FASCISTS. They chose the term on purpose, to flummox idiots. You’ve proven it works.
Actually, the Nazi party did have a ‘socialist’ wing in its inception, but it was wiped out by the right wing after the party manoevered itself into control of the state. Literally: the 1934 purge in the party ranks know as the ‘Night of Long Knives’ achieved, among other handy political aims, the slaughtering of all the leaders of the ‘left’.
This ‘left’ wing was not, by the way, anything we would call socialist today. It is shocking to realise that the closest analogy to them in the current American political discourse is to be found in the right-wing grass-roots fringe. Although never much strong on ideas, they were libertarian, paramilitarised, and appealed to the vast numbers of working and middle-class Germans that were out of a job or empoverished in the aftermath of the post-war crisis and that felt cheated by the system. Sounds familiar?
The real German socialists of the time were the Spartacus League – that, by the way, was also physically wiped out by the (right-wing) nazis.
Be careful with the labels you put on things.
According to Godwin’s Law, this this discussion is officially over.
good one Tenaya, that happened pretty fast here, but I’m going to continue anyway! Fascism, Socialism, and Communism end up being very similar in the end, read your history. Goebbels said “the difference between the Communism and the Hitler faith was very slight”, the sense of nationalism was the difference for the most part. The far right actually leads to Anarchy not Fascism, the smaller the government… No need to call people idiots here when you don’t know the first thing about them. Intelligence, candor and good will would work just fine.
all tax based incentives for startups will only be used for tax avoidance. eg.
the uk has had a system where one can invest up to 200k (plus more in later years) and deduct this against tax. the capital gains were tax free if held for 5yrs +. the investee company has to be approved by tax authorities. of course it ended up in companies that were merely owners of assets not growing businesses.
and a note on your “i know what it takes to succeed” – i have yet to meet anyone, anywhere who is not an expert on startups. thats the problem we all want to be the gatekeeper.
most startups would just like a level playing field – if that cant be delivered. then the rest is just window dressing.
a true role for government — to require that banks lend to those baskets
What a stunning idea. I bet it would work with home loans too.
haha, well played.
“…on those long drives from town-to-town with the kids and Mary Alyce asleep in the back of the RV”
Is this legal in US? It sure is very illegal in EU and very against common sense – what would happen to your family in case of an accident, for Pete’s sake?
“What will actually work is a short-term tax (or tax credit — they are the same thing if you squint) on savings.”
Echoing inflation propaganda from the 1930s. https://www.youtube.com/watch?v=JUvm9UgJBtg
“Forget about accelerated depreciation — make all non-reimbursed expenses of any kind 100 percent deductible in the current tax year.”
Aren’t expenses routinely deductible already?
“Tech startups will continue to happen in great numbers no matter what Congress and the White House do.”
Not true. Congress and the White House have the power to punish startups and small businesses with onerous regulation and union-sponsored rules. I agree that they can’t help, but they sure can hurt, and very much so. Government works best when government gets out of the way.
I agree with the commenter who gave the Scrooge McDuck statement. Rich people want their money out working for them. There’s a reason people turn to “qualified investors,” people with personal assets of $1 million or more. These investors have been there, and want to put their money to work.
You can’t spend your way out of a recession. You get out of a recession by putting people back to work with 1) stable and small government, 2) capital investment. This allows companies to expand, create new products, and increase the quality of existing products. This increases the workforce by the hiring of new people, and increases demand by producing better products.
It all starts with capital, which is another word for — the savings of rich people.
Rich people spending is simply giving a fish to a poor person. Rich people saving (creating capital and therefore investments) is giving poor people jobs.
(I hate it when people reply to themselves, but I had another thought.)
Bob, where do you think the money will come from for all these startups you’re out promoting? Will it come from the pennies of poor people, or from the savings of rich people?
I have to ask, are you equating spending and investing? Are you using “spending” as a euphemism for investing in tech startups? Surely not. You must know the difference, right?
If this is what you’re saying, then you’re simply not qualified to run this thing.
(Ok, one more)
The title of this post says it all.
Cringely views rich people as stuffy old white ladies exploiting black people and stuffing all their cash in a hole in the back yard. These old white biddies have to be “motivated,” i.e., compelled by the government with the threat of jail time, to buy things and invest.
This post isn’t just socialist, it’s racist, and it reeks of classism as well.
Bob, after this insulting post, what self-respecting member of the “rich interests” would bother to invest with you and your startups?
>>Cringely views rich people as stuffy old white ladies exploiting black people
>>and stuffing all their cash in a hole in the back yard. These old white biddies
>>have to be “motivated,” i.e., compelled by the government with the threat of
>>jail time, to buy things and invest.
>>This post isn’t just socialist, it’s racist, and it reeks of classism as well.
Yikes!
You there, Rand: set down the keyboard, step back from the machine and slowly turn towards your meds…
Someone’s got to speak the truth. When socialists and racists speak, do you call them deranged? Why allow someone to use racism to make a point? Speak out to stop it.
We should be thanking Rand for adding some common sense.
Odd thing about your rant Rand is that the only one equating Mr Cringely’s ideas with racism is you. And that is an invalid argument just like the rest of what you so in-eloquently present.
— This post isn’t just socialist, it’s racist, and it reeks of classism as well.
Warren Buffet: “There’s class warfare, all right,” Mr. Buffett said, “but it’s my class, the rich class, that’s making war, and we’re winning.”
He said that in 2006.
Buffett also said that the government should raise taxes across the board. And, since he doesn’t pay taxes – that makes him selfish and unqualified to do anything by make money for himself……
Yes, Mr. Buffet did say that.
You are however entirely missing the context.
He was saying that it was unfair for taxation to be arranged so that when he followed the rules, he paid far less of his income than his clerks and secretaries did of theirs.
In other words, he was against what ‘his economic class’ had arranged.
Here’s where you can become informed about this:
https://www.nytimes.com/2006/11/26/business/yourmoney/26every.html
Talking about helping start-ups and how (some of) the rich spend their money… Here in Canada we have a show on TV called “The Dragon’s Den”: five highly successful entrepreneurs listen to pitches from start-up owners and decide to fund them or not. The show is going in its fifth season, the whole series is available at https://www.cbc.ca/video/#/Shows/Dragons%27_Den.
Your columns have become less and less interesting, more and more snarky, less and less analytical and more and more pontificating since you left PBS.
You used to be an atypical and interesting writer, now you are just the same old tired stuff as everyone else with your topic of the day just an excuse for a thinly veiled personal rant or ideological diatribe.
Goodbye.
romzburg
What a dopey article. Did someone shuffle up the assorted Cringely’s and the dumbest one landed here?
Hey Cringe – Here’s a BIG idea!
Why don’t you start a mutual fund that invests in start-ups like the ones you visited? It will work just like VC funding does – it’s high risk, but VERY high reward if the company(s) succeed. I’m game. And screw the Morningstar Rating crap – it’s BS anyway.
The first half of the article on establishing debt pools for tech startups is very interesting. Angels and VCs require huge equity stakes and huge returns. Friends and family invest life savings in crazy entrepreneurs for common stock that usually gets diluted down to nearly nothing. A micro-cap mutual fund buying over-the-counter shares of Cringly-vetted tech startups and targeting returns of 10% (via dividends from preferred shares) might provide a mechanism the merely wealthy to contribute capital to startup ventures on terms . We have social-cause mutual funds, why not one for the tech entrepreneur cause?
Tha’s EXACTLY what I’m talking about! WHY NOT?
I don’t have enough money to invest in big time ventures so I’d love the opportunity to do so in smaller ventures without the guarantee that my investment would disappear.
Too bad the war wasn’t ended the recession…
I agree with Ayn Rand above. It is actually a good thing that small tech companies fly under the govmt radar.
I think it was you Bob, who said that government will do in the future what it does now. What are they good at? They create bureaucracy and spend money. How would the department of technology business development work? Using paper, one office downtown only open 9-4:30. The budget for the huge IT system built by IBM consulting and Oracle would be astronomical. Too bad it will never work.
Small business needs to lobby against protectionist rules, Obama Care, and additional expenses for hiring. That would be a real help from the government.
https://www.forbes.com/forbes/2010/0830/opinions-rich-karlgaard-digital-rules-forgotten-employee.html
The opinion in the link makes a lot of sense.
There is really only one way to re-start the economy, and no one in gov’t or economics is really considering it. The problem right now is that we are in a _debt_ driven recession. Companies and most individuals realize this, and are doing what they can to alleviate themselves of debt and build back savings. However, economists and gov’t are not realizing this. The economy may restart on its own at some point – once companies and individuals are satisfied with the debt, income, and savings amounts; but unless gov’t (Federal, State, and local) does the same, it will then be burdened by the debt of those institutions and won’t restart as strongly as it would if those institutions do the same – reduce the debt.
While the Great Depression was similar (in some respects) the problem there was also the lack of ability to generate savings; so the New Deal program worked by giving people the ability to generate savings and reduce the debt, at the expense of gov’t debt. However, today we have not lost the ability to generate savings or reduce debt; but the economists, the white house, and congress are all responding by spending money when that is exactly the wrong thing to do.
This is one recession that the gov’t cannot spend its way out of.
— The problem right now is that we are in a _debt_ driven recession.
Wrong. We’re in a distribution driven depression, same as everyone before. The proximate cause, the housing bubble, was engineered by mortgage companies, banks, builders, and Wall Street. Follow the money. Where did it end up? It surely didn’t end up in the hands of the Great Unwashed Lower Class. Anyone who asserts such is simply lying. When a country reaches the point that 1% take 24% of national income, it’s in Banana Republic territory. Those in the 1%, and those who suck up to the 1% in hopes of being gifted, will forever deny that destroying the rest of the economy for their own is a bad thing. It’s a bad thing.
– Wrong. We’re in a distribution driven depression, same as everyone before.
Nope, you’re the one that’s wrong. The original poster had it right. Your post is nonsense.
Read history; not just the propaganda from the AEI.
– The problem right now is that we are in a _debt_ driven recession. –
Actually our whole society is driven by debt, because we use debt as money. Most people think money is “printed” into existance by the government; what actually happens is new debts (loans,credit) are created by private banks and we use these debts as our money supply. If all loans we repaid, there would literally be no money in circulation, but all loans can never be repaid because the compounding interest must also be repaid with additional money, but new money means more new debts, which means more interest, ad infinitum.
A sustainable society needs a permanent debt-free money supply, but instead we borrow all our money from banks. The current economic problems all arise from this crazy system.
https://www.youtube.com/watch?v=rC720Cl3N-0
Bob, you need to drive some more; you’re way off.
The thing to do is establish a rating agency for tech startups.
Then the startup goes to the bank and says, “I’m AAA rated by Cringely&Co., let’s talk about a loan”
Of course, Cringely&Co. better be real sure about that rating, otherwise it’s 2008 all over again…
As for the economy, here’s what you do if you are King:
– No federal income taxes on the first $25,000 (the poverty line is somewhere around $22k) of income, personal or corporate, expires in 4 years unless renewed by 2/3rds of Congress
– No federal taxes on the first $25,000 of capital gains, expires in 4 years unless renewed by 2/3rds of Congress
– The Federal budget will be 95% of last year’s until the budget is within 10% of being balanced, unless war is declared
Let me know when you are crowned King…
Nouriel Roubini makes similar points and proposes a solution that has some similarities.
“What America needs is a payroll tax cut”
https://www.washingtonpost.com/wp-dyn/content/article/2010/09/16/AR2010091605846.html
Bob, I think you took a left turn back there – literally.
Taxing savings? Are you kidding? Some other posters have already pointed out that rich folk don’t have their money sitting in savings accounts – they invest it to get a better return, and to avoid having the 1% return get eaten up with taxes. If a business was taxed on any savings they had, they are not going to just piss it away. They will do stock buy-backs, or give it back to shareholders as an increased dividend, or they would just give it to the board and managers as an additional bonus check. They certainly won’t hire new employees with it.
I’m not rich by any stretch of the imagination, but my wife and I have managed to pay off ALL of our debt, buy our retirement home with cash, and put some money away for our golden years. A little of our savings is in a savings account but, just for emergencies. Most of our savings is invested. We have looked at investing in startup companies, but the vast majority of them have no chance of succeeding. We are reduced to investing in real estate (there are some good bargains out there right now) for long-term investment. I would love to be able to get into a good managed VC club, but we don’t have a 7 or 8 figure income. We’re too small potatoes to bother with.
Employers of all sizes and types have put company investments (capital and new employees) on hold mainly because of the onerous regulations and restrictions being passed into law almost on a daily basis by the government.
Until the government realizes that it IS the anchor that is holding back recovery (yeah, like that’s going to happen) and decides to get out of the way we will continue to be stuck in our current quagmire.
See this post:
“How Regulations Accumulate as a Small Business Grows”
http://biggovernment.com/wcrews/2010/09/16/how-regulations-accumulate-as-a-small-business-grows/
Notice the chart on the growing government influence as you gain more employees. Who can afford this? What’s the incentive to grow? How are tech startups dealing with this? Is this where my investment money is going? Is Cringely now proposing a government mandate to invest in companies just so they can pay for these ridiculous programs?
Socialism, pure and simple. We’re not talking about stealing my assets, not just income, but assets, to pay for these socialist programs.
You’re running off the rails, Bob.
ONE EMPLOYEE
Fair Labor Standards Act (overtime and minimum wage [27% min. wage increase since 1990])
Social Security matching and deposits
Medicare, FICA
Military Selective Service Act (90 days leave for reservists; rehire discharged veterans)
Equal Pay Act (no sex discrimination in wages)
Immigration Reform Act (eligibility must be documented)
Federal Unemployment Tax Act (unemployment compensation)
Employee Retirement Income Security Act (standards for pension and benefit plans)
Occupational Safety and Health Act
Polygraph Protection Act
4 EMPLOYEES: ALL THE ABOVE, PLUS
Immigration Reform Act (no discrimination with regard to national origin, citizenship, or intention to obtain citizenship)
15 EMPLOYEES: ALL THE ABOVE, PLUS
Civil Rights Act Title VII (no discrimination with regard to race, color, origin, religion, or sex; pregnancy-related protections; recordkeeping)
Americans with Disabilities Act (no discrimination, “reasonable accommodations”)
20 EMPLOYEES: ALL THE ABOVE, PLUS
Age Discrimination Act (no discrimination on the basis of age against those 40 and older)
Older Worker Benefit Protection Act (benefits for older workers must be commensurate with younger workers)
COBRA (continuation of medical benefits for up to 18 months upon termination)
25 EMPLOYEES: ALL THE ABOVE, PLUS
Health Maintenance Organization Act (HMO Option required)
Veterans’ Reemployment Act (reemployment for persons returning from active duty, reserve, or Nat’l Guard)
50 EMPLOYEES: ALL THE ABOVE, PLUS
Family and Medical Leave Act (12 weeks unpaid leave or care for newborn or ill family member)
100 EMPLOYEES: ALL THE ABOVE, PLUS
WARN Act (60-days written plant closing notice) -Civil Rights Act (annual EEO-1 form)
Should have read “We’re now talking about…”
Also, this chart doesn’t even include the new ObamaCare provisions. Good luck with that, tech startups.
Caveat for chart above: “Assumes non-union, non-government contractor, with interstate operations and a basic employee benefits package. Includes general workforce-related regulation only; Omitted are categories such as environmental and consumer product safety regulations, and regulations applying to specific types of businesses such as mining, farming, trucking or financial firms.”
Obviously the problem is those rich old white biddies who won’t cough up their life savings.
What we need is more government and more taxes. That’s the answer!
Yes, and all these regulations have been proven to be necessary because corporations are amoral, and will only follow normal people’s rules of behavior when it is a condition of staying in business.
Does anyone else think that the current ultra-low interest rates on savings accounts and CDs is effectively a tax on saving? The effect of these low interest rates, intended or not, is “don’t save—BORROW!”
I have two ideas, the first of which is similar to Crash McBang’s above: with your experience for gauging the likelihood of a startup’s success, create a rating system. You can model this rating in the style of big bank/investor debt (e.g. AAA), or in the style of personal credit score (e.g. a number like 700). Whatever. But, take it a step further, and build a *turnkey program* that will output this rating for you. Then you can sell your program to banks, VC’s, or even “nearly rich” people like Casey Barker above. They can then in turn use this program to decide how to loan money to these startups. Your software could even suggest ideal rates and terms based on their “likely success factor” (credit score), the current economic conditions (use benchmarks like CPI, UST rates, etc).
Or maybe you don’t even sell the software, but deploy your own startup that uses your own software. Then YOU get a big pool of money to loan out to these startups.
My other idea is wackier, and maybe not even feasible. But the idea is this: the housing bubble was largely based around these CDOs, basically big pools of mortgages that were sliced up and sold as AAA-rated debt products.
Why not do just that but in reverse? You create a contract that is kind of like a stock option, but instead, it’s an option to buy a loan. You get “rich people” (banks, VCs, whoever) to sell you a bunch of these “loan options”. What you’re buying is the ability to, at some agreed upon date, purchase a loan at a specific rate and term for some amount.
Now, once you’re holding all of these loan options, *YOU* can be the banker than actually gives loans out to these startups. You can pool groups of these loan options together to effectively create the capital you need to loan to these startups.
The underlying scheme of all this is that you’ve created a new financial instrument. That instrument itself has no value, but represents the ability to get capital.
The real idea is you inventing some construct so that you can become a middle-man for distributing the much-needed capital to these startups.
I mean, here’s an honest question: if you really believe in these startups, why not encourage them the *real* American Way: by creating your own enterprise to make a little money AND fulfill a social need at the same time?
Intentional or not, when you make these “government should do X” posts, I think you polarize your readership. But I can’t imagine how either side would fault you for proposing some new kind of private *business* (as opposed to government action) that could be both profitable and further the social cause.
So maybe my “yet another derivative product” idea is too radical, or smells too much like yet more exploitation of an imperfect (and wounded) system… but the underlying message is the same: YOU, Cringely, now have some unique experience and expertise in judging tech startups. Why not become a broker for loans to these fledgling companies? Maybe you’re not rich enough to do it on your own, but if the idea is good enough, I think you could sell it to rich people who would fund you. Your startup is the “Meta” Startup.
“The effect of these low interest rates, intended or not, is “don’t save—BORROW!”” Or it could be “Pay off your debts.”
How do I invest in one of your baskets? Sounds like a better idea for “angels” than banks.
Let’s not get too carried away folks. Just because Bob is a great thought provoking journalist, who is taking a family vacation at Kaufman’s expense, does not mean he has a crystal ball about the success of tech startups. No doubt that’s why he is suggesting government involvement. Which is why we are back on the more-or-less government train, which, like a GPS, keeps us going in circles until we die.
Mark Cuban says the opposite:
http://blogmaverick.com/2010/06/09/some-notes-to-congress-on-the-economy/
“One of the keys to failure in starting a business is borrowing startup funds. Why ? Because startups never work on a schedule and loans always have to be paid back on schedule.”
Wow. So much economic cluelessness packed into a single column!
The Laffer Curve was a way to maximize tax revenue, and supposedly reduce deficits. It had nothing to do with stimulating the economy, (Of course, some of the proponents of the Laffer Curve also believed in the Trickle Down theory, a different concept.)
The Laffer Curve worked. It increased tax revenue. However, government spending exploded. Reagan wanted Star Wars spending and the liberals insisted on maintaining welfare spending. So both sides got what they wanted, at the cost of increased government deficits.
The proposition that the government knows how to stimulate the economy, without causing inflation or other problems down the road is ridiculous. Oh, sorry, there is a way. Start a war, kill off millions of people, incur billions of debt, and blame someone else for all the problems and suffering.
So, let me see if I understand the Cringely plan…
Current U.S. economic status:
– corporations taxed at some of the highest rates in the world
– Americans losing jobs in record numbers with unemployment sky-rocketing
– government spending (of tax payer money) at the highest rate in history
– government taking over private sector companies (and running them into the ground)
– cost-inflating government regulation of private sector increasing
– numbers of welfare recipients rapidly increasing (supported by taxed Americans)
The Plan:
All non-reimbursed expenses of any kind 100% tax deductible for a while
The Progress:
– rich people start spending money more than usual
– some companies experience higher income
– some companies higher more non-rich people
– some companies save in anticipation of tax deductions expiring
– companies where non-rich people spend continue to decline
– some recently hired non-rich people start spending more
– some recently hired non-rich people save and invest
– tax deductions eventually peter out and expire
– companies stop hiring and reduce staff back to pre-deduction levels
– rich people stop spending as much again
Resulting U.S. economic status:
– corporations still taxed at some of the highest rates in the world
– Americans back to losing jobs/unemployment sky-rocketing
– government spending (of tax payer money) continues as responsibly as ever
– any government-run “private sector” companies still in business continue running as well as the post office
– cost-inflating government regulation stricter than ever amid continued demands for more “corporate accountability”
– numbers of welfare recipients rapidly increasing (still supported by taxed Americans)
…. well done.
I have a simpler solution – take all the money that banks and local government etc are willing to “invest” in building fancy Technical Parks and Business Incubators (typically 10’s of millions of dollars) and form a local entity that functions like a VC. Their mandate is to break this money up into grants of $50k-200k and “invest” in any small local company that appears to have a good idea. The money is “invested” as stock in the company.
Some companies will succeed and generate good returns – possibly making up for the “losses” on the companies that fail but it’s not critical that they do. The companies that fail will not burden their founders with debt – allowing them to have another go at getting running if they can show another good idea.
What’s interesting is what happens with the companies that fail – a substantial number of these companies will have hired engineers, software developers and other technical talent – these people will then be looking for a job and a fair proportion will apply at the local companies that are successful – so there will be a small pool of talent available to the successful companies as they grow.
It seems to me that a starting point for getting the USA back on track is to add
“A corporation shall be a moral citizen.”
to the USA equivalent of the Corporations Act.
Also, looking at recent rulings of the SCOTUS regarding obligations of companies to their shareholders I can’t see how any of them can, without legal censure, take what we, the reasonable man, see as sensible medium or long term bets on investment.
(A view from Australia, a defacto state of the US without voting rights).
Cringley you are an idiot! You correctly diagnose the problem – but your solutions are worse than the disease. What makes you think you can predict with 75% certainty something that John Doerr can only do 1/20 (don’t forget he is rich – we are not). Taxes and debt are ruining this country – more of them are not going to help……
John Herndon
Carmel Indiana
A bank fund for loaning to startups? You say you have an 85%chance of picking the winners Bob. So 15% of the time you are wrong. So doesn’t that mean the bank would have to charge 15%+ interest to even break even on it’s loans? Loans at 15% to 20% interest ? No thanks. I’d rather sell equity.
Hey Bob,
This article made me think of a BBC TV show called “Dragon’s Den”. Ever seen it?
It shows a panel of expert investors as they interview people/companies looking for some money, say 100 K£ for 30% equity in their company. The candidates pitch and the investors decide, sometimes yes and often brutally no. You should check this out and why not start one in the US, on the web even???
Here’s the link:
https://www.bbc.co.uk/dragonsden/
Too late, it is already in many countries around the world. ABC ordered a pilot called “Shark’s Tank” (not yet scheduled). It is a huge success in Canada.
See my post above and: http://en.wikipedia.org/wiki/Dragons%27_Den
[…] Tech Startups are Being Ignored I, Cringely […]
“make all non-reimbursed expenses of any kind 100 percent deductible in the current tax year.”
Businesses would just raise their prices so the consumer would get little value. And it would just steal future purchases and bring it to the present. As soon as you stop the subsidy things are worse than before. Did you forget cash for clunkers and the housing tax credit?
Please stop drinking and driving… and writing. You look ignorant and it’s dangerous.
Taxing savings is a terrible idea. If such an idea were proposed by the government, the outcry would be deafening.
Bob:
I’m not disputing that the White House and the Fed are full of pointy-headed bozos, but this article and your economic-dictatorship ideas bring the derogatory term “bozo” to a new depth.
I’m not a Ron Paul Zombie, but if they get wind of your hybrid monarchist-fascist-communist proposals, they’ll go bananas.
Hmm, that is some compelling information you’ve got going. Makes me scratch my head and think. Keep up the good writing!
Unless production happens domestically, helping start-ups is subsidizing jobs overseas. A “Thumb on the scale” heavy enough to overcome big money’s aversion to American sweat will not go over well. I don’t expect to see a recovery in my lifetime.
Bob, usually you’re a pretty smart guy, but not today. Unfortunately it seems you’ve been brainwashed by Keynesian nonsense like everyone else in the country. Please do yourself a favor and pick up a copy of “Economics in One Lesson” by Henry Hazlitt. You’ll find it quite illumunating.
“This is where there becomes a true role for government — to require that banks lend to those baskets of tech startups I put together.” Dumb idea. Federal mandates forcing banks to make loans to people they normally wouldn’t give money to is what created our current banking crisis.
“a near-100 percent chance of delivering 3-5X on each loaned dollar”? BS. If that were true banks, finance companies, VCs, etc. would be falling over themselves to make those loans. As a long-time banker, let me tell you that if you don’t believe that, you are as clueless about banking/finance as you allege the politicians know about tech start-ups. BTW, I agree with you on that.
20 trillion economy? Who is your fact checker? Fire him/her and hire someone else. In 2009 the U.S. GDP was $14.266 trillion. I’m guessing the economy isn’t growing 40% in 2010.
Wow, Ayn Rand seems to really like posting!
History: Most of us (USA) came to escape the economic tyranny of inherited wealth. At WW2, many of us viewed a “meritocracy” with favor, that the system should favor the smart and hard-working. The current system is choking on change, with a collapse of civilization in the offing. When the RICH see their long-term wealth is based on lowered greenhouse warming, the system will change. Meanwhile “Muffie and I must have our home in the Hamptons next summer”.
“…a short-term tax (or tax credit — they are the same thing if you squint) on savings.”
They are the same thing to the economy in the same sense as it really doesn’t matter to the economy who spends my money…it could be me or it could be a thief who held me up at gun point. Or did I miss the point of your plan?
The arguing about tax cuts and trickling, is there not nations that tried both and have a track record? Is one economic theory more robust with evidence?
Tariffs, global economy, tax breaks for shipping jobs overseas, public election funding, the rise of lobbists with ever more money to hand out, infrastructure collapse, and many others.
How can you focus on one without a holistic view of the problems?
Little OT….
Re: “Small Business Innovation Research (SBIR) grants”
Found it to be kind of interesting that Dept. of Defense (a multitude), Agriculture, Education, Centers For Disease Control, EPA, DOE, National Institute of Health, Homeland Security, and a whole host of other federal agencies are listed, but guess who isn’t anywhere to be found in the list…..
Any of the financial regulatory agencies. Nope, not one. And we wonder why our so-called “watchdogs” appear to have been asleep at the switch. They look to be so woefully behind the technological curve that it would almost be funny if it wasn’t so sad.
I’m just astounded at the opportunities being passed over by our financial regulatory agencies to have small, innovative, entrepreneurial companies create applications and processes for them.
Course, if you said “cloud computing” to them, they would probably turn on The Weather Channel and wonder how you could ever get a computer to stay up in the clouds….
Did you know that iTunes is not showing your last 3 podcasts. I really miss them.
Thanks
The last podcast was September 4th. Check the RSS feed next to the iTunes link.
I’m a bit confused because you were talking about the need to invest, yet the rich people investing are the very same people who can invest in tech firms.
Perhaps someone has already pointed this out, but ratcheting up inflation accomplishes the same thing, since in effect it is a tax on savings. See Paul Krugman’s blog, http://krugman.blogs.nytimes.com/2010/02/13/the-case-for-higher-inflation/
Great idea. The US has already destroyed much of the market value that people had invested in their homes. Let’s destroy their savings too.
My savings are my pension. They keep telling us Americans are not saving enough for retirement – I’m starting to understand why.
I were sent here seeing as this weblog was tweeted by a gentleman I had been following and i’m delighted I made it here.
Exceptional blog and definitely assists with understanding the subject much better.
You make a lot of statements that you haven’t backed up and that much of MY reading on economics tells me are wrong. Your bullets read like a litany of bad left-wing talking points of the kind that got us into this mess in the first place.
And, from personal experience, I can tell you that I nudge into what Obama calls “the rich”. If I see a big tax hit next year, it will hugely affect my spending. And particularly on tech, and other discretionary spending that creates the more interesting and well-paying jobs.
And, contrary to your big plan, temporary windfalls don’t generally impress small businesses that much. What they need is stability. Right now small businesses don’t know what the cost of new employees will be over the next 5 years, and until they know, what would be the point of hiring?
The ridiculously botched health care bill, the increasing cost of often pointless regulation, and the knowledge that the enormous failed stimulus will need to be paid is causing all sensible people to pull back their horns and try to save what they can.
This is just another utopian fantasy in which the plan is to take my money and spend it on your pet projects.
Yes, like we’re not paying for uninsured people to get their healthcare in ERs– and who has ever known what would be in 5 years? NO ONE has. Typical Republican rhetoric.
Nice rob from the poor attitude. The super rich can’t wait to redirect whats left of SS into their pockets.
You Marxists that claim you want to help the poor, always seem to go about it in the worst possible way.
Your plan is always the same: kill the geese that lay the golden eggs.
When will you guys ever learn?
The first person, to say “socialism” or “communism” or “marxism” along with “Nazis”, “Naziism” and “Hitler” lose the argument, automatically. It’s the attempt to drop a nuclear bomb on an discussion dealing with nuances.
The fact is, public policy is very much like engineering… it’s all about aligning doable things to achieve a functional goal. Like engineering, it requires intense specialized knowledge – the average bloke can’t design an engine or a cpu – but unlike Engineering, everyone thinks they know how to do it. Dropping a nuclear bomb on the discussion is in essence, saying you don’t know how to do it.
But policy being a lot like engineering creates for a myriad of interesting discussion over the myriad of possible solutions. It is all engineering, which is to say, merely aligning things correctly then executing.
It doesn’t help to introduce ideology. If I believe that water runs up hill, then I’m going to scream that all engineering solutions contrary to that are un-American or socialist, or fasicst or naziist, or whatever… and where will that get us? Well, it won’t allow us to engineer any solutions in the real world, that’s for sure.
Ending the recession could be done in a myriad of ways. One way is health care reform.
This OECD study shows (see top graph on page 13) that the U.S. government already pays out more money, per capita, in health care expenditures than any other country, except Norway.
What that means is that if we implemented a single payer system tomorrow, say France’s often vaulted system, not only would every one be covered, you would get a TAX CUT. That means everyone that wanted to could go to work on Monday and ask to have their health care benefits monetized into their pay check. The result would create a surge in purchasing power for the average worker who currently receives health insurance benefits which is most of the working middle class.
In otherwords a surge in purchasing power would lead to a surge in demand, and that would thus, lead us out of the depression.
You might say this is socialism. I would reply, isn’t all insurance a form of socialism? In truth, it’s all just organizational arrangments: aligning what’s doable in order to engineer the best possible outcome.
In the insurance game, the bigger the pool, the lower the cost and the risk. The biggest pool is the entire nation. Why isn’t this done? Socialism, nee, welfare for private health insurance companies who benefit from special antitrust legislation and legislation that forces us to buy insurance from them.
The conservative talking points are antithetical to getting us out of the depression. We are a market economy. That means our economy is driven by demand. Demand side policies are antithetical to conservatives… they’re still talking supply side policies. That would be okay if we had structural inflation, but we don’t we have deflation (okay, .01 inflation in the last quarter) and up against the zero bound interest rates, aka a liquidity trap.
As we are a market oriented system it’s no surprise that 70% of our economy is based upon consumption. If you shrink consumption you shrink the economy. Supply side policies thus make no sense 80% of the time for a market economy. They are the arguments that one would make for a Soviet style economy which was all supply oriented – and worked well when demand was limited to things like t-34 tanks during WWII (because the demand for T-34’s was infinite). It’s always surprising to hear free market types scream supply side policies because it’s the ultimate form of hypocrisy – or evidence that they don’t know what they are talking about.
Running the economy is not like running your household. Running around screaming socialism, communism and marxism doesn’t help either. 30 years of supply side economics has gotten us nothing but concentrated wealth and a shrinking economy and society in a state of continuous crisis. Thank you conservatives for the wreckage. Like Uncle Ebeneezer they are always ready to serve up more wreckage.
Um, Cringely. Stick to tech because when you talk finances your ignorance shows.
No economist who uses data to back their theories argues that raising taxes on the “rich” raises us government revenue. It does just the opposite. Those tax shelters? When you raise taxes enough it becomes cost effective to hire people who have the full time job of minimizing tax impact to their employer.
Also exactly where do you think Bill Gates, Warren Buffet, and Mark Zuckerberg keep their money? In a cash savings account? No, they keep most of it in equity (i.e stock) of companies.
Now ask yourself what would happen to the stock market if Bill Gates, Mr Elison, Mark Zuckerberg and Mr Buffet all announced they where liquidating all their stock and “spending” their money on consumer goods? First, they can’t spend that much money so they would have to waste a lot, but say they could. Second the companies that they founded and which they own large chuncks of would get to watch their stock price’s make a big crater. And that would take your 401k with it, and it would take the retirement funds of most of america with it.
Think about it. If their savings is in stocks, bonds and investments (and it is), then what happens if they “spend” their “savings”?
R & D stops due to lack of investment, all stock prices will start to fall as the “Rich” sell their shares to get cash to spend. Companies suddenly have lower valuations, which means they can’t get new loans, so they can’t get the money to buy new inventory.
The us government will also get hit. Bond’s don’t just magically sell themselves, they have an interest rate, and a maturity date. If the us government find’s that it can’t sell its bonds at the price it wants, it has to raise the interest rate it pays, or lower the purchase price, either way this makes borrowing even more expensive and makes the national debt even more unmanageable.
But that’s OK, because then those evil “Rich People” will not have the money, so we can all be impoverished together.
Good plan.
Would someone who has a million dollars in high tech equipment and land count as rich? Good let’s take it away.
Oh. Wait, you mean a family farm needs a harvester that costs $400,000 and several tractors that cost more than $50,000 each and a $300,000 tiller, and a thousand acres (worth $Millions) and several giant barns costing tens of thousands each. Hit the farmers, and the small business that runs as a sole proprietorship (i.e. a husband and wife providing catering/consulting/child care/pluming/electrical work) which since they are not incorporated is being reported as “personal income”. Hit the life blood of this country with a crippling tax rate and lets see what happens.
Oh. They go out of business. Good job.
Oh, wait, no it’s a bad plan, and we have seen it tried before. It’s basic wealth redistribution as practiced in socialist countries around the world. Take the rewards of good decisions, hard work and effort away from those who have it. Don’t pay attention to the fact they earned that money by taking risks. Sometimes they earned it quickly, sometimes over the course of years of work, but generaly no one just walked up to them and gave them money for no reason.
So instead of letting them use the money they earned, lets take it away with special taxes and give it to some other group who we think deserves it more. That way they can buy gameboys, and go out for pizza’s, and buy new cars.
Banks:
Let’s review.
Before the U.S. Government got involved in funding banks with tax payer dollars to promote social change banks had a very simple design.
You and I walk into a branch and deposit $X into an account. It earns % Interest each year. So at the end of the year I can draw out my $X + the % interest earned.
This makes you what is called a Depositor.
Now You and I walk into a different bank and we both want to borrow money. Maybe it’s to buy a house (this is called an equity backed loan), or to start a business (backed by the equity of my inventory), or in rare cases I might want a “Signature Loan” or “Line of Credit” (this is only backed up by my good name, and any proof I have provided that I earn enough to pay it back.)
This makes us what is called a Borrower.
Let’s say we both want to get an equity loan, and the bank agrees to give it to us at a higher % interest rate. Wait, why are they getting to charge a higher % Interest rate? Why not just charge the same % Interest rate we got for our investment?
Well, it’s because one of us is going to fail to repay the loan.
You see The % Interest rate charged has a formula.
$ Needed to cover bad loans made to other clients +
$ needed to pay for banks operation (i.e. lights, computers, office space) +
$ needed to pay the interest rate promised to the Depositors (remember them)+
$ needed to pay the people making choices about who to makes loans to +
$ extra fudge factor to carry over from year to year, because we don’t always get it right in any one year.
Now if the bank always does it’s job right and enver get’s the formula wrong, then they end up with a surplus of money.
If they do it wrong they get closed down, and when you come back at the end of the year to get your $X + the % interest earned, you may be told “Well, we got it wrong, so here’s 50% of the $X you deposited. Sorry for losing your money”.
This scenario is what we call a bad thing.
So why would a bank be conservative and make loans only on those topics it understands well enought to not lose money? It’s very simple: It’s not their money to loose. It’s your money, and my money. So if we “require that banks lend to those baskets of tech startups”, they you are forcing me to take risks with my money that I don’t want to.
We have a vehicle for that kind of thing: It’s called equity investment, private financing, peer to peer lending, etc. See each kind of investing has a niche.
But we found out that people are stupid and will loan money to business that fail. So we made it hard to sell stock on the NYSE. If fact we made it so hard you can’t do it unless you are already a successful business. No small business allowed.
We also put rules can invest in private equity offerings, and rules on who can offer penny stocks, and rules on everything.
See, you can’t protect consumers from all risk of loss and at the same time require that they make risky loans to high tech start ups. It’s mutually exclusive.
So how do we fix this? Well we allow people to loan money again, without stupid rules.
One place we see this is in Peer 2 Peer lending like lendingclub. I make investments each month in people paying down credit card debt, remodeling a house, going to school, etc.
But because of the laws these loans can’t really be for that. What they are is simply signature loans. So you can say you want to borrow it to buy a car and then spend it on crack and I can’t do anything about it. So I only loan to people with good credit scores, and no history of bad debt. And I make about 500% of what I would make in a bank. But I also have people run off with bout 20% of my money each year. So when you average it out I still do OK because I make enough to cover those losses.
But I have to be involved, make choices, pick loans and take risk.
More government programs or regulation’s won’t make lending easier for business, it will make it harder.
You want to make it easier for small start ups to get funding? Remove some of the laws that make it so hard to borrow, don’t pass new laws that require someone to make risky and stupid loans with my money.
“The Obama Administration just successfully passed important small business legislation”
Dude, Obama doesn’t write or pass legislation. The Congress is full of idiots and charlatans and evil pricks — can’t blame that on Obama.
Then why is Obama trying to get people to re-elect them?
Because if Republicans get a majority in the house that will give them subpoena power to hold hearings on the Obama administration, including impeachment.
Obama may not be motivated by the fact that you and I don’t have a job, but as you might recall from the campaign, he’s very motivated when his own job is at stake.
Anyway, he doesn’t want to play defense to Republican majorities in the house.
On the other hand, if the Republicans held hearings on nonsense things like his birth status, it wouldn’t be such a bad thing. I’m more worried about them trying to wreck the economy even more than they have by giving more and more money to the rich at the expense of the commercial (demand) side of the economy – which is what wrecked the economy in the first place.
I am not lamenting that the Republicans didn’t win the last set of elections. The economy would be thoroughly in the ditch and supply side economics would be thoroughly discredited now with everyone but the pundits who are on the payroll of Republican billionaires.
“I’ve visited enough startups to tell with a 85 percent certainty whether they have what it takes to succeed.”
You must be a billionaire!
Every time I see a really good blog post I usually do some things:1.Show it to my relevant friends.2.Bookmark it in some of the popular social bookmarking sites.3.
Be sure to visit the blog where I first read the post.After reading this article I am really thinking of going ahead and doing all three!
Bob, if I read you right, you suggest a new “temporary” tax?
I am sure you are aware there is no such thing as a temporary tax.
There are, however, plenty of very temporary tax deductibles.
=-MDP-=
I think it is CRAZY that a billionaire like Meg Whitman, and a working Joe like me are in the same income tax bracket in California.
https://www.entrepreneur.com/tradejournals/article/109581636.html
PERSONAL INCOME TAX (PIT)
In 1980-81, the PIT made-up 35 percent of California’s General Fund. By 2000-01, it grew to 58 percent, before falling to 51 percent in 2002-03. At the same time, the share of the General Fund attributable to the corporate income tax had decreased from 14 percent to 10 percent. Likewise, the share attributable to sales tax had also decreased from 38 to 35 percent. We will now examine each revenue source, in turn.
From 1994-05 through 2000-01, the growth in PIT revenues was dramatic, evidenced by double-digit growth each year as depicted in the preceding chart. In 2001-02, the bottom fell out as PIT revenues decreased by 25.5 percent. Let’s examine the factors behind this decrease.
As most people already know, the decrease was due, in most part, to the loss of revenue from capital gains. The exceptional growth in PIT revenues in the late 1990s was almost entirely the result of the growth in capital gains. When the bauble burst, it took PIT revenues with it. As Figure 10 shows, the decline in capital gain income from 2000 to 2001 was over 50 percent, more than 100 billion dollars. This decline explains almost the entire decline in California’s PIT revenues.
Since capital gains and option income tend to be earned by the wealthiest taxpayers, the share of PIT borne by the wealthiest taxpayers fell dramatically in 2001, to a level below that in 1999.
I don’t know that Laffer was wrong, I just don’t think we know where the revenue maximizing rate is.
Considering that most of the “stimulus” that has been tried hasn’t stimulated anything – I am inclined to think that some funding for this makes a great deal more sense than that. The program could start small – and if it works and proves to be self-funding, expand it. I am a fan of experimenting with policies and pursuing things that work, so it would be a no-brainer if it turned out to be self-funding.
Ideologically I’m not really on the same page with you, but I think your ideas are much better than what we usually get from Washington, so keep it up. I think there are some policymakers who should read this because the terms you are thinking in are solid and constructive – and it might lead to something that works.
“This is where there becomes a true role for government — to require that banks lend to those baskets of tech startups I put together.” They already tried that with home loans and look where it got us. Investment should be left to those who have a stake in the success or failure of the company to motivate them to invest wisely. You’re suggesting taxpayers (me) should give your companies my money yet neither you nor the people running the company have a personal stake in it since it’s all dependent on involuntary taxes to pay for the failures.
Stop spreading misinformation. No bank was forced to make loans. In fact, most of the loans that busted up have been made outside of the CRA and the CRA has had more reliable loans than the others. The banks did this themselves, all the government did was make it easier for them. Please inform yourself, you make yourself look rather uninformed.
Taking away the risk of making a bad loan is the same as making a requirement to do so. That was the whole point of my comment. The government shouldn’t transfer the risk of Bob’s favorite companies to unwilling taxpayers.
I agree that the government shouldn’t transfer the risks of loans to taxpayers. But the comparison is wrong since this is not what happened in the 2008 crisis. The loans were not backed by the government. That’s why Hank Paulson wanted at first to let the banks fail since they made bad loans and the government had absolutely no obligation to save them. But he quickly realized that the size of the problem would bring about the total collapse of the total financial system so he decided to save some of them and not others to let them understand that they were on their own. The loans were never guaranteed by the government. The banks did this on their own with the help of totally unregulated derivatives that the banks were quickly selling to the blind investors who wanted a good return on their money (which is usually an indicator of something wrong).
This is why it happened in other countries too, the US government didn’t back the loans of the London banks nor the Icelandic banks. But they had the same problem: deregulation of the financial market to let the financial success that was happening in the US also happen in their countries. It seemed like a good idea at the time.
Forget about changing the tax code or setting government policy, Bob. You aren’t big enough to do it.
Here’s what you could do: Put together a market basket of tech startups. Start a fund to lend to them. Look for investors to buy shares – say $1000 a pop, in $1000 increments up to $10000. When you hit $10,000,000 in shares sold, start lending. In due time, let the returns roll in to the investors. Put me in for a share – then we can kickstart our own little recovery.
It’s better than the status quo – all my money in savings since the market looks bad and could get much worse really fast. Better to lose it slowly than all at once. But a chance to invest in a market basket of entrepreneurs would be worth some risk.
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Nuts, Bob. If you want more of something, you subsidize it, less of something, you tax it. Taxing the rich to encourage them to spend their money just means we’ll have less rich. In the meantime, we’re subsidizing people to stay unemployed.
That’s just nuts.
It’s like with the Bush stimulus plan, where households got small checks to be used to stimulate the economy. The smart money was to use this in the most un-stimulating way — pay off debt. Which is exactly what I did.
It’s like your Dry Powder column. The rich will find some way to keep a hold of their money, regardless.
The way to get the economy rolling again is simply to remove obstacles to starting a business.
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Bob, you need a better comment despammer.
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