Tuesday, January 7, 2014

Perspective: How well does Government run businesses?


This Christmas Santa sent us a letter (my December 24, 2013 blog) that recommended a way to make jobs for those who are unemployed or who are unemployable in the digital age. Santa’s idea was that the government should get out of the way of private enterprise and let them exploit our natural gas windfall by converting every internal combustion engine to compressed natural gas (CNG), and in addition convert every gas station in the Nation to supply CNG. Despite this obvious opportunity, our politicians continue to think that government is the best place to create jobs! Let’s examine some government run businesses and then imagine whether you, an investor, would want to invest in any of them.

Education:

All public schools are organized and managed by government and funded via taxes, with the objective of producing a high school graduate in 13 years. The United States spends about $10,000 to $15,000 per student per year which is more money per K-12 pupil than any other industrial nation. But look at the results! Our students rank lower than our competitor nations in the basics of language, math and science, and on top of that the high school drop out rate exceeds 30%. Now, as an investor would you put $100,000 to $150,000 into a company whose only product fails 30% of the time? Worse, the management of the company has not the slightest clue how to fix the problem. How long would you tolerate such incompetent management? Would you ask them to walk down the production line to see where the problem begins? OMG, if they did that they might learn that the boys, who represent 60% of the dropouts, fall behind the girls as early as 3rd grade and decide to drop out by 9th grade. Oh, I forgot to mention that management might find a dozen books that spell our exactly why the boys drop out. But no, they just ask you, the investor (read taxpayer), to invest more money in the failing plant.

It is even worse than that. The new digital work place requires graduates who have education at least 1-2 years beyond high school, particularly in science, technology, engineering and math. The government’s failing education system is not producing the needed number of graduates that qualify for the advanced training the high tech jobs require and that the Country absolutely must have to compete in the vibrant global economy.

On top of that, the government the owner and operation of the education business makes you the investor responsible for what to do with the 30% of the product that has no market value. Since there are no jobs to support the high school drop outs, you, the investor (read tax payer) has to subsidize food, shelter, utilities and other amenities for the discarded product, i.e. the dropouts. Many of these will be on the dole for as far out as you can see. But the dropout can vote, which means in effect, that the dropout is your BOSS!!

When you recover from the shock of this failed business, we will continue to the next one!

Roads and Bridges:

We are constantly told that these are in serious disrepair, yet these are government owned and government maintained. The revenue to pay for the work comes from government taxes and tolls, already in place which government can increase nearly at will. The 800 billion dollar stimulus program was intended to fund “shovel ready jobs” presumably for the unemployed and unemployable.. Today’s road and bridge jobs involve highly sophisticated machinery which requires well trained and experienced operators. There are no shovel jobs anymore!

A much more pertinent question is why is this problem? Roads and bridges are always in need of repair, and the money needed for that is being raised constantly from taxes and tolls. Oh, no, don’t tell me the money designated for this infrastructure repair was used for something else!

The Post Office:

The government owns and operates the Post Office which sells a service and in some cases a product, but it looses billions of dollars year after year doing it. Worse, FedEx and UPS beat it every day on services where the Post Office might make money if they knew how to manage a business. As an investor, you would want to sell this one as soon as possible.

Medicare:

Medicare like Social Security is like a ponzi scheme. It is based on the premise that more people pay in at the bottom than take out at the top. That was a fine plan when the number at the bottom (paying in) equaled or exceeded those at the top (taking out). But that was when the average age of death was 65 years. However, in the current real world, the pyramid is turned upside down. We do not die at 65 as was factored in actuarially 50-75 years ago. Today, the average age of death is 79, but if you check the obits, you will find that most lives will end in the 80’s and 90’s. The extra years can be traced to our modern medical technology including our ability to replace virtually any body part that has worn out. Meanwhile, another factor that inexorably exacerbates the issue is that the “boomers” are reaching 65 years of age. This group which totals 80 million is beginning to participate in both Medicare and Social Security while the group putting money into these programs totals only 40 million. Oh, by the way, someone took the funds from the Social Security “Lock Box”, so it is already bankrupt. Do you want to invest in either of these businesses?

Affordable Care Act:

So, now the government wants to get into the insurance business! Insurance is a business that is based on the actuarial bet that you are not sick in the case of health or in the case of your home that you are not an arsonist or in the case of the automobile that you have passed all of the tests indicating that you know how to drive safely. However, under the ACA the government is willing to insure you even if you are deathly ill and require millions of dollars of medical treatment to permit you to live just one more year. This is analogous to going to your insurance agent to get insurance because your house just caught fire!

If you want to become more cynical consider this. The government might set up a committee to decide who might be permitted to get treatment. Oh, wait, that idea is expressed in the ACA bill, and Sarah Palin had the unmitigated gall to call such a committee a “Death Panel”. Knowing what you now know about the NSA data collection and the IRS interference with non-profits that are of the wrong political affiliation, do you question whether the “Death Panel” might check your voting record before authorizing the treatment you need?

In short, it will only be a matter of time until the ACA insurance idea collapses and goes bankrupt, and the government will have to bail out or take over the insurance industry. Oh, that’s right; the bail out provision is in the ACA bill. It is just as Nancy Pelosi said “You have to pass the bill to find out what is in it” .Let’s get real, does anyone really believe that government can manage the health industry which represents one sixth of the US economy? So, do you want to invest in such a mismanaged operation?

We could go on and on examining businesses our government tries to run and that would certainly include Solyndra and a myriad of illogical clean energy fiascos that have already gone bankrupt. Or consider the investment to save Chrysler. We spent billions of dollars to rescue Chrysler only to have it purchased by Fiat at 50 cents on the dollar. Would you sell an asset you just repaired for half of what it cost you to repair it?

In short, businesses owned and operated by our government are bankrupt or are edging their way into bankruptcy of a financial order never before seen or even imagined. Thus when we question whether government can run businesses, we can use the President’s way to punctuate his thought …. It can’t… PERIOD!!!

When the government doesn’t run the enterprise, they feel that they should regulate it. Now, if government does such a lousy job running a business, why should we believe that they would be intelligent enough or have the needed business experience to regulate one? Actually, it is the government’s over regulation of nearly every step that businesses have to take that is precisely why private enterprise is not creating new jobs. This is easy to understand. Would you enter a poker game where the rules were unknown or likely to change in mid-game like Obamacare? Of course not! But that is what the private investor faces vis a vis government regulations.

As a consequence companies with no place to safely invest are hording capital by the bushel. This has resulted in the gigantic rise in stock prices, and the huge amount of cash on corporate books. So, why should we be surprised if companies, who are struggling in the highly competitive global markets made infinitely more complex by the digital revolution and massive and ever-changing government regulations, are willing to pay top dollar to acquire and keep the top CEOs. Oh, in case you haven’t noticed, these top managers are running their businesses quite well for their stockholders, thank you.

By the way, with all the complaints about CEO pay scales, why does no one mention the humongous salaries of our Hollywood stars and our star athletes? Since TV expanded the cash flow produced from the increased number of viewers, our star athletes are being paid massively more, on a constant dollar basis, than Babe Ruth was paid in his time. Moreover, these stars are certainly paid much more than the venders who sell peanuts and other items to those who attend the games. The fact is that in a free market, consumers (stock owners, movie goers and sports enthusiasts alike) will pay high prices for the best products and services.

Now, we can begin to understand why we feel the rich are getting richer and the poor are getting poorer. Machines have replaced the equivalent of “shovel” jobs in just about every endeavor. Any worker from those who operates today’s machines to those who are in management needs higher skills and continuous training than ever before. Now, we can grasp the nub of why the middle class is falling behind. Highly skilled workers are getting paid significantly more proportionately than those with low or no skills. The problem is that we have a huge shortage of those with the skills needed, and there are no significant jobs for dropouts.

“Santa caught the essence of the problem and told us in his Christmas letter that “Government is the problem not the solution”. Wasn’t there a Santa of the 80ies saying that very same thing? He was also called the Gipper, as I recall. Where is the Republican Gipper today?

When are the Republicans going to have the courage to say it out loud and in clear unequivocal language?

• Government cannot run businesses viably, PERIOD!!

• Private Industry cannot create jobs with government’s over regulation and without a sufficient supply of skilled workers, PERIOD!!