Friday, September 16, 2011

What Would President Jack Welch do about Bailing Out States?

Yesterday we talked about the importance of focusing on revenue growth and expense management in difficult economic times. We also contrasted what would be the fundamental difference in approach between Sam Walton and President Obama in addressing the problem of our national debt and deficits.

Today let's look at capital allocation and how it's best managed in economically challenging times. We'll review these choices in the context of America's dual or federalist system of government. Specifically, we'll discuss the national government's responsibility to provide funding for the various individual states (localities, too) in relation to their debts and deficits.

To bring clarity to this capital allocation issue, we'll compare what I believe would be the very different approaches of Jack Welch and President Obama.

No less than America's unique federalist system of government is at stake. Thus, the substantive issue of capital allocation between the central government and several states must be confronted directly. In other words, calling a bailout a jobs act won't make it a jobs act. Instead it's a wrongheaded and even dangerous thing to do, and inconsistent with our American way.

When comparing capital allocation decision making within a business to that of government, the obvious question to ask is why choose Welch over Walton? Why not simply stick with Walton?

The answer is simply because of the different government and business interests of Wal-Mart and GE. Yesterday's theme of revenue growth and expense management contrasts meaningfully with today's topic of capital allocation in a dual system of governance.

Today we'll deal with federalism, and the relationship between a central government and its satellite sovereign states. GE's several disparate businesses and our nation's fifty separate states make the comparison with GE an appropriate one.

Simply stated, the type of entity Jack Welch led was dual federalism in action. On the other hand, Sam Walton led an enormously successful but structurally simple single focused retail business.

Both Walton and Welch were great CEOs and great leaders as well, but one focused on a single retail business while the other oversaw several distinct businesses within one big corporate umbrella. Sam Walton focused his career on growing one business, the retail business of Wal-Mart. In contrast, Jack Welch was responsible for a portfolio of businesses within GE which included jet engines, NBC, commercial finance, medical systems, plastics, appliances and others.

Each separate state is an important piece of our unique American system of federalism. And one national government combines with those fifty sovereigns to make up our dual system of government.

Let's now review how a President Welch would handle these matters in comparison with President Obama's approach to the latest stimulus-er-jobs program. Stated another way, would Welch propose bailing out poor performing states with borrowed stimulus funds, as Obama has?

My unequivocal opinion is that the approaches taken by Obama and Welch would be as different as night and day. Welch's would make sense.

A Blue-State Bailout in Disguise says this about President Obama's latest $447 billion stimulus-er-jobs-bailout proposal:

"Last Thursday, the president urged Congress to pony up roughly $200 billion in taxpayer money to "provide more jobs for teachers [and] more jobs for construction workers" and more money to carry out other state and local activities. He urges Congress to spend this money even after handing out hundreds of billions of dollars for similar purposes as part of the 2009 stimulus package, as well as a score and more billion dollars again in 2010.

These vast contributions to the coffers of state and local governments, though pitched as a jobs bill, are in reality the latest in a series of bailouts for debt-ridden state and local governments. They are of special benefit to states in the blue regions of the country where the president's most fervent supporters reside.

In many blue states, legislators have copied the politicians in Washington by running up state debts to extraordinary levels. Nationwide, state debt is running around $3 trillion. If unfunded pension liabilities are factored in, estimated liabilities leap forward by another $1 trillion to $3 trillion, depending on the optimism of the assumptions made."

Jack Welch required that GE's various businesses be strong competitors and that each was a #1 or #2 performer in its sphere of competition. If an individual business didn't perform at that high level, its leadership and employees were challenged to "fix it" or know that Welch would "sell it" and remove it from the GE portfolio.

Totally unlike President Obama, GE didn't reward poor performers by bailouts or supplying them with additional investment monies. Basic economics teaches that investment funds are scarce, and choices have to be made about how to use them. As a matter of common sense, those scarce funds should be allocated, if at all, only to that piece of a business or federal structure where the money will be best spent or invested.

Investments should reward those doing well instead of those doing poorly. Said another way, we should not throw good money after bad but invest money only where we will realize appropriate rates of return.

That's only common sense portfolio management at work, and that's exactly what Jack would do. It's also what any other good stewards of the public trust would do.

That's the way our American brand of federalism has always worked. Until President Obama came along, this is.

The above referenced article candidly labels Obama's bailout proposal an existential threat to our remarkably unique and successful federalist system:

"But federal fiscal bailouts put our federal system at risk. In essence, the national government is acting as if states are too big to fail. In the next financial crisis, the federal government may decide that states need to be treated like General Motors or, at least, be given ever bigger handouts of the kind the Obama administration seems committed to making.

But if the federal government is going to tacitly assume responsibility for state debts, then those $3 trillion in sovereign state debt must be added to the $14 trillion national debt that has already caused grave concern, pushing the current U.S. debt into the danger zone. Even if pension liabilities are ignored, the combined federal-state-local debt runs in excess of 120% of GDP.

The costs go beyond dollars and cents. The more often the federal government bails out the states, the more Washington bureaucrats will insist on regulating state and local affairs. At some point the United States will see the end of state fiscal sovereignty and the demise our federal system of government."

Suffice it to say that Texas, North Dakota or other well functioning states shouldn't be forced to send money to Michigan, California or Illinois via Washington, D.C.

But if for some inexplicable reason they are so forced, there should at least be a recognized legal debt incurred which needs to be repaid on time and with interest.

Calling the latest government giveaway proposal the American Jobs Act and then making it a gift to the poor performing states and localities is disingenuous at best. And things like this would, if left unchecked, lead to the demise of our federalist system and American way of life.

Jack wouldn't do it that way, nor should we.

Thanks. Bob.

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